<PAGE>
PAGE 1
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1)) February 1998
Dear Shareholders:
[Photo of The final six months of 1997 were very friendly to both the
William M. stock and bond markets, helping propel the Evergreen Balanced
Ennis appears Fund (formerly Keystone Balanced Fund, K-1), to another strong
here] performance year.
Despite some short-term volatility, most notably in the wake
William M. of the Asian financial and currency crisis in October, the
Ennis stock market continued to perform well, led by stable, growing,
large company stocks that comprise the majority of your Fund's
portfolio. In the bond market, low inflation, moderate economic
growth and a strong U.S. dollar were actually helped by the
market turmoil in Asia, contributing to declining interest
rates and rising bond prices.
BALANCED STRATEGY
The stock and bond markets do not always move in the same,
positive direction, which is why
an investment strategy balancing stock and bond investments can
give investors expanded opportunities even while lowering the
risks of a setback in any one market.
This balanced, diversified approach and an emphasis on large, dividend-paying
companies and better quality bonds has resulted in positive returns in 20 of the
past 22 years for your Fund.
We at Evergreen Funds believe this moderate, successful approach is
particularly appropriate for investors who seek the growth opportunities within
the stock market, but who want less risk than a pure stock fund investment.
EVERGREEN CHANGES
As we enter 1998, investors in the Evergreen and the former Keystone fund
families will continue to see changes designed to enhance their investment
experience.
We are pleased to report that shareholders of the Evergreen Balanced Fund II
and the Keystone Balanced Fund (K-1) have approved a proposal to reorganize
these funds into a new fund, the Evergreen Balanced Fund, effective January 23,
1998. The new fund's investment objective is substantially the same as that of
the former funds. The fund will be managed by Walter T. McCormick, Senior Vice
President and Chief Investment Officer, Growth and Income, Keystone Investment
Management Company, in the same style he has employed as long-time manager of
the Keystone Balanced Fund (K-1).
What will not change is our continued commitment to provide you with the
finest investment products and shareholder services possible.
If you have any questions about these changes or other issues affecting your
investments, we encourage you to consult your financial advisor or call
Evergreen Funds at 1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
<PAGE>
PAGE 2
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
Portfolio Manager Interview
[Photo of Walter T. McCormick appears here]
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 THE EVERGREEN BALANCED FUND. A CHARTERED
FINANCIAL ANALYST WITH MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE, MR. MCCORMICK HOLDS AN MBA FROM RUTGERS UNIVERSITY.
Q HOW DID THE FUND PERFORM?
A We think the Fund performed very well during a period of changing market
conditions. The Fund's total return was 7.35% for the six-month period that
ended on December 31, 1997.
Q WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE PERIOD?
A The economic backdrop continued to be quite favorable, with moderate economic
growth, very low inflation and declining interest rates. However, the period
also was marked by a significant short-term volatility in the stock market, even
as the bond market rallied.
In the stock market, the first three months beginning in June were generally
favorable, although small- and medium-sized companies tended to do somewhat
better than the larger, dividend-paying companies that the Fund emphasizes. This
was particularly evident in August, when large company stocks, after a stellar
three years of market leadership, had a mini-correction, and small company
stocks surged ahead. However in October, the mounting financial problems in Asia
had a significant impact on stocks of U.S. companies, with the market losing 10%
of its value in just one week. This correction proved, however, to be an
opportunity for long-term investors. In the final two months of 1997,
stocks-- especially the large, dividend-paying stocks emphasized by the
Fund-- staged a strong comeback as investors again sought out quality.
The bond market was extremely favorable for investors, as receding fears of
inflation, evidence of moderating economic growth and a strong dollar helped
fuel a rally. Interest rates declined and prices tended to rise for both
government and corporate bonds. During the six months, for example, the yield on
the 30-year Treasury fell from 6.78% to 5.92%.
Q WHAT WERE YOUR PRIMARY STRATEGIES DURING THE SIX-MONTH PERIOD?
A The Balanced Fund is managed with a consistent strategy, with a portfolio
balanced between stocks and bonds. The stocks tend to be of higher quality,
stable growth companies that pay dividends. The bonds tend to be government
bonds and higher quality corporate bonds. Throughout the period, the Fund had a
target asset allocation of 60% stocks and 40% bonds, and completed the six
months with an allocation very close to that: 60% stocks; 37.9% bonds; and 2.1%
cash.
Within the equity portion of the portfolio, the greatest industry weightings
at the end of the period were in finance, which had 11.1% of net assets at the
end of the period, and pharmaceuticals, which had 9.7% of net assets. The
largest single investment position at the conclusion of the period was the stock
of General Electric Co., which had another excellent year of performance.
Within the bond portion of the portfolio, we continued to emphasize better
quality bonds, with the average credit quality remaining at AA. The average
weighted maturity of the bond portion of the portfolio was lengthened somewhat
from 11.5 years to 12.2 years to take advantage of opportunities in a declining
interest rate environment.
<PAGE>
PAGE 3
- ---------------------------------------------------------
Q WHY DID YOU EMPHASIZE THE STOCKS OF PHARMACEUTICALS AND FINANCIAL COMPANIES?
A Demographic changes strongly favor the pharmaceutical industry. The aging baby
boomer population will use more and more of this industry's products. Drug
companies also have strong product flows, and we believe their future earnings'
streams can be relied upon, regardless of the overall economic environment.
Major holdings in the industry include Johnson & Johnson, the Fund's second
largest position, American Home Products, Merck & Co., and Pfizer.
Finance stocks, particularly banking stocks, have been helped by declining
interest rates and the growth of fee income. In addition, an underlying trend
toward consolidation in the banking industry has helped support bank stock
values. Within this sector, we substantially reduced our holdings in BankAmerica
stock, which had been a very strong performer for the Fund. At the same time, we
substantially increased our investment in BankBoston and established a position
in Fleet Financial. We believe these two New England-based banks are potential
acquisition candidates.
Q WERE THERE ANY OTHER AREAS THAT YOU EMPHASIZED?
A The Fund continues to emphasize Real Estate Investment Trusts, or REITs. At
the conclusion of the period, they accounted for 3.4% of net assets. We believe
REITs will deliver better returns than the stocks of electric utilities, so
REITS have essentially replaced utilities in the portfolio. Real estate
investments in general are doing well, and REITS are very attractive because of
their growing dividends. They also offer better defensive protection than most
equity-related investments.
