Keystone Tax Free Income Fund
Seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on activities in Keystone Tax Free Income
Fund for the twelve-month period which ended November 30, 1995.
Performance
Your Fund provided the following returns, including reinvestment of
dividends, for the twelve-month period:
Class A shares returned 18.71%,
Class B shares returned 17.84%, and
Class C shares returned 17.84%.
Your Fund's strong performance during the fiscal year represented a
significant recovery from the weak municipal bond market environment of 1994.
We were pleased with this performance which resulted in significant price
appreciation for shareholders. This return was in line with municipal bond
benchmarks during the period. We attribute that performance to our careful
credit analysis and the positive performance of the municipal bond market in
1995.
Municipal bond market rebound
This was an unusually strong year for municipal bonds. After an unsettled
market in 1994, patience rewarded municipal bond investors in 1995. Interest
rates declined and bond prices rose as the slow growth economy kept inflation
under control. This 'soft landing' for the economy created a very positive
environment for bond investors, resulting in unusually strong one-year total
returns. The Lehman Municipal Bond Index--a widely recognized benchmark of
municipal bond performance--returned 18.91% for the twelve-month period which
ended November 30, 1995.
The efforts of the Federal Reserve Board in 1994 to engineer a soft
landing for the U.S. economy appeared to succeed in 1995. Economic growth
slowed throughout the year, inflation remained under control and interest
rates declined--generally favorable indicators for municipal bonds. While
growth slowed, the fiscal condition of many municipalities generally
improved. Limited supply also had a positive influence on the municipal bond
market. New issue supply continued to decline from $298 billion in 1993 to
approximately half that amount in 1995.
Portfolio strategy
During the twelve-month period, we emphasized bonds that we believed would
benefit from a declining interest rate environment. We concentrated on
non-callable, discount and zero coupon bonds which typically tend to perform
better when rates decline. This strategy resulted in a lengthening of the
Fund's average maturity to 20 years as of November 30, 1995. We continued to
focus on bonds with maturities in the 20-year area for their attractive
income and lower risk characteristics than longer term bonds. We also
maintained an average portfolio quality of AA- as of November 30, 1995.
(continued on next page)
1
<PAGE>
Keystone Tax Free Income Fund
Relatively attractive values
Despite the strong performance of municipal bonds in 1995, they remained
attractive versus comparable U.S. Treasury securities. In fact, municipal
bond yields averaged about 93% of the yields on comparable long-term U.S.
Treasury bonds, a historically high level.(1) This meant that many investors
could obtain significantly better yields from municipal bonds than Treasuries
on an after-tax basis.
Outlook
We anticipate a continuation of the positive environment for municipal bonds
over the next twelve months. Interest rates should trend down as the economy
continues to slow and level off. However, we do not expect a recession in
1996. A slow growth environment could result in some price appreciation for
shareholders, but we believe most of the returns should come from income.
Municipal bond supply should remain tight in 1996. With the possibility of
rising demand, we think these factors should continue to provide positive
support for municipal bond prices and your Fund.
We encourage you to maintain a long-term perspective about your Fund. Over
time, investment returns have tended to even out, rewarding municipal bond
investors who are able to tolerate short-term price fluctuations. This has
been particularly true for investors over the past couple of years. In all
market environments, we will continue to manage Keystone Tax Free Income Fund
to seek valuable tax-free income from a portfolio of quality municipal
obligations.(2)
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
[signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
January 1996
(1) Source: Keystone Investments, Inc. The average yield of a selection of
30-year AA-rated municipal bonds compared to the yield on a 30-year U.S.
Treasury bond yield on November 30, 1995.
(2) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
2
<PAGE>
A Discussion With
Your Fund Manager
Betsy A. Blacher is the senior portfolio manager of your Fund and leads
Keystone's municipal bond investment team. Ms. Blacher is a professional with
16 years of investment experience specializing in municipal bonds. She holds
a Bachelor's degree from Wheaton College in economics and sociology.
Together, with portfolio managers Daniel Rabasco and George Kimball and
analyst David Moore, the team evaluates municipal bonds for Keystone tax free
funds.
Q What does the Fund offer investors?
A The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(3) The Fund offers
professional management and diversification by investing in investment grade
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than recovered
from their losses in 1994 and recorded double-digit total returns. This was a
reversal from 1994 when yields rose and bond prices declined. As growth
moderated at the start of 1995, municipal bonds rallied resulting in
unusually positive total returns.
Q How did the Fund perform?
A The Fund generated returns that paralleled the strong performance of the
municipal bond market. At the beginning of 1995 we expected economic growth
to moderate and interest rates to decline. So, we emphasized bonds that we
expected to benefit from declining rates: non-callable, discount and zero
coupon bonds. Since callable bonds are likely to be bought back by the issuer
in this type of environment, we emphasized noncallable bonds to preserve
income as rates declined. At the same time, these bonds became expensive
relative to other municipal bonds and this contributed to the Fund's price
appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in a
falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio. But, these
bonds were important contributors to the Fund's strong price recovery.
Because zeroes pay income at maturity, they have historically tended to be
the most sensitive to changes in interest rates. As rates declined, they were
among the best performing holdings in the portfolio.
We were pleased with the results of this strategy which helped the Fund
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including
Keystone Tax Free Income Fund. Slower economic growth lessens the potential
for higher inflation which reduces net bond yields. We held a number of high
coupon bonds and attempted to lock-in income by emphasizing selected
non-callable bonds. While the Fund's income still declined, we believe the
portfolio's holdings of these bonds helped the portfolio to maintain income.
Fund Profile
Objective: Seeks growth and income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Commencement of investment operations: April 14, 1987
Average quality: AA-
Average maturity: 20 years
Net assets: $148 million
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
3
<PAGE>
Keystone Tax Free Income Fund
In evaluating bonds for the Fund, Keystone looks for . . .
(bullet) Strong credit ratings; bonds rated in the top 4 categories (AAA, AA,
A, BBB)
(bullet) Responsible fiscal policies
(bullet) Solid financial positions
(bullet) Attractive values
Keystone's municipal bond team also evaluates local economic conditions, the
state legislative climate, the taxing power of the issuer and expected cash
flows from the project.
