[FRONT COVER]
KEYSTONE
FAMILY OF FUNDS
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.
[LOGO] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
K1-R-8/96
79M [Recycle Logo]
K E Y S T O N E
[PHOTOGRAPH TWO PEOPLE WALKING IN WOODS]
BALANCED
FUND (K-1)
ANNUAL REPORT
JUNE 30, 1996
<PAGE>
PAGE 1
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Keystone Balanced Fund (K-1)
Seeks current income from a quality selection of stocks and bonds.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone Balanced Fund (K-1) for the twelve-month period which ended June 30,
1996. Following this letter, we have included an interview with your Fund's
manager discussing portfolio strategy.
Performance
Your Fund returned 17.35% for the twelve-month period which ended June 30,
1996. For the same period, the Standard & Poor's 500, a broad-based index of
common stocks returned 25.99%. The Lehman Aggregate Bond Index, an index of
government, corporate and mortgage-backed securities, returned 5.01%.
We believe that Keystone Balanced Fund (K-1) generated excellent returns
during the twelve-month period, especially given your Fund's conservative
approach to investing in stocks and bonds. Your Fund's balanced approach to
investing in established companies and investment grade bonds was successful
during a period which was characterized by change and increased uncertainty,
especially over the last six months of the period.
Strong gains for stocks continued . . .
While stock prices fluctuated during the period, they closed the period with
impressive gains. Stocks of large, established companies, which had been
leaders in 1995, continued to rise during the first half of 1996. Many of
these companies were well represented in the Fund's portfolio. Your Fund
benefitted from a higher than average emphasis on stocks, which comprised 61%
of net assets as of June 30, 1996.
. . . But it was a changed environment for bonds
For most of 1995 bonds produced double-digit returns. However, early in 1996
long-term interest rates rose, causing bond prices to decline. The Fund's fixed
income holdings were lower than our historical average weighting for most of the
period. This smaller position helped minimize the effects of the bond price
declines on your Fund, and demonstrated the value of the balanced investment
approach. On June 30, 1996 fixed-income securities comprised 36% of net assets.
After the close of your Fund's fiscal period, stock prices experienced sharp
declines in the early part of July. We were not surprised by this activity. In
fact, we had been expecting the possibility of a market correction for some time
given the strong performance of the markets in 1995 and year-to-date in 1996.
In our opinion, short-term corrections are a healthy and normal part of the
investing process. They help to wring out the excesses of the market and provide
opportunities for investors to add to their portfolios at lower prices. While we
may not know the final results of this recent activity for some time, we believe
the environment for stocks remains healthy. Corporate profits have been
positive, and as investors begin to focus on the improving earnings environment
we expect in 1997, higher equity values should eventually be the result.
--continued--
<PAGE>
PAGE 2
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Keystone Balanced Fund (K-1)
Taking a longer term view, we think there are several strategies you can use
which have proven their value in varying market environments:
Diversify your investments. By putting your money in different types of
investments, you can minimize your risk. Keystone Balanced Fund (K-1)
provides you with diversification among stocks and bonds. Be patient. A long
term approach can provide more consistent results than trying to time the
market. Invest regularly. By making periodic investments over time, you can
build a nest egg and lower your average cost per share. Of course, your
investment will fluctuate with market conditions, and there is no assurance
that it will be worth more when you sell shares.
Your investment adviser can help you with these strategies by developing a
plan to meet your particular needs. He or she is a professional with the
resources and expertise to help you achieve your investment goals. We
encourage you to take advantage of the valuable services your adviser can
provide.
Looking ahead
We continue to believe that a careful selection of stocks and bonds can
provide investors with consistent returns. In observing the markets through
changing environments, it has been our experience that a balanced approach
can produce reliable returns over the long term. Because of this, we believe
that this Fund makes sense for many investors who do not want the price
volatility associated with higher risk investments.
We think shareholders should keep the short-term 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,
/s/ Albert H. Elfner, III [PHOTO OF ALBERT H. ELFNER, III]
Albert H. Elfner, III [PHOTO OF GEORGE S. BISSEL]
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
August 1996
<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
[PHOTO OF WALTER MCCORMICK]
- ----------------------------------------------------------------------------
[PHOTO CAPTION]
Walter McCormick is senior portfolio manager of your Fund and leads
Keystone's core equity 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.
[END PHOTO CAPTION]
- -----------------------------------------------------------------------------
Q What is your strategy in managing the Fund?
A The Fund seeks current income from a careful selection of stocks and
bonds. We focus primarily on stocks of established U.S. companies, and
investment grade corporate, government and mortgage-backed securities. We
pursue a conservative strategy in seeking to provide investors with
consistent performance over the long term.
Q What was the economic environment like during the twelve-month period?
A Overall it was a favorable environment for stocks and bonds. During the last
six months of 1995, economic growth was moderate. Long-term interest rates had
declined for most of the year. Many analysts believed that at least the first
half of 1996 could be characterized by modest growth, declining interest rates
and deceleration of corporate profits. As we moved into 1996, however, the
economy proved to be very resilient. Higher employment figures and increases in
selected commodity prices signaled the possibility of stronger growth. This
raised concerns about growing inflation and long-term interest rates rose. By
June 30, 1996, long-term interest rates had risen by one percentage point.
Q How did this environment affect the Fund's investments?
A This was an excellent environment for many of the blue chip stocks in
which your Fund invests. Corporate earnings at many of these companies
continued to be positive and valuations of stocks remained reasonable for a
low interest rate and inflation environment. As evidence of stronger than
expected growth began to appear in February, interest rates rose resulting in
price declines for bonds. We think this "growth scare" should be short lived,
which could lead to lower interest rates and a recovery in bond prices later
this year.
Q How did you manage the Fund in this environment?
A In the stock portion of the portfolio, we continued our consistent
approach of investing primarily in large, well established companies that
have solid track records and attractive dividends. We emphasize companies we
believe are well managed and industry leaders. These
- ----------------------------------------------------------
Fund Profile
Objective: Seeks current income from a quality selection
of stocks and bonds.
Commencement of investment operations: September 11, 1935
Number of stocks: 137
Average bond rating: AAA
Net assets: $1,481 million
Newspaper listing: "BalnceK1"
- ----------------------------------------------------------
<PAGE>
PAGE 4
- -----------------------------------------------------------------------------
Keystone Balanced Fund (K-1)
- --------------------------------------------------------------------
Keystone's Balanced Fund Approach
Stocks
(bullet) Seasoned, financially sound companies
(bullet) Companies with consistent earnings
(bullet) Income producing securities
Bonds
(bullet) Quality corporate, government and mortgage-backed securities
(bullet) Rated in top 4 categories (AAA, AA, A, BBB)
(bullet) Contribute major portion of quarterly dividend
- -----------------------------------------------------------------------
tend to be relatively well known companies that have grown steadily over a
long period of time. We continued to diversify your Fund's investments among
many different types of companies in various economic sectors. However, we
were careful to limit our exposure to any single stock or industry.
Q Did you reduce any large positions in the Fund?
