PAGE 1
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Keystone Balanced Fund II
Seeks current income from a quality selection of stocks and bonds.
Dear Shareholder:
We are pleased to have the opportunity to present our first report on the
Keystone Balanced Fund II. Following this letter, we have included an interview
with your Fund's manager in which he discusses portfolio strategy.
Performance
Since commencement of operations on September 3, 1996 through December 31, 1996,
your fund provided the following total returns:
Class A shares returned 10.00%.
Class B shares returned 9.89%.
Class C shares returned 9.79%.
For the same period, the Standard & Poor's 500, a broad-based index of common
stocks, returned 14.4%, and the Lehman Aggregate Bond Index, an index of
government, corporate and mortgage-backed securities, returned 4.7%.
We believe your Fund performed very well during the period. We think the
Fund's conservative strategy and emphasis on quality in both stock and bond
selection worked very well during a period of uncertainty and volatility.
Taking a conservative approach
Strong corporate earnings and a favorable economic environment sent stocks to
new highs during the period. In October the Dow Jones Industrial Average set
another record, crossing the 6000 mark, and it continued to rise to the end of
the year. In managing your Fund, we took a conservative, but flexible, approach.
Your fund invested in a combination of high quality stocks and bonds. At the end
of the period, your Fund's asset allocation breakdown was 60% in stocks and 40%
in bonds. Your Fund primarily benefitted from its emphasis on the stocks of
large, established companies, which were market leaders during the period.
Our outlook
We expect the favorable economic fundamentals of 1996 to continue into 1997. We
believe that the economy should grow at a moderate rate, inflation should
continue to be under control and interest rates should remain relatively stable.
After two years of very strong performance, we anticipate more moderate returns
in both the stock and bond markets in 1997. We believe it would be unrealistic
to expect another year when returns significantly exceed historical market
averages.
While we have a favorable outlook for 1997, it is important to remember that
we are now in the sixth year of a stock market rally, the longest since the end
of World War II. History has shown that strong performance does not persist
indefinitely, and stocks periodically experience price declines. We experienced
this type of correction in June and July, followed by a recovery. While we
continue to see opportunities in the stock market, we caution investors to be
prepared for less generous returns in the future and to not be surprised by
corrections. We believe, however, that investors should maintain a long-term
perspective and not be swayed by short-term performance issues, whether they be
positive or negative.
--continued--
<PAGE>
PAGE 2
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Keystone Balanced Fund II
Keystone acquired by First Union Corporation
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 six 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.
Thank you for your continued support of Keystone Balanced Fund II. If you have
any questions or comments about your investments, we encourage you 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 28, 1997
[Photos of Albert H. Elfner, III and George S. Bissell]
Albert H. Elfner, III George S. Bissell
<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
[Photo of Walter McCormick]
Walter McCormick is senior portfolio manager of your Fund and leads Keystone's
core equity stock team. A Chartered Financial Analyst, Mr. McCormick holds an
MBA from Rutgers University and has more than 26 years of investment management
experience. Together with portfolio managers Andrew Baldassarre, Jonathan
Noonan, Judith Warners, George Wilkins and Walter Zagrobski, the team focuses on
income-producing stocks of established companies that are attractively valued.
Q How would you characterize Keystone Balanced Fund II?
A The Fund seeks consistent returns over the long term without incurring
excessive risk. Our conservative management style involves investing in a blend
of quality, dividend-paying stocks and bonds. We primarily focus on U.S.
companies, and investment grade corporate, government and mortgage-backed
securities. By investing in both the stock and bond markets, the Fund seeks to
reduce the impact of fluctuations in either market. The combination of growth
and income which we seek makes the Fund suitable for conservative investors with
long-term financial goals.
Q How do you select stocks for the portfolio?
A We focus on well established companies, that are financially sound and that
have long records of consistent earnings growth and dividend payouts. We look
for both value and growth, combining the stocks of attractively priced,
undervalued companies with those that offer strong potential for price
appreciation. We diversify the Fund's investments among a variety of economic
sectors and industries.
Q What are your criteria for investing in bonds?
A We emphasize higher rated investment grade corporate and U.S. Treasury
securities. We tend to focus on bonds in the top four ratings categories (AAA,
AA, A, BBB).
Q What was the economic environment like from September through December 31,
1996?
