Keystone Government Securities Fund
Seeks generous income primarily from US Government and agency obligations.
Dear Shareholder:
We are pleased to report on the performance of Keystone Government Securities
Fund for the twelve-month period which ended July 31, 1995.
Performance
Class A shares returned 8.64% for the twelve-month period.
Class B shares returned 7.81% for the twelve-month period.
Class C shares returned 7.81% for the twelve-month period.
The Lehman Intermediate Government Bond Index, returned 8.40% for the same
period.
Your Fund's twelve-month returns reflect a significantly improved
investment environment. Investors witnessed better performance as US interest
rates fell and bond prices rose in the first half of 1995. This was a
reversal from the rising rate environment that characterized most of 1994.
Slowing economic growth and evidence of moderate inflation in the first half
of 1995 contributed to strong performance for your Fund's holdings.
Keystone Government Securities Fund was designed to seek attractive income
by investing in US government and agency securities.
We manage the Fund based on the changing economic cycles. As a result, we
made adjustments to the portfolio in an attempt to capitalize on attractive
income and return opportunities during the twelve-month period. To take
advantage of rising interest rates during the last half of 1994, we invested
in bonds with zero- to five-year maturities and fifteen-year or longer
maturities. This strategy helped to minimize price declines while short-term
yields were rising. When interest rates declined, we concentrated on bonds
with average maturities in the five- to fifteen-year range. This approach
helped the Fund generate a steady stream of income and some capital
appreciation. On July 31, 1995 the portfolio's average maturity was nine
years.
Our Outlook
The "soft landing" we expected for the US economy has arrived. We believe it
should give way to stable, non- inflationary growth. We think this should be
an environment of improved stability for bond investors, with most of the
returns coming from income rather than price appreciation.
We also believe that the more fiscally conservative government policies
being proposed by Congress could be positive for the economy and the bond
market. If enacted, we believe that the legislative initiatives to balance
the federal budget, pay down the deficit, and reduce the size of the federal
government could help keep interest rates and inflation at moderate levels
over the long term.
1
<PAGE>
Keystone Government Securities Fund
Thank you for your continued support of Keystone Government Securities
Fund. If you have questions or comments about your investment, we encourage
you to write to us.
Sincerely,
[SIG] Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[SIG] George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
September 1995
2
<PAGE>
A Discussion With
Your Fund's Manager
Christopher P. Conkey is senior portfolio manager of Keystone Government
Securities Fund. Mr. Conkey is a senior vice president and leads Keystone's
high grade bond group. A Chartered Financial Analyst, he has 11 years of
experience managing fixed-income investments. Mr. Conkey holds a BA in
economics from Clark University and an MBA in finance from Boston University.
Q What was the economic environment like during the twelve-month period?
A The economic environment improved significantly during the twelve-month
period. From August through December 1994, economic growth was strong, and
there were concerns that inflation might rise. The Federal Reserve Board (the
Fed) maintained its policy of raising interest rates in order to keep
inflation in check. At the beginning of 1995, economic growth began to slow,
inflation fears waned, and interest rates began to decline. The Fed reacted
to these events by decreasing short-term interest rates in July 1995.
Q How did you manage the Fund in this environment?
A During the twelve-month period, we employed two distinct investment
strategies. During the first half of the period, when interest rates rose, we
structured the portfolio in a barbelled configuration. That is, we emphasized
shorter term (zero to five-year) and longer term bonds (fifteen-year or
longer maturities). We believed that bonds with maturities in the
intermediate-term maturity range of five to fifteen years would underperform
in this rising rate environment.
When interest rates declined early in 1995, we changed this strategy
to focus on intermediate-term bonds. Intermediate-term bonds were
attractively priced, and we believed that bonds in this middle maturity range
would perform better in a declining interest rate environment.
Q How did you allocate the Fund's assets during the period?
A During the first half of the period, when interest rates were rising, most
of the Fund's assets were invested in mortgage-backed securities.
Adjustable-rate mortgage securities (ARMS) were particularly attractive.
Between August 1994 and January 1995, we built an ARMS position in the
portfolio from zero to 18% of portfolio assets. Yields on ARMS adjust with
changes in interest rates. So, during the period of rising interest rates,
ARMS provided the Fund with increased income, consistent with changes in
market interest rates.
When interest rates declined, we sold ARMS in the Fund and invested in
intermediate-term and long-term US Treasury securities. Treasury securities
are primarily influenced by changes in interest rates. When interest rates
declined, government securities provided reliable and consistent income as
well as price appreciation.
