PAGE 1
- --------------------------------------
Keystone Tax Free Income Fund
Seeks highest possible current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on the activities in Keystone Tax Free Income
Fund for the twelve-month period which ended November 30, 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 twelve-month period:
Class A shares returned 3.83%,
Class B shares returned 2.99%, and
Class C shares returned 2.99%.
The Lehman Municipal Bond Index--a widely recognized benchmark of municipal
bond performance--returned 5.88% for the same twelve-month period.
We believe the Fund performed satisfactorily, given the uncertainty in the
markets and the Fund's conservative, quality-oriented investment style.
Adjustments and Resolutions
The environment for municipal bonds underwent a series of adjustments over the
past twelve months. At the beginning of this reporting period, market sentiment
was driven by an outlook for slow economic growth, low inflation and the
possibility of tax reform. The prospect of tax-law changes created uncertainty
and limited the performance of municipal bonds in late 1995 and early 1996,
however, prices continued to rise because investors anticipated a favorable
economic and interest rate climate.
In February 1996, the trend of interest rates underwent a sharp and rapid
reversal. Reports of strength in employment stimulated investors' concerns about
robust economic growth and future inflation. Investors revised their interest
rate outlooks, waiting for longer-term trends to appear. During this
transitional period, volatility characterized the fixed-income markets, in
general.
By mid-year, the economy was confirmed to be growing at a moderate pace and
inflation remained well-contained. Enactment of tax-reform now became viewed as
unlikely. With these uncertainties resolved, investors became more confident
that a steadier investment climate could prevail. The tax-exempt sector regained
stability and then began to gather strength, with yields eventually returning to
levels that rivaled those of a year ago.
Market strategy
We employed several strategies to guide your Fund through this challenging
investment period. We improved the portfolio's quality and maintained an
emphasis on call protection. We also made adjustments to your Fund's average
maturity in accordance with our interest rate outlook. The market's uncertainty
and volatility made the timing of these adjustments unusually critical; and we
believe this had an adverse effect on your Fund's total return. We have
witnessed a more positive trend over the past few months, and we are pleased
with the Fund's progress during this time.
At the end of the reporting period, your Fund's average quality was AA- and
the average maturity of its portfolio was 18 1/2 years.
--continued--
<PAGE>
PAGE 2
- --------------------------------------
Keystone Tax Free Income Fund
Outlook
As we approach 1997, the stage appears to be set for the continuation of
moderate economic growth and low inflation. We believe this should help to
provide a relatively stable interest rate climate, with yields trading within a
narrow range. In light of the recent rally made by the municipal bond market, we
would anticipate that over the coming months, much of the Fund's total return
will result from income as opposed to price appreciation.
We are pleased to inform you that Keystone has been acquired by First Union
Corporation. First Union, based in Charlotte, N.C., is the nation's sixth
largest bank holding company with assets of approximately $130 billion. Keystone
Investment Management Company will continue to be the investment adviser,
responsible for managing your Fund's portfolio. Your Fund will continue to be
managed with the same style and philosophy as in the past. First Union also owns
another mutual fund management company, Evergreen Asset Management Corp.
Together, Evergreen and Keystone manage approximately $30 billion in assets.
Some services will now be conducted under the "Evergreen Keystone Funds"
umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
January 1997
<PAGE>
PAGE 3
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A Discussion With
Your Fund's Manager
[GRAPHIC OF FIVE PEOPLE HAVING A DISCUSSION]
Daniel A. Rabasco is vice pesident 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 Hutchings. The team also
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 tax that is axempt from ferderal income taxwhile
preserving capital.(1) 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 environment like for municipal bonds over the past year?
A Municipal bond investors experienced several different investment
environments over the past year. At the beginning of the reporting period,
investors were still benefiting from last year's strong bond market rally, which
pushed the prices of fixed-income securities in general, higher. The possibility
of tax-reform also influenced the municipal bond market at that time, however.
Investors were concerned that tax-reform would threaten the tax-favored status
of municipal bonds and approached the market with caution. This caused the
performance of municipal bonds to lag that of the benchmark, U.S. Treasuries in
late 1995 and early 1996.
In February 1996, interest rates reversed course and rose sharply. Reports
of a strengthening employment market raised investors' concerns about robust
economic growth and future inflation. The fixed-income markets became volatile
as investors waited for longer-term economic trends to emerge. In addition to
the changes taking place in the economy, municipal bond investors also focused
on the uncertainties of the campaign season.
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: AA-
Average maturity: 18.5 years
Net assets: $129 million
- -------------------------
(1) For investors in certain tax situations, a portion of income may be subject
to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 4
- --------------------------------------
Keystone Tax Free Income Fund
Q Did this volatility continue throughout 1996?
A No, it began to subside by mid-year when most pro-tax reform candidates lost
political momentum. Reports also began to confirm that the economy was growing
at a moderate pace and inflation was well-contained. With these issues becoming
resolved, investors developed confidence that a steadier interest rate
environment would prevail. Municipal bonds regained stability and turned in a
positive price performance.
Q What was the environment like at the end of the reporting period?
A As of the end of this fiscal year, the investment environment for municipal
bonds was relatively stable. Economic growth has remained moderate and inflation
has been minimal, which is positive for interest rates. Cash flow into the
municipal bond market has been light. We attribute much of that to the
relatively low level of interest rates having to compete with the strong
performance of the stock market.
Also as of the end of the reporting period, investors' primary focus was
expected future Federal Reserve Board policy. We believe that municipal bond
yields will be most affected by the events influencing the greater fixed-income
market over the next few months and that the driving force will be the strength
of the economy and the level of inflation.
Q How did you manage the Fund during these changing environments?