A The economic environment was positive for investors. After experiencing strong
economic growth and relatively high interest rates early in 1996, economic
growth moderated to a slower, sustainable pace, and interest rates declined.
These factors, coupled with solid corporate profits, provided a strong economic
backdrop for stocks. Fixed-income investors also benefitted, as declining
interest rates increased the value of existing bonds.
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Fund Profile
Objective: Seeks to provide current income and capital appreciation
consistent with the preservation of principal.
Number of stocks: 63
Average Quality: AAA
Assets: $7.26 million
Commencement of investment operations: September 3, 1996
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<PAGE>
PAGE 4
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Keystone Balanced Fund II
Q Did stocks or bonds contribute most to the Fund's performance?
A Most of your Fund's return came from the stock portion of the portfolio. We
selected well established companies, that are financially sound and that have
long records of consistent earnings growth and dividend payouts. We found
opportunities in a number of different sectors, including telecommunications,
energy, finance, and foods.
Q Large-company stocks have been market leaders for more than a year. What are
some of the factors that have contributed to their success?
A Many of the large companies in which we invested are multinationals. Over the
past several years, many of these companies have undertaken massive
restructuring programs, which have paid off. Strict cost-control programs and
downsizing have led to greater efficiency and productivity. In many instances,
U.S.-based companies have become the low-cost producers of goods and services
in the global economy. Established U.S. companies also reaped the rewards of
large capital inflows into the stock market. A significant portion of the money
invested in the stock market has come from retirement investors. These investors
tend to be more conservative and often favor the stocks of high quality
companies that usually perform well in rising markets and that tend to hold
their own during market downturns.
Q Did you invest in convertible securities?
A On December 31, 1996, convertible securities accounted for 7.6% of the Fund's
net assets. We emphasized convertible securities for their attractive yields and
price appreciation potential. These securities are convertible into common stock
at predetermined prices. As a result, their prices tend to rise along with
increases in common stock prices.
Top 10 Holdings
as of December 31, 1996
Percentage of
Stocks Industry net assets
- -------------------------------------------------------------------------------
Conseco Conv. Pfd. Insurance 1.6
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Arden Realty Real Estate 1.5
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SunAmerica Conv. Pfd. Insurance 1.5
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Boston Edison Utilities 1.4
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Analog Devices Electronics 1.4
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Hewlett Packard Office & Business Equipment 1.4
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Prentiss Properties Real Estate 1.4
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Minnesota Mng. & Mfg. Diversified Companies 1.4
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Emerson Electric Capital Goods 1.3
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Halliburton Co. Oil Services 1.3
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Q What is your outlook?
A We expect the environment for stocks to remain healthy. We anticipate moderate
economic growth and believe inflation and interest rates will remain at
relatively low levels. We believe these factors, along with our expectations for
positive earnings, should favor stocks. However, we believe that returns in 1997
may be less than those of 1996. We would not be surprised to see some short-term
pullback in stock prices in the months ahead. Should a "correction" in the stock
market occur, we would view it as a normal part of the investing cycle and
attempt to use such a downturn to our advantage.
Top 5 Equity Industries
as of December 31, 1996
Percentage of
Industry net assets
- ------------------------------------------
Telecommunications 7.1
- ------------------------------------------
Real Estate 5.0
- ------------------------------------------
Oil 4.9
- ------------------------------------------
Foods 4.1
- ------------------------------------------
Finance 3.8
- ------------------------------------------
[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
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
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Your Fund's Performance
[Mountain Chart]
Growth of an investment in
Keystone Balanced Fund II Class A
In Thousands
Initial Reinvested
Investment Distributions
8/96 9,524 9,524
9/96 9,914 9,914
10/96 10,019 10,111
11/96 10,476 10,572
12/96 10,381 10,476
Total Value: $10,478
A $10,000 investment in Keystone Balanced Fund II Class A made on
September 3, 1996 with all distributions reinvested was worth $10,478 on
December 31, 1996. Past performance is no guarantee of future results.
Performance as of December 31, 1996
Class A Class B Class C
- -----------------------------------------------------------------------------
Total returns* 10.00% 9.89% 9.79%
Net asset value 9/3/96 $10.00 $10.00 $10.00
12/31/96 $10.90 $10.91 $10.90
Dividends $ 0.08 $ 0.06 $ 0.06
Capital Gains $ 0.02 $ 0.02 $ 0.02
* From commencement date of 9/3/96 before deduction of front-end or
contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1996
- ------------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
Life of Class
Without sales charge 10.00% 9.89% 9.79%
With sales charge 4.78% 4.89% 8.79%
Class A, Class B, and Class C shares commenced investment operations on
September 3, 1996.
