<PAGE>
PAGE 1
KEYSTONE GOVERNMENT SECURITIES FUND
Dear Shareholders:
We are pleased to have the opportunity to provide this annual report, which is
also the final report, for Keystone Government Securities Fund, covering the
fiscal year through July 31, 1997.
PERFORMANCE
For the 12-month period that ended on July 31, 1997, your Fund provided the
following results:
Class A Shares returned 10.60%.
Class B Shares returned 9.90%.
Class C Shares returned 9.89%.
We believe your Fund performed well, consistent with its objective of
providing generous monthly income from government securities.
MERGER
Effective August 1, 1997, Keystone Government Securities Fund was acquired by,
or effectively merged with, Evergreen U.S. Government Fund in a tax-free
transaction for investors. Shareholders of Keystone Government Securities Fund
now are shareholders of Evergreen U.S. Government Fund. We believe Evergreen
U.S. Government Fund, with its solid, long-term record, is an excellent fund for
shareholders who had chosen Keystone Government Securities Fund.
We thank you for your investment in, and support of, Keystone Government
Securities Fund.
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
<TABLE>
<S> <C>
(Photo of Albert H. (Photo of George
Elfner, III appears here) S. Bissell appears here)
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
September 1997
<PAGE>
PAGE 2
KEYSTONE GOVERNMENT SECURITIES FUND
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
<CAPTION>
U.S. AGENCY OBLIGATIONS-- 31.2%
<S> <C> <C>
Federal Home Loan Mortgage
Corporation:
$ 1,750,000 7.80%, 9/12/16.................. $ 1,880,659
51,995 10.50%, 11/1/09................. 57,021
1,093,630 Federal National Mortgage
Association,
11.00%, 1/1/16.................. 1,226,986
Government National Mortgage
Association (Pass-Thru):
3,913,430 6.50%, 5/15/02-- 10/15/25....... 3,856,524
4,552,604 7.00%, 5/15/24-- 12/15/25....... 4,567,372
57,240 7.25%, 2/15/05-- 3/15/05........ 58,574
32,677 8.00%, 2/15/04.................. 33,916
93,230 9.00%, 6/15/16-- 8/15/16........ 100,920
1,145,566 9.50%, 11/15/16-- 5/15/21....... 1,247,601
TOTAL U.S. AGENCY OBLIGATIONS
(COST $12,458,089).............. 13,029,573
<CAPTION>
U.S. TREASURY OBLIGATIONS-- 65.4%
<S> <C> <C>
7,520,000 U.S. Treasury Bonds,
7.88%, 2/15/21.................. 8,880,646
U.S. Treasury Notes:
4,500,000 6.00%, 6/30/99.................. 4,523,904
1,500,000 6.25%, 5/31/99.................. 1,513,593
7,500,000 6.25%, 6/30/02.................. 7,607,813
3,000,000 6.75%, 4/30/00.................. 3,072,186
1,600,000 7.88%, 11/15/04................. 1,774,000
TOTAL U.S. TREASURY OBLIGATIONS
(COST $27,166,786).............. 27,372,142
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
REPURCHASE AGREEMENT-- 2.0%
$ 839,000 Keystone Joint Repurchase
Agreement, (Investments in
repurchase agreements in a
joint trading account, 5.82%,
dated 7/31/97, due 8/1/97,
maturity value $839,136(a))
(cost $839,000)................. $ 839,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS--
(COST $40,463,875)........................ 98.6% 41,240,715
OTHER ASSETS AND
LIABILITIES-- NET......................... 1.4 604,654
NET ASSETS.................................. 100.0% $41,845,369
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at July 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 3
FINANCIAL HIGHLIGHTS-- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1997 1996 1995 1994(B) 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $9.41 $9.61 $9.48 $10.45 $10.58
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.59 0.61 0.67 0.57 0.68
Net realized and unrealized gain (loss) on investments 0.37 (0.18) 0.11 (0.63) 0.46
Total from investment operations 0.96 0.43 0.78 (0.06) 1.14
LESS DISTRIBUTIONS FROM:
Net investment income (0.57) (0.60) (0.65) (0.57) (0.68)
In excess of net investment income 0 (0.03) 0 (0.02) (0.06)
Tax basis return of capital 0 0 0 (0.06) 0
