PAGE 1
- ---------------------------------
Keystone Balanced Fund (K-1)
Seeks income and growth from a quality selection of stocks and bonds.
Dear Shareholder:
We are pleased to report to you on activities in Keystone Balanced Fund (K-1)
for the six-month period which ended December 31, 1995.
Performance
Your Fund returned 11.47% for the six-month period and 27.13% for the
twelve-month period which ended December 31, 1995. For the same periods, the
Standard & Poor's 500, a broad-based index of common stocks, returned 14.45%
for the six months and 37.58% for the twelve months. The Lehman Aggregate
Bond Index returned 6.31% for six months and 18.48% for twelve months.
We think your Fund produced excellent results for a conservatively managed
balanced fund. For 1995, it outperformed the average return of balanced funds
according to Lipper Analytical Services, Inc.(1)
A robust market environment
This was a remarkable period for stock and bond investors. Only nine times in
the last fifty years have stocks provided returns above 30%. And bonds rarely
realize double-digit returns as they did last year. The strong market
performance of the first six months of 1995 continued during the second half
of the year. The slow growth, low inflation environment was positive for
equity investors. Many companies continued to report strong earnings. In
addition, the downward trend in interest rates and subdued inflation was also
favorable for fixed-income investors, resulting in higher bond prices.
Keystone Balanced Income Fund (K-1) invests in stocks of established
companies that pay dividends and in quality bonds. Historically these
investments have provided more consistent returns than higher risk
investments. And the six month period was no exception to this. We believe it
has been this balanced approach that is responsible for your Fund's positive
performance in 19 of the last 21 years.
Steady asset allocation
We maintained your Fund's asset allocation among stocks and bonds throughout
the six-month period. As of December 31, 1995, stocks accounted for 60% and
bonds accounted for 38% of net assets, with the balance in cash and other
obligations. Your Fund's bond holdings provided attractive income and we also
expected them to appreciate as interest rates declined. The Fund's balanced
approach proved to be particularly effective during the period under review.
Our outlook
We were encouraged by the market's strong showing in 1995 and expect that the
positive environment for stocks should continue in 1996. However, we expect
some companies may have lower earnings in 1996 as the economy continues on
its slow growth path. As a result, we think investors should expect returns
to be closer to the long-term historical returns.
--continued--
- ---------------
(1)Lipper Analytical Services, Inc., an independent mutual fund rating
service. The average one-year return of 249 balanced funds was 25.16% as of
December 31, 1995. Lipper ranks funds based on total returns, which includes
reinvestment of dividends and does not include the effects of sales charges.
Past performance is no guarantee of future results.
<PAGE>
PAGE 2
- ---------------------------------
Keystone Balanced Fund (K-1)
Some investors might argue that the extraordinary returns of 1995 must
inevitably be followed by a market correction the following year. However,
this has not been the case historically. For example, seven of the nine
30%-plus return years since 1945 were followed by positive total return
years. The two negative return years saw returns of -5% and -3%. For bonds,
nine of the twelve 10%-plus return years were followed by positive total
return years. For the three years that were not positive, returns were -0.7%,
- -3% and -8%.
While there is no assurance that history will repeat itself, we continue to
have a positive outlook for the markets in 1996. Our favorable outlook is
based on a continuation of solid market fundamentals. We expect slow but
positive economic growth to continue; inflation should remain under control;
the deficit should continue to shrink as a percentage of our gross domestic
product and interest rates should be stable or decline slightly as the
Federal Reserve Bank seeks to stimulate the economy.
Overall, we believe your Fund's balanced approach makes sense for investors
seeking consistent, long term returns in varying market conditions. And we
think Keystone Balanced Income Fund (K-1) provided generous rewards to
shareholders while pursuing a conservative approach.
We appreciate your continued support of Keystone Balanced Fund (K-1). If you
have any questions or comments about your Keystone investment, we encourage
you to write to us.
Sincerely,
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
George S. Bissell
Chairman of the Board
Keystone Funds
[photos of Elfner and Bissell]
February 1996 Albert H. Elfner, III George S. Bissell
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear senior portfolio
manager Walter McCormick discuss his latest strategy for Keystone Balanced
Fund (K-1). You can also listen to Keystone's overall market outlook from
James McCall, chief investment officer and other fund updates. The service is
available 24 hours a day, seven days a week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
Keystone Balanced Fund (K-1) Update Press 6
<PAGE>
PAGE 3
- ---------------------------------
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 25 years of
investment management experience. Barbara McCue, senior portfolio manager in
the high grade bond area, manages the fixed-income portion of the portfolio.
Together they focus on selecting income-producing stocks and high quality
bonds for your Fund.
Q How would you characterize the market conditions of the past six months?
A The positive economic and market environment in the U.S. during the first
six months of 1995 continued during the second half of the year. Strong
corporate earnings persisted, interest rates generally declined, inflation
remained under control and stock prices were still fairly valued. While the
debate over balancing the federal budget caused some uncertainty for bond
investors, the Federal Reserve Bank's accommodative policy had a positive
effect and interest rates declined. Elsewhere in the world, the economic
picture remained weak, adding to the attractiveness of the U.S. markets. 1995
was an ideal environment for U.S. stocks and bonds and the markets'
performance reflected it.
- ---------------------
(2)Lipper Analytical Services, Inc., an independent mutual fund rating
service. The average one-year return of 249 balanced funds was 25.16% as of
December 31, 1995. Lipper ranks funds based on total returns, which includes
reinvestment of dividends and does not include the effects of sales charges.
Past performance is no guarantee of future results.
Q How did the Fund perform?
A We believe the Fund provided excellent results, especially considering its
conservative approach. We manage the Fund for consistent returns with income
by investing in a combination of established companies and quality bonds.
This approach has historically resulted in respectable total returns year
after year. However, 1995 was an unusually good year. Aggressive growth stock
strategies returned more than 30% and bonds delivered double-digit total
returns, including income and price changes. While the Fund did not invest in
aggressive growth or high risk investments, it provided very attractive
returns that outperformed the average balanced fund according to Lipper
Analytical Services, Inc.(2)
Q How did you manage the Fund?