Q WHY DOES THE FUND NOT HAVE A HEAVY EMPHASIS ON TECHNOLOGY STOCKS?
A The Balanced Fund has fairly consistently underweighted technology. One reason
is that many large technology companies do not pay substantial dividends, an
important factor in the Fund's strategy. As a result, the Fund has not had
significant investments in companies such as Microsoft and Oracle. At the end of
the period, it had no investments in any software companies. The Fund does have
investments in companies such as Hewlett-Packard, Xerox and IBM and formerly had
positions in telecommunications equipment companies, including Motorola and
Northern Telecom.
Q WHAT IS YOUR OUTLOOK?
A We believe both the stock and bond markets offer reasonable opportunities,
although investors should moderate their expectations for stock investments. The
stock market, after all, has just gone through three extraordinary years. A
return to annual returns approaching the normal, historic average of 10% or less
would not be unexpected. Stock market valuations are high, although I do not
believe they are excessive, and we think there is continued potential for
positive returns.
The outlook in the bond market continues to be favorable. The impact of the
Asian financial crisis in the United States has dampened fears of excessive
economic growth and a return of inflation.
We believe both the stock and bond markets have the potential to produce
respectable returns in 1998, although perhaps not as impressive as the returns
of 1997.
<PAGE>
PAGE 4
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
Your Fund's Performance
Comparison of change in value of a $10,000 investment in Evergreen Balanced
Fund, the Standard & Poors 500 Index and the Consumer Price Index.
[Line graph appears below with the following plot points:]
Class B Shares CPI S&P 500
(In Thousands)
6/87 $10,000 $10,000 $10,000
12/89 13,366 10,926 14,452
12/91 16,278 11,949 18,261
12/93 18,587 12,632 21,623
12/95 22,524 13,299 30,130
12/97 31,044 13,955 49,249
Past performance is no guarantee of future results. The investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than original cost. 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 December 31, 1997.
HISTORICAL RECORD
<TABLE>
<S> <C>
- ----------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
6 mos. w/o sales charge 7.35%
6 mos. w/sales charge 3.53%
1 year w/o sales charge 19.01%
1 year w/sales charge* 16.01%
5 years 13.00%
10 years 11.99%
CUMULATIVE TOTAL RETURN
5 years 84.26%
10 years 210.44%
</TABLE>
*ADJUSTED FOR MAXIMUM CONTINGENT DEFERRED SALES CHARGE OF 3.0% FOR THOSE
INVESTORS WHO SOLD FUND SHARES AFTER ONE CALENDAR YEAR.
<PAGE>
PAGE 5
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- 56.3%
ADVERTISING AND RELATED
SERVICES-- 0.3%
<C> <C> <S> <C>
93,600 Gannett Co., Inc........... $ 5,785,650
--------------
AEROSPACE & DEFENSE-- 1.3%
200,000 Boeing Co. (The)........... 9,787,500
49,600 Honeywell, Inc............. 3,397,600
9,566 Raytheon Co. Cl. A......... 471,699
50,000 Rockwell International
Corp..................... 2,612,500
62,200 United Technologies Corp... 4,528,937
--------------
20,798,236
--------------
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 1.3%
250,000 Ford Motor Co.............. 12,171,875
150,000 General Motors Corp........ 9,093,767
--------------
21,265,642
--------------
BANKS-- 4.8%
250,020 BankAmerica Corp........... 18,251,460
250,000 BankBoston Corp............ 23,484,375
161,473 Chase Manhattan Corp....... 17,681,293
250,000 Fleet Financial Group,
Inc...................... 18,734,375
--------------
78,151,503
--------------
BUSINESS EQUIPMENT &
SERVICES-- 0.3%
62,769 Xerox Corp................. 4,633,137
--------------
CAPITAL GOODS-- 0.4%
60,000 Deere & Co................. 3,498,750
75,750 Ingersoll Rand Co.......... 3,067,875
--------------
6,566,625
--------------
CHEMICAL & AGRICULTURAL
PRODUCTS-- 4.0%
28,000 Air Products & Chemicals,
Inc...................... 2,303,000
133,200 Dow Chemical Co............ 13,519,800
250,000 Du Pont (E. I.) De Nemours
& Co..................... 15,015,625
400,000 Monsanto Co................ 16,800,000
300,000 Morton International,
Inc........................ 10,312,500
136,000 PPG Industries, Inc........ 7,769,000
--------------
65,719,925
--------------
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
CONSUMER PRODUCTS &
SERVICES-- 2.8%
150,000 Gillette Co. (The)......... $ 15,065,625
100,000 International Flavors &
Fragrances, Inc.......... 5,150,000
220,000 Procter & Gamble Co.