A We emphasized quality and call protection; and made adjustments to the Fund's
average maturity. We had extended the average maturity when we believed economic
growth would continue to slow and inflation would remain minimal; and shortened
it as interest rates rose.
We believed the stronger credit quality would protect the Fund better
against price erosion when interest rates were rising and we were able to
improve credit quality while giving up only minimal yield. We decreased holdings
rated BBB and NR to 29% from 39% at the end of May and increased AAA-rated
positions to 48% from 42%, and AA-rated positions to 11% from 7%, also as of
that time. This change is reflected in the Fund's average rating, which was AA-
on November 30, 1996 versus A+, six months ago. We focused on call protection to
maintain the Fund's income stream.
We managed the Fund's average maturity based on our interest rate outlook.
These adjustments involved extending the Fund's average maturity in anticipation
of declining interest rates; and shortening it when we believed interest rates
would rise. The sharp and dramatic changes in sentiment surprised many investors
and made the timing of these changes particularly critical. Although we believe
the market's volatility, combined with the timing of these changes had a
negative effect on the Fund's performance during much of the fiscal year, the
Fund's performance has been on a positive trend over the past few months.
As of the end of this reporting period, the average maturity of your Fund's
portfolio stood at just under 18 1/2 years, modestly shorter than 19 years,
where it was in May. Your Fund was positioned for a neutral interest rate
environment, also as of that time.
Q What is your outlook for municipal bonds over the next six months?
A Our outlook is one of cautious optimism. We believe that interest rates and
the economy will be the greatest influence on municipal bonds over the coming
months, rather than issues that are specific to
<PAGE>
PAGE 5
- --------------------------------------
the tax-exempt market, such as tax-reform. We expect the economy to grow at a
rate of approximately 2% and inflation to fall in the 3% area; and that this
pattern of moderate economic growth and low inflation should set the stage for a
relatively stable interest rate environment.
However, we are cautious about the degree to which prices can improve
further, in light of the decline in interest rates that has taken place over the
past few months. We anticipate that much of the Fund's total return will result
from income reinvestment over the next few months.
Q Are municipal bonds still an attractive investment?
A We think municipal bonds still provide value to the long-term investor seeking
tax-advantaged income, because of the yields an investor receives after taxes
and inflation. Since inflation continues to be relatively low, "real" interest
rates, or the interest rate an investor receives after inflation is subtracted,
is high by historical standards. Further, as of November 30, 1996, municipal
bonds yielded approximately 90%(2) of U.S. Treasuries with comparable
maturities. These two factors contribute to what we believe is an attractive
level of current income.
- -------------------------
(2)Based on the Revenue Bond Index, a widely followed index of 25 of the most
current actively traded municipal bonds in the tax-exempt market.
Taxable-Equivalent Yields(3)
<TABLE>
<CAPTION>
Federal Tax Bracket
--------------------------
31% 36% 39.6%
------- ------- ------
Yield Taxable Equivalent Yield
- ------- --------------------------
<S> <C> <C> <C>
4.0% 5.8% 6.3% 6.6%
5.0% 7.2% 7.8% 8.3%
6.0% 8.7% 9.4% 9.9%
- ----- ------ ------ ------
</TABLE>
- -------------------------
(3)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.
<PAGE>
PAGE 6
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Keystone Tax Free Income Fund
Your Fund's Performance
[Data for Mountain Chart]
Growth of an investment in
Keystone Tax Free Income Fund Class A
Total Value: $18,241
In Thousands
Initial Investment Reinvested Distribution
4/87 9649 9649
9620 9620
11/88 9191 9838
9763 11206
11/90 9487 11802
9677 12836
11/92 9839 14036
9944 15528
11/94 9153 15480
9391 16789
11/96 9182 18241
A $10,000 investment in Keystone Tax Free Income Fund Class A made on April 14,
1987 with all distributions reinvested was worth $18,241 on November 30, 1996.
Past performance is no guarantee of future results.
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.
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.
Twelve-Month Performance as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Total returns* 3.83% 2.99% 2.99%
Net asset value 11/30/95 $10.05 $9.97 $9.97
11/30/96 $ 9.90 $9.81 $9.81
Dividends $ 0.52 $0.44 $0.44
Capital gains None None None
</TABLE>
* Before deducting any sales charges.
Historical Record as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 3.83% 2.99% 2.99%
1-year (1.10%) (0.94%) 2.99%
5-year 29.44% -- --
Life of Class 82.41% 15.60% 18.46%
Average Annual Returns
1-year w/o sales charge 3.83% 2.99% 2.99%
1-year (1.10%) (0.94%) 2.99%
5-year 5.30% -- --
Life of Class 6.44% 3.85% 4.52%
</TABLE>
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. You may also exchange funds using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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[Data for 3 Line Chart]
Growth of an Investment
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.
Average Annual Total Return
1 Year 5 Year Life of Class
Class A -1.10% 5.30% 6.44%
Class B -0.94% -- 3.85%
Class C 2.99% -- 4.52%
In Thousands April 14, 1987 through November 30, 1996
Class A LMBI CPI
4/87 9524 10000 1000
9540 9768 10294
11/88 10552 10805 10731
11604 11994 11231
11/90 12247 12917 11936
13421 14243 12293
11/92 14676 15672 12667
16051 17409 13006
11/94 14798 16499 13354
17567 19618 13702
11/96 18241 20771 14148
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.
This chart graphically compares your Fund's performance to certain investment
indexes. It is the result of fund performance guidelines issued by the
Securities and Exchange Commission. The intent is to provide investors with more
information about their investment.
Components of the Chart
The chart is composed of three lines that represent the accumulated value of an
initial $10,000 investment for the period indicated. The lines illustrate a
hypothetical investment in:
1. Keystone Tax Free 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)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable benchmark
for investors who seek to outperform increases in the cost of living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's performance in relation to a well known
investment index and to increases in the cost of living. It is important to
understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help you
evaluate fund performance in conjunction with the other important financial
considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several ways.