A For our stock holdings, selection was key to positive performance. We
emphasized dividend-paying stocks of selected well established U.S.
companies. These tended to be stable growth companies with a history of
consistent earnings progress. As the economy appeared to be slowing in the
second half of 1995, we expected many of these companies with steady earnings
histories to be in favor. We think these companies should continue to be
sought after, especially if earnings at other companies slow. We think the
Fund was ideally positioned to benefit from this environment during the
six-month period. In the bond portion of the portfolio, we lengthened the
average maturity to benefit from declining interest rates.
Fund Profile
Objective: Seeks income and growth from a quality selection of stocks and
bonds.
Number of stocks: 124
Average bond rating: AAA
Assets: $1,471 million
Commencement of investment operations: September 11, 1935
Newspaper listing: BalnceK1
<PAGE>
PAGE 4
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Keystone Balanced Fund (K-1)
Keystone's Balanced Fund Approach
Stocks
(bullet) Seasoned, financially sound companies
(bullet) Companies with consistent earnings histories
(bullet) Holdings are required to pay dividends
Bonds
(bullet) Quality corporate, government and mortgage-backed securities
(bullet) Focus on bonds rated in top 4 categories (AAA, AA, A, BBB)
(bullet) Contribute major portion of quarterly dividend
Q You focus on stable growth companies. What are they?
A Stable growth companies--also known as noncyclicals--tend to be less
affected by swings in the economic cycle. These companies tend to grow
regardless of the state of the economy. At Keystone, we often refer to the
stocks of stable growth companies as "ruler stocks." If we plot their
earnings-per-share over time, it typically results in a straight, upward
sloping line. Their growth tends to be steady and consistent. Gillette is
among the Fund's top holdings and is a good example of a "ruler stock" (see
chart).
Our focus on stable growth company stocks led us to emphasize the drugs,
oil, finance, chemicals and capital goods areas.
Q Tell us about the Fund's holdings of drug stocks.
A We continued to maintain an emphasis in this area. Similar to other
industries, the pharmaceutical industry has had to cut costs and increase
productivity to remain competitive. The pressures of health care reform,
global competition and an inability to raise prices significantly have caused
change and created opportunities at many drug companies. We held several well
known names including Johnson & Johnson, Merk & Co., and Pfizer.
Q You added some new names to the portfolio in the financial services area.
Why?
A We invested in several financial services stocks such as banks, brokerage
and mortgage companies. At the end of the period, financial stocks accounted
for 5% of net assets. 1995 was a particularly advantageous time for financial
services companies. These companies enjoyed the rewards of declining interest
rates, and bank stocks benefited from the consolidation of the industry. We
added BankAmerica to the portfolio. We also invested in Donaldson Lufkin &
Jenrette, a brokerage firm that we believed was undervalued, and PMI Group, a
private mortgage insurance company.
Q Chemical stocks continued to be among the Fund's top industry holdings.
What opportunities did you find there?
A Chemical stocks comprised about 5% of net assets as of December 31, 1995.
Some of the best performing
[typeset representation of line chart]
"Ruler Stocks"
Historical Earnings of Gillette
Earnings per share
1986 $0.36
1987 0.50
1988 0.61
1989 0.67
1990 0.80
1991 0.87
1992 1.15
1993 1.33
1994 1.57
1995 1.65
1996 2.15
Est.
Share price
Dec. 29, 1995...52 1/8
[end chart]
<PAGE>
PAGE 5
- ---------------------------------
Top 5 Equity Industries
as of December 31, 1995
Percentage of
Industry net assets
-----------------------------------
Drugs 6.9
-----------------------------------
Oil 6.6
-----------------------------------
Finance 5.3
-----------------------------------
Chemicals 5.1
-----------------------------------
Capital goods 4.6
-----------------------------------
stocks were those of fertilizer companies and large chemical companies that
produce agricultural products, such as Monsanto. There are relatively few
companies that produce chemicals for agricultural purposes. These companies
have developed products that we believe are in demand. The chemical companies
in the portfolio generated solid, steady earnings and were strong
contributors to your Fund's total return.
Q You also continued to hold convertible securities. What made them
attractive?
A We emphasized convertible securities for their attractive yields and price
appreciation potential. Approximately 4% of the Fund's net assets were
invested in convertible securities. They were strong performers during the
twelve-month period. 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. Alco Standard, a convertible preferred
stock holding, is a marketer and distributor of paper products. Its AOP
division is the largest office products dealer network in the world.
Q How did the economic environment affect bonds?
A The economic environment continued to remain positive for bonds during the
second half of 1995. Overall, economic growth remained modest. This
contributed to the low inflation environment, which has historically been
favorable for bonds. As a result, interest rates trended down and bond prices
rose.
Q How did you manage the Fund's bond holdings in this environment?
A In the first half of 1995, we increased the quality of the portfolio and
extended the portfolio's average maturity to 10.5 years. We continued with
this approach because we believed the economy would proceed on a slow growth
track. We also maintained the portfolio's high quality composition by holding
higher rated corporate bonds and U.S. Treasury securities. Historically,
higher quality bonds have tended to perform better than lower rated
securities during times of moderate economic growth and declining interest
rates.
Asset Allocation
as of December 31, 1995
[typeset representation of pie chart]
Bonds (38%)
Stocks (60%)
Cash(3) (2%)
(as a percent of portfolio assets)
[end pie chart]
(3)Includes short-term investments and other assets and liabilities.
<PAGE>
PAGE 6
- ---------------------------------
Keystone Balanced Fund (K-1)
Q How did this strategy contribute to the Fund's performance?
A Lengthening the portfolio's maturity helped performance as interest rates
continued to decline during the period. Bonds with longer term maturities
have typically provided better price appreciation than shorter term bonds as
interest rates decline. Lower quality investment grade corporate bonds--those
rated BBB--outperformed higher quality bonds--those rated AAA, AA, and A.
