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KEYSTONE AMERICA
FAMILY OF FUNDS
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Balanced Fund II
Capital Preservation and Income Fund
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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
Fund for Total Return
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Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Small Company Growth Fund II
Strategic Development Fund
[KEYSTONE LOGO] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
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.
TFIF-R-7/96
6.9M
K E Y S T O N E
[PHOTO OF FLAG]
TAX FREE
INCOME FUND
[KEYSTONE LOGO]
SEMIANNUAL REPORT
MAY 31, 1996
<PAGE>
PAGE 1
Keystone Tax Free Income Fund
Seeks a high level of current income, exempt from federal income tax, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on the activities in Keystone Tax Free Income
Fund for the six-month period which ended May 31, 1996. Following this letter,
we have included a discussion with your Fund's manager discussing portfolio
strategy.
Performance
Your Fund provided the following returns, including both price changes and
reinvestment of dividends, for the six and twelve-month periods:
Class A shares returned (1.55%) for the six-month and 3.02% for the
twelve-month period.
Class B shares returned (1.92%) for the six-month and 2.27% for the
twelve-month period.
Class C shares returned (1.92%) for the six-month and 2.27% for the
twelve-month period.
The Lehman Municipal Bond Index--a widely recognized benchmark of municipal
bond performance--returned (0.58%) and 4.57% for the same six- and twelve-month
periods.
These negative returns reflected a volatile and challenging period for
municipal bond investors. The unsettled period was triggered by a changed
environment of significantly higher interest rates. This was not expected by
many professional investment managers who had anticipated a continuation of
moderate economic growth and relatively low interest rates. The rate increases
resulted in widespread price declines. As a result, we believe higher rates have
added to the attractiveness of municipal bonds, increasing the potential for
greater tax-free income.
A period of adjustment
The past six months can be characterized as a time of adjustment for municipal
bonds. In December 1995 investors were still enjoying the final phase of last
year's powerful bond market rally. However, by February 1996, a series of
economic reports indicated that the economy was stronger than many had expected.
These reports created uncertainty and raised concerns about higher inflation. As
a result, interest rates rose and bond prices declined. Caution still influences
the bond market's tone; however, it appears that most of the increase in
long-term rates has already occurred.
We know that the markets and interest rates are influenced by changes in the
economic and business cycle over the short-term. However, over the long-term, we
believe tax-free bonds should provide attractive returns and income. Today, we
think municipal bonds offer significant opportunities for investors. Inflation
is still relatively low by historical standards and, real yields--after
factoring in the effects of taxes and inflation--are historically high, in our
opinion. For example, a 10-year AA-rated bond was yielding 5.15% on May 31,
1996. For an investor in the 36% tax bracket, the taxable equivalent yield is
8.05%.1 We think this yield is very attractive especially when you consider that
inflation has been relatively low.
Outlook
In the coming months, we expect municipal bonds to trade in a narrow range, with
yields somewhat higher than 1995. During the second half of 1996, we expect
moderate economic strength and well contained inflation which should help to
support prices close to current levels.
--continued--
1Yields are presented for illustrative purposes only and do not reflect your
Fund's yield. Your yield and return is dependent on the Fund's yield and your
individual tax situation.
<PAGE>
PAGE 2
Keystone Tax Free Income Fund
On January 1, 1996, Daniel A. Rabasco assumed responsibility as portfolio
manager of your Fund. Mr. Rabasco is portfolio manger of several other Keystone
state tax free funds and has over nine years' experience evaluating municipal
bonds. He will continue to work closely with Betsy Blacher, head of Keystone's
municipal bond team. We look forward to Mr. Rabasco's contribution as portfolio
manager of your Fund.
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
July 1996
2 For investors in certain tax situations, a portion of income may be subject to
the federal alternative minimum tax (AMT).
[DALBAR LOGO] Dalbar Key Honors
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.
[TELEPHONE Keystone Introduces Investment Insight Line for [TELEPHONE LOGO]
LOGO] Shareholders
Now you can keep up-to-date on your fund's current strategy and
outlook by calling Keystone Investment Insight Line. You can hear
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
<PAGE>
PAGE 3
A Discussion With
Your Fund's Manager
Daniel A. Rabasco is vice president and portfolio manager of your Fund. Mr.
Rabasco is a Chartered Financial Analyst with nine years' experience in the
financial services industry. He received a BA in History and Political Science
from Boston College and an MBA from Suffolk University. Mr. Rabasco is a member
of Keystone's municipal bond team headed by Betsy Blacher. The team includes
portfolio manager George Kimball, analyst David Moore and trader Craig Kasap.
The team searches for quality municipal bonds for your Fund.
Q What does the Fund offer investors?
A Keystone Tax Free Income Fund is designed for tax-sensitive investors who seek
a high level of current income exempt from federal income tax, while preserving
capital.3 The Fund offers professional management and diversification by
investing in a portfolio of quality municipal bonds.
Q How do you select securities for the Fund?
A Our management team employs an intensive research process, paying careful
attention to credit quality and financial stability. We structure the portfolio
with bonds that meet our high credit standards. Our holdings typically have the
characteristics that we believe are necessary for good performance in the
current and anticipated interest rate environment. We emphasize diversification
and focus on maximizing the Fund's income.
Q What was the tone of the municipal bond market over the past six months?