Because the measurement
<PAGE>
PAGE 8
- --------------------------------------
Keystone Tax Free Income Fund
is based on total returns over an extended period of time, the comparison often
favors those funds which emphasize capital appreciation when the market is
rising. Likewise, when the market is declining, the comparison usually favors
those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to buy
stocks that have been traded on a stock exchange for a minimum number of years
or of a certain company size. Indexes usually do not have the same investment
restrictions as your fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not take
into account any deductions for sales charges, transactions costs or other fund
expenses. Your Fund's performance figures do reflect such deductions. Sales
charges--whether up-front or deferred--pay for the cost of the investment advice
of your financial adviser. Transaction costs pay for the costs of buying and
selling securities for your Fund's portfolio. Fund expenses pay for the costs of
investment management and various shareholder services. None of these costs are
reflected in index total returns. The comparison is not completely realistic
because an index cannot be duplicated by an investor--even an unmanaged
index--without incurring some charges and expenses.
One of Several 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 perfomance of either the
Fund or the indexes is not representative of what shareholders should expect to
receive from their Fund investment in the future; it is presented to illustrate
only past performance and is not a guarantee of future returns.
[Diamond}
This column is intended to answer
questions about your Fund.
If you have a question you would like answered,
please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 9
- --------------------------------------
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 10
- --------------------------------------
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (98.0%)
ALABAMA
Alabama Housing Finance Agency, Single Family Mortgage 10.750% 06/01/2013 $ 315,000 $ 336,407
Alexander City, Alabama, Special Care Facilities, The Russell
Hospital Group 6.000 12/01/2022 2,000,000 1,943,660
Birmingham, Alabama, Baptist Medical Center, Baptist Health
Systems, Inc. 5.800 11/15/2016 2,500,000 2,542,075
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
ALASKA
Alaska Housing Finance Corp., Collateralized Home Mortgage 8.750 12/01/2016 780,000 807,518
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
CALIFORNIA
California Educational Facilities Authority, Stanford University
Project, Series H 5.000 01/01/2015 1,250,000 1,199,337
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
COLORADO
City and County of Denver, Colorado, Airport System, Series A 7.000 11/15/1999 1,250,000 1,332,112
City and County of Denver, Colorado, Airport System, Series A 7.250 11/15/2025 720,000 835,387
City and County of Denver, Colorado, Airport System, Series A 8.000 11/15/2025 1,000,000 1,136,180
City and County of Denver, Colorado, Airport System, Series A 8.750 11/15/2023 750,000 893,640
City and County of Denver, Colorado, Airport System, Series B 7.250 11/15/2012 750,000 818,505
City and County of Denver, Colorado, Airport System, Series D 7.750 11/15/2013 1,100,000 1,344,277
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
DISTRICT OF COLUMBIA
District of Columbia, Howard University 5.750 10/01/2017 2,000,000 2,015,000
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
FLORIDA
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.400 09/01/2030 1,000,000 1,020,580
Jacksonville, Florida, Excise Tax Revenue, Series B 5.700 10/01/2009 2,000,000 2,032,120
Orange County, Florida, Health Facilities Authority, Orlando
Hospital Regional Healthcare, Series A 6.250 10/01/2018 2,000,000 2,222,200
Sarasota County, Florida, Utility Systems Revenue (FGIC) 6.500 10/01/2022 1,000,000 1,141,160
Tallahassee, Florida, Health Facilities, Tallahassee Memorial
Regional Medical Project (MBIA) 6.625 12/01/2013 2,640,000 2,952,470
Tampa, Florida, Subordinated Guaranteed Entitlement Revenue,
Series 1988B 8.400 10/01/2008 1,015,000 1,093,683
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
GEORGIA
Georgia Municipal Electric Authority Power Revenue, Series Z 5.500 01/01/2012 2,000,000 2,030,240
- ------------------------------------------------------------------ -------- ------------ ---------- ----------
ILLINOIS
Chicago, Illinois, Gas Supply Revenue (People's Gas, Light and
Coke Co.), Series A 8.100 05/01/2020 910,000 1,012,102
</TABLE>
<PAGE>
PAGE 11
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ILLINOIS (continued)
Illinois Health Facilities Authority, Community Hospital,
Ottawa Project 6.850% 08/15/2024 $1,500,000 $1,549,740
Illinois Health Facilities Authority, United Medical Center 8.375 07/01/2012 1,000,000 1,208,880
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
INDIANA
St. Joseph County, Indiana, Educational Facilities Revenue,
University of Notre Dame 6.500 03/01/2026 1,640,000 1,896,775
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
LOUISIANA
Louisiana Public Facilities Authority, Health and Education,
Pre-refunded 7.900 12/01/2015 1,435,000 1,551,780
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
MASSACHUSETTS
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2021 1,950,000 2,351,856
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 1,875,000 2,067,225
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 1,000,000 1,180,250
Massachusetts, General Obligation (FGIC) (effective yield 7.000%) (b) 0.000 06/01/2007 400,000 239,220
Massachusetts State Housing Finance Agency, Residential Housing,
Series A 8.400 08/01/2021 1,490,000 1,571,011
Massachusetts State Consolidated Loan, Series B 5.500 06/01/2012 1,000,000 1,019,720
Massachusetts State Health and Educational Facilities,
Rehabilitation Hospital, Cape Islands, Series A 7.875 08/15/2024 1,400,000 1,484,504
Massachusetts State Industrial Finance Agency, Senior Lien,
Massachusetts Recycling Association 9.000 08/01/2016 500,000 250,000
