<PAGE>
PAGE 1
KEYSTONE BALANCED FUND II
Dear Shareholders:
We are pleased to have the opportunity to provide the final report for Keystone
Balanced Fund II, covering the fiscal period through June 30, 1997.
PERFORMANCE
Since the Fund's start of investment operations on September 3, 1996, your Fund
produced the following investment results, before deduction of any sales
charges:
Class A Shares returned 19.61%
Class B Shares returned 19.05%
Class C Shares returned 18.95%.
We believe your Fund performed very well. During a period in which both the
stock and bond markets experienced significant short-term volatility and
longer-term positive trends, we believe your Fund's consistent conservative
strategy resulted in very strong performance.
MERGER
Effective July 17, 1997, Keystone Balanced Fund II was acquired by, or
effectively merged with, Evergreen Foundation Fund in a tax-free transaction for
investors. Shareholders of Keystone Balanced Fund II now are shareholders of
Evergreen Foundation Fund. We believe Evergreen Foundation Fund, with its
strong, long-term track record, is an excellent fund for shareholders who had
chosen the Balanced Fund II.
We thank you for your investment in, and support of, Keystone Balanced Fund
II.
Sincerely,
/s/ Albert H. Elfner, III (Photo of Albert (Photo of George
Albert H. Elfner, III H. Elfner, III S. Bissell
CHAIRMAN appears here) appears here)
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<TABLE>
<S> <C>
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
August 1997
<PAGE>
PAGE 2
KEYSTONE BALANCED FUND II
Your Fund's Performance
Comparison of change in value of a $10,000 investment in Keystone Balanced Fund
II, the Standard & Poors 500 Index and the Consumer Price Index.
9/3/96 9/96 10/96 11/96 12/96 1/97 2/97 3/97 4/97 5/97 6/97
In Thousands September 3, 1996 through June 30, 1997
Class A Shares (Customer to fill in plot points)
CPI
S&P 500
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The Standard & Poors 500 index is an unmanaged market
index. The index does not include transaction costs associated with buying and
selling securities nor any management fees.
<TABLE>
<S> <C>
Class A shares were introduced on September 3, 1996. Performance is reported at
the current maximum front-end sales charge of 4.75%.
Class B and C shares were introduced on September 3, 1996. Shares purchased
after January 1, 1997 are subject to a contingent deferred sales charge (CDSC)
that declines from 5% to 1% over six years after the month purchased.
Performance assumes that shares were redeemed after the end of a one-year
holding period and reflects the deduction of a 5% CDSC.
Class C shares are subject to a 1% contingent deferred sales charge for 12
months after the month purchased. Performance reflects the return you would have
received after holding shares for one year or more and redeeming after the end
of that period.
</TABLE>
<PAGE>
PAGE 3
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
[CAPTION]
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 52.1%
<C> <C> <S> <C>
AEROSPACE & DEFENSE-- 2.0%
1,600 Boeing Co. (The)................... $ 84,900
1,000 United Technologies Corp........... 83,000
167,900
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 0.8%
1,900 Chrysler Corp...................... 62,344
BANKS-- 2.8%
1,100 BankBoston Corp.................... 79,269
800 Chase Manhattan Corp............... 77,650
1,200 NationsBank Corp................... 77,400
234,319
BUSINESS EQUIPMENT & SERVICES-- 1.9%
2,000 Hewlett-Packard Co................. 112,000
700 Ikon Office Solutions, Inc......... 45,063
157,063
CHEMICAL & AGRICULTURAL PRODUCTS-- 1.7%