(The).................... 17,558,750
139,000 Whirlpool Corp............. 7,645,000
--------------
45,419,375
--------------
DIVERSIFIED COMPANIES-- 0.7%
142,600 AlliedSignal, Inc.......... 5,552,488
80,000 Minnesota Mining &
Manufacturing Co......... 6,565,000
--------------
12,117,488
--------------
ELECTRICAL EQUIPMENT &
SERVICES-- 4.1%
50,000 AMP, Inc................... 2,100,000
108,000 Emerson Electric Co........ 6,095,250
792,000 General Electric Co........ 58,113,000
--------------
66,308,250
--------------
FINANCE & INSURANCE-- 4.4%
64,892 Allstate Corp. (The)....... 5,897,060
60,000 CIGNA Corp................. 10,383,750
414,400 Federal Home Loan Mortgage
Corp..................... 17,378,900
200,000 Federal National Mortgage
Association.............. 11,412,500
15,000 General Reinsurance
Corp....................... 3,180,000
82,000 Morgan (J.P.) & Co.,
Inc...................... 9,255,750
53,600 PMI Group, Inc. (The)...... 3,875,950
68,200 SAFECO Corp................ 3,320,488
40,000 St. Paul Companies, Inc.... 3,282,500
100,000 Travelers Property Casualty
Corp. Cl. A.............. 4,400,000
--------------
72,386,898
--------------
FOOD & BEVERAGE
PRODUCTS-- 3.2%
300,000 Anheuser Busch Companies,
Inc...................... 13,200,000
46,800 CPC International, Inc..... 5,042,700
30,000 General Mills, Inc......... 2,148,750
79,200 H.J. Heinz Co.............. 4,024,350
88,000 Kellogg Co................. 4,367,000
400,000 Philip Morris Companies,
Inc...................... 18,125,000
86,000 Sara Lee Corp.............. 4,842,875
--------------
51,750,675
--------------
</TABLE>
<PAGE>
PAGE 6
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
FOREST PRODUCTS-- 0.0%
30,800 Georgia Pacific Timber
Corp..................... $ 698,775
--------------
HEALTHCARE PRODUCTS &
SERVICES-- 9.7%
300,000 American Home Products
Corp..................... 22,950,000
160,000 Bristol-Myers Squibb Co.... 15,140,000
600,000 Johnson & Johnson.......... 39,525,000
95,252 Lilly (Eli) & Co........... 6,631,920
213,000 Merck & Co., Inc........... 22,631,250
290,400 Pfizer, Inc................ 21,652,950
204,800 Schering-Plough Corp....... 12,723,200
114,400 SmithKline Beecham Plc--
ADR...................... 5,884,450
84,000 Warner-Lambert Co.......... 10,416,000
--------------
157,554,770
--------------
INFORMATION SERVICES &
TECHNOLOGY-- 1.0%
100,000 Hewlett-Packard Co......... 6,250,000
100,000 International Business
Machines Corp............ 10,456,250
--------------
16,706,250
--------------
OIL/ENERGY-- 7.4%
96,600 Amoco Corp................. 8,223,075
289,000 Atlantic Richfield Co...... 23,156,125
263,600 Chevron Corp............... 20,297,200
127,000 Exxon Corp................. 7,770,812
310,800 Mobil Corp................. 22,435,875
280,400 Royal Dutch Petroleum Co... 15,194,175
255,000 Sonat, Inc................. 11,666,250
294,400 Unocal Corp................ 11,426,400
--------------
120,169,912
--------------
OIL FIELD SERVICES-- 0.6%
90,400 Halliburton Co............. 4,695,150
62,200 Schlumberger Ltd........... 5,007,100
--------------
9,702,250
--------------
PAPER & PACKAGING-- 1.5%
30,800 Georgia Pacific Corp....... 1,871,100
57,000 International Paper Co..... 2,458,125
126,600 Kimberly-Clark Corp........ 6,242,963
300,000 Weyerhaeuser Co............ 14,718,750
--------------
25,290,938
--------------
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
REAL ESTATE-- 3.4%
119,500 Arden Realty Group, Inc.
REIT..................... $ 3,674,625
50,000 Boston Properties, Inc.
REIT..................... 1,653,125
703,150 Equity Office Properties
Trust
REIT..................... 22,193,172
70,000 First Industrial Realty
Trust, Inc. REIT......... 2,528,750
200,003 Patriot American
Hospitality, Inc. REIT... 5,762,586
294,112 Rouse Co................... 9,632,168
100,000 Spieker Properties, Inc.
REIT..................... 4,287,500
50,000 Tower Realty Trust, Inc.
REIT..................... 1,231,250
100,000 TriNet Corporate Realty
Trust, Inc. REIT......... 3,868,750
--------------
54,831,926
--------------
RETAILING & WHOLESALE-- 0.4%
60,000 May Department Stores Co... 3,161,250
70,000 Sears, Roebuck & Co........ 3,167,500
--------------
6,328,750
--------------
TRANSPORTATION-- 0.4%
120,000 Norfolk Southern Corp...... 3,697,500
46,800 Union Pacific Corp......... 2,922,075
--------------
6,619,575
--------------
UTILITIES-- ELECTRIC-- 0.9%
39,500 American Electric Power
Co., Inc................. 2,039,188
74,000 Consolidated Edison Co. of
New York, Inc............ 3,034,000
42,000 Duke Power Co.............. 2,325,750
71,400 Florida Progress Corp...... 2,802,450
86,800 Houston Industries, Inc.... 2,316,475
44,105 Texas Utilities Co......... 1,833,114
--------------
14,350,977
--------------
UTILITIES-- TELEPHONE-- 3.4%
124,000 Ameritech Corp............. 9,982,000
300,000 AT&T Corp.................. 18,375,000
157,651 Bell Atlantic Corp......... 14,346,241
162,000 GTE Corp................... 8,464,500
75,480 Sprint Corp................ 4,425,015
--------------
55,592,756
--------------
TOTAL COMMON STOCKS
(COST $427,899,850)...... 918,750,283
--------------
</TABLE>
<PAGE>
PAGE 7
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
CONVERTIBLE PREFERRED-- 2.5%
FINANCE & INSURANCE-- 1.9%
<C> <C> <S> <C>
64,200 Allstate Corp. (The)
6.76%, DECS (Exchangeable
for PMI Group, Inc.
common stock)............ $ 3,852,000
63,500 Conseco, Inc.
7.00%, PRIDES............ 9,906,000
150,000 Newell Financial Trust 1
144A..................... 7,743,750
200,000 SunAmerica, Inc.
$3.188, PERCS............ 9,312,500
--------------
30,814,250
--------------
RETAILING & WHOLESALE-- 0.6%
200,000 Kmart Financing I
7.75%.................... 10,325,000
--------------
TOTAL CONVERTIBLE PREFERRED
(COST $31,958,992)....... 41,139,250
--------------
</TABLE>
<TABLE>
<CAPTION>
<C> <C> <S> <C>
PRINCIPAL
AMOUNT
- ------------------
CONVERTIBLE DEBENTURES-- 1.2%
ENVIRONMENTAL SERVICES-- 0.5%
$2,000,000 US Filter Corp.
6.00%, 9/15/05, 144A..... 3,355,000
4,900,000 USA Waste Services, Inc.
4.00%, 2/1/02............ 5,414,500
--------------
8,769,500
--------------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 0.3%
3,000,000 Solectron Corp.
6.00%, 3/1/06............ 4,020,000
--------------
RETAILING & WHOLESALE-- 0.4%
5,250,000 Staples, Inc.
4.50%, 10/1/00, 144A..... 6,995,625
--------------
TOTAL CONVERTIBLE
DEBENTURES
(COST $15,150,000)....... 19,785,125
--------------
CORPORATE BONDS-- 15.0%
AEROSPACE & DEFENSE-- 0.8%
3,000,000 Boeing Co. (The)
7.88%, 4/15/43........... 3,496,050
Northrop Grumman Corp.