Net realized gain on investments 0 0 0 0 (0.53)
In excess of net realized gain on investments 0 0 0 (0.26) 0
Total distributions (0.57) (0.63) (0.65) (0.91) (1.27)
NET ASSET VALUE END OF YEAR $9.80 $9.41 $9.61 $9.48 $10.45
TOTAL RETURN (A) 10.60% 4.51% 8.64% (0.71%) 11.51%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.16% 1.14% 1.00% 1.00% 1.41%
Total expenses excluding indirectly paid expenses 1.15% 1.13% -- -- --
Total expenses excluding waivers and reimbursements 1.47% 1.41% 1.42% 1.35% 1.73%
Net investment income 6.25% 6.27% 7.11% 5.97% 6.49%
PORTFOLIO TURNOVER RATE 102% 176% 182% 230% 189%
NET ASSETS END OF YEAR (THOUSANDS) $21,547 $24,685 $29,776 $38,541 $50,594
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $10.18 $10.01 $10.11 $9.74 $10.22
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.68 0.76 0.76 0.75 0.75
Net realized and unrealized gain (loss) on investments 0.55 0.17 (0.10) 0.35 (0.40)
Total from investment operations 1.23 0.93 0.66 1.10 0.35
LESS DISTRIBUTIONS FROM:
Net investment income (0.69) (0.76) (0.76) (0.73) (0.83)
In excess of net investment income (0.04) 0 0 0 0
Tax basis return of capital 0 0 0 0 0
Net realized gain on investments (0.10) 0 0 0 0
In excess of net realized gain on investments 0 0 0 0 0
Total distributions (0.83) (0.76) (0.76) (0.73) (0.83)
NET ASSET VALUE END OF YEAR $10.58 $10.18 $10.01 $10.11 $9.74
TOTAL RETURN (A) 12.45% 9.62% 6.84% 11.89% 3.55%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.93% 1.92% 1.91% 1.90% 1.30%
Total expenses excluding indirectly paid expenses -- -- -- -- --
Total expenses excluding waivers and reimbursements 1.93% 1.92% 1.91% 1.90% 1.30%
Net investment income 6.44% 7.46% 7.61% 7.68% 7.29%
PORTFOLIO TURNOVER RATE 93% 72% 58% 171% 206%
NET ASSETS END OF YEAR (THOUSANDS) $47,892 $55,597 $61,744 $68,493 $73,757
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 4
KEYSTONE GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS-- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED JULY 31, PUBLIC OFFERING) TO
1997 1996 1995 1994(B) JULY 31, 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $9.40 $9.61 $9.48 $10.45 $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.53 0.53 0.59 0.50 0.26
Net realized and unrealized gain (loss) on investments 0.37 (0.18) 0.12 (0.63) 0.22
Total from investment operations 0.90 0.35 0.71 (0.13) 0.48
LESS DISTRIBUTIONS FROM:
Net investment income (0.50) (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 (0.50) (0.56) (0.58) (0.84) (0.35)
NET ASSET VALUE END OF YEAR $9.80 $9.40 $9.61 $9.48 $10.45
TOTAL RETURN (A) 9.90% 3.63% 7.81% (1.44%) 4.69%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.91% 1.89% 1.75% 1.75% 1.72%(c)
Total expenses excluding indirectly paid expenses 1.90% 1.88% -- -- --
Total expenses excluding waivers and reimbursements 2.22% 2.17% 2.09% 2.12% 2.28%(c)
Net investment income 5.50% 5.52% 6.40% 5.32% 5.46%(c)
PORTFOLIO TURNOVER RATE 102% 176% 182% 230% 189%
NET ASSETS END OF YEAR (THOUSANDS) $14,503 $17,694 $18,064 $15,386 $9,223
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 5
FINANCIAL HIGHLIGHTS-- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED JULY 31, PUBLIC OFFERING) TO
1997 1996 1995 1994(B) JULY 31, 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $9.41 $9.62 $9.49 $10.46 $10.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.53 0.54 0.61 0.50 0.25
Net realized and unrealized gain (loss) on investments 0.37 (0.19) 0.10 (0.63) 0.24
Total from investment operations 0.90 0.35 0.71 (0.13) 0.49
LESS DISTRIBUTIONS FROM:
Net investment income (0.50) (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 (0.50) (0.56) (0.58) (0.84) (0.35)
NET ASSET VALUE END OF YEAR $9.81 $9.41 $9.62 $9.49 $10.46
TOTAL RETURN (A) 9.89% 3.62% 7.81% (1.44%) 4.79%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.91% 1.89% 1.75% 1.75% 1.71%(c)
