PAGE 1
- --------------------------------------
Keystone Government Securities Fund
Seeks generous income primarily from U.S. government and agency obligations.
Dear Shareholder:
We would like to take this opportunity to report on your Fund's performance and
review market events for the six-month period which ended January 31, 1997.
Performance
Class A shares returned 4.73% for the six-month and 2.22% for the twelve-month
periods.
Class B shares returned 4.34% for the six-month and 1.35% for the
twelve-month periods.
Class C shares returned 4.34% for the six-month and 1.34% for the
twelve-month periods.
We were pleased with your Fund's returns, which include both income and
price changes. The Lehman Intermediate Government Bond Index returned 4.14% for
the six-month and 3.58% for the twelve month periods. Class A shares performed
better than its competitive average for the past year and all three classes
turned in above average performance for the past six months, when compared
against the 170 funds in the Government Securities Fund Category, as measured by
Lipper Analytical Services, Inc.
Market Environment
Fixed-income investors were reminded of the value of maintaining a long-term
perspective over the past six months. The slower economic activity and continued
low inflation we experienced during this period presented a direct contrast to
the environment that existed in the first half of 1996. At that time, investors'
concerns of a robust economy and burgeoning inflation plagued the U.S.
fixed-income market. Gradually, though, a trend of moderate growth and low
inflation became established and investor uncertainty gave way to confidence in
the outlook for the U.S. fixed-income market. Volatility subsided and interest
rates declined.
During this time, your Fund sought to meet its objective of maximizing
safety and liquidity by investing in U.S. Treasury and agency notes and bonds,
mortgage-backed securities, collateralized mortgage obligations (CMOs) and
adjustable rate mortgage-backed securities (ARMS). Among the mortgage-backed
securities issuers in which the Fund invested were the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC). Your Fund invests only in
securities issued or guaranteed by the U.S. government or its agencies.
We employed two main strategies to maximize your Fund's total return during
this period. We sought to increase yield by increasing holdings in CMOs and by
investing in a type of GNMA security called project notes.
We also lengthened the Fund's average maturity from 11 years on July 31,
1996 to approximately 11.5 years on January 31, 1997. We extended the average
maturity late in the third quarter of 1996 when indications of slower economic
growth began to emerge. We believe that this also maintained the Fund's highest
yields for a greater period of time and enhanced its total return.
Outlook
Looking forward, we expect a continuation of the favorable economic environment
that has existed over the past few months. We believe that the economy is in a
prolonged period of moderate growth, which should be accompanied by low
inflation. This environment should provide a solid background for financial
assets, including U.S. government securities.
--continued--
<PAGE>
PAGE 2
- --------------------------------------
Keystone Government Securities Fund
As investors monitor developments within the economy, however, the bond
market could be subject to periods of volatility. We look for this volatility to
be short-term in nature and for the fluctuations to be contained within a narrow
range. It also is important to remember, however, that your Fund's combination
of high quality and liquidity can enhance price stability during such periods.
Keystone acquired by First Union Corporation
We are pleased to inform you that Keystone has been acquired by First Union
Corporation. First Union, based in Charlotte, N.C., is the nation's sixth
largest bank holding company with assets of approximately $130 billion. Keystone
Investment Management Company will continue to be the investment adviser,
responsible for managing your Fund's portfolio. Your Fund will continue to be
managed with the same style and philosophy as in the past.
First Union also owns another mutual fund management company, Evergreen
Asset Management Corp. Together, Evergreen and Keystone manage approximately $30
billion in assets. Service and marketing will now be conducted under the
"Evergreen Keystone Funds" umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
Thank you for your continued support of Keystone Government Securities
Fund. If you have any questions or comments about your investment, we encourage
you to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
March 1997
[Photo Albert H. Elfner, III]
Albert H. Elfner, III
[Photo George S. Bissell]
George S. Bissell
<PAGE>
PAGE 3
- --------------------------------------------------------------------
A Discussion With
Your Fund's Manager
[Photo of Christopher P. Conkey]
Christopher P. Conkey is Chief Investment Officer of Keystone's fixed income
group and is the portfolio manager of your Fund. A Chartered Financial Analyst,
Mr. Conkey has 12 years of experience managing fixed-income investments. He
holds a BA in economics from Clark University and an MBA in finance from Boston
University. Together with analysts David J. Bowers and Gary E. Pzegeo, the team
evaluates the economic environment in selecting high quality bonds for your
Fund.
