Keystone Balanced Fund (K-1)
(formerly Keystone Custodian Fund, Series K-1)
Seeks income and growth from a quality selection of stocks and bonds.
Dear Shareholder:
We are pleased to report on the performance of Keystone Balanced Fund (K-1)
for the twelve-month period which ended June 30, 1995.
On May 1, 1995, your Fund's name was revised to more clearly identify the
Fund's investment strategy. However, we'd like to assure you that your Fund's
strategy has remained the same--to seek income and growth from a quality
selection of stocks and bonds. We made this name change at the suggestion of
shareholders and their advisers who expressed a desire for a clearer, more
meaningful name.
Performance
Keystone Balanced Fund (K-1) returned 14.20% for the twelve-month period.
Your Fund provided satisfactory performance with virtually all of the
returns achieved during the first six months of 1995. US stocks and bonds
have rallied strongly so far in 1995, after a mixed performance in 1994.
Throughout the period, your Fund maintained its focus on stocks of well
known, established US companies, and on investment-grade bonds. These quality
investments tended to benefit the most from the positive environment for
stocks and bonds since the beginning of 1995.
The last six months of 1994 were challenging as investors remained
concerned about strong economic growth potentially leading to higher
inflation. The Federal Reserve Board continued to raise short-term interest
rates to prevent the economy from overheating and to control inflation. Yet,
economic growth continued at a rapid pace.
The investment environment turned more positive early in 1995 as signs of
slowing economic growth became more evident. In addition, the Federal Reserve
Bank appeared satisfied with its efforts to control inflation through
increases in short-term interest rates. Interest rates declined and bond
prices rose, which benefited your Fund's fixed-income holdings. Meanwhile,
corporate earnings continued to exceed analysts' expectations. We think this
earnings strength was partly the result of a rise in foreign currencies and
corporate restructurings at many US companies.
As global competition has increased over the last few years, many large US
companies have sought to improve their competitive position by restructuring
their businesses and lowering production costs. As a result, and in stark
contrast to five or ten years ago, the US is now one of the lowest cost
producers of goods and services in the industrialized world. We believe these
restructurings are continuing to benefit many of your Fund's holdings of
large, established companies.
In addition, a number of US multinational companies have benefited from
the strength of selected foreign currencies. As the Japanese yen and the
German mark reached new post-World War II highs versus the US dollar during
the period, American goods and services have become comparatively less
expensive. Selected exports have increased and the earnings of foreign
subsidiaries of US multinationals have improved with the favorable foreign
currency translation. This has resulted in improved revenues for many US
companies that have significant foreign operations. With modernized plants
and lower cost production, US products are now very competitive in the world
markets.
--continued--
1
<PAGE>
Your Fund's conservative investment style focuses on providing consistent
returns over the long term. By investing in a balanced allocation of
dividend-paying stocks and high-quality bonds, we seek to provide more
stability than a fund which invests solely in equities or only in
fixed-income securities. We believe a careful selection of stocks and bonds
can result in attractive income and reduced price volatility over the long
term. We are confident that your Fund's approach will continue to be
appropriate for investors seeking income, long-term growth and dependable
returns. A further discussion of your Fund's strategy is contained under "A
Discussion With Your Fund Manager" on page 3.
Our Outlook
With economic growth significantly slower in the first six months of 1995, we
think the expected "soft landing" may have arrived. Looking ahead, we believe
there are several reasons the investment environment for your Fund should
continue to be attractive. Lower interest rates and modest inflation should
be favorable for corporate earnings. Productivity has continued to improve at
many corporations. US multinational companies in particular are in a more
competitive position abroad. In Washington, we think investors may be
encouraged by Congress's fiscally responsible initiatives. While final
legislation has not been signed into law yet, we believe that this new
direction by the elected officials in Washington may be a positive signal for
the markets.
We think shareholders should keep the recent strong performance of markets
in perspective, remembering that staying with a well thought out investment
program developed with the advice of a financial adviser offers the greatest
potential for reaching long-term financial goals.
We appreciate your continued support of Keystone Balanced Fund (K-1). If
you have any comments or questions about your investment, we encourage you to
write to us.
Sincerely,
[SIG]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[SIG]
George S. Bissell
Chairman of the Board
Keystone Funds
August 1995
[PICTURE BOX]
Albert H. Elfner, III
[PICTURE BOX]
George S. Bissell
2
<PAGE>
A Discussion With
Your Fund Manager
[PICTURE BOX]
Walter McCormick is portfolio manager of Keystone Balanced Fund (K-1) and
leads Keystone's core equity investment group. A Chartered Financial Analyst,
Mr. McCormick has more than 25 years of investment management experience and
holds an MBA from Rutgers University. We asked him several questions about
the market's recent performance. His responses follow.
Q. What is your strategy in managing the Fund?
A. The Fund seeks income and growth from a quality selection of stocks and
bonds. We focus primarily on stocks of established US companies, and
investment grade government and corporate bonds. We believe the Fund's
conservative, balanced approach offers long term investors the potential for
consistent performance.
Q. What was the investment environment like during the twelve-month period?
A. The second half of 1994 was a difficult period for investors which gave
way to an improved environment during the first six months of 1995. In the
last half of 1994, economic activity was robust, and the Federal Reserve
Board (the Fed) raised short-term interest rates several times in an attempt
to slow growth and control inflation. At the beginning of 1995, the
investment environment became more positive. The Fed appeared to have
achieved its goal of reining in economic growth and containing inflation. As
economic growth moderated, bond yields declined which was good news not only
for bond holders, but also for stock investors.
Q. How did the Fund perform?
A. We were pleased with the Fund's performance and believe it was consistent
with the Fund's conservative investments and long term approach. Over time,
we think a portfolio of high quality stocks and bonds has tended to provide
performance with fewer peaks and valleys. As a result, we expect the Fund to
provide positive, but more modest results when the markets are rising and
better price protection when the markets are declining.
Q. When stocks rallied in the first six-months of 1995, how did it affect the
Fund?
A. The stock market rally had a positive effect on Fund performance. During
the first six-months of 1995, stocks made strong gains--especially the stocks
of large, established US companies which were typical holdings for the Fund.
The solid performance of these stocks surprised many investors. These stocks
have historically been among the first to benefit in a rising market.
Investors often buy these blue chip stocks when the market begins to rally
because they are usually well known, carefully followed by Wall Street
analysts, and highly liquid.
Fund Profile
Objective: Seeks income and growth from a quality selection of stocks and
bonds.
Number of stocks: 175
Average bond rating: AAA-
Net assets: $1,316.9 millions
Inception date: September 11, 1935
3
<PAGE>
[PIE CHART INSERTS HERE]
Asset Allocation
as of June 30, 1995
Bonds (41%)
Cash(1) (1%)
Stocks (58%)
(as a percentage of net assets)
(1)Includes short-term investments and other assets and liabilities.
Q. You increased the bond component of the Fund from 37% to 42% of net
assets. Why?