5,500,000 7.00%, 3/1/06............ 5,673,525
3,000,000 9.38%, 10/15/24............ 3,479,310
--------------
12,648,885
--------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------
CORPORATE BONDS-- CONTINUED
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.5%
$ 7,500,000 Hertz Corp.
7.00%, 5/1/02............ $ 7,637,025
--------------
BANKS-- 1.0%
6,500,000 ABN Amro Bank NV Chicago
Branch
7.30%, 12/1/26........... 6,551,675
2,215,000 Amsouth Bancorp
6.75%, 11/1/25........... 2,269,555
4,000,000 National Westminster
Bancorp
9.38%, 11/15/03.......... 4,595,960
2,500,000 Southtrust Bank
6.57%, 12/15/27.......... 2,533,500
--------------
15,950,690
--------------
DIVERSIFIED COMPANIES-- 0.4%
5,300,000 General Electric Capital
Corp.
8.13%, 5/15/12........... 6,115,140
--------------
ENVIRONMENTAL SERVICES-- 0.4%
7,000,000 Waste Management, Inc.
7.65%, 3/15/11........... 7,262,500
--------------
FINANCE & INSURANCE-- 5.2%
8,000,000 AMBAC, Inc.
9.38%, 8/1/11............ 9,892,480
6,550,000 Associates Corp.
North America
8.63%, 11/15/04.......... 7,369,208
5,000,000 Bear Stearns Companies,
Inc.
6.63%, 10/1/04........... 5,016,200
CIT Group Holdings, Inc.
6,500,000 6.38%, 10/1/02............. 6,515,665
4,500,000 9.25%, 3/15/01............. 4,887,090
4,400,000 Commercial Credit
Group, Inc.
10.00%, 5/15/09.......... 5,572,204
2,250,000 International Lease
Finance Corp.
6.63%, 6/1/00............ 2,267,438
3,500,000 Jefferson Pilot Capital
Trust A
8.14%, 1/15/46, 144A..... 3,652,950
</TABLE>
<PAGE>
PAGE 8
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS-- CONTINUED
<C> <C> <S> <C>
FINANCE & INSURANCE-- CONTINUED
$ 6,500,000 Lehman Brothers
Holdings, Inc.
6.50%, 10/1/02........... $ 6,483,295
7,000,000 Liberty Mutual Insurance
Co.
7.69%, 10/15/97.......... 7,373,030
3,000,000 Mellon Capital II
7.99%, 1/15/27........... 3,220,860
Paine Webber Group, Inc.
4,705,000 8.25%, 5/1/02.............. 5,007,108
5,050,000 9.25%, 12/15/01............ 5,521,620
6,200,000 Prudential Funding
7.13%, 7/1/07............ 6,428,904
5,500,000 Sun Life Canada US Trust I
8.53%, 5/29/49........... 6,072,220
--------------
85,280,272
--------------
FOOD & BEVERAGE
PRODUCTS-- 0.7%
5,000,000 Grand Metropolitan
Investment Corp.
7.45%, 4/15/35........... 5,588,950
5,000,000 Philip Morris Companies,
Inc.
7.20%, 2/1/07............ 5,152,150
--------------
10,741,100
--------------
HEALTHCARE PRODUCTS &
SERVICES-- 0.5%
8,000,000 Medpartners, Inc.
6.88%, 9/1/00............ 7,890,000
--------------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 0.1%
1,100,000 Textron, Inc.
10.01%, 2/1/00........... 1,204,500
--------------
MACHINERY-- DIVERSIFIED-- 0.1%
2,000,000 Caterpillar, Inc.
9.38%, 7/15/01........... 2,194,100
--------------
OIL/ENERGY-- 1.3%
3,000,000 Global Marine, Inc.
7.13%, 9/1/07, 144A...... 3,071,719
10,000,000 Sun, Inc.
8.13%, 11/1/99........... 10,323,700
7,500,000 Transocean Offshore, Inc.
8.00%, 4/15/27........... 8,482,500
--------------
21,877,919
--------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS-- CONTINUED
<C> <C> <S> <C>
OIL FIELD SERVICES-- 0.4%
$ 4,000,000 Apache Finance Property
Limited
6.50%, 12/15/07.......... $ 3,998,240
3,000,000 Smith International, Inc.
7.00%, 9/15/07........... 3,053,670
--------------
7,051,910
--------------
PAPER & PACKAGING-- 0.5%
8,000,000 James River Corp. of
Virginia
6.75%, 10/1/99........... 8,069,360
--------------
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.6%
10,000,000 Time Warner, Inc.
7.57%, 2/1/24............ 10,461,500
--------------
RETAILING & WHOLESALE-- 0.4%
4,300,000 Sears Roebuck & Co.
10.00%, 2/3/12........... 5,632,828
--------------
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 0.7%
6,750,000 Bellsouth Capital Funding
Corp.
7.12%, 7/15/97........... 7,091,955
4,000,000 Frontier 144A
6.25%, 12/15/99.......... 3,995,200
--------------
11,087,155
--------------
TRANSPORTATION-- 0.8%
4,000,000 Atlantic Coast Airlines
Corp.
7.20%, 1/1/14............ 4,070,680
3,000,000 Golden St. Pete Trans Corp.
8.04%, 2/1/19............ 3,173,437
5,500,000 Norfolk Southern Corp.
7.05%, 5/1/37............ 5,813,170
--------------
13,057,287
--------------
UTILITIES-- 0.6%
5,000,000 Central Illinois Public
Service Co.
7.61%, 6/1/17............ 5,417,700
4,000,000 Rural Electric Cooperative
8.67%, 9/15/18........... 4,539,480
284,000 System Energy Resources,
Inc.