A General Electric has been a solid contributor to your Fund's returns for
more than a year, and it had grown to a significant position in the Fund. We
reduced the Fund's position in GE from nearly 4% of net assets on December
31, 1995 to 3.5% as of June 30, 1996. GE is a well managed, diversified
company that we think excels in nearly every business line. This industrial
company has changed into a more diversified and globally competitive company.
Today the company's businesses range from power generating equipment and jet
engines to financial services, which we think will be sought after by many
developing countries. GE's products also include television broadcasting
(NBC) and financial services products (credit cards). The stock has been a
consistent performer
- -----------------------------------------
Top 5 Equity Industries
as of June 30, 1996
Percentage of
Industry net assets
Drugs 7.8
Chemicals 6.4
Oil 6.3
Finance 5.8
Capital goods 4.5
- -----------------------------------------
Asset Allocation
as of June 30, 1996
[PIE CHART]
Stocks (61%)
Bonds (36%)
Other (1) (3%)
(as a percentage of net assets)
(1) Includes short-term investments and other assets and liabilities.
- -----------------------------------------
for a long time, out pacing the returns of the Standard & Poor's 500 Index
for the last ten years through June 30, 1996. We think that the company
should benefit from these strengths and from infrastructure projects in
emerging markets countries.
Q Where did you find new opportunities?
A During the last six months of the period, we added American Home Products,
a consumer products company to the portfolio. We also invested in Rhone
Poulenc Rorer, a pharmaceutical company. These stocks were attractively
valued and met our criteria for stable growth, dividend payouts, industry
leadership, and solid finances. We also took advantage of some initial public
offerings of established enterprises. We added Associates First Capital, a
well capitalized mortgage company, 80% of which is owned by Ford. We also
invested in Travelers/ Aetna Property Casualty Corporation and Lucent
Technology Company, a spinoff of AT&T.
Q Turning to bonds, what was your strategy?
A We maintained our conservative approach by continuing to emphasize higher
rated investment grade corporate bonds and U.S. Treasury securities. When
interest rates declined early in the period, we lengthened the portfolio's
average maturity. In a declining interest rate environment, bonds with longer
term
<PAGE>
PAGE 5
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Top 10 Holdings
as of June 30, 1996
Percentage of
Stocks Industry net assets
- ------ ------------ --------------
General Electric Capital goods 3.5
Johnson & Johnson Drugs 2.7
Monsanto Chemicals 2.6
Du Pont Chemicals 2.4
BankAmerica Finance 1.8
Bonds
United States Treasury bonds, 7.88%, mat. 2021 2.3
United States Treasury notes, 6.25%, mat. 1998 2.1
Federal National Mortgage Association, 6.50%, mat. 2008 1.9
Canadian government bonds, 8.75%, mat. 2005 1.9
Federal Home Loan Mortgage Corp., 7.00%, mat. 2000 1.5
- --------------------------------------------------------------------
maturities tend to provide better price appreciation than shorter term bonds.
When interest rates rose in 1996, we decreased the portfolio's average
maturity to take advantage of higher yields. On June 30, 1996, the average
maturity of the portfolio was slightly under 10 years, and its average
quality was AAA.
Q You also added foreign bonds to the portfolio. Why were these attractive?
A On June 30, 1996, about 6% of net assets was invested in foreign bonds.
These included Canadian, German, and Spanish government securities. These
foreign bonds had more attractive yields than comparable U.S. securities and
we expect our European holdings to benefit from declining interest rates. We
protected these holdings from currency changes by investing in U.S.
dollar-denominated bonds or by hedging into U.S. dollars. We believed foreign
bonds would contribute solid income and returns.
Q What is your outlook?
A Despite the strong economic reports during the first half of 1996, we
believe the economy should con- tinue to grow at a moderate pace and
inflation should remain under control during the second half of 1996. We
expect the healthy U.S. economy to provide a generally supportive environment
for stocks and bonds. However, we do not expect the tremendous stock market
gains of the last 18 months to repeated in the second half of this year. We
expect corporate earnings rates to remain positive, but we think their rate
of increase may slow. This would not be bad. In fact, we think the second
half of 1996 may turn out to be a return to a more "normal" environment for
stock and bond returns. Time will certainly tell.
(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
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
- ------------------------------------------------------
Consistency, Year after Year
The Fund's careful selection of stocks and bonds has
provided positive returns in 19 of the past 21 calender
years. We manage Keystone Balanced Fund (K-1) to seek
steady returns year after year. We believe this
persistent approach makes sense for many investors who do
not want the risk or worry associated with more
aggressive stock investments.
- --------------------------------------------------------
Fund Performance
[BAR CHART]
Calendar year total returns
- -5% - -30%
Years Percentage
75 27.7
76 27.1
77 2.1
78 3.3
79 9.4
80 15.4
81 4.7
82 26.5
83 18.8
84 5.2
85 25.9
86 16.6
87 3.7
88 11.5
89 19.8
90 -1.8
91 24
92 3.5
93 10.3
94 -4.7
95 27.1
<PAGE>
PAGE 6
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Keystone Balanced Fund (K-1)
Your Fund's Performance
[MOUNTAIN CHART]
Growth of an investment in
Keystone Balanced Fund (K-1)
In Thousands
6/86 10000 10000
9276 11539
6/88 7971 11149
8686 12941
6/90 8667 13974
8724 15021
6/92 9305 16802
9619 18547
6/94 8819 18333
9610 20935
6/96 10790 24568
A $10,000 investment in Keystone Balanced Fund made on June 30, 1986 with all
distributions reinvested was worth $24,568 on June 30, 1996. 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 sold Fund shares after
one calendar year. Investors who retained their fund investment earned the
returns reported in the second column of the table.
NThe investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Twelve-Month Performance as of June 30, 1996
- --------------------------------------------------
Total return* 17.35%
Net asset
value 6/30/95 $10.09
6/30/96 $11.33
Dividends $ 0.27
Capital gains $ 0.20
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of June 30, 1996
- --------------------------------------------------
If you If you did
Cumulative total return redeemed not redeem
1-year 14.35% 17.35%
5-year 63.56% 63.56%
10-year 145.68% 145.68%
Average annual total
return
1-year 14.35% 17.35%
5-year 10.34% 10.34%
10-year 9.40% 9.40%
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.
[SHADED TEXT BOX INCLUDING ILLUSTRATIONS OF A TELEPHONE AND RECEIVER
DESCRIBING KEYSTONE INVESTMENT INSIGHT LINE FOR SHAREHOLDERS]
Keystone 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 Keystone portfolio
managers discuss their latest strategies, or listen to Keystone's overall
market outlook from James McCall, chief investment officer. Of course, your
financial adviser can provide you with more complete information on Keystone
Funds. This 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 after the greeting
<PAGE>
PAGE 7
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Growth of an Investment
[BEGIN LINE CHART]
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.
June 30, 1986 through June 30, 1996
Fund Average Annual Total Return
In Thousands
1 Year 5 Year 10 Year
14.35% 10.34% 9.40%
6/86 10000 10000 10000
11539 12499 10365
6/88 11149 11599 10776
12941 13970 11333
6/90 13974 16210 11863
15021 17404 12420
6/92 16802 19750 12804
18547 22439 13187
6/94 18333 22755 13516
20935 28688 13927
6/96 24568 36154 14301
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, 1996.
