PAGE 1
- ---------------------------
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 Keystone Balanced Fund
(K-1) for the six-month period which ended December 31, 1996. Following this
letter, we have included an interview with your Fund's manager in which he
discusses portfolio strategy.
Performance
Your Fund returned 10.0% for the six-month period which ended December 31,
1996 and 15.8% for the twelve-month period which ended December 31, 1996.
For the same periods, the Standard & Poor's 500, a broad-based index of
common stocks, returned 11.6% and 22.9%, respectively. The Lehman Aggregate
Bond Index, an index of government, corporate and mortgage-backed securities,
returned 4.9% and 3.6%, for the same six- and twelve-month periods.
We believe your Fund performed very well during the period. We think the
Fund's conservative strategy and emphasis on quality in both stock and bond
selection worked very well during a period of uncertainty and volatility.
Taking advantage of market leaders
Strong corporate earnings and a favorable economic environment sent stocks to
new highs during the six-month period. In October the Dow Jones Industrial
Average set another record, crossing the 6000 mark, and it continued to rise
to the end of the year. Your Fund maintained its conservative approach and
attempted to minimize portfolio volatility by investing in a combination of
high quality stocks and bonds. Because the stocks of large, established
companies were market leaders during the period, your Fund benefitted from
its greater exposure to these types of stocks. At the end of the period, your
Fund's asset allocation breakdown was 62% in stocks and 34% in bonds.
Our outlook
We expect the favorable economic fundamentals of 1996 to continue into 1997.
We believe that the economy should grow at a moderate rate, inflation should
continue to be under control and interest rates should remain relatively
stable. After two years of very strong performance, we anticipate more
moderate returns in both the stock and bond markets in 1997. We believe it
would be unrealistic to expect another year when returns significantly exceed
historical market averages.
While we have a favorable outlook for 1997, it is important to remember that
we are now in the sixth year of a stock market rally, the longest since the
end of World War II. History has shown that strong performance does not
persist indefinitely, and stocks periodically experience price declines. We
experienced this type of correction in June and July, followed by a recovery.
While we continue to see opportunities in the stock market, we caution
investors to be prepared for less generous returns in the future and to not
be surprised by corrections. We believe, however, that investors should
maintain a long-term perspective and not be swayed by short-term performance
issues, whether they be positive or negative.
--continued--
<PAGE>
PAGE 2
- ---------------------------
Keystone Balanced Fund (K-1)
Keystone acquired by First Union Corporation
We are pleased to inform you that Keystone has been acquired by First Union
Corporation. First Union, based in Charlotte, N.C., is the nation's six
largest bank holding company with assets of approximately $130 billion.
Keystone Investment Management Company will continue to be the investment
adviser, responsible for managing your Fund's portfolio. Your Fund will
continue to be managed with the same style and philosophy as in the past.
First Union also owns another mutual fund management company, Evergreen
Asset Management Corp. Together, Evergreen and Keystone manage approximately
$30 billion in assets. Service and marketing will now be conducted under the
"Evergreen Keystone Funds" umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
Thank you for your continued support of Keystone Balanced Fund (K-1). If you
have any questions or comments about your investments, we encourage you to
write to us.
Sincerely,
[SIG]Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investments Management Co., Inc.
[SIG]Geprge S. Bissell
George S. Bissell
Chairman of the Board
February 1997
[PHOTO]Albert H. Elfner, III
[PHOTO]George S. Bissell
<PAGE>
PAGE 3
- ---------------------------
A Discussion With
Your Fund Manager
[PHOTO] Walter McCormick
Walter McCormick is senior portfolio manager of your Fund and leads
Keystone's core equity stock team. A Chartered Financial Analyst, Mr.
McCormick holds an MBA from Rutgers University and has more than 26 years of
investment management experience. Together with portfolio managers Andrew
Baldassarre, Jonathan Noonan, Judith Warners, George Wilkins and Walter
Zagrobski, the team focuses on income-producing stocks of established
companies that are attractively valued.
Q What was the economic environment like during the six-month period?
A The economic environment changed during the last six months of 1996. After
experiencing strong economic growth and relatively high interest rates in the
first half of the year, economic growth moderated to a slower, sustainable
pace, and interest rates declined. These factors, coupled with solid
corporate profits, provided a strong economic backdrop for stocks. While
stock prices declined sharply in the early part of July, this short-term
downturn in the market provided us with opportunities to purchase more stocks
at attractive prices. Fixed-income investors also benefitted from a favorable
economic environment, as declining interest rates increased the value of
existing bonds.
Q How did you manage the portfolio in this environment?
A We maintained a conservative strategy of investing in established
companies and high quality bonds. Stocks of large, established companies were
market leaders throughout 1996, and your Fund benefitted from a higher than
average emphasis on these types of businesses. On December 31, 1996, about
62% of your Fund's net assets were invested in stocks, and about 34% were
invested in bonds.
Q What contributed to the Fund's strong performance during the six-month
period?
A Most of your Fund's return came from the stock portion of the portfolio.
We selected companies with proven records of consistent earnings and dividend
payouts. We diversified the Fund's investments among a variety of economic
sectors. Many of the companies in which we invested, such as GE, Gillette,
Johnson & Johnson, are household names.
Q Why were large-company stocks such strong performers?
A Many of the large companies in which we invested are multinationals. Over
the past several years, many of these companies have undertaken massive
restructuring programs, which have paid off. Strict cost-control programs
and downsizing have led to greater efficiency and productivity. In many
instances, U.S.-based companies have become the low-cost producers of goods
and services in the global economy. Estab-
Fund Profile
Objective: Seeks income and growth from a quality selection of
stocks and bonds.
Number of stocks: 135
Average bond rating: AAA
Assets: $1,571 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
lished U.S. companies also reaped the rewards of large capital inflows into
the stock market. A significant portion of the money invested in the stock
market has come from retirement investors. These investors tend to be more
conservative and often favor the stocks of high quality companies that
usually perform well in rising markets and that tend to hold their own during
market downturns.
Q At 8.0% of net assets on December 31, 1996, drug stocks accounted for the
portfolio's largest sector weighting. Where did you find opportunity in
this area?
A Large pharmaceutical companies were consistent performers throughout 1996.
Some of the companies in which we invested included American Home Products,
Johnson & Johnson, Merck & Company, SmithKline Beecham, and Warner-Lambert.
Drug companies had a number of positive attributes, including promising new
drugs in the pipeline and the benefits of cost efficiencies following
restructuring and major acquisitions.
Q Financial stocks continued to be a prominent part of the portfolio during
the period. Why were these stocks attractive?