A As we began the reporting period in December 1995, investors were still
enjoying the final phase of last year's strong bond market rally. By February
1996, expectations of a slowing economy and further interest rate declines gave
way to stronger economic growth. Higher than expected employment numbers in
February raised concerns about higher inflation. This caused interest rates to
rise and bond prices to decline. At the end of May, investors continued to be
cautious, but seemed to have a greater comfort level with the outlook for the
economy and inflation.
Q How did you manage the portfolio in these different environments?
A The sudden and dramatic shift in sentiment surprised many professional
managers. Our forecast for 1996 was for a continuation of the slow growth, low
interest rate and controlled inflation environment. Based on this forecast, we
had a slightly longer average maturity than our peers. Longer term bonds tend to
be more sensitive to changes in interest rates and provide higher income than
shorter term bonds. With interest rates expected to remain stable or decline
slightly, we thought a longer average maturity made sense. When interest rates
rose and bond prices declined in February, the Fund's longer maturity caused the
Fund to slightly lag the performance of municipal bond indexes. As yields rose,
we concentrated on building income. We swapped out of the lower yielding issues
that the Fund held into higher yielding bonds that we considered undervalued. On
May 31, 1996, the Fund's average maturity was 19 years, comparable to that of
its peer group.
3For investors in certain tax situations, a portion of income may be subject
to the federal alternative minimum tax (AMT).
- -------------------------------------------------------------
Fund Profile
Objective: Seeks a high level of current income exempt from
federal income tax, while preserving capital by investing in
high quality municipal bonds.
Commencement of investment operations: April 14, 1987
Average quality: A+
Average maturity: 19 years
Net assets: $137 million
- -------------------------------------------------------------
<PAGE>
PAGE 4
Keystone Tax Free Income Fund
- --------------------------------------------------------------------------------
[Description of Pie Chart]
Portfolio Quality Summary
as of May 31, 1996
S&P Rating4
AAA (39%) AA (7%) A (12%)
BBB (23%) Not rated (18%) Cash (1%)
(as a percentage of portfolio assets) Average Quality: A+
- --------------------------------------------------------------------------------
Q How did you structure the Fund, in terms of quality?
A We sought to maintain the Fund's high credit standards and maximize its income
by utilizing a "barbelled" approach to quality. Primarily, we invested in
insured issues, which were rated AAA. We also invested in BBB and non-rated
securities. We conduct our own credit research on non-rated issues, and believed
that these issues were of comparable quality to investment grade obligations.
Some of the BBB and non-rated bonds were issued by power producers or hospitals.
These bonds typically generate higher yields than AAA-rated bonds. We believed
that these power and hospital bonds were undervalued and presented an investment
opportunity for the Fund.
Q How does the municipal bond market look going forward?
A We continue to believe that the economy is growing at a healthy pace and
inflation poses no immediate threat. Near term price volatility may persist
because of mixed economic indicators. Once signs of moderate growth and tame
inflation emerge, interest rates should stabilize or decline. The supply of
municipal bonds should continue to decline as more bond calls are expected than
new issues over the next twelve months.
We believe the environment continues to be attractive for investors. Municipal
bonds have recently outperformed their taxable counterparts -- U.S. Treasury
securities. In addition, we think that this higher interest rate environment
should be positive for investors seeking tax-free income.
Q Are municipal bonds still a good investment?
A We think that municipal bonds have become more attractive as opportunities to
shelter income have dwindled and the supply of municipals has declined.
In fact, one of the most compelling reasons to own municipals is for their
relatively attractive tax-free yields.6 As of May 31, 1996, a selection of
20-year A-rated municipal bonds were yielding approximately 89% of comparable
U.S. Treasuries.7 With inflation relatively low, the after-tax and after
inflation yields to investors is very attractive.
Taxable-Equivalent Yields5
Federal Tax Bracket
- --------------------------------------
31% 36% 39.6%
- --------------------------------------
Yield Taxable Equivalent Yield
- --------------------------------------
5.5% 8.0% 8.6% 9.1%
6.0% 8.7% 9.4% 9.9%
6.5% 9.4% 10.2% 10.8%
- --------------------------------------
A tax-free yield of 5.5% is equal to a taxable yield of 8.6% for investors in
the 36% federal tax bracket.
4 When a Standard & Poor's rating was not available, we used ratings assigned by
other nationally recognized statistical rating organizations such as Fitch
Investor's Service, Inc. or Moody's Investor's Service, Inc.
5 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.
6 For investors in certain tax situations, a portion of income may be subject to
the federal alternative minimum tax (AMT).
7 Source: Keystone Investments, Inc. Based on a selection of 30-year A-rated
municipal bonds versus the yield on the 30-year U.S. Treasury bond on May 31,
1996.