Massachusetts Water Resources Authority, General Revenue Bonds,
Series A 5.500 11/01/2016 2,600,000 2,613,702
Massachusetts Water Resources Authority, General Revenue Bonds,
Series A 6.000 08/01/2020 2,000,000 2,065,940
Massachusetts Water Resources Authority, General Revenue Bonds,
1995, Series B 4.000 12/01/2018 700,000 550,130
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
MICHIGAN
Monroe County, Michigan, Economic Development Corp., Detroit
Edison Co. (FGIC) 6.950 09/01/2022 500,000 608,825
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
MINNESOTA
Minnesota Housing Finance Agency, Single Family Mortgage,
Series A 8.200 08/01/2019 595,000 615,575
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
MISSOURI
Sikeston, Missouri, Electric Revenue (MBIA) 6.000 06/01/2014 500,000 543,145
University of Missouri Health Facilities Revenue, University of
Missouri Health Systems, Series A (AMBAC) 5.500 11/01/2016 2,750,000 2,758,332
- ----------------------------------------------------------------------- -------- ------------ ----------- -----------
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
- --------------------------------------
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
NEW HAMPSHIRE
New Hampshire Housing Higher Education and Health Authority,
Frisbee Memorial Hospital, Revenue Bonds 6.125% 10/01/2013 $2,000,000 $2,009,000
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
NEW JERSEY
Salem County, New Jersey, Pollution Control Financing Authority,
Waste Disposal Revenue 6.500 11/15/2021 4,325,000 4,594,318
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
NEW MEXICO
Albuquerque, New Mexico, Airport Revenue, Series B 8.750 07/01/2019 500,000 519,395
New Mexico Mortgage Finance Authority, Single Family Mortgage
(FGIC) 8.625 07/01/2017 1,645,000 1,703,069
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
NEW YORK
New York City, New York, General Obligation, Fiscal 1992,
Pre-refunded, Series A 7.750 08/15/2015 1,410,000 1,632,089
New York City, New York, General Obligation, Series G 6.750 02/01/2009 2,500,000 2,715,425
New York and New Jersey, Port Authority, Special Obligation, 4th
Installment Special Project (c) 6.750 10/01/2011 1,000,000 1,041,690
New York and New Jersey, Port Authority, Special Obligation, 5th
Installment Special Project (c) 6.750 10/01/2019 1,000,000 1,032,380
New York State Dormitory Authority, State University Dormitory
Facilities, Series A 6.000 07/01/2009 2,000,000 2,162,420
New York State Dormitory Authority, State University Educational
Facilities Revenue, Series C 7.375 05/15/2010 1,300,000 1,519,414
New York State Local Government Assistance Corp., Series A 5.500 04/01/2017 1,600,000 1,623,392
New York State Urban Development Corp., Correctional Facilities,
Series A 7.500 04/01/2011 1,000,000 1,141,620
New York State Urban Development Corp., Higher Education
Technology Grants (MBIA) 6.000 04/01/2010 805,000 855,852
New York State Urban Development Corp., Refunding Correctional
Facilities, Series A 6.500 01/01/2010 1,000,000 1,085,910
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
OHIO
Montgomery County, Ohio, Hospital Revenue, Kettering
Medical Center 6.250 04/01/2020 1,000,000 1,074,360
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
OREGON
Western Generation Agency, Oregon, Wauna Cogeneration Project,
Series B (c) 7.400 01/01/2016 1,000,000 1,044,150
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
PENNSYLVANIA
Horizon Hospital System Authority, Pennsylvania, Horizon Hospital
System, Inc. 6.350 05/15/2016 1,665,000 1,676,938
</TABLE>
<PAGE>
PAGE 13
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (continued)
McKeesport, Pennsylvania, Hospital Authority Revenue,
McKeesport Hospital Project 6.500% 07/01/2008 $1,500,000 $1,512,090
Pennsylvania Convention Center Authority, Series A (FGIC)
(effective yield 7.000%) (b) 0.000 09/01/2008 3,500,000 1,933,190
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.500 01/01/2013 1,750,000 1,747,865
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Community College, Series B (MBIA) 6.500 05/01/2007 1,000,000 1,114,950
Scranton-Lackawanna, Pennsylvania, Health and Welfare Authority
Revenue, Walters Institute Project 8.125 07/15/2028 2,200,000 2,337,280
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
PUERTO RICO
Commonwealth of Puerto Rico, General Obligation (MBIA) 7.000 07/01/2010 2,000,000 2,367,560
Puerto Rico Electric Power Authority, Series S 7.000 07/01/2007 1,000,000 1,146,340
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
TENNESSEE
Bristol, Tennessee, Health and Education Authority, Bristol
Memorial Hospital (FGIC) 6.750 09/01/2010 2,000,000 2,326,940
Knox County, Tennessee, Health and Educational Facilities, Fort
Sanders Hospital Alliance, Series B (MBIA) 7.250 01/01/2010 1,000,000 1,194,600
Knox County, Tennessee, Health and Educational Facilities, Fort
Sanders Hospital Alliance, Series C (MBIA) 5.250 01/01/2015 1,500,000 1,465,515
Metropolitan Government of Nashville and Davidson County,
Tennessee Water and Sewer, step bond (effective yield 4.263%) (b) 0.000 01/01/2012 1,000,000 1,088,220
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
TEXAS
Alliance Airport Authority Inc., Texas, Special Federal Express
Corp. Project 6.375 04/01/2021 2,310,000 2,332,754
Amarillo, Texas, Independent School District 5.000 02/01/2014 1,000,000 960,620
Brazos River Authority, Texas, Revenue Refunding, Houston Light
and Power Project (MBIA) 8.100 05/01/2019 3,000,000 3,212,640
Harris County, Texas, Toll Road, Senior Lien, Series A 7.000 08/15/2010 1,000,000 1,183,040
Tarrant County, Texas, Health Facilities Development, Harris
Methodist Health Systems, Series A 5.125 09/01/2012 2,125,000 2,054,153
Texas Municipal Power Agency (AMBAC) (effective yield 7.090%) (b) 0.000 09/01/2006 2,500,000 1,539,200
Texas Municipal Power Agency (AMBAC) (effective yield 7.150%) (b) 0.000 09/01/2008 2,125,000 1,157,679
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
UTAH
Intermountain Power Agency, Utah, Power Supply Refunding,
Series A (effective yield 6.950%) (b) 0.000 07/01/2007 750,000 441,203