Class A share performance is reported at the current maximum front-end sales
charge of 5.75%.
Class B shares 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 the period and reflect the
deduction of a 5% CDSC.
Class C shares are subject to a 1% contingent deferred sales charge (CDSC) if
redeemed during the first twelve-month period held. Performance assumes that
shares were redeemed at the end of the period and reflects the deduction of the
CDSC.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Performance
for each class will differ.
Shareholders may exchange shares for another Keystone fund in writing or by
calling Keystone's Automated Response Line (KARL). The Fund reserves the right
to change or terminate the exchange offer.
<PAGE>
PAGE 6
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Keystone Balanced Fund II
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for managing
a portfolio's assets prudently and making appropriate investment decisions, such
as which securities to buy, hold and sell, based on the investment objectives of
the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a claim
on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it has
borrowed money. A bond usually promises to pay interest income to the bondholder
at regular intervals and to repay the entire amount borrowed at maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds)
that is exchangeable for a set number of another security type (usually common
stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The
NAV per share is determined by subtracting a fund's total liabilities from its
total assets, and dividing that amount by the number of fund shares outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses. Capital
gains are paid to fund shareholders on a per share basis. When a capital gain
distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net asset
value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified period
of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price at
which the share is sold to the public.
<PAGE>
PAGE 7
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SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
Market
Shares Value
- ---------------------------------------------------------------
COMMON STOCKS (51.6%)
CANADA (1.7%)
BUSINESS SERVICES (0.9%)
Laidlaw, Inc. 6,000 $ 69,000
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TELECOMMUNICATIONS (0.8%)
Northern Telecom Ltd. 900 55,687
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TOTAL CANADA 124,687
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GERMANY (1.3%)
TELECOMMUNICATIONS (1.3%)
Deutsche Telekom AG, ADR (b) 4,500 91,687
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UNITED STATES (48.6%)
ADVERTISING & PUBLISHING (0.9%)
Tribune Co. 800 63,100
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AEROSPACE (2.1%)
Boeing Co. 800 85,100
United Technologies Corp. 1,000 66,000
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151,100
- ---------------------------------------------------------------
AUTOMOTIVE (0.9%)
Chrysler Corp. 1,900 62,700
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BUSINESS SERVICES (1.1%)
Rental Service Corp. (b) 3,000 83,438
- ---------------------------------------------------------------
CAPITAL GOODS (3.2%)
Deere & Co. 1,700 69,063
Emerson Electric Co. 1,000 96,750
General Electric Co. 700 69,212
- ---------------------------------------------------------------
235,025
- ---------------------------------------------------------------
CHEMICALS (1.5%)
du Pont de Nemours & Co. 600 56,625
Monsanto Co. 1,300 50,537
- ---------------------------------------------------------------
107,162
- ---------------------------------------------------------------
CONSUMER GOODS (1.0%)
Procter & Gamble Co. 700 75,250
- ---------------------------------------------------------------
DIVERSIFIED COMPANIES (1.4%)
Minnesota Mining & Manufacturing Co. 1,200 $ 99,450
- ---------------------------------------------------------------
DRUGS (3.2%)
American Home Products Corp. 1,000 58,625
Johnson & Johnson 1,700 84,575
Rhone-Poulenc Rorer, Inc. 1,100 85,938
- ---------------------------------------------------------------
229,138
- ---------------------------------------------------------------
ELECTRONICS (2.3%)
Analog Devices, Inc. (b) 3,000 101,625
Intel Corp. 500 65,469
- ---------------------------------------------------------------
167,094
- ---------------------------------------------------------------
FINANCE (3.8%)
Bank of Boston Corp. 1,100 70,675
Federal National Mortgage Association 1,400 52,150
Nationsbank Corp. 600 58,650
Student Loan Marketing Association 1,000 93,125
- ---------------------------------------------------------------
274,600
- ---------------------------------------------------------------
FOODS (4.1%)
Anheuser-Busch Cos., Inc. 1,700 68,000
Nabisco Holdings Corp., Class A 1,800 69,975
Philip Morris Cos., Inc. 600 67,575
Pioneer Hi Bred International, Inc. 1,300 91,000
- ---------------------------------------------------------------
296,550
- ---------------------------------------------------------------
METALS & MINING (0.8%)
Nucor Corp. 1,100 56,100
- ---------------------------------------------------------------
NATURAL GAS (0.8%)
Sonat, Inc. 1,200 61,800
- ---------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (1.4%)
Hewlett Packard Co. 2,000 100,500
- ---------------------------------------------------------------
OIL (4.9%)
Atlantic Richfield Co. 600 79,500
Exxon Corp. 700 68,600
Kerr McGee Corp. 900 64,800
Mobil Corp. 600 73,350
Pennzoil Co. 1,300 73,450
- ---------------------------------------------------------------
359,700
- ---------------------------------------------------------------
<PAGE>
PAGE 8
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Keystone Balanced Fund II
OIL SERVICES (2.3%)
Halliburton Co. 1,600 $ 96,400
Schlumberger, Ltd. 700 69,914
- ---------------------------------------------------------------
166,314
- ---------------------------------------------------------------
REAL ESTATE (5.0%)
Arden Realty, Inc. (R.E.I.T.) 4,000 111,000
Beacon Properties (R.E.I.T.) 2,200 80,575
Patriot American Hospitality, Inc.