[END LINE CHART]
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 current income 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 U.S. 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 U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding what the chart means
The chart demonstrates your Fund's 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.
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 perfor-
<PAGE>
PAGE 8
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Keystone Balanced Fund (K-1)
mance 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.
<PAGE>
PAGE 9
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Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 10
- ----------------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--June 30, 1996
<TABLE>
<CAPTION>
Market
Shares Value
- ------------------------------------------ -------- -------------
<S> <C> <C>
COMMON STOCKS (60.5%)
ADVERTISING & PUBLISHING (0.2%)
Gannett, Inc. 46,800 $ 3,311,100
- ------------------------------------------ -------- -------------
AEROSPACE (2.5%)
Boeing Co. 270,500 23,567,313
Honeywell, Inc. 49,600 2,703,200
Raytheon Co. 68,000 3,510,500
Rockwell International Corp. 50,000 2,862,500
United Technologies Corp. 31,100 3,576,500
- ------------------------------------------ -------- -------------
36,220,013
- ------------------------------------------ -------- -------------
AUTOMOTIVE (1.3%)
Chrysler Corp. 27,780 1,722,360
Ford Motor Co. 220,000 7,122,500
General Motors Corp. 150,000 7,856,250
Genuine Parts Co. 62,025 2,837,644
- ------------------------------------------ -------- -------------
19,538,754
- ------------------------------------------ -------- -------------
CAPITAL GOODS (4.5%)
Deere & Co. 60,000 2,400,000
Emerson Electric Co. 54,000 4,880,250
Foster Wheeler Corp. 70,000 3,141,250
General Electric Co. 596,000 51,554,000
Ingersoll-Rand Co. 50,500 2,209,375
Johnson Controls, Inc. 18,500 1,285,750
Sundstrand Corp. 34,000 1,245,250
- ------------------------------------------ -------- -------------
66,715,875
- ------------------------------------------ -------- -------------
CHEMICALS (6.4%)
Air Products & Chemicals, Inc. 28,000 1,617,000
Dow Chemical Co. 133,200 10,123,200
du Pont (E.I.) de Nemours & Co. 450,900 35,677,463
Hercules, Inc. 39,000 2,154,750
Monsanto Co. 1,167,000 37,927,500
PPG Industries, Inc. 136,000 6,630,000
Union Carbide Corp. 30,000 1,192,500
- ------------------------------------------ -------- -------------
95,322,413
- ------------------------------------------ -------- -------------
CONSUMER GOODS (3.1%)
Avon Products, Inc. 32,600 1,471,075
Eastman Kodak Co. 78,500 6,103,375
Gillette Co. 400,000 24,950,000
CONSUMER GOODS -- CONTINUED
International Flavors & Fragrances, Inc. 48,000 $ 2,286,000
Procter & Gamble Co. 110,000 9,968,750
Whirlpool Corp. 29,800 1,478,825
- ------------------------------------------ -------- -------------
46,258,025
- ------------------------------------------ -------- -------------
DIVERSIFIED COMPANIES (1.7%)
Alco Standard Corp. 348,028 15,748,267
Allied-Signal, Inc. 71,300 4,073,013
Minnesota Mining & Manufacturing Co. 80,000 5,520,000
- ------------------------------------------ -------- -------------
25,341,280
- ------------------------------------------ -------- -------------
DRUGS (7.8%)
American Home Products Corp. 300,000 18,037,500
Baxter International, Inc. 47,400 2,239,650
Bristol-Myers Squibb Co. 55,000 4,950,000
Guidant Corp. 77,432 3,813,526
Johnson & Johnson 810,400 40,114,796
Lilly (Eli) & Co. 87,626 5,695,690
Merck & Co. 213,000 13,765,125
Pfizer, Inc. 145,200 10,363,650
Rhone Poulenc Rorer, Inc. 34,700 2,329,238
Schering-Plough Corp. 102,400 6,425,600
SmithKline Beecham PLC, ADR 57,200 3,110,250
Warner-Lambert Co. 84,000 4,620,000
- ------------------------------------------ -------- -------------
115,465,025
- ------------------------------------------ -------- -------------
ELECTRONICS PRODUCTS (0.3%)
AMP, Inc. 50,000 2,006,250
Thomas & Betts Corp. 40,000 1,500,000
- ------------------------------------------ -------- -------------
3,506,250
- ------------------------------------------ -------- -------------
FINANCE (5.8%)
Associates First Capital Corp., Class A 125,000 4,703,125
Banc One Corp. 60,500 2,057,000
Bank of Boston Corp. 250,000 12,375,000
BankAmerica Corp. 346,960 26,282,220
Chase Manhattan Corp. 115,775 8,176,609
Federal Home Loan Mortgage Corp. 103,600 8,857,800
<PAGE>
PAGE 11
- ----------------------------------------
SCHEDULE OF INVESTMENTS--June 30, 1996
Market
Shares Value
- ------------------------------------------ -------- -------------
FINANCE -- continued
Federal National Mortgage Association 200,000 $ 6,700,000
Fleet Financial Group, Inc. 60,000 2,610,000
Merrill Lynch & Co., Inc. 42,000 2,735,250
Morgan (J.P.) & Co., Inc. 42,000 3,554,250
PMI Group 53,600 2,278,000
Wells Fargo & Co. 24,200 5,780,775
- ------------------------------------------ -------- -------------
86,110,029
- ------------------------------------------ -------- -------------
FOODS (3.8%)
Anheuser-Busch Cos., Inc. 52,000 3,900,000
CPC International, Inc. 46,800 3,369,600
General Mills, Inc. 30,000 1,635,000
Heinz (H.J.) Co. 79,200 2,405,700
Kellogg Co. 44,000 3,223,000
Nabisco Holdings Corp., Class A 81,900 2,897,213
PepsiCo., Inc. 290,000 10,258,750
Philip Morris Cos., Inc. 227,100 23,618,400
Sara Lee Corp. 86,000 2,784,250
UST, Inc. 46,200 1,582,350
- ------------------------------------------ -------- -------------
55,674,263
- ------------------------------------------ -------- -------------
INSURANCE (1.3%)
Aetna Life & Casualty Co. 30,000 2,145,000
Allstate Corp. 64,892 2,960,698
Travelers/Aetna Property Casualty Corp.,
Class A 100,000 2,837,500
CIGNA Corp. 20,000 2,357,500
GCR Holdings, Ltd. 58,400 1,540,300
General Reinsurance Corp. 15,000 2,283,750
SAFECO Corp. 68,200 2,416,838
St. Paul Cos., Inc. 40,000 2,140,000
- ------------------------------------------ -------- -------------
18,681,586
- ------------------------------------------ -------- -------------
METALS & MINING (0.5%)
Aluminum Co. of America 40,000 2,295,000
Freeport-McMoRan Copper & Gold, Class B 56,138 1,789,399
Phelps Dodge Corp. 22,000 1,372,250
Reynolds Metals Co. 24,400 1,271,850
- ------------------------------------------ -------- -------------
6,728,499
- ------------------------------------------ -------- -------------
NATURAL GAS (1.7%)
Enron Corp. 54,000 $ 2,207,250
Enron Global Power & Pipelines LLC 101,500 2,461,375
Sonat, Inc. 455,000 20,475,000
- ------------------------------------------ -------- -------------
25,143,625
- ------------------------------------------ -------- -------------
OFFICE & BUSINESS EQUIPMENT (1.0%)
IBM Corp. 111,000 10,989,000
Xerox Corp. 62,769 3,358,142
- ------------------------------------------ -------- -------------
14,347,142
- ------------------------------------------ -------- -------------
OIL (6.3%)
Amoco Corp. 96,600 6,991,425
Atlantic Richfield Co. 144,500 17,123,250
Chevron Corp. 263,600 15,552,400
Exxon Corp. 63,500 5,516,563
Mobil Corp. 155,400 17,424,225
Occidental Petroleum Corp. 157,000 3,885,750
Royal Dutch Petroleum Co. 70,100 10,777,875
Texaco, Inc. 150,000 12,581,250
Unocal Corp. 100,000 3,375,000
- ------------------------------------------ -------- -------------
93,227,738
- ------------------------------------------ -------- -------------
OIL SERVICES (0.3%)
Halliburton Co. 45,200 2,508,600
Schlumberger, Ltd. 31,100 2,620,175
- ------------------------------------------ -------- -------------
5,128,775
- ------------------------------------------ -------- -------------
PAPER & PACKAGING (1.6%)
Georgia-Pacific Corp. 30,800 2,186,800
International Paper Co. 57,000 2,101,875
Kimberly-Clark Corp. 34,800 2,688,300
Union Camp Corp. 25,500 1,243,125
Weyerhaeuser Co. 370,350 15,739,875
- ------------------------------------------ -------- -------------
23,959,975
- ------------------------------------------ -------- -------------
REAL ESTATE (1.7%)
Beacon Properties (R.E.I.T.) 700,000 17,937,500
Liberty Property Trust (R.E.I.T.) 100,000 1,987,500
Patriot American Hospitality, Inc.