<PAGE>
PAGE 5
Your Fund's Performance
- --------------------------------------------------------------------------------
[Description of Mountain Chart]
Growth of an investment in
Keystone Tax Free Income Fund Class A
Total Value: $17,297
4/87 9649 9649
9620 9620
5/88 9191 9838
9763 11206
5/90 9487 11802
9677 12836
5/92 9839 14036
9944 15528
5/94 9153 15480
9391 16789
5/96 9182 17296
A $10,000 investment in Keystone Tax Free Income Fund Class A made on April 14,
1987 with all distributions reinvested was worth $17,297 on May 31, 1996. Past
performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Six-Month Performance as of May 31, 1996
-----------------------------------------------------------------------------
Class A Class B Class C
Total return* (1.55%) (1.92%) (1.92%)
Net asset value 11/30/95 $10.05 $9.97 $9.97
5/31/96 $ 9.64 $9.56 $9.56
Dividends $ 0.26 $0.22 $0.22
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of May 31, 1996
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 3.02% 2.27% 2.27%
1-year (1.87%) (1.64%) 2.27%
5-year 28.35% -- --
Life of Class 72.97% 10.02% 12.81%
Average Annual Returns
1-year w/o sales charge 3.02% 2.27% 2.27%
1-year (1.87%) (1.64%) 2.27%
5-year 5.12% -- --
Life of Class 6.18% 2.91% 3.68%
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 reported from the commencement of investment
operations on February 1, 1993. Performance reflects the return you would have
received after holding shares for one year and redeeming at 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.
<PAGE>
PAGE 6
Keystone Tax Free Income Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for managing
a portfolio's assets prudently and making appropriate investment decisions, such
as which securities to buy, hold and sell, based on the investment objectives of
the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds)
that is exchangeable for a set number of another security type (usually common
stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The
NAV per share is determined by subtracting a fund's total liabilities from its
total assets, and dividing that amount by the number of fund shares outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.8%)
ALABAMA
Alabama Housing Finance Agency, Single Family Mortgage 10.750% 06/01/2013 $ 350,000 $ 368,911
Alexander City, Alabama, Special Care Facilities 6.000 12/01/2022 2,000,000 1,815,600
---------------------------------------------------------------------------------------------------------------
ALASKA
Alaska Housing Finance Corp., Collateralized Home Mortgage 8.750 12/01/2016 970,000 1,002,282
North Slope Borough, Alaska, General Obligation Refunding,
Series G (ETM) 8.350 06/30/1998 450,000 482,279
---------------------------------------------------------------------------------------------------------------
CALIFORNIA
California Educational Facilities Authority, Stanford
University Project, Series H 5.000 01/01/2015 1,250,000 1,124,813
California Housing Finance Agency, Home Mortgage Revenue,
Single Family, Series B 8.600 08/01/2019 180,000 188,194
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue 6.750 01/01/2032 1,000,000 1,014,320
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue (effective yield 7.750%) (b) 0.000 01/01/2020 2,000,000 408,160
Southern California Public Power Authority, Palo Verde
Project, Series C (AMBAC) 5.750 07/01/2017 1,000,000 1,049,480
---------------------------------------------------------------------------------------------------------------
COLORADO
City and County of Denver, Colorado, Airport System,
Series A 7.000 11/15/1999 1,250,000 1,305,663
City and County of Denver, Colorado, Airport System,
Series A 7.250 11/15/2025 1,000,000 1,081,467
City and County of Denver, Colorado, Airport System,
Series A 8.000 11/15/2025 1,000,000 1,124,040
City and County of Denver, Colorado, Airport System,
Series A 8.750 11/15/2023 750,000 880,905
City and County of Denver, Colorado, Airport System,
Series B 7.250 11/15/2012 750,000 792,615
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2013 1,100,000 1,265,924
Colorado Housing Finance Authority, Single Family
Residential Revenue, Series C 8.750 09/01/2017 510,000 527,233
---------------------------------------------------------------------------------------------------------------
DELAWARE
Delaware Health Facilities Authority, Medical Center of
Delaware (MBIA) 6.250 10/01/2006 1,000,000 1,087,130
---------------------------------------------------------------------------------------------------------------
FLORIDA
Dade County, Florida, Seaport Refunding (MBIA) 5.125 10/01/2026 2,000,000 1,751,720
Orange County, Florida, Housing Finance Authority, Florida,
GNMA Collateralized Mortgage Revenue Refunding 8.400 12/01/2018 300,000 312,831
Orange County, Florida, Housing Finance Authority, Mortgage
Revenue Refunding 8.100 11/01/2021 710,000 738,641
Palm Beach County, Florida, Health Facilities Authority,
Good Samaritan Health Systems 6.200 10/01/2011 1,500,000 1,496,085
</TABLE>
(continued on next page)
<PAGE>
PAGE 8
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (continued)
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850% 02/15/2021 $2,000,000 $1,918,880
Palm Beach County, Florida, Solid Waste Industrial
Development (Osceola Power) (c) 6.950 01/01/2022 2,750,000 2,653,723
Sarasota County, Florida, Utility Systems Revenue (FGIC) 6.500 10/01/2022 1,000,000 1,121,550
Tallahassee, Florida, Health Facilities, Tallahassee