1,200 Du Pont (E. I.) De Nemours & Co.... 75,450
1,500 Monsanto Co........................ 64,594
140,044
CONSUMER PRODUCTS & SERVICES-- 2.3%
1,700 Deere & Co......................... 93,288
700 Procter & Gamble Co. (The)......... 98,875
192,163
DIVERSIFIED COMPANIES-- 2.6%
1,200 Minnesota Mining & Manufacturing
Co............................... 122,400
1,400 Tyco International Ltd............. 97,387
219,787
ELECTRICAL EQUIPMENT & SERVICES-- 5.6%
2,666 * Analog Devices, Inc................ 70,816
2,000 Emerson Electric Co................ 110,125
1,400 General Electric Co................ 91,525
1,500 Motorola, Inc...................... 114,000
1,000 Texas Instruments, Inc............. 84,062
470,528
FINANCE & INSURANCE-- 2.3%
1,400 Federal National Mortgage
Association...................... 61,075
1,000 Student Loan Marketing
Association...................... 127,000
188,075
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
FOOD & BEVERAGE PRODUCTS-- 3.7%
1,700 Anheuser Busch Companies, Inc...... $ 71,294
1,800 Heinz (H.J.) Co.................... 83,025
1,800 Nabisco Holdings Corp. Cl. A....... 71,775
1,800 Philip Morris Companies, Inc....... 79,875
305,969
HEALTHCARE PRODUCTS & SERVICES-- 4.8%
1,000 American Home Products Corp........ 76,500
1,200 Bristol-Myers Squibb Co............ 97,200
1,700 Johnson & Johnson.................. 109,437
1,000 Pfizer, Inc........................ 119,500
402,637
METAL PRODUCTS & SERVICES-- 0.7%
1,100 Nucor Corp......................... 62,150
OIL-- 7.3%
1,200 Atlantic Richfield Co.............. 84,600
1,400 Exxon Corp......................... 86,100
1,600 Halliburton Co..................... 126,800
900 Kerr-McGee Corp.................... 57,037
1,200 Mobil Corp......................... 83,850
1,100 Pennzoil Co........................ 84,425
700 Schlumberger Ltd................... 87,500
610,312
REAL ESTATE-- 4.3%
4,000 Arden Realty, Inc. (REIT).......... 104,000
3,200 Patriot American Hospitality, Inc.
(REIT)........................... 81,600
4,000 Prentiss Properties Trust (REIT)... 102,500
2,200 TriNet Corporate Realty Trust, Inc.
(REIT)........................... 72,737
360,837
TELECOMMUNICATION SERVICES & EQUIPMENT-- 2.3%
4,500 Deutsche Telekom AG, ADR........... 108,563
900 Northern Telecom Ltd............... 81,900
190,463
TRANSPORTATION-- 0.9%
700 Norfolk Southern Corp.............. 70,525
UTILITIES-- ELECTRIC-- 1.2%
3,800 Boston Edison Co................... 100,225
UTILITIES-- GAS-- 0.7%
1,200 Sonat, Inc......................... 61,500
</TABLE>
<PAGE>
PAGE 4
KEYSTONE BALANCED FUND II
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
UTILITIES-- TELEPHONE-- 4.2%
1,000 Ameritech Corp..................... $ 67,937
1,000 Bell Atlantic Corp................. 75,875
1,600 BellSouth Corp..................... 74,200
1,400 GTE Corp........................... 61,425
1,200 SBC Communications, Inc............ 74,250
353,687
<CAPTION>
TOTAL COMMON STOCKS
<C> <C> <S> <C>
(COST $3,540,339)............................... 4,350,528
<CAPTION>
CONVERTIBLE PREFERRED-- 3.7%
<C> <C> <S> <C>
FINANCE & INSURANCE-- 2.9%
1,000 Conseco, Inc.
7.00%, PRIDES.................... 129,750
2,500 SunAmerica, Inc.
$3.188, PERCS.................... 109,062
238,812
RETAILING & WHOLESALE-- 0.8%
1,300 Kmart Financing I
7.75%............................ 71,338
<CAPTION>
TOTAL CONVERTIBLE PREFERRED
<C> <C> <S> <C>
(COST $263,492)................................. 310,150
<CAPTION>
CONVERTIBLE DEBENTURES-- 3.0%
<C> <C> <S> <C>
CAPITAL GOODS-- 1.7%
100,000 Robbins & Myers, Inc.
6.50%, 9/1/03.................... 143,000
ENVIRONMENTAL SERVICES-- 1.3%
100,000 USA Waste Services, Inc.