A. We added to the bond portion of the Fund from June through December 1994.
During this time, the Fed continued to raise interest rates, and the Fund
benefited from the increases in bond yields. When long-term interest rates
began to decline in December 1994, bond prices rose, and the Fund profited
from the appreciation of bonds in the portfolio.
Q. What sectors did you focus on in this environment?
A. During the twelve-month period, we emphasized dividend-paying equity
securities of established companies. We focused on companies that we believed
had demonstrated earnings growth and long term track records. Major industry
concentrations were in the energy, pharmaceutical, finance, chemical, and
capital goods sectors. Our bond investments primarily focused on long-term US
Treasury securities and high-quality corporate bonds.
Q. Turning to industry sectors for a moment, energy stocks continued to
comprise a significant share of the Fund's assets. What was attractive about
these stocks?
A. We believe energy stock prices have been depressed. At nearly 9% of net
assets, these stocks included the natural gas, oil and oil service sectors.
We thought that energy stocks would benefit from improved world economies and
limited productive capacity. Historically, as economic growth accelerates,
the demand for energy has tended to increase, often resulting in higher
prices. Some energy companies, such as our holdings of Mobil and Chevron,
have restructured and cut costs to improve earnings. We expect selected
energy stocks to continue to be an important component of the Fund's
portfolio, providing attractive dividends and the potential for price
appreciation.
Q. You increased the finance portion of the Fund from 4.5% at the end of 1994
to almost 6% on June 30, 1995. Why?
A. Historically, finance stocks have performed well when interest rates have
declined. As rates decline, the cost of funds for banks, credit card and
mortgage companies typically declines. However, interest rates charged on
loans usually do not decline right away. This effectively lowers a financial
firm's costs and can result in an increase in gross margins.
During the first half of 1995, we emphasized holdings of government
mortgage agencies such as the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These
public government chartered organizations were attractive to us because when
interest rates rose in 1994, prices on finance stocks declined sharply, and
these companies became undervalued, in our opinion.
Top 5 Equity Industries
as of June 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Industry Percent of
net assets
Oil 6.6
Drugs 5.9
Finance 5.5
Chemicals 5.0
Capital goods 4.2
</TABLE>
4
<PAGE>
Top 10 Holdings
as of June 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Stocks Percent of
Industry net assets
General Electric Capital goods 3.3
Johnson & Johnson Drugs 2.0
Chevron Oil 1.6
Monsanto Chemicals 1.6
AT&T Telecommunications 1.5
Bonds
United States Treasury bonds, 7.88%, mat. 2021 5.3
United States Treasury bonds, 9.38%, mat. 2006 4.2
United States Treasury notes, 8.88%, mat. 1998 2.0
United States Treasury notes, 8.13%, mat. 1998 1.6
Federal National Mortgage Association, 8.00%, mat. 2024 1.1
</TABLE>
Q. Capital goods companies represented more than 4% of net assets. Why did
you emphasize this area?
A. We think selected capital good companies stand to benefit from economic
growth, especially overseas. These industrial companies are involved in
producing machinery, hardware and products that are used in the manufacture
of other products. A representative capital goods holding is General
Electric.
GE was our number one holding at the end of the period. The company has
diversified businesses (including financial services) in both the US and
overseas. We believe the company has fundamental strength, solid earnings and
is well managed. In our opinion, capital goods companies like GE should
benefit from positive US economic growth and accelerating growth abroad.
Q. Chemical companies were also an important weighting in the portfolio. Why?
A. Chemical companies comprised 5% of net assets. These companies have been
out of favor for several years. Many have spent the past few years
restructuring their businesses and reducing costs. Today, we believe that
selected chemical companies may benefit from an acceleration of global
economic growth. Already worldwide demand for chemicals has increased, and
many chemical companies have raised prices.
Q. What are the long-term advantages of investing in a portfolio of stocks
and bonds?
A. Historically, portfolios comprised of a combination of high quality stocks
and bonds have provided more stability and consistent returns than an
investment only in stocks or bonds. By carefully allocating investments
between stocks and bonds, we believe the risks associated with any one class
of securities can be moderated. In the past twenty years, for example, there
were three calendar years in which the Standard and Poor's 500 Index
generated negative returns. In each of those years, the Lehman Aggregate Bond
Index reported positive, respectable gains. For Keystone Balanced Fund (K-1),
this balanced approach has resulted in positive performance in 18 out of the
last 20 years.
Q. What is your outlook?
A. We are optimistic about the stock and bond markets for the next six
months. We think the decline in long-term interest rates and slowing economic
growth should be positive for the markets. While we anticipate slower
earnings growth rates for US companies, we believe that multinational
companies--which characterize many of the Fund's equity holdings--should
benefit from positive economic growth abroad.
[diamond]
This column is intended to answer common
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company, Inc.
Attn: Manager, Shareholder Communications
200 Berkeley Street,
Boston, Massachusetts 02116-5034.
5
<PAGE>
Your Fund's Performance
[MOUNTAIN CHART GOES HERE]
Growth of an investment in Keystone Balanced Fund (K-1)
(Plot Points) In Thousands
Initial Investment Reinvested Distributions
6/85 10000 10000
11589 12781
6/87 10751 14748
9238 14250
6/89 10066 16540
10044 17861
6/91 10110 19199
10784 21475
6/93 11148 23706
10221 23431
6/95 11137 26758
A $10,000 investment in Keystone Balanced Fund (K-1) made on June 30, 1985
with all distributions reinvested was worth $26,758 on June 30, 1995. Past
performance is no guarantee of future results.
The "if you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who sold Fund shares after
one calendar year. Investors who retained their fund investment earned the
returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Six-Month Performance as of June 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Total return* 14.20%
Net asset value 6/30/94 $ 9.26
6/30/95 $10.09
Dividends $ .33
Capital gains $ .105
</TABLE>
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of June 30, 1995
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year 11.20% 14.20%
5-year 49.81% 49.81%
10-year 167.58% 167.58%
Average annual total return
1-year 11.20% 14.20%
5-year 8.42% 8.42%
10-year 10.34% 10.34%
</TABLE>
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
6
<PAGE>
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone Balanced
Fund (K-1), the Standard & Poor's 500 Index, and the Consumer Price Index.
Fund Average
Annual Total Return
1 Year 5 Year 10 Year
11.20% 8.42% 10.34%
Fund S&P 500 CPI
6/85 10000 10000 10000
12781 13558 10177
6/87 14748 16946 10548
14250 15726 10967
6/89 16540 18939 11533
17861 21976 12073
6/91 19199 23596 12639
21475 26776 13030
6/93 23706 30422 13420
23431 30851 13755
6/95 26758 38894 14145
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charge for
shares held for more than one year. CPI is through May 31, 1995.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several 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 Balanced Fund (K-1)
The Fund seeks income and growth from a quality selection of stocks and
bonds. The return is quoted after deducting sales charges (if applicable),
fund expenses and transaction costs and assumes reinvestment of all
distributions.