Intermountain Power Agency, Utah, Power Supply Refunding,
Series C 5.700 07/01/2017 2,000,000 2,038,180
- ------------------------------------------------------------------- -------- ------------ ----------- -----------
</TABLE>
(continued on next page)
<PAGE>
PAGE 14
- --------------------------------------
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
WASHINGTON
Washington Public Power Supply System, Refunding, Series A 5.700% 07/01/2012 $3,500,000 $ 3,557,785
Washington Public Power Supply System, Refunding, Series A 5.750 07/01/2012 2,000,000 2,041,500
Washington Public Power Supply System, Nuclear Project #2,
Series C 7.625 07/01/2010 1,000,000 1,137,820
Washington State General Obligation 5.500 05/01/2018 2,000,000 2,025,180
Washington State General Obligation, Series A 6.750 02/01/2015 1,000,000 1,167,740
- ------------------------------------------------------------ ------- ------------ ----------- -----------
WYOMING
Wyoming Community Development Authority, Single Family
Mortgage, Series A 7.875 06/01/2018 1,215,000 1,266,237
- ------------------------------------------------------------ ------- ------------ ----------- -----------
TOTAL MUNICIPAL BONDS (Cost--$119,674,400) 126,616,966
- ------------------------------------------------------------ -----------
TEMPORARY TAX-EXEMPT INVESTMENT (2.7%)
Dade County, Florida, Water and Sewer Systems Revenue
(Cost--$3,530,000) (a) 3.500 10/05/2022 3,530,000 3,530,000
- ------------------------------------------------------------ ------- ------------ ----------- -----------
TOTAL INVESTMENTS (Cost--$123,204,400) (d) 130,146,966
OTHER ASSETS AND LIABILITIES--NET (-0.7%) (890,052)
- ------------------------------------------------------------------------------------------------------------- -----------
NET ASSETS (100.0%) $129,256,914
- ------------------------------------------------------------------------------------------------------------- -----------
</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.
(d) The cost of investments for federal income tax purposes is identical. Gross
unrealized appreciation and depreciation on investments, based on
identified tax cost, at November 30, 1996 are as follows:
Gross unrealized appreciation $7,243,249
Gross unrealized depreciation (300,683)
----------
Net unrealized appreciation $6,942,566
==========
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Federal Guaranty Insurance Company
MBIA--Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended November 30,
<S> <C> <C> <C> <C> <C>
1996(d) 1995(d) 1994 1993 1992
- ------------------------------ -------- -------- -------- ----- -----
Net asset value beginning
of year $ 10.05 $ 8.93 $ 10.25 $ 10.17 $ 10.13
- ------------------------------ -------- -------- -------- ------- -------
Income from investment
operations:
Net investment income 0.51 0.51 0.51 0.57 0.63
Net realized and unrealized
gain (loss) on investments
and futures contracts (0.14) 1.13 (1.28) 0.36 0.30
- ------------------------------ -------- -------- -------- ------- -------
Total from investment
operations 0.37 1.64 (0.77) 0.93 0.93
- ------------------------------ -------- -------- -------- ------- -------
Less distributions from:
Net investment income (0.52) (0.51) (0.52) (0.57) (0.62)
In excess of net investment
income 0* (0.01) 0 (0.04) 0
Net realized gain on
investments 0 0 0 (0.24) (0.27)
Tax basis return of capital 0 0 (0.03) 0 0
- ------------------------------ -------- -------- -------- ------- -------
Total distributions (0.52) (0.52) (0.55) (0.85) (0.89)
- ------------------------------ -------- -------- -------- ------- -------
Net asset value end of year $ 9.90 $ 10.05 $ 8.93 $ 10.25 $ 10.17
============================== ======== ======== ======== ======= =======
Total return (a) 3.83% 18.71% (7.81%) 9.37% 9.35%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.13%(b) 1.19%(b) 1.13% 1.21% 1.25%
Net investment income 5.21% 5.35% 5.27% 5.40% 6.02%
Portfolio turnover rate 128% 30% 98% 47% 32%
- ------------------------------ -------- -------- -------- ------- -------
Net assets end of year
(thousands) $ 82,425 $ 94,183 $95,691 $124,102 $120,660
============================== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
February 13, 1987
Year Ended November 30, (Commencement
of Operations) to
1991 1990 1989 1988 November 30, 1987
- ------------------------------ ----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 9.94 $ 10.24 $ 9.96 $ 9.64 $ 10.00
- ------------------------------ ------- ------- ------- ------- --------
Income from investment
operations:
Net investment income 0.61 0.59 0.62 0.63 0.33
Net realized and unrealized
gain (loss) on investments
and futures contracts 0.31 (0.06) 0.34 0.37 (0.32)
- ------------------------------ ------- ------- ------- ------- --------
Total from investment
operations 0.92 0.53 0.96 1.00 0.01
- ------------------------------ ------- ------- ------- ------- --------
Less distributions from:
Net investment income (0.61) (0.60) (0.63) (0.68) (0.37)
In excess of net investment
income 0 (0.03) 0 0 0
Net realized gain on
investments (0.12) (0.20) (0.05) 0 0
Tax basis return of capital 0 0 0 0 0
- ------------------------------ ------- ------- ------- ------- --------
Total distributions (0.73) (0.83) (0.68) (0.68) (0.37)
- ------------------------------ ------- ------- ------- ------- --------
Net asset value end of year $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64
============================== ======= ======= ======= ======= ========
Total return (a) 9.59% 5.55% 9.97% 10.60% 0.17%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.58% 1.66% 1.62% 1.57% 1.00%(c)
Net investment income 5.95% 6.03% 6.15% 6.13% 6.85%(c)
Portfolio turnover rate 37% 42% 49% 109% 67%
- ------------------------------ ------- ------- ------- ------- --------
Net assets end of year
(thousands) $133,524 $146,335 $162,013 $179,191 $ 16,090
============================== ======= ======= ======= ======= ========
</TABLE>
* Reflects distributions in excess of net investment income which were under
$0.01 per share.