This strong performance by BBB-rated bonds generally surprised investors in
1995. Our holdings of higher grade bonds provided positive, but modest
results compared to investors who had significant holdings of BBB-rated
bonds. Nevertheless we maintained high quality and diversification in the
bond portion of the portfolio with an average rating of AAA.
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 19 out of the
last 21 years.
Q What is your outlook?
A Our outlook remains cautiously optimistic. We believe moderate economic
growth, low inflation, and stable-to-declining interest rates should create
an attractive environment for your Fund's investments. In a slower growing
economy, we believe investors will pay more for the consistent earnings that
these types of companies tend to generate. While we think stock prices may
rise over the next six to twelve months, we do not expect stocks to duplicate
the very strong gains they generated in 1995. We believe your Fund's
flexibility and its emphasis on income-producing investments should provide
it with the potential to produce above-average returns over the long term.
Top 10 Holdings
as of December 31, 1995
Percent of
Stocks Industry net assets
- --------------------------------------------------------------------
General Electric Capital goods 3.9
- --------------------------------------------------------------------
Johnson & Johnson Drugs 2.4
- --------------------------------------------------------------------
Monsanto Chemicals 2.0
- --------------------------------------------------------------------
AT&T Telecommunications 1.7
- --------------------------------------------------------------------
Chevron Oil 1.7
- --------------------------------------------------------------------
Bonds
- --------------------------------------------------------------------
U. S. Treasury bonds, 7.875%, mat. 2021 5.0
- --------------------------------------------------------------------
U. S. Treasury notes, 5.125%, mat. 1998 2.9
- --------------------------------------------------------------------
Federal National Mortgage Assoc., 6.50%, mat. 2010 2.2
- --------------------------------------------------------------------
U. S. Treasury notes, 7.750%, mat. 2000 2.0
- --------------------------------------------------------------------
U. S. Treasury bonds, 9.375%, mat. 2006 1.2
- --------------------------------------------------------------------
[diamond]
This column is intended to answer questions
about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company, Inc.,
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 7
- ---------------------------------
Your Fund's Performance
[typeset representation of mountain chart]
Growth of an investment in
Keystone Balanced Fund (K-1)
Initial Investment Reinvested Distributions
12/85 $10,000 $10,000
9,363 11,662
12/87 8,639 12,094
9,039 13,489
12/89 10,011 16,165
9,201 15,877
12/91 10,832 19,687
10,475 20,375
12/93 10,702 22,479
9,708 21,427
12/95 11,782 Total Value: $27,240
A $10,000 investment in Keystone Balanced Fund (K-1) made on December 31,
1985 with all distributions reinvested was worth $27,240 on December 31,
1995. Past performance is no guarantee of future results.
[end mountain chart]
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who bought and 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 December 31, 1995
- -----------------------------------------------------
Total return* 11.47%
Net asset value 6/30/95 $10.09
12/31/95 $10.91
Dividends $ 0.18
Capital gains $ 0.14
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1995
- -------------------------------------------------------------------
If you If you did
Cumulative total return redeemed not redeem
1-year 24.13% 27.13%
5-year 71.57% 71.51%
10-year 172.40% 172.40%
Average annual total return
1-year 24.13% 27.13%
5-year 11.40% 11.40%
10-year 10.54% 10.54%
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 8
- ---------------------------------
Keystone Balanced Fund (K-1)
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 9
- ---------------------------------
SCHEDULE OF INVESTMENTS--December 31, 1995
(Unaudited)
Market
Shares Value
---------------------------------------------------------------------------
COMMON STOCKS (57.8%)
AMUSEMENTS (0.1%)
ITT Corp. 33,400 $ 1,770,200
---------------------------------------------------------------------------
ADVERTISING & PUBLISHING (0.6%)
Donnelly (R.R.) & Sons Co. 70,000 2,756,250
Dun & Bradstreet Corp. 48,600 3,146,850
Gannett, Inc. 46,800 2,872,350
---------------------------------------------------------------------------
8,775,450
---------------------------------------------------------------------------
AEROSPACE (2.2%)
Boeing Co. (The) 270,500 21,200,437
Honeywell, Inc. 49,600 2,411,800
Raytheon Co. 68,000 3,213,000
Rockwell International Corp. 50,000 2,643,750
United Technologies Corp. 31,100 2,950,613
---------------------------------------------------------------------------
32,419,600
---------------------------------------------------------------------------
AUTOMOTIVE (1.2%)
Ford Motor Co. 220,000 6,380,000
General Motors Corp. 150,000 7,931,250
Genuine Parts Co. 62,025 2,543,025
---------------------------------------------------------------------------
16,854,275
---------------------------------------------------------------------------
CAPITAL GOODS (4.6%)
Deere & Co. 60,000 2,115,000
Emerson Electric Co. 54,000 4,414,500
General Electric Co. 796,000 57,311,994
Ingersoll-Rand Co. 50,500 1,773,813
Johnson Controls, Inc. 18,500 1,271,875
Sundstrand Corp. 17,000 1,196,375
---------------------------------------------------------------------------
68,083,557
---------------------------------------------------------------------------
CHEMICALS (5.1%)
Air Products & Chemicals, Inc. 28,000 1,477,000
Dow Chemical Co. 133,200 9,373,950
Du Pont (E.I.) de Nemours & Co. 131,000 9,153,625
Grace (W.R.) & Co. 39,500 2,335,438
Hercules, Inc. 39,000 2,198,625
Monsanto Co. 233,400 28,591,500
PPG Industries, Inc. 456,000 20,862,000
Union Carbide Corp. 30,000 1,125,000
---------------------------------------------------------------------------
75,117,138
---------------------------------------------------------------------------