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A Discussions about a 'flat tax' limited performance that otherwise would have
been stronger than the impressive returns of 1995. The 'flat tax' would have
been a negative for municipal bonds because it would have taxed municipal
bond income. At this writing, the possibility of such a tax appears remote.
But, the mere discussion of it caused municipal bonds to rise less in price
than comparable U.S. Treasuries. As a result, we believe that municipals are
still attractive values.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market. We
expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable to declining interest
rates over the next six months. In particular, we expect short-term interest
rates to decline further, which could result in some price appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and new
family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth is
a factor. In Europe, growth has been slow, even with cuts in interest rates.
Because U.S. growth is increasingly dependent on world growth, economic
growth should not be a threat to bond investors for some time. Combined with
a proposal to balance the federal budget, these could be strong positives for
municipal bond investors over the long term.
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance of 1995; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On November 30 the
yield on a 30-year AA-rated municipal bond equaled 93% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
- ---------------------------------------[pie chart]------------------------------
Portfolio Quality Summary
as of November 30, 1995
S&P rating(4)
AAA 37%
A 19%
BBB 18%
AA 14%
Not rated 12%
Average portfolio quality: AA-
(percentage of portfolio assets)
(4) Where Standard & Poor's (S&P) ratings were not available, we have used
ratings from Moody's Investor Service, Inc., Fitch Investor's Service,
Inc. or ratings assigned by another nationally recognized statistical
rating organization.
- --------------------------------------------------------------------------------
4
<PAGE>
- ----------------------------------[bar chart]-----------------------------------
Relatively Attractive
Municipal Bond Yields(5)
as of November 30, 1995
Municipal Bonds 5.7
U.S. Treasury Bond 6.13
Municipal bond yields recently equalled 93% of
the yield on a comparable U.S. Treasury bond.
(5) Source: Keystone Investments, Inc. Based on a selection of 30-year
AA-rated municipal bonds versus the yield on the 30-year U.S. Treasury
bond on November 30, 1995.
- --------------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(6)
- ---------------------------------------
31% 36% 39.6%
- ---------------------------------------
Yield Taxable Equivalent Yield
- ---------------------------------------
4.5% 6.5% 7.0% 7.5%
- ---------------------------------------
5.0% 7.2% 7.8% 8.3%
- ---------------------------------------
5.5% 8.0% 8.6% 9.1%
- ---------------------------------------
A tax free yield of 5% is equal to a taxable yield of 7.8% if you are in the
36% federal tax bracket.
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(6) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
[diamond]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
5
<PAGE>
Keystone Tax Free Income Fund
Your Fund's Performance
- ------------------------------[Mountain Chart]----------------------------------
Growth of an investment in
Keystone Tax Free Income Fund Class A
$ In Thousands
Initial Reinvested
Investment Distributions
11/86 9649 9649
11/87 9249 9541
11/88 9534 10553
11/89 9801 11605
11/90 9534 12249
11/91 9820 13423
11/92 9991 14678
11/93 9763 16053
11/94 8506 14799
11/95 9572 17569
A $10,000 investment in Keystone Tax Free Income Fund Class A made on
April 14, 1987 with all distributions reinvested was worth $17,569 on
November 30, 1995. Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Twelve-Month Performance as of November 30, 1995
================================================================================
Class A Class B Class C
Total returns* 18.71% 17.84% 17.84%
Net asset value 11/30/94 $ 8.93 $ 8.88 $ 8.88
11/30/95 $10.05 $ 9.97 $ 9.97
Dividends $ 0.52 $ 0.46 $ 0.46
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1995
================================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 36.62% -- --
Life of Class 75.69% 12.11% 15.02%
Average Annual Returns
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 6.44% -- --
Life of Class 6.75% 4.12% 5.06%
Class A share performance is from the commencement of investment operations
on April 14, 1987. Performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B share performance is from the commencement of investment
operations on February 1, 1993. Shares purchased after June 1, 1995 are
subject to a contingent deferred sales charge (CDSC) that declines from 5% to
1% over six years from the month purchased. Performance assumes that shares
were redeemed after the end of a one-year holding period and reflects the
deduction of a 4% CDSC.
Class C share performance is from the commencement of investment
operations on February 1, 1993. Performance reflects the return you would
have received for holding shares for one year and redeeming after the end of
the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
6
<PAGE>
Growth of an Investment
- -------------------------------[Line Chart]-------------------------------------
Comparison of change in value of a $10,000 investment
in Keystone Tax Free Income Fund, the
Lehman Municipal Bond Index, and the Consumer Price Index.
In Thousands April 14, 1987 through November 30, 1995
Average Annual Total Return
1 Year 5 Year Life of Class
Class A 13.07% 6.44% 6.75%
Class B 13.84% -- 4.12%
Class C 17.84% -- 5.06%
Class A LMBI* CPI**
11/86 9649 10000 10000
11/87 9541 9768 10294
11/88 10553 10805 10731
11/89 11605 11994 11231
11/90 12249 12917 11936
11/91 13423 14243 12293
11/92 14678 15672 12667
11/93 16053 17409 13006
11/94 14799 16499 13354
11/95 17569 19618 13711
*LMBI = Lehman Municipal Bond Index
**CPI = Consumer Price Index
Past performance is no guarantee of future results. The performance
of Class B or Class C shares may be greater or less than the line shown
based on differences in loads and fees paid by the shareholder investing
in the different classes. Class B and Class C shares were introduced
February 1, 1993. The Lehman Municipal Bond Index is from March 31, 1987.
The Consumer Price Index is through October 31, 1995.
- --------------------------------------------------------------------------------
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of 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 Income Fund
Your Fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting sales charges (if applicable), fund expenses, and
transaction costs and assumes reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
The CPI is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as the prices of
services, housing, food, transportation and electricity which are compiled by
the U.S. Bureau of Labor Statistics. The CPI is generally considered a
valuable benchmark for investors who seek to outperform increases in the cost
of living.