11.38%, 9/1/16........... 302,449
--------------
10,259,629
--------------
TOTAL CORPORATE BONDS
(COST $237,964,992)...... 244,421,800
--------------
</TABLE>
<PAGE>
PAGE 9
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------
ASSET-BACKED SECURITIES-- 6.6%
<C> <C> <S> <C>
$ 5,500,000 Americredit Automobile
Receivable, Series
1997-C,
Class A3,
6.30%, 7/5/03............ $ 5,539,531
12,500,000 Carco Auto Loan Master
Trust, Series 1997-1,
Class A,
6.69%, 8/15/04........... 12,662,500
Contimortgage Home Equity
Loan
2,750,000 Series 1997-4, Class A7,
6.63%, 9/15/16........... 2,765,455
2,500,000 Series 1996-4, Class A9,
6.88%, 1/15/28........... 2,525,000
6,150,000 Corestates Home Equity
Loan, Series 1996-1,
Class A4,
7.00%, 6/15/12........... 6,242,250
Green Tree Financial Corp.
6,000,000 Series 1993-4, Class A3,
6.25%, 1/15/19........... 5,994,360
6,000,000 Series 1997-3, Class A5,
7.14%, 7/15/28........... 6,103,080
Merrill Lynch Mortgage
Investors, Inc.
1,706,993 Series 1992-B, Class B,
8.50%, 4/15/12........... 1,730,993
3,746,972 Series 1992-D, Class B,
8.50%, 6/15/17........... 4,011,621
5,000,000 Series 1991-D, Class B,
9.85%, 7/15/11........... 5,209,350
8,000,000 Olympic Automobile
Receivables Trust, Series
1997-A, Class A5
6.80%, 2/15/05........... 8,108,420
10,000,000 Premier Auto Trust, Series
1997 2, Class B,
6.53%, 12/6/03........... 10,056,200
Southern Pacific Secured
Assets Corp.
11,350,000 Series 1997-4, Class A6,
6.74%, 1/25/28........... 11,278,779
7,500,000 Series 1996-3, Class A4,
7.60%, 10/25/27.......... 7,603,125
1,035,000 University Support
Services,
Inc., Series 1992-D,
9.07%, 11/1/07........... 1,031,766
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
ASSET-BACKED SECURITIES-- CONTINUED
<C> <C> <S> <C>
$10,900,000 WFS Financial Owner Trust,
Series 1997-C,
6.30%, 3/20/05........... $ 10,865,937
6,650,000 World Omni Automobile
Lease, Series 1997-A,
Class A4,
6.90%, 6/25/03........... 6,745,561
--------------
108,473,928
--------------
TOTAL ASSET-BACKED
SECURITIES
(COST $107,020,646)...... 108,473,928
--------------
<CAPTION>
FOREIGN BONDS (U.S. DOLLARS)-- 0.5%
<C> <C> <S> <C>
5,000,000 Bayer Corp.
7.13%, 10/1/15, 144A..... 5,225,250
30,000,000 Skandinaviska Enskilda
0%, 5/26/33.............. 2,514,000
--------------
7,739,250
--------------
TOTAL FOREIGN BONDS
(U.S. DOLLARS)
(COST $7,547,056)........ 7,739,250
--------------
<CAPTION>
FOREIGN BONDS (NON U.S. DOLLARS)-- 1.8%
<C> <C> <S> <C>
Nykredit
DKK100,249,000 7.00%, 10/1/29............. 14,462,578
98,913,000 6.00%, 10/1/26............. 14,067,735
--------------
28,530,313
--------------
TOTAL FOREIGN BONDS
(NON U.S. DOLLARS)
(COST $27,975,158)....... 28,530,313
--------------
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS-- 2.3%
<C> <C> <S> <C>
TREASURY NOTES & BONDS-- 2.3%
U.S. Treasury Bonds
$12,200,000 6.38%, 8/15/27............. 12,867,218
730,000 6.50%, 11/15/26............ 779,275
3,150,000 7.88%, 2/15/21............. 3,867,602
U.S. Treasury Notes
1,050,000 5.75%, 11/15/00............ 1,051,963
18,660,000 5.88%, 11/30/01............ 18,735,760
--------------
37,301,818
--------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(COST $36,995,785)....... 37,301,818
--------------
</TABLE>
<PAGE>
PAGE 10
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES-- 11.7%
<C> <C> <S> <C>
MORTGAGE PASS-THROUGH
CERTIFICATES-- 3.9%
Federal Home Loan
Mortgage Corp.
$ 2,315,610 7.43%, 8/1/22.............. $ 2,407,516
1,861,983 7.58%, 3/1/22.............. 1,920,170
4,614,027 7.88%, 4/1/22.............. 4,859,170
1,323,873 7.92%, 11/1/21............. 1,376,000
Federal National Mortgage
Association
18,680,797 5.50%, 7/1/09.............. 18,254,127
5,257,409 5.75%, 2/1/27.............. 5,348,573
15,053,319 6.50%, 12/1/08............. 15,132,048
5,429,836 7.00%, 5/1/24.............. 5,492,605
2,949,046 7.61%, 5/1/22.............. 3,086,353
2,644,872 7.65%, 9/1/21.............. 2,774,233
2,657,358 7.65%, 1/1/31.............. 2,772,368
--------------
63,423,163
--------------
COLLATERALIZED MORTGAGE
OBLIGATIONS-- 7.8%
Asset Securitization Corp.
5,000,000 Series 1997- D5, Class A3,
7.11%, 2/14/41........... 5,067,000
4,000,000 Series 1997-D4, Class A2,
7.68%, 2/14/29........... 4,295,000
3,300,000 Series 1996-D3, Class A3,
7.69%, 10/13/26.......... 3,544,406
4,431,963 BA Mortgage Securities
Inc.,
Series 1997-1, Class M,
7.50%, 7/25/26........... 4,501,905
2,000,000 Chase Commercial Mortgage
Secs Corp., Series
1997-2,
Class B,
6.60%, 11/19/07.......... 1,995,000
2,200,000 Chase Commercial Mortgage
Securities Corp., Series
1997-1, Class B,
7.37%, 4/19/07........... 2,291,713
4,782,154 Chase Mortgage Finance
Corp., Series 1994-D,
Class M
6.75%, 2/25/25........... 4,662,552
2,400,000 Commercial Mortgage
Acceptance Corp., Series
1997-ML1, Class B,
6.41%, 12/15/07.......... 2,398,125
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
MORTGAGE-BACKED SECURITIES-- CONTINUED
<C> <C> <S> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS-- CONTINUED
$ 1,726,013 Criimi Mae Financial Corp.,
Series 1, Class A,
7.00%, 1/1/33............ $ 1,716,304
Federal Home Loan Mortgage
Corp.