2. Standard & Poor's 500 Index (S&P 500)
The S&P 500 is a broad-based unmanaged index of common stock prices. It is
comprised of stocks of the largest US companies. These stocks are selected
and compiled by Standard & Poor's Corporation 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 US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
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 total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
7
<PAGE>
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 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 stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
8
<PAGE>
SCHEDULE OF INVESTMENTS-June 30, 1995
<TABLE>
<CAPTION>
Market
Shares Value
--------------------------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS (55.6%)
ADVERTISING & PUBLISHING (0.7%)
Donnelly (R.R.) & Sons Co. 70,000 $ 2,520,000
Dun & Bradstreet Corp. 48,600 2,551,500
Gannett, Inc. 46,800 2,538,900
Times Mirror Co., Class A 39,400 940,675
--------------------------------------- ---- --------
8,551,075
--------------------------------------- --------
AEROSPACE (1.7%)
Boeing Co. 220,500 13,808,812
Honeywell, Inc. 49,600 2,139,000
Raytheon Co. 34,000 2,639,250
Rockwell International Corp. 50,000 2,287,500
United Technologies Corp. 31,100 2,429,688
--------------------------------------- ---- --------
23,304,250
--------------------------------------- --------
AMUSEMENTS (0.2%)
Carnival Corp., Class A 52,000 1,215,500
Hilton Hotels Corp. 20,000 1,405,000
--------------------------------------- ---- --------
2,620,500
--------------------------------------- --------
AUTOMOTIVE (1.2%)
Ford Motor Co. 220,000 6,545,000
General Motors Corp. 150,000 7,031,250
Genuine Parts Co. 62,025 2,349,197
--------------------------------------- ---- --------
15,925,447
--------------------------------------- --------
BUILDING MATERIALS (0.2%)
Armstrong World Industries, Inc. 10,000 501,250
Masco Corp. 35,000 945,000
Sherwin-Williams Co. 15,000 534,375
--------------------------------------- ---- --------
1,980,625
--------------------------------------- --------
CAPITAL GOODS (4.2%)
Cooper Industries, Inc. 21,200 837,400
Deere & Co. 20,000 1,712,500
Emerson Electric Co. 54,000 3,861,000
General Electric Co. 796,000 44,874,500
Ingersoll-Rand Co. 50,500 1,931,625
Johnson Controls, Inc. 18,500 1,045,250
Sundstrand Corp. 17,000 1,015,750
Westinghouse Electric Corp. 60,000 877,500
--------------------------------------- ---- --------
56,155,525
--------------------------------------- --------
CHEMICALS (5.0%)
Air Products & Chemicals, Inc. 28,000 1,561,000
Dow Chemical Co. 133,200 9,573,750
Du Pont (E.I.) de Nemours & Co. 131,000 9,006,250
Grace (W.R.) & Co. 39,500 2,424,312
Hercules, Inc. 39,000 1,901,250
Monsanto Co. 233,400 21,035,175
PPG Industries, Inc. 456,000 19,608,000
Praxair, Inc. 30,000 750,000
Union Carbide Corp. 30,000 1,001,250
--------------------------------------- ---- --------
66,860,987
--------------------------------------- --------
CONSUMER GOODS (2.9%)
Avon Products, Inc. 16,300 1,092,100
Colgate-Palmolive Co. 35,000 2,559,375
Eastman Kodak Co. 78,500 4,759,062
Gillette Co. 400,000 17,850,000
International Flavors & Fragrances,
Inc. 48,000 2,388,000
Procter & Gamble Co. 110,000 7,906,250
Tambrands, Inc. 27,000 1,154,250
Whirlpool Corp. 29,800 1,639,000
--------------------------------------- ---- --------
39,348,037
--------------------------------------- --------
DIVERSIFIED COMPANIES (1.2%)
Allied-Signal, Inc. 71,300 3,172,850
Corning, Inc. 61,200 2,004,300
ITT Corp. 33,400 3,924,500
Minnesota Mining & Manufacturing Co. 80,000 4,580,000
Tenneco, Inc. 25,000 1,150,000
Textron, Inc. 16,600 964,875
--------------------------------------- ---- --------
15,796,525
--------------------------------------- --------
DRUGS (5.9%)
Abbott Laboratories 168,000 6,804,000
American Home Products Corp. 90,000 6,963,750
Baxter International, Inc. 47,400 1,724,175
Bristol-Myers Squibb Co. 55,000 3,746,875
Johnson & Johnson 405,200 27,401,650
Lilly (Eli) & Co. 66,000 5,181,000
Merck & Co. 213,000 10,437,000
Pfizer, Inc. 72,600 6,706,425
Schering-Plough Corp. 102,400 4,518,400
SmithKline Beecham PLC, ADR 57,200 2,588,300
Warner-Lambert Co. 42,000 3,627,750
--------------------------------------- ---- --------
79,699,325
--------------------------------------- --------
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
ELECTRONICS PRODUCTS (0.3%)
AMP, Inc. 50,000 $ 2,112,500
General Signal Corp. 20,000 795,000
Thomas & Betts Corp. 20,000 1,367,500
--------------------------------------- ---- --------
4,275,000
--------------------------------------- --------
FINANCE (5.5%)
American Express Co. 100,000 3,512,500
Banc One Corp. 55,000 1,773,750
BankAmerica Corp. 346,960 18,258,770
Chemical Banking Corp. 112,854 5,332,352
Dean Witter, Discover & Co. 27,321 1,284,087
Federal Home Loan Mortgage Corp. 189,200 13,007,500
Federal National Mortgage Association 128,700 12,146,062
Fleet Financial Group, Inc. 60,000 2,227,500
Merrill Lynch & Co., Inc. 42,000 2,205,000
Morgan (J.P.) & Co., Inc. 42,000 2,945,250
Nationsbank Corp. 50,000 2,681,250
PMI Group 53,600 2,324,900
Salomon Inc. 60,000 2,407,500
Wells Fargo & Co. 24,200 4,362,050
--------------------------------------- ---- --------
74,468,471
--------------------------------------- --------
FOODS (3.4%)
Anheuser-Busch Cos., Inc. 52,000 2,957,500
CPC International, Inc. 46,800 2,889,900
General Mills, Inc. 30,000 1,541,250
Heinz (H.J.) Co. 52,800 2,343,000
Kellogg Co. 44,000 3,140,500
PepsiCo., Inc. 145,000 6,615,625
Philip Morris Cos., Inc. 227,100 16,890,562
RJR Nabisco Holdings Corp. 190,923 5,321,979
Sara Lee Corp. 86,000 2,451,000
UST, Inc. 46,200 1,374,450
--------------------------------------- ---- --------
45,525,766
--------------------------------------- --------
INSURANCE (1.8%)
Aetna Life & Casualty Co. 30,000 1,886,250
American General Corp. 80,000 2,700,000
CIGNA Corp. 20,000 1,552,500
General Reinsurance Corp. 95,000 12,718,125
SAFECO Corp. 34,100 1,954,356
St. Paul Cos., Inc. 40,000 1,970,000
Torchmark Corp. 17,550 662,512
Transamerica Corp. 14,000 815,500
--------------------------------------- ---- --------
24,259,243
--------------------------------------- --------
METALS & MINING (0.5%)
Aluminum Co. of America 40,000 2,005,000
Freeport-McMoRan, Inc. 80,000 1,410,000
Phelps Dodge Corp. 22,000 1,298,000
Reynolds Metals Co. 24,400 1,262,700
--------------------------------------- ---- --------
5,975,700
--------------------------------------- --------
NATURAL GAS (1.5%)
Coastal Corp. 24,000 729,000
Consolidated Natural Gas Co. 17,500 660,625
Enron Corp. 54,000 1,896,750
Enron Global Power & Pipelines LLC 101,500 2,410,625
Panhandle Eastern Corp. 34,800 848,250
Sonat, Inc. 455,000 13,877,500
--------------------------------------- ---- --------
20,422,750
--------------------------------------- ---- --------
OFFICE & BUSINESS EQUIPMENT (1.4%)
IBM Corp. 167,800 16,108,800
Xerox Corp. 20,923 2,453,222
--------------------------------------- ---- --------
18,562,022
--------------------------------------- --------
OIL (6.6%)
Amoco Corp. 96,600 6,435,975
Atlantic Richfield Co. 144,500 15,858,875
Chevron Corp. 463,600 21,615,350
Exxon Corp. 63,500 4,484,687
Mobil Corp. 155,400 14,918,400
Occidental Petroleum Corp. 157,000 3,591,375
Royal Dutch Petroleum Co. 70,100 8,543,438
Texaco, Inc. 150,000 9,843,750
Unocal Corp. 100,000 2,762,500
--------------------------------------- ---- --------
88,054,350
--------------------------------------- ---- --------
OIL SERVICES (0.3%)
Halliburton Co. 45,200 1,615,900
McDermott International, Inc. 38,000 916,750
Schlumberger, Ltd. 31,100 1,932,088
--------------------------------------- ---- --------
4,464,738
--------------------------------------- --------
See Notes to Schedule of Investments.
