<PAGE>
PAGE 1
KEYSTONE BALANCED FUND (K-1)
SEEKS CURRENT INCOME FROM A QUALITY SELECTION OF STOCKS AND BONDS.
Dear Shareholders:
We are pleased to report on Keystone Balanced Fund (K-1) for the 12-month period
which ended June 30, 1997. Following this letter, the fund's portfolio manager
will discuss specific issues of portfolio strategy.
PERFORMANCE
Your Fund returned 22.0% for the 12-month period which ended June 30, 1997. For
the same period, the Standard & Poor's 500, a broad-based index of common
stocks, returned 31.0%.
We believe your Fund performed very well. During a year in which both the
stock and bond markets experienced significant short-term volatility and
longer-term positive trends, we believe your Fund's consistent, conservative
strategy resulted in very strong performance.
ENVIRONMENT
The 12-month fiscal period was marked by successive waves of changing sentiment
in the markets: first of investor confidence; then of concerns caused by rising
interest rates and fears of excessive growth; and finally of renewed investor
confidence as economic growth appeared to moderate and inflation remained under
control.
The first six months of the fiscal year, from July through December 1996, were
characterized by an environment of strong corporate earnings and healthy
economic growth. In this environment, the prices of stocks, especially the
quality, dividend-paying, blue-chip stocks which your fund traditionally
emphasizes, soared to new records. This environment carried over into early
1997, with the stock market continuing to rise. This rally, however, sputtered
and paused in February as the stock market became worried about the bond market.
Market interest rates started rising as bond traders worried that growth might
be getting out of control and could generate a new burst of inflation. In fact,
the rates of growth were increasing. Gross Domestic Product (GDP) grew by an
inflation-adjusted 4.7% annualized rate in the last quarter of 1996 and by an
even higher 5.6% in the first quarter of 1997. The Federal Reserve Board took
notice, and hiked short-term rates by one-quarter of one percent in late March.
The fears of inflation combined with the actions and expected future actions
of the Federal Reserve Board caused a sharp correction in the bond and stock
markets in late March and April. At the end of April, however, a succession of
new economic reports indicated that economic growth was moderating and that
inflation was not increasing. In response, interest rates again began falling
and the bond market rallied. The stock market then resumed its rally, posting
extremely strong performance numbers for the second quarter of 1997, the final
quarter of your Fund's fiscal year.
STRATEGY
During the year, your Fund remained true to its long-term strategy, investing in
larger capitalization, dividend-paying stocks and higher-rated bonds. At the end
of the fiscal year, your Fund's allocation to stocks was 62.6% of net assets,
close to the 62% allocation at the end of 1996. Your Fund's allocation to bonds,
36.7%, was modestly above the 34% allocation on December 31, 1996. Cash was
relatively low, less than 1% of net assets. These allocations reflected
decisions made in early May that the relative values of stocks were attractive,
after the corrections of March and April, and that the reports of moderating
economic growth could fuel a market rally.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE BALANCED FUND (K-1)
Within the stock portion of the portfolio, the Fund concentrated on seasoned
companies with stable earnings growth and reasonable price/earnings ratios,
relative to the overall market. These stocks tended to be the better quality,
highly liquid stocks which have led the rally. Within sectors, the Fund has been
emphasizing the financial, chemicals and pharmaceutical industries, all of which
performed very strongly in the rally in the latter part of the fiscal year.
Within the bond portion of the portfolio, the Fund continued to focus on high
quality corporate bonds, which tended to do very well in a period of moderate
economic growth and low inflation. Average credit quality of portfolio bonds at
the end of the fiscal year was AA, and the average maturity was 11.5 years.
OUTLOOK
Despite the lofty levels of stock prices at the conclusion of the fiscal year,
we believe the environment continues to be healthy for both stocks and bonds in
the foreseeable future. Gross Domestic Product continues to grow at a more
moderate rate than it had experienced earlier in 1997, and there are still
relatively few signs of inflationary pressure that could prompt the Federal
Reserve Board to push short-term interest rates up significantly. To be sure,
further market corrections, similar to that of March and April, would not be
surprising.
Despite our cautious optimism, it is important to remember that the financial
markets move in cycles. We currently are well into our third year of strong,
above-average returns from the stock markets. It seems reasonable to expect that
the markets cannot indefinitely sustain their recent performance, and we
recommend investors moderate their expectations about the level of returns they
are likely to enjoy.
With this outlook, we will continue to manage the Keystone Balanced Fund (K-1)
with a conservative strategy, emphasizing the higher quality, dividend-paying
securities that have helped the fund deliver consistent performance over the
long term.
Thank you for your support of Keystone Balanced Fund (K-1).
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
(Photo of Albert H. Elfner, III) (Photo of George S. Bissell)
ALBERT H. ELFNER, III GEORGE S. BISSELL
August 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
(Photo of Walter T. McCormick)
WALTER T. MCCORMICK IS SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER,
GROWTH AND INCOME, AT KEYSTONE INVESTMENT MANAGEMENT COMPANY. HE IS ALSO
SENIOR PORTFOLIO MANAGER OF YOUR FUND. A CHARTERED FINANCIAL ANALYST WITH
MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE, MR. MCCORMICK
HOLDS AN MBA FROM RUTGERS UNIVERSITY. THE GROWTH & INCOME TEAM AT KEYSTONE
ALSO INCLUDES PORTFOLIO MANAGERS MAUREEN CULLINANE, JUDITH WARNERS AND A
TEAM OF EQUITY ANALYSTS. THE FIXED INCOME PORTION OF THE PORTFOLIO IS
MANAGED BY CHRISTOPHER P. CONKEY, SENIOR VICE PRESIDENT AND CHIEF
INVESTMENT OFFICER, FIXED INCOME.
Q HOW DO YOU MANAGE THE FUND, AND IN WHAT KINDS OF SECURITIES DO YOU INVEST?
A The Fund is managed as a conservative-oriented vehicle that will provide
long-term performance without taking too much risk. It is a balanced fund, and
typically we will have from 60-to-65% of the portfolio in stocks, from 30-to-35%
in bonds, with the remainder in cash. We manage the Fund to give the shareholder
the opportunity to participate in the upside of the stock market, to have
regular income coming into the portfolio to limit downside risk, and to be as
consistent as possible.
The stocks in which we invest tend to be the stocks of seasoned companies that
pay regular quarterly dividends. They usually are large-cap companies, the type
you find in the S&P 500 Index. Many of the stocks in the fund are household
names with which the average person would be familiar. For example, on June 30,
the top five stock holdings were DuPont, General Electric, Johnson & Johnson,
BankAmerica, and Monsanto.