- -Q
How did the U.S. government securities market perform over the past
six months?
- -A
We think U.S. government securities performed well. Interest rates declined
moderately over the period, providing opportunity for price appreciation.
Because there is no credit risk associated with U.S. government securities,
performance is primarily influenced by changes in interest rates. From July 31,
1996 to January 31, 1997, short-term interest rates declined by approximately
.2%; interest rates with 3-10 year maturities fell by approximately .3% and
long-term interest rates, based on the benchmark 30-year U.S. Treasury bond,
declined by .2%.
- -Q
Why was the environment positive?
- -A
The government securities market benefited from an increasingly favorable
economic climate and strong foreign demand. The economy grew at a moderate rate
and inflation remained low over the last six months. This represented a slowdown
in economic activity from a pace in the first half of 1996 that many investors
considered to be too robust. Investors fears of higher inflation and its impact
on interest rates pushed bond prices lower during that time. The slowdown,
combined with continued low inflation, gave investors confidence that the
Federal Reserve Board would not raise interest rates over the near-term. This
created a very positive background for fixed-income investments.
The U.S. fixed-income market, including the U.S. government securities
market also experienced strong demand from foreign investors. Global liquidity
increased significantly in 1996 due to expansionary monetary policies,
particularly in Europe and Japan. Seeking to invest this excess cash, foreigners
were attracted to the U.S. bond market because of high "real" interest rates in
the U.S.--or the interest rate received by the investor when inflation is
subtracted, a strong U.S. dollar and a favorable economic and interest rate
outlook.
Fund Profile
Objective: Seeks generous income primarily from US government and agency
obligations.
Inception Date: April 14, l987
Average Maturity: 11.5 years
Net assets: $45.7 million
<PAGE>
PAGE 4
- --------------------------------------------------------------------
Keystone Government Securities Fund
- -Q
How was the Fund invested?
- -A
We invested in U.S. Treasury and agency notes and bonds, mortgage-backed
securities, collateralized mortgage obligations (CMOs) and adjustable rate
mortgage-backed securities (ARMs). We increased the portfolio's investment in
CMOs to 11% from approximately 6% and modestly reduced our holdings in
mortgage-backed securities to 50%. Like mortgage- backed securities, CMOs
provided attractive yield and income, as well as high credit quality. Because of
the manner in which CMOs are structured, however, they provide greater
protection against prepayment risk than traditional mortgage-backed securities.
This can be particularly helpful in a declining interest rate environment by
serving to preserve yield.
We also invested in project notes. These are bonds that are backed by the
cash flows from a specific property such as a nursing home or an apartment
complex. They carry a government guarantee on the principal and interest which
makes them attractive long-term investments. Also, project notes typically
cannot be prepaid for a specific period of time.
- -Q
What other strategies did you employ?
- -A
We extended the Fund's average maturity from 11 years on July 31, 1996 to 11.5
years on January 31, 1997. Interest rates began to decline late in the third
quarter of 1996 as investor fears of higher inflation proved unwarranted. A
longer maturity generally increases the Fund's ability to participate in market
rallies. A second benefit of extending maturities is the potential of earning a
higher yield.
- -Q
What is your outlook for the economy and interest rates over the next six
months?
- -A
We anticipate a steady interest rate environment. We expect the economy to grow
at a pace of 1 1/2% to 3% and for inflation to remain well-contained. The
economy still exhibits signs of strength, particularly in the housing and
manufacturing sectors and in consumer confidence. However, consumer borrowing
has slowe. This could dampen the rate of growth, since consumer spending
accounts for two-thirds of domestic economic activity.
We believe that the U.S. economy is in a prolonged moderate growth cycle, with
periodic over-heating and recessionary scares. This leads to a bond market that
should trade in a volatile pattern, within a generally well-defined range.
Longer term, we do not see excesses in the economy that could cause higher
inflation to become embedded. Within the next few months, we expect an
environment of moderate economic growth and low inflation should bode well for
U.S. government securities.
This column is intended to answer questions about your Fund. If you have a
question you would like answered, please write to
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
- --------------------------------------
Your Fund's Performance
Growth of an investment in
Keystone Government Securities Fund
Class A
In Thousands
4/87 9523.81 9523.81
9733.33 10217.2
1/89 9295.24 10556
9466.67 11598.5
1/91 9733.33 12870.9
10095.2 14350.8
1/93 9885.71 15979.2
9685.71 17300.6
1/95 8800 16819.8
9476.19 19391.6
1/97 9095.24 19822.2
A $10,000 investment in Keystone Government Securities Fund
Class A made on April 14, 1987 with all distributions reinvested was
worth $19,822 on January 31, 1997. Past performance is no guarantee
of future results.