A When we talk about financial stocks, we include what we refer to as
"interest-rate sensitive" stocks. These are stocks that tend to perform well in
a declining interest rate environment. They include the stocks of banks,
insurance companies and real estate investment trusts (REITs). In the banking
sector we invested in BankAmerica and BankBoston. These two large banks not only
benefitted from declining interest rates, they also profited from consolidation
trends in the industry. Insurance stocks in which we invested included
Travelers/Aetna Property Insurance, PMI, a mortgage insurance company, and GCR
Holdings, a reinsurance company. Reinsurance companies provide a way for
individual insurance companies to take on clients whose coverage would be too
great a burden for one insurer to carry alone. A reinsurer shares risk with
other insurance companies, in return for part of the premium fee paid by the
insured.
[Pie Chart]
Asset Allocation
as of December 31, 1996
Stocks (62%)
Bonds (34%)
Cash (4%)
(as a percent of portfolio assets)
(1) Includes short-term investments and other assets and liabilities.
Q . . . and what types of REITs did you add to the portfolio?
A We began investing in REITs more than a year ago, when we believed they
were undervalued and offered potential for strong returns. We were very
selective in choosing REITs for the portfolio. Focusing primarily on
commercial properties, we invested in Beacon Properties, a Boston-based real
estate development company, and Patriot American Hospitality, a hotel REIT.
Q Oil stocks generated solid returns during the period. What contributed to
their performance?
<PAGE>
PAGE 5
- ---------------------------
A Rising oil prices boosted the earnings of many of the large oil companies we
held in the portfolio. On December 31, 1996, oil was $25.95 a barrel, up from
$20.95 a barrel on June 30, 1996. In investing in this sector, we concentrated
on large oil companies, such as Atlantic Richfield, Exxon, Mobil, and Royal
Dutch Petroleum.
Top 10 Holdings
as of December 31, 1996
<TABLE>
<CAPTION>
Percentage of
Stocks Industry net assets
- ------------------------------------------------------------
<S> <C> <C>
General Electric Capital Goods 3.2
- ------------------------------------------------------------
Du Pont Chemicals 2.6
- ------------------------------------------------------------
Johnson & Johnson Drugs 2.5
- ------------------------------------------------------------
BankAmerica Finance 2.1
- ------------------------------------------------------------
Gillette Consumer Goods 1.9
- ------------------------------------------------------------
Boeing Co. Aerospace 1.7
- ------------------------------------------------------------
Beacon Properties Real Estate 1.6
- ------------------------------------------------------------
Monsanto Chemicals 1.6
- ------------------------------------------------------------
Sonat Natural Gas 1.5
- ------------------------------------------------------------
Atlantic Richfield Oil 1.2
- ------------------------------------------------------------
</TABLE>
Top 5 Equity Industries
as of December 31, 1996
Percentage of
Industry net assets
- ----------------------------------
Drugs 8.0
- ----------------------------------
Finance 6.5
- ----------------------------------
Oil 6.2
- ----------------------------------
Chemical 5.5
- ----------------------------------
Capital Goods 4.0
- ----------------------------------
Q Did you continue to hold convertible securities in the portfolio?
A On December 31, 1996, convertible securities accounted for 3.8% of the
Fund's net assets. We emphasized convertible securities for their attractive
yields and price appreciation potential. These securities are convertible
into common stock at predetermined prices. As a result, their prices tend to
rise along with increases in common stock prices. At the end of the period,
KMart, a large retail department store, and Conseco, an insurance company,
were among your Fund's convertible stock holdings.
Q What was your strategy for investing in bonds?
A We maintained our conservative approach and emphasized higher rated
investment grade corporate bonds and U.S. Treasury securities. We lengthened
the average maturity of the portfolio, as interest rates declined. This is
because in a declining interest rate environment, bonds with longer term
maturities tend to provide better price appreciation than those with shorter
term maturities.
Q Did you continue to invest in foreign bonds?
A We reduced the Fund's exposure to foreign bonds. The Canadian, German, and
Spanish government bonds in which we had invested earlier in the year were
strong contributors to your Fund's return. As prices on these bonds rose, we
believed they were approaching levels at which they were becoming overvalued,
so we took profits.
Q What is your outlook?
A We expect the environment for stocks to remain healthy. We anticipate
moderate economic growth and believe inflation and interest rates will remain
at relatively low levels. We believe these factors, along with our
expectations for positive earnings, should favor stocks. However, we believe
that returns in 1997 may be less than those of 1996. We would not be
surprised to see some short-term pullback in stock prices in the months
ahead. Should a "correction" in the stock market occur, we would view it as a
normal part of the investing cycle, and attempt to use such a downturn to our
advantage.
<PAGE>
PAGE 6
- ---------------------------
Keystone Balanced Fund (K-1)
Your Fund's Performance
[Mountain Chart]
Growth of an investment in
Keystone Balanced Fund (K-1)
Initial Reinvested
Investment Distributions
12/86 10,000 10,000
9,227 10,370
12/88 9,654 11,567
10,692 13,861
12/90 9,827 13,614
11,569 16,881
12/92 11,188 17,472
11,430 19,276
12/94 10,369 18,373
12,584 23,358
12/96 13,645 27,051
A $10,000 investment in Keystone Balanced Fund (K-1) made on
December 31, 1996 with all distributions reinvested was worth $27,051
on December 31, 1996. Past performance is no guarantee of future results.
Total Value: $27,051
Six-Month Performance as of December 31, 1996
- ---------------------------------------------
<TABLE>
<S> <C> <C>
Total return* 10.01%
Net asset value 6/30/96 $11.33
12/31/96 $11.83
Dividends $ 0.15
Capital gains $ 0.45
</TABLE>
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1996
- -----------------------------------------------
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year 12.81% 15.81%
5-year 60.24% 60.24%
10-year 170.51% 170.51%
Average annual total return
1-year 12.81% 15.81%
5-year 9.89% 9.89%
10-year 10.46% 10.46%
</TABLE>
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.