The bonds in which we invest tend to be higher quality bonds. They are there
to provide regular income and limit the fund's volatility. Typically, the
average credit quality of the bond portfolio will be AAA or AA. We normally do
not emphasize higher-yielding, "junk" bonds.
Q WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PAST YEAR, AND HOW DID IT
AFFECT STRATEGY?
A In the broadest terms, you would have to say we had a terrific environment.
Unfortunately, it wasn't that simple. The fiscal year, which began in July 1996,
started out very strong with a stable bond market, moderate to increasing
economic growth, and rising corporate profits. The Keystone Balanced Fund (K-1)
participated fully in this market, which was led by the larger-company stocks
which the Fund emphasizes.
The markets worry though, and early in 1997 there began to be growing concern
that growth might become excessive, that the stock market was being fueled by
speculation, and that we could have a resurgence of inflation that could upset
the entire economy. That's when the Federal Reserve Board stepped in-- first in
words in late December when Chairman Alan Greenspan warned of "irrational
exuberance." The markets started cooling after reaching highs in February. In
March, the Federal Reserve Board did raise short-term rates by one-quarter of
one percent. There followed a sell-off that lasted for several weeks. During
this FED-induced
<PAGE>
PAGE 4
KEYSTONE BALANCED FUND (K-1)
TOP FIVE EQUITY INDUSTRY ALLOCATIONS
JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare Products & Services 9.2%
Oil 6.7%
Chemical & Agricultural Products 6.3%
Banks 5.4%
Finance & Insurance 4.4%
</TABLE>
correction, the S&P 500, which represents the largest stocks, fell by more than
10% and the broader NASDAQ Index, which includes some small company stocks, fell
by more than 15%. At the time, we believed it would take two-to-three rate
increases by the Federal Reserve Board to cool the economy down. During this
period, we viewed the correction as an opportunity for long-term investors who
were looking for value. In this rising interest rate environment, we managed the
portfolio conservatively, lowering the price/earnings ratio of portfolio
holdings, increasing the cash reserves, and investing in defensive areas, such
as Real Estate Investment Trusts (REITS).
In early May, it became apparent that the pace of economic growth was
moderating and it was less certain that the Federal Reserve Board would raise
rates one or two times more. The markets then began to recover. When the Federal
Reserve Board did not raise rates at its May 20 meeting, the markets took off.
Our strategy then was to reduce cash reserves, reduce REIT exposure, and
increase holdings in some sectors, such as pharmaceuticals. We also
re-established positions in some companies that we had sold when we had been
concerned earlier in the year that their prices may have peaked. After the
corrections of the spring, some of these stocks began to look attractive.
Q HOW IS THE BOND PORTFOLIO OF THE FUND MANAGED?
A We work closely with Keystone's fixed income department. In fact, Christopher
Conkey, a Senior Vice President and Chief Investment Officer for Fixed Income,
manages the bond portion of the portfolio.
The emphasis in the bond portion of the portfolio continues to be on higher
credit quality issues. Over the past several months, we have placed a greater
emphasis on corporate bonds, which have done particularly well because of the
generally favorable environment of moderate economic growth and low inflation.
Since December 31, 1996, the percentage of corporate, industrial bonds in the
overall portfolio has increased from about 4% to about 15%, while government
bonds have been reduced from 6% of the entire portfolio to about 3%.
As of June 30, 1997, the average credit quality of the portfolio was AA, the
average maturity was 11.5 years, and the duration was 5.5 years.
Q A MAJOR CONCENTRATION OF STOCKS IN THE PORTFOLIO AT THE END OF THE PERIOD WAS
IN HEALTHCARE. WHY DID YOU HAVE THIS EMPHASIS?
A Drug company stocks were hurt by the February correction in the market.
However, after that correction, they began to look very attractive and we
increased our emphasis there as the sector came back strongly. We like companies
with strong product pipelines. By that, I mean they have the capability to
develop and introduce new products over time. We like companies with stable
earnings.
Demographics tend to favor this industry. As the general population ages,
there is likely to be a greater need for the drugs produced by the
pharmaceutical industry.
Major portfolio holdings from the pharmaceutical industry at the end of the
fiscal year included American Home Products, Johnson & Johnson, and
Bristol-Myers.
<PAGE>
PAGE 5
TOP 10 EQUITY HOLDINGS
JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
STOCK INDUSTRY NET ASSETS
<S> <C> <C>
Du Pont (E.I.) Chemical &
De Nemours & Co. Agricultural
Products 3.3%
General Electric Co. Capital Goods 3.2%
Johnson & Johnson Healthcare
Products &
Services 2.8%
BankAmerica Corp. Banks 2.7%
Monsanto Co. Chemical &
Agricultural
Products 1.6%
American Home Products Corp. Healthcare
Products &
Services 1.4%
Merck & Co., Inc. Healthcare
Products &
Services 1.4%
Mobil Corp. Oil 1.3%
Boeing Co. Aerospace &
Defense 1.3%
Sonat, Inc. Natural Gas 1.3%
</TABLE>
Q FINANCE, INCLUDING BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INSTITUTIONS, WAS ANOTHER MAJOR SECTOR IN THE FUND. WHY?
A Financial companies have played a leadership role in the stock market for the
past two years, and their fundamentals still look good. The price/earnings
ratios of this sector are still below the markets, and yet we believe the growth
rates and prospects are above average.
We have invested chiefly in banks, insurance companies, and government
mortgage agencies such as the Federal Home Loan Mortgage Corporation (Freddie
Mac) and Federal National Mortgage Association (Fannie Mae). The banks in which
we have invested tend to have strong operating fundamentals that should help
them thrive in the current environment of stable-to-declining interest rates. We
have good positions in BankAmerica, BankBoston and Chase Manhattan.
Q THE THIRD LARGEST SECTOR WAS THE CHEMICAL INDUSTRY. WHY DID YOU INVEST THERE?
A We are not enthusiastic about the commodity chemical business, but we do like
some companies in this industry.
One is Du Pont, which is restructuring and refocusing its business on the
fastest growing areas, such as agriculture and healthcare.
Another is Monsanto, which probably is best positioned in the agricultural
chemicals, which is a very important leader. It is a market leader with products
such as Roundup, a weedkiller marketed to both farmers and homeowners.
Q WHAT IS YOUR OUTLOOK?