10
<PAGE>
PAPER & PACKAGING (1.9%)
Georgia-Pacific Corp. 30,800 $ 2,671,900
International Paper Co. 28,500 2,443,875
Kimberly-Clark Corp. 34,800 2,083,650
Union Camp Corp. 25,500 1,475,812
Weyerhaeuser Co. 370,350 17,452,744
--------------------------------------- ---- --------
26,127,981
--------------------------------------- --------
REAL ESTATE (1.4%)
Beacon Properties (R.E.I.T.) 700,000 13,912,500
Liberty Property Trust (R.E.I.T.) 100,000 1,962,500
Spieker Properties (R.E.I.T.) 100,000 2,237,500
--------------------------------------- ---- --------
18,112,500
--------------------------------------- --------
RETAIL (0.7%)
K Mart Corp. 100,000 1,462,500
May Department Stores Co. 60,000 2,497,500
Melville Corp. 30,000 1,027,500
Sears, Roebuck and Co. 70,000 4,191,250
Woolworth (F.W.) Co. 48,000 726,000
--------------------------------------- ---- --------
9,904,750
--------------------------------------- --------
SERVICES (0.3%)
Block (H&R), Inc. 37,200 1,529,850
Browning-Ferris Industries, Inc. 40,000 1,445,000
Deluxe Corp. 15,000 496,875
Ogden Corp. 17,500 382,813
--------------------------------------- ---- --------
3,854,538
--------------------------------------- --------
TELECOMMUNICATIONS (3.2%)
Ameritech Corp. 124,000 5,456,000
AT&T Corp. 383,000 20,346,875
Bell Atlantic Corp. 90,000 5,040,000
GTE Corp. 162,000 5,528,250
NYNEX Corp. 88,088 3,545,542
Southern New England
Telecommunications Corp. 30,000 1,057,500
Sprint Corp. 75,480 2,538,015
--------------------------------------- ---- --------
43,512,182
--------------------------------------- --------
TRANSPORTATION (2.3%)
Burlington Northern, Inc. 20,300 1,286,513
Canadian Pacific Ltd. 78,300 1,360,462
Conrail, Inc. 30,000 1,668,750
CSX Corp. 153,000 11,494,125
Norfolk Southern Corp. 190,000 12,801,250
Union Pacific Corp. 46,800 2,591,550
--------------------------------------- ---- --------
31,202,650
--------------------------------------- --------
UTILITIES (1.3%)
American Electric Power Co., Inc. 39,500 1,387,438
Central & South West Corp. 40,600 1,065,750
Consolidated Edison Co. of
New York, Inc. 74,000 2,183,000
Dominion Resources, Inc. 31,050 1,133,325
Duke Power Co. 42,000 1,743,000
Florida Progress Corp. 71,400 2,231,250
FPL Group, Inc. 27,000 1,042,875
Houston Industries, Inc. 43,400 1,828,225
Ohio Edison Co. 34,400 778,300
PacifiCorp 35,400 663,750
Public Service Enterprise Group, Inc. 54,969 1,525,390
Texas Utilities Co. 44,105 1,516,109
Unicom Corp. 36,000 958,500
--------------------------------------- ---- --------
18,056,912
--------------------------------------- --------
TOTAL COMMON STOCKS
(Cost--$535,283,233) 747,021,849
--------------------------------------- --------
CONVERTIBLE/PREFERRED STOCKS (2.3%)
Alco Standard Corp., $2.375, Series AA 200,000 17,900,000
Allstate Corp. 64,200 2,616,150
American General DEL LLC 37,500 1,945,313
Chrysler Corp., $4.625
(4/30/92--$606,475) (b) 10,000 1,335,000
Rouse Co., $3.25, Conv. Series A 125,000 6,375,000
St. Paul Co., LLC 25,000 1,306,250
--------------------------------------- ---- --------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(Cost--$21,676,214) 31,477,713
------------------------------------------------- --------
</TABLE>
(continued on next page)
11
<PAGE>
SCHEDULE OF INVESTMENTS-June 30, 1995
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
------ ------ ---------- --------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (40.5%)
CONVERTIBLE BONDS (2.1%)
INSURANCE (1.1%)
Equitable Companies, Inc. Conv. Deb. (Subord.) 6.13% 2024 $14,400,000 $14,976,000
------------------------------- -------------------- ---- ---- -------- ------------
OFFICE & BUSINESS EQUIPMENT (1.0%)
EMC Corp. Conv. 4.25 2001 10,000,000 13,275,000
------------------------------- -------------------- ---- ---- -------- ------------
TOTAL CONVERTIBLE BONDS (Cost--$24,468,490) 28,251,000
------------------------------------------------------------------- ---- -------- ------------
INDUSTRIAL BONDS & NOTES (5.5%)
ADVERTISING & PUBLISHING (0.4%)
Donnelly (R.R.) & Sons Co. Med. Term Notes 6.58 2005 5,000,000 4,954,000
------------------------------------------------------------------------------------------------------------
AUTOMOTIVE (0.3%)
General Motors Corp. Notes 9.63 2000 6,000,000 6,747,420
------------------------------- -------------------- ---- ---- -------- ------------
CONSUMER GOODS (0.5%)
Procter & Gamble, ESOP Deb. Series A 9.36 2021 5,000,000 6,092,750
------------------------------- -------------------- ---- ---- -------- ------------
DIVERSIFIED COMPANIES (0.4%)
General Electric Capital
Corporation Notes 8.75 2007 4,825,000 5,621,511
------------------------------- -------------------- ---- ---- -------- ------------
NATURAL GAS (0.2%)
Wisconsin Natural Gas Co. Deb. 8.25 2022 2,300,000 2,484,230
------------------------------- -------------------- ---- ---- -------- ------------
MEDIA (0.3%)
Time Warner Entertainment Deb. 9.63 2002 3,000,000 3,362,010
------------------------------- -------------------- ---- ---- -------- ------------
OIL (1.0%)
Atlantic Richfield Co. Deb. 9.88 2016 5,500,000 6,964,705
California Petroleum Transport
Corp. FMB 8.52 2015 2,500,000 2,609,000
Occidental Petroleum Corp. Sr. Notes 11.13 2010 2,600,000 3,420,664
------------------------------------------------------------------------------------------------------------
12,994,369
------------------------------- -------------------- ---- ---- -------- ------------
RETAIL (0.4%)
Dayton Hudson Corp. Deb. 9.75 2002 5,000,000 5,789,950
------------------------------- -------------------- ---- ---- -------- ------------
TELECOMMUNICATIONS (1.4%)
AT&T Corp. Notes 7.50 2006 6,000,000 6,295,800
See Notes to Schedule of Investments.