Q Where else did you invest?
A About 7% of the portfolio's assets were invested in collateralized mortgage
obligations (CMOs). CMOs were beneficial to the Fund in a couple of ways.
They tend to produce more income than Treasury securities in a rising
interest rate environment. They also provided us with an opportunity to lock
in higher yields. When interest rates declined, the Fund profited from the
Fund Profile
Objective: Seeks generous income primarily from US government and agency
obligations.
Commencement of Investment Operations: April 14, 1987
Average maturity: 9 years
Net assets: $57 million
3
<PAGE>
higher income these securities generated.
We also invested in Federal Housing Administration (FHA) bonds which
sponsor projects such as nursing homes. These bonds are guaranteed by the
full faith and credit of the US Government. In addition, they have a
"prepayment lockout." That is, they cannot be refinanced at the issuer's
discretion when interest rates decline. This provided us with the advantage
of locking in higher yields.
Q What is your outlook?
A We believe that the economy will continue to expand over the next several
months. However, we anticipate that economic growth will be more moderate
than the 4%-5% range that we experienced in 1995. We expect interest rates to
continue to decline and inflation to remain relatively low. Going forward, we
expect most of the Fund's return to come from income rather than price
appreciation.
[diamond]
This column is intended to answer
questions about your Fund.
If you have a question you would like answered, please write to:
Manager, Shareholder Communications,
Keystone Investment Distributors, Inc.,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
Securities in Which Your Fund Invests
US Treasury Notes, Bills, or Bonds--debt obligations issued by
the US government. Interest and principal payments are guaranteed by the full
faith and credit of the federal government. Income from Treasuries is exempt
from state and local, but not federal taxes. Considered the safest, and
highest credit quality among fixed-income investments.
Mortgage-backed securities--mortgage pools that provide financing primarily
for homeowners. Credit quality better than high quality corporate bonds; more
attractive yields than US Treasury securities. Several government chartered
agencies package and sell these securities to investors:
* Government National Mortgage Association (Ginnie Mae) and Federal
Housing Administration (FHA)--principal and interest payments guaranteed by
the US government.
* Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal
National Mortgage Association (Fannie Mae)--agencies backed by the US
government.
Repurchase Agreements (repos)--an agreement between a seller and a buyer
whereby the seller agrees to repurchase the securities at an agreed upon
price and, usually, at a stated time. Considered a low risk investment
because it is usually collateralized by US government securities. Repos are
very liquid and have a short maturity (from 1 to 180 days).
4
<PAGE>
Your Fund's Performance
[MOUNTAIN CHART]
Growth of an investment in Keystone Government Securities Fund
Class A
(Plot Points) In Thousands
Initial Reinvested
Investment Distributions
7/87 9,658 9,658
9,801 9,868
7/89 9,334 10,210
9,687 11,430
7/91 9,591 12,211
9,763 13,398
7/93 10,230 15,057
9,953 16,789
7/95 9,029 16,670
9,153 18,111
A $10,000 investment in Keystone Government Securities Fund Class A made on
April 14, 1987 with all distributions reinvested was worth $18,111 on July
31, 1995. Past performance is no guarantee of future results.
Twelve-Month Performance as of July 31, 1995
==========================================================================
Class A Class B Class C
Total returns* 8.64% 7.81% 7.81%
Net asset value 7/31/94 $9.48 $9.48 $9.49
7/31/95 $9.61 $9.61 $9.62
Dividends $ .65 $ .58 $ .58
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of July 31, 1995
==========================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 8.64% 7.81% 7.81%
1-year 3.48% 3.81% 7.81%
5-year 41.27% -- --
Life of Class 81.11% 8.44% 11.34%
Average Annual Returns
1-year w/o sales charge 8.64% 7.81% 7.81%
1-year 3.48% 3.81% 7.81%
5-year 7.15% -- --
Life of Class 7.42% 3.29% 4.39%
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 6% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 5% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received for holding shares for one year and
redeeming after the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares to another Keystone fund for a $10 fee by
contacting Keystone directly. The exchange fee is waived for individual
investors who make an exchange using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
5
<PAGE>
Growth of an Investment
[LINE CHART]
Comparison of change in value of a $10,000 investment in Keystone Government
Securities Fund Class A, the Lehman Intermediate Government Bond Index, and
the Consumer Price Index.