A The current investing environment is good. We have good growth, low inflation
and strong corporate profits. Right now, I see no reason for this environment to
end, although eventually there will be something down the road that will change
things.
We are enjoying an environment that is favorable to the stocks of the quality,
seasoned companies in which we invest. But the environment also help the quality
corporate bonds in which the Fund invests.
As long as these relatively benign conditions persist, we do not anticipate
major corrections.
It is important to remember though that this is a fund that does not take
excessive risk. When corrections do come, we believe we are prepared to
outperform more aggressive investment strategies.
(Diamond)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400,
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE BALANCED FUND (K-1)
Your Fund's Performance
Growth of an investment in
Keystone Balanced Fund (K-1)
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
In Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
Dividend Reinvestment (CUSTOMER: PLEASE FILL IN)
Initial Investment
</TABLE>
Total value: $25,965
A $10,000 investment in Keystone Balanced Fund (K-1) made on June 30, 1987
with all distributions reinvested was worth $25,965 on June 30, 1997. Past
performance is no guarantee of future results.
Comparisons of change in value of a $10,000 investment in Keystone
Balanced Fund (K-1), the Standard & Poors 500 Index and the Consumer Price
Index.
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
In Thousands June 30, 1987 through June 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
The Fund (CUSTOMER: PLEASE FILL IN)
CPI
S&P 500
</TABLE>
Past performance is no guarantee of future results. The Standard & Poors 500
Index is an unmanaged market index. This index does not include transaction
costs associated with buying and selling securities nor any management fees.
The Consumer Price Index, a measure of inflation, is through June 30, 1997.
The cumulative and average annual total returns with sales charge calculations
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 investment earned the returns in the without sales charge lines.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<TABLE>
<CAPTION>
HISTORICAL RECORD
<S> <C>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 21.95%
1 year w/sales charge 18.95%
Five years 78.31%
Ten years 159.65%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 21.95%
1 year w/sales charge 18.95%
5 years 12.26%
10 years 10.01%
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- 59.4%
<S> <C> <C>
ADVERTISING & RELATED SERVICES-- 0.3%
46,800 Gannett Inc.................. $ 4,621,500
AEROSPACE & DEFENSE-- 2.0%
400,000 Boeing Co. (The)............. 21,225,000
49,600 Honeywell, Inc............... 3,763,400
50,000 Rockwell International
Corp....................... 2,950,000
62,200 United Technologies Corp..... 5,162,600
33,101,000
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 1.3%
250,000 Ford Motor Co................ 9,437,500
150,000 General Motors Corp.......... 8,353,125
93,038 Genuine Parts Co............. 3,151,645
20,942,270
BANKS-- 5.4%
673,920 BankAmerica Corp............. 43,509,960
250,000 BankBoston Corp.............. 18,015,625
159,747 Chase Manhattan Corp......... 15,505,443
42,000 Morgan (J.P.) & Co., Inc..... 4,383,750
24,200 Wells Fargo & Co............. 6,521,900
87,936,678
BUSINESS EQUIPMENT & SERVICES-- 0.3%
62,769 Xerox Corp................... 4,950,905
CAPITAL GOODS-- 3.6%
60,000 Deere & Co................... 3,292,500
792,000 General Electric Co.......... 51,777,000
50,500 Ingersoll Rand Co............ 3,118,375
58,187,875
CHEMICAL & AGRICULTURAL PRODUCTS-- 6.3%
28,000 Air Products & Chemicals,
Inc........................ 2,275,000
133,200 Dow Chemical Co.............. 11,605,050
862,000 Du Pont (E.I.) De Nemours &
Co......................... 54,198,250
600,000 Monsanto Co.................. 25,837,500
136,000 PPG Industries, Inc.......... 7,905,000
101,820,800
CONSUMER PRODUCTS & SERVICES-- 2.3%
32,600 Avon Products, Inc........... 2,300,338
150,000 Gillette Co. (The)........... 14,212,500
100,000 International Flavours &
Fragrances, Inc............ 5,050,000
110,000 Procter & Gamble Co. (The)... 15,537,500
37,100,338
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
DIVERSIFIED COMPANIES-- 0.9%
71,300 Allied-Signal Inc............ $ 5,989,200
80,000 Minnesota Mining &
Manufacturing Co........... 8,160,000
14,149,200
ELECTRICAL EQUIPMENT & SERVICES-- 1.2%
50,000 AMP, Inc..................... 2,087,500
200,000 Motorola, Inc................ 15,200,000
40,000 Thomas & Betts Corp.......... 2,102,500
19,390,000
FINANCE & INSURANCE-- 3.2%
30,000 Aetna, Inc................... 3,071,250
64,892 Allstate Corp. (The)......... 4,737,116
20,000 CIGNA Corp................... 3,550,000
414,400 Federal Home Loan Mortgage
Corp....................... 14,245,000
200,000 Federal National Mortgage
Assn....................... 8,725,000
15,000 General Reinsurance Corp..... 2,730,000
25,200 Hartford Life, Inc. Cl. A.... 945,000
53,600 PMI Group, Inc. (The)........ 3,343,300
68,200 SAFECO Corp.................. 3,186,219
40,000 St. Paul Companies, Inc...... 3,050,000
100,000 Travelers Property Casualty
Corp. Cl. A................ 3,987,500
51,570,385
FOOD & BEVERAGE PRODUCTS-- 2.8%
324,000 Anheuser-Busch Companies.,
Inc........................ 13,587,750
46,800 CPC International, Inc....... 4,320,225
30,000 General Mills, Inc........... 1,953,750
79,200 H.J. Heinz Co................ 3,653,100
44,000 Kellogg Co................... 3,767,500
339,300 Philip Morris Companies,
Inc........................ 15,056,437
86,000 Sara Lee Corp................ 3,579,750
45,918,512
</TABLE>
<PAGE>
PAGE 8
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
HEALTHCARE PRODUCTS & SERVICES-- 9.2%
300,000 American Home Products
Corp....................... $ 22,950,000
47,400 Baxter International, Inc.... 2,476,650
110,000 Bristol-Myers Squibb Co...... 8,910,000
710,400 Johnson & Johnson............ 45,732,000
47,626 Lilly (Eli) & Co............. 5,206,117
213,000 Merck & Co., Inc............. 22,045,500
145,200 Pfizer, Inc.................. 17,351,400
204,800 Schering-Plough Corp......... 9,804,800
57,200 SmithKline Beecham plc, ADR.. 5,240,950
84,000 Warner-Lambert Co............ 10,437,000
150,154,417
METAL PRODUCTS & SERVICES-- 0.5%
40,000 Aluminum Company of
America.................... 3,015,000
56,138 Freeport McMoran Copper &
Gold Class B............... 1,747,295
22,000 Phelps Dodge Corp............ 1,874,125
24,400 Reynolds Metals Co........... 1,738,500
8,374,920
NATURAL GAS-- 1.4%
54,000 Enron Corp................... 2,203,875
407,000 Sonat, Inc................... 20,858,750
23,062,625
OFFICE EQUIPMENT & SUPPLIES-- 1.8%
200,000 Hewlett-Packard Co........... 11,200,000
348,028 Ikon Office Solutions, Inc... 8,678,948
100,000 International Business
Machines Corp.............. 9,018,750
28,897,698
OIL-- 6.7%
96,600 Amoco Corp................... 8,398,162
289,000 Atlantic Richfield Co........ 20,374,500
263,600 Chevron Corp................. 19,489,925
127,000 Exxon Corp................... 7,810,500
310,800 Mobil Corp................... 21,717,150
157,000 Occidental Petroleum Corp.... 3,934,813
280,400 Royal Dutch Petroleum Co..... 15,246,750
294,400 Unocal Corp.................. 11,426,400
108,398,200
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
OIL FIELD SERVICES-- 0.5%
45,200 Halliburton Co............... $ 3,582,100
31,100 Schlumberger Ltd............. 3,887,500
7,469,600
PAPER & PACKAGING-- 1.9%
30,800 Georgia-Pacific Corp......... 2,629,550
57,000 International Paper Co....... 2,768,063
69,600 Kimberly-Clark Corp.......... 3,462,600
174,014 Unisource Worldwide, Inc..... 2,784,224
370,350 Weyerhaeuser Co.............. 19,258,200
30,902,637
REAL ESTATE-- 2.8%
119,500 Arden Realty, Inc.