(R.E.I.T.) 100,000 2,962,500
<PAGE>
PAGE 12
- ----------------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--June 30, 1996
Market
Shares Value
- ------------------------------------------ -------- -------------
REAL ESTATE -- continued
Spieker Properties, Inc. (R.E.I.T.) 100,000 $ 2,725,000
- ------------------------------------------ -------- -------------
25,612,500
- ------------------------------------------ -------- -------------
RETAIL (0.4%)
May Department Stores Co. 60,000 2,625,000
Sears, Roebuck and Co. 70,000 3,403,750
- ------------------------------------------ -------- -------------
6,028,750
- ------------------------------------------ -------- -------------
SERVICES (0.3%)
Browning-Ferris Industries, Inc. 140,000 4,060,000
- ------------------------------------------ -------- -------------
SOFTWARE SERVICES (0.7%)
Computer Associates International, Inc. 150,000 10,687,500
- ------------------------------------------ -------- -------------
TELECOMMUNICATIONS (3.6%)
Ameritech Corp. 124,000 7,362,500
AT&T Corp. 383,000 23,746,000
Bell Atlantic Corp. 90,000 5,737,500
GTE Corp. 162,000 7,249,500
Lucent Technologies, Inc. 68,000 2,575,500
NYNEX Corp. 88,088 4,184,180
Sprint Corp. 75,480 3,170,160
- ------------------------------------------ -------- -------------
54,025,340
- ------------------------------------------ -------- -------------
TRANSPORTATION (2.4%)
Conrail, Inc. 30,000 1,991,250
CSX Corp. 306,000 14,764,500
Norfolk Southern Corp. 190,000 16,102,500
Union Pacific Corp. 46,800 3,270,150
- ------------------------------------------ -------- -------------
36,128,400
- ------------------------------------------ -------- -------------
UTILITIES (1.3%)
American Electric Power Co., Inc. 39,500 $ 1,683,687
Central & South West Corp. 40,600 1,177,400
Consolidated Edison Co. of New York, Inc. 74,000 2,164,500
Dominion Resources, Inc. 31,050 1,242,000
Duke Power Co. 42,000 2,152,500
Florida Progress Corp. 71,400 2,481,150
FPL Group, Inc. 27,000 1,242,000
Houston Industries, Inc. 86,800 2,137,450
Public Service Enterprise Group, Inc. 54,969 1,504,776
Texas Utilities Co. 44,105 1,885,489
Unicom Corp. 36,000 1,003,500
- ------------------------------------------ -------- -------------
18,674,452
- ------------------------------------------ -------- -------------
TOTAL COMMON STOCKS
(COST--$526,377,409) 895,897,309
- ------------------------------------------------------ -------------
CONVERTIBLE/PREFERRED STOCKS (1.5%)
Alco Standard Corp., Series AA 55,000 4,565,000
Allstate Corp. 64,200 2,535,900
Conseco, Inc. 63,500 4,921,250
Kmart Financing 45,000 2,441,250
Rouse Co., $3.25, Series A 125,000 7,609,375
- ------------------------------------------ -------- -------------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(COST--$18,245,541) 22,072,775
- ------------------------------------------------------ -------------
</TABLE>
<PAGE>
PAGE 13
- ----------------------------------------
SCHEDULE OF INVESTMENTS--June 30, 1996
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (36.4%)
CONVERTIBLE BONDS & NOTES (1.9%)
ELECTRONICS (0.2%)
Solectron Corp. (b) 6.00% 2006 $ 3,000,000 $ 2,722,500
------------------------------ ------------------------ ------ ------ ------------ ------------
INSURANCE (1.1%)
Equitable Companies, Inc. 6.13 2024 14,400,000 16,164,000
------------------------------ ------------------------ ------ ------ ------------ ------------
OFFICE & BUSINESS EQUIPMENT
(0.4%)
Staples, Inc. (b) 4.50 2000 5,250,000 5,696,250
------------------------------ ------------------------ ------ ------ ------------ ------------
SERVICES (0.2%)
US Filter Corp. (b) 6.00 2005 2,000,000 2,700,000
------------------------------ ------------------------ ------ ------ ------------ ------------
TOTAL CONVERTIBLE BONDS & NOTES (COST--$24,650,000) 27,282,750
---------------------------------------------------------------------------------------------- ------------
INDUSTRIAL BONDS & NOTES (1.9%)
AUTOMOTIVE (0.3%)
Ford Motors Credit 6.75 2001 5,000,000 5,032,050
------------------------------ ------------------------ ------ ------ ------------ ------------
CONSUMER GOODS (0.4%)
Procter & Gamble, ESOP 9.36 2021 5,000,000 5,922,750
------------------------------ ------------------------ ------ ------ ------------ ------------
DRUGS (0.2%)
Lilly (Eli) & Co. 6.57 2016 4,000,000 3,654,040
------------------------------ ------------------------ ------ ------ ------------ ------------
HEALTH CARE SERVICES (0.1%)
Manor Care, Inc. 7.50 2006 1,750,000 1,752,188
------------------------------ ------------------------ ------ ------ ------------ ------------
OIL (0.2%)
Occidental Petroleum Corp. 11.13 2010 2,600,000 3,335,748
------------------------------ ------------------------ ------ ------ ------------ ------------
TELECOMMUNICATIONS (0.2%)
US West Communications 6.38 2002 2,500,000 2,430,425
------------------------------ ------------------------ ------ ------ ------------ ------------
UTILITIES (0.5%)
Rural Electric Coop. 8.67 2018 4,000,000 4,229,040
System Energy Resources, Inc. 11.38 2016 2,568,000 2,741,828
------------------------------ ------------------------ ------ ------ ------------ ------------
6,970,868
---------------------------------------------------------------------------------------------- ------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$29,541,741) 29,098,069
- --------------------------------------------------------------------------------------------------------------
(continued on next page)
<PAGE>
PAGE 14
- -----------------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--June 30, 1996
Interest Maturity Par Market
Rate Date Value Value
-------------------------------------------------------------------------------------------------------------
BANK & FINANCE BONDS & NOTES (6.0%)
Amsouth Bancorp 6.75% 2025 $3,000,000 $ 2,895,660
Associates Corp. of North America 8.63 2004 6,250,000 6,826,750
Bankers Trust New York 7.38 2008 6,000,000 5,900,460
Barnett Banks Inc. 10.88 2003 4,500,000 5,318,280
CIT Group Holdings 6.38 1999 6,000,000 5,966,400
Chemical Bank Card Master Trust 6.23 2003 5,000,000 4,906,250
Donaldson, Lufkin & Jenrette 5.63 2016 5,000,000 4,722,500
First Security Grantor Trust 6.25 2001 2,794,594 2,797,221
Fleet Mortgage Securities, Inc. 6.13 1997 3,000,000 2,989,290
Huntington Bankshares, Inc. 5.68 1998 6,500,000 6,360,250
Lehman Brothers Holdings, Inc. 6.75 1999 7,000,000 6,965,000
Merrill Lynch & Co., Inc. 6.50 2001 6,000,000 5,894,400
Nationsbank Corp. 7.75 2015 7,000,000 6,994,120
Old Kent Auto Receivables Trust 6.20 2001 2,224,802 2,225,314
Olympic Automobile Receivables Trust 6.90 2004 6,000,000 5,998,125
Sears Credit Account Master Trust 6.20 2006 7,000,000 6,838,090
Standard Credit Card Master Trust 6.85 2002 6,000,000 5,910,000
------------------------------ ----------------------- ------ ------ ------------ ------------
TOTAL BANK & FINANCE BONDS & NOTES (COST--$90,582,822) 89,508,110
--------------------------------------------------------------------------------------------- ------------
COLLATERALIZED MORTGAGE OBLIGATIONS (4.8%)(c)
AFC Mortgage Loan Trust
(Est. Mat. 1997) Series 1995 1 Cert. Cl. A 8.05 2026 1,982,431 2,002,870
American Southwest Financial
Secs. (Est. Mat. 1999) Series 1994-A Class A3 8.00 2010 6,000,000 6,082,500
RASTA (Est. Mat. 1999) Series 1995-A Class A3 7.75 2026 3,876,000 3,888,113
Contimortgage Home Equity
Loan (Est. Mat. 1998) Series 1995 4 Class A4 6.33 2010 5,000,000 4,939,063
CoreStates Home Equity Trust
(Est. Mat. 2008) Series 1996 1 Class A4 7.00 2012 6,000,000 5,780,625
Criimi Mae Financial Corp.
(Est. Mat. 2006) Series 1A 7.00 2033 1,991,158 1,882,888
Fleet Financial Home Equity
Trust (Est. Mat. 2003) Series 1991 Class A5 6.70 2006 1,340,184 1,346,978
FNMA (Est. Mat. 2006) Remic Trust 1993 38L 5.00 2022 2,500,000 2,031,450
Remic Trust 1992 181 Cl.
FNMA (Est. Mat. 2002) P 6.50 2021 6,000,000 5,563,140
Remic Trust 1993 156 Cl.
FNMA (Est. Mat. 2001) B 6.50 2018 5,000,000 4,651,550
FHLMC (Est. Mat. 2001) Series 1996 Class A 6.00 2004 6,500,000 6,179,063
KS Mortgage Capital, L.P.
(Est. Mat. 1998) (b) Series 1995 Class A1 6.98 2002 2,973,106 2,972,177
(continued on next page)
<PAGE>
PAGE 15
- -------------------------------------------
SCHEDULE OF INVESTMENTS--June 30, 1996
Interest Maturity Par Market
Rate Date Value Value
-------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- continued
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2001) Series 92B Class B 8.50% 2012 $ 2,121,138 $ 2,159,276
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) Series 92D Class B 8.50 2017 2,506,007 2,579,934
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) Series 91D Class B 9.85 2011 5,000,000 5,251,800
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) Series 1995 Class A3 7.23 2021 964,447 959,926
Paine Webber Mortgage
Acceptance Corp. IV (Est.
Mat. 1999) Series 1993 5 Class A3 6.88 2008 1,841,900 1,841,324
Ryland Acceptance Corp.