(R.E.I.T.) 1,600 69,000
Prentiss Properties Trust (R.E.I.T.) 4,000 100,000
- ---------------------------------------------------------------
360,575
- ---------------------------------------------------------------
RETAIL (0.7%)
Kmart Financing, Inc. 1,100 53,625
- ---------------------------------------------------------------
TELECOMMUNICATIONS (5.0%)
Ameritech Corp. 1,000 60,625
Bell Atlantic Corp. 1,000 64,750
Bellsouth Corp 1,600 64,600
GTE Corp. 1,400 63,700
Lucent Technologies, Inc. 1,100 50,875
SBC Communications, Inc. 1,200 62,100
- ---------------------------------------------------------------
366,650
- ---------------------------------------------------------------
TRANSPORTATION (0.8%)
Norfolk Southern Corp. 700 $ 61,250
- ---------------------------------------------------------------
UTILITIES (1.4%)
Boston Edison Co. 3,800 102,125
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TOTAL UNITED STATES 3,533,246
- ---------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$3,383,944) 3,749,620
- ---------------------------------------------------------------
CONVERTIBLE/PREFERRED STOCKS (4.8%)
Alco Standard Corp., ADS 700 66,850
Conseco, Inc. 1,000 113,750
Fuji International Financing Bermuda
Trust, ADR (b) 2 61,829
Sunamerica, Inc. 2,500 105,625
- ---------------------------------------------------------------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(Cost--$314,447) 348,054
- ---------------------------------------------------------------
Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------
FIXED INCOME (41.4%)
CONVERTIBLE BONDS & NOTES (2.8%)
CAPITAL GOODS (1.5%)
Robbins & Myers, Inc. 6.50% 2003 $100,000 $110,500
- ------------------------------------------------------------------------------
RETAIL (1.3%)
Saks Holdings, Inc. 5.50 2006 100,000 91,875
- ------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS & NOTES (Cost--$200,000) 202,375
- ------------------------------------------------------------------------------
BANK & FINANCE BONDS & NOTES (1.1%)
Swift Energy Co. 6.25 2006 75,000 81,281
- ------------------------------------------------------------------------------
TOTAL BANK & FINANCE BONDS & NOTES (Cost--$75,000) 81,281
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<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------
UNITED STATES GOVERNMENT (AND AGENCY)
ISSUES (37.5%)
U.S. Treasury Notes 6.13% 1998 $535,000 $ 537,338
U.S. Treasury Notes 6.50 2001 900,000 909,846
U.S. Treasury Notes 6.50 2005 630,000 634,038
U.S. Treasury Bonds 6.75 2026 340,000 342,550
Federal Home Loan Bank, Cons.
Discount Note 1997 300,000 299,814
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TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES
(Cost--$2,697,969) 2,723,586
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TOTAL FIXED INCOME (Cost--$2,972,969) 3,007,242
- ------------------------------------------------------------------------------
Maturity
Value
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (1.8%)
REPURCHASE AGREEMENTS (1.8%)
Investments in repurchase
agreements, in a joint
trading account, purchased
12/31/96, 6.716%, maturing
1/2/97 (Cost $130,000) (a) $130,050 $ 130,000
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$6,801,360) 7,234,916
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.4%) 28,008
- ------------------------------------------------------------------------------
NET ASSETS (100.0%) $7,262,924
- ------------------------------------------------------------------------------
(a) The repurchase agreements are fully collateralized by U. S. government
and/or agency obligations based on market prices at December 31, 1996.