Memorial Regional Medical Project (MBIA) 6.625 12/01/2013 2,640,000 2,862,235
Tampa, Florida, Subordinated Guaranteed Entitlement Revenue,
Series 1988B 8.400 10/01/2008 1,065,000 1,160,413
---------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago, Illinois, Gas Supply Revenue (People's Gas, Light
and Coke Co.), Series A 8.100 05/01/2020 910,000 1,001,055
Illinois Health Facilities Authority, Community Hospital,
Ottawa Project 6.850 08/15/2024 1,500,000 1,475,775
Illinois Health Facilities Authority, United Medical Center 8.375 07/01/2012 1,000,000 1,192,350
Robbins, Illinois, Robbins Resources Recovery 9.250 10/15/2014 500,000 477,500
---------------------------------------------------------------------------------------------------------------
LOUISIANA
Louisiana Public Facilities Authority, Pendelton Memorial
Methodist Hospital 6.750 06/01/2022 1,470,000 1,429,443
Louisiana Public Facilities Authority, Health and Education,
Prerefunded 7.900 12/01/2015 235,000 258,697
Louisiana Public Facilities Authority, West Jefferson
Medical Center (MBIA) 7.900 12/01/2015 1,435,000 1,552,053
---------------------------------------------------------------------------------------------------------------
MARYLAND
Maryland State Community Development Administration 8.125 04/01/2017 360,000 372,226
---------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Attleboro, Massachusetts, General Obligation 5.125 12/01/2015 670,000 605,050
Franklin, Massachusetts, School Improvements (MBIA) 5.250 11/15/2013 500,000 474,065
Massachusetts Bay Transportation Authority 7.000 03/01/2021 1,950,000 2,200,049
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 2,000,000 2,108,080
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 1,000,000 1,135,520
Massachusetts, General Obligation (FGIC)
(effective yield 7.000%) (b) 0.000 06/01/2007 400,000 222,460
Massachusetts Health and Educational Facilities Authority,
Mount Auburn Hospital (MBIA) 6.250 08/15/2014 500,000 510,035
Massachusetts Housing Finance Agency, Housing Revenue 9.000 12/01/2018 305,000 316,739
Massachusetts Housing Finance Agency, Multi-family
Residential Housing 8.800 08/01/2021 250,000 258,413
Massachusetts Housing Finance Agency, Residential Housing 8.400 08/01/2021 1,490,000 1,524,911
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS (continued)
Massachusetts State Health and Educational Facilities,
Rehabilitation Hospital, Cape Islands, Series A 7.875% 08/15/2024 $1,400,000 $1,430,198
Massachusetts State Industrial Finance Agency, Solid Waste
Disposal, Fitchburg, Massachusetts 9.000 08/01/2016 500,000 431,090
Massachusetts Water Resources Authority, General Revenue
Bonds, Series B 4.000 12/01/2018 500,000 368,220
---------------------------------------------------------------------------------------------------------------
MICHIGAN
Monroe County, Michigan, Economic Development Corp., Detroit
Edison Co. (FGIC) 6.950 09/01/2022 500,000 572,620
---------------------------------------------------------------------------------------------------------------
MINNESOTA
Minnesota Housing Finance Agency, Single Family Mortgage,
Series A 8.200 08/01/2019 595,000 612,416
---------------------------------------------------------------------------------------------------------------
MISSOURI
Kansas City, Missouri, Municipal Assistance Corp. Revenue
(AMBAC) 5.000 04/15/2020 2,000,000 1,761,460
---------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE
New Hampshire Housing Finance Authority, Single Family
Residential Mortgage 8.625 07/01/2013 240,000 248,239
New Hampshire Housing Higher Education and Health Authority 6.125 10/01/2013 2,000,000 1,907,480
---------------------------------------------------------------------------------------------------------------
NEW MEXICO
Albuquerque, New Mexico, Airport Revenue, Series B 8.750 07/01/2019 500,000 524,205
New Mexico Mortgage Finance Authority, Single Family
Mortgage (FGIC) 8.500 07/01/2007 360,000 371,542
New Mexico Mortgage Finance Authority, Single Family
Mortgage (FGIC) 8.625 07/01/2017 1,825,000 1,883,528
---------------------------------------------------------------------------------------------------------------
NEW YORK
New York City, New York, General Obligation 5.750 02/01/2017 2,250,000 2,037,668
New York City, New York, General Obligation 6.750 02/01/2009 2,500,000 2,593,700
New York City, New York, General Obligation, Fiscal 1992,
Series A 7.750 08/15/2015 90,000 97,223
New York City, New York, General Obligation, Fiscal 1992,
Pre-refunded, Series A 7.750 08/15/2015 1,410,000 1,622,642
New York State Dormitory Authority, State University
Educational Facilities Revenue, Series A 6.375 05/15/2014 1,900,000 1,900,912
New York State Dormitory Authority, State University
Educational Facilities Revenue, Series C 7.375 05/15/2010 1,300,000 1,458,691
New York State Local Government Assistance Corp., Series A 5.500 04/01/2017 1,100,000 1,044,791
</TABLE>
(continued on next page)
<PAGE>
PAGE 10
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (continued)
New York State Urban Development Corp., Refunding
Correctional Facilities, Series A 6.500% 01/01/2010 $1,000,000 $1,032,130
New York Urban Development Corp., Correctional Facilities,
Series A 7.500 04/01/2011 1,000,000 1,135,450
---------------------------------------------------------------------------------------------------------------
OKLAHOMA
Tulsa, Oklahoma, Industrial Authority Hospital Revenue, St.