In Thousands April 14, 1987 through July 31, 1995
Average Annual Total Returns
-----------------------------
1 Year 5 Year Life of Class
Class A 3.48% 7.15% 7.42%
Class B 3.81% -- 3.29%
Class C 7.81% -- 4.39%
Class A LIGBI CPI
9,658 10,000 10,000
7/87 9,868 9,939 10,152
10,210 10,631 10,571
7/89 11,430 11,977 11,097
12,211 12,824 11,632
7/91 13,398 14,129 12,150
15,057 16,077 12,533
7/93 16,789 17,393 12,881
16,670 17,553 13,238
7/95 18,111 19,027 13,604
Past performance is no guarantee of future results. The performance of Class
B or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the
different classes. Class B and Class C shares were introduced February 1,
1993. The Consumer Price Index and Lehman Intermediate Government Bond Index
are from March 31, 1987.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Government Securities Fund
The Fund seeks generous income primarily from US Government and agency
obligations. The return is quoted after deducting sales charges (if
applicable), fund expenses, and transaction costs and assumes reinvestment of
all distributions.
2. Lehman Intermediate Government Bond Index (LIGBI)
The LIGBI is a broad-based, unmanaged fixed-income market index of US
government and agency securities. It represents the price change and coupon
income of several hundred securities with intermediate (1- to 10-year)
maturities. Securities are selected and compiled by Lehman Brothers, Inc.
according to criteria that may be unrelated to your Fund's investment
objective. It would be difficult for most individual investors to duplicate
this index.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you
6
<PAGE>
evaluate fund performance in conjunction with the other important financial
considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
7
<PAGE>
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a
diversified portfolio of short-term securities, including commercial paper,
bankers' acceptances, certificates of deposit and other short-term
instruments. The fund pays income which can fluctuate daily. Liquidity and
safety of principal are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the
price at which the share is sold to the public.
8
<PAGE>
SCHEDULE OF INVESTMENTS--July 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
===========================================================================================================
<S> <C> <C> <C> <C>
GNMA AND FHA (36.5%)
FHA Pool #2343143 9.125% 2034 $ 3,286,957 $ 3,377,348
FHA Pool #2343143 10.250 2034 2,509,148 2,578,149
GNMA Pool #155671 9.500 2016 5,483 5,865
GNMA Pool #163934 9.000 2016 17,684 18,712
GNMA Pool #165633 9.000 2016 92,822 98,220
GNMA Pool #192803 9.500 2016 219,072 235,325
GNMA Pool #204238 9.500 2017 374,615 400,707
GNMA Pool #208850 9.500 2017 248,968 266,308
GNMA Pool #212897 9.500 2017 231,678 248,361
GNMA Pool #213635 9.500 2017 108,073 115,600
GNMA Pool #221645 9.500 2017 292,729 314,446
GNMA Pool #223682 9.500 2018 192,559 205,241
GNMA Pool #224848 9.500 2017 61,957 66,272
GNMA Pool #226032 9.500 2017 244,614 261,651
GNMA Pool #227163 10.000 2004 106,284 111,930
GNMA Pool #229824 9.500 2017 17,943 19,192
GNMA Pool #263455 10.000 2004 133,102 140,173
GNMA Pool #265090 10.000 2004 99,609 104,901
GNMA Pool #267047 10.000 2004 19,729 20,777
GNMA Pool #267545 10.000 2004 175,578 184,905
GNMA Pool #268164 10.250 2029 2,599,102 2,783,457
GNMA Pool #270183 10.000 2004 113,176 119,188
GNMA Pool #270218 10.000 2004 53,531 56,375
GNMA Pool #270281 10.000 2004 163,901 172,608
GNMA Pool #271395 10.000 2004 57,403 60,452
GNMA Pool #275214 10.000 2004 155,467 163,725
GNMA Pool #276242 10.000 2004 71,254 75,039
GNMA Pool #305224 9.500 2021 60,607 64,453
GNMA Pool #325164 8.000 2022 4,643,936 4,739,694
GNMA Pool #354696 6.500 2023 3,956,193 3,758,383
- -----------------------------------------------------------------------------------------------------------
TOTAL GNMA AND FHA (Cost--$20,526,750) 20,313,174 20,767,457
===========================================================================================================
FNMA (3.2%)
FNMA Pool #002497 (Cost--$1,782,689) 11.000 2016 1,641,141 1,822,684
- -----------------------------------------------------------------------------------------------------------
FHLMC (0.1%)
FHLMC Pool #430438 (Cost--$63,756) 10.500 2009 62,315 67,156
- -----------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (7.0%)
FHLMC Series 1615 Class 1615 SB (Est. Mat. 2005) (c) 3.214 2008 1,000,000 602,500
FHLMC Series 1684 Class 1684 JC (Est. Mat. 1998) (c) 5.507 2020 1,781,496 1,758,114
FHLMC Series 1684 Class 1684 JD (Est. Mat. 1998) (c) 3.493 2020 1,824,372 113,453
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
===========================================================================================================
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
Resolution Trust Corp. Series 1995 Class 2C (Est.