12
<PAGE>
Interest Maturity Par Market
Rate Date Value Value
---- ---- -------- ------------
TELECOMMUNICATIONS -- CONTINUED
Ameritech Capital Funding
Corp. Deb. 7.50% 2005 $6,000,000 $ 6,348,960
Cincinnati Bell, Inc. Deb. 9.10 2000 5,000,000 5,492,850
------------------------------------------------------------------------------------------------------------
18,137,610
------------------------------- -------------------- ---- ---- -------- ------------
UTILITIES (0.6%)
Cincinnati Gas & Electric Co. FMB 10.20 2020 1,000,000 1,010,000
Rural Electric Coop. Gov't. Gtd. 8.67 2018 4,000,000 4,530,880
System Energy Resources, Inc. FMB 11.38 2016 2,568,000 2,894,906
------------------------------------------------------------------------------------------------------------
8,435,786
------------------------------- -------------------- ---- ---- -------- ------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$73,344,233) 74,619,636
----------------------------------------------------------------------------- ------------
BANK & FINANCE BONDS & NOTES (5.6%)
Associates Corp. of North
America Deb. 7.50 1999 3,000,000 3,103,080
Banc One Credit Card Master Series 1994-A Class
Trust A 7.15 1998 5,000,000 5,065,600
Bankamerica Corp. Notes 7.13 2005 6,000,000 6,054,600
Bank of Boston Corp. Deb. 10.30 2000 3,000,000 3,017,340
Barnett Banks, Inc. Notes (Subord.) 10.88 2003 4,500,000 5,534,910
Boatmens Bancshares, Inc. Deb. 9.25 2001 2,000,000 2,231,620
European Investor Bank Deb. 9.13 1997 5,000,000 5,718,750
First Chicago Corp. Sub. Notes 8.88 2002 4,800,000 5,292,528
Fleet Mortgage Securities,
Inc. Notes 6.13 1997 3,000,000 2,982,210
Ford Capital BV Deb. 9.00 1996 5,000,000 5,121,700
Greentree Financial Corp. Sr. Notes (Subord.) 10.25 2002 5,000,000 5,868,200
International Bank For
Reconstruction
and Development Bond 8.25 2016 6,850,000 7,762,351
Morgan Stanley Group, Inc. Notes 7.79 1997 6,000,000 6,145,260
Olympic Auto Trust 1996 ABS (Subord.) 6.20 2002 6,000,000 5,984,760
Paine Webber Group, Inc. Deb. 9.25 2001 5,000,000 5,442,300
------------------------------- -------------------- ---- ---- -------- ------------
TOTAL BANK & FINANCE BONDS & NOTES (Cost--$73,706,978) 75,325,209
----------------------------------------------------------------------------- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.0%)
Advanta Home Equity Loan Trust Series 1991-2
(Est. Mat. 2004) (c) Class A 8.80 2006 2,928,299 3,029,852
AFC Mortgage Loan Trust Series 1995 1
(Est. Mat. 2005) (c) Certificate Class A 8.05 2026 3,763,410 3,833,974
(continued on next page)
13
<PAGE>
Interest Maturity Par Market
Rate Date Value Value
---- ---- -------- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- CONTINUED
FHLMC (Est. mat. 2001) (c) Series 1360 Class PK. 10.00% 2020 $ 2,500,000 $ 2,820,125
FNMA (Est. mat. 2006) (c) Remic Trust 1993 38L 5.00 2022 2,500,000 2,069,325
FNMA (Est. mat. 2002) (c) Remic Trust 1991 141
Class PH 7.50 2019 5,000,000 5,035,550
FNMA (Est. mat. 2001) (c) Remic Trust 1992 49H 7.00 2020 6,850,000 6,781,500
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2001) (c) Series 92B Class B 8.50 2012 2,518,141 2,599,729
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) (c) Series 92D Class B 8.50 2017 2,989,867 3,090,147
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) (c) Series 91D Class B 9.85 2011 5,000,000 5,436,200
Paine Webber Mortgage
Acceptance Corp. IV (Est.
Mat. 1999) (c) Series 1993 5 Class A3 6.88 2008 2,700,888 2,695,823
Resolution Funding Corp.
(6/18/92--$729,615) (Est.
Mat. 2000) (c)(d) Series 2-B-4 7.97 2004 763,162 686,159
University Support Services,
Inc. (Est. Mat. 2003) (c) Series 1992 Class D 9.17 2007 2,035,000 2,040,088
----------------------------------------------------------------------------- -------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$38,733,432) 40,118,472
----------------------------------------------------------------------------- ------------
FOREIGN BONDS (U.S. DOLLARS) (1.2%)
British Columbia Hydro & Power
Authority Gtd. Bond Series GG 15.00 2011 3,310,000 3,691,511
British Columbia Hydro & Power
Authority Gtd. Bond Series FH 15.50 2011 1,000,000 1,152,830
Ontario Province, Canada Deb. 15.13 2011 2,000,000 2,248,400
Ontario Province, Canada Deb. 15.75 2012 1,000,000 1,199,460
Ontario Province, Canada Deb. 17.00 2011 1,000,000 1,195,560
Wharf International Capital
1994 Ltd. Guaranteed Notes 8.88 2004 6,000,000 6,216,900
------------------------------- -------------------- ---- ---- -------- ------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$14,911,801) 15,704,661
----------------------------------------------------------------------------- ------------
MORTGAGE PASS-THROUGH CERTIFICATES (8.2%)
FHLMC Pool #B00366 8.00 2002 8,953,393 9,199,612
FHLMC Pool #170264 9.00 2019 7,434,117 7,770,734
FHLMC Pool #555218 9.00 2021 5,981,090 6,253,768
FHLMC Pool #555226 9.00 2021 10,961,149 11,452,318
FNMA Pool #125306 8.00 2024 14,768,416 15,040,597
FNMA Pool #250212 8.50 2025 9,723,581 10,027,443
FNMA Pool #283580 7.00 2024 7,176,050 7,052,694
See Notes to Schedule of Investments.