(R.E.I.T).................. 3,107,000
500,000 Beacon Properties Corp.
(R.E.I.T.)................. 16,687,500
50,000 Boston Properties, Inc.
(R.E.I.T.)................. 1,375,000
70,000 First Industrial Realty
Trust, Inc. (R.E.I.T.)..... 2,047,500
200,000 Patriot American Hospitality,
Inc. (R.E.I.T.)............ 5,100,000
50,000 Prentiss Properties Trust
(R.EI.T.).................. 1,281,250
294,112 Rouse Co..................... 8,676,304
100,000 Spieker Properties, Inc.
(R.E.I.T.)................. 3,518,750
100,000 TriNet Corporate Realty
Trust, Inc. (R.E.I.T.)..... 3,306,250
45,099,554
RETAILING & WHOLESALE-- 0.4%
60,000 May Department Stores Co..... 2,835,000
70,000 Sears Roebuck & Co........... 3,762,500
6,597,500
TELECOMMUNICATION SERVICES & EQUIPMENT-- 3.0%
124,000 Ameritech Corp............... 8,424,250
90,000 Bell Atlantic Corp........... 6,828,750
162,000 GTE Corp..................... 7,107,750
200,000 Northern Telecom Ltd......... 18,200,000
88,088 NYNEX Corp................... 5,076,071
75,480 Sprint Corp.................. 3,972,135
49,608,956
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C>
TRANSPORTATION-- 0.4%
40,000 Norfolk Southern Corp........ $ 4,030,000
46,800 Union Pacific Corp........... 3,299,400
7,329,400
UTILITIES-- 1.2%
39,500 American Electric Power Co.,
Inc........................ 1,659,000
74,000 Consolidated Edison Co. of
New York, Inc.............. 2,178,375
31,050 Dominion Resources, Inc...... 1,137,206
42,000 Duke Power Co................ 2,013,375
108,000 Emerson Electric Co.......... 5,946,750
71,400 Florida Progress Corp........ 2,235,712
27,000 FPL Group, Inc............... 1,243,688
86,800 Houston Industries., Inc..... 1,860,775
44,105 Texas Utilities Co........... 1,518,866
19,793,747
TOTAL COMMON STOCKS
(COST $458,795,114)........................... 965,378,717
<CAPTION>
CONVERTIBLE PREFERRED-- 2.1%
<S> <C> <C>
FINANCE & INSURANCE-- 1.2%
64,200 Allstate Corp. (The)
6.76%, Exchangeable Notes
Due 4/15/98................ 3,338,400
63,500 Conseco, Inc.
7.00%, PRIDES.............. 8,239,125
200,000 SunAmerica, Inc.
$3.188, PERCS.............. 8,725,000
20,302,525
OFFICE EQUIPMENT & SUPPLIES-- 0.2%
55,000 Ikon Office Solutions, Inc.
$5.04, 10/01/1998.......... 3,540,625
RETAILING & WHOLESALE-- 0.7%
200,000 Kmart Financing I
7.75%...................... 10,975,000
TOTAL CONVERTIBLE PREFERRED
(COST $28,714,617)............................ 34,818,150
<CAPTION>
CONVERTIBLE DEBENTURES-- 1.1%
<S> <C> <C>
BUSINESS EQUIPMENT & SERVICES-- 0.2%
2,000,000 US Filter Corp.
6.00%, 9/15/05 144A........ 3,100,000
<CAPTION>
SHARES VALUE
CONVERTIBLE DEBENTURES-- CONTINUED
<S> <C> <C>
ELECTRICAL EQUIPMENT & SERVICES-- 0.2%
3,000,000 Solectron Corp.
6.00%, 3/1/06 144A......... $ 3,723,750
ENVIRONMENTAL SERVICES-- 0.3%
4,900,000 USA Waste Services, Inc.
4.00%, 2/1/02.............. 5,344,087
RETAILING & WHOLESALE-- 0.4%
5,250,000 Staples, Inc.
4.50%, 10/1/00 144A........ 6,339,375
TOTAL CONVERTIBLE DEBENTURES
(COST $15,150,000)............................ 18,507,212
<CAPTION>
CORPORATE BONDS-- 15.4%
<S> <C> <C>
AEROSPACE & DEFENSE-- 0.5%
3,000,000 Boeing Co.
7.88%, 4/15/43............. 3,165,060
3,650,000 McDonnell Douglas Corp.
9.25%, 4/1/02.............. 4,013,321
7,178,381
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 1.0%
3,000,000 Ford Motor Co.
7.70%, 5/15/97............. 3,023,520
5,600,000 General Motors Corp.
9.63%, 12/1/00............. 6,094,200
7,500,000 Hertz Corp.