Shareholders may exchange shares for another Keystone fund in writing or by
calling Keystone's Automated Response Line (KARL). The Fund reserves the
right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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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 8
- ---------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- ------------------------------------ ------- --------------
<S> <C> <C>
COMMON STOCKS (60.0%)
ADVERTISING & PUBLISHING (0.2%)
Gannett, Inc. 46,800 $ 3,504,150
- ------------------------------------ ------- --------------
AEROSPACE (2.3%)
Boeing Co. 250,000 26,593,750
Honeywell, Inc. 49,600 3,261,200
Rockwell International Corp. 50,000 3,043,750
United Technologies Corp. 62,200 4,105,200
- ------------------------------------ ------- --------------
37,003,900
- ------------------------------------ ------- --------------
AUTOMOTIVE (1.3%)
Chrysler Corp. 55,560 1,833,480
Ford Motor Co. 220,000 7,012,500
General Motors Corp. 150,000 8,362,500
Genuine Parts Co. 62,025 2,760,113
- ------------------------------------ ------- --------------
19,968,593
- ------------------------------------ ------- --------------
CAPITAL GOODS (4.0%)
Deere & Co. 60,000 2,437,500
Emerson Electric Co. 54,000 5,224,500
General Electric Co. 503,000 49,734,125
Ingersoll-Rand Co. 50,500 2,247,250
Johnson Controls, Inc. 18,500 1,533,188
Sundstrand Corp. 34,000 1,445,000
- ------------------------------------ ------- --------------
62,621,563
- ------------------------------------ ------- --------------
CHEMICALS (5.5%)
Air Products & Chemicals, Inc. 28,000 1,935,500
Dow Chemical Co. 133,200 10,439,550
du Pont (E.I.) de Nemours & Co. 436,000 41,147,500
Hercules, Inc. 39,000 1,686,750
Monsanto Co. 627,000 24,374,625
PPG Industries, Inc. 136,000 7,633,000
- ------------------------------------ ------- --------------
87,216,925
- ------------------------------------ ------- --------------
CONSUMER GOODS (3.3%)
Avon Products, Inc. 32,600 1,862,275
Eastman Kodak Co. 78,500 6,299,625
Gillette Co. 375,000 29,156,250
International Flavors & Fragrances,
Inc. 48,000 2,160,000
Procter & Gamble Co. 110,000 11,825,000
CONSUMER GOODS--CONTINUED
Whirlpool Corp. 29,800 $ 1,389,425
- ------------------------------------ ------- --------------
52,692,575
- ------------------------------------ ------- --------------
DIVERSIFIED COMPANIES (1.9%)
Alco Standard Corp. 348,028 17,966,946
Allied-Signal, Inc. 71,300 4,777,100
Minnesota Mining & Manufacturing Co. 80,000 6,630,000
29,374,046
- ------------------------------------ ------- --------------
DRUGS (8.0%)
American Home Products Corp. 300,000 17,587,500
Baxter International, Inc. 47,400 1,943,400
Bristol-Myers Squibb Co. 55,000 5,981,250
Guidant Corp. 100,032 5,701,824
Johnson & Johnson 785,400 39,073,650
Lilly (Eli) & Co. 87,626 6,396,698
Merck & Co. 213,000 16,880,250
Pfizer, Inc. 145,200 12,033,450
Rhone Poulenc Rorer, Inc. 34,700 2,710,938
Schering-Plough Corp. 102,400 6,630,400
SmithKline Beecham PLC, ADR 57,200 3,889,600
Warner-Lambert Co. 84,000 6,300,000
- ------------------------------------ ------- --------------
125,128,960
- ------------------------------------ ------- --------------
ELECTRONICS PRODUCTS (0.2%)
AMP, Inc. 50,000 1,918,750
Thomas & Betts Corp. 40,000 1,775,000
- ------------------------------------ ------- --------------
3,693,750
- ------------------------------------ ------- --------------
FINANCE (6.5%)
Associates First Capital Corp.,
Class A 125,000 5,515,625
Bank of Boston Corp. 250,000 16,062,500
BankAmerica Corp. 336,960 33,611,760
Chase Manhattan Corp. 157,738 14,078,117
Federal Home Loan Mortgage Corp. 103,600 11,408,950
Federal National Mortgage
Association 200,000 7,450,000
Merrill Lynch & Co., Inc. 42,000 3,423,000
Morgan (J.P.) & Co., Inc. 42,000 4,100,250
<PAGE>
PAGE 9
- ---------------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
FINANCE--CONTINUED
Wells Fargo & Co. 24,200 $ 6,527,950
- ------------------------------------ ------- --------------
102,178,152
- ------------------------------------ ------- --------------
FOODS (3.5%)
Anheuser-Busch Cos., Inc. 324,000 12,960,000
CPC International, Inc. 46,800 3,627,000
General Mills, Inc. 30,000 1,901,250
Heinz (H.J.) Co. 79,200 2,831,400
Kellogg Co. 44,000 2,887,500
Nabisco Holdings Corp., Class A 70,000 2,721,250
Philip Morris Cos., Inc. 113,100 12,737,888
Pioneer Hi Bred Intl. 150,000 10,500,000
Sara Lee Corp. 86,000 3,203,500
UST, Inc. 46,200 1,495,725
- ------------------------------------ ------- --------------
54,865,513
- ------------------------------------ ------- --------------
INSURANCE (1.5%)
Aetna Life & Casualty Co. 30,000 2,400,000
Allstate Corp. 64,892 3,755,625
Travelers / Aetna Property Casualty
Corp., Class A 100,000 3,537,500
CIGNA Corp. 20,000 2,732,500
GCR Holdings, Ltd. 58,400 1,295,750
General Reinsurance Corp. 15,000 2,366,250
PMI Group 53,600 2,968,100
SAFECO Corp. 68,200 2,689,638
St. Paul Cos., Inc. 40,000 2,345,000
- ------------------------------------ ------- --------------
24,090,363
- ------------------------------------ ------- --------------
METALS & MINING (0.4%)
Aluminum Co. of America 40,000 2,550,000
Freeport-McMoRan Copper & Gold,
Class B 56,138 1,677,123
Phelps Dodge Corp. 22,000 1,485,000
Reynolds Metals Co. 24,400 1,375,550
- ------------------------------------ ------- --------------
7,087,673
- ------------------------------------ ------- --------------
NATURAL GAS (1.8%)
Enron Corp. 101,500 2,740,500
Enron Global Power & Pipelines LLC 54,000 2,328,750
NATURAL GAS--CONTINUED
Sonat, Inc. 455,000 $ 23,432,500
- ------------------------------------ ------- --------------
28,501,750
- ------------------------------------ ------- --------------
OFFICE & BUSINESS EQUIPMENT (1.9%)
Hewlett Packard Co. 200,000 10,050,000
International Business Machines 111,000 16,761,000
Xerox Corp. 62,769 3,303,219
- ------------------------------------ ------- --------------
30,114,219
- ------------------------------------ ------- --------------
OIL (6.2%)
Amoco Corp. 96,600 7,776,300
Atlantic Richfield Co. 144,500 19,146,250
Chevron Corp. 263,600 17,134,000
Exxon Corp. 63,500 6,223,000
Mobil Corp. 155,400 18,997,650
Occidental Petroleum Corp. 157,000 3,669,875
Royal Dutch Petroleum Co. 70,100 11,969,575
Unocal Corp. 294,400 11,960,000
- ------------------------------------ ------- --------------
96,876,650
- ------------------------------------ ------- --------------
OIL SERVICES (0.4%)
Halliburton Co. 45,200 2,723,300
Schlumberger, Ltd. 31,100 3,106,113
- ------------------------------------ ------- --------------
5,829,413
- ------------------------------------ ------- --------------
PAPER & PACKAGING (1.7%)
Georgia-Pacific Corp. 30,800 2,217,600
International Paper Co. 57,000 2,301,375
Kimberly-Clark Corp. 34,800 3,314,700
Union Camp Corp. 25,500 1,217,625
Weyerhaeuser Co. 370,350 17,545,331
- ------------------------------------ ------- --------------
26,596,631
- ------------------------------------ ------- --------------
REAL ESTATE (3.2%)
Arden Realty Inc. (R.E.I.T.) 119,500 3,316,125
Beacon Properties (R.E.I.T.) 700,000 25,637,500
First Industrial Realty Trust, Inc.