Mat. 2000) (c) 7.500% 2028 $ 1,500,000 $ 1,501,875
- -----------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$3,921,032) 6,105,868 3,975,942
===========================================================================================================
U.S. GOVERNMENT ISSUES (47.7%)
U.S. Treasury Bonds 7.875 2021 6,200,000 6,882,000
U.S. Treasury Notes 6.750 1997 8,500,000 8,624,865
U.S. Treasury Notes 8.875 1998 2,000,000 2,163,740
U.S. Treasury Notes 7.500 2002 1,000,000 1,065,160
U.S. Treasury Notes 7.875 2004 7,000,000 7,673,750
U.S. Treasury Notes 6.500 2005 750,000 753,397
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (Cost--$27,382,743) 25,450,000 27,162,912
===========================================================================================================
Maturity
Value
===========================================================================================================
REPURCHASE AGREEMENTS (6.6%)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
purchased 7/31/95) (b) (Cost--$3,748,000) 5.834 8/1/95 $ 3,748,607 3,748,000
===========================================================================================================
TOTAL INVESTMENTS (Cost--$57,424,970) (a) 57,544,151
===========================================================================================================
OTHER ASSETS AND LIABILITIES--NET (-1.1%) (603,327)
- -----------------------------------------------------------------------------------------------------------
NET ASSETS--(100.0%) $56,940,824
===========================================================================================================
</TABLE>
See Notes to Schedule of Investments.
10
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) The cost of investments for federal income tax purposes is $57,472,202.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at July 31, 1995, are as follows:
Gross unrealized appreciation $ 697,239
Gross unrealized depreciation (625,290)
----------
Net unrealized appreciation (depreciation) $ 71,949
==========
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at July 31, 1995.
(c) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected pre-payment rates. Changes in interest
rates can cause the estimated maturity to differ from the listed dates.
These estimated maturity dates are unaudited.
Legend of Portfolio Abbreviations
GNMA--Government National Mortgage Association
FHA--Federal Housing Association
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
See Notes to Financial Statements.
11
<PAGE>
Keystone Government Securities Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------
1995 1994(c) 1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
period $ 9.48 $ 10.45 $ 10.58 $ 10.18 $ 10.01
=====================================================================================
Income from investment operations:
Net investment income 0.67 0.57 0.68 0.68 0.76
Net gain (loss) on investments 0.11 (0.63) 0.46 0.55 0.17
- -------------------------------------------------------------------------------------
Total from investment operations 0.78 (0.06) 1.14 1.23 0.93
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.65) (0.57) (0.68) (0.69) (0.76)
In excess of net investment income 0 (0.02) (0.06) (0.04) 0
Tax basis return of capital 0 (0.06) 0 0 0
Net realized gain on investments 0 0 (0.53) (0.10) 0
In excess of net realized gain on
investments 0 (0.26) 0 0 0
- -------------------------------------------------------------------------------------
Total distributions (0.65) (0.91) (1.27) (0.83) (0.76)
- -------------------------------------------------------------------------------------
Net asset value end of period $ 9.61 $ 9.48 $ 10.45 $ 10.58 $ 10.18
=====================================================================================
Total return (a) 8.64% (0.71%) 11.51% 12.45% 9.62%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.00% 1.00% 1.41% 1.93% 1.92%
Net investment income 7.11% 5.97% 6.49% 6.44% 7.46%
Portfolio turnover rate 182% 230% 189% 93% 72%
Net assets end of period
(thousands) $29,776 $38,541 $50,594 $47,892 $55,597
=====================================================================================
<CAPTION>
February 13, 1987
(Commencement
Year Ended July 31, of Operations)
------------------- to July 31,
1990 1989 1988 1987
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 10.11 $ 9.74 $ 10.22 $ 10.00
============================================================================================
Income from investment operations:
Net investment income 0.76 0.75 0.75 0.14
Net gain (loss) on investments (0.10) 0.35 (0.40) 0.22
- --------------------------------------------------------------------------------------------
Total from investment operations 0.66 1.10 0.35 0.36
- --------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.76) (0.73) (0.83) (0.14)
In excess of net investment income 0 0 0 0
Tax basis return of capital 0 0 0 0
Net realized gain on investments 0 0 0 0
In excess of net realized gain on
investments 0 0 0 0
- --------------------------------------------------------------------------------------------