CONSUMER GOODS (2.7%)
Avon Products, Inc. 16,300 $ 1,228,613
Eastman Kodak Co. 78,500 5,259,500
Gillette Co. 400,000 20,850,000
International Flavors & Fragrances, Inc. 48,000 2,304,000
Procter & Gamble Co. 110,000 9,130,000
Whirlpool Corp. 29,800 1,586,850
---------------------------------------------------------------------------
40,358,963
---------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.9%)
Allied-Signal, Inc. 71,300 3,386,750
Corning, Inc. 61,200 1,958,400
ITT Industries, Inc. 33,400 801,600
Minnesota Mining & Manufacturing Co. 80,000 5,300,000
Tenneco, Inc. 25,000 1,240,625
---------------------------------------------------------------------------
12,687,375
---------------------------------------------------------------------------
DRUGS (6.9%)
Abbott Laboratories 168,000 7,014,000
American Home Products Corp. 90,000 8,730,000
Baxter International, Inc. 47,400 1,984,875
Bristol-Myers Squibb Co. 55,000 4,723,125
Guidant Corp. 77,432 3,271,502
Johnson & Johnson 405,200 34,695,250
Lilly (Eli) & Co. 87,626 4,928,962
Merck & Co. 213,000 14,004,750
Pfizer, Inc. 145,200 9,147,600
Schering-Plough Corp. 102,400 5,606,400
SmithKline Beecham PLC, ADR 57,200 3,174,600
Warner-Lambert Co. 42,000 4,079,250
---------------------------------------------------------------------------
101,360,314
---------------------------------------------------------------------------
ELECTRONICS PRODUCTS (0.8%)
AMP, Inc. 50,000 1,918,750
Foster Wheeler Corp. 70,000 2,975,000
Texas Instruments Inc. 100,000 5,175,000
Thomas & Betts Corp. 20,000 1,475,000
---------------------------------------------------------------------------
11,543,750
---------------------------------------------------------------------------
FINANCE (5.3%)
American Express Co. 100,000 4,137,500
(continued on next page)
<PAGE>
PAGE 10
- ---------------------------------
Keystone Balanced Fund (K-1)
Market
Shares Value
---------------------------------------------------------------------------
FINANCE (continued)
Banc One Corp. 55,000 $ 2,076,250
Bank of Boston Corp. 160,000 7,400,000
BankAmerica Corp. 346,960 22,465,660
Chemical Banking Corp. 113,941 6,694,034
Donaldson, Lufkin & Jenrette, Inc. 73,500 2,296,875
Federal Home Loan Mortgage Corp. 103,600 8,650,600
Federal National Mortgage Association 50,000 6,206,250
Fleet Financial Group, Inc. 60,000 2,445,000
Merrill Lynch & Co., Inc. 42,000 2,142,000
Morgan (J.P.) & Co., Inc. 42,000 3,370,500
PMI Group 53,600 2,425,400
Salomon Inc. 60,000 2,130,000
Wells Fargo & Co. 24,200 5,227,200
---------------------------------------------------------------------------
77,667,269
---------------------------------------------------------------------------
FOODS (3.2%)
Anheuser-Busch Cos., Inc. 52,000 3,477,500
CPC International, Inc. 46,800 3,211,650
General Mills, Inc. 30,000 1,732,500
Heinz (H.J.) Co. 79,200 2,623,500
Kellogg Co. 44,000 3,399,000
PepsiCo., Inc. 145,000 8,101,875
Philip Morris Cos., Inc. 227,100 20,552,550
Sara Lee Corp. 86,000 2,741,250
UST, Inc. 46,200 1,541,925
---------------------------------------------------------------------------
47,381,750
---------------------------------------------------------------------------
INSURANCE (2.0%)
Aetna Life & Casualty Co. 30,000 2,077,500
American General Corp. 64,892 2,668,702
CIGNA Corp. 20,000 2,065,000
GCR Holdings, Ltd. 58,400 1,306,700
General Reinsurance Corp. 95,000 14,725,000
ITT Hartford Group, Inc. 33,400 1,615,725
SAFECO Corp. 68,200 2,357,163
St. Paul Cos., Inc. 40,000 2,225,000
Transamerica Corp. 14,000 1,020,250
---------------------------------------------------------------------------
30,061,040
---------------------------------------------------------------------------
METALS & MINING (0.4%)
Aluminum Co. of America 40,000 2,115,000
Freeport-McMoRan, Inc. 56,138 1,578,881
---------------------------------------------------------------------------
METALS & MINING (continued)
Phelps Dodge Corp. 22,000 $ 1,369,500
Reynolds Metals Co. 24,400 1,381,650
---------------------------------------------------------------------------
6,445,031
---------------------------------------------------------------------------
NATURAL GAS (1.4%)
Enron Corp. 54,000 2,058,750
Enron Global Power & Pipelines LLC 101,500 2,524,813
Sonat, Inc. 455,000 16,209,375
---------------------------------------------------------------------------
20,792,938
---------------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (0.9%)
IBM Corp. 111,000 10,184,250
Xerox Corp. 20,923 2,866,451
---------------------------------------------------------------------------
13,050,701
---------------------------------------------------------------------------
OIL (6.6%)
Amoco Corp. 96,600 6,943,125
Atlantic Richfield Co. 144,500 16,003,375
Chevron Corp. 463,600 24,339,000
Exxon Corp. 63,500 5,087,938
Mobil Corp. 155,400 17,404,800
Occidental Petroleum Corp. 157,000 3,355,875
Royal Dutch Petroleum Co. 70,100 9,892,863
Texaco, Inc. 150,000 11,775,000
Unocal Corp. 100,000 2,912,500
---------------------------------------------------------------------------
97,714,476
---------------------------------------------------------------------------
OIL SERVICES (0.7%)
Halliburton Co. 45,200 2,288,250
Schlumberger, Ltd. 31,100 2,153,675
Union Pacific Resources Group, Inc. 205,500 5,214,563
---------------------------------------------------------------------------
9,656,488
---------------------------------------------------------------------------
PAPER & PACKAGING (1.7%)
Georgia-Pacific Corp. 30,800 2,113,650
International Paper Co. 57,000 2,158,875
Kimberly-Clark Corp. 34,800 2,879,700
Schweitzer Mauduit International, Inc. 3,480 80,475
Union Camp Corp. 25,500 1,214,438
Weyerhaeuser Co. 370,350 16,017,638
---------------------------------------------------------------------------
24,464,776
---------------------------------------------------------------------------
<PAGE>
PAGE 11
- ---------------------------------
Market
Shares Value
---------------------------------------------------------------------------
REAL ESTATE (1.5%)
Beacon Properties (R.E.I.T.) 700,000 $ 16,100,000
Liberty Property Trust (R.E.I.T.) 100,000 2,075,000