(R.E.I.T.) 70,000 2,126,250
Patriot American Hospitality, Inc.
(R.E.I.T.) 100,000 4,312,500
Prentiss Property Trust (R.E.I.T.) 50,000 1,250,000
Rouse Co. 294,112 9,338,056
(continued on next page)
<PAGE>
PAGE 10
- ---------------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS-December 31, 1966
(Unaudited)
Real Estate--continued
Spieker Properties, Inc. (R.E.I.T.) 100,000 $ 3,600,000
- ------------------------------------ ------- --------------
49,580,431
- ------------------------------------ ------- --------------
RETAIL (0.4%)
May Department Stores Co. 60,000 2,805,000
Sears, Roebuck and Co. 70,000 3,228,750
- ------------------------------------ ------- --------------
6,033,750
- ------------------------------------ ------- --------------
TELECOMMUNICATIONS (3.2%)
Ameritech Corp. 124,000 7,517,500
Bell Atlantic Corp. 90,000 5,827,500
Deutsche Telekom AG 30,300 617,363
GTE Corp. 162,000 7,371,000
Lucent Technologies, Inc. 192,124 8,885,743
Northern Telecom Ltd. 200,000 12,375,000
NYNEX Corp. 88,088 4,239,235
Sprint Corp. 75,480 3,009,765
- ------------------------------------ ------- --------------
49,843,106
- ------------------------------------ ------- --------------
TRANSPORTATION (1.5%)
Conrail, Inc. 22,964 2,287,789
Norfolk Southern Corp. 190,000 16,625,000
Union Pacific Corp. 46,800 2,813,850
Union Pacific Research Group 39,637 1,159,382
- ------------------------------------ ------- --------------
22,886,021
- ------------------------------------ ------- --------------
UTILITIES (1.1%)
American Electric Power Co., Inc. 39,500 1,624,438
Central & South West Corp. 40,600 1,040,375
UTILITIES--CONTINUED
Consolidated Edison Co. of New York,
Inc. 74,000 $ 2,164,500
Dominion Resources, Inc. 31,050 1,195,425
Duke Power Co. 42,000 1,942,500
Echelon Intl Corp. 4,760 74,375
FPL Group Inc. 27,000 1,242,000
Florida Progress Corp. 71,400 2,302,650
Houston Industries, Inc. 86,800 1,963,850
Public Service Enterprise Group,
Inc. 54,969 1,497,905
Texas Utilities Co. 44,105 1,797,279
- ------------------------------------ ------- --------------
16,845,297
- ------------------------------------ ------- --------------
TOTAL COMMON STOCKS
(COST--$503,862,989) 942,533,431
- ------------------------------------ ------- --------------
CONVERTIBLE/PREFERRED STOCKS (1.9%)
Alco Standard Corp. 55,000 5,252,500
Allstate Corp. 64,200 3,033,450
Conseco, Inc. 63,500 7,223,125
Fuji International Finance, Bermuda
Trust, ADR 110 3,400,612
Kmart Financing 45,000 2,193,750
SunAmerica, Inc. 200,000 8,450,000
- ------------------------------------ ------- --------------
TOTAL CONVERTIBLE/PREFERRED STOCKS
(COST--$28,027,780) 29,553,437
- ----------------------------------------------- --------------
</TABLE>
<PAGE>
PAGE 11
- -----------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
------------------------------ ------------------------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (34.1%)
CONVERTIBLE BONDS & NOTES (1.9%)
ELECTRONICS (0.2%)
Solectron Corp. (b) 6.00% 2006 $ 3,000,000 $ 3,232,500
------------------------------ ------------------------- ------- ------- ---------- --------------
INSURANCE (1.1%)
Berkshire Hathaway, Inc. 1.00 2001 1,000,000 928,750
Equitable Companies, Inc. 6.13 2024 14,400,000 16,542,000
------------------------------ ------------------------- ------- ------- ---------- --------------
17,470,750
------------------------------ ------------------------- ------- ------- ---------- --------------
OFFICE & BUSINESS EQUIPMENT (0.3%)
Staples, Inc. (b) 4.50 2000 5,250,000 5,407,500
------------------------------ ------------------------- ------- ------- ---------- --------------
RETAIL (0.1%)
Saks Holdings, Inc. 5.50 2006 1,400,000 1,286,250
------------------------------ ------------------------- ------- ------- ---------- --------------
SERVICES (0.2%)
US Filter Corp. (b) 6.00 2005 2,000,000 3,547,500
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL CONVERTIBLE BONDS & NOTES (COST--$26,957,780) 30,944,500
- --------------------------------------------------------------------------------- ---------- --------------
INDUSTRIAL BONDS & NOTES (4.8%)
AEROSPACE (0.4%)
Boeing Co. 7.88 2043 3,000,000 3,221,670
Simon Debartolo Group, LP 6.88 2006 3,500,000 3,449,600
------------------------------ ------------------------- ------- ------- ---------- --------------
6,671,270
------------------------------ ------------------------- ------- ------- ---------- --------------
AMUSEMENTS (0.2%)
Mattel, Inc. 6.75 2000 3,000,000 2,952,390
------------------------------ ------------------------- ------- ------- ---------- --------------
AUTOMOTIVE (0.3%)
Ford Motors Credit 6.90 2000 4,750,000 4,810,658
------------------------------ ------------------------- ------- ------- ---------- --------------
CONSUMER GOODS (0.4%)
Conagra Inc. 7.13 2026 6,605,000 6,749,385
------------------------------ ------------------------- ------- ------- ---------- --------------