Six-Month Performance as of January 31, 1997
- --------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C> <C>
Total Returns* 4.73% 4.34% 4.34%
Net Asset Value 7/31/96 $ 9.41 $ 9.40 $ 9.41
1/31/97 $ 9.55 $ 9.54 $ 9.55
Dividends $ .30 $ .26 $ .26
Capital Gains None None None
</TABLE>
* Before deduction of front-end or contingent deferred sales charge.
Historical Record as of January 31, 1997
- --------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 2.22% 1.35% 1.34%
1-year -2.64% -2.49% 1.34%
5-year 31.56% -- --
Life of Class 98.25% 17.50% 20.38%
Average annual returns
1-year w/o sales charge 2.22% 1.35% 1.34%
1-year -2.64% -2.49% 1.34%
5-year 5.64% -- --
Life of Class 7.23% 4.11% 4.75%
</TABLE>
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75% except where noted.
Class B shares were introduced on February 1, 1993. Performance assumes
that shares were redeemed after the end of a one-year holding period and
reflects the deduction of a 4% CDSC. If you have not redeemed, you earned the
larger return quoted.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after 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 their original cost.
Performance for each class will differ.
You may exchange shares for another Keystone fund by phone or in writing.
You may also exchange funds through Keystone's Automated Response Line (KARL).
The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 6
- --------------------------------------------------------------------
Keystone Government Securities Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 7
- --------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT ISSUES (37.3%)
U.S. Treasury Bonds 7.875% 2021 $7,520,000 $ 8,377,731
U.S. Treasury Bonds 6.875 2025 600,000 601,218
U.S. Treasury Bonds 6.000 2026 1,575,000 1,408,633
U.S. Treasury Bonds 6.500 2026 1,000,000 962,340
U.S. Treasury Notes 6.125 1998 1,585,000 1,591,689
U.S. Treasury Notes 6.750 2000 4,000,000 4,070,640
- --------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (Cost--$17,416,498) 17,012,251
====================================================================================================================
GNMA (26.7%)
GNMA Pool #163934 9.000 2016 13,586 14,614
GNMA Pool #165633 9.000 2016 84,750 91,163
GNMA Pool #192803 9.500 2016 119,623 129,941
GNMA Pool #204238 9.500 2017 165,702 179,916
GNMA Pool #208850 9.500 2017 128,848 139,900
GNMA Pool #212897 9.500 2017 128,263 139,266
GNMA Pool #213635 9.500 2017 86,374 93,782
GNMA Pool #221645 9.500 2017 218,483 237,224
GNMA Pool #224848 9.500 2017 28,383 30,817
GNMA Pool #226032 9.500 2017 224,593 243,859
GNMA Pool #229824 9.500 2017 12,608 13,690
GNMA Pool #223682 9.500 2018 100,586 109,167
GNMA Pool #305224 9.500 2021 41,461 44,928
GNMA Pool #414739 6.500 2025 3,687,551 3,518,145
GNMA Pool #415807 7.000 2025 4,472,978 4,383,519
GNMA Pool #268164 10.250 2029 2,586,570 2,807,695
- --------------------------------------------------------------------------------------------------------------------
TOTAL GNMA (Cost--$11,885,491) 12,177,626
====================================================================================================================
FHA (13.8%)
FHA Pool #2343143 9.125 2034 3,374,466 3,652,860
FHA Pool #2343143 10.250 2034 2,501,540 2,653,978
- --------------------------------------------------------------------------------------------------------------------
TOTAL FHA (Cost--$6,219,181) 6,306,838
====================================================================================================================
COLLATERALIZED MORTGAGE OBLIGATIONS (11.4%)
FHLMC Series 1701 PH (Est. Mat. 2005) (b) 6.500 2009 1,000,000 977,540
FHLMC Series 117 G (Est. Mat. 2007) (b) 8.500 2021 1,000,000 1,050,988
FNMA Series 93-248 SA (Est. Mat. 2006) (b) 3.429 2023 1,250,000 909,180
FNMA GT 95-T5A (Est. Mat. 2001) (b) 7.000 2035 807,738 785,525
Resolution Trust Corp. Series 95-1 A2C (Est. Mat. 2000) (b) 7.500 2028 1,500,000 1,506,094
- --------------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$5,186,771) 5,229,327
====================================================================================================================
</TABLE>
<PAGE>
PAGE 8
- --------------------------------------
Keystone Government Securities Fund
SCHEDULE OF INVESTMENTS--January 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC (6.3%)
FHLMC Debenture 7.800% 2016 $1,750,000 $1,798,405
FHLMC Pool #430438 10.500 2009 55,123 59,746
FHLMC Pool #607352 7.682 2022 973,614 1,018,186
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FHLMC (Cost--$2,836,079) 2,876,337
=======================================================================================================================
FNMA (2.9%) (Cost--$1,290,444)
FNMA Pool #002497 11.000 2016 1,187,980 1,322,757
- -----------------------------------------------------------------------------------------------------------------------
Maturity
Value
- -----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.3%) (Cost--$125,000)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account, purchased
1/31/97) (a) 5.580 2/3/97 125,058 125,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$44,959,464) 45,050,136
OTHER ASSETS AND LIABILITIES--NET (1.3%) 610,179
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS--(100.0%) $45,660,315
=======================================================================================================================
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at January 31, 1997.