3,801,140 Series 2008, Class SA,
3.58%,
2/15/24.................. 3,273,732
8,148,000 Series 117, Class G, 8.50%,
1/15/21.................. 8,929,801
Federal National Mortgage
Association
1,250,000 Remic Trust 1993-248,
Class SA, 3.88%,
8/25/23.................. 1,034,925
5,000,000 Remic Trust 1993-156,
Class B, 6.50%, 4/25/18.. 4,989,050
5,000,000 Series 1997-M6, Class C,
6.85%, 5/17/20........... 5,143,750
1,250,000 FFCA Secured Lending Corp.,
Series 1997-1, Class B1,
7.74%, 6/18/13........... 1,324,805
5,518,577 Financial Asset
Securitization, Series
1997-NAM 1,
Class FXA2,
7.75%, 5/25/27........... 5,631,314
3,454,305 G E Capital Mortgage
Services Inc., Series
1994-10, Class A14,
6.50%, 3/25/24........... 3,432,750
6,450,556 Headlands Mortgage
Securities, Inc., Series
1997-2, Class AI10,
7.75%, 5/25/27........... 6,579,567
7,918,762 Independent National
Mortgage Corp., 144A,
Series 1997-A,
Class A,
7.84%, 12/26/26.......... 7,987,259
1,147,075 KS Mortgage Capital, L. P.,
144A, Series 1995-1,
Class A1,
7.09%, 4/20/02........... 1,147,075
</TABLE>
<PAGE>
PAGE 11
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES-- CONTINUED
<C> <C> <S> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS-- CONTINUED
Merrill Lynch Mortgage
Investors, Inc.
$ 2,299,000 Series 1996-C2, Class B,
6.96%, 11/21/28.......... $ 2,346,776
5,000,000 Series 1997-C1, Class A3,
7.12%, 6/18/29........... 5,192,969
5,870,000 Merrill Lynch Trust XXXV,
Class G,
8.45%, 11/1/18........... 6,257,009
1,933,308 Mid State Trust, Series 6,
Class A3,
7.54%, 7/1/35............ 1,987,112
603,093 Paine Webber Mortgage
Acceptance Corp. IV,
Series
1993-5, Class A3,
6.88%, 6/25/08........... 602,152
PNC Mortgage Securities
Corp.
2,491,222 Series 1997-4, Class 2PP3,
7.25%, 7/25/27........... 2,484,247
6,923,329 Series 1997-4, Class 2PP1,
7.50%, 7/25/27........... 7,012,034
6,538,000 Residential Accredit Loans,
Inc., Series 1996-QS4,
Class AI 10,
7.90%, 8/25/26........... 6,754,571
9,726,237 Residential Funding
Mortgage
Securities I Inc., Series
1997-S7, Class A4,
7.50%, 5/25/10........... 10,005,867
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- --------------------------------------------------------------------
<CAPTION>
MORTGAGE-BACKED SECURITIES-- CONTINUED
<C> <C> <S> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS-- CONTINUED
$ 5,000,000 Shearson Lehman CMO Inc.,
Series V, Class 5
7.50%, 5/1/19............ $ 5,188,650
--------------
127,777,420
--------------
TOTAL MORTGAGE-BACKED
SECURITIES
(COST $187,487,948)...... 191,200,583
--------------
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
REPURCHASE AGREEMENT-- 1.5%
24,328,000 Keystone Joint Repurchase
Agreement, investments
in repurchase
agreements, in a joint
trading account,
purchased 12/31/97,
6.60%, maturing 1/2/98
(maturity value
$24,332,460) (a)....... 24,328,000
--------------
TOTAL INVESTMENTS--
(COST-- $1,104,328,427).................... 99.4% 1,621,670,350
OTHER ASSETS AND
LIABILITIES-- NET.......................... 0.6 10,225,413
----- --------------
NET ASSETS................................... 100.0% $1,631,895,763
===== ==============
</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 December 31, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS
ADR American Depository Receipt
DECS Dividend Enhanced Convertible Stock
DKK Danish Kroner
PERCS Preferred Equity Redemption Cumulative Stock
PRIDES Provisionally Redeemable Income Debt Exchangeable for Stock
REIT Real Estate Investment Trust
<PAGE>
PAGE 12
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
SCHEDULE OF INVESTMENTS-- DECEMBER 31, 1997 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Buy:
<S> <C> <C> <C> <C> <C>
UNREALIZED
EXCHANGE U.S. VALUE AT IN EXCHANGE APPRECIATION
DATE CONTRACTS TO RECEIVE DECEMBER 31, 1997 FOR U.S. $ (DEPRECIATION)
- -------------------------------------------------------------------------------------------------------------------------
10/10/97 97,152,000 Danish Kroner $14,618,116 $14,189,129 $428,987
10/14/97 92,915,000 Danish Kroner 13,944,920 13,571,719 373,201
11/24/97 17,765,000 Canadian Dollars 12,556,989 12,453,837 103,152
--------------
$905,340
--------------
<CAPTION>
Forward Foreign Currency Exchange Contracts to Sell:
CONTRACTS TO DELIVER
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
12/4/97 17,765,000 Canadian Dollars $12,537,493 $12,453,837 $(83,655)
--------------
Net unrealized appreciation on forward foreign currency contracts $821,685
--------------
--------------
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
- ---------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1997 ------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 12.95 $ 11.33 $ 10.09 $ 9.26 $10.10 $ 9.77
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.18 0.30 0.29 0.31 0.28 0.31
Net realized and unrealized gains (losses) on investment
and foreign currency related transactions 0.75 2.07 1.42 0.96 (0.37) 0.66
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.93 2.37 1.71 1.27 (0.09) 0.97
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.18) (0.30) (0.24) (0.31) (0.28) (0.31)
In excess of net investment income 0 0 (0.03) (0.02) (0.07) (0.09)
Tax basis return of capital 0 0 0 0 (0.02) 0
Net realized gain on investments (1.33) (0.45) (0.20) (0.02) (0.25) (0.24)
In excess of net realized gain on investments 0 0 0 (0.09) (0.13) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.51) (0.75) (0.47) (0.44) (0.75) (0.64)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $ 12.37 $ 12.95 $ 11.33 $10.09 $ 9.26 $10.10
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (A) 7.35% 21.95% 17.35% 14.20% (1.16%) 10.39%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.34%+ 1.70% 1.72% 1.77% 1.71% 1.93%
Total expenses, excluding indirectly paid expenses 1.34%+ 1.69% 1.71% N/A N/A N/A
Net investment income 2.78%+ 2.50% 2.71% 3.33% 2.81% 3.07%
PORTFOLIO TURNOVER RATE 42% 89% 96% 88% 88% 74%
AVERAGE COMMISSION RATE PAID $0.0602 $0.0400 $0.0031 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (MILLIONS) $ 1,632 $ 1,625 $ 1,481 $1,345 $1,390 $1,464
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF YEAR $ 9.16 $ 9.10 $ 9.12 $ 8.37 $ 9.74
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.32 0.45 0.50 0.46 0.47
Net realized and unrealized gains (losses) on investment and foreign currency
related transactions 0.75 0.18 0.20 0.83 (0.82)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 0.63 0.70 1.29 (0.35)
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.32) (0.50) (0.50) (0.54) (0.60)
In excess of net investment income (0.14) (0.04) (0.04) 0 0
Tax basis return of capital 0 0 0 0 0
Net realized gain on investments 0 (0.03) (0.18) 0 (0.42)