Total distributions (0.76) (0.73) (0.83) (0.14)
- --------------------------------------------------------------------------------------------
Net asset value end of period $ 10.01 $ 10.11 $ 9.74 $ 10.22
============================================================================================
Total return (a) 6.84% 11.89% 3.55% 3.60%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.91% 1.90% 1.30% 1.00%(d)
Net investment income 7.61% 7.68% 7.29% 5.74%(d)
Portfolio turnover rate 58% 171% 206% 60%
Net assets end of period (thousands) $61,744 $68,493 $73,757 $3,479
=============================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.42%,
1.35% and 1.73% for the years ended July 31, 1995, 1994 and 1993,
respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
See Notes to Financial Statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
CLASS B SHARES
-------------------------------------------
February 1, 1993
Year Ended July 31, (Date of Initial
-------------------- Public Offering) to
1995 1994(d) July 31, 1993
==================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 9.48 $ 10.45 $10.32
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.59 0.50 0.26
Net realized gain (loss) on investments 0.12 (0.63) 0.22
- --------------------------------------------------------------------------------------------------
Total from investment operations 0.71 (0.13) 0.48
- --------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.58) (0.49) (0.26)
In excess of net investment income 0 (0.03) (0.09)
Tax basis return of capital 0 (0.06) 0
In excess of net realized gain on investments 0 (0.26) 0
- --------------------------------------------------------------------------------------------------
Total distributions (0.58) (0.84) (0.35)
- --------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.61 $ 9.48 $10.45
==================================================================================================
Total return (a) 7.81% (1.44%) 4.69%
Ratios/supplemental data
Ratio to average net assets:
Total expenses (b) 1.75% 1.75% 1.72%(c)
Net investment income 6.40% 5.32% 5.46%(c)
Portfolio turnover rate 182% 230% 189%
Net assets end of period (thousands) $18,064 $15,386 $9,223
==================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.09%,
2.12% and 2.28% for the years ended July 31, 1995, 1994, and the period
February 1, 1993 (Date of Initial Public Offering) to July 31, 1993,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
CLASS C SHARES
-------------------------------------------
February 1, 1993
Year Ended July 31, (Date of Initial
-------------------- Public Offering to
1995 1994(d) July 31, 1993
==================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 9.49 $ 10.46 $ 10.32
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.61 0.50 0.25
Net realized gain (loss) on investments 0.10 (0.63) 0.24
- --------------------------------------------------------------------------------------------------
Total from investment operations 0.71 (0.13) 0.49
- --------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.58) (0.50) (0.25)
In excess of net investment income 0 (0.02) (0.10)
Tax basis return of capital 0 (0.06) 0
In excess of net realized gain on
investments 0 (0.26) 0
- --------------------------------------------------------------------------------------------------
Total distributions (0.58) (0.84) (0.35)
- --------------------------------------------------------------------------------------------------
Net asset value end of period $ 9.62 $ 9.49 $ 10.46
==================================================================================================
Total return (a) 7.81% (1.44%) 4.79%
Ratios/supplemental data
Ratio to average net assets:
Total expenses (b) 1.75% 1.75% 1.71(c)
Net investment income 6.32% 5.32% 5.31(c)
Portfolio turnover rate 182% 230% 189%
Net assets end of period (thousands) $9,101 $17,505 $13,286
==================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.17%, 2.12%
and 2.17% for the years ended July 31, 1995, 1994, and for the period
February 1, 1993 (Date of Initial Public Offering) to July 31, 1993,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995
==================================================================
Assets (Note 1):
Investments at market value
(identified cost--$57,424,970) $57,544,151
Cash 284
Receivable for:
Fund shares sold 303,047
Interest 690,219
Prepaid expenses 37,880
Other assets 7,132
------------------------------------------------------------------
Total assets 58,582,713
------------------------------------------------------------------
Liabilities (Notes 2, 4, and 5):
Payable for:
Fund shares redeemed 1,463,115
Distributions to shareholders 119,848
Due to related parties 3,625
Other accrued expenses 55,301
------------------------------------------------------------------
Total liabilities 1,641,889
------------------------------------------------------------------
Net assets $56,940,824
------------------------------------------------------------------
Net assets represented by (Note 1):
Paid-in capital $61,401,784
Accumulated distributions in excess of net