(b) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed date.
Legend of Portfolio Abbreviations
FHA--Federal Housing Association
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
<PAGE>
PAGE 9
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
Six Months
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.41 $ 9.61 $ 9.48 $10.45 $10.58 $10.18
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.30 0.61 0.67 0.57 0.68 0.68
Net realized and
unrealized gain (loss) on
investments 0.14 (0.18) 0.11 (0.63) 0.46 0.55
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.44 0.43 0.78 (0.06) 1.14 1.23
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.30) (0.60) (0.65) (0.57) (0.68) (0.69)
In excess of net investment
income 0 (0.03) 0 (0.02) (0.06) (0.04)
Tax basis return of capital 0 0 0 (0.06) 0 0
Net realized gain on
investments 0 0 0 0 (0.53) (0.10)
In excess of net realized
gain on investments 0 0 0 (0.26) 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.63) (0.65) (0.91) (1.27) (0.83)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value end of
period $9.55 $ 9.41 $ 9.61 $ 9.48 $10.45 $10.58
===========================================================================================================================
Total return (a) 4.73% 4.51% 8.64% (0.71%) 11.51% 12.45%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.16%(b)(d) 1.14%(b) 1.00% 1.00% 1.41% 1.93%
Total expenses
excluding
reimbursement 1.46%(d) 1.41% 1.42% 1.35% 1.73% 1.93%
Net investment income 6.14%(d) 6.27% 7.11% 5.97% 6.49% 6.44%
Portfolio turnover rate 59% 176% 182% 230% 189% 93%
Net assets end of period
(thousands) $22,844 $24,685 $29,776 $38,541 $50,594 $47,892
===========================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.15% (annualized) and 1.13% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 10
- --------------------------------------
Keystone Government Securities Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
February 1, 1993
(Date of Initial
Six Months Public Offering) to
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) July 31, 1993
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of
period $9.40 $ 9.61 $ 9.48 $10.45 $10.32
- --------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.53 0.59 0.50 0.26
Net realized and unrealized gain
(loss) on investments 0.14 (0.18) 0.12 (0.63) 0.22
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.35 0.71 (0.13) 0.48
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.26) (0.53) (0.58) (0.49) (0.26)
In excess of net investment
income 0 (0.03) 0 (0.03) (0.09)
Tax basis return of capital 0 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 0 (0.26) 0
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.56) (0.58) (0.84) (0.35)
- --------------------------------------------------------------------------------------------------------------------
Net asset value end of period $9.54 $ 9.40 $ 9.61 $ 9.48 $10.45
====================================================================================================================
Total return (a) 4.34% 3.63% 7.81% (1.44%) 4.69%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.91%(b)(d) 1.89%(b) 1.75% 1.75% 1.72%(d)
Total expenses excluding
reimbursement 2.22%(d) 2.17% 2.09% 2.12% 2.28%(d)
Net investment income 5.40%(d) 5.52% 6.40% 5.32% 5.46%(d)
Portfolio turnover rate 59% 176% 182% 230% 189%
Net assets end of period
(thousands) $16,070 $17,694 $18,064 $15,386 $9,223
====================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.90% (annualized) and 1.88% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
<S>
February 1, 1993
(Date of Initial
Six Months Public Offering) to
Ended Year Ended July 31,
January 31, 1997 1996 1995 1994(c) July 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of
period $9.41 $9.62 $9.49 $10.46 $10.32
- -------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.54 0.61 0.50 0.25
Net realized and unrealized gain
(loss) on investments 0.14 (0.19) 0.10 (0.63) 0.24
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.40 0.35 0.71 (0.13) 0.49
- -------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.26) (0.53) (0.58) (0.50) (0.25)
In excess of net investment
income 0 (0.03) 0 (0.02) (0.10)
Tax basis return of capital 0 0 0 (0.06) 0
In excess of net realized gain on
investments 0 0 0 (0.26) 0
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.56) (0.58) (0.84) (0.35)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value end of period $9.55 $9.41 $9.62 $9.49 $10.46
=========================================================================================================================
Total return (a) 4.34% 3.62% 7.81% (1.44%) 4.79%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.91%(b)(d) 1.89%(b) 1.75% 1.75% 1.71%(d)
Total expenses excluding
reimbursement 2.22%(d) 2.17% 2.17% 2.12% 2.17%(d)
Net investment income 5.39%(d) 5.53% 6.32% 5.32% 5.31%(d)
Portfolio turnover rate 59% 176% 182% 230% 189%
Net assets end of period