4.00%, 2/1/02.................... 109,063
TOTAL CONVERTIBLE DEBENTURES
(COST $200,000)................................. 252,063
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS-- 36.9%
340,000 U.S. Treasury Bonds
6.75%, 8/15/26................... $ 336,494
U.S. Treasury Notes
350,000 5.875%, 2/15/00.................... 347,211
400,000 6.25%, 3/31/99..................... 401,376
630,000 6.50%, 8/15/05..................... 628,230
900,000 6.50%, 5/31/01..................... 904,923
455,000 6.125%, 8/31/98.................... 456,137
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $3,066,274)............................... 3,074,371
<CAPTION>
PAR
VALUE
<C> <C> <S> <C>
<CAPTION>
REPURCHASE AGREEMENT-- 3.2%
<C> <C> <S> <C>
$267,000 Keystone Joint Repurchase
Agreement, Investments in
repurchase agreements, in a joint
trading account, purchased
6/30/97, 6.039%, maturing 7/1/97
(maturity value $267,045) (a)..... 267,000
TOTAL INVESTMENTS
(COST $7,337,105) 98.9% 8,254,112
OTHER ASSETS AND
LIABILITIES-- NET 1.1 87,941
NET ASSETS 100.0% $8,342,053
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at June 30, 1997.
ADR-- American Depositary Receipt
PERCS-- Preferred Equity Redemption Cumulative Stock
PRIDES-- Preferred Redeemable Increased Dividend Equity Securities
REIT-- Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 5
FINANCIAL HIGHLIGHTS-- CLASS A, B, & C SHARES
PERIOD FROM SEPTEMBER 3, 1996 (COMMENCEMENT OF
INVESTMENT OPERATIONS) TO JUNE 30, 1997
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.24 0.18 0.19
Net gain (loss) on investments and foreign currency related transactions 1.70 1.71 1.69
Total from investment operations 1.94 1.89 1.88
LESS DISTRIBUTIONS FROM:
Net investment income (0.24) (0.18) (0.18)
Net realized gain on investments (0.02) (0.02) (0.02)
Total distributions (0.26) (0.20) (0.20)
NET ASSET VALUE END OF PERIOD $11.68 $11.69 $11.68
TOTAL RETURN (A) 19.61% 19.05% 18.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Net expenses (b) 1.61% 2.31% 2.34%
Net expenses, excluding indirect expenses (b) 1.54% 2.24% 2.27%
Net expenses, excluding fee waivers and expense reimbursements (b) 2.61% 4.31% 4.31%
Net investment income (b) 2.74% 2.10% 2.21%
PORTFOLIO TURNOVER RATE 91% 91% 91%
AVERAGE COMMISSION RATE PAID $0.0748 $0.0748 $0.0748
NET ASSETS END OF PERIOD (THOUSANDS) $2,049 $5,623 $670
</TABLE>
Per share calculation based on weighted average shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 6
KEYSTONE BALANCED FUND II
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value
(identified cost, $7,337,105) $8,254,112
Cash 461
Dividends and interest receivable 66,740
Receivable for investments sold 63,306
Receivable for Fund shares sold 18,043
Deferred organization expenses 15,800
Other assets 1,185
Total assets 8,419,647
LIABILITIES
Payable for investments purchased 49,417
Distribution fee payable 844
Due to affiliates 5,889
Other accrued expenses 21,444
Total liabilities 77,594
NET ASSETS $8,342,053
NET ASSETS REPRESENTED BY
Paid-in capital $7,225,676
Undistributed net investment income 3,317
Accumulated net realized gain on investments 192,275
Net unrealized appreciation on investments 920,785
Total net assets $8,342,053
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
CLASS A SHARES
Net assets of $2,048,946 4 175,376 shares
outstanding $ 11.68
Offering price per share ($11.68 4 0.9525)
(based on a sales charge of 4.75% of the
offering price June 30, 1997) $ 12.26
CLASS B SHARES
Net assets of $5,623,061 4 480,959 shares
outstanding $ 11.69
CLASS C SHARES
Net assets of $670,046 4 57,376 shares
outstanding $ 11.68
</TABLE>
STATEMENT OF OPERATIONS
PERIOD FROM SEPTEMBER 3, 1996 (COMMENCEMENT OF INVESTMENT OPERATIONS)
TO JUNE 30, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend (net of foreign taxes
withheld of $268) $ 90,561
Interest 178,074
Total income 268,635
EXPENSES
Management fee $41,377