Total expenses excluding indirectly paid expenses 1.90% 1.88% -- -- --
Total expenses excluding waivers and reimbursements 2.21% 2.17% 2.17% 2.12% 2.17%(c)
Net investment income 5.49% 5.53% 6.32% 5.32% 5.31%(c)
PORTFOLIO TURNOVER RATE 102% 176% 182% 230% 189%
NET ASSETS END OF YEAR (THOUSANDS) $5,795 $8,293 $9,101 $17,505 $ 13,286
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 6
KEYSTONE GOVERNMENT SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value
(identified cost-- $40,463,875) $41,240,715
Cash 7,467
Interest receivable 565,219
Receivable from investment adviser 51,016
Receivable for investments sold 29,729
Receivable for Fund shares sold 726
Other assets 7,133
Total assets 41,902,005
LIABILITIES
Distribution fee payable 16,087
Payable for Fund shares redeemed 16,078
Accrued professional fees 8,497
Accrued custody fee 8,383
Accrued printing fees 5,038
Due to related parties 1,600
Accrued expenses and other liabilities 953
Total liabilities 56,636
NET ASSETS $41,845,369
NET ASSETS REPRESENTED BY
Paid-in capital $45,506,193
Accumulated net realized loss on investments (4,437,664)
Net unrealized appreciation on investments 776,840
Total net assets $41,845,369
NET ASSET VALUE PER SHARE
CLASS A SHARES
Net assets of $21,547,302 (division symbol)
2,198,461 shares outstanding $ 9.80
Offering price per share ($9.80 (division
symbol) 0.9525)
(based on a sales charge of 4.75% of the
offering price at
July 31, 1997) $ 10.29
CLASS B SHARES
Net assets of $14,503,355 (division symbol)
1,480,005 shares outstanding $ 9.80
CLASS C SHARES
Net assets of $5,794,712 (division symbol)
590,684 shares outstanding $ 9.81
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $3,412,219
EXPENSES
Management fee $ 298,614
Distribution Plan expenses 285,927
Transfer agent fees 112,394
Custodian fees 51,061
Professional fees 27,418
Administrative services fees 7,818
Other 67,179
Fees waived by investment adviser (141,920)
Total expenses 708,491
Less: Expenses paid indirectly (5,087)
Net expenses 703,404
Net investment income 2,708,815
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments 78,640
Net change in unrealized
appreciation (depreciation) on
investments 1,647,696
Net realized and unrealized gain on
investments 1,726,336
Net increase in net assets
resulting from operations $4,435,151
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 7
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 2,708,815 $ 3,316,330
Net realized gain (loss) on investments 78,640 (1,599)
Net change in unrealized appreciation (depreciation) on investments 1,647,696 (990,037)
Net increase in net assets resulting from operations 4,435,151 2,324,694
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A (1,373,422) (1,727,494)
Class B (846,668) (1,084,150)
Class C (370,961) (473,896)
In excess of net investment income:
Class A 0 (81,785)
Class B 0 (51,327)
Class C 0 (22,436)
Total distributions to shareholders (2,591,051) (3,441,088)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A 958,084 1,651,672
Class B 2,642,206 5,962,724
Class C 490,547 2,368,822
Payments for shares redeemed:
Class A (5,937,802) (7,382,633)
Class B (6,936,639) (6,522,312)
Class C (3,504,839) (3,283,434)
Net asset value of shares issued in reinvestment of distributions:
Class A 921,012 1,158,479
Class B 465,840 617,384
Class C 230,708 277,020
Net decrease in net assets resulting from capital share transactions (10,670,883) (5,152,278)
Total decrease in net assets (8,826,783) (6,268,672)
NET ASSETS
Beginning of year 50,672,152 56,940,824
End of year [including accumulated distributions in excess of net investment income as
follows: 1997-- $0 and 1996-- ($94,763)] $ 41,845,369 $50,672,152
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 8
KEYSTONE GOVERNMENT SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Government Securities Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified
open-end management investment company.