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
7
<PAGE>
Keystone Tax Free Income Fund
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
8
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
MUNICIPAL BONDS (97.1%)
ALABAMA
Alabama Housing Finance
Agency, Single Family
Mortgage 10.750% 06/01/2013 $ 395,000 $ 424,578
ALASKA
Alaska Housing Finance
Corp., Collateralized
Home Mortgage 8.750 12/01/2016 1,105,000 1,155,311
North Slope Borough,
Alaska, General
Obligation Refunding,
Series G (ETM) 8.350 06/30/1998 450,000 492,485
CALIFORNIA
California Educational
Facilities Authority,
Stanford University
Project, Series H 5.000 01/01/2015 1,250,000 1,182,038
California Housing
Finance Agency, Home
Mortgage Revenue,
Single Family, Series B 8.600 08/01/2019 185,000 195,158
Los Angeles, California,
Public Works Finance
Authority, Multi
Capital Facilities
Project (MBIA) 5.250 12/01/2016 1,000,000 970,260
San Diego County,
California, Water
Revenue Certificates 5.681 04/23/2008 750,000 790,065
San Joaquin Hills,
California,
Transportation Corridor
Agency, Toll
Road Revenue 6.750 01/01/2032 1,000,000 1,038,680
San Joaquin Hills,
California,
Transportation Corridor
Agency, Toll
Road Revenue
(effective yield
7.750%) (a) 0.000 01/01/2020 2,000,000 431,360
Southern California
Public Power Authority,
Palo Verde Project,
Series C (AMBAC) 5.750 07/01/2017 1,000,000 1,076,280
COLORADO
City and County of
Denver, Colorado,
Airport System, Series
A 7.000 11/15/1999 1,250,000 1,335,216
City and County of
Denver, Colorado,
Airport System, Series
A 8.000 11/15/2025 1,000,000 1,116,790
City and County of
Denver, Colorado,
Airport System, Series
A 8.750 11/15/2023 750,000 878,303
City and County of
Denver, Colorado,
Airport System, Series
A 7.250 11/15/2025 1,000,000 1,085,680
City and County of
Denver, Colorado,
Airport System, Series
B 7.250 11/15/2012 750,000 812,025
City and County of
Denver, Colorado,
Airport System, Series
D 7.750 11/15/2013 1,100,000 1,337,215
Colorado Housing Finance
Authority, Single
Family Residential
Revenue, Series C 8.750 09/01/2017 545,000 569,078
Jefferson County,
Colorado, Single Family
Refunding, Series A
(MBIA) 8.875 10/01/2013 170,000 184,032
CONNECTICUT
Connecticut Special Tax
Obligation, Revenue
Transportation
Infrastructure Series
(MBIA) 5.375 09/01/2008 1,000,000 1,025,780
DELAWARE
Delaware Health
Facilities Authority,
Medical Center of
Delaware (MBIA) 6.250 10/01/2006 1,000,000 1,121,200
DISTRICT OF COLUMBIA
District of Columbia,
General Obligation
(AMBAC) 5.400 06/01/2006 1,000,000 1,020,810
FLORIDA
Dade County, Florida,
School District (MBIA) 5.000 08/01/2013 1,000,000 951,170
Florida State Turnpike
Authority, Series A
(FGIC) 5.000 07/01/2014 2,000,000 1,899,580
Jacksonville, Florida,
Electric Authority
Revenue, St. John's
River Project 5.250 10/01/2020 1,950,000 1,876,817
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
FLORIDA--continued
Orange County, Florida,
Health Facilities
Authority, Adventist
Health System 5.750% 11/15/2025 $1,500,000 $1,509,090
Orange County, Florida,
Housing Finance
Authority, Florida,
GNMA Collateralized
Mortgage Revenue
Refunding 8.400 12/01/2018 300,000 315,861
Orange County, Florida,
Housing Finance
Authority, Mortgage
Revenue Refunding 8.100 11/01/2021 735,000 777,637
Orlando, Florida,
Utilities Commission,
Water and Electric
Revenue 6.000 10/01/2010 150,000 162,881
Palm Beach County,
Florida, Health
Facilities Authority,
Good Samaritan Health
Systems 6.200 10/01/2011 1,500,000 1,554,195
Palm Beach County,
Florida, Solid Waste
Authority,
Adjustable/Fixed
Rate Revenue 8.750 07/01/2010 55,000 59,930
Palm Beach County,
Florida, Solid Waste
Industrial Development,
Okeelanta Power Project 6.850 02/15/2021 2,000,000 2,043,320
Palm Beach County,
Florida, Solid Waste
Industrial Development
(Osceola Power) 6.950 01/01/2022 2,750,000 2,835,168
Sarasota County, Florida,
Utility Systems Revenue
(FGIC) 6.500 10/01/2022 1,000,000 1,107,190
Tallahassee, Florida,
Health Facilities,
Tallahassee Memorial
Regional Medical
Project (MBIA) 6.625 12/01/2013 2,640,000 2,978,923
Tampa, Florida,
Subordinated Guaranteed
Entitlement Revenue,
Series 1988B 8.400 10/01/2008 1,065,000 1,186,378
ILLINOIS
Chicago, Illinois, Gas
Supply Revenue
(People's Gas, Light
and Coke Co.), Series A 8.100 05/01/2020 910,000 1,027,581
Illinois Educational
Facilities Authority,
Wesleyan University 5.625 09/01/2018 1,500,000 1,491,330
Illinois Health
Facilities Authority,
Community Hospital,
Ottawa Project 6.850 08/15/2024 1,500,000 1,540,725
Illinois Health
Facilities Authority,
United Medical Center 8.375 07/01/2012 1,000,000 1,233,260
Quincy, Illinois,
Blessing Hospital
Revenue 6.000 11/15/2018 750,000 733,448
Robbins, Illinois,
Robbins Resources
Recovery 9.250 10/15/2014 1,000,000 1,079,590
LOUISIANA
Louisiana Public
Facilities Authority,
Prerefunded Health and
Education 7.900 12/01/2015 235,000 263,686
Louisiana Public
Facilities Authority,
West Jefferson Medical
Center (MBIA) 7.900 12/01/2015 1,455,000 1,607,877
MARYLAND
Maryland State Community
Development
Administration 8.125 04/01/2017 395,000 412,451
MASSACHUSETTS
Boston, Massachusetts,
Metropolitan District,
General Obligation 5.900 12/01/2009 1,595,000 1,701,482
Massachusetts Bay
Transportation
Authority 7.000 03/01/2021 1,750,000 2,085,090
Massachusetts Bay
Transportation
Authority, Series A 6.250 03/01/2012 2,000,000 2,190,780
Massachusetts Bay
Transportation
Authority, Series A 7.000 03/01/2011 1,000,000 1,168,990
Massachusetts General
Obligation (FGIC)
(effective yield
7.000%) (a) 0.000 06/01/2007 400,000 228,088
Massachusetts Health and
Educational Facilities
Authority, Daughters of
Charity, Series D 6.100 07/01/2014 600,000 624,594
See Notes to Schedule of Investments.