7.00%, 5/1/02.............. 7,528,125
16,645,845
BANKS-- 1.0%
6,500,000 ABN Amro Bank NV Chicago
Branch
7.30%, 12/1/26............. 6,119,360
4,500,000 Amsouth Bancorp.
6.75%, 11/1/25............. 4,399,875
4,500,000 Export Import Bank Korea
7.10%, 3/15/07............. 4,541,130
1,000,000 Wachovia Corp.
6.61%, 10/1/25............. 985,460
16,045,825
ELECTRICAL EQUIPMENT & SERVICES-- 0.1%
2,250,000 Korea Electric Power Corp.
7.00%, 2/1/27.............. 2,205,923
</TABLE>
<PAGE>
PAGE 10
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
FINANCE & INSURANCE-- 4.5%
8,000,000 Ambac, Inc.
9.38%, 8/1/11.............. $ 9,512,800
6,550,000 Associates Corp. North
America
8.63%, 11/15/04............ 7,159,805
5,250,000 CCC Putable Asset Trust
6.45%, 10/18/99 144A....... 5,233,725
4,500,000 CIT Group Holdings, Inc.
9.25%, 3/15/01............. 4,875,660
5,050,000 Fleet Mortgage Group, Inc.
6.50%, 6/15/00............. 5,035,305
5,400,000 Ford Credit Auto Owner Trust
6.30%, 1/15/01............. 5,389,848
4,750,000 Ford Motor Credit
6.90%, 6/5/00.............. 4,784,865
6,400,000 General Motors Acceptance
Corp.
7.13%, 5/1/01.............. 6,476,992
5,000,000 International Lease Finance
Corp.
6.38%, 2/15/02............. 4,912,300
3,000,000 Mellon Capital II
7.99%, 1/15/27............. 2,996,400
5,750,000 Michigan Bell Telephone Co.
5.88%, 9/15/99............. 5,684,852
2,200,000 Prudential Funding
7.13%, 7/1/07.............. 2,195,600
5,500,000 Sun Life Canada Us Cakp
Trust I
8.53%, 5/29/49 144A........ 5,678,750
3,500,000 Travelers Capital III
7.75%, 12/1/36............. 3,395,140
73,332,042
FOOD & BEVERAGE PRODUCTS-- 0.3%
5,000,000 Philip Morris Companies, Inc.
7.20%, 2/1/07.............. 4,933,800
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES--
0.6%
7,000,000 GTE Corp.
8.75%, 11/1/21............. 7,906,430
1,100,000 Textron, Inc. Series C
10.01%, 2/1/00............. 1,188,962
9,095,392
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
MACHINERY-- DIVERSIFIED-- 0.1%
2,000,000 Caterpillar, Inc.
9.38%, 7/15/01............. $ 2,176,320
NATURAL GAS-- 0.4%
6,575,000 Tennessee Gas Pipeline Co.
7.50%, 4/1/17.............. 6,549,818
OIL-- 1.8%
4,300,000 Occidental Petroleum Corp.
10.13%, 9/15/09............ 5,245,312
5,286,572 Oslo Seismic
8.28%, 6/1/11 144A......... 5,573,422
10,000,000 Sun, Inc.
8.13%, 11/1/99............. 10,346,300
7,500,000 Transocean Offshore, Inc.
8.00%, 4/15/27............. 7,752,075
28,917,109
OIL FIELD SERVICES-- 0.6%
10,000,000 Baker Hughes Inc.
7.63%, 2/15/99............. 10,195,000
PAPER & PACKAGING-- 0.5%
8,000,000 James River Corp. of Virginia
6.75%, 10/1/99............. 8,051,040
PUBLISHING, BROADCASTING & ENTERTAINMENT--
1.8%
5,500,000 Belo (A.H.) Corp.
7.13%, 6/1/07.............. 5,452,947
11,338,000 Continental Cablevision, Inc.
9.00%, 9/1/08.............. 12,674,977
10,000,000 Time Warner, Inc.
9.15%, 2/1/23.............. 11,044,900
29,172,824
REAL ESTATE-- 0.2%
3,500,000 Simon Debartolo Group, Inc.
6.88%, 11/15/06............ 3,386,950
RETAILING & WHOLESALE-- 0.3%
5,250,000 Mattel, Inc.
6.75%, 5/15/00............. 5,269,215
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
CORPORATE BONDS-- CONTINUED
<S> <C> <C>
TRANSPORTATION-- 0.5%
3,000,000 Golden State Petroleum
Transport Corp.
8.04%, 2/1/19 144A......... $ 2,997,656
5,500,000 Norfolk Southern Corp.
7.05%, 5/1/37.............. 5,582,170
8,579,826
UTILITIES-- 1.2%
5,000,000 Central Illinois Public
Service Co.
7.61%, 6/1/17.............. 5,081,250
4,000,000 Citizens Utilities Co.
7.05%, 10/1/46............. 3,755,880
5,000,000 Georgia Power Co.
6.13%, 9/1/99.............. 4,970,100
4,000,000 Rural Electric Cooperative
8.67%, 9/15/18............. 4,399,360
568,000 System Energy Resources, Inc.
11.38%, 9/1/16............. 606,596
18,813,186
TOTAL CORPORATE BONDS
(COST $250,445,805)........................... 250,548,496
<CAPTION>
FOREIGN BONDS (U.S. DOLLARS)--
0.3%
<S> <C> <C>
5,000,000 Bayer Corp.
7.13%, 10/1/15 144A........ 4,806,450
TOTAL FOREIGN BONDS (U.S. DOLLARS)
(COST $5,164,250)............................. 4,806,450
<CAPTION>
FOREIGN BONDS (NON U.S. DOLLARS)-- 2.7%
<S> <C> <C>
18,500,000 Canada Government
8.75%, 12/1/05............. 15,570,839
86,299,000 Denmark Kingdom
7.00%, 11/15/07............ 13,653,383
21,850,000 Germany (Republic of)
6.88%, 5/12/05............. 13,680,523
424,000 Nykredit
6.00%, 10/1/26............. 58,014
42,962,759
TOTAL FOREIGN BONDS (NON U.S.
DOLLARS) (COST $45,039,690)................... 42,962,759
<CAPTION>
SHARES VALUE
ASSET-BACKED SECURITIES-- 2.7%
<S> <C> <C>
2,500,000 Contimortgage Home Equity
Loan, Series 1996-4, Class
A9,
6.88%, 1/15/28............. $ 2,477,325
6,150,000 Correstates Home Equity Loan,
Series 1996-1, Class A4,
7.00%, 6/15/12............. 6,105,797
Green Tree Financial Corp.