(b) Non-income-producing security.
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
ADS---American Depository Share
REIT--Real Estate Investment Trust
See Notes to Financial Statements.
<PAGE>
PAGE 10
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Keystone Balanced Fund II
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.080
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.916
- ------------------------------------------------------------------------------
Total from investment operations 0.996
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.080)
Net realized gain from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.096)
- ------------------------------------------------------------------------------
Net asset value end of period $ 10.90
- ------------------------------------------------------------------------------
Total return (a) 10.00%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.56%(b)(c)
Total expenses excluding reimbursement 2.16%(c)
Net investment income 2.65%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 1,850
- ------------------------------------------------------------------------------
(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 ratio would have
been 1.50% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
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FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.060
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.926
- ------------------------------------------------------------------------------
Total from investment operations 0.986
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.060)
Net realized gain from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.076)
- ------------------------------------------------------------------------------
Net asset value end of period $ 10.91
- ------------------------------------------------------------------------------
Total return (a) 9.89%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.29%(b)(c)
Total expenses excluding reimbursement 4.87%(c)
Net investment income 1.94%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 5,224
- ------------------------------------------------------------------------------
(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 ratio would have
been 2.25% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
(Unaudited)
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.070
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.906
- ------------------------------------------------------------------------------
Total from investment operations 0.976
- ------------------------------------------------------------------------------
Less distributions from
Net investment income (0.060)
Net realized gains from investments (0.016)
- ------------------------------------------------------------------------------
Total distributions (0.076)
- ------------------------------------------------------------------------------
Net asset value at the end of period $ 10.90
- ------------------------------------------------------------------------------
Total return (a) 9.79%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.29%(b)(c)
Total expenses excluding reimbursement 4.93%(c)
Net investment income 2.01%(c)
Portfolio turnover rate 64%
Average commission rate paid $0.0783
- ------------------------------------------------------------------------------
Net assets end of period (thousands) $ 189
- ------------------------------------------------------------------------------
(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 ratio would have
been 2.25% for the period ended December 31, 1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------
Assets
Investments at market value
(identified cost--$6,801,360) $7,234,916
Cash 1,148
Receivable for:
Investments sold 24,862
Dividends and interest 54,175
Prepaid organization 17,676
Other receivables 29,303
Due from Adviser 37,431
- -------------------------------------------------------------------------
Total assets 7,399,511
- -------------------------------------------------------------------------
Liabilities
Payable for:
Investments purchased 135,881
Other accrued expenses 706
- -------------------------------------------------------------------------
Total liabilities 136,587
- -------------------------------------------------------------------------
Net assets $7,262,924
- -------------------------------------------------------------------------
Net assets represented by (Note 1)
Paid-in-capital $6,699,417
Undistributed net investment income 2,550
Accumulated net realized gain on investments 127,401
Net unrealized appreciation on investments 433,556
- -------------------------------------------------------------------------
Total net assets $7,262,924
- -------------------------------------------------------------------------
Net asset value per share (Note 2)
Class A Shares
Net assets of $1,849,708 / 169,693 shares outstanding $10.90
Offering price per share ($10.90 / 0.9425)
(based on sales charge of 5.75% of the offering price
at December 31, 1996) (Note 1) $11.56
Class B Shares
Net assets of $5,224,441 / 478,969 shares outstanding $10.91
Class C Shares
Net assets of $188,775 / 17,314 shares outstanding $10.90
- -------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Period from September 3, 1996
(commencement of investment operations)
to December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------
Investment income (Note 1)
Dividends (net of foreign withholding taxes of $72) $ 30,775
Interest 67,982
- --------------------------------------------------------------------------
Total income 98,757
- --------------------------------------------------------------------------
Expenses (Notes 1, 4, 5 and 6)
Management fee $ 15,454
Registration fee 28,142
Shareholder services 5,234
Auditing 2,054
Custodian fees 6,623
Legal 3,081
Reimburseable accounting fees 4,108
Distribution Plan fees 12,510
Organizational fees 1,243
Printing fees 4,108
Miscellaneous fees 822
Reimbursement from investment adviser (37,431)
- --------------------------------------------------------------------------
Total expenses 45,948
Less: Expenses paid indirectly (2,326)
- --------------------------------------------------------------------------
Net Expenses 43,622
- --------------------------------------------------------------------------
Net investment income 55,135
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency related transactions (Note 3)
Net realized gain on investments and foreign
currency related transactions 139,314
Net change in unrealized appreciation on
investments and foreign currency related
transactions 433,556
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency related transactions 572,870