10
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
MASSACHUSETTS--continued
Massachusetts Health and
Educational Facilities
Authority, Mount Auburn
Hospital (MBIA) 6.250% 08/15/2014 $ 500,000 $ 531,630
Massachusetts Housing
Finance Agency (MBIA) 5.950 12/01/2014 850,000 860,880
Massachusetts Housing
Finance Agency, Housing
Revenue 9.000 12/01/2018 305,000 320,345
Massachusetts Housing
Finance Agency,
Multi-family
Residential Housing 8.800 08/01/2021 250,000 260,530
Massachusetts Housing
Finance Agency,
Residential Housing 8.400 08/01/2021 1,490,000 1,545,592
Massachusetts Housing
Finance Agency,
Residential Housing 8.500 08/01/2020 15,000 15,503
Massachusetts Industrial
Finance Agency, Harvard
Community Health Plan,
Inc. 8.125 10/01/2017 300,000 326,838
Massachusetts Industrial
Finance Agency, Solid
Waste Disposal 9.000 08/01/2016 1,200,000 1,205,772
Massachusetts State
Health and Educational
Facilities,
Rehabilitation
Hospital, Cape Islands,
Series A 7.875 08/15/2024 500,000 514,175
Massachusetts State Water
Pollution, Series A 6.375 02/01/2015 1,000,000 1,072,860
Massachusetts State Water
Pollution, Series C 6.000 12/01/2011 1,000,000 1,068,980
North Adams,
Massachusetts, Limited
Tax, General Obligation
(AMBAC) 5.700 03/01/2013 600,000 617,106
Quincy, Massachusetts,
Quincy Hospital (FSA) 5.250 01/15/2016 375,000 359,629
MICHIGAN
Monroe County, Michigan,
Economic Development
Corp., Detroit Edison
Co. (FGIC) 6.950 09/01/2022 500,000 607,495
MINNESOTA
Minnesota Housing Finance
Agency, Single Family
Mortgage, Series A 8.200 08/01/2019 595,000 620,972
MISSOURI
Kansas City, Missouri,
Municipal Assistance
Corp. Revenue (AMBAC) 6.000 04/15/2020 500,000 515,250
Kansas City, Missouri,
School District
Building, Capital
Improvement Project
(FGIC) 5.000 02/01/2014 1,500,000 1,427,460
Missouri Housing
Development Corp.,
Multi-family, Series A 5.400 02/01/2013 60,000 58,663
Missouri State Health and
Educational Facilities
Authority, Barnes
Jewish Inc. 5.250 05/15/2012 500,000 485,845
St. Louis County,
Missouri, Convention
Sports Project, Series
B 5.600 08/15/2008 500,000 499,445
NEW HAMPSHIRE
New Hampshire Housing
Finance Authority,
Single Family
Residential Mortgage 8.625 07/01/2013 240,000 250,980
NEW MEXICO
Albuquerque, New Mexico,
Airport Revenue, Series
B 8.750 07/01/2019 500,000 536,065
New Mexico Mortgage
Finance Authority,
Single Family Mortgage
(FGIC) 8.500 07/01/2007 380,000 397,024
New Mexico Mortgage
Finance Authority,
Single Family Mortgage
(FGIC) 8.625 07/01/2017 1,950,000 2,037,302
NEW YORK
Metropolitan
Transportation
Authority, New York,
Series K,
Transportation
Facilities Revenue
(MBIA) 6.000 07/01/2016 135,000 138,804
New York City, New York,
General Obligation,
Fiscal 1992, Series A 7.750 08/15/2015 1,500,000 1,700,400
New York City Municipal
Water Financing
Authority, Series A 6.000 06/15/2025 2,000,000 2,062,220
See Notes to Schedule of Investments. (continued on next page)
11
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
NEW YORK--continued
New York State Dormitory
Authority, State
University Educational
Facilities Revenue,
Series A 6.375% 05/15/2014 $1,900,000 $1,992,074
New York State Dormitory
Authority, State
University Educational
Facilities Revenue,
Series C 7.375 05/15/2010 1,300,000 1,540,331
New York State Local
Government Assistance
Corp., Series A 5.500 04/01/2017 1,100,000 1,098,526
New York State Thruway
Authority, Service
Contract Revenue, Local
Highways and Bridges 5.875 04/01/2014 2,000,000 2,001,120
New York State Urban
Development Corp.,
Refunding Correctional
Facilities, Series A 5.250 01/01/2021 2,000,000 1,845,500
New York State Urban
Development Corp.,
Refunding Correctional
Facilities, Series A 6.500 01/01/2010 1,000,000 1,088,360
New York Urban
Development Corp.,
Correctional
Facilities, Series A 7.500 04/01/2011 1,000,000 1,161,440
Triborough Bridge and
Tunnel Authority, New
York 6.250 01/01/2012 1,690,000 1,780,567
OKLAHOMA
Tulsa, Oklahoma,
Industrial Authority
Hospital Revenue, St.