Distribution Plan expenses 44,217
Shareholder services 15,735
Registration fees 75,828
Custodian fee expense 20,421
Professional fees 17,847
Printing 11,160
Organization expense amortization 3,118
Miscellaneous expenses 1,235
Total expenses 230,938
Less: Expenses paid indirectly (4,406)
Waiver of management fee and
expense reimbursement (102,453)
Net expenses 124,079
Net investment income 144,556
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS:
Net realized gain on investments and
foreign currency related
transactions 203,840
Net unrealized appreciation on
investments 917,007
Net realized and unrealized gain on
investments and foreign currency
related transactions 1,120,847
Net increase in net assets resulting
from operations $1,265,403
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 7
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD FROM SEPTEMBER 3, 1996 (COMMENCEMENT OF
INVESTMENT OPERATIONS) TO JUNE 30, 1997
<TABLE>
<S> <C>
OPERATIONS
Net investment income $ 144,556
Net realized gain on investments and foreign currency related transactions 203,840
Net unrealized appreciation on investments 917,007
Net increase in net assets resulting from operations 1,265,403
DISTRIBUTIONS TO SHAREHOLDERS FROM
NET INVESTMENT INCOME
Class A Shares (59,456)
Class B Shares (79,282)
Class C Shares (5,716)
NET REALIZED GAIN ON INVESTMENTS
Class A Shares (6,171)
Class B Shares (5,230)
Class C Shares (166)
Total distributions to shareholders (156,021)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A Shares 5,021,487
Class B Shares 6,316,517
Class C Shares 598,057
Payments for shares redeemed:
Class A Shares (3,524,948)
Class B Shares (1,377,870)
Class C Shares (10,475)
Net asset value of shares issued in reinvestment of distributions:
Class A Shares 30,380
Class B Shares 75,051
Class C Shares 4,472
Net increase in net assets resulting from capital share transactions 7,132,671
Total increase in net assets 8,242,053
NET ASSETS:
Beginning of period 100,000
End of period, including undistributed net investment income of $3,317 $8,342,053
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 8
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Balanced Fund II (the "Fund") is a Massachusetts Business Trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Adviser and Manager. Keystone was formerly a wholly owned subsidiary of Keystone
Investments, Inc ("KII") and is currently a subsidiary of First Union
Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end investment company. The Fund's
investment objective is to provide shareholders with current income and capital
appreciation consistent with preservation of capital.
The Fund offers Class A, Class B and Class C shares. Class A shares were
offered at a public offering price, which includes a maximum sales charge of
4.75% payable at the time of purchase. Class B shares were 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 January 1, 1997 that have been outstanding for seven years will
automatically convert to Class A shares. Class B shares purchased prior to
January 1, 1997 retain their existing conversion features. Class C shares are
sold subject to a contingent deferred sales charge payable on shares redeemed
within one year of purchase.
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 relative to the net assets of the
Fund.
A. VALUATION OF SECURITIES
U.S. government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar securities which are generally recognized by
institutional traders.
The Fund values securities traded on a national securities exchange or
included on the NASDAQ National Market System ("NMS") at the last reported sales
price on the exchange where primarily traded. The Fund values securities traded
on an exchange or NMS for which there has been no sale and other securities
traded in the over-the-counter market at the mean between the last reported bid
and asked price.