14
<PAGE>
Interest Maturity Par Market
Rate Date Value Value
--------------------------------------------------------- ---- ---- -------- ------------
MORTGAGE PASS-THROUGH CERTIFICATES -- continued
FNMA Pool #283689 7.00% 2024 $ 2,954,240 $ 2,903,457
FNMA Pool #284365 7.00 2024 3,904,337 3,837,222
FNMA Pool #284376 7.00 2024 6,734,887 6,619,114
FNMA Pool #289682 8.50 2024 3,904,168 4,026,173
FNMA Pool #305104 8.50 2025 4,883,289 5,035,892
FNMA Pool #306253 8.50 2025 976,772 1,007,297
GNMA Pool #352906 7.00 2024 341,275 335,835
GNMA Pool #383754 7.50 2024 4,754,790 4,778,563
GNMA Pool #389229 7.50 2024 4,769,812 4,793,661
GNMA Pool #392484 8.00 2024 4,931,188 5,048,304
GNMA Pool #392517 8.00 2024 4,886,930 5,002,995
--------------------------------------------------------- ---- ---- -------- ------------
TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (Cost--$107,052,111) 110,185,679
----------------------------------------------------------------------------- -------- ------------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (14.9%)
Federal Home Loan Mortgage
Corp. Deb. 7.83 2004 2,000,000 2,041,560
U.S. Treasury Bonds 9.38 2006 45,250,000 55,975,608
U.S. Treasury Bonds 9.25 2016 4,000,000 5,128,760
U.S. Treasury Bonds 7.88 2021 62,950,000 71,586,110
U.S. Treasury Notes 8.88 1998 24,250,000 26,364,358
U.S. Treasury Notes 8.13 1998 20,000,000 21,071,800
U.S. Treasury Notes 7.75 2000 8,200,000 8,761,208
U.S. Treasury Notes 8.50 2000 7,000,000 7,792,960
U.S. Treasury Notes 7.50 2002 2,000,000 2,153,120
------------------------------- -------------------- ---- ---- -------- ------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$197,737,773) 200,875,484
------------------------------------------------------------------------------------------- ------------
TOTAL FIXED INCOME (Cost--$529,954,818) 545,080,141
------------------------------------------------------------------------------------------- ------------
SHORT-TERM INVESTMENTS (0.8%)
REPURCHASE AGREEMENTS (0.8%)
Investments in repurchase agreements, in a joint trading account, purchased 06/30/95,
6.21%, maturing 07/03/95 (Cost $11,083,000) (e) 11,083,000
------------------------------------------------------------------------------------------- ------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$11,083,000) 11,083,000
------------------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (Cost--$1,097,997,265) (a) 1,334,662,703
----------------------------------------------------------------------------- ------------
OTHER ASSETS AND LIABILITIES--NET (0.8%) 10,217,118
----------------------------------------------------------------------------- ------------
NET ASSETS (100.0%) $1,344,879,821
----------------------------------------------------------------------------- ------------
</TABLE>
(continued on next page)
15
<PAGE>
Keystone Balanced Fund (K-1)
(formerly Keystone Custodian Fund, Series K-1)
NOTES TO SCHEDULE OF INVESTMENTS:
(a) The cost of investments for federal income tax purposes amounted to
$1,098,003,023. Gross unrealized appreciation and depreciation on
investments, based on identified tax cost, at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $247,990,551
Gross unrealized depreciation (11,330,871)
-----------
Net unrealized appreciation $236,659,680
-----------
</TABLE>
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933. These securities have been
determined to be liquid under guidelines established by the Board of
Trustees.
(c) The estimated maturity of a collateralized mortgage obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the date shown.
(d) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) and are valued using market quotations where readily
available. In the absence of market quotations, the securities are valued
based upon their fair value determined under procedures approved by the Board
of Trustees. The Fund may make investments in an amount up to 10% of the
value of the Fund's net assets in such securities. Dates of acquisition and
costs are set forth in parentheses after the title of the restricted
securities. On the date of acquisition there was no market quotation on
similar securities and the above security was valued at acquisition cost. At
June 30, 1995, the fair value of this restricted security was $686,159 (0.05%
of net assets). The Fund will not pay the costs of disposition of the above
restricted securities other than ordinary brokerage fees, if any.
(e) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices on June 30, 1995.
Legend of Portfolio Abbreviations
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
ADR--American Depository Receipt
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
====== ====== ====== ====== ==== ==== ==== ==== ==== ======
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of year $ 9.26 $10.10 $ 9.77 $ 9.16 $ 9.10 $ 9.12 $ 8.37 $ 9.74 $10.50 $ 9.06
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Income from investment
operations
Net investment
income 0.31 0.28 0.31 0.32 0.45 0.50 0.46 0.47 0.46 0.56
Net gain (loss) on
investments,
futures contracts
and foreign
currency related
transactions 0.96 (0.37) 0.66 0.75 0.18 0.20 0.83 (0.82) 0.81 1.87
Net commissions
paid on fund
share sales (a) 0 0 0 0 0 0 0 0 0 (0.09)
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Total from
investment
operations 1.27 (0.09) 0.97 1.07 0.63 0.70 1.29 (0.35) 1.27 2.34
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Less distributions from:
Net investment
income (0.31) (0.28) (0.31) (0.32) (0.50) (0.50) (0.54) (0.60) (0.54) (0.56)
In excess of net
investment income
(b) (0.02) (0.07) (0.09) (0.14) (0.04) (0.04) 0 0 0 0
Tax basis return of
capital 0 (0.02) 0 0 0 0 0 0 0 0
Net realized gain
on investments (0.02) (0.25) (0.24) 0 (0.03) (0.18) 0 (0.42) (1.49) (0.34)
In excess of net
realized gain
on investments
(b) (0.09) (0.13) 0 0 0 0 0 0 0 0
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Total distributions (0.44) (0.75) (0.64) (0.46) (0.57) (0.72) (0.54) (1.02) (2.03) (0.90)
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Net asset value end
of year $10.09 $ 9.26 $10.10 $ 9.77 $ 9.16 $ 9.10 $ 9.12 $ 8.37 $ 9.74 $10.50
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Total return (c) 14.20% (1.16%) 10.39% 11.86% 7.49% 7.99% 16.07% (3.37%) 15.39% 27.81%
Ratios/Supplemental Data
Ratios to average net assets:
Total expenses 1.77% 1.71% 1.93% 1.97% 1.88% 1.99% 1.96% 1.91% 1.93% 0.86%
Net investment
income 3.33% 2.81% 3.07% 3.25% 4.56% 4.94% 5.48% 5.34% 4.47% 5.82%
Portfolio turnover
rate 88% 88% 74% 52% 60% 35% 49% 64% 79% 92%
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
Net assets end of
year (thousands) $1,344,880 $1,389,810$1,464,066$1,184,094 $901,994$826,934$712,009 $685,427 $727,723 $419,066
------------------- ----- ----- ----- ----- --- --- --- --- --- ----
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both financial
statement and tax purposes as capital charges. On June 11, 1987, the
Securities and Exchange Commission adopted a rule which required for financal
statements for the periods ended on or after June 30, 1987, that net
commissions paid under Rule 12b-1 be treated as operating expenses rather
than capital charges. Accordingly, beginning with the year ended June 30,
1987, the Fund's financial statements reflect 12b-1 Distribution Plan
expenses (i.e., shareholder service fees plus commissions paid net of
deferred sales charges received by the Fund) as a component of net investment
income.