John Medical Center
Project, Series A 6.250 02/15/2014 1,250,000 1,297,388
OREGON
Western Generation
Agency, Oregon, Wauna
Cogeneration Project,
Series B (b) 7.400 01/01/2016 1,000,000 1,083,270
PENNSYLVANIA
Allentown, Pennsylvania,
Area Hospital Authority
Reveneue, Sacred Heart
Hospital of Allentown 6.750 11/15/2014 750,000 754,020
Butler County,
Pennsylvania, Hospital
Authority, Butler
Memorial Hospital 8.000 07/01/2016 935,000 971,456
Cambria County,
Pennsylvania, Hospital
Development Authority,
Conemaugh Valley
Memorial Hospital 6.625 08/15/2012 100,000 109,996
Cambria County,
Pennsylvania, Hospital
Development Authority,
Conemaugh Valley
Memorial Hospital 8.875 07/01/2018 2,400,000 2,718,288
Chester County,
Pennsylvania, Health
And Education
Facilities Authority,
Mainline Health System 5.500 05/15/2015 1,000,000 974,130
Pennsylvania Convention
Center Authority (FGIC)
(effective yield
7.000%) (a) 0.000 09/01/2008 3,500,000 1,849,785
Pennsylvania Economic
Development Financing
Authority, Resources
Recovery, Colver
Project (b) 7.125 12/01/2015 1,000,000 1,062,200
Pennsylvania Economic
Development Financing
Authority, Resources
Recovery, Northampton
Project (b) 6.500 01/01/2013 2,000,000 1,990,780
Pennsylvania Higher
Education Facilities
Authority, Temple
University (MBIA) 5.750 04/01/2031 500,000 501,140
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities 6.000 06/01/2014 2,000,000 1,894,440
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities, Albert
Einstein Medical Center
Authority 7.625 04/01/2011 250,000 270,078
See Notes to Schedule of Investments.
12
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
PENNSYLVANIA--continued
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities, Community
College, Series B
(MBIA) 6.500% 05/01/2007 $1,000,000 $1,117,710
Pottsville, Pennsylvania,
Hospital Authority,
Daughters of Charity
Health Systems, Inc.,
Good Samaritan Hospital 8.250 08/01/2012 285,000 309,866
Ridley Park,
Pennsylvania, Hospital
Authority 6.125 12/01/2020 500,000 457,885
Scranton-Lackawanna,
Pennsylvania, Health
and Welfare Authority
Revenue, Walters
Institute Project 8.125 07/15/2028 2,200,000 2,391,818
PUERTO RICO
Puerto Rico Commonwealth,
General Obligation 7.000 07/01/2010 1,000,000 1,178,060
Puerto Rico Commonwealth,
Telephone Authority 5.400 01/01/2008 1,400,000 1,426,348
Puerto Rico Electric
Power Authority, Series
S 7.000 07/01/2007 1,365,000 1,593,023
Puerto Rico Public
Buildings Authority,
Guaranteed Public
Education and Health
Facilities, Series M 5.700 07/01/2009 100,000 103,314
SOUTH DAKOTA
South Dakota Student Loan
Finance, Series A 6.750 08/01/2010 1,510,000 1,564,451
TENNESSEE
Bristol, Tennessee,
Health and Education
Authority, Bristol
Memorial Hospital
(FGIC) 6.750 09/01/2010 2,000,000 2,309,200
Knox County, Tennessee,
Health and Educational
Facilities, Fort
Sanders Hospital
Alliance, Series B
(MBIA) 7.250 01/01/2010 1,000,000 1,193,700
Knox County, Tennessee,
Health and Educational
Facilities, Fort
Sanders Hospital
Alliance, Series C
(MBIA) 5.250 01/01/2015 1,500,000 1,464,480
TEXAS
Austin, Texas, Utilities
System Revenue
(effective yield
6.810%) (a) 0.000 11/15/2011 2,700,000 1,131,570
Brazos River Authority,
Texas, Revenue
Refunding, Houston
Light and Power Project
(MBIA) 8.100 05/01/2019 3,000,000 3,278,580
Brazos, Texas, Higher
Education Authority
Inc., Series A 6.500 06/01/2004 475,000 506,013
Harris County, Texas,
Toll Road, Series A 7.000 08/15/2010 625,000 742,963
Harris County, Texas,
Toll Road, Sr. Lien
Revenue Toll Road 8.625 08/15/2007 1,000,000 1,103,350
Harris County, Texas,
Toll Road, Unlimited
Tax and Subordinate
Lien Refunding 8.125 08/01/2015 2,250,000 2,514,060
Midland County, Texas,
Hospital District,
Midland Memorial
Hospital 7.500 06/01/2016 400,000 421,226
Midland County, Texas,
Hospital District,
Midland Memorial
Hospital (effective
yield 7.700%) (a) 0.000 06/01/2007 90,000 44,913
Port of Corpus Christi,
Texas, Industrial
Development Corp.,
Valero Refining and
Marketing Co. Project,
Series A 10.250 06/01/2017 990,000 1,093,693
Texas Municipal Power
Agency (AMBAC)
(effective yield
7.090%) (a) 0.000 09/01/2006 2,500,000 1,466,325
Texas Municipal Power
Agency (AMBAC)
(effective yield
7.150%) (a) 0.000 09/01/2008 1,200,000 617,844
Texas State Water
Development, Unlimited
Tax, General Obligation 5.125 08/01/2015 650,000 628,368
See Notes to Schedule of Investments. (continued on next page)
13
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
UTAH
Intermountain Power
Agency, Utah, Power
Supply (ETM)
(effective yield
6.800%) (a) 0.000% 07/01/2020 $ 500,000 $ 75,975
Intermountain Power
Agency, Utah, Power
Supply Refunding,
Series A (effective
yield 6.950%) (a) 0.000 07/01/2007 750,000 424,005
Utah State Housing
Finance Authority,
Single Family Mortgage 9.000 01/01/2019 35,000 36,816
VIRGINIA
Hanover County, Virginia,
Industrial Development
Authority, Bon Secours
Health System Project 5.500 08/15/2025 2,000,000 1,979,960
Pittsylvania County,
Virginia, Industrial
Development, Series A 7.300 01/01/2004 1,000,000 1,069,740
Pittsylvania County,
Virginia, Industrial
Development, Series A
(b) 7.500 01/01/2014 3,500,000 3,749,935
WASHINGTON
Port of Seattle,
Washington, General
Obligation 5.750 05/01/2014 500,000 503,000
Washington Public Power
Supply System, Nuclear
Project # 1 14.500 07/01/2002 150,000 173,781
Washington Public Power
Supply System, Nuclear
Project # 1, Series D 15.000 07/01/2017 250,000 273,110
Washington Public Power
Supply System, Nuclear
Project # 2, Series C 7.625 07/01/2010 1,000,000 1,161,170
Washington State General
Obligation, Series A 6.750 02/01/2015 1,000,000 1,156,000
WYOMING
Wyoming Community
Development Authority,
Single Family Mortgage 7.875 06/01/2018 1,405,000 1,477,034
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost--$132,449,310) 143,651,396
================================================================================
TEMPORARY TAX-EXEMPT
INVESTMENTS (1.2%)
Dade County, Florida,
Water and Sewer Systems
Revenue
(Cost $1,825,000) (d) 3.700 10/05/2022 1,825,000 1,825,000
================================================================================
TOTAL INVESTMENTS
(Cost--$134,274,310) (c) 145,476,396
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES--NET (1.7%) 2,540,652
- --------------------------------------------------------------------------------
NET ASSETS (100.0%) $148,017,048
================================================================================
See Notes to Schedule of Investments.