John Medical Center Project, Series A 6.250 02/15/2014 1,250,000 1,258,475
---------------------------------------------------------------------------------------------------------------
OREGON
Western Generation Agency, Oregon, Wauna Cogeneration
Project, Series B (c) 7.400 01/01/2016 1,000,000 1,052,600
---------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allentown, Pennsylvania, Area Hospital Authority Revenue,
Sacred Heart Hospital of Allentown 6.750 11/15/2014 750,000 740,295
Butler County, Pennsylvania, Hospital Authority, Butler
Memorial Hospital 8.000 07/01/2016 935,000 955,635
Cambria County, Pennsylvania, Hospital Development
Authority, Conemaugh Valley Memorial Hospital 8.875 07/01/2018 2,400,000 2,656,752
McKeesport, Pennsylvania, Hospital Authorized Revenue
Project 6.500 07/01/2008 1,500,000 1,455,885
Pennsylvania Convention Center Authority (FGIC)
(effective yield 7.000%) (b) 0.000 09/01/2008 3,500,000 1,808,030
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project 7.050 12/01/2010 1,000,000 1,021,280
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project 7.125 12/01/2015 1,000,000 1,023,080
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.400 01/01/2009 2,500,000 2,393,675
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.500 01/01/2013 2,250,000 2,139,120
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Community College, Series B (MBIA) 6.500 05/01/2007 1,000,000 1,065,500
Ridley Park, Pennsylvania, Hospital Authority 6.125 12/01/2020 500,000 429,635
Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority Revenue, Walters Institute Project 8.125 07/15/2028 2,200,000 2,340,404
---------------------------------------------------------------------------------------------------------------
PUERTO RICO
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority 5.000 07/01/2019 1,650,000 1,413,770
Commonwealth of Puerto Rico, General Obligation 7.000 07/01/2010 1,000,000 1,117,210
Commonwealth of Puerto Rico, Highway and Transportation
Authority 5.000 07/01/2036 1,500,000 1,248,060
Puerto Rico Electric Power Authority, Series S 7.000 07/01/2007 1,365,000 1,533,741
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTH DAKOTA
South Dakota, Student Loan Finance, Series A 6.750% 08/01/2010 $1,510,000 $1,523,077
---------------------------------------------------------------------------------------------------------------
TENNESSEE
Bristol, Tennessee, Health and Education Authority, Bristol
Memorial Hospital (FGIC) 6.750 09/01/2010 2,000,000 2,212,580
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series B (MBIA) 7.250 01/01/2010 1,000,000 1,146,870
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series C (MBIA) 5.250 01/01/2015 1,500,000 1,403,370
Metropolitan Government of Nashville and Davidson County,
Tennessee Water and Sewer (effective yield 4.263%) (b) 0.000 01/01/2012 1,000,000 1,012,650
---------------------------------------------------------------------------------------------------------------
TEXAS
Austin, Texas, Utilities System Revenue (effective yield
6.810%) (b) 0.000 11/15/2011 2,700,000 1,088,289
Austin, Texas, Utilities System Revenue (effective yield
6.804%) (b) 0.000 11/15/2012 3,300,000 1,244,133
Austin, Texas, Utilities System Revenue (effective yield
6.720%) (b) 0.000 05/15/2017 7,000,000 1,935,780
Brazos River Authority, Texas, Revenue Refunding, Houston
Light and Power Project (MBIA) 8.100 05/01/2019 3,000,000 3,231,120
Brazos, Texas, Higher Education Authority Inc., Series A 6.500 06/01/2004 700,000 729,673
Harris County, Texas, Health Facilities Hospital 7.125 06/01/2015 475,000 501,771
Harris County, Texas, Toll Road, Series A 7.000 08/15/2010 1,000,000 1,130,070
Harris County, Texas, Toll Road, Sr. Lien Revenue Toll Road 8.625 08/15/2007 1,000,000 1,083,170
Harris County, Texas, Toll Road, Unlimited Tax and
Subordinate Lien, Refunding 8.125 08/01/2015 2,250,000 2,466,225
Houston, Texas, Airport Revenue Senior Lien (AMT) 8.200 07/01/2017 160,000 172,835
Houston, Texas, Water and Sewer Systems Revenue
(effective yield 6.850%) (b) 0.000 12/01/2010 2,500,000 1,073,475
Lower Colorado River Authority, Texas, Series B (AMBAC)
(effective yield 7.050%) (b) 0.000 01/01/2011 2,000,000 848,560
Midland County, Texas, Hospital District, Midland Memorial
Hospital 7.500 06/01/2016 400,000 410,580
Port of Corpus Christi, Texas, Industrial Development Corp.,
Valero Refining and Marketing Co. Project, Series A 10.250 06/01/2017 990,000 1,064,399
Tarrant County, Texas, Health Facilities Systems 5.125 09/01/2012 1,000,000 922,320
Texas Housing Agency, Single Family Mortgage Revenue 8.200 03/01/2016 155,000 161,569
Texas Housing Agency, Residential Development Revenue,
Series D 8.400 01/01/2021 155,000 158,821
Texas Municipal Power Agency (AMBAC) (effective yield
7.090%) (b) 0.000 09/01/2006 2,500,000 1,424,150
Texas Municipal Power Agency (AMBAC) (effective yield
7.150%) (b) 0.000 09/01/2008 2,125,000 1,059,121
Texas Municipal Power Agency (AMBAC) (effective yield
6.100%) (b) 0.000 09/01/2013 755,000 269,271
Texas Municipal Power Agency (AMBAC) (effective yield
6.149%) (b) 0.000 09/01/2015 4,000,000 1,232,920
Texas Municipal Power Agency (AMBAC) (effective yield
6.099%) (b) 0.000 09/01/2016 5,000,000 1,449,650
Tomball, Texas, Hospital Authority Revenue, Series 1993 6.125 07/01/2023 1,000,000 920,190
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTAH
Intermountain Power Agency, Utah, Power Supply Refunding,
Series A (effective yield 6.950%) (b) 0.000% 07/01/2007 $ 750,000 $ 411,240
--------------------------------------------------------------------------------------------------------------
VIRGINIA
Pittsylvania County, Virginia, Industrial Development,
Series A (c) 7.300 01/01/2004 1,000,000 1,045,890
Pittsylvania County, Virginia, Industrial Development,
Series A (c) 7.500 01/01/2014 1,700,000 1,773,865
----------------------------------------------------------------------------------------------------------------
WASHINGTON
Washington Public Power Supply System, Nuclear Project # 1 14.500 07/01/2002 150,000 166,356
Washington Public Power Supply System, Nuclear Project # 1,
Series D 15.000 07/01/2017 250,000 259,470