DRUGS (0.2%)
Apache Corp. 7.63 2096 3,000,000 2,988,480
------------------------------ ------------------------- ------- ------- ---------- --------------
OIL (0.7%)
Oslo Seismic 8.28 2011 5,395,443 5,577,324
Occidental Petroleum Corp. 10.13 2009 4,300,000 5,296,482
------------------------------ ------------------------- ------- ------- ---------- --------------
10,873,806
--------------
(continued on next page)
<PAGE>
PAGE 12
- -----------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
------------------------------ ------------------------- ------- ------- ---------- --------------
INDUSTRIAL BONDS & NOTES -- CONTINUED
TELECOMMUNICATIONS (1.5%)
Ambac Inc. 9.38% 2035 $8,000,000 $ 9,598,880
GTE Corp. 8.75 2021 7,000,000 8,190,000
Michigan Bell Telephone Co. 5.88 1999 5,750,000 5,689,108
------------------------------ ------------------------- ------- ------- ---------- --------------
23,477,988
------------------------------ ------------------------- ------- ------- ---------- --------------
TRANSPORTATION (0.2%)
Golden St. Pete Transportation
Corp. 8.04 2011 3,000,000 3,007,500
------------------------------ ------------------------- ------- ------- ---------- --------------
UTILITIES (0.9%)
Citizens Utilities Co. 7.05 2046 4,000,000 3,846,400
Georgia Power Co. 6.13 1999 5,000,000 4,971,900
Rural Electric Coop. 8.67 2018 4,000,000 4,378,480
System Energy Resources, Inc. 11.38 2016 568,000 606,641
------------------------------ ------------------------- ------- ------- ---------- --------------
13,803,421
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$75,101,137) 75,334,898
----------------------------------------------------------- ------- ------- ---------- --------------
BANK & FINANCE BONDS & NOTES (6.7%)
1995 D Auto Receivables 6.40 2003 3,000,000 2,995,418
Amsouth Bancorp 6.75 2025 4,500,000 4,434,390
Asset Securitization Corp. 7.53 2026 3,300,000 3,400,547
Associates Corp. of North
America 8.63 2004 6,550,000 7,254,780
CCC Potable Asset 6.45 1999 5,250,000 5,256,825
Capital One Bank 6.73 1998 5,000,000 5,027,900
CIT Group Holdings 9.25 2001 4,500,000 4,967,325
Fleet Mortgage Group, Inc. 6.50 2000 5,050,000 5,035,406
Ford Credit Auto Owner Trust 6.30 2001 5,400,000 5,421,546
General Electric Capital Corp. 7.50 2035 6,500,000 6,749,665
Grand Met Investment Corp. 0.00 2004 3,000,000 1,851,840
Green Tree Financial Corp. 6.25 2019 5,000,000 4,987,500
Lehman Brothers Holdings, Inc. 8.05 2015 5,000,000 5,223,150
Lumbermans Mutual Co. (b) 9.15 2026 3,000,000 3,256,980
Merrill Lynch Mortgage
Investors, Inc. 6.96 2028 2,299,000 2,272,418
Morgan Stanley Capital, Inc.
(b) 6.59 2028 2,000,000 1,939,375
Olympic Automobile Receivables
Trust 6.80 2004 5,000,000 5,069,500
Paine Webber Group, Inc. 7.49 2004 6,750,000 6,797,250
Phoenix Home Life Insurance
(b) 6.95 2006 3,000,000 2,939,430
Smith Barney Holdings, Inc. 7.13 2006 7,000,000 6,995,450
Sun Canada Financial Co. 6.63 2007 4,500,000 4,315,230
Travelers Cap. II 7.63 2036 3,500,000 3,437,630
<PAGE>
PAGE 13
- -----------------------
SCHEDULE OF INVESTMENTS--Decemer 31, 1996
(Unaudited)
BANK & FINANCE BONDS & NOTES -- Continued
US West Capital Funding, Inc. 6.75% 2005 $2,750,000 $ 2,676,933
World Financial Properties
Tower D Financial (b) 6.95 2013 3,000,000 2,973,750
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL BANK & FINANCE BONDS & NOTES (COST--$105,507,177) 105,280,238
- ---------------------------------------------------------------------- ------- ---------- --------------
COLLATERALIZED MORTGAGE OBLIGATIONS (7.6%)(C)
Bankamerica Institutional Cap. (b) Series A 6.59 2028 2,000,000 3,047,730
BT Institutional Cap. Trust (b) Series B 8.07 2026 7,000,000 6,679,400
Contimortgage Home Equity Loan
(Est. Mat. 1998) Series 1995 4 Class A4 6.88 2028 2,500,000 2,465,625
CoreStates Home Equity Trust
(Est. Mat. 2008) Series 1996 1 Class A4 7.00 2012 6,150,000 6,101,953
Criimi Mae Financial Corp.
(Est. Mat. 2006) Series 1A 7.00 2033 1,852,183 1,796,329
CWMBS, Inc. Series 1996 Class A3 7.75 2026 3,850,000 3,889,402
FHLMC Comm. Mtg. 8.50 2021 4,148,000 4,391,915
FNMA (Est. Mat. 2006) Remic Trust 1993 38L 5.00 2022 2,500,000 2,108,575
Remic Trust 1992 181 Cl.
FNMA (Est Mat. 2002) P 6.50 2021 6,000,000 5,769,360
Remic Trust 1993 156 Cl.
FNMA (Est. Mat. 2001) B 6.50 2018 5,000,000 4,767,150
FNMA Pool (Est. Mat. 2006) 6.50 2020 9,000,000 8,945,156
FHLMC Pool (Est. Mat. 2001) 7.80 2016 5,000,000 5,189,850
FHLMC (Est. Mat. 2001) Series 1996 Class A 6.00 2004 6,500,000 6,274,531
GS Mortgage Security Corp. Series 1996 Class A2 7.40 2027 4,450,000 4,414,539
KS Mortgage Capital, L.P.
(Est. Mat. 1998) (b) Series 1995 Class A1 7.04 2002 2,848,382 2,865,294
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2001) Series 92B Class B 8.50 2012 1,961,545 2,019,156
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) Series 92D Class B 8.50 2017 2,298,208 2,410,544
Merrill Lynch Mortgage
Investors, Inc. (Est. Mat.