In excess of net realized gain on investments 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.46) (0.57) (0.72) (0.54) (1.02)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF YEAR $ 9.77 $ 9.16 $ 9.10 $ 9.12 $ 8.37
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (A) 11.86% 7.49% 7.99% 16.07% (3.37%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.97% 1.88% 1.99% 1.96% 1.91%
Total expenses, excluding indirectly paid expenses N/A N/A N/A N/A N/A
Net investment income 3.25% 4.56% 4.94% 5.48% 5.34%
PORTFOLIO TURNOVER RATE 52% 60% 35% 49% 64%
AVERAGE COMMISSION RATE PAID N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF YEAR (MILLIONS) $1,184 $ 902 $ 827 $ 712 $ 685
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charge.
+ Annualized
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------
ASSETS:
Investments, at value (identified cost,
$1,104,328,427) $1,621,670,350
Cash 8,130
Dividends and interest receivable 9,062,152
Receivable for Fund shares sold 3,010,400
Unrealized appreciation on forward foreign
currency contracts 905,340
Receivable for investments sold 76,182
Prepaid expenses and other assets 173,943
- -------------------------------------------------------------
Total assets 1,634,906,497
- -------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 1,420,374
Unrealized depreciation on forward foreign
currency contracts 83,655
Distribution Plan expenses payable 696,007
Management fee payable 610,590
Due to related parties 25,000
Accrued expenses and other liabilities 175,108
- -------------------------------------------------------------
Total liabilities 3,010,734
- -------------------------------------------------------------
NET ASSETS $1,631,895,763
- -------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Paid-in capital $1,086,228,485
Undistributed net investment income 4,045,599
Accumulated net realized gain on
investments and foreign currency related
transactions 23,469,846
Net unrealized appreciation on investments
and foreign currency related
transactions 518,151,833
- -------------------------------------------------------------
Total net assets $1,631,895,763
- -------------------------------------------------------------
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $1,631,895,763 / 131,873,465
shares outstanding $ 12.37
- -------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------
INVESTMENT INCOME
Interest $ 22,458,671
Dividends (net of foreign
withholding taxes of $26,609) 11,573,174
- -------------------------------------------------------------
Total income 34,031,845
- -------------------------------------------------------------
EXPENSES
Management fee $ 3,622,603
Distribution Plan expenses 5,255,295
Transfer agent fees 1,255,913
Administrative fees 204,649
Custodian fees 345,811
Printing 119,165
Trustees' fees and expenses 80,844
Registration fees 73,056
Professional fees 37,246
Miscellaneous 62,050
- -------------------------------------------------------------
Total expenses 11,056,632
Less: Expenses paid
indirectly (3,558)
- -------------------------------------------------------------
Net expenses 11,053,074
- -------------------------------------------------------------
Net investment income 22,978,771
- -------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS, FUTURES
CONTRACTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS:
Net realized gain (loss) on:
Investments 89,864,449
Futures contracts (266,127)
Foreign currency related
transactions 1,278,193
- -------------------------------------------------------------
Net realized gain 90,876,515
- -------------------------------------------------------------
Net change in unrealized
appreciation on:
Investments 1,887,771
Foreign currency related
transactions 131,104
- -------------------------------------------------------------
Net change in unrealized
appreciation 2,018,875
- -------------------------------------------------------------
Net realized and unrealized
gain on investments, futures
contracts and foreign
currency related transactions 92,895,390
- -------------------------------------------------------------
Net increase in net assets
resulting from operations $115,874,161
- -------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 15
- ---------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1997 YEAR ENDED
(UNAUDITED) JUNE 30, 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 22,978,771 $ 38,677,977
Net realized gain on investments, futures contracts and foreign currency related
transactions 90,876,515 120,987,282
Net change in unrealized appreciation on investments and foreign currency
related transactions 2,018,875 146,568,036
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 115,874,161 306,233,295
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (22,153,179) (38,660,044)
Net realized gain on investments (159,828,039) (57,571,132)
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (181,981,218) (96,231,176)
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 70,080,530 200,987,044
Payments for shares redeemed (159,976,391) (351,020,484)
Net asset value of shares issued in reinvestment of distributions 162,503,338 84,249,628
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions 72,607,477 (65,783,812)
- ------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 6,500,420 144,218,307
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 1,625,395,343 1,481,177,036
- ------------------------------------------------------------------------------------------------------------------------
End of period, including undistributed net investment income of $4,045,599 and
$3,239,562, respectively $ 1,631,895,763 $1,625,395,343
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Evergreen Balanced Fund, formerly Keystone Balanced Fund (K-1), (the "Fund") is
a Pennsylvania 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 Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end management investment company. The
Fund's investment objective is to provide shareholders with current income. The
Fund seeks to meet its objective principally through investments 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.
2. SIGNIFICANT ACCOUNTING POLICIES
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. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
Securities traded on a national securities exchange or included on the NASDAQ
National Market System ("NMS") are valued at the last reported sales price on
the exchange where primarily traded. Securities traded on an exchange or NMS for
which there has been no sale and other securities traded in the over-the-counter
market are valued at the mean between the last reported bid and asked price.