Washington Public Power Supply System, Nuclear Project # 2,
Series C 7.625 07/01/2010 1,000,000 1,130,790
Washington State General Obligation, Series A 6.750 02/01/2015 1,000,000 1,101,180
----------------------------------------------------------------------------------------------------------------
WYOMING
Wyoming Community Development Authority,
Single Family Mortgage 7.875 06/01/2018 1,290,000 1,335,215
----------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (COST--$129,622,904) 134,437,512
----------------------------------------------------------------------------------------------------------------
TEMPORARY TAX-EXEMPT INVESTMENT (0.4%)
Dade County, Florida, Water and Sewer Systems Revenue
(Cost--$590,000) (a) 3.500 10/05/2022 590,000 590,000
----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$130,212,904) 135,027,512
OTHER ASSETS AND LIABILITIES--NET (1.8%) 2,419,244
----------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $137,446,756
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features.
(b) Effective yield (calculated at date of purchase) is the yield at which the
bond accretes on an annual basis until maturity date.
(c) Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corporation
AMT--Alternative Minimum Tax
ETM--Escrowed To Maturity
FGIC--Federal Guaranty Insurance Company
MBIA--Municipal Bond Investors Assurance
<PAGE>
PAGE 13
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
May 31, Year Ended November 30,
1996(d) 1995(d) 1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 10.05 $ 8.93 $ 10.25 $ 10.17 $ 10.13 $ 9.94
--------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.26 0.51 0.51 0.57 0.63 0.60
Net realized and unrealized gain (loss)
on investments and futures contracts (0.41) 1.13 (1.28) 0.36 0.30 0.31
--------------------------------------------------------------------------------------------------------------
Total from investment operations (0.15) 1.64 (0.77) 0.93 0.93 0.92
--------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.26) (0.51) (0.52) (0.57) (0.62) (0.60)
In excess of net investment income 0.00 (0.01) 0.00 (0.04) 0.00 (0.00)
Net realized gain on investments 0.00 0.00 0.00 (0.24) (0.27) (0.12)
Tax basis return of capital 0.00 0.00 (0.03) 0.00 0.00 0.00
--------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.52) (0.55) (0.85) (0.89) (0.73)
--------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.64 $ 10.05 $ 8.93 $ 10.25 $ 10.17 $ 10.13
==============================================================================================================
Total return (b) (1.55%) 18.71% (7.81%) 9.37% 9.35% 9.59%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.16%(a)(c) 1.19%(a) 1.13% 1.21% 1.25% 1.58%
Net investment income 5.22%(c) 5.35% 5.27% 5.40% 6.02% 5.95%
Portfolio turnover rate 60% 30% 98% 47% 32% 37%
--------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $86,300 $94,183 $95,691 $124,102 $120,660 $133,524
==============================================================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the six months ended May
31, 1996 and the year ended November 30, 1995 include indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.15% and 1.18%, respectively.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average monthly shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 14
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months Year Ended (Date of Initial
Ended November 30, Public Offering) to
May 31, 1996(d) 1995(d) 1994 November 30, 1993
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 9.97 $ 8.88 $ 10.25 $ 10.27
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.44 0.45 0.37
Net realized and unrealized gain (loss)
on investments and futures contracts (0.41) 1.11 (1.29) 0.30
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations (0.19) 1.55 (0.84) 0.67
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.22) (0.45) (0.50) (0.37)
In excess of net investment income 0.00 (0.01) 0.00 (0.08)
Net realized gain on investments 0.00 0.00 0.00 (0.24)
Tax basis return of capital 0.00 0.00 (0.03) 0.00
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.22) (0.46) (0.53) (0.69)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.56 $ 9.97 $ 8.88 $ 10.25
================================================================================================================
Total return (b) (1.92%) 17.84% (8.43%) 6.59%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.92%(a)(c) 1.96%(a) 1.88% 1.96%(c)
Net investment income 4.45%(c) 4.59% 4.60% 4.42%(c)
Portfolio turnover rate 60% 30% 98% 47%
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $34,325 $33,449 $28,860 $14,091
================================================================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the six months ended May
31, 1996 and the year ended November 30, 1995 include indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.91% and 1.94%, respectively.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average monthly shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 15
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months Year Ended (Date of Initial
Ended November 30, Public Offering) to
May 31, 1996(d) 1995(d) 1994 November 30, 1993
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 9.97 $ 8.88 $ 10.26 $ 10.27
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.44 0.43 0.37
Net realized and unrealized gain (loss)
on investments and futures contracts (0.41) 1.11 (1.27) 0.31
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations (0.19) 1.55 (0.84) 0.68
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.22) (0.45) (0.51) (0.37)
In excess of net investment income 0.00 (0.01) 0.00 (0.08)
Net realized gain on investments 0.00 0.00 0.00 (0.24)
Tax basis return of capital 0.00 0.00 (0.03) 0.00
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.22) (0.46) (0.54) (0.69)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.56 $ 9.97 $ 8.88 $ 10.26
================================================================================================================
Total return (b) (1.92%) 17.84% (8.52%) 6.70%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.92%(a)(c) 1.96%(a) 1.89% 1.94%(c)