investment income (25,769)
Accumulated net realized gain (loss) on
investments (4,554,372)
Net unrealized appreciation (depreciation) on
investments 119,181
------------------------------------------------------------------
Total net assets $56,940,824
==================================================================
Net Asset Value (Notes 1 and 2):
Class A Shares
Net assets of $29,775,995 / 3,097,266 shares
outstanding $ 9.61
Offering price per share ($9.61 / 0.9525)
(based on a sales charge of 4.75% of the
offering price at July 31, 1995) $ 10.09
Class B Shares
Net assets of $18,064,313 / 1,879,324 shares
outstanding $ 9.61
Class C Shares
Net assets of $9,100,516 / 945,843 shares
outstanding $ 9.62
==================================================================
STATEMENT OF OPERATIONS
Year Ended July 31, 1995
=============================================================================
Investment income (Note 1):
Interest $4,949,025
-----------------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fees $ 404,773
Transfer agent fees 138,976
Accounting, auditing, and legal fees 52,937
Custodian fees 42,881
Printing 31,469
Distribution Plan expenses 354,670
Registration fees 36,667
Miscellaneous 6,524
-----------------------------------------------------------------------------
Total expenses 1,068,897
Less: Reimbursement from investment adviser (243,672)
-----------------------------------------------------------------------------
Net expenses 825,225
-----------------------------------------------------------------------------
Net investment income 4,123,800
-----------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and
closed futures contracts
(Notes 1 and 3):
Net realized gain (loss) on:
Investments (369,310)
Closed futures contracts (57,244)
-----------------------------------------------------------------------------
Net realized gain (loss) on
investments and closed futures
contracts (426,554)
-----------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) on
investments 684,236
-----------------------------------------------------------------------------
Net gain (loss) on investments and
closed futures contracts 257,682
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $4,381,482
=============================================================================
See Notes to Financial Statements.
15
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------
1995 1994
==========================================================================================================
<S> <C> <C>
Operations (Notes 1 and 3):
Net investment income $ 4,123,800 $ 4,419,838
Net realized gain (loss) on investments and closed futures contracts (426,554) (2,926,353)
Net change in unrealized appreciation (depreciation) on investments 684,236 (2,448,250)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 4,381,482 (954,765)
- ----------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Notes 1 and 6):
Net investment income:
Class A Shares (2,209,540) (2,548,951)
Class B Shares (956,018) (710,096)
Class C Shares (785,806) (936,223)
In excess of net investment income:
Class A Shares (14,410) (128,556)
Class B Shares (6,235) (25,413)
Class C Shares (5,125) (46,773)
Tax basis return of capital:
Class A Shares 0 (231,563)
Class B Shares 0 (92,445)
Class C Shares 0 (105,195)
In excess of net realized gain from investments:
Class A Shares 0 (1,219,222)
Class B Shares 0 (323,905)
Class C Shares 0 (461,128)
- ----------------------------------------------------------------------------------------------------------
Total distributions to shareholders (3,977,134) (6,829,470)
- ----------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 2,769,293 3,687,992
Class B Shares 7,568,772 10,504,811
Class C Shares 2,745,502 10,026,367
Payments for shares redeemed:
Class A Shares (13,142,989) (14,118,247)
Class B Shares (5,680,735) (3,534,381)
Class C Shares (11,661,880) (5,031,672)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 1,398,434 2,697,792
Class B Shares 567,452 681,340
Class C Shares 537,320 1,202,632
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions (14,898,831) 6,116,634
- ----------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (14,494,483) (1,667,601)
- ----------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 71,435,307 73,102,908
- ----------------------------------------------------------------------------------------------------------
End of year
investment income as follows: July 31, 1995--($25,769) and July 31,
1994--($133,033)} (Note 1) $ 56,940,824 $ 71,435,307
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Government Securities Fund (formerly Keystone America Government
Securities Fund) (the "Fund") is a Massachusetts business trust for which
Keystone Management, Inc. ("KMI") is the Investment Manager and Keystone
Investment Management Company (formerly Keystone Custodian Funds, Inc.)
("Keystone") is the Investment Adviser. The Fund was organized on October 24,
1986 and had no operations prior to February 13, 1987. It is registered under
the Investment Company Act of 1940 as a diversified open-end investment
company.