6,000,000 Series 1993-4, Class A3,
6.25%, 1/15/19............. 5,968,080
6,000,000 Series 1997-3, Class A5,
7.14%, 7/15/28............. 6,068,437
5,000,000 Olympic Automobile
Receivables,
Series 1996-C, Class A4,
6.80%, 3/15/02............. 5,029,400
7,500,000 Southern Pacific Secured
Assets Corp.,
Series 1996-3A, Class A4,
7.60%, 10/25/27............ 7,514,062
1,185,000 University Support Services
Inc., Series 1992-D,
9.07%, 11/1/07............. 1,184,259
3,000,000 Western Financial Owner
Trust, Series 1996-D,
6.40%, 4/20/03............. 2,984,063
6,650,000 World Omni Automobile Lease,
Series 1997-A, Class A4,
6.90%, 6/25/03............. 6,706,060
44,037,483
TOTAL ASSET-BACKED SECURITIES
(COST $43,609,424)............................ 44,037,483
<CAPTION>
MORTGAGE-BACKED SECURITIES--
12.4%
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-- 8.4%
Asset Securitization Corp.
3,300,000 Series 1996-D3, Class A3,
7.69%, 10/13/26............ 3,400,031
4,000,000 Series 1997-D4, Class A2,
7.41%, 4/14/27............. 4,128,750
4,450,000 Bankamerica Mortgage
Services, Series 1997-1,
Class M,
7.50%, 10/15/25............ 4,446,507
</TABLE>
<PAGE>
PAGE 12
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
2,200,000 Chase Commercial
Mortgage Securities Corp.,
Series 1997-1, Class B,
7.37%, 6/19/29............. $ 2,236,438
4,818,686 Chase Mortgage Finance
Corp., Series 1994-D, Class
M,
6.75%, 2/25/25............. 4,501,327
1,774,203 Criimi Mae Financial Corp.,
Series 1A,
7.00%, 1/1/33.............. 1,735,946
1,250,000 FFCA Secured Lending
Corp., Series 1997-1, Class
B1,
7.74%, 6/15/13............. 1,271,875
FHLMC
7,148,000 Series 117, Class G,
8.50%, 1/15/21............. 7,631,848
5,500,000 Series 1701, Class PH,
6.50%, 3/15/09............. 5,391,100
6,500,000 Series 1996-17, Class A,
6.00%, 8/25/04............. 6,268,925
5,542,694 Financial Asset
Securitization,
Series 1997-NAM 1, Class
FXA2,
7.75%, 4/25/27............. 5,631,655
FNMA
5,000,000 Remic Trust 1993-156, Class
B,
6.50%, 4/25/18............. 4,812,500
1,250,000 Remic Trust 1993-248, Class
SA,
3.26%, 8/25/23............. 947,656
3,454,305 G E Capital Mortgage Services
Inc.,
Series 1994-10, Class A14,
6.50%, 3/25/24............. 3,310,736
4,450,000 GS Mortgage Security Corp.,
Series 1996-PL, Class A2,
7.41%, 2/15/27............. 4,338,055
6,450,556 Headlands Mortgage
Securities, Inc.,
Series 1997-2, Class AI10,
7.75%, 5/25/27............. 6,517,077
7,974,017 Independent National Mortgage
Corp., Series 1997-A, Class
A,
7.85%, 12/26/26 144A....... 8,003,301
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
1,273,516 KS Mortgage Capital,
L. P., Series 1995-1, Class
A1,
7.06%, 4/20/02 144A........ $ 1,277,496
Merrill Lynch Mortgage
Investors, Inc.
5,000,000 Series 1991-D, Class B,
9.85%, 7/15/11............. 5,276,550
1,823,926 Series 1992-B, Class B,
8.50%, 4/15/12............. 1,867,810
2,110,236 Series 1992-D, Class B,
8.50%, 6/15/17............. 2,198,824
2,299,000 Series 1996-C2, Class B,
6.96%, 11/21/28............ 2,263,437
5,000,000 Series 1997-C1, Class A3,
7.12%, 6/18/29............. 5,012,500
5,870,000 Merrill Lynch Trust
XXXV, Class G,
8.45%, 11/1/18............. 6,163,500
2,000,000 Mid State Trust,
Series 6, Class A3,
7.54%, 7/1/35.............. 2,011,250
7,000,000 Morgan Stanley Capital 1
Inc.,
Series 1997-WF1, Class A2,
7.22%, 5/15/07 144A........ 7,089,687
1,131,031 Paine Webber Mortgage
Acceptance Corp. IV, Series
1993-5, Class A3,
6.88%, 6/25/08............. 1,131,384
7,000,000 PNC Mortgage Securities
Corp., Series 1997-4, Class
2PP1,
7.50%, 7/25/27............. 7,060,641
6,538,000 Residential Accredit Loans
Inc., Series 1996-QS4,
Class AI 10,
7.90%, 8/25/26............. 6,621,768
9,961,608 Residential Funding Mortgage
Secs I Inc., Series
1997-S7, Class A4,
7.50%, 5/25/27............. 10,123,484
3,317,712 Ryland Acceptance Corp.,
Series 1988, Class E,
7.95%, 1/1/19.............. 3,368,507
136,040,565
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
MORTGAGE-BACKED SECURITIES-- CONTINUED
<S> <C> <C>
MORTGAGE PASS-THROUGH CERTIFICATES-- 4.0%
3,090,436 Federal Home Loan Mortgage
Corp.
7.84%, 4/1/22.............. $ 3,255,589
Federal National Mortgage
Assn.
1,413,898 7.68%, 11/1/17............... 1,470,454
1,507,450 7.65%, 1/1/31................ 1,589,426
5,626,647 7.00%, 5/1/24................ 5,544,048
26,258,111 6.50%, 12/1/08............... 25,918,856
8,822,456 5.75%, 2/1/27................ 9,138,124
19,803,326 5.50%, 7/1/09................ 18,776,028
288,721 Government National Mortgage
Assn.