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.12% and 1.18% for the years ended November 30, 1996 and 1995,
respectively.
(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.
<PAGE>
PAGE 16
- --------------------------------------
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended November 30, Public Offering) to
1996(d) 1995(d) 1994 November 30, 1993
- ------------------------------------------ -------- -------- -------- -------------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 9.97 $ 8.88 $ 10.25 $ 10.27
- ------------------------------------------- -------- -------- --------- -------
Income from investment operations:
Net investment income 0.44 0.44 0.45 0.37
Net realized and unrealized gain (loss) on
investments and futures contracts (0.16) 1.11 (1.29) 0.30
- ------------------------------------------- -------- -------- --------- -------
Total from investment operations 0.28 1.55 (0.84) 0.67
- ------------------------------------------- -------- -------- --------- -------
Less distributions from:
Net investment income (0.44) (0.45) (0.50) (0.37)
In excess of net investment income 0* (0.01) 0 (0.08)
Net realized gain on investments 0 0 0 (0.24)
Tax basis return of capital 0 0 (0.03) 0
- ------------------------------------------- -------- -------- --------- -------
Total distributions (0.44) (0.46) (0.53) (0.69)
- ------------------------------------------- -------- -------- --------- -------
Net asset value end of year $ 9.81 $ 9.97 $ 8.88 $ 10.25
=========================================== ======== ======== ========= =======
Total return (a) 2.99% 17.84% (8.43%) 6.59%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.90%(b) 1.96%(b) 1.88% 1.96%(c)
Net investment income 4.44% 4.59% 4.60% 4.42%(c)
Portfolio turnover rate 128% 30% 98% 47%
- ------------------------------------------- -------- -------- --------- -------
Net assets end of year (thousands) $ 33,063 $ 33,449 $28,860 $14,091
=========================================== ======== ======== ========= =======
</TABLE>
* Reflects distributions in excess of net investment income which were under
$0.01 per share.
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.89% and 1.94% for the years ended November 30, 1996 and 1995,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended November 30, Public Offering) to
1996(d) 1995(d) 1994 November 30, 1993
- ------------------------------------------ -------- -------- -------- -----------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 9.97 $ 8.88 $ 10.26 $ 10.27
- ------------------------------------------- -------- -------- --------- -------
Income from investment operations:
Net investment income 0.41 0.44 0.43 0.37
Net realized and unrealized gain (loss) on
investments and futures contracts (0.13) 1.11 (1.27) 0.31
- ------------------------------------------- -------- -------- --------- -------
Total from investment operations 0.28 1.55 (0.84) 0.68
- ------------------------------------------- -------- -------- --------- -------
Less distributions from:
Net investment income (0.44) (0.45) (0.51) (0.37)
In excess of net investment income 0* (0.01) 0 (0.08)
Net realized gain on investments 0 0 0 (0.24)
Tax basis return of capital 0 0 (0.03) 0
- ------------------------------------------- -------- -------- --------- -------
Total distributions (0.44) (0.46) (0.54) (0.69)
- ------------------------------------------- -------- -------- --------- -------
Net asset value end of year $ 9.81 $ 9.97 $ 8.88 $ 10.26
=========================================== ======== ======== ========= =======
Total return (a) 2.99% 17.84% (8.52%) 6.70%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.90%(b) 1.96%(b) 1.89% 1.94%(c)
Net investment income 4.44% 4.59% 4.52% 4.41%(c)
Portfolio turnover rate 128% 30% 98% 47%
- ------------------------------------------- -------- -------- --------- -------
Net assets end of year (thousands) $ 13,769 $ 20,386 $23,230 $27,261
=========================================== ======== ======== ========= =======
</TABLE>
* Reflects distributions in excess of net investment income which were under
$0.01 per share.