Patriot American Hospitality, Inc. (R.E.I.T.) 40,000 1,030,000
Spieker Properties (R.E.I.T.) 100,000 2,512,500
---------------------------------------------------------------------------
21,717,500
---------------------------------------------------------------------------
RETAIL (0.5%)
May Department Stores Co. 60,000 2,535,000
Melville Corp. 60,000 1,845,000
Sears, Roebuck and Co. 70,000 2,730,000
---------------------------------------------------------------------------
7,110,000
---------------------------------------------------------------------------
SERVICES (0.7%)
Block (H&R), Inc. 37,200 1,506,600
Browning-Ferris Industries, Inc. 290,000 8,555,000
---------------------------------------------------------------------------
10,061,600
---------------------------------------------------------------------------
SOFTWARE SERVICES (0.6%)
Computer Associates International, Inc. 150,000 8,531,250
---------------------------------------------------------------------------
TELECOMMUNICATIONS (3.6%)
Ameritech Corp. 124,000 7,316,000
AT&T Corp. 383,000 24,799,250
Bell Atlantic Corp. 90,000 6,018,750
GTE Corp. 162,000 7,128,000
NYNEX Corp. 88,088 4,756,752
Sprint Corp. 75,480 3,009,765
---------------------------------------------------------------------------
53,028,517
---------------------------------------------------------------------------
TRANSPORTATION (2.3%)
Conrail, Inc. 30,000 2,100,000
CSX Corp. 306,000 13,961,250
Norfolk Southern Corp. 190,000 15,081,250
Union Pacific Corp. 46,800 3,088,800
---------------------------------------------------------------------------
34,231,300
---------------------------------------------------------------------------
UTILITIES (1.3%)
American Electric Power Co., Inc. 39,500 $ 1,599,750
Central & South West Corp. 40,600 1,131,725
Consolidated Edison Co. of
New York, Inc. 74,000 2,368,000
Dominion Resources, Inc. 31,050 1,280,813
Duke Power Co. 42,000 1,989,750
Florida Progress Corp. 71,400 2,525,775
FPL Group, Inc. 27,000 1,252,125
Houston Industries, Inc. 86,800 2,104,900
Public Service Enterprise Group, Inc. 54,969 1,683,426
Texas Utilities Co. 44,105 1,813,818
Unicom Corp. 36,000 1,179,000
---------------------------------------------------------------------------
18,929,082
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$536,399,555) 849,814,340
---------------------------------------------------------------------------
CONVERTIBLE/PREFERRED STOCKS (2.5%)
Alco Standard Corporation $5.04 Series 55,000 4,702,500
Alco Standard Corp. Series AA 200,000 20,300,000
Allstate Corp. exchangeable note 64,200 2,632,200
Chrysler Corp., $4.625
(4/30/92--$606,475) (a) 10,000 1,532,500
Rouse Co., $3.25, Conv. Series A 125,000 6,453,125
St. Paul Companies, Inc. 25,000 1,406,250
---------------------------------------------------------------------------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(Cost--$24,056,839) $ 37,026,575
---------------------------------------------------------------------------
(continued on next page)
<PAGE>
PAGE 12
- ---------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (37.8%)
CONVERTIBLE BONDS (1.6%)
INSURANCE (1.1%)
Equitable Companies, Inc. Conv. Deb. (Subord.) 6.13% 2024 $14,400,000 $16,200,000
- ---------------------------------------------------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (0.4%)
Staples, Inc. Conv. 4.50 2001 5,250,000 5,250,000
- ---------------------------------------------------------------------------------------------------------------
SERVICES (0.1%)
United States Filter Corporation Conv. Notes 6.00 2005 2,000,000 2,290,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS (Cost--$21,650,000) 23,740,000
- ---------------------------------------------------------------------------------------------------------------
INDUSTRIAL BONDS & NOTES (4.3%)
CONSUMER GOODS (0.4%)
Procter & Gamble, ESOP Deb. Series A 9.36 2021 5,000,000 6,387,500
- ---------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.4%)
General Electric Capital Corporation Notes 8.75 2007 4,825,000 5,820,832
- ---------------------------------------------------------------------------------------------------------------
DRUGS (0.4%)
Merck & Company, Inc. Debentures 6.75 2005 5,825,000 6,115,551
- ---------------------------------------------------------------------------------------------------------------
MEDIA (0.2%)
Cox Communications Inc. Notes 6.50 2002 3,000,000 3,052,860
- ---------------------------------------------------------------------------------------------------------------
OIL (0.8%)
Atlantic Richfield Co. Deb. 9.88 2016 6,000,000 8,109,540
Occidental Petroleum Corp. Sr. Notes 11.13 2010 2,600,000 3,586,180
- ---------------------------------------------------------------------------------------------------------------
11,695,720
- ---------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.6%)
AT&T Corp. Notes 7.50 2006 6,000,000 6,353,820
Ameritech Capital Funding Corp. Deb. 7.50 2005 6,000,000 6,610,680
Southwestern Bell Telephone Deb. 7.00 2015 6,850,000 7,180,512
US West Communications Shelf 7 6.38 2002 2,500,000 2,563,900
- ---------------------------------------------------------------------------------------------------------------
22,708,912
- ---------------------------------------------------------------------------------------------------------------
UTILITIES (0.5%)
Rural Electric Coop. Grantor Trust 8.67 2018 4,000,000 4,784,400
Certificates
System Energy Resources, Inc. FMB 11.38 2016 2,568,000 2,755,926
- ---------------------------------------------------------------------------------------------------------------
7,540,326
- ---------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$60,472,234) 63,321,701
- ---------------------------------------------------------------------------------------------------------------
<PAGE>
PAGE 13
- ----------------------------------------
SCHEDULE OF INVESTMENTS--December 31, 1995
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ---------------------------------------------------------------------------------------------------------------
BANK & FINANCE BONDS & NOTES (4.9%)
Associates Corp. of North America Deb. 7.50% 1999 $6,250,000 $ 7,298,125
AT & T Universal Card Master Trust Asset Backed