14
<PAGE>
Notes to Schedule of Investments:
(a) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until its maturity date. All
zero coupon bonds are noncallable.
(b) 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 amended. These securities have been
determined to be liquid under guidelines established by the Board of
Trustees.
(c) The cost of investments for federal tax purposes amounted to
$134,271,034. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at November 30, 1995 are as
follows:
Gross unrealized appreciation $11,310,602
Gross unrealized depreciation (105,240)
------------
Net unrealized appreciation $11,205,362
============
(d) Variable or floating rate instruments with periodic demand features.
The Fund is entitled to full payment of principle and accrued interest
upon surrendering the security to the issuing agent according to the
terms of the demand features.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrowed To Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
See Notes to Financial Statements.
15
<PAGE>
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
February 13,
1987
(Commencement
of Operations)
Year Ended November 30, to
November 30,
1995(d) 1994 1993 1992 1991 1990 1989 1988 1987
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.93 $ 10.25 $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.51 0.51 0.57 0.63 0.61 0.59 0.62 0.63 0.33
Net realized and
unrealized gain
(loss) on investments
and futures contracts 1.13 (1.28) 0.36 0.30 0.31 (0.06) 0.34 0.37 (0.32)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.64 (0.77) 0.93 0.93 0.92 0.53 0.96 1.00 0.01
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.51) (0.52) (0.57) (0.62) (0.61) (0.60) (0.63) (0.68) (0.37)
In excess of net
investment income (0.01) 0.00 (0.04) 0.00 (0.00) (0.03) 0.00 0.00 0.00
Net realized gain
on investments 0.00 0.00 (0.24) (0.27) (0.12) (0.20) (0.05) 0.00 0.00
Tax basis return of
capital 0.00 (0.03) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.52) (0.55) (0.85) (0.89) (0.73) (0.83) (0.68) (0.68) (0.37)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of year $ 10.05 $ 8.93 $ 10.25 $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64
================================================================================================================================
Total return (b) 18.71% (7.81%) 9.37% 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
Ratios/supplemental data
Ratios to average
net assets:
Total expenses 1.19%(a) 1.13% 1.21% 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(c)
Net investment income 5.35% 5.27% 5.40% 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(c)
Portfolio turnover rate 30% 98% 47% 32% 37% 42% 49% 109% 67%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of year
(thousands) $94,183 $95,691 $124,102 $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
================================================================================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.18%.
(b) Excluding applicable sales charges.
(c) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to November 30, 1987.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the year)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1995 (d) 1994 November 30, 1993
================================================================================
Net asset value, beginning
of year $8.88 $10.25 $10.27
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.44 0.45 0.37
Net realized and unrealized
gain (loss) on
investments and futures
contracts 1.11 (1.29) 0.30
- --------------------------------------------------------------------------------
Total from investment
operations 1.55 (0.84) 0.67
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.45) (0.50) (0.37)
In excess of net investment
income (0.01) 0.00 (0.08)
Net realized gain on
investments 0.00 0.00 (0.24)
Tax basis return of capital 0.00 (0.03) 0.00
- --------------------------------------------------------------------------------
Total distributions (0.46) (0.53) (0.69)
- --------------------------------------------------------------------------------
Net asset value, end of
year $ 9.97 $ 8.88 $10.25
================================================================================
Total return (b) 17.84% (8.43%) 6.59%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.96%(a) 1.88% 1.96%(c)
Net investment income 4.59% 4.60% 4.42%(c)
Portfolio turnover rate 30% 98% 47%
- --------------------------------------------------------------------------------
Net assets, end of year
(thousands) $33,449 $28,860 $14,091
================================================================================
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.94%.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
17
<PAGE>
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the year)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1995 (d) 1994 November 30, 1993
================================================================================
Net asset value, beginning
of year $8.88 $10.26 $10.27
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.44 0.43 0.37
Net realized and unrealized
gain (loss) on
investments and futures
contracts 1.11 (1.27) 0.31
- --------------------------------------------------------------------------------
Total from investment
operations 1.55 (0.84) 0.68
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.45) (0.51) (0.37)
In excess of net investment
income (0.01) 0.00 (0.08)
Net realized gain on
investments 0.00 0.00 (0.24)
Tax basis return of capital 0.00 (0.03) 0.00
- --------------------------------------------------------------------------------
Total distributions (0.46) (0.54) (0.69)
- --------------------------------------------------------------------------------
Net asset value, end of
year $ 9.97 $ 8.88 $10.26
================================================================================
Total return (b) 17.84% (8.52%) 6.70%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.96%(a) 1.89% 1.94%(c)
Net investment income 4.59% 4.52% 4.41%(c)
Portfolio turnover rate 30% 98% 47%
- --------------------------------------------------------------------------------
Net assets, end of year
(thousands) $20,386 $23,230 $27,261
================================================================================
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.94%.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average shares oustanding.
See Notes to Financial Statements.