- --------------------------------------------------------------------------
Net increase in net assets resulting from
operations $628,005
- --------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 14
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Keystone Balanced Fund II
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period from September 3, 1996
(commencement of investment
operations) to December 31, 1996
- ------------------------------------------------------------------------------
Operations
Net investment income $ 55,135
Net realized gain on investments and
foreign currency related transactions 139,314
Net change in unrealized appreciation on
investments and foreign currency
related transactions 433,556
- ------------------------------------------------------------------------------
Net increase in net assets resulting from operations 628,005
- ------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income
Class A (31,626)
Class B (20,337)
Class C (621)
Net realized gain on investment transactions
Class A (6,325)
Class B (5,423)
Class C (166)
- ------------------------------------------------------------------------------
Total distributions to shareholders (64,498)
- ------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 4,671,766
Class B Shares 5,348,708
Class C Shares 150,674
Payments for shares redeemed:
Class A Shares (3,214,492)
Class B Shares (386,633)
Class C Shares (60)
Net asset value of shares issued in
reinvestment of distributions:
Class A Shares 6,959
Class B Shares 22,020
Class C Shares 475
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from capital share transactions 6,599,417
- ------------------------------------------------------------------------------
Total increase in net assets 7,162,924
- ------------------------------------------------------------------------------
Net assets
Beginning of period 100,000
- ------------------------------------------------------------------------------
End of period (includes undistributed
net investment income of $2,550) (Note 1) $ 7,262,924
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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. Keystone was formerly a wholly-owned subsidiary of Keystone
Investments, Inc. ("KII") and is currently a subsidiary of First Union Keystone,
Inc. First Union Keystone, Inc. is a wholly-owned subsidiary of First Union
National Bank of North Carolina which in turn is a wholly-owned 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 offers several classes of shares. The
Fund's investment objective is to provide shareholders with current income and
capital appreciation consistent with the preservation of principal.
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
Listed corporate bonds, other fixed income securities, mortgage and other
asset-backed securities, and other related 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 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.
Investments are usually valued at the closing sales price, or in the absence
of sales and for over-the-counter securities, the mean of the bid and asked
prices.
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. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
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.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States 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
<PAGE>
PAGE 16
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
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 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 foreign currency transactions.
D. 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. Dividend income is recorded on the
ex-dividend date.
E. Organization Expenses
The Fund's 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 First Union 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 redemption.
F. 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 taxes is required.
G. Distributions
The Fund distributes net investment income quarterly 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. Distributions from taxable net investment income and net
capital gains can exceed book basis net investment income and net capital gains.
H. Class Allocations
As of December 31, 1996, Class A shares were offered at a public offering price
which included a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares were sold subject to a contingent deferred sales charge that was
payable upon redemption and decreased depending on how long the shares had been
held. Class B shares purchased on or after June 1, 1995 that had been
outstanding for eight years automatically converted to Class A shares. Class B
shares purchased prior to June 1, 1995 that had
<PAGE>
PAGE 17
- ------------------------------------------------------------------------------
been outstanding for seven years automatically converted to Class A shares.
Class C shares were 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:
Period from September 3, 1996
(commencement of operations)
to December 31, 1996
- ------------------------------------------------------------------------------
Class A
Shares sold 458,332
Shares redeemed (293,305)
Shares issued in reinvestment of dividends and distributions 666
- ------------------------------------------------------------------------------
Net increase 165,693
- ------------------------------------------------------------------------------
Class B
Shares sold 509,919
Shares redeemed (36,055)
Shares issued in reinvestment of dividends and distributions 2,105
- ------------------------------------------------------------------------------
Net increase 475,969
- ------------------------------------------------------------------------------
Class C
Shares sold 14,275
Shares redeemed (6)
Shares issued in reinvestment of dividends and distributions 45
- ------------------------------------------------------------------------------
Net increase 14,314
- ------------------------------------------------------------------------------
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the period ended December 31, 1996:
Cost of Proceeds
Purchases from Sales
- ------------------------------------------------------------------------------
Non-U.S. Government $5,574,287 $1,712,239
U.S. Government $5,663,306 $2,998,210
- ------------------------------------------------------------------------------
4. Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for 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
amounts which are calculated and paid monthly.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On December
11, 1996, the Fund entered into a principal underwriting agreement with
Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. At that time, EKD
replaced EKIS as the Fund's principal underwriter.