(thousands) $6,746 $8,293 $9,101 $17,505 $13,286
=========================================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.90% (annualized) and 1.88% for the six months ended January 31, 1997
and the year ended July 31, 1996, respectively.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------------------------------------
Keystone Government Securities Fund
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
- --------------------------------------------------------------------
<TABLE>
<S> <C>
Assets (Notes 2 and 5)
Investments at market value (identified cost--
$44,959,464) $45,050,136
Cash 880
Receivable for:
Fund shares sold 26,308
Interest 719,932
Due from investment adviser 13,235
Other assets 6,875
- ----------------------------------------------------------------------------
Total assets 45,817,366
- ----------------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Fund shares redeemed 3,266
Distributions to shareholders 104,413
Distribution fee payable 20,236
Due to related parties 3,399
Other accrued expenses 25,737
- ----------------------------------------------------------------------------
Total liabilities 157,051
- ----------------------------------------------------------------------------
Net assets $45,660,315
============================================================================
Net assets represented by
Paid-in capital $50,381,946
Accumulated distributions in excess of net
investment income (95,359)
Accumulated net realized loss on investments (4,716,944)
Net unrealized appreciation on investments 90,672
- ----------------------------------------------------------------------------
Total net assets $45,660,315
============================================================================
Net asset value per share (Note 2)
Class A Shares
Net assets of $22,844,412 [dividedby] 2,393,152 shares
outstanding $ 9.55
Offering price per share ($9.55 [dividedby] 0.9525) (based
on a sales charge of 4.75% of the offering
price at January 31, 1997) $ 10.03
Class B Shares
Net assets of $16,070,293 [dividedby] 1,683,755 shares
outstanding $ 9.54
Class C Shares
Net assets of $6,745,610 [dividedby] 706,004 shares
outstanding $ 9.55
============================================================================
</TABLE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997 (Unaudited)
Investment income
<S> <C> <C>
Interest $1,832,404
- -------------------------------------------------------------------
Expenses (Notes 4, 5 and 6)
Management fee $ 161,671
Distribution Plan expenses 157,845
Transfer agent fees 56,905
Accounting, auditing and legal fees 29,127
Custodian fees 25,295
Registration fees 22,186
Other 12,501
Reimbursement from investment
adviser (76,910)
- ----------------------------------------------------
Total expenses 388,620
Less: Expenses paid indirectly (3,251)
- ----------------------------------------------------
Net expenses 385,369
- -------------------------------------------------------------------
Net investment income 1,447,035
- -------------------------------------------------------------------
Net realized and unrealized gain
on investments (Note 3)
Net realized loss on investments (191,763)
Net change in unrealized
appreciation on investments 961,528
- ----------------------------------------------------
Net realized and unrealized gain
on investments 769,765
- -------------------------------------------------------------------
Net increase in net assets
resulting from operations $2,216,800
===================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
January 31, 1997 July 31, 1996
===============================================================================================================
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 1,447,035 $ 3,316,330
Net realized loss on investments (191,763) (1,599)
Net change in unrealized appreciation (depreciation) on investments 961,528 (990,037)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,216,800 2,324,694
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (746,537) (1,727,494)
Class B Shares (480,133) (1,084,150)
Class C Shares (220,961) (473,896)
In excess of net investment income:
Class A Shares 0 (81,785)
Class B Shares 0 (51,327)
Class C Shares 0 (22,436)
- ---------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,447,631) (3,441,088)
- ---------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 460,966 1,651,672
Class B Shares 1,882,605 5,962,724
Class C Shares 338,968 2,368,822
Payments for shares redeemed:
Class A Shares (3,167,965) (7,382,633)
Class B Shares (4,039,559) (6,522,312)
Class C Shares (2,158,475) (3,283,434)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 500,933 1,158,479
Class B Shares 268,642 617,384
Class C Shares 132,879 277,020
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share transactions (5,781,006) (5,152,278)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (5,011,837) (6,268,672)
- ---------------------------------------------------------------------------------------------------------------