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 an 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. 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 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
securities transactions and foreign currency transactions and foreign currency
gains and losses resulting from the difference between the amounts of interest
and dividends
<PAGE>
PAGE 17
- ---------------------------------------------------------
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 investments.
D. 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.
E. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Funds 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.
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. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
G. FEDERAL TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable 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 taxes 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 18
- ---------------------------------------------------------
EVERGREEN BALANCED FUND (FORMERLY KEYSTONE BALANCED FUND (K-1))
3. 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>
SIX MONTHS ENDED
DECEMBER 31, 1997 YEAR ENDED
(UNAUDITED) JUNE 30, 1997
<S> <C> <C>
- ---------------------------------------------------------
Shares sold 5,427,397 16,959,452
Shares redeemed (12,193,344) (29,517,723)
Shares issued in
reinvestment of
distributions 13,105,292 7,405,182
- ---------------------------------------------------------
Net increase
(decrease) 6,339,345 (5,153,089)
- ---------------------------------------------------------
</TABLE>
4. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the six months ended December 31, 1997 were
$573,142,144 and $681,947,939, respectively.
5. DISTRIBUTION PLAN
Evergreen Distributors, Inc. ("EDI"), formerly Evergreen Keystone Distributor,
Inc. , a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") serves as
principal underwriter to the Fund. 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.
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 of the Fund.
However, after the termination of the Distribution Plan, and subject to the
discretion of the Independent Trustees, payments to EDI and/or its predecessor
may continue as compensation for services which had been provided while the
Distribution Plan was in effect.
6. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Keystone serves as the investment adviser and manager to the Fund. Keystone
provides the Fund with investment advisory and management services for which it
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.
During the six months ended December 31, 1997, the Fund paid or accrued
$204,649 to Keystone for certain administration and accounting services.
Additionally, Evergreen Service Company ("ESC"), formerly Evergreen Keystone
Services Company, a wholly-owned subsidiary of Keystone, serves as the Fund's
transfer and dividend disbursing agent.
BISYS Fund Services, Inc. ("BISYS"), an affiliate of EDI, serves 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.
7. 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
8. FINANCING AGREEMENT
On December 23, 1997, a financing agreement among all of the Evergreen Funds,
State Street Bank & Trust ("State Street") and a group of Banks (the "Banks")
became effective. Under this agreement, the Banks provide an unsecured credit
facility in the aggregate
<PAGE>
PAGE 19
- ---------------------------------------------------------
amount of $400 million ($275 million committed and $125 million uncommitted)
allocated evenly among the Banks. The credit facility is to be accessed by the
Funds for temporary or emergency purposes only and is subject to each Fund's
borrowing restrictions. Borrowings under this facility bear interest at 0.50%
per annum above the Federal Funds rate. A commitment fee of 0.065% per annum
will be incurred on the unused portion of the committed facility, which will be
allocated to all funds. For its assistance in arranging this financing
agreement, the Capital Market Group of First Union was paid a one time
arrangement fee of $27,500. State Street serves as administrative agent for the
Banks, and as administrative agent is entitled to a fee of $20,000 per annum
which is allocated to all of the Funds. During the six months ended December 31,
1997, the Fund had no borrowings under this agreement.
9. SPECIAL MEETING OF SHAREHOLDERS
The Fund held a special meeting of shareholders on Tuesday, January 6, 1998 to
consider a proposal providing for the acquisition of all the assets of the Fund,
by a new Fund, the Evergreen Balanced Fund, a series of the Evergreen Equity
Trust. On November 10, 1997, the record date for the meeting, the Fund had
120,903,563 shares outstanding, of which 67,051,635 shares (55.48% of record
date shares) were represented at the meeting. The votes at the meeting were as
follows:
<TABLE>
<S> <C> <C>
For 61,550,057
Against 1,584,174
Abstain 3,917,404
</TABLE>
The reorganization was completed as of the close of business on January 23,
1998.
10. REORGANIZATION
Effective January 9, 1998, the Fund added two classes of shares designated as
Class A and Class C and designated its current class of shares as Class B. Class
A shares are sold with a maximum front-end sales charge of 4.75%. Class B and
Class C shares are sold without a front-end sales charge, but pay a higher
ongoing distribution fee than Class A. Class B shares are sold subject to a
contingent deferred sales charge that is payable upon redemption and decreases
depending on how long the shares have been held. Class C shares are sold subject
to a contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Shareholders of the Fund who, on January 16, 1998,
held Class B shares acquired before January 1, 1995 and certain other
non-commissionable Class B shares had such shares converted to Class A shares
having an aggregate value equal to that of the shareholder's converted Class B
shares prior to the conversion.
At the meeting on January 6, 1998, the shareholders of the Fund approved the
acquisition of substantially all assets and certain liabilities of the Fund by
Evergreen Balanced Fund ("Evergreen Balanced"), a series of Evergreen Equity
Trust, a Delaware business trust, in exchange for shares of Evergreen Balanced.
Also at a meeting on January 6, 1998, the shareholders of Evergreen Balanced
Fund II ("Balanced Fund II"), a series of Evergreen Investment Trust, approved
the acquisition of substantially all assets and certain liabilities of Balanced
Fund II by Evergreen Balanced in exchange for shares of Evergreen Balanced.
Balanced Fund II had net assets of approximately $987 million at December 31,
1997.
11. DISTRIBUTIONS TO SHAREHOLDERS
A distribution of $0.308 per share was declared on January 21, 1998 for Class A,
Class B and Class C shares, respectively. Of this amount $0.079 per share was
paid from ordinary income and $0.229 per share was paid from taxable net
long-term capital gains. This distribution was payable on January 23, 1998 to
shareholders of record at the close of business on January 21, 1998. This
distribution is not reflected in these financial statements.
<PAGE>
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 Funds, contact your
financial advisor or call Evergreen Funds.
<TABLE>
<C> <S>
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
EVERGREEN DISTRIBUTOR, INC.
Evergreen is a Service Mark of Evergreen
Investment Services, Inc. Copyright 1997.
K-1R REV02 [Recycle logo appears here]
</TABLE>
EVERGREEN
BALANCED
FUND
(Formerly Keystone
Balanced Fund (K-1))
[EVERGREEN FUNDS LOGO APPEARS HERE]
SINCE 1932
SEMIANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