Net investment income 4.44%(c) 4.59% 4.52% 4.41%(c)
Portfolio turnover rate 60% 30% 98% 47%
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $16,821 $20,386 $23,230 $27,261
================================================================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the six months ended May
31, 1996 and the year ended November 30, 1995 include indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.91% and 1.94%, respectively.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average monthly shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 16
Keystone Tax Free Income Fund
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996 (Unaudited)
===================================================================
Assets (Notes 1 and 4)
Investments at market value (identified cost--
$130,212,904) $135,027,512
Receivable for:
Investments sold 1,271,928
Fund shares sold 9,535
Interest 2,745,739
Receivable from investment advisor 4,448
Prepaid expenses and other assets 21,517
-------------------------------------------------------------------
Total assets 139,080,679
-------------------------------------------------------------------
Liabilities (Notes 1, 2 and 4)
Payable for:
Investments purchased 1,257,861
Fund shares redeemed 24,209
Distributions to shareholders 273,637
Distribution fee payable 4,307
Accrued reimbursable accounting expense 3,622
Accrued Trustees' fees 5,181
Other accrued expenses 65,106
-------------------------------------------------------------------
Total liabilities 1,633,923
-------------------------------------------------------------------
Net assets $137,446,756
===================================================================
Net assets represented by (Note 1)
Paid-in capital $138,991,153
Accumulated distributions in excess of
net investment income (244,395)
Accumulated net realized loss on investments (6,114,610)
Net unrealized appreciation on investments 4,814,608
-------------------------------------------------------------------
Total net assets $137,446,756
===================================================================
Net Asset Value
Class A Shares
Net asset value of $86,300,339 / 8,952,254
shares outstanding $9.64
Offering price per share ($9.64 / 0.9525)
(based on a sales charge of 4.75% of the
offering price on May 31, 1996) $10.12
Class B Shares
Net asset value of $34,325,201 / 3,592,376
shares outstanding $9.56
Class C Shares
Net asset value of $16,821,216 / 1,760,087
shares outstanding $9.56
===================================================================
STATEMENT OF OPERATIONS
Six Months Ended May 31, 1996
(Unaudited)
=================================================================
Investment income (Note 1)
Interest $ 4,577,351
Expenses (Notes 2 and 4)
Management fee $ 440,267
Transfer agent fees 105,251
Accounting, auditing and legal 29,046
Custodian fees 46,585
Trustees' fees and expenses 6,055
Distribution Plan expenses 367,683
Miscellaneous expenses 37,696
----
Total expenses 1,032,583
Less: Expenses paid indirectly
(Note 4) (7,125)
----
Net expenses 1,025,458
-----------------------------------------------------------------
Net investment income 3,551,893
-----------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (Notes 1 and 3)
Net realized gain on investments 582,950
Net change in unrealized
depreciation
on investments (6,387,478)
-----------------------------------------------------------------
Net realized and unrealized loss on
investments (5,804,528)
-----------------------------------------------------------------
Net decrease in net assets resulting
from operations ($ 2,252,635)
=================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 17
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
May 31, November 30,
1996 1995
================================================================================================================
(Unaudited)
<S> <C> <C>
Operations:
Net investment income $ 3,551,893 $ 7,600,756
Net realized gain (loss) on investments and closed futures contracts 582,950 (760,743)
Net change in unrealized appreciation (depreciation) on investments (6,387,478) 18,451,939
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (2,252,635) 25,291,952
----------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (2,347,709) (5,042,433)
Class B Shares (743,775) (1,531,824)
Class C Shares (416,644) (1,026,499)
In excess of net investment income:
Class A Shares 0 (70,626)
Class B Shares 0 (21,455)
Class C Shares 0 (14,377)
----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (3,508,128) (7,707,214)
----------------------------------------------------------------------------------------------------------------
Capital share transactions (Notes 2 and 5)
Shares issued in connection with the acquisition of Keystone Texas Tax Free
Fund:
Class A Shares 1,269,729 0
Class B Shares 3,592,334 0
Class C Shares 257,617 0
Proceeds from shares sold:
Class A Shares 1,121,762 2,127,732
Class B Shares 1,963,638 6,139,897
Class C Shares 1,367,853 3,205,146
Payment for shares redeemed:
Class A Shares (7,869,144) (17,659,525)
Class B Shares (3,744,629) (5,968,412)
Class C Shares (4,615,743) (9,212,881)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 1,209,729 2,608,685
Class B Shares 380,025 790,394
Class C Shares 257,300 619,790
----------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share transactions (4,809,529) (17,349,174)
----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (10,570,292) 235,564
Net assets:
Beginning of period 148,017,048 147,781,484
----------------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of net
investment income as follows: 1996--($244,395) and 1995--($288,160)] $137,446,756 $148,017,048
================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Tax Free Income Fund (the "Fund") is a Massachusetts business trust for
which Keystone Management Inc. ("KMI") is the Investment Manager and Keystone
Investment Management Company 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 seeks the highest
possible current income exempt from federal income taxes, while preserving
capital.