Net assets
Beginning of period 50,672,152 56,940,824
- ---------------------------------------------------------------------------------------------------------------
End of period {including accumulated distributions in excess
of net investment income as follows: 1997--($95,359) and
1996--($94,763)} (Note 1) $ 45,660,315 $50,672,152
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone Government Securities Fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Government Securities Fund (the "Fund") is a Massachusetts business
trust for which Keystone Investment Management Company ("Keystone") is the
investment adviser and manager. Keystone was formerly a wholly-owned subsidiary
of Keystone Investments, Inc. ("KII") and is currently a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly-
owned subsidiary of First Union National Bank of North Carolina, which in turn
is a wholly-owned subsidiary of First Union Corporation ("First Union"). The
Fund is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as a diversified, open-end investment company. The Fund offers
several classes of shares. The Fund's investment objective is to seek the
highest possible level of current income, consistent with the safety of
principal and maintenance of liquidity, by investing primarily in securities
issued, or guaranteed as to principal and interest by the full faith and credit
of the U.S. government.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed-income
securities, mortgage and other asset-backed securities, and other related
securities are valued at prices provided by an independent pricing service. In
determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities and
various relationships between securities that are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is based
upon competitive market rates at the time of issuance. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated
<PAGE>
PAGE 15
- --------------------------------------
account with its custodian containing liquid assets having a value not less than
the repurchase price (including accrued interest). If the counterparty to the
transaction is rendered insolvent, the ultimate realization of the securities to
be repurchased by the Fund may be delayed or limited.
D. 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
amortization of discounts.
E. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
F. Distributions
The Fund distributes net investment income monthly 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 paydown gains (losses).
G. Class Allocations
Class A shares are offered at a public offering price which includes 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 that
is payable upon redemption and decreases depending on how long the shares have
been held. Class B shares purchased after January 1, 1997 will automatically
convert to Class A shares after seven years. Class B shares purchased prior to
January 1, 1997 will retain their existing conversion features.
Class C shares are sold subject to a contingent deferred sales charge
payable on shares redeemed within one year after the month of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
<PAGE>
PAGE 16
- --------------------------------------
Keystone Government Securities Fund
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
Class A January 31, 1997 July 31, 1996
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 48,482 169,632
Shares redeemed (332,540) (762,511)
Shares issued in
reinvestment of dividends
and distributions 52,730 120,093
- -------------------------------------------------------------
Net decrease (231,328) (472,786)
=============================================================
Class B
- -------------------------------------------------------------
Shares sold 197,687 614,502
Shares redeemed (423,742) (676,246)
Shares issued in
reinvestment of dividends
and distributions 28,275 63,955
- -------------------------------------------------------------
Net increase (decrease) (197,780) 2,211
=============================================================
Class C
- -------------------------------------------------------------
Shares sold 35,432 245,017
Shares redeemed (224,388) (338,579)
Shares issued in
reinvestment of dividends
and distributions 13,971 28,708
- -------------------------------------------------------------
Net decrease (174,985) (64,854)
=============================================================
</TABLE>
3. Securities Transactions
Cost of purchases and proceeds from sales of U.S. government securities
(excluding short-term securities) for the six months ended January 31, 1997,
were $28,214,704 and $33,822,003, respectively.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended January 31, 1997, was approximately $1,265,800 at a
weighted average interest rate of 3.11%. The maximum amount of borrowing during
the six months ended
January 31, 1997 was $2,793,925 (including accrued interest).