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.89% and 1.94% for the years ended November 30, 1996 and 1995,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- --------------------------------------
Keystone Tax Free Income Fund
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS November 30, 1996
Year Ended November 30, 1996
<TABLE>
<S> <C>
Assets (Note 2)
Investments at market value (identified cost--
$123,204,400) $130,146,966
Cash 1,368
Receivable for:
Fund shares sold 3,223
Interest 2,116,351
Prepaid expenses and other assets 17,027
- --------------------------------------------------------- ------------
Total assets 132,284,935
- --------------------------------------------------------- ------------
Liabilities (Note 2)
Payable for:
Investments purchased 2,724,457
Fund shares redeemed 9,541
Distributions to shareholders 245,552
Due to related parties 2,348
Accrued Trustees' fees and expenses 395
Other accrued expenses 45,728
- --------------------------------------------------------- ------------
Total liabilities 3,028,021
- --------------------------------------------------------- ------------
Net assets $129,256,914
========================================================= ============
Net assets represented by
Paid-in capital $127,329,691
Accumulated distributions in excess of net
investment income (245,552)
Accumulated net realized loss on investments (4,769,791)
Net unrealized appreciation on investments 6,942,566
- --------------------------------------------------------- ------------
Total net assets $129,256,914
========================================================= ============
Net asset value per share (Note 2)
Class A Shares
Net assets of $82,424,769 [dividedby] 8,325,748 shares
outstanding $ 9.90
Maximum offering price per share
($9.90 [dividedby] 0.9525) (based on asales charge of
4.75% of the offering price at November 30, 1996) $ 10.39
Class B Shares
Net assets of $33,062,951 [dividedby] 3,370,577 shares
outstanding $ 9.81
Class C Shares
Net assets of $13,769,194 [dividedby] 1,403,319 shares
outstanding $ 9.81
========================================================= ============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income
Interest $ 8,727,446
Expenses (Notes 4, 5 and 6)
Management fee $ 844,486
Transfer agent fees 186,105
Accounting, auditing and legal fees 48,622
Custodian fees 94,590
Distribution Plan expenses 709,281
Trustees' fees and expenses 6,780
Other 55,583
- ------------------------------------------- ---------
Total expenses 1,945,447
Less: Expenses paid indirectly (12,939)
- ------------------------------------------- ---------
Net expenses 1,932,508
- ------------------------------------------- -----------
Net investment income 6,794,938
- ------------------------------------------- -----------
Net realized and unrealized loss on investments and closed futures contracts
(Note 3)
Net realized gain (loss) on:
Investments 2,300,652
Closed futures contracts (301,239)
- ------------------------------------------- ---------
Net realized gain on investments and
closed futures contracts 1,999,413
Net change in unrealized appreciation
(depreciation) on investments (4,259,520)
- ------------------------------------------- -----------
Net realized and unrealized loss on
investments and closed futures
contracts (2,260,107)
- ------------------------------------------- -----------
Net increase in net assets resulting from
operations $ 4,534,831
=========================================== ===========
</TABLE>
<PAGE>
PAGE 19
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended November 30,
1996 1995
============== ================
<S> <C> <C>
Operations
Net investment income $ 6,794,938 $ 7,600,756
Net realized gain (loss) on investments and closed futures contracts 1,999,413 (760,743)
Net change in unrealized appreciation (depreciation) on investments (4,259,520) 18,451,939
- ---------------------------------------------------------------------------------- ------------ ------------
Net increase in net assets resulting from operations 4,534,831 25,291,952
- ---------------------------------------------------------------------------------- ------------ ------------
Distributions to shareholders from (Note 1) Net investment income:
Class A Shares (4,538,414) (5,042,433)
Class B Shares (1,498,516) (1,531,824)
Class C Shares (758,007) (1,026,499)
In excess of net investment income:
Class A Shares (31,491) (70,626)
Class B Shares (10,398) (21,455)
Class C Shares (5,260) (14,377)
- ---------------------------------------------------------------------------------- ------------ ------------
Total distributions to shareholders (6,842,086) (7,707,214)
- ---------------------------------------------------------------------------------- ------------ ------------
Capital share transactions (Notes 2 and 7)
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 1,689,450 2,127,732
Class B Shares 3,194,770 6,139,897
Class C Shares 1,454,967 3,205,146
Payment for shares redeemed:
Class A Shares (15,690,464) (17,659,525)
Class B Shares (7,498,073) (5,968,412)
Class C Shares (8,352,411) (9,212,881)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 2,380,811 2,608,685
Class B Shares 776,860 790,394
Class C Shares 471,531 619,790
- ---------------------------------------------------------------------------------- ------------ ------------
Net decrease in net assets resulting from capital share transactions (16,452,879) (17,349,174)
- ---------------------------------------------------------------------------------- ------------ ------------
Total increase (decrease) in net assets (18,760,134) 235,564
Net assets
Beginning of year 148,017,048 147,781,484
- ---------------------------------------------------------------------------------- ------------ ------------
End of year [including accumulated distributions in excess of net investment
income as follows: 1996--($245,552) and 1995--($288,160)] (Note 1) $129,256,914 $148,017,048
================================================================================== ============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 20
- --------------------------------------
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
(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 ("Keystone") is the Investment Adviser. Keystone
is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII") and KMI is in
turn a wholly-owned subsidiary of Keystone. On December 11, 1996, KII, and
indirectly each of its subsidiaries, were acquired by First Union National Bank
of North Carolina (Note 9). The Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as a diversified open-end investment
company. The Fund offers several classes of shares. The Fund's investment
objective is to seek the highest possible current income exempt from federal
income taxes, while preserving capital.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
Securities held by the Fund are valued by an independent pricing service.
In determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
The risks of entering into futures contracts include (i) the possibility of
an illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill the obligations of the contract. Futures contracts also involve
elements of market risk in excess of the amount reflected in the statement of
assets and liabilities.
C. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the identified
cost basis. Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums.
D. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
<PAGE>
PAGE 21
- --------------------------------------
"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 excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
E. Distributions
The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment of market discount on securities.