2004) Series 91D Class B 9.85 2011 5,000,000 5,279,650
ML Trust XXXV Class G 8.45 2018 5,870,000 6,229,538
Paine Webber Mortgage
Acceptance Corp. IV (Est. Mat.
1999) Series 1993 5 Class A3 6.88 2008 1,302,399 1,303,213
Residential Accredit, Inc. Series 1996 Class A 7.90 2026 6,538,000 6,717,795
Ryland Acceptance Corp.
(Est. Mat. 2004) Series 88 E 7.95 2019 6,565,578 6,637,340
Southern Pacific Secured
Assets Corp. Series 1996 7.60 2027 7,500,000 7,621,875
Structured Asset Securities
Corp. Series 1996 Class B 6.30 2028 2,464,375 2,390,059
University Support Services,
Inc. (Est. Mat. 2003) Series 1992 Class D 9.07 2007 1,385,000 1,387,597
Vests Insurance Group, Inc. Deb. 8.75 2025 3,000,000 3,235,740
<PAGE>
PAGE 14
- -----------------------
Keystone Balanced Fund (K-1)
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
- ---------------------------------------------------------------------- ------- ---------- --------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- Continued
World Omni Automobile Lease
Trust Series 1996 Class A3 6.25% 2002 $ 5,150,000 $ 5,141,915
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$117,869,440) 119,081,231
- ---------------------------------------------------------------------- ------- ---------- --------------
FOREIGN BONDS & NOTES (U.S. DOLLARS) (0.3%)
Bayer Corp (b) 7.13 2015 5,000,000 4,885,600
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL FOREIGN BONDS & NOTES (U.S. DOLLARS) (Cost--$5,164,250) 4,885,600
- ----------------------------------------------------------------------------------------------- --------------
FOREIGN BONDS & NOTES (NON U.S. DOLLARS) (1.6%)
Germany (Republic of) 6.88 2008 21,850,000 15,288,468
Germany (Republic of) 6.50 2003 14,880,000 10,282,943
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL FOREIGN BONDS & NOTES (NON-U.S. DOLLAR) (Cost--$25,312,308) 25,571,411
- --------------------------------------------------------------------------------- ---------- --------------
MORTGAGE PASS-THROUGH CERTIFICATES (5.7%)(c)
FHLMC Pool #607352 (Est. Mat. 1999) 7.68 2022 12,099 12,628
FHLMC Pool #846298 (Est. Mat. 1999) 7.20 2022 20,593 21,265
FNMA Pool #050973 (Est. Mat. 2001) 6.00 2009 3,807,320 3,696,070
FNMA Pool #050986 (Est. Mat. 2001) 6.00 2009 3,093,638 3,003,242
FNMA Pool #190911 (Est. Mat. 2001) 6.00 2009 5,942,734 5,769,087
FNMA Pool #250008 (Est. Mat. 2001) 6.00 2009 2,026,754 1,966,580
FNMA Pool #283580 (Est. Mat. 2004) 7.00 2024 6,532,999 6,414,556
FNMA Pool #283689 (Est. Mat. 2004) 7.00 2024 2,812,502 2,761,511
FNMA Pool #284365 (Est. Mat. 2004) 7.00 2024 3,554,837 3,490,388
FNMA Pool #284376 (Est. Mat. 2004) 7.00 2024 6,053,882 5,944,125
FNMA Pool #303119 (Est. Mat. 2001) 6.00 2009 4,469,952 4,337,239
FNMA Pool #303664 (Est. Mat. 2001) 6.50 2008 27,937,410 27,618,644
FNMA Pool #338877 (Est. Mat. 2002) 6.50 2011 5,100,000 4,744,569
GNMA Pool #429399 (Est. Mat. 2007) 6.50 2026 5,517,805 5,262,606
GNMA Pool #352906 (Est. Mat. 2006) 7.00 2024 306,386 300,448
GNMA Pool #405576 (Est. Mat. 2007) 6.50 2026 4,807,249 4,584,914
GNMA Pool #414739 (Est. Mat. 2007) 6.50 2025 154,990 147,967
GNMA Pool #418360 (Est. Mat. 2007) 7.00 2025 6,356,547 6,221,470
GNMA Pool #415807 (Est. Mat. 2007) 7.00 2025 1,343,105 1,314,564
GNMA Pool #423413 (Est. Mat. 2007) 7.00 2026 1,742,421 1,705,395
----------------------------------------------------------- ------- ------- ---------- --------------
TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (Cost--$88,846,888) 89,317,268
- --------------------------------------------------------------------------------- ---------- --------------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (5.5%)
U.S. Treasury Notes 5.88 1998 18,500,000 18,497,040
U.S. Treasury Notes 7.75 2000 20,000,000 20,928,200
U.S. Treasury Notes 7.50 2002 5,000,000 5,286,700
U.S. Treasury Notes 6.50 2006 13,250,000 13,322,478
U.S. Treasury Notes 6.13 1998 7,400,000 7,432,330
U.S. Treasury Notes 6.38 2001 6,500,000 6,538,610
U.S. Treasury Bonds 6.50 2026 4,250,000 4,170,993
<PAGE>
PAGE 15
- -----------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
(Unaudited)
- --------------------------------------------------------------------------------- ---------- --------------
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES -- Continued
U.S. Treasury Bonds 7.88% 2021 $8,850,000 $ 10,003,244
------------------------------ ------------------------- ------- ------- ---------- --------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$87,005,937) 86,179,595
- --------------------------------------------------------------------------------- ---------- --------------
TOTAL FIXED INCOME (Cost--$531,764,917) 536,594,741
- --------------------------------------------------------------------------------- ---------- --------------
</TABLE>
<TABLE>
<CAPTION>
Maturity
Value
- ------------ ---------- ---------- ---------- ------------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (2.7%)
Investments in repurchase agreements, in a joint trading account, purchased
12/31/96, 6.716%, maturing 1/2/97 (Cost $41,820,000)(a) 41,835,605 41,820,000
- ---------------------------------------- ---------- ------------ ------------
</TABLE>
<TABLE>
<S> <C>
TOTAL SHORT-TERM INVESTMENTS (Cost--$41,820,000) 41,820,000
- ------------------------------------------------------------------------------------ ---------------
TOTAL INVESTMENTS (Cost--$1,105,475,686) 1,550,501,609
- ------------------------------------------------------------------------------------ ---------------
OTHER ASSETS AND LIABILITIES--NET (1.3%) 20,290,970
- ------------------------------------------------------------------------------------ ---------------
NET ASSETS (100.0%) $1,570,792,579
- ------------------------------------------------------------------------------------ ---------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U. S. government
and/or agency obligations based on market prices at December 31, 1996.