The Fund currently issues Class A, B, and C 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 ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is privately owned by an investor group consisting
predominantly 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, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. 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
terms of the repurchase agreement will be required to provide securities
("collateral") to the Fund whose
<PAGE>
PAGE 19
value will be maintained at an amount not less than the repurchase price, and
which generally will be maintained at 101% of the repurchase price. The Fund
monitors the value of collateral on a daily basis, and if the value of 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 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.
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
<PAGE>
PAGE 20
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.
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:
Six Months Ended Year Ended
Class A Shares May 31, 1996 November 30, 1995
----------------------------------------------------------------------
Shares issued in
connection with the
acquisition of Keystone
Texas Tax Free Fund
(Note 5) 131,228 0
Shares sold 122,953 224,063
Shares redeemed (794,989) (1,843,241)
Shares issued in
reinvestment of
dividends and
distributions 122,387 270,624
----------------------------------------------------------------------
Net decrease (418,421) (1,348,554)
======================================================================
Six Months Ended Year Ended
Class B Shares May 31, 1996 November 30, 1995
----------------------------------------------------------------------
Shares issued in
connection with the
acquisition of Keystone
Texas Tax Free Fund
(Note 5) 374,545 0
Shares sold 205,070 647,077
Shares redeemed (382,264) (625,195)
Shares issued in
reinvestment of
dividends and
distributions 38,795 82,512
----------------------------------------------------------------------
Net increase 236,146 104,394
======================================================================
Class C Shares
----------------------------------------------------------------------
Shares issued in
connection with the
acquisition of Keystone
Texas Tax Free Fund
(Note 5) 26,855 0
Shares sold 131,654 338,010
Shares redeemed (469,822) (974,642)
Shares issued in
reinvestment of
dividends and
distributions 26,248 64,840
----------------------------------------------------------------------
Net decrease (285,065) (571,792)
======================================================================
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 expenditures currently limited to
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
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PAGE 21
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 expenditures at an annual rate of
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
service fees at an annual rate of 0.25% of the average daily net asset value of
each Class B share 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 expenditures at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses of 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, 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 six months ended May 31, 1996, the Fund paid KIDC $106,293, $167,008
and $94,382, 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 May 31, 1996 are
$2,032,073 for shares purchased prior to June 1, 1995 and $348,938 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
$2,273,503 as of May 31, 1996.
Presently, each Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its Distribution
Plans.
<PAGE>
PAGE 22
Keystone Tax Free Income Fund
(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 six months ended May 31, 1996 were $83,146,803
and $86,556,158, respectively.
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the Fund,
KMI provides investment management and administrative services to the Fund. In
return, KMI is paid a management fee computed and payable daily at a rate of
2.0% of the Fund's gross investment income plus an amount determined by applying
percentage rates, which start at 0.50% and decline, as net assets increase, to
0.25% per annum, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone, under
which Keystone provides investment advisory and management services to the Fund
and receives for its services an annual fee representing 85% of the management
fee received by KMI. During the six months ended May 31, 1996, the Fund paid or
accrued to Keystone investment management and administrative services fees of
$440,267 which represented 0.62% on an annualized basis of the average net
assets of the Fund. Of such amount paid to KMI, $374,227 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 and dividend dispersing agent.
During the six months ended May 31, 1996, the Fund paid or accrued to KII
$10,706 for certain accounting services.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended May 31, 1996, the Fund paid custody fees in the amount
of $39,460 and received a credit of $7,125 pursuant to the expense offset
arrangement, resulting in a total expense of $46,585. 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.) Fund Reorganization
On April 30, 1996 the Fund acquired the net assets of Keystone Texas Tax Free
Fund in exchange for Class A, B and C Shares of the Fund pursuant to a plan of
reorganization approved by the shareholders of Keystone Texas Tax Free Fund on
April 30, 1996. The acquisition was accomplished by a tax-free exchange of
shares of the Fund for the net assets of Keystone Texas Tax Free Fund. The net
assets of Keystone Texas Tax Free Fund on that date including $81,550 of
unrealized appreciation on investments, were combined with the Fund. The
aggregate net assets of the Fund and Keystone Texas Tax Free Fund immediately
before the acquisition were $135,184,118 and $5,119,680, respectively. The net
assets of the Fund immediately after the acquisition was $140,303,798.
(6.) Distributions to Shareholders
Distributions of $0.043, $0.037 and $0.037 per share were declared payable July
5, 1996 to shareholders of record on June 25, 1996 for Class A, Class B and
Class C shares, respectively. These distributions are not reflected in the
accompanying financial statements.
<PAGE>
PAGE 23
Keystone's Services
for Shareholders
0
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution. You
may also process transactions such as investments, redemptions and exchanges
using a touch-tone telephone as well as receive quotes on price, yield, and
total return of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your investment
by automatically reinvesting your Fund's distributions at net asset value with
no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone offers
a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move
money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans, including
IRA, SEP-IRA, profit sharing, money purchase, and defined contribution plans.
For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