Certificates 5.95 2002 6,000,000 6,052,500
Barnett Banks Inc. Med. Term Notes 10.88 2003 4,500,000 5,678,055
Chemical Bank Card Master Trust Deb. 6.23 2003 5,000,000 5,110,900
Dean Witter Discover & Co. Notes (Subord.) 10.88 1999 5,000,000 5,240,500
Donaldson, Lufkin & Jenrette Deb. 6.88 2005 1,250,000 1,281,263
European Investor Bank Deb. 9.13 1997 5,000,000 5,873,050
First Security Grantor Trust Sub. Notes 6.25 2001 5,000,000 3,934,137
Fleet Mortgage Securities, Inc. Notes 6.13 1997 3,000,000 3,018,390
Huntington Bankshares, Inc. Deb. 5.68 1998 6,500,000 6,513,520
International Bank For Reconstruction
and Development Bond 8.25 2016 6,850,000 8,303,502
Morgan Stanley Group, Inc. Notes 7.79 1997 6,000,000 6,142,800
Old Kent Auto Receivables Trust Notes 6.20 2001 3,500,000 3,003,776
Olympic Auto Trust 1996 ABS (Subord.) 6.20 2002 6,000,000 5,665,433
- ---------------------------------------------------------------------------------------------------------------
TOTAL BANK & FINANCE BONDS & NOTES (Cost--$70,458,682) 73,115,951
- ---------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.7%)
Advanta Home Equity Loan Trust (Est.
Mat. 2004) (b) Series 1991-2 Class A 8.80 2006 6,087 6,276
AFC Mortgage Loan Trust Series 1995 1
(Est. Mat. 2005) (b) Certificate Class A 8.05 2026 3,003,951 3,064,961
Contimortgage Home Equity Loan Series 1995 4 Class
A4 6.33 2010 5,000,000 5,009,375
Criimi Mae Financial Corp. CMO 7.00 2033 1,997,836 1,993,466
FNMA (Est. mat. 2006) (b) Remic Trust 1993 38L 5.00 2022 2,500,000 2,188,000
FNMA (Est. mat. 2002) (b) Remic Trust 1992 181
Class P 6.50 2021 6,000,000 5,885,160
FNMA (Est. mat. 2001) (b) Remic Trust 1993 156
Class B 6.50 2018 5,000,000 4,884,350
Merrill Lynch Mortgage Investors, Inc.
(Est. Mat. 2001) (b) Series 92B Class B 8.50 2012 2,306,300 2,414,973
Merrill Lynch Mortgage Investors, Inc.
(Est. Mat. 2004) (b) Series 92D Class B 8.50 2017 2,736,891 2,877,267
Merrill Lynch Mortgage Investors, Inc.
(Est. Mat. 2004) (b) Series 91D Class B 9.85 2011 5,000,000 5,569,450
Merrill Lynch Mortgage Investors, Inc.
(Est. Mat. 2004) (b) Series 1995 Class A3 7.79 2021 993,670 1,022,859
Paine Webber Mortgage Acceptance Corp. Series 1993 5 Class
IV (Est. Mat. 1999) (b) A3 6.88 2008 2,287,527 2,290,386
Resolution Funding Corp.
(6/18/92--$729,615)
(Est. Mat. 2000)(b)(c) Series 2-B-4 7.97 2004 752,920 695,419
(continued on next page)
<PAGE>
PAGE 14
- --------------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--December 31, 1995
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ---------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
University Support Services, Inc.
(Est. Mat. 2003) (b) Series 1992 Class D 9.17% 2007 $ 1,860,000 $ 1,864,650
- ---------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$38,326,573) 39,766,592
- ---------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (1.8%)
Bayer Corp (a) Notes 7.13 2015 5,000,000 5,316,450
Dresdner Bank AG Sub. Notes 7.25 2015 6,000,000 6,399,720
Ireland (Republic of) Deb. 7.88 2001 5,000,000 5,500,200
Ontario Province, Canada Deb. 7.00 2005 6,000,000 6,336,900
See Notes to Financial
Statements.Wharf International
Capital Guaranteed Notes 8.88 2004 3,000,000 3,221,580
- ---------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$25,882,480 ) 26,774,850
- ---------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U.S. DOLLARS) (0.9%)
Germany (Republic of)
(Cost $12,382,444) Deb. 6.88 2005 17,000,000 12,551,202
Deutsche Mark
- ---------------------------------------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH CERTIFICATES (6.0%)
FHLMC Pool #B00366 7.95 2004 5,000,000 5,176,550
FNMA Pool #050973 6.00 2009 4,310,109 4,265,629
FNMA Pool #056986 6.00 2009 3,448,700 3,413,109
FNMA Pool #190911 6.00 2009 6,622,956 6,554,607
FNMA Pool #250008 6.00 2009 2,238,188 2,215,090
FNMA Pool #283580 7.00 2024 7,092,149 7,149,737
FNMA Pool #283689 7.00 2024 2,935,185 2,959,019
FNMA Pool #284365 7.00 2024 3,841,309 3,872,500
FNMA Pool #284376 7.00 2024 6,627,840 6,681,658
FNMA Pool #303119 6.00 2009 4,938,406 4,887,442
FNMA Pool #303664 6.50 2010 31,668,963 31,827,308
GNMA Pool #352906 7.00 2024 333,357 337,314
GNMA Pool #383754 7.50 2024 4,501,677 4,631,099
GNMA Pool #389229 7.50 2024 4,667,477 4,801,667
- ---------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (Cost--$86,735,227) 88,772,729
- ---------------------------------------------------------------------------------------------------------------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (15.6%)
Federal Home Loan Mortgage Corp. Deb. 7.83 2004 2,000,000 2,069,280
Federal Home Loan Mortgage Corp. Deb. 7.15 2005 8,000,000 8,122,480
FNMA Deb. 8.55 2004 10,000,000 10,540,600
U.S. Treasury Bonds 9.38 2006 13,250,000 17,028,370
U.S. Treasury Bonds 9.25 2016 8,675,000 11,924,048
U.S. Treasury Bonds 7.88 2021 59,950,000 73,823,030
U.S. Treasury Notes 5.13 1998 43,000,000 42,852,078
U.S. Treasury Notes 6.38 2002 8,000,000 8,388,720
<PAGE>
PAGE 15
- ----------------------------------------------
SCHEDULE OF INVESTMENTS--December 31, 1995
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------------------------------------------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (continued)
U.S. Treasury Notes 7.75% 2000 $27,170,000 $ 29,513,413
U.S. Treasury Notes 7.88 2004 10,000,000 11,575,000
U.S. Treasury Notes 7.50 2002 12,000,000 13,305,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$222,374,245 ) 229,142,019
- ------------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$538,281,885) 544,633,842
- ------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (0.7%)
REPURCHASE AGREEMENTS (0.7%)
Investments in repurchase agreements, in a joint trading
account, purchased 12/29/95, 6.21%, maturing 01/02/96
(Cost $10,139,000) (d) 10,139,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$10,139,000) 10,139,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$1,108,877,279) 1,454,164,959
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (1.2%) 17,214,357
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $1,471,379,316
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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.