7.00%, 5/15/24............. 284,662
65,977,187
TOTAL MORTGAGE-BACKED
SECURITIES (COST $201,190,752)................ 202,017,752
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS-- 3.2%
<S> <C> <C>
U.S. TREASURY-- 3.2%
8,555,000 U.S. Treasury Bonds
6.50%, 11/15/26............ 8,204,758
U.S. Treasury Notes
39,300,000 6.63%, 3/31/02............... 39,656,058
2,250,000 6.38%, 9/30/01............... 2,250,360
1,500,000 6.25%, 2/15/07............... 1,467,660
51,578,836
<CAPTION>
SHARES VALUE
<S> <C> <C>
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST $51,092,262)................ $ 51,578,836
<CAPTION>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT-- 0.8%
<S> <C> <C>
$12,664,000 Keystone Joint Repurchase Agreement,
Investments in repurchase
agreements, in a joint
trading account, purchased
6/30/97, 6.039%, maturing
7/1/97 (maturity value
$12,666,124) (a)........... 12,664,000
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS--
(COST $1,111,865,914) 100.1% 1,627,319,855
OTHER ASSETS AND
LIABILITIES-- NET (0.1) (1,924,512)
NET ASSETS 100.0% $1,625,395,343
</TABLE>
144A-- 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.
(a) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at June 30, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS
ADR-- American Depository Receipt
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
GNMA-- Government National Mortgage Association
PERCS-- Preferred Equity Redemption Cumulative Stock
PRIDES-- Provisionally Redeemable Income Debt Exchangeable for Stock
R.E.I.T.-- Real Estate Investment Trust
<PAGE>
PAGE 14
KEYSTONE BALANCED FUND (K-1)
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
NET UNREALIZED
SETTLEMENT U.S. VALUE AT IN EXCHANGE APPRECIATION/
DATE JUNE 30, 1997 FOR U.S. $ (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Contracts to Sell:
08/12/97 39,638,000 German Deutsche Marks $ 22,798,817 $23,218,135 $ 419,318
08/20/97 94,311,000 Danish Krone 14,245,563 14,632,296 386,733
08/27/97 21,302,750 Canadian Dollars 15,481,425 15,619,570 138,145
Unrealized appreciation on forward foreign currency contracts $ 944,196
Forward Foreign Currency Contracts to Buy:
08/12/97 16,000,000 German Deutsche Marks $ 9,202,812 $9,457,942 $ (255,130)
Net unrealized appreciation on forward foreign currency contracts $ 689,066
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 15
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $11.33 $10.09 $9.26 $10.10 $9.77 $9.16 $9.10 $9.12 $8.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.30 0.29 0.31 0.28 0.31 0.32 0.45 0.50 0.46
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions 2.07 1.42 0.96 (0.37) 0.66 0.75 0.18 0.20 0.83
Total from investment operations 2.37 1.71 1.27 (0.09) 0.97 1.07 0.63 0.70 1.29
LESS DISTRIBUTIONS FROM:
Net investment income (0.30) (0.24) (0.31) (0.28) (0.31) (0.32) (0.50) (0.50) (0.54)
In excess of net investment income 0 (0.03) (0.02) (0.07) (0.09) (0.14) (0.04) (0.04) 0
Tax basis return of capital 0 0 0 (0.02) 0 0 0 0 0
Net realized gain on investments (0.45) (0.20) (0.02) (0.25) (0.24) 0 (0.03) (0.18) 0
In excess of net realized gain on
investments 0 0 (0.09) (0.13) 0 0 0 0 0
Total distributions (0.75) (0.47) (0.44) (0.75) (0.64) (0.46) (0.57) (0.72) (0.54)
NET ASSET VALUE END OF PERIOD $12.95 $11.33 $10.09 $9.26 $10.10 $9.77 $9.16 $9.10 $9.12
TOTAL RETURN(A) 21.95% 17.35% 14.20% (1.16%) 10.39% 11.86% 7.49% 7.99% 16.07%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.70% 1.72% 1.77% 1.71% 1.93% 1.97% 1.88% 1.99% 1.96%
Total expenses, excluding
indirectly paid expenses 1.69% 1.71% N/A N/A N/A N/A N/A N/A N/A
Net investment income 2.50% 2.71% 3.33% 2.81% 3.07% 3.25% 4.56% 4.94% 5.48%
PORTFOLIO TURNOVER RATE 89% 96% 88% 88% 74% 52% 60% 35% 49%
AVERAGE COMMISSION RATE PAID $0.0400 $0.0031 N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF YEAR (MILLIONS) $1,625 $1,481 $1,345 $1,390 $1,464 $1,184 $902 $827 $712
<CAPTION>
1988
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR $9.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions (0.82)
Total from investment operations (0.35)
LESS DISTRIBUTIONS FROM:
Net investment income (0.60)
In excess of net investment income 0
Tax basis return of capital 0
Net realized gain on investments (0.42)
In excess of net realized gain on
investments 0
Total distributions (1.02)
NET ASSET VALUE END OF PERIOD $8.37
TOTAL RETURN(A) (3.37%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.91%
Total expenses, excluding
indirectly paid expenses N/A
Net investment income 5.34%
PORTFOLIO TURNOVER RATE 64%
AVERAGE COMMISSION RATE PAID N/A
NET ASSETS END OF YEAR (MILLIONS) $685
</TABLE>
(a) Excluding applicable sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
KEYSTONE BALANCED FUND (K-1)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value
(identified cost, $1,111,865,914) $1,627,319,855
Foreign currency, at value
(identified cost, $8,980) 9,192
Unrealized appreciation on forward foreign
currency contracts 944,196
Dividends and interest receivable 9,470,139
Receivable for investments sold 4,131,827
Receivable for Fund shares sold 1,477,963
Prepaid expenses and other assets 161,753
Total assets 1,643,514,925
LIABILITIES:
Unrealized depreciation on forward foreign
currency contracts 255,130
Payable for investments purchased 14,732,214
Payable for Fund shares redeemed 2,080,054
Distribution fee payable 934,761
Accrued expenses and other liabilities 117,423
Total liabilities 18,119,582
NET ASSETS $1,625,395,343
NET ASSETS REPRESENTED BY:
Paid-in capital $1,013,621,008
Accumulated undistributed net investment
income 3,239,562
Accumulated net realized gain on
investments and foreign currency related
transactions 92,401,815
Net unrealized appreciation on investments
and foreign currency related transactions 516,132,958
Total net assets 1,625,395,343
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $1,625,395,343 (divided by) 125,534,120
shares outstanding $ 12.95
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $ 40,204,287
Dividends (net of foreign
withholding taxes of $91,085) 24,547,062
Total income 64,751,349
EXPENSES
Management fee $ 6,854,615
Distribution Plan expenses 15,437,631
Transfer agent fees 2,979,483
Accounting expenses 101,818
Custodian fees 596,802
Trustees' fees and expenses 55,886
Miscellaneous 193,248
Total expenses 26,219,483
Less: Expenses paid indirectly (146,111)
Net expenses 26,073,372
Net investment income 38,677,977
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain on:
Investments 116,423,636
Foreign currency related
transactions 4,563,646
Net realized gain 120,987,282
Net change in unrealized
appreciation on:
Investments 145,989,829
Foreign currency related
transactions 578,207
Net change in unrealized
appreciation 146,568,036
Net realized and unrealized gain
on investments and foreign
currency related transactions 267,555,318
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $306,233,295
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 17
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 38,677,977 $ 38,649,314
Net realized gain on investment and foreign currency related transactions 120,987,282 54,917,152
Net change in unrealized appreciation 146,568,036 132,899,484
Net increase in net assets resulting from operations 306,233,295 226,465,950
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (38,660,044) (38,649,314)
In excess of net investment income 0 (4,413,251)
Net realized gain on investments (57,571,132) (18,717,526)
Total distributions to shareholders (96,231,176) (61,780,091)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 200,987,044 227,626,268
Payments for shares redeemed (351,020,484) (308,498,436)
Net asset value of shares issued in reinvestment of distributions 84,249,628 52,483,524