<PAGE>
PAGE 18
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares. During the period
ended December 31, 1996, the Fund paid $1,071 to EKIS 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% annually 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 period ended December 31, 1996, under the Class B Distribution
Plans, the Fund paid or accrued $353 for Class B shares purchased before June 1,
1995 and subsequently exchanged into the Fund and $10,690 for Class B shares
purchased on or after June 1, 1995. The Fund paid $396 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
EKIS and/or EKD may continue as compensation for services which had been earned
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.
At December 31, 1996 total unpaid distribution costs were $4,859 for Class B
shares purchased before June 1, 1995 and subsequently exchanged into the Fund
and $291,384 for Class B shares purchased on or after June 1, 1995. Unpaid
distribution costs for Class C were $9,283.
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 the Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return, Keystone is paid a management
fee that is computed and paid daily. The management fee is calculated by
applying percentage rates, which start at 0.55% and decline to 0.25% per annum
as net assets increase, to the average daily net asset value of the Fund.
Keystone has voluntarily limited the expenses of Class A shares to 1.50% of
its average daily net assets and has limited the expenses of Class B and C to
2.25% of the average daily net assets of each respective class. For the period
ended December 31, 1996, Keystone reimbursed the Fund $37,431.
During the period ended December 31, 1996, the Fund paid or accrued $4,108 to
Keystone for certain accounting services. The Fund paid or accrued $5,234 to
Evergreen Keystone Service Company (formerly, Keystone Investor Resource Center,
Inc.), a wholly-owned subsidiary of Keystone, for services rendered as the
Fund's transfer and dividend disbursing agent.
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.
For the period ended Decem-
<PAGE>
PAGE 19
- ------------------------------------------------------------------------------
ber 31, 1996, the Fund incurred total custody fees of $6,623 and received a
credit of $2,326 pursuant to this expense offset arrangement, resulting in a net
custody expense of $4,297. The assets deposited with the custodian under this
expense offset arrangement could have been invested in income-producing assets.
<PAGE>
PAGE 20
- ------------------------------------------------------------------------------
Keystone Balanced Fund II
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>
PAGE 21
- ------------------------------------------------------------------------------
Additional Information
(Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below at
a special meeting of shareholders held Monday, December 9, 1996. In addition,
below each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
- --------------------------------------------------------
Laurence B. Ashkin 491,285 4,987
Frederick Amling 491,285 4,987
Charles A. Austin III 491,285 4,987
Foster Bam 491,285 4,987
George S. Bissell 491,285 4,987
Edwin D. Campbell 491,285 4,987
Charles F. Chapin 491,285 4,987
K. Dun Gifford 491,285 4,987
James S. Howell 491,285 4,987
Leroy Keith, Jr. 491,285 4,987
F. Ray Keyser, Jr. 491,285 4,987
Gerald M. McDonell 491,285 4,987
Thomas L. McVerry 491,285 4,987
William Walt Pettit 491,285 4,987
David M. Richardson 491,285 4,987
Russell A. Salton, III M.D. 491,285 4,987
Michael S. Scofield 491,285 4,987
Richard J. Shima 491,285 4,987
Andrew J. Simons 491,285 4,987
2. To approve an Investment Advisory and Management Agreement between
Keystone Investment Management Company and the Fund, subject to completion
of the Merger, substantially as described in the Proxy Statement.
Affirmative 487,577
Against 1,063
Abstain 7,631
<PAGE>
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<PAGE>
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<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 & 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 Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
[GRAPHIC] Evergreen Keystone Logo
P.O. Box 2121
Boston, Massachusetts 02106-2121
BAL2-R-2/97
3M [recycle symbol]
KEYSTONE
[GRAPHIC]Man and Woman on bicycles
BALANCED
FUND II
[GRAPHIC] Evergreen Keystone Logo
SEMIANNUAL REPORT
DECEMBER 31, 1996