(b) 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.
(c) All or a portion of this security is restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933) and is valued using market quotations where readily available.
In the absence of market quotations, the security is valued based upon its
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 December 31, 1995, the fair value
of this restricted security was $695,419 (0.05% of net assets). The Fund will
not pay the costs of disposition of the above restricted security other than
ordinary brokerage fees, if any.
(d) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices on December 31, 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.
<PAGE>
PAGE 16
- ---------------------------------
Keystone Balanced Fund (K-1)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended June 30,
Ended
December 31, ----------------------------------------------------------------
1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
Net asset value
beginning of year $10.09 $9.26 $10.10 $9.77 $9.16 $9.10
- ---------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.15 0.31 0.28 0.31 0.32 0.45
Net realized and
unrealized gain (loss)
on investments, futures
contracts and foreign
currency related
transactions 0.99 0.96 (0.37) 0.66 0.75 0.18
- ---------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.14 1.27 (0.09) 0.97 1.07 0.63
- ---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.15) (0.31) (0.28) (0.31) (0.32) (0.50)
In excess of net
investment income (a) (0.03) (0.02) (0.07) (0.09) (0.14) (0.04)
Tax basis return of
capital 0 0 (0.02) 0 0 0
Net realized gain on
investments (0.14) (0.02) (0.25) (0.24) 0 (0.03)
In excess of net
realized gain on
investments (a) 0 (0.09) (0.13) 0 0 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.32) (0.44) (0.75) (0.64) (0.46) (0.57)
- ---------------------------------------------------------------------------------------------------------------
Net asset value end of
year $10.91 $10.09 $9.26 $10.10 $9.77 $9.16
- ---------------------------------------------------------------------------------------------------------------
Total return (b) 11.47% 14.20% (1.16%) 10.39% 11.86% 7.49%
Ratios/Supplemental Data
Ratios to average net assets:
Total expenses 1.75%(c) 1.77% 1.71% 1.93% 1.97% 1.88%
Net investment income 2.83%(c) 3.33% 2.81% 3.07% 3.25% 4.56%
Portfolio turnover rate 53% 88% 88% 74% 52% 60%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $1,471,379 $1,344,880 $1,389,810 $1,464,066 $1,184,094 $901,994
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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".
(b) Excluding applicable sales charge.
(c) Annualized
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ---------------------------------
STATEMENT OF ASSETS AND LIABILITIES--
December 31, 1995 (Unaudited)
- --------------------------------------------------------------------
Assets:
Investments at market value (identified
cost--$1,108,877,279 ) (Note 1) $1,454,164,959
Cash 35
Receivable for:
Investments sold 1,026,565
Fund shares sold 4,412,040
Dividends 2,284,997
Interest 9,906,959
Prepaid expenses and other assets 67,034
--------------------------------------------------------------------
Total assets 1,471,862,589
--------------------------------------------------------------------
Liabilities:
Payable for:
Unrealized depreciation on open forward currency
contracts (Notes 1 and 5) 80,089
Investments purchased 18,500
Fund shares redeemed 115,204
Other accrued expenses 269,480
--------------------------------------------------------------------
Total liabilities 483,273
--------------------------------------------------------------------
Net assets $1,471,379,316
--------------------------------------------------------------------
Net assets represented by: (Note 1)
Paid-in capital $1,118,973,910
Accumulated distributions in excess of net
investment income (253,216)
Accumulated net realized gain (loss) on
investments and foreign currency related
transactions 7,448,101
Net unrealized appreciation (depreciation) on:
Investments, foreign currency related
transactions and other assets and liabilities 345,290,610
Open currency contracts (80,089)
--------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($10.91 a share
on 134,826,780 shares outstanding) (Note 1) $1,471,379,316
--------------------------------------------------------------------
STATEMENT OF OPERATIONS--
Six Months Ended December 31, 1995
(Unaudited)
- -----------------------------------------------------------------------------
Investment income: (Note 1)
Interest $ 19,125,318
Dividends (net of foreign withholding
taxes of $24,697) 12,589,994
---------------------------------------------------------------------------
Total income 31,715,312
---------------------------------------------------------------------------
Expenses: (Notes 2 and 4)
Management fee $ 3,181,225
Transfer agent fees 1,672,071
Accounting, auditing and legal fees 43,554
Custodian fees 159,027
Printing 27,084
Trustees' fees and expenses 29,280
Distribution Plan expenses 6,909,191
Registration fees 44,652
Insurance expense 30,023
Miscellaneous 16,168
---------------------------------------------------------------------------
Total expenses 12,112,275
---------------------------------------------------------------------------
Net investment income 19,603,037
---------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions:
(Notes 1, 3 and 5)
Net realized gain on investments sold 23,121,402
Net change in unrealized appreciation
(depreciation) on: Investments 108,625,172
Open currency contracts (80,089)
---------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments and
foreign currency related
transactions 108,545,083
---------------------------------------------------------------------------
Net gain on investments and foreign
currency related transactions 131,666,485
---------------------------------------------------------------------------
Net increase in net assets resulting
from operations $151,269,522
---------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ---------------------------------
Keystone Balanced Fund (K-1)
STATEMENTS OF CHANGES IN NET ASSETS
Six Months
Ended
December 31, Year Ended
1995 June 30, 1995
---------------------------------------------------------------------------
(Unaudited)
Operations:
Net investment income $ 19,603,037 $ 44,364,373
Net realized gain on investment
transactions 23,121,402 2,352,166