Net decrease in net assets resulting from capital share transactions (65,783,812) (28,388,644)
Total increase in net assets 144,218,307 136,297,215
NET ASSETS
Beginning of year 1,481,177,036 1,344,879,821
End of year, including undistributed net investment income of $3,239,562
and $138,085, respectively $1,625,395,343 $ 1,481,177,036
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 18
KEYSTONE BALANCED FUND (K-1)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Balanced Fund (K-1) (the "Fund") is a Pennsylvania common law trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Advisor and Manager. Keystone was formerly a wholly owned subsidiary of Keystone
Investments, Inc ("KII") and is currently a subsidiary of First Union
Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act") as an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with current income. The
Fund seeks to meet its objective principally through investment in a combination
of equity and debt securities chosen primarily for their potential for current
income and secondarily, to the extent consistent with the Fund's objective, for
their potential capital appreciation.
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
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price.
U.S. government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed 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 analysis of various
relationships between similar 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.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or federal agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, the Fund may enter into reverse repurchase
agreements with qualified third-party broker-dealers. Interest on the value of
reverse repurchase agreements 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 with the custodian containing
qualifying assets having a value not less than the repurchase price, including
accrued interest. If the
<PAGE>
PAGE 19
counterparty to the transaction is rendered insolvent, the ultimate realization
of the securities to be repurchased by the Fund may be delayed or limited.
D. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gain (loss) on
investment transactions.
E. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate 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
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
F. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis and includes amortization of discounts and
premiums.
G. 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 intends to avoid any excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise tax is required.
H. DISTRIBUTIONS
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatment for net realized gains from foreign currency related transactions.
<PAGE>
PAGE 20
KEYSTONE BALANCED FUND (K-1)
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
<S> <C> <C>
Shares sold 16,959,452 20,948,679
Shares redeemed (29,517,723) (28,542,355)
Shares issued in reinvestment
of distributions 7,405,182 4,948,269
Net decrease (5,153,089) (2,645,407)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term securities, for the year ended June 30, 1997 were $1,335,545,818 and
$1,442,119,831, respectively.
The average daily balance of reverse repurchase agreements outstanding for the
Fund during the year ended June 30, 1997 was approximately $14,403,239 at a
weighted average interest rate of 4.415%. The maximum amount outstanding under
reverse repurchase agreements during the year ended June 30, 1997 for the Fund
was $19,557,472 (including accrued interest). There were no reverse repurchase
agreements outstanding at June 30, 1997.
On June 30, 1997, the cost of investments for federal income tax purposes was
$1,111,455,155, gross unrealized appreciation of investments was $522,900,444
and gross unrealized depreciation of investments was $7,035,744, resulting in
net unrealized appreciation of $515,864,700 for federal income tax purposes.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940
Act. The Distribution plan permits the fund to reimburse its principal
underwriter for costs related to selling shares of the fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution Plan expenses." The Fund pays a service
fee equal to 0.25% of its average daily net assets and a distribution fee equal
to 0.75% of its average daily net assets. Distribution Plan expenses are
calculated daily and paid monthly.
With respect to the Fund's shares, the principal underwriter may incur
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
The Plan may be terminated at any time by vote of the Independent Trustees or
by vote of a majority of the outstanding voting shares of the Fund. However,
after the termination of the Plan, and subject to the discretion of the
Independent Trustees, payments to EKD and/or EKIS may continue as compensation
for services which had been earned while the 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.
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or its predecessor.
<PAGE>
PAGE 21
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of the investment advisory agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. As such,
Keystone manages the Fund's investments, provides certain administrative
services and supervises the Funds daily business affairs. In return, Keystone is
paid a management fee, computed daily and paid monthly calculated at a rate of
1.50% of the Fund's gross investment income plus an amount which is determined
by applying percentage rates starting at 0.60% and declining as net assets
increase to 0.30% per annum, to the average daily 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. Under an investment advisory
agreement between KMI and Keystone, Keystone served as 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 year ended June 30, 1997, the Fund paid or accrued $101,818 to
Keystone for certain accounting services. Additionally, Evergreen Keystone
Services Company ("EKSC") (formerly Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend
disbursing agent.
Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate
of EKD, began serving as the Fund's sub-administrator. As sub-administrator,
BISYS provides the officers of the Fund. For this service, BISYS is paid a fee
by Keystone, which is not a Fund expense.
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. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
<PAGE>
PAGE 22
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, 1997,
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 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, 1997 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, 1997, 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
August 8, 1997
<PAGE>
PAGE 23
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED)
During the fiscal year ended June 30, 1996, distributions of $.75 per share were
paid in shares or cash. This total includes a taxable long-term capital gain
distribution of $.45 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, 48% 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 1998, we will send you complete information on the distributions
paid during the calendar year 1997
to help you in completing your federal tax return.
<PAGE>
KEYSTONE
FAMILY OF FUNDS
(graphic of a diamond)
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
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.
Evergreen Keystone
FUNDS(SM)
(Evergreen logo) (Keystone logo)
P.O. Box 2121
Boston, Massachusetts 02106-2121
K1-R Rev01 7/97
(Recycle logo)
KEYSTONE
(picture)
BALANCED
FUND (K-1)
Evergreen Keystone
FUNDS(SM)
(Evergreen logo) (Keystone logo)
ANNUAL REPORT
JUNE 30, 1997