The Fund currently offers three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption which varies depending on when shares were purchased and how
long they have been held. Class C shares are sold subject to a contingent
deferred sales charge payable upon redemption within one year of purchase,
and are available only through dealers who have entered into special
distribution agreements with Keystone Investment Distributors Company
(formerly Keystone Distributors, Inc.) ("KIDC"), the Fund's principal
underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former management of Keystone. KMI is a wholly-owned subsidiary of Keystone.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Government National Mortgage Association ("GNMA") certificates are traded
in the over-the-counter market and are valued at the mean of bid and asked
prices at the time of valuation. Short-term investments that are purchased
with maturities of sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased that
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest
approximates market. All other securities for which market quotations are
readily available are valued at current market value. Management values the
following securities at prices it deems in good faith to be fair: (i)
securities (including restricted securities) for which complete quotations
are not readily available and (ii) listed securities if, in the opinion of
management, the last sales price does not reflect a current value, or if no
sale occurred.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or in the
case of a stock index, cash at a set price on a future date. The Fund enters
into currency and other financial futures contracts as a hedge against
changes in interest or currency exchange rates. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount (initial
margin) equal to a certain percent-
17
<PAGE>
age of the purchase price indicated in the futures contract. Subsequent
payments (variation margin) are made or received by the Fund each day, as the
value of the underlying instrument or index fluctuates, and are recorded for
book purposes as unrealized gains or losses by the Fund. For federal tax
purposes, any futures contracts that remain open at fiscal year-end are
marked-to-market and the resultant net gain or loss is included in federal
taxable income. In addition to market risk, the Fund is subject to the credit
risk that the other party will not complete the obligations of the contract.
B. 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. All
discounts are amortized for both financial reporting and federal income tax
purposes. Distributions to shareholders are recorded by the Fund on the close
of business on the ex-dividend date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of
any federal income or excise 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 Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
(collateral) to the Fund whose value will be maintained at an amount not less
than the repurchase price, and which generally will be maintained at 101% of
the repurchase price. The Fund monitors the value of collateral on a daily
basis, and if the value of collateral falls below required levels, the Fund
intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are based on tax
basis net income. From time to time, the Fund may distribute dividends that
exceed book basis net income.
The significant differences between financial statement amounts available
for distribution and distributions made in accordance with income tax
regulations
18
<PAGE>
are due to the deferral of losses for income tax purposes that have been
recognized for financial statement purposes and differences in the treatment
of paydown gains and losses.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest, without par value. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
--------------------------
Year Ended July 31,
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Shares sold 291,673 362,308
Shares redeemed (1,409,532) (1,402,079)
Shares issued in reinvestment of dividends
and distributions 149,602 265,813
- ------------------------------------------------------------------------
Net increase (decrease) (968,257) (773,958)
========================================================================
<CAPTION>
Class B Shares
--------------------------
Year Ended July 31,
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Shares sold 804,244 1,029,889
Shares redeemed (608,903) (356,875)
Shares issued in reinvestment of dividends
and distributions 60,604 68,102
- ------------------------------------------------------------------------
Net increase (decrease) 255,945 741,116
========================================================================
<CAPTION>
Class C Shares
--------------------------
Year Ended July 31,
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Shares sold 295,567 967,368
Shares redeemed 1,253,057) (511,906)
Shares issued in reinvestment of dividends
and distributions 57,570 120,008
- ------------------------------------------------------------------------
Net increase (decrease) (899,920) 575,470
========================================================================
</TABLE>
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of up to 0.25% of
the average net asset value of Class A shares maintained by such others and
remaining outstanding on the Fund's books for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class B shares to pay
expenses of the distribution of Class B shares. Amounts paid by the Fund
under the Class B Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 4.00% of the
price paid for each share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of a Class B share, the
dealer or other party will receive service fees at an annual rate of 0.25% of
the average daily net asset value of such Class B shares maintained by such
others and remaining outstanding on the Fund's books for specified periods. A
contingent deferred sales charge will be imposed, if applicable, on Class B
shares purchased after June 1, 1995 at rates ranging from a maximum of 5% of
amounts redeemed during the first 12 months following the date of purchase to
1% of amounts redeemed during the sixth twelve month period following the
date of purchase. Class B shares
19
<PAGE>
purchased on or after June 1, 1995 that have been outstanding for eight years
following the month of purchase will automatically convert to Class A shares
without a front end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will retain their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase in the amount of 0.75% of the
price paid for each Class C share sold, plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class C share.
Beginning approximately 15 months after purchase, the dealer or other party
will receive a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc.) ("NASD Rule") plus service fees at the annual rate of 0.25%,
respectively, of the average net asset value of each Class C share maintained
by such others and remaining outstanding on the Fund's books for specified
periods.
Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
During the year ended July 31, 1995, the Fund paid or accrued to KIDC
$80,521, $142,683, and $131,466 under its Class A, Class B, and Class C
Distribution Plans, respectively. These amounts represent 0.25%, 0.92% and
1.00%, respectively, of the average daily net assets of Class A, B and C.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Distribution Plan are $1,249,882 and
$1,399,338 or 6.92% and 15.38% of the net assets of Classes B and C,
respectively, as of July 31, 1995.
(3.) Securities Transactions
As of July 31, 1995, the Fund had a capital loss carryover for federal income
tax purposes of approximately $4,164,000 which will expire in 2003. Purchases
and sales of investment securities (including proceeds received at maturity)
for the year ended July 31, 1995 were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------------------------------
<S> <C> <C>
Portfolio securities $105,990,871 $121,169,213
Short-term investments 705,844,913 703,476,000
- ---------------------------------------------------------------------------
$811,835,784 $824,645,213
===========================================================================
</TABLE>
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and payable daily at a
rate of 2.0% of the Fund's gross investment income plus an amount determined
by applying percentage rates, which start at 0.50% and decline, as net assets
increase, to 0.25% to the net asset value of the Fund. KMI has entered into
an Investment Advisory Agreement with Keystone, under which Keystone provides
investment advisory and management services to the Fund and receives for its
services an annual fee representing 85% of the management fee received by
KMI. During the year
20
<PAGE>
ended July 31, 1995, the Fund paid or accrued to KMI investment management
and administrative services fees of $404,773, which represented 0.66% of the
Fund's average net assets. Of such amount paid to KMI, $344,057 was paid to
Keystone for its services to the Fund.
During the year ended July 31, 1995, the Fund paid or accrued $18,880 to
KII as reimbursement for certain accounting and printing services and
$138,976 to KIRC for transfer agent fees.
Beginning January 1, 1993, Keystone voluntarily agreed to limit expenses
of Class A shares to 1% annually and each of Class B and Class C shares to
1.75% annually. However, Keystone would not be required to make such
reimbursement to an extent which would result in the Fund's inability to
qualify as a regulated investment company under the provisions of the
Internal Revenue Code. In accordance with this voluntary expense limitation,
Keystone reimbursed the Fund $135,617, $53,116, and $54,939 for Class A
Shares, Class B Shares and Class C Shares, respectively. Keystone does not
intend to seek repayment of these amounts.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently, the Independent Trustees
receive no compensation for their services.
(5.) Class Level Expenses
Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
For the year ended July 31, 1995, the total amount of expenses incurred by
each class' Distribution Plan is set forth in Note (2.) "Capital Share
Transactions."
(6.) Distributions to Shareholders
A distribution of $0.055 for Class A, $0.049 for Class B, and $0.049 for
Class C per share from net investment income was declared payable by
September 7, 1995 to shareholders of record August 25, 1995. This
distribution is not reflected in the accompanying financial statements.
21
<PAGE>
Keystone Government Securities Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Government Securities Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Government Securities Fund (formerly Keystone America Government
Securities Fund), including the schedule of investments, as of July 31, 1995,
and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
eight year period ended July 31, 1995 and the period from February 13, 1987
(Commencement of Operations) to July 31, 1987, for Class A Shares and for
each of the years in the two year period ended July 31, 1995 and the period
from February 1, 1993 (Date of Initial Public Offering) to July 31, 1993, for
Class B and Class C Shares. 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 July 31, 1995 by correspondence with the custodian. 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 Government Securities Fund as of July 31, 1995, 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 or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 1, 1995
22
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions (Unaudited)
Keystone Government Securities Fund
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows for Class A shares:
Income
Dividends
---------
$0.65
=========
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows for Class B shares:
Income
Dividends
---------
$0.58
========
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows for Class C shares:
Income
Dividends
---------
$0.58
========
In January 1996, complete information on the calendar year 1995
distributions will be forwarded to you to assist you in completing your 1995
federal income tax return.
23
<PAGE>
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information
of the Fund's shareholders. Its use for other purposes is
authorized only when it is preceded or accompanied by
the prospectus, describing all fees, charges and other
important facts about the Fund.
[KEYSTONE LOGO] KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
GSF-AR-9/95
6M ["recycled" symbol]
[FRONT COVER]
K E Y S T O N E
[PHOTO: Mom and baby on porch beneath flag]
GOVERNMENT
SECURITIES FUND
[KEYSTONE LOGO]
ANNUAL REPORT
JULY 31, 1995