(Est. Mat. 2004) Series 88 E 7.95 2019 6,790,969 6,776,114
Structured Asset Securities
Corp. (Est. Mat. 2002) Comm. Mtg. Pass-thru 6.30 2028 2,464,375 2,352,708
University Support Services,
Inc. (Est. Mat. 2003) Series 1992 Class D 9.06 2007 1,610,000 1,613,019
----------------------------- --------------------- ---- ---- ---------- ----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST--$71,398,795) 70,854,518
------------------------------------------------------------------------------------------- ----------
FOREIGN BONDS & NOTES (U.S. DOLLARS) (1.1%)
Bayer Corp (b) 7.13 2015 5,000,000 4,787,700
International Bank For Reconstruction and Development 8.25 2016 6,850,000 7,484,516
Royal Bank of Scotland 6.38 2011 5,000,000 4,376,250
----------------------------- --------------------- ---- ---- ---------- ----------
TOTAL FOREIGN BONDS & NOTES (U.S. DOLLARS) (COST--$17,294,458) 16,648,466
------------------------------------------------------------------------------------------- ----------
FOREIGN BONDS & NOTES (NON-U.S. DOLLARS) (5.1%)
Canadian Dollar
Canadian Government 8.75 2005 36,000,000 $28,384,971
Canadian Government 7.50 2003 28,500,000 20,949,034
Deutsche Mark
Germany (Republic of) 6.50 2003 16,270,000 10,851,304
Spanish Peseta
Kingdom of Spain 10.15 2006 1,900,000,000 16,012,960
----------------------------- ---------------------- ----- ----- ----------- -----------
TOTAL FOREIGN BONDS & NOTES (NON-U.S. DOLLAR) (COST--$77,010,998) 76,198,269
-------------------------------------------------------------------------------------------- -----------
MORTGAGE PASS-THROUGH CERTIFICATES (8.3%)(C)
FHLMC Pool #G50352 (Est. Mat. 1998) 7.00 2000 $21,631,338 $21,638,044
FHLMC Pool #607352 (Est. Mat. 1999) 7.97 2022 4,127,267 4,279,460
FHLMC Pool #846298 (Est. Mat. 1999) 7.20 2022 5,000,000 5,146,875
FNMA Pool #050973 (Est. Mat. 2001) 6.00 2009 4,067,044 3,886,548
FNMA Pool #050986 (Est. Mat. 2001) 6.00 2009 3,263,306 3,118,480
(continued on next page)
<PAGE>
PAGE 16
- ------------------------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--June 30, 1996
Interest Maturity Par Market
Rate Date Value Value
-------------------------------------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH CERTIFICATES -- CONTINUED
FNMA Pool #190911 (Est. Mat. 2001) 6.00% 2009 $ 6,276,885 $ 5,998,317
FNMA Pool #250008 (Est. Mat. 2001) 6.00 2009 2,139,387 2,044,441
FNMA Pool #250407 (Est. Mat. 2005) 7.00 2025 1,009,162 970,684
FNMA Pool #283580 (Est. Mat. 2004) 7.00 2024 6,795,255 6,548,927
FNMA Pool #283689 (Est. Mat. 2004) 7.00 2024 2,874,234 2,770,043
FNMA Pool #284365 (Est. Mat. 2004) 7.00 2024 3,714,263 3,579,621
FNMA Pool #284376 (Est. Mat. 2004) 7.00 2024 6,258,862 6,031,977
FNMA Pool #298163 (Est. Mat. 2005) 7.00 2026 2,007,521 1,930,974
FNMA Pool #303119 (Est. Mat. 2001) 6.00 2009 4,702,223 4,493,539
FNMA Pool #303664 (Est. Mat. 2001) 6.50 2008 29,544,338 28,796,275
FNMA Pool #334520 (Est. Mat. 2005) 7.00 2026 1,009,010 970,537
FNMA Pool #337532 (Est. Mat. 2005) 7.00 2026 2,517,784 2,421,781
FNMA Pool #338877 (Est. Mat. 2002) 6.50 2011 5,025,821 4,860,874
FNMA Pool #344571 (Est. Mat. 2005) 7.00 2026 3,021,735 2,906,516
GNMA Pool #352906 (Est. Mat. 2006) 7.00 2024 324,051 312,000
GNMA Pool #405576 (Est. Mat. 2007) 6.50 2026 4,844,938 4,508,796
GNMA Pool #414739 (Est. Mat. 2007) 6.50 2025 159,661 148,584
GNMA Pool #429399 (Est. Mat. 2007) 6.50 2026 5,549,792 5,164,748
-------------------------------------------------------- ----- ----- ----------- -----------
TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (COST--$123,705,731) 122,528,041
-------------------------------------------------------------------------------------------- -----------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (7.3%)
U.S. Treasury Notes 6.25 1998 31,500,000 31,573,710
U.S. Treasury Notes 7.75 2000 20,000,000 20,846,800
U.S. Treasury Notes 7.50 2002 11,000,000 11,515,570
U.S. Treasury Bonds 9.38 2006 50,000 59,312
U.S. Treasury Bonds 7.88 2021 31,350,000 34,391,891
U.S. Treasury Bonds 6.88 2025 10,000,000 9,898,400
-------------------------------------------------------- ----- ----- ----------- -----------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (COST--$110,102,172) 108,285,683
-------------------------------------------------------------------------------------------- -----------
TOTAL FIXED INCOME (COST--$544,286,717) 540,403,906
-------------------------------------------------------------------------------------------- -----------
Maturity
Value
----------- -----------
SHORT-TERM INVESTMENTS (3.3%)
Investments in repurchase agreements, in a joint trading account, purchased
6/28/96, 5.55%, maturing 7/1/96 (Cost $18,492,000) (d) 18,500,555 18,492,000
---------------------------------------------------------------------------- ----------- -----------