(b) Effective July 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies." As
a result, distribution amounts exceeding book basis net investment income (or
tax basis net income on a temporary basis) are presented as "Distributions in
excess of net investment income." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis capital gains on a temporary
basis) are presented as "Distributions in excess of realized capital gains."
From January 31, 1990 until the date of adoption of the Statement of
Position, distribution amounts exceeding book basis net investment income
were presented as "Distributions from paid-in capital".
(c) Excluding applicable sales charge.
See Notes to Financial Statements.
17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments at market value (identified cost--$1,097,997,265)
(Note 1) $1,334,662,703
Cash 51,256
Receivable for:
Investments sold 6,252,778
Fund shares sold 1,218,610
Dividends 2,192,215
Interest 9,577,838
Prepaid expenses and other assets 128,209
-------------------------------------------------------------------- -----------
Total assets 1,354,083,609
-------------------------------------------------------------------- -----------
Liabilities:
Payable for:
Investments purchased 8,140,960
Fund shares redeemed 895,739
Other accrued expenses 167,089
-------------------------------------------------------------------- -----------
Total liabilities 9,203,788
-------------------------------------------------------------------- -----------
Net assets $1,344,879,821
-------------------------------------------------------------------- -----------
Net assets represented by (Note 1):
Paid-in capital $1,101,747,063
Undistributed net investment income 3,773,334
Accumulated net realized gain (loss) on investments 2,693,986
Net unrealized appreciation (depreciation) on investments 236,665,438
-------------------------------------------------------------------- -----------
Total net assets applicable to outstanding shares of beneficial
interest ($10.09 a share on 133,332,616 shares outstanding)
Note 1) $1,344,879,821
-------------------------------------------------------------------- -----------
</TABLE>
STATEMENT OF OPERATIONS
Year Ended June 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income (Note 1):
Interest $ 41,380,278
Dividends (net of foreign withholding taxes of $56,157) 26,568,776
-------------------------------------------------------- ----------
Total income 67,949,054
-------------------------------------------------------- ----------
Expenses (Notes 2 and 4):
Management fee $ 6,272,956
Transfer agent fees 3,344,123
Accounting, auditing and legal fees 87,239
Custodian fees 314,898
Printing 54,255
Trustees' fees and expenses 50,582
Distribution Plan expenses 13,254,068
Registration fees 95,560
Miscellaneous 111,000
-------------------------------------------------------- -------
Total expenses 23,584,681
-------------------------------------------------------- ----------
Net investment income 44,364,373
-------------------------------------------------------- ----------
Net realized and unrealized gain (loss) on investments,
futures contracts and foreign currency related
transactions (Notes 1 and 3):
Net realized gain (loss) on:
Investment transactions 2,797,452
Closed futures contracts (445,230)
Foreign currency related transactions (56)
-------------------------------------------------------- -------
Net realized gain (loss) on investments, closed futures
contracts, and foreign currency related transactions 2,352,166
-------------------------------------------------------- ----------
Net change in unrealized appreciation (depreciation)
on investments 126,215,529
-------------------------------------------------------- ----------
Net gain (loss) on investments, closed futures
contracts and foreign currency related transactions 128,567,695
-------------------------------------------------------- ----------
Net increase (decrease) in net assets resulting
from operations $172,932,068
-------------------------------------------------------- ----------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1994
=========== ==============
<S> <C> <C>
Operations:
Net investment income $ 44,364,373 $ 41,474,879
Net realized gain (loss) on investments, closed future contracts and
foreign currency related transactions 2,352,166 35,996,899
Net change in unrealized appreciation (depreciation) on investments 126,215,529 (92,796,094)
-------------------------------------------------------------------------- --------- ------------
Net increase (decrease) in net assets resulting from operations 172,932,068 (15,324,316)
-------------------------------------------------------------------------- --------- ------------
Distributions to shareholders from (Note 1):
Net investment income (44,364,373) (41,474,879)
In excess of net investment income (2,609,005) (11,163,134)
Tax basis return of capital 0 (2,510,713)
Net realized gain on investments (2,352,166) (35,996,899)
In excess of net realized gain on investments (12,888,642) (19,761,716)
-------------------------------------------------------------------------- --------- ------------
Total distributions to shareholders (62,214,186) (110,907,341)
-------------------------------------------------------------------------- --------- ------------
Capital share transactions (Note 2):
Proceeds from shares sold 147,551,759 228,457,731
Payments for shares redeemed (355,376,426) (271,898,085)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income and in excess of net investment income 38,393,490 44,707,410
Net realized gain on investments and in excess of net realized gains
on investments 13,783,386 50,708,277
-------------------------------------------------------------------------- --------- ------------
Net increase (decrease) in net assets resulting from capital share
transactions (155,647,791) 51,975,333
-------------------------------------------------------------------------- --------- ------------
Total increase (decrease) in net assets (44,929,909) (74,256,324)
-------------------------------------------------------------------------- --------- ------------
Net assets:
Beginning of year 1,389,809,730 1,464,066,054
-------------------------------------------------------------------------- --------- ------------
End of year (including undistributed net investment income as follows:
1995--$3,773,334 and 1994--$678,093) (Note 1) $1,344,879,821 $1,389,809,730
-------------------------------------------------------------------------- --------- ------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Principles
Keystone Balanced Fund (K-1) (formerly known as Keystone Custodian Fund,
Series K-1) (the "Fund") is a common law trust for which Keystone Management,
Inc. ("KMI") is the Investment Manager and Keystone Investment Management
Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is the
Investment Adviser. The Fund is registered under the Investment Company Act
of 1940 as a diversified open-end management investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of management of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"),
a wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing sales price, or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith, by or under the direction of the Board of Trustees, to
be fair: (a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value
or if no sale occurred. Short-term investments maturing in sixty days or less
are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which when combined with
accrued interest approximates market. Short-term investments maturing in more
than sixty days for which market quotations are readily available are valued
at current market value. Short-term investments maturing in more than sixty
days when purchased which are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount) which when combined with
accrued interest approximates market. Investments denominated in a foreign
currency are adjusted daily to reflect changes in exchange rates. Market
quotations are not considered to be readily available for long-term corporate
bonds and notes; such investments are stated at fair value on the basis of
valuations furnished by a pricing service, approved by the Trustees, which
determines valuations for normal institutional-size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any
20
<PAGE>
futures contracts which remain open at fiscal year end are marked-to-market
and the resultant net gain or loss is included in federal taxable income.
Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily
rates 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 gains/losses are a component of unrealized
appreciation/depreciation of investments.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. All original issue
discounts are amortized for both financial reporting and federal income tax
purposes. Distributions to shareholders are recorded at the close of business
on the ex-dividend date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code. Thus, the Fund
expects to be 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 Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency Obligations.
E. In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Fund may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time the Fund
may enter into contracts to hedge certain foreign currency assets. Contracts
are recorded at market value. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on investments and
forward foreign
21
<PAGE>
currency exchange contracts. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
F. The Fund distributes net investment income to shareholders quarterly and
capital gains, if any, annually. Distributions are determined in accordance
with income tax regulations. Distributions from taxable net investment income
and net capital gains can exceed book basis net investment income and net
capital gains. 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 of 12b-1
expenses prior to April 1995 and treatment of mortgage paydowns.
G. As of June 30, 1994 $8,593,264 in capital losses were treated as Post
October Losses for book purposes but were ultimately not deferred for income
tax purposes. Accordingly, this amount has been reclassified as of June 30,
1994 to reflect a decrease in paid-in-capital and an increase in accumulated
realized gains (losses) on investment transactions.
(2.) Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest with a par value of $1.00. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1994
---------------------------------------- ----------- -------------
<S> <C> <C>
Shares sold 15,603,073 23,134,606
Shares redeemed (38,034,514) (27,733,373)
Shares issued in reinvestment of
distributions from:
Net investment income and in excess of
net investment income 4,153,267 4,568,990
Net realized gain on investments and in
excess of net realized gains 1,519,667 5,153,280
---------------------------------------- --------- -----------
Net increase (decrease) (16,758,507) 5,123,503
---------------------------------------- --------- -----------
</TABLE>
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the
Fund's principal underwriter and a wholly-owned subsidiary of Keystone,
amounts which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, fund shares are offered for sale at net asset value without
any initial
22
<PAGE>
sales charge. From the amounts received by KIDC in connection with the
Distribution Plan, and subject to the limitations discussed below, KIDC
generally pays brokers or others a commission equal to 4.0% of the price paid
to the fund for each sale of fund shares as well as a shareholder service fee
at a rate of 0.25% per annum of the net asset value of shares sold by such
brokers or others and remaining outstanding on the books of the Fund for
specified periods.
To the extent fund shares are redeemed within four calendar years of
original issuance, depending upon when those shares were issued, the Fund may
be eligible to receive a deferred sales charge from the investor as partial
reimbursement for sales commissions previously paid on those shares. This
charge is based on declining rates, which begin at 4.0%, applied to the
lesser of the net asset value of shares redeemed or the total cost of such
shares.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar quarter (approximately 1.25% annually)
occurring after the inception of the Distribution Plan. A rule of the
National Association of Securities Dealers, Inc. ("NASD Rule") limits the
annual expenditures which the Fund may incur under the Distribution Plan to
1.0% of which 0.75% may be used to pay such distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD Rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of gross share sales since the inception of the Fund's Distribution Plan,
plus interest at the prime rate plus 1.0% on unpaid amounts thereof (less any
contingent deferred sales charges paid by the shareholders to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus one percent) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC since January 1, 1992.
Commencing on July 8, 1992, contingent deferred sales charges applicable
to shares of the Fund issued after January 1, 1992 have, to the extent
permitted by the NASD Rule, been paid to KIDC rather than to the Fund.
During the year, the Fund paid KIDC $13,340,407 under the Distribution
Plan. The amount paid by the Fund under its Distribution Plan, net of
deferred sales charges, was $13,254,068 (1.0% of the Fund's average daily net
asset value during the year). During the year, KIDC received $5,705,621 after
payments of commissions on new sales to dealers and others of $7,634,786.
Under a rule of the NASD, the maximum uncollected amounts for which KIDC
may seek payment from the Fund under its distribution plan is $6,030,120
(0.45% of the Funds net asset value as of June 30, 1995)
(3.) Securities Transactions
For the year ended June 30, 1995, purchases and sales of investment
securities were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
============ =============
<S> <C> <C>
Portfolio securities $1,144,249,966 $1,326,567,993
Short-term investments 5,773,267,485 5,767,206,284
--------------------------------------- ---------- -----------
$6,917,517,451 $7,093,774,277
---------- -----------
</TABLE>
23
<PAGE>
(4) Investment Management and Transactions with Affiliates
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 daily and paid
monthly. The management fee is calculated at a rate of 1.5% of the Fund's
gross investment income plus an amount determined by applying percentage
rates, starting at 0.60% and declining as net assets increase to 0.30% per
annum, to the net asset value of the Fund. KMI has entered into an Investment
Advisory Agreement with Keystone, under which Keystone provides investment
advisory and management services to the Fund and receives for its services an
annual fee representing 85% of the management fee received by KMI.
During the year ended June 30, 1995, the Fund paid or accrued to KMI
investment management and administrative services fees of $6,272,956 which
represented 0.47% of the Fund's average net assets on an annualized basis. Of
such amount paid to KMI, $5,332,013 was paid to Keystone for its services to
the Fund.
During the year ended June 30, 1995, the Fund paid or accrued $26,798 to
KIRC and KIDC for certain accounting services, and $3,344,123 to KIRC for
transfer agent services.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Balanced Fund (K-1)
(formerly Keystone Custodian Fund, Series K-1)
We have audited the accompanying statement of assets and liabilities of
Keystone Balanced Fund (K-1) (formerly Keystone Custodian Fund, Series K-1),
including the schedule of investments, as of June 30, 1995, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the ten-year period then ended.
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 June 30, 1995 by correspondence with the custodian and
brokers. An audit 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 Balanced Fund (K-1) as of June 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
July 28, 1995
25
<PAGE>
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS
During the fiscal year ended June 30, 1995, distributions of $0.44 per share
were paid in shares or cash. This total includes a taxable long-term capital
gain distribution of $0.11 per share. The remaining $0.33 per share is
taxable to shareholders as ordinary income in the year in which received by
them or credited to their accounts. Of the ordinary income distribution, 39%
is eligible for the corporate dividend received deduction. The above figures
may differ from 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 1996, we will send you complete information on the distributions
paid during the calendar year 1995 to help you in completing your federal tax
return.
26
<PAGE>
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.
27
<PAGE>
[COVER]
ANNUAL REPORT
JUNE 30, 1995
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Exempt Trust
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. Its use for other purposes is authorized only when it is
preceded or accompanied by the prospectus, describing all fees, charges and
other important facts about the Fund.
KEYSTONE [PICTURE BOX, MAN & WOMAN RUNNING ON BEACH]
BALANCED FUND (K-1)
KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
K-1-AR-8/95 78M [RECYCLE LOGO]