Net change in unrealized appreciation
(depreciation) 108,545,083 126,215,529
---------------------------------------------------------------------------
Net increase in net assets resulting
from operations 151,269,522 172,932,068
---------------------------------------------------------------------------
Distributions to shareholders from:
(Note 1)
Net investment income (19,603,037) (44,364,373)
In excess of net investment income (4,026,550) (2,609,005)
Net realized gain on investments (18,367,287) (2,352,166)
In excess of net realized gain on
investments 0 (12,888,642)
---------------------------------------------------------------------------
Total distributions to shareholders (41,996,874) (62,214,186)
---------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold 107,656,335 147,551,759
Payments for shares redeemed (126,512,520) (355,376,426)
Net asset value of shares issued in
reinvestment of distributions from:
Net investment income and in excess
of net investment income 19,494,505 38,393,490
Net realized gain on investments and
in excess of net realized gains
on investments 16,588,527 13,783,386
---------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting
from capital share transactions 17,226,847 (155,647,791)
---------------------------------------------------------------------------
Total increase (decrease) in net
assets 126,499,495 (44,929,909)
---------------------------------------------------------------------------
Net assets:
Beginning of period 1,344,879,821 1,389,809,730
---------------------------------------------------------------------------
End of period [including accumulated
distributions in excess of net
investment income of
($253,216)--December, 1995 and
undistributed net investment income
of $3,773,334--1995] (Note 1) $1,471,379,316 $1,344,879,821
---------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ---------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Balanced Fund (K-1) ( formerly 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. The Fund seeks income and
growth from a quality selection of stocks and bonds.
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
<PAGE>
PAGE 20
- ---------------------------------
Keystone Balanced Fund (K-1)
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. In
addition to market risk, the Fund is subject to the credit risk that the
other party will not be able to complete the obligations of the contract.
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 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 and are marked to market
<PAGE>
PAGE 21
- ----------------------------------
daily. Realized gains and losses arising from such transactions are included
in net realized gain (loss) on foreign currency related transactions. 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.
(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>
Six Months Ended Year Ended
December 31, 1995 June 30, 1995
<S> <C> <C>
----------------------------------------------------------------------------------------
Shares sold 10,194,999 15,603,073
Shares redeemed (12,155,093) (38,034,514)
Shares issued in reinvestment of
distributions from:
Net investment income, in excess of net
investment income and paid-in capital 1,890,777 4,153,267
Net realized gain and in excess of net
realized gain 1,563,481 1,519,667
----------------------------------------------------------------------------------------
Net increase (decrease) 1,494,164 (16,758,507)
----------------------------------------------------------------------------------------
</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 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 4.00% 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 purchased prior to January 1, 1992 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 4.00%, 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
<PAGE>
PAGE 22
- ---------------------------------
Keystone Balanced Fund (K-1)
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 six
months ended December 31, 1995, KIDC received $625,012 in contingent deferred
sales charges.
During the six months ended December 31, 1995, the Fund paid KIDC $6,909,191
under its Distribution Plan (0.50% of the Fund's average daily net asset
value during the year). During the year, KIDC received $2,850,880 after
payments of commissions on new sales to dealers and others of $4,058,311.
Under a rule of the NASD, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its distribution plan is $5,572,984 (0.38%
of the Funds net asset value as of December 31, 1995).
(3.) Securities Transactions
For the six months ended December 31, 1995, cost of purchases and proceeds
from sales of investment securities, excluding short-term securities, were
$720,399,878 and $732,042,499, respectively.
(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 daily.
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 six months ended December 31, 1995, the Fund paid or accrued to
KMI investment management and administrative services fees of $3,181,225
which represented 0.46% of the Fund's average net assets on an annualized
basis. Of such amount paid to KMI, $2,704,041 was paid to Keystone for its
services to the Fund.
During the six months ended December 31, 1995, the Fund paid or accrued
$13,359 to KIRC and KIDC
<PAGE>
PAGE 23
- ---------------------------------
for certain accounting services, and $1,672,071 to KIRC for transfer agent
services.
(5.) Forward Foreign Currency Exchange Contracts
At December 31, 1995, the Fund had an open currency exchange contract that
obligates the Fund to deliver currency at a specified future date. The
unrealized depreciation of $80,089 on this contract is included in the
accompanying financial statements. The terms of the open contract are as
follows:
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 12/31/95 be received as of 12/31/95
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
05/03/96 18,825,000 $13,166,638 $13,086,549 $13,086,549
Deutsche Mark
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[cover]
KEYSTONE
[photo of water & lighthouse]
BALANCED
FUND (K-1)
[Keystone logo]
SEMIANNUAL REPORT
DECEMBER 31, 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 Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. for a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
[Keystone logo] KEYSTONE
I N V E S T M E N T S
P.O. Box 2121
Boston, Massachusetts 02106-2121
K-1-SAR-2/96 [recycle logo]
65M