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.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone, 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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
<PAGE>
PAGE 9
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, the Fund may enter into reverse repurchase
agreements with qualified third-party broker-dealers. Interest on the value of
reverse repurchase agreements is based upon competitive market rates at the time
of issuance. At the time the Fund enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with the custodian containing
qualifying assets having a value not less than the repurchase price, including
accrued interest. If the counterparty to the transaction is rendered insolvent,
the ultimate realization of the securities to be repurchased by the Fund may be
delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, foreign currency transactions and the
difference between the amounts of interest and dividends recorded on the books
of the Fund and the amount actually received. The portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized gain
(loss) on investment transactions
E. 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. Dividend income is recorded on the ex-dividend date Interest income is
recorded on the accrual basis and includes amortization of discounts and
premiums.
F. ORGANIZATION EXPENSES
Organization expenses are amortized to operations over a five-year period on a
straight-line basis. In the event any of the initial shares of the Fund are
redeemed by any holder during the five-year amortization period, redemption
proceeds will be reduced by any unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of the redemption.
G. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise taxes is required.
H. DISTRIBUTIONS
The Fund distributes net investment income on a quarterly basis and net capital
gains, if any, at least annually. Distributions to shareholders are recorded at
the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distribution and distributions made in accordance with
income tax regulations are primarily due to differing treatment for organization
and stock issuance costs and certain distributions received from real estate
investment trusts.
<PAGE>
PAGE 10
KEYSTONE BALANCED FUND II
I. CLASS ALLOCATIONS
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 were divided into Class A, Class B, and Class C. For the
period from September 3, 1996 (commencement of investment operations) to June
30, 1997, Transactions in shares of the Fund were as follows:
<TABLE>
<S> <C>
CLASS A
Shares sold 489,743
Shares redeemed (321,187)
Shares issued in reinvestment of distributions 2,820
Net increase 171,376
CLASS B
Shares sold 596,181
Shares redeemed (125,198)
Shares issued in reinvestment of distributions 6,976
Net increase 477,959
CLASS C
Shares sold 54,890
Shares redeemed (928)
Shares issued in reinvestment of distributions 414
Net increase 54,376
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the period from September 3, 1996 to June 30, 1997,
were $13,666,276 and $6,806,253 respectively.
The average daily balance of reverse repurchase agreements outstanding for the
Fund during the period ended June 30, 1997 was approximately $516,250 at a
weighted average interest rate of 5.386%. The maximum amount outstanding under
reverse repurchase agreements during the period ended June 30, 1997 for the Fund
was $516,799 (including accrued interest). There were no reverse repurchase
agreements outstanding at June 30, 1997.
On June 30, 1997, the cost of investments for federal income tax purposes was
$7,333,327, gross unrealized appreciation of investments was $943,741 and gross
unrealized depreciation of investments was $22,956, resulting in net unrealized
appreciation of $920,785 for federal income tax purposes.
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit the fund to reimburse its
principal underwriter for costs related to selling shares of the fund and for
various other services. These costs, which consist primarily of commissions and
services fees to broker-dealers who sell shares of the fund, are paid by
shareholders through expenses called "Distribution Plan expenses". Each class
currently pays a service fee equal to 0.25% of the average daily net asset of
the class. Class B and Class C shares also presently pay distribution fees equal
to 0.75% of the average daily net assets of the Class. Distribution Plan
expenses are calculated daily and paid monthly.
With respect to Class B and Class C shares, the principal underwriter may pay
12b-1 fees greater than the allowable annual amounts the Fund is permitted to
pay. The Fund may reimburse the principal underwriter for such excess amounts in
later years with annual interest at the prime rate plus 1.00%.
<PAGE>
PAGE 11
During the period from September 3, 1996 to June 30, 1997, amounts paid to EKD
and/or EKIS pursuant to the Fund's Class A, Class B and Class C Distribution
Plans were $3,397, $37,966 and $2,854, respectively.
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 EKD
and/or its predecessor may continue as compensation for services which had been
provided while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of an investment advisory agreement between Keystone and the
Fund, Keystone serves as the investment adviser and manager to the Fund. As
such, Keystone manages the Fund's investments, provides certain administrative
services and supervises the Funds daily business affairs. In return, Keystone is
paid a management fee, computed daily and paid monthly calculated at a rate of
1.50% of the Fund's gross investment income plus an amount which is determined
by applying percentage rates starting at 0.60% and declining as net assets
increase to 0.30% per annum, to the average daily net asset value of the Fund.