18
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
November 30, 1995
===================================================================
Assets (Note 1):
Investments at market value
(identified cost--$134,274,310) $145,476,396
Cash 4,472
Receivable for:
Fund shares sold 24,803
Interest 2,895,155
Prepaid expenses 16,572
- -------------------------------------------------------------------
Total assets 148,417,398
- -------------------------------------------------------------------
Liabilities (Notes 2 and 4):
Payable for:
Fund shares redeemed 22,764
Distributions to shareholders 288,160
Other accrued expenses 89,426
- -------------------------------------------------------------------
Total liabilities 400,350
- -------------------------------------------------------------------
Net assets $148,017,048
===================================================================
Net assets represented by (Note 1):
Paid-in capital $143,800,682
Accumulated distributions in excess of net
investment income (288,160)
Net accumulated realized gain (loss) on
investments (6,697,560)
Net unrealized appreciation (depreciation) on
investments 11,202,086
- -------------------------------------------------------------------
Total net assets $148,017,048
===================================================================
Net Asset Value per share
Class A Shares
Net asset value of $94,182,774 / 9,370,675
shares outstanding $10.05
Offering price per share ($10.05 / 0.9525)
(based on a sales charge of 4.75% of the
offering price on November 30, 1995) $10.55
Class B Shares
Net asset value of $33,448,526 / 3,356,230
shares outstanding $ 9.97
Class C Shares
Net asset value of $20,385,748 / 2,045,152
shares outstanding $ 9.97
====================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended November 30, 1995
====================================================================
Investment income (Note 1):
Interest $ 9,776,365
Expenses (Notes 2 and 4):
Management fee $ 919,802
Transfer agent fees 211,525
Accounting, auditing and legal 64,552
Custodian fees 98,704
Printing 46,538
Trustees' fees and expenses 12,634
Distribution Plan expenses 766,469
Registration fees 60,285
Miscellaneous expenses 15,378
- --------------------------------------------------------------------
Total expenses 2,195,887
Less: Expenses paid indirectly (Note 4) (20,278)
- --------------------------------------------------------------------
Net expenses 2,175,609
- --------------------------------------------------------------------
Net investment income 7,600,756
- --------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and closed futures
contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments (110,715)
Closed futures contracts (650,028)
- --------------------------------------------------------------------
Net realized gain (loss) on investments
and closed futures contracts (760,743)
Net change in unrealized appreciation
(depreciation) on investments 18,451,939
- --------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and closed futures
contracts 17,691,196
- --------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $25,291,952
====================================================================
19
<PAGE>
Keystone Tax Free Income Fund
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS Year Ended November 30,
1995 1994
============================================================================= ==============================
<S> <C> <C>
Operations:
Net investment income $ 7,600,756 $ 8,330,638
Net realized loss on investments and closed futures contracts (760,743) (5,869,377)
Net change in unrealized appreciation (depreciation) on investments 18,451,939 (16,025,461)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 25,291,952 (13,564,200)
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1):
Net investment income:
Class A Shares (5,042,433) (5,980,145)
Class B Shares (1,531,824) (1,297,179)
Class C Shares (1,026,499) (1,452,252)
In excess of net investment income:
Class A Shares (70,626) 0
Class B Shares (21,455) 0
Class C Shares (14,377) 0
Tax basis return of capital:
Class A Shares 0 (338,046)
Class B Shares 0 (101,954)
Class C Shares 0 (82,063)
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (7,707,214) (9,251,639)
- ------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 2,127,732 6,833,913
Class B Shares 6,139,897 21,886,789
Class C Shares 3,205,146 9,086,896
Payment for shares redeemed:
Class A Shares (17,659,525) (23,370,474)
Class B Shares (5,968,412) (4,163,609)
Class C Shares (9,212,881) (10,093,259)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 2,608,685 3,231,223
Class B Shares 790,394 718,132
Class C Shares 619,790 1,013,566
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions (17,349,174) 5,143,177
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 235,564 (17,672,662)
Net assets:
Beginning of year 147,781,484 165,454,146
- ------------------------------------------------------------------------------------------------------------
End of year [including accumulated distributions in excess of net investment
income as follows: November 1995--($288,160) and November 1994--($333,473)] $148,017,048 $147,781,484
============================================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Tax Free Income Fund (formerly Keystone America Tax Free Income
Fund) ("Fund") is a Massachusetts business trust for which Keystone
Management Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the Investment Adviser. The Fund was organized on October 24, 1986 and had no
operations prior to February 13, 1987. It is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified open-end
investment company.
The Fund currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year of purchase, and available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company (formerly Keystone Distributors,
Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members 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.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value. Short-term investments which are purchased
with maturities of sixty days or less are valued at amortized cost (original
cost as adjusted for amortization of premium or accretion of discount) which,
when combined with accrued interest approximates market. Short term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in more than sixty days when purchased which are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on
the sixtieth day adjusted for amortization of premium or accretion of
discount) which, when combined with accrued interest, approximates market.
All other securities and other assets are valued at fair value as determined
in good faith using methods prescribed by the Board of Trustees.
B. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
21
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
101% of 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 agreement,
the realization of the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
C. The Fund may enter into currency or financial futures contracts as a hedge
against changes in interest or currency exchange rates. A futures contract is
an agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at a set price on a future date. Upon entering into a futures contract
the Fund is required to deposit with a broker an amount ("initial margin")
equal to a certain percentage of the purchase price indicated in the futures
contract. Subsequent payments ("variation margin") are made or received by
the Fund each day, as the value of the underlying instrument or index
fluctuates, and are recorded for book purposes as unrealized gains or losses
by the Fund. For federal tax purposes, any futures contracts which remain
open at fiscal year end are marked-to-market and the resultant net gain or
loss is included in the Fund's taxable income. In addition to market risk,
the Fund is subject to the credit risk that the other party will not complete
the obligations of the contract.
D. When-issued or delayed delivery transactions arise when securities or
currencies are purchased or sold by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When-issued
and delayed delivery agreements are subject to risks from changes in value
based upon changes in the level of interest rates and other market factors,
both before and after delivery.
E. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis. All
premiums and original issue discounts are amortized/accreted for both
financial reporting and federal income tax purposes.