Goldman Sachs Group LP repurchase agreement, 5.61%, purchased 6/28/96
(Collateralized by $31,039,203 FHLMC, 6.12%, due 2/1/2025) maturing 7/1/96
(Cost $30,000,000) 30,014,025 30,000,000
---------------------------------------------------------------------------- ----------- -----------
<PAGE>
PAGE 17
- -------------------------------------------
SCHEDULE OF INVESTMENTS--June 30, 1996
Market
Value
--------------
TOTAL SHORT-TERM INVESTMENTS (COST--$48,492,000) $ 48,492,000
- ------------------------------------------------------------------------------ --------------
TOTAL INVESTMENTS (COST--$1,137,401,667) (A) 1,506,865,990
- ------------------------------------------------------------------------------ --------------
OTHER ASSETS AND LIABILITIES--NET (-1.7%) (25,688,954)
- ------------------------------------------------------------------------------ --------------
NET ASSETS (100.0%) $1,481,177,036
- ------------------------------------------------------------------------------ --------------
</TABLE>
(a) The cost for federal income tax purposes amounted to $1,139,651,045.
Gross unrealized appreciation and depreciation on investments, based on
identified tax cost, at June 30, 1996, are as follows:
Gross unrealized
appreciation: $382,093,378
Gross unrealized
depreciation: (14,878,433)
-------------
Net unrealized appreciation: $367,214,945
=============
(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 mortgage obligation is based on current and
projected prepayment rates. Changes in interest rates can cause the
estimated maturity to differ from the maturity date disclosed at the time
of purchase.
(d) The repurchase agreements are fully collateralized by U. S. government
and/or agency obligations based on market prices at June 30, 1996.
Legend of Portfolio Abbreviations
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
ADR--American Depository Receipt
R.E.I.T.--Real Estate Investment Trust
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. Value
at In Net Unrealized
Exchange June 30, Exchange Appreciation/
Date 1996 for U.S. $ Depreciation
- --------- ------------ ------------------ ------------ ---------- --------------
Forward foreign currency exchange contracts to sell:
- --------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/12/96 2,053,000,000 Spanish Pesetas $16,025,846 $16,266,540 $ 240,694
German Deutsche
08/12/96 17,630,000 Marks 11,626,266 11,696,411 70,145
08/30/96 68,831,500 Canadian Dollars 50,479,556 50,271,326 (208,230)
--------------
Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts $ 102,609
==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ------------------------------------
Keystone Balanced Fund (K-1)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of year $ 10.09 $ 9.26 $ 10.10 $ 9.77 $ 9.16 $ 9.10 $ 9.12 $ 8.37 $ 9.74 $ 10.50
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.29 0.31 0.28 0.31 0.32 0.45 0.50 0.46 0.47 0.46
Net realized and
unrealized gains (losses)
on investment and foreign
currency related
transactions 1.42 0.96 (0.37) 0.66 0.75 0.18 0.20 0.83 (0.82) 0.81
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total from investment
operations 1.71 1.27 (0.09) 0.97 1.07 0.63 0.70 1.29 (0.35) 1.27
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income (0.24) (0.31) (0.28) (0.31) (0.32) (0.50) (0.50) (0.54) (0.60) (0.54)
In excess of net
investment income (0.03) (0.02) (0.07) (0.09) (0.14) (0.04) (0.04) 0 0 0
Tax basis return of capital 0 0 (0.02) 0 0 0 0 0 0 0
Net realized gain on
investments (0.20) (0.02) (0.25) (0.24) 0 (0.03) (0.18) 0 (0.42) (1.49)
In excess of net realized
gain on investments 0 (0.09) (0.13) 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total distributions (0.47) (0.44) (0.75) (0.64) (0.46) (0.57) (0.72) (0.54) (1.02) (2.03)
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Net asset value end
of year $ 11.33 $ 10.09 $ 9.26 $ 10.10 $ 9.77 $ 9.16 $ 9.10 $ 9.12 $ 8.37 $ 9.74
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total return (a) 17.35% 14.20% (1.16%) 10.39% 11.86% 7.49% 7.99% 16.07% (3.37%) 15.39%
Ratios/Supplemental Data
Ratios to average net
assets:
Total expenses 1.72%(b) 1.77% 1.71% 1.93% 1.97% 1.88% 1.99% 1.96% 1.91% 1.93%
Net investment income 2.71% 3.33% 2.81% 3.07% 3.25% 4.56% 4.94% 5.48% 5.34% 4.47%
Portfolio turnover rate 96% 88% 88% 74% 52% 60% 35% 49% 64% 79%
Average commission rate
paid per share $ 0.0031 N/A N/A N/A N/A N/A N/A N/A N/A N/A
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Net assets end of year
(thousands) $1,481,177 $1,344,880 $1,389,810 $1,464,066 $1,184,094 $901,994 $826,934 $712,009 $685,427 $727,723
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
</TABLE>
(a) Excluding applicable sales charge.