F. Class Allocations
Class A shares are offered at a public offering price which includes 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 that is payable upon
redemption and decreases depending on how long the shares have been held. Class
B shares purchased on or after June 1, 1995 that have been outstanding for eight
years will automatically convert to Class A shares. Class B shares purchased
prior to June 1, 1995 that have been outstanding for seven years will
automatically convert to Class A shares. Class C shares are sold subject to a
contingent deferred sales charge payable on shares redeemed within one year of
purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
Class A 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Shares issued in connection with the 131,228 0
acquisition of Keystone Texas Tax Free Fund
(Note 7)
Shares sold 181,417 224,063
Shares redeemed (1,600,793) (1,843,241)
Shares issued in
reinvestment of dividends
and distributions 243,221 270,624
- -----------------------------------------------------------------------------
Net decrease (1,044,927) (1,348,554)
=============================================================================
Class B
- -----------------------------------------------------------------------------
Shares issued in connection 374,545 0
with the acquisition of
Keystone Texas Tax Free
Fund (Note 7)
Shares sold 332,958 647,077
Shares redeemed (773,268) (625,195)
Shares issued in reinvestment of dividends 80,112 82,512
and distributions
- -----------------------------------------------------------------------------
Net increase 14,347 104,394
=============================================================================
</TABLE>
<PAGE>
PAGE 22
- --------------------------------------
Keystone Tax Free Income Fund
<TABLE>
<CAPTION>
Year Ended November 30,
Class C 1996 1995
- ----------------------------- ------------- -------------
<S> <C> <C>
Shares issued in connection
with the acquisition of
Keystone Texas Tax Free
Fund (Note 7) 26,855 0
Shares sold 140,724 338,010
Shares redeemed (857,965) (974,642)
Shares issued in
reinvestment of dividends
and distributions 48,553 64,840
- ---------------------------- --------- ---------
Net decrease (641,833) (571,792)
============================ ========= =========
</TABLE>
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended November 30, 1996 were $172,834,242
and $188,508,299, respectively.
As of November 30, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $4,770,000 which expires as follows:
$3,903,000--2002 and $867,000--2003.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted by its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter,
Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of
Keystone, amounts which are calculated and paid daily.
The Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average net assets of the Class A
shares, to pay expenses related to the distribution of Class A shares. During
the year ended November 30, 1996, the Fund paid $205,872 to KIDC under the Class
A Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund
pays a distribution fee which may not exceed 1.00% of the average daily net
assets of Class B and Class C shares, respectively. Of that amount 0.75% is used
to pay distribution expenses and 0.25% is used to pay service fees.
During the year ended November 30, 1996, under the Class B Distribution
Plans, the Fund paid or accrued $285,049 for Class B shares purchased before
June 1, 1995 and $48,368 for Class B shares purchased on or after June 1, 1995.
The Fund paid $169,992 under the Class C Distribution Plan.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
KIDC may continue as compensation for services which had been earned while the
Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At November 30, 1996 total unpaid distribution costs were $1,980,732 for
Class B shares purchased before June 1, 1995 and $371,085 for Class B shares
purchased on or after June 1, 1995. Unpaid distribution costs for Class C were
$2,292,841 at November 30, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid
to KIDC.
<PAGE>
PAGE 23
- --------------------------------------
(5.) Investment Management Agreement and Other Affiliated 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 an annual rate
of 2.00% of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets increase
to 0.25% per annum, to the 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.
In return for its services, Keystone receives an annual fee equal to 85% of the
management fee received by KMI.
During the year ended November 30, 1996, the Fund paid or accrued $21,926
to Keystone for certain accounting services. The Fund paid or accrued $186,105
to Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of
Keystone, for services rendered as the Fund's transfer and dividend disbursing
agent.
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.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the year ended November 30, 1996, the Fund incurred total custody fees of
$94,590 and received a credit of $12,939 pursuant to this expense offset
arrangement, resulting in a net custody expense of $81,651. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
(7.) 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.
(8.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.043 for Class A, $0.037 for Class
B and $0.037 for Class C were declared payable on January 7, 1997 to
shareholders of record on December 24, 1996. These distributions are not
reflected in the accompanying financial statements.
(9.) Subsequent Events
On December 11, 1996, KII and indirectly each of its subsidiaries, including
Keystone, the Fund's investment adviser, were acquired (the "Acquisition") by
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union").
Consequently, the Fund entered into a new Investment Advisory and
Management Agreement (the "New Advisory Agreement") with Keystone. Under the New
Advisory Agreement, Keystone will provide the Fund with all the services that
previously may have been provided by KMI. As a result of the Acqui- <PAGE>
PAGE 24
- --------------------------------------
Keystone Tax Free Income Fund
sition, KMI no longer acts as the investment manager to the Fund. The annual fee
paid by the Fund remains unchanged.
In addition, the Fund has entered into a principal underwriting agreement
with Evergreen Keystone Distributors, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. EKD
replaces Evergreen Keystone Investment Services, Inc. (formerly, Keystone
Investment Distributors Company ("KIDC")) as the Fund's principal underwriter.
Also, in connection with the Acquisition, KIRC changed its name to
Evergreen Keystone Service Company.
It is expected that the Acquisition will not affect services provided to
the Fund.
<PAGE>
PAGE 25
- --------------------------------------
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, including the schedule of investments, as of November 30,
1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the nine-year
period ended November 30, 1996 and 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 three-year period ended November 30, 1996 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, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Income Fund as of November 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 27, 1996
<PAGE>
PAGE 26
- --------------------------------------
Keystone Tax Free Income Fund
FEDERAL TAX STATUS--Fiscal 1996 Distributions (Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in shares
or cash, are as follows:
Income Dividends
- --------------------
Tax-exempt
- --------------------
Class A $0.52
Class B $0.44
Class C $0.44
========= ======
In January 1997, complete information on the calendar year 1996 distributions
was forwarded to you to assist you in completing your 1996 federal income tax
return.
<PAGE>
PAGE 27
- --------------------------------------
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account information
on your balance, last transaction and recent Fund distribution. You may also
process transactions such as investments, redemptions and exchanges using a
touch-tone telephone as well as receive quotes on price, yield, and total return
of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net asset
value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you the
added ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move
money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined contribution
plans. For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
[Diamond]
Balanced Fund II
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources and Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond 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
TFIF-R-1/97
7M [RECYCLE LOGO]
KEYSTONE
[Graphic of American Flag flapping in the wind]
TAX FREE
INCOME FUND
[Keystone Logo]
ANNUAL REPORT
NOVEMBER 30, 1996