For the period from September 3, 1996 to June 30, 1997, Keystone reimbursed the
Fund $102,453.
During the period from September 3, 1996 to June 30, 1997, the Fund paid
Keystone for certain accounting services. Additionally, Evergreen Keystone
Service Company ("EKSC") (formerly Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend
disbursing agent.
Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate
of EKD, began serving as the Fund's sub-administrator. As sub-administrator,
BISYS provides the officers of the Fund. For this service, BISYS is paid a fee
by keystone, which is not a Fund expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets
7. MERGER WITH EVERGREEN FOUNDATION FUND
On June 30, 1997, the Fund held a special meeting of its shareholders, the
purpose of which was to approve an agreement and plan of reorganization
providing for the acquisition of all the assets and the assumption of certain
identified liabilities of the Fund by the Evergreen Foundation Fund. The plan,
to be effective as of the close of business on July 17, 1997, provided for the
issuance of shares of the Evergreen Foundation Fund to shareholders of the Fund
in liquidation of the Keystone Balanced Fund II.
8. DISTRIBUTIONS TO SHAREHOLDERS
Distributions of $0.02 per share and $0.28 per share were declared on July 15,
1997 from net investment income and net short-term capital gains. This
distribution was payable on July 17, 1997 to shareholders of record at the close
of business on July 15, 1997 and are not reflected in these financial
statements.
<PAGE>
PAGE 12
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE BALANCED FUND II
We have audited the accompanying statement of assets and liabilities of Keystone
Balanced Fund II, including the schedule of investments, as of June 30, 1997,
and the related statement of operations, statement of changes in net assets and
financial highlights for the period from September 3, 1996 (commencement of
investment operations) to June 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of June 30, 1997 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 audit provides 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 Balanced Fund II as of June 30, 1997, the results of its operations,
the changes in its net assets and financial highlights for the period from
September 3, 1996 to June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 8, 1997
<PAGE>
PAGE 13
OTHER INFORMATION-- MERGER WITH EVERGREEN FOUNDATION FUND
(UNAUDITED)
On June 30, 1997, the Fund held a special meeting of its shareholders, the
purpose of which was to approve an agreement and plan of reorganization
providing for the acquisition of all the assets and the assumption of certain
identified liabilities of the Fund by the Evergreen Foundation Fund. The plan,
to be effective as of the close of business on July 17, 1997, provided for the
issuance of shares of the Evergreen Foundation Fund to shareholders of the Fund
in liquidation of the Keystone Balanced Fund II.
On May 2, 1997, the record date for the meeting, the Fund had 693,991 shares
outstanding, of which 675,347 shares were represented at the meeting. The vote
at the meeting was as follows:
<TABLE>
<S> <C>
Affirmative 358,486
Against 4,988
Abstain 11,873
</TABLE>
The closing for the merger took place as of the close of business July 17, 1997.
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED)
During the fiscal year ended June 30, 1996, distributions of $0.26, $0.20 and
$0.20 per share were paid in shares or cash to Class A, Class B and Class C
shareholders, respectively. These amounts are taxable to shareholders as
ordinary income in the year in which received by them or credited to their
accounts. Of the ordinary income distributions, 26% is eligible for the
corporate dividend received deduction. The above figures may differ from those
previously reported and those cited elsewhere in this report due to differences
in the calculation of income and capital gains for accounting (book) purposes
and Internal Revenue Service (tax) purposes.
In January 1998, we will send you complete information on the distributions
paid during the calendar year 1997 to help you in completing your federal tax
return.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
(Diamond appears here)
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Global Resources & Development 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
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
Evergreen Keystone
(Tree appears here) FUNDS(SM) (Keystone logo appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
BAL2-R Rev01 8/97 (Recycling logo appears here)
KEYSTONE
(Photo of two people cycling appears here)
BALANCED
FUND II
ANNUAL REPORT
JUNE 30, 1997
Evergreen Keystone
(Tree appears here) FUNDS(SM) (Keystone logo appears here)