(b) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.71%.
See Notes to Financial Statements.
<PAGE>
PAGE 19
- -----------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
<TABLE>
<S> <C>
Assets (Notes 1 and 5)
Investments at market value
(identified cost--$1,137,401,667) $1,506,865,990
Cash 14,146
Receivable for:
Unrealized appreciation on forward foreign
currency contracts 310,839
Investments sold 5,107,595
Fund shares sold 2,620,661
Dividends 1,547,057
Interest 7,376,132
Prepaid expenses and other assets 135,019
- -------------------------------------------------- -------------
Total assets 1,523,977,439
- -------------------------------------------------- -------------
Liabilities (Notes 1 and 5)
Payable for:
Unrealized depreciation on forward foreign
currency contracts 208,230
Investments purchased 41,733,010
Fund shares redeemed 721,235
Other accrued expenses 137,928
- -------------------------------------------------- -------------
Total liabilities 42,800,403
- -------------------------------------------------- -------------
Net assets $1,481,177,036
- -------------------------------------------------- -------------
Net assets represented by (Note 1)
Paid-in capital $1,079,440,999
Accumulated undistributed net investment income 138,085
Accumulated net realized gain on investments and
foreign currency related transactions 32,033,030
Net unrealized appreciation on:
Investments, foreign currency related
transactions and other assets and liabilities 369,462,313
Forward foreign currency contracts 102,609
- -------------------------------------------------- -------------
Total net assets applicable to
outstanding shares of beneficial interest
$11.33 a share on 130,687,209 shares
outstanding) $1,481,177,036
- -------------------------------------------------- -------------
</TABLE>
STATEMENT OF OPERATIONS
Year Ended June 30, 1996
<TABLE>
<S> <C> <C>
Investment income (Note 1)
Interest $ 38,281,387
Dividends (net of foreign
withholding taxes of $61,728) 24,826,769
- ---------------------------------- ---------- ------------
Total income 63,108,156
- ---------------------------------- ---------- ------------
Expenses (Notes 2 and 4)
Management fee $ 6,447,849
Transfer agent fees 3,226,256
Accounting, auditing and legal fees 73,225
Custodian fees 473,336
Printing 53,474
Trustees' fees and expenses 44,064
Distribution Plan expenses 14,166,573
Registration fees 65,905
Insurance expense 42,328
Miscellaneous 35,478
- ---------------------------------- ---------- ------------
Total expenses 24,628,488
Less: Expenses paid indirectly
(Note 6) (169,646)
- ---------------------------------- ---------- ------------
Net expenses 24,458,842
- ---------------------------------- ---------- ------------
Net investment income 38,649,314
- ---------------------------------- ---------- ------------
Net realized and unrealized gain
on investments and foreign
currency related transactions
(Notes 1, 3 and 5)
Net realized gain on:
Investments $54,390,213
Foreign currency related
transactions 526,939
- ---------------------------------- ---------- ------------
Net realized gain on investment
and foreign currency related
transactions 54,917,152
- ---------------------------------- ---------- ------------
Net change in unrealized
appreciation on investments and
foreign currency related
transactions 132,899,484
- ---------------------------------- ---------- ------------
Net gain on investment and foreign
currency related transactions 187,816,636
- ---------------------------------- ---------- ------------
Net increase in net assets
resulting from operations $226,465,950
- ---------------------------------- ---------- ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 20
- -------------------------------------
Keystone Balanced Fund (K-1)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
======================================================================= =========== ==============
<S> <C> <C>
Operations:
Net investment income $ 38,649,314 $ 44,364,373
Net realized gain on investment and foreign currency related
transactions 54,917,152 2,352,166
Net change in unrealized appreciation on investments and foreign
currency related transactions 132,899,484 126,215,529
- ----------------------------------------------------------------------- ----------- --------------
Net increase in net assets resulting from operations 226,465,950 172,932,068
- ----------------------------------------------------------------------- ----------- --------------
Distributions to shareholders from (Note 1):
Net investment income (38,649,314) (44,364,373)
In excess of net investment income (4,413,251) (2,609,005)
Net realized gain on investments (18,717,526) (2,352,166)
In excess of net realized gain on investments 0 (12,888,642)
- ----------------------------------------------------------------------- ----------- --------------
Total distributions to shareholders (61,780,091) (62,214,186)
- ----------------------------------------------------------------------- ----------- --------------
Capital share transactions (Note 2):
Proceeds from shares sold 227,626,268 147,551,759
Payments for shares redeemed (308,498,436) (355,376,426)
Net asset value of shares issued in reinvestment of distributions 52,483,524 52,176,876
- ----------------------------------------------------------------------- ----------- --------------
Net decrease in net assets resulting from capital share transactions (28,388,644) (155,647,791)
- ----------------------------------------------------------------------- ----------- --------------
Total increase (decrease) in net assets 136,297,215 (44,929,909)
- ----------------------------------------------------------------------- ----------- --------------
Net assets:
Beginning of year 1,344,879,821 1,389,809,730
- ----------------------------------------------------------------------- ----------- --------------
End of year [including undistributed net investment income of
$138,085--1996 and $3,773,334--1995] (Note 1) $1,481,177,036 $1,344,879,821
- ----------------------------------------------------------------------- ----------- --------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 21
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Balanced Fund (K-1) (the "Fund") is registered as an open-end
diversified management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund was created under Pennsylvania
law as a common law trust and has been offering its shares continuously since
1935. Keystone Management, Inc., ("KMI") serves as the Fund's Investment
Manager. Keystone Investment Management Company ("Keystone") serves as the
Fund's Investment Adviser. The Fund's investment objective is to provide
shareholders with current income.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation predominately owned by
current and former members of management of Keystone and its affiliates. KMI
is a wholly-owned subsidiary of Keystone. Keystone Investor Resource Center,
Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
and dividend disbursing 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,
which require management to make estimates and assumptions that affect the
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial relative to the
net assets of the Fund.