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B and Class C shares are
sold without a front-end sales charge, but pay a higher ongoing distribution fee
than Class A. Class B shares are sold subject to a contingent deferred sales
charge that is payable upon redemption and decreases depending on how long the
shares have been held. Class C shares are sold subject to a contingent deferred
sales charge payable on shares redeemed within one year after the month of
purchase. 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 retain their existing conversion rights.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
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. Corporate bonds, other fixed-income securities, and mortgage and other
asset-backed securities are valued at prices provided by an independent pricing
service. In determining value for normal institutional-size transactions, the
pricing service uses methods based on market transactions for comparable
securities and analysis of various relationships between similar securities
which are generally recognized by institutional traders. Securities for which
valuations are not available from an independent pricing service (including
restricted securities) are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other 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, including accrued interest.
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 account with its custodian containing qualifying 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
<PAGE>
PAGE 9
income is recorded on the accrual basis and includes amortization of discounts
and premiums.
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund
will not incur any federal income tax liability since it is expected to
distribute all of its net investment company taxable income, net tax-exempt
income and net capital gains, if any, to its shareholders. The Fund also intends
to avoid any excise tax liability by making the required distributions under the
Code. Accordingly, no provision for federal income taxes is required. To the
extent that realized capital gains can be offset by capital loss carryforwards,
it is the Fund's policy not to distribute such gains.
F. DISTRIBUTIONS
The Fund distributes net investment income monthly and net capital gains, if
any, annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatment for paydown gains (losses).
G. CLASS ALLOCATIONS
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:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
CLASS A 1997 1996
<S> <C> <C>
Shares sold 100,074 169,632
Shares redeemed (623,179) (762,511)
Shares issued in reinvestment of
dividends and distributions 97,086 120,093
Net decrease (426,019) (472,786)
CLASS B
Shares sold 277,247 614,502
Shares redeemed (727,881) (676,246)
Shares issued in reinvestment of
dividends and distributions 49,104 63,955
Net increase/(decrease) (401,530) 2,211
CLASS C
Shares sold 51,375 245,017
Shares redeemed (365,975) (338,579)
Shares issued in reinvestment of
dividends and distributions 24,295 28,708
Net decrease (290,305) (64,854)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. government securities
(excluding short-term securities) for the year ended July 31, 1997 were
$45,676,318 and $56,079,464, respectively.
The average daily balance of reverse repurchase agreements outstanding during
the year ended July 31, 1997 was approximately $1,265,800 at a weighted average
interest rate of 3.11%. The maximum amount of borrowing during the year ended
July 31, 1997 was $2,793,925 (including accrued interest). There were no reverse
repurchase agreements outstanding as of July 31, 1997.
At July 31, 1997, the cost of investments for federal income tax purposes was
$40,512,445. Gross unrealized appreciation of investments was $779,717 and gross
unrealized depreciation of investments was $51,447, resulting in net unrealized
appreciation of $728,270.
<PAGE>
PAGE 10
KEYSTONE GOVERNMENT SECURITIES FUND
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone Investment Management Company ("Keystone"), served as the Fund's
principal underwriter.
The Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit the Fund to reimburse its
principal underwriter for costs related to selling shares of the Fund and for
various other services. These costs, which consist primarily of commissions and
services fees to broker-dealers who sell shares of the fund, are paid by
shareholders through expenses called "Distribution Plan expenses." Each class
currently pays a service fee equal to 0.25% of the average daily net asset of
the class. Class B and Class C also presently pay distribution fees equal to
0.75% of the average daily net assets of the class. Distribution Plan expenses
are calculated daily and paid monthly.
With respect to Class B and Class C shares, the principal underwriter may pay
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
During the year ended July 31, 1997, amounts paid to EKD and/or EKIS pursuant
to the Fund's Class A, Class B, and Class C Distribution Plans were $54,309,
$161,258 and $70,360, respectively.
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.
EKD and/or its predecessor has advised the Fund that it has retained front-end
sales charges resulting from the sales of Class A shares of the Fund during the
year ended July 31, 1997 of $2,396.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under an investment advisory agreement dated December 11, 1996, Keystone, a
subsidiary of First Union Corporation ("First Union"), serves as the Investment
Adviser to the Fund. Keystone provides the Fund with investment advisory and
management services. In return, Keystone is paid a management fee, computed
daily and paid monthly, 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.
Effective January 1, 1997, BISYS acquired Furman Selz' mutual fund unit and
accordingly BISYS Fund Services became sub-administrator and is paid for its
services by Keystone.
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, excluding indirectly paid
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 waived $141,920 in management fees during the year ended July 31, 1997.
During the year ended July 31, 1997, the Fund paid or accrued $7,818 to EKIS
for certain administrative
<PAGE>
PAGE 11
services. Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary
of Keystone, serves 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. As sub-administrator, BISYS provides the
officers of the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
7. SUBSEQUENT EVENT
Effective August 1, 1997, Evergreen U.S. Government Fund acquired substantially
all the Fund's assets and assumed the Fund's liabilities in exchange for Class
A, B and C shares of Evergreen U.S. Government Fund.
<PAGE>
PAGE 12
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, including the schedule of investments, as of July
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the ten-year
period ended July 31, 1997 for Class A Shares and for each of the years in the
four-year period ended July 31, 1997 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, 1997 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, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 5, 1997
<PAGE>
PAGE 13
KEYSTONE GOVERNMENT SECURITIES FUND
OTHER INFORMATION-- (UNAUDITED)
On July 14, 1997, the Fund held a special meeting of its shareholders, the
purpose of which was to approve an agreement and plan of reorganization
providing for the acquisition of all the assets and the assumption of certain
identified liabilities of the Fund by the Evergreen U.S. Government Fund. The
plan also provided for the distribution of shares of the Evergreen U.S.
Government Fund to shareholders of the Fund in liquidation of the Keystone
Government Securities Fund.
The following are the results of the meeting held to vote on the reorganization:
<TABLE>
<S> <C>
Affirmative 2,210,986
Against 88,807
Abstain 274,833
</TABLE>
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED)
The per share distributions paid to you for fiscal 1997, whether taken in shares
or cash, are as follows:
<TABLE>
<CAPTION>
INCOME
DIVIDENDS
<S> <C>
Class A $0.57
Class B $0.50
Class C $0.50
</TABLE>
In January 1998, complete information on the calendar year 1997 distributions
will be forwarded to you to assist you in completing your 1997 federal income
tax return.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
(Diamond appears here)
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Global Resources & Development Fund
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
Evergreen Keystone
(Evergreen logo (Keystone logo
appears here) FUNDS (SM) appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
541894 (Recycle logo appears here)
GSF-R
KEYSTONE
(Photo appears here)
GOVERNMENT
SECURITIES FUND
Evergreen Keystone
(Evergreen logo (Keystone logo
appears here) FUNDS (SM) appears here)
ANNUAL REPORT
JULY 31, 1997