As of July 31, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $3,703,000 which expires in 2002.
4. Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter
amounts which are calculated and paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned
subsidiary of The BISYS Group Inc. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. (formerly, Keystone Investment Distributors
Company) ("EKIS"), a wholly-owned subsidiary of Keystone, served as the Fund's
principal underwriter.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays
a distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the six months ended January 31, 1997, amounts paid to EKD or EKIS
pursuant to the Fund's Class A, Class B and Class C Distribution Plans were as
follows:
<PAGE>
PAGE 17
- --------------------------------------
<TABLE>
<CAPTION>
Paid to Paid to
EKD EKIS
--------- ----------
<S> <C> <C>
Class A -- $28,470
Class B prior to June 1, 1995 -- 59,527
Class B on or after June 1, 1995 $97 29,098
Class C 46 40,607
</TABLE>
Each of the Distribution Plans 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 respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
EKIS and/or EKD may continue as compensation for services which had been earned
while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At January 31, 1997, total unpaid distribution costs were $1,084,026 for
Class B shares purchased before June 1, 1995, and $355,248 for Class B shares
purchased on or after June 1, 1995. Unpaid distribution costs for Class C were
$1,592,782 at January 31, 1997.
Contingent deferred sales charges paid by redeeming shareholders are paid
to EKD or its predecessor.
5. Investment Advisory and Management Agreement and Other Affiliated
Transactions
Under an Investment Advisory and Management Agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. Keystone
provides the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed and paid daily, at an annual rate of
2.00% of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets increase
to 0.25% per annum, to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as investment manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as the
investment adviser and provided investment advisory and management services to
the Fund. In return for its services, Keystone received an annual fee equal to
85% of the management fee received by KMI.
Keystone has voluntarily limited the expenses of Class A shares to 1.15% of
its average daily net assets and has limited the expenses of Class B and C to
1.90% of the average daily net assets of each respective class. In accordance
with the voluntary expense limits, Keystone reimbursed $76,910 to the Fund
during the six months ended January 31, 1997.
During the six months ended January 31, 1997, the Fund paid or accrued
12,900 to Keystone for certain accounting services. The Fund paid or accrued
$56,905 to Evergreen Keystone Service Company (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services
rendered as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund. Currently the Independent Trustees of the Fund receive
no compensation for their services.
<PAGE>
PAGE 18
- --------------------------------------
Keystone Government Securities Fund
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended January 31, 1997, the Fund incurred total custody fees of
$25,295 and received a credit of $3,251 pursuant to this expense offset
arrangement, resulting in a net custody expense of $22,044. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income- producing assets.
7. Subsequent Distribution to Shareholders
Distributions from net investment income of $0.050 for Class A, $0.044 for Class
B and $0.044 for Class C were declared payable by March 6, 1997, to shareholders
of record February 25, 1997. These distributions are not reflected in the
accompanying financial statements.
<PAGE>
ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday, December 9, 1996. In
addition, beside each proposal are the results of that vote.
<TABLE>
<CAPTION>
Affirmative Withheld
------------- ----------
<S> <C> <C> <C>
1. To elect the following Trustees:
Frederick Amling 3,628,419 68,876
Laurence B. Ashkin 3,627,189 70,106
Charles A. Austin III 3,628,419 68,876
Foster Bam 3,627,189 70,106
George S. Bissell 3,626,443 70,851
Edwin D. Campbell 3,628,419 68,876
Charles F. Chapin 3,628,419 68,876
K. Dun Gifford 3,628,419 68,876
James S. Howell 3,627,189 70,106
Leroy Keith, Jr. 3,628,419 68,876
F. Ray Keyser 3,628,419 68,876
Gerald M. McDonnell 3,627,189 70,106
Thomas L. McVerry 3,627,189 70,106
William Walt Pettit 3,628,419 68,876
David M. Richardson 3,628,419 68,876
Russell A. Salton, III MD 3,628,419 68,876
Michael S. Scofield 3,628,419 68,876
Richard J. Shima 3,628,419 68,876
Andrew J. Simons 3,626,453 70,842
</TABLE>
<TABLE>
<CAPTION>
Affirmative Against Abstain
------------- --------- ---------
<S> <C> <C> <C>
To approve an Investment Advisory and Management
Agreement between the Fund and Keystone Investment
2. Management Company. 3,499,650 39,041 158,603
</TABLE>