(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.
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
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
Ended Year Ended June 30,
-------------------------------------------------------------------
December 31,
1996 1996 1995 1994 1993 1992
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $ 11.33 $ 10.09 $ 9.26 $ 10.10 $ 9.77 $ 9.16
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Income from investment operations
Net investment income 0.15 0.29 0.31 0.28 0.31 0.32
Net realized and
unrealized gain (loss)
on investments and
foreign currency
related transactions 0.95 1.42 0.96 (0.37) 0.66 0.75
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Total from investment
operations 1.10 1.71 1.27 (0.09) 0.97 1.07
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Less distributions from
Net investment income (0.15) (0.24) (0.31) (0.28) (0.31) (0.32)
In excess of net
investment income 0.00 (0.03) (0.02) (0.07) (0.09) (0.14)
Net realized gain on
investments (0.45) (0.20) (0.02) (0.25) (0.24) 0.00
In excess of net
realized gain on
investments 0.00 0.00 (0.09) (0.13) 0.00 0.00
Tax basis return of
capital 0.00 0.00 0.00 (0.02) 0.00 0.00
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Total distributions (0.60) (0.47) (0.44) (0.75) (0.64) (0.46)
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Net asset value end of
period $ 11.83 $ 11.33 $ 10.09 $ 9.26 $ 10.10 $ 9.77
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Total return (a) 10.01% 17.35% 14.20% (1.16%) 10.39% 11.86%
Ratios/supplemental
data
Ratios to average net
assets:
Total expenses (b) 1.71%(c) 1.72% 1.77% 1.71% 1.93% 1.97%
Net investment income 2.54%(c) 2.71% 3.33% 2.81% 3.07% 3.25%
Portfolio turnover
rate 51% 96% 88% 88% 74% 52%
Average commissions
rate paid $ 0.0594 $ 0.0031 N/A N/A N/A N/A
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
Net assets end of
period (thousands) $1,570,793 $1,481,177 $1,344,880 $1,389,810 $1,464,066 $1,184,094
- ---------------------- --------------- ---------- ---------- ---------- ---------- -----------
</TABLE>
(a) Excluding applicable sales charges.
(b) The expense ratios include indirectly paid expenses. Excluding
indirectly paid expenses, the expense ratio would have been 1.70% and
1.71% for the six months ended December 31, 1996 and the year ended
June 30, 1996.
(c) Annualized
See Notes to Financial Statements.
<PAGE>
PAGE 17
- -----------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
(Unaudited)
<TABLE>
-------------------------------------------------- --------------
<S> <C>
Assets
Investments at market value
(identified cost--$1,105,475,686) $1,550,501,609
Cash 26,924
Receivable for:
Investments sold 10,295,390
Unrealized appreciation on forward foreign
currency exchange contracts 1,147,765
Fund shares sold 1,422,374
Dividends and interest 8,823,430
Prepaid expenses and other assets 87,036
-------------------------------------------------- --------------
Total assets 1,572,304,528
-------------------------------------------------- --------------
Liabilities
Payable for:
Unrealized depreciation on forward foreign
currency exchange contracts 20,631
Fund shares redeemed 484,959
Other accrued expenses 1,006,359
-------------------------------------------------- --------------
Total liabilities 1,511,949
-------------------------------------------------- --------------
Net assets $1,570,792,579
-------------------------------------------------- --------------
Net assets represented by (Note 2)
Paid-in-capital $1,102,723,817
Accumulated undistributed net investment income 149,624
Accumulated net realized gain on investments and
foreign currency related transactions 21,766,080
Net unrealized appreciation on investments and
foreign currency exchange contracts 446,153,058
-------------------------------------------------- --------------
Total net assets $1,570,792,579
-------------------------------------------------- --------------
Net asset value
Net assets of $1,570,792,579 / 132,794,134
shares outstanding $11.83
-------------------------------------------------- --------------
</TABLE>
STATEMENT OF OPERATIONS
Six Months Ended December 31, 1996
(Unaudited)
<TABLE>
<S> <C> <C>
Investment income
Dividends (net of foreign withholding
tax of $33,651) $ 12,630,797
Interest 19,576,510
- --------------------------------------- ---------- -------------
Total income 32,207,307
- --------------------------------------- ---------- -------------
Expenses (Notes 4 and 5)
Management fee $ 3,404,763
Shareholder services 1,507,481
Accounting 13,981
Auditing and legal 31,656
Custodian fees 290,815
Printing 12,590
Distribution Plan expenses 7,623,746
Trustees' fees and expenses 23,173
Registration fees 27,081
Miscellaneous expenses 59,076
- --------------------------------------- ---------- -------------
Total expenses 12,994,362
Less: Expenses paid indirectly
(Note 6) (75,317)
- --------------------------------------- ---------- -------------
Net expenses 12,919,045
- --------------------------------------- ---------- -------------
Net investment income 19,288,262
- --------------------------------------- ---------- -------------
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions (Note 3)
Net realized gain on investments 47,565,387
Net realized loss on foreign currency
related transactions (262,421)
- --------------------------------------- ---------- -------------
Net realized gain on investments and
foreign currency related transactions 47,302,966
- --------------------------------------- ---------- -------------
Net change in unrealized appreciation
on investments and foreign currency
related transactions 76,588,136
- --------------------------------------- ---------- -------------
Net realized and unrealized gain on
investments and foreign currency
related transactions 123,891,102
- --------------------------------------- ---------- -------------
Net increase in net assets resulting from operations $143,179,364
- ----------------------------------------------------- -------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
- -----------------------
Keystone Balanced Fund (K-1)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended
1996 June 30, 1996
======================================================================== =============== ===============
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 19,288,262 $ 38,649,314
Net realized gain on investments and foreign currency related
transactions 47,302,966 54,917,152
Net change in unrealized appreciation on investments and foreign
currency related transactions 76,588,136 132,899,484
- ------------------------------------------------------------------------ --------------- ---------------
Net increase in net assets resulting from operations 143,179,364 226,465,950
- ------------------------------------------------------------------------ --------------- ---------------
Distributions to shareholders from
Net investment income (19,276,723) (38,649,314)
In excess of net investment income 0 (4,413,251)
Net realized gain on investment transactions (57,569,916) (18,717,526)
- ------------------------------------------------------------------------ --------------- ---------------
Total distributions to shareholders (76,846,639) (61,780,091)
- ------------------------------------------------------------------------ --------------- ---------------
Capital share transactions
Proceeds from shares sold 112,675,090 227,626,268
Payments for shares redeemed (157,504,662) (308,498,436)
Net asset value of shares issued in reinvestment of distributions 68,112,390 52,483,524
- ------------------------------------------------------------------------ --------------- ---------------
Net increase (decrease) in net assets resulting from capital share
transactions 23,282,818 (28,388,644)
- ------------------------------------------------------------------------ --------------- ---------------
Total increase in net assets 89,615,543 136,297,215
- ------------------------------------------------------------------------ --------------- ---------------
Net assets:
Beginning of period 1,481,177,036 1,344,879,821
- ------------------------------------------------------------------------ --------------- ---------------
End of period [including accumulated undistributed net investment income
as follows: December 31, 1996--$149,624 and June 30, 1996--$138,085] $1,570,792,579 $1,481,177,036
- ------------------------------------------------------------------------ --------------- ---------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 19
- -----------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Balanced Fund (K-1) (the "Fund") is a Pennsylvania business trust
for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone was formerly a wholly-owned
subsidiary of Keystone Investments, Inc. ("KII") and is currently a
subsidiary of First Union Keystone, Inc. First Union Keystone, Inc. is a
wholly-owned subsidiary of First Union National Bank of North Carolina which
in turn is a wholly-owned subsidiary of First Union Corporation ("First
Union"). The Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified, open-end investment company. The
Fund's investment objective is to provide shareholders with current income.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices, as furnished by an independent
pricing service. Listed corporate bonds, other fixed income securities,
mortgage and other asset-backed securities, and other related securities are
valued at prices provided by an independent pricing service.
In determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities
and various relationships between securities which are generally recognized
by institutional traders. Securities for which valuations are not available
from an independent pricing service (including restricted securities) are
valued at fair value as determined in good faith according to procedures
established by the Board of Trustees.
Investments are usually valued at the closing sales price, or, in the
absence of sales and for over-the-counter securities, the mean of the bid
and asked prices.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
<PAGE>
PAGE 20
- -----------------------
Keystone Balanced Fund (K-1)
C. Securities Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums.
D. Repurchase Agreements
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.
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. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
F. Distributions
The Fund distributes net investment income to shareholders quarterly and
capital gains, if any, annually. Distributions to shareholders are recorded
at the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of short-term capital gains and mortgage backed
securities.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Transactions in
shares of the Fund were as follows:
<PAGE>
PAGE 21
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<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended
1996 June 30, 1996
- ------------------------ --------------- ---------------
<S> <C> <C>
Shares sold 9,747,064 20,948,679
Shares redeemed (13,686,482) (28,542,355)
Shares issued in
reinvestment of
distributions 6,046,343 4,948,269
- ------------------------ --------------- ---------------
Net increase (decrease) 2,106,925 (2,645,407)
- ------------------------ --------------- ---------------
</TABLE>
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities
(excluding short-term securities, U.S. government securities and foreign
cash) for the six-months ended December 31, 1996 were $645,679,449 and
$718,657,292, respectively.
(4.) Distribution Plans
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. Under the
Distribution Plan, the Fund pays its principal underwriter amounts which are
calculated and paid monthly.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On
December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group, Inc. At
that time, EKD replaced EKIS as the Fund's principal underwriter.
Under the Distribution Plan, the Fund pays a distribution fee which may not
exceed 1.00% of the Fund's average daily net assets, of which 0.75% is used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares. However, after the termination of the Distribution Plan, and subject
to the discretion of the Independent Trustees, payments to EKIS and/or EKD
may continue as compensation for services which had been earned while the
Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
Total unpaid distribution costs at December 31, 1996 amounted to $4,172,435.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, 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.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund
and provided investment management and administrative services.
<PAGE>
PAGE 22
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Keystone Balanced Fund (K-1)
Under an investment advisory agreement between KMI and Keystone, Keystone
served as the Investment Adviser and provided investment advisory and
management services to the Fund. In return for its services, Keystone
received an annual fee equal to 85% of the management fee received by KMI.
During the six months ended December 31, 1996, the Fund paid or accrued
$13,981 to Keystone for certain accounting services.
The Fund paid or accrued $1,507,481 to Evergreen Keystone Service Company
(formerly, Keystone Investor Resource Center, Inc.), a wholly-owned
subsidiary of Keystone, for services rendered as the Fund's transfer and
dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended December 31, 1996, the Fund incurred total custody
fees of $290,815 and received a credit of $75,317 pursuant to this expense
offset arrangement, resulting in a net custody expense of $215,498. The
assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
<PAGE>
PAGE 23
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ADDITIONAL INFORMATION
Shareholders of the Fund considered and acted upon the proposal listed below
at a special meeting of shareholders held Monday, December 9, 1996. In
addition, below each proposal are the results of that vote.
<TABLE>
<CAPTION>
Affirmative Withhold
----------- -----------
<S> <C> <C>
1. To elect the following Trustees:
Frederick Amling 72,685,612 1,517,279
Laurence B. Ashkin 72,667,542 1,535,348
Charles A. Austin III 72,696,254 1,506,637
Foster Bam 72,653,368 1,549,522
George S. Bissell 72,654,937 1,547,954
Edwin D. Campbell 72,663,584 1,539,306
Charles F. Chapin 72,678,860 1,524,031
K. Dun Gifford 72,698,737 1,504,154
James S. Howell 72,639,646 1,563,244
Leroy Keith, Jr. 72,691,910 1,510,981
F. Ray Keyser, Jr. 72,647,536 1,555,354
Gerald M. McDonell 72,663,527 1,539,364
Thomas L. McVerry 72,662,820 1,540,071
William Walt Pettit 72,668,055 1,534,835
David M. Richardson 72,688,149 1,514,742
Russell A. Salton, III MD 72,670,562 1,532,328
Michael S. Scofield 72,661,251 1,541,639
Richard J. Shima 72,687,886 1,515,004
Andrew J. Simons 72,687,577 1,515,314
2. To approve an Investment Advisory and Management Agreement between the Fund
and Keystone Investment Management Company.
Affirmative 70,683,079
Against 1,094,515
Abstain 2,425,297
</TABLE>
<PAGE>
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth in 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 Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
[GRAPHIC]Evergreen Keystone Logo
P.O. Box 2121
Boston, Massachusetts 02106-2121
K1-R-2/97
79.5M
KEYSTONE
[GRAPHIC]Man and Woman walking in woods
BALANCED
FUND (K-1)
[GRAPHIC]Evergreen Keystone Logo
SEMIANNUAL REPORT
DECEMBER 31, 1996