A. 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: (1.) securities (including restricted securities) for which complete
quotations are not readily available and (2.) 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.
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 per-
<PAGE>
PAGE 22
- -------------------------------------
Keystone Balanced Fund (K-1)
centage 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 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.
Investments denominated in a foreign exchange currency are adjusted daily to
reflect changes in exchange rates. 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. Net realized currency gains and losses resulting from changes in
exchange rates between initial purchase trade date and subsequent sale trade
date are included in net realized gain (loss) on foreign currency
transactions.
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. Gains and losses on foreign currency contracts are
treated as ordinary income for federal income tax purposes. 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 of 1986 (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund intends to avoid any excise tax
liability by making the required distributions under the 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. 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.
<PAGE>
PAGE 23
- ------------------------------------
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. 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 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
distributions of short term capital gains and net investment income.
G. The Fund enters into reverse repurchase agreements with qualified
third-party broker-dealers as determined by and under the direction of the
Fund's Board of Trustees. Interest on the value of reverse repurchase
agreements issued and outstanding is based upon competitive market rates at
the time of issuance. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account containing
securities having a value not less than the repurchase price (including
accrued interest). If the counterparty to the transaction is rendered
insolvent, the ultimate realization of the securities to be repurchased by
the Fund may be delayed.
The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1996 was approximately $3,762,438, or $.02 per share
based on average shares outstanding during the year at a weighted average
interest rate of 5.60%. The maximum amount of borrowings outstanding at any
week-end during the year was $6,006,242 (including accrued interest) at a
weighted average interest rate of 5.44%, which represented 0.01% of total
assets at that date.
(2.) Capital Share Transactions
The Fund's Declaration of Trust 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:
Year Ended June 30,
1996 1995
- ------------------------ ----------- -------------
Shares sold 20,948,679 15,603,073
Shares redeemed (28,542,355) (38,034,514)
Shares issued in
reinvestment of
dividends and
distributions 4,948,269 5,672,934
- ------------------------ ----------- -------------
Net decrease (2,645,407) (16,758,507)
- ------------------------ ----------- -------------
The Fund bears some of the costs of selling its shares under a distribution
plan adopted pursuant to Rule 12b-1 under the 1940 Act (the "Distribution
Plan"). Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Company ("KIDCO"), the Fund's principal underwriter, amounts
that in total may not exceed the Distribution Plan
<PAGE>
PAGE 24
- -------------------------------------
Keystone Balanced Fund (K-1)
maximum. KIDCO is a wholly owned subsidiary of Keystone.
In connection with the Distribution Plan and subject to the limitations
discussed below, the Fund's shares are offered for sale at net asset value
without any initial sales charge. From the amounts received by KIDCO in
connection with the Distribution Plan, and subject to the limitations
discussed below, KIDCO generally pays brokers or others a commission equal to
4.00% of the price paid for each Fund share sold. In addition, KIDCO
generally reallows to broker-dealers or others, a shareholder service fee at
a rate of 0.25% per annum of the net asset value of shares sold by such
broker-dealers or others maintained on the books of the Fund for specified
periods.
With certain exceptions, when Fund shares are redeemed within four calendar
years after their purchase, the Fund may charge a contingent deferred sales
charge 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 that
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. The National Association of
Securities Dealers, Inc. (the "NASD"), limits the annual expenditures that
the Fund may incur under the Distribution Plan to 1.00% of which 0.75% may be
used to pay distribution expenses and 0.25% may be used to pay shareholder
service fees. The NASD also limits the aggregate amount that the Fund may pay
for distribution costs to 6.25% of gross share sales since the inception of
its 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 KIDCO). Contingent deferred sales charges are, to the extent
permitted by the NASD paid to KIDCO.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution charges that exceed current annual payments permitted to be
received by KIDCO from the Fund. KIDCO 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.
During the year ended June 30, 1996, KIDCO received $1,167,950 in contingent
deferred sales charges.
The amount paid by the Fund under its Distribution Plan for the year ended
June 30, 1996 was $14,166,573 (1.00% of the Fund's average daily net asset
value during the year). During the year ended June 30, 1996, KIDCO made
payments of commissions on new sales to dealers and others of $7,112,127.
Under the NASD's rules, the maximum uncollected amounts for which KIDCO may
seek payment from the Fund under its Distribution Plan is $5,436,167 (0.37%
of the Funds net asset value as of June 30, 1996).
(3.) Securities Transactions
For the year ended June 30, 1996, cost of purchases and proceeds from sales
of investment securities, excluding short-term securities, were
$1,346,522,431 and $1,398,630,654, respectively.
<PAGE>
PAGE 25
- --------------------------------------
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund (the "Investment Management Agreement "), KMI provides certain
investment management and administrative services to the Fund. In return, KMI
is paid a management fee that is computed 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. Pursuant to the Investment Management Agreement, 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 equal to 85% of the management fee received by
KMI.
During the year ended June 30, 1996, the Fund paid or accrued to KMI
investment management and administrative services fees of $6,447,849 which
represented 0.45% of the Fund's average daily net assets. Of such amount paid
to KMI, $5,480,672 was paid to Keystone for its services to the Fund.
During the year ended June 30, 1996, the Fund paid or accrued $19,572 to KII
for certain accounting services, and $3,226,256 to KIRC for transfer agent
services.
The Fund has entered into an expense offset arrangement with its custodian
bank. For the year ended June 30, 1996, the Fund paid custody fees in the
amount of $473,336 and received a credit of $169,646 pursuant to the expense
offset arrangement, resulting in a net custody expense of $303,690. The
assets deposited with the custodian bank under the expense offset arrangement
could have been invested in income-producing assets.
(5.) Forward Foreign Currency Exchange Contracts
At June 30, 1996, the Fund had open currency exchange contracts that obligate
the Fund to deliver currency at specified future dates. The net unrealized
gain of $102,609 on these contracts is included in the accompanying financial
statements.
(6.) Distributions to Shareholders
A distribution of net investment income of $0.075 per share was declared
payable August 6, 1996 for shareholders of record July 24, 1996. This
distribution is not reflected in the accompanying financial statements.
<PAGE>
PAGE 26
- ---------------------------------------
Keystone Balanced Fund (K-1)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Balanced Fund (K-1)
We have audited the accompanying statement of assets and liabilities of
Keystone Balanced Fund (K-1), including the schedule of investments as of
June 30, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the 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, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Balanced Fund (K-1) as of June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 26, 1996
<PAGE>
PAGE 27
- -----------------------------------
FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS (Unaudited)
During the fiscal year ended June 30, 1996, distributions of $0.47 per share
were paid in shares or cash. This total includes a taxable long-term capital
gain distribution of $0.20 per share. The remaining $0.27 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 previously reported and those cited elsewhere in this
report due to differences in the calculation of income and capital gains for
accounting (book) purposes and Internal Revenue Service (tax) purposes.
In January 1997, we will send you complete information on the distributions
paid during the calendar year 1996 to help you in completing your federal tax
return.