F. 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 "Internal Revenue 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 intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
G. The Fund declares dividends from net investment income monthly and
distributes to its shareholders such dividends monthly. The Fund declares and
distributes all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. Distributions from tax basis net investment income and net
capital gains can exceed book basis net investment income and net capital
gains. Differences between book basis investment income distributions and tax
basis investment income distributions are primarily attributable to
differences in the treatment of 12b-1 Distribution Plan charges and tax basis
returns of capital.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:
Year Ended November 30,
1995 1994
- ------------------------------------------------------
Class A Shares
Shares sold 224,063 697,684
Shares redeemed (1,843,241) (2,421,649)
Shares issued in
reinvestment of
dividends and
distributions 270,624 333,532
- ------------------------------------------------------
Net decrease (1,348,554) (1,390,433)
======================================================
Class B Shares
Shares sold 647,077 2,235,194
Shares redeemed (625,195) (432,965)
Shares issued in
reinvestment of
dividends and
distributions 82,512 75,307
- ------------------------------------------------------
Net increase 104,394 1,877,536
======================================================
Class C Shares
Shares sold 338,010 922,206
Shares redeemed (974,642) (1,068,581)
Shares issued in
reinvestment of
dividends and
distributions 64,840 105,124
- ------------------------------------------------------
Net decrease (571,792) (41,251)
======================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B, and Class C
shares pursuant to Rule 12b-1 under the 1940 Act.
The Class A Distribution Plan provides for payments at an annual rate of
0.25% of the average daily net asset value of Class A shares to pay expenses
for 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 0.25% of the average net asset
value of Class A shares maintained by such others and remaining outstanding
on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class B shares to pay
expenses for the distribution of Class B shares. Amounts paid by the Fund
under the 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 a Class B share, the
dealer or other party will receive
23
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
service fees at an annual rate of 0.25% of the average daily net asset value
of each Class B shares maintained by such others and remaining outstanding on
the Fund's books for specified periods. A contingent deferred sales charge
will be imposed, if applicable, on Class B shares purchased after June 1,
1995 at rates ranging from a maximum of 5% of amounts redeemed during the
first twelve months following the date of purchase to 1% of amounts redeemed
during the sixth twelve month period following the date of purchase. Class B
shares purchased on or after June 1, 1995 that have been outstanding for
eight years following 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 will retain their existing conversion
rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by each Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 0.75% of the
price paid for each 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% (subject to applicable
limitations imposed by a rule of the National Association of Securities
Dealers, Inc. ("NASD Rule")) plus service fees at an annual rate of 0.25%,
respectively, of the average net asset value of each Class C share sold by
such others and remaining outstanding on the books of the Fund for specified
periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any of the
Distribution Plans, 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 Plan was in effect.
For the year ended November 30, 1995, the Fund paid KIDC $229,818,
$320,355 and $216,296, pursuant to the Fund's Class A, Class B and Class C
Distribution Plans, respectively.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Class B Distribution Plans at November
30, 1995 are $1,945,004 for shares purchased prior to June 1, 1995 and
$162,557 for shares purchased on or after June 1, 1995. The maximum
uncollected amounts for which KIDC may seek payment from the Fund under its
Class C Distribution Plans is $2,197,650 as of November 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of November 30, 1995, the Fund had capital loss carryovers for federal
income tax purposes of approximately $6,698,000 which expire as follows:
2002-$5,831,000, 2003-$867,000.
Cost of purchases and proceeds from sales of investment securities,
excluding short-term securities, during the year ended November 30, 1995 were
$44,461,072 and $63,089,275, respectively.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily at a
rate of 2.0% of the Fund's gross investment income plus an amount determined
by applying annual percentage rates, which start at 0.50% and decline to
0.25% as net assets increase, 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 November 30, 1995, the
Fund paid or accrued to Keystone investment management and administrative
service fees of $919,802 which represented 0.61% of the average net assets of
the Fund. Of such amount paid to KMI, $781,832 was paid to Keystone for its
services to the Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, serves as the Fund's transfer agent. During the year
ended November 30, 1995, the Fund paid or accrued to KIRC $211,525 for
transfer agent fees.
During the year ended November 30, 1995, the Fund paid or accrued to KII
$19,338 for certain accounting services.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets
over $100 million.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended November 30, 1995, the Fund paid custody fees
in the amount of $78,426 and received a credit of $20,278 pursuant to the
expense offset arrangement, resulting in a total expense of $98,704. The
assets deposited with the custodian under this expense offset arrangement
could have been invested in an income-producing asset.
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.
(5.) Distributions to Shareholders
Distributions of $0.043, $0.037 and $0.037 per share were declared payable
January 5, 1996 to shareholders of record on December 22, 1995 for Class A,
Class B and Class C shares, respectively. These distributions are not
reflected in the accompanying financial statements.
25
<PAGE>
Keystone Tax Free Income Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Tax Free Income Fund (formerly Keystone America Tax Free Income
Fund), including the schedule of investments, as of November 30, 1995, and
the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the eight-year
period then ended and for the period from February 13, 1987 (commencement of
operations) to November 30, 1987 for Class A shares and for each of the years
in the two year period ended November 30, 1995 and the period from February
1, 1993 (date of initial public offering) to November 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 November 30, 1995 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 Tax Free Income Fund as of November 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 5, 1996
26
<PAGE>
TAX STATUS--Fiscal 1995 Distributions (Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Income Dividends
- -----------------------------------------------
Tax-exempt Taxable Total
- -----------------------------------------------
Class A $0.52 $0.00 $0.52
Class B $0.46 $0.00 $0.46
Class C $0.46 $0.00 $0.46
===============================================
In January 1996, we will send you complete information on distributions
paid during the calendar year 1995 to assist you in completing your federal
income tax return.
27
<PAGE>
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development 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 INVESTMENTS LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
TFI-AR-1/96 ["Recycle" symbol]
7.8M
[FRONT COVER]
K E Y S T O N E
[Mother and child beneath American flag]
TAX FREE
INCOME FUND
[KEYSTONE LOGO]
ANNUAL REPORT
NOVEMBER 30, 1995
