<PAGE>
KEYSTONE
(photo of mountains)
CAPITAL
PRESERVATION AND
INCOME FUND
(logo) EVERGREEN KEYSTONE (logo)
FUNDS
SEMI-ANNUAL REPORT
MARCH 31, 1997
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PAGE 1
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
SEEKS A HIGH LEVEL OF CURRENT INCOME CONSISTENT WITH LOW VOLATILITY OF
PRINCIPAL.
Dear Shareholder:
We are writing to report on the activities of Keystone Capital Preservation and
Income Fund for the six-month period which ended March 31, 1997.
PERFORMANCE
Class A shares returned 3.09% for the six-month period and 6.50% for the
twelve-month period.
Class B shares returned 2.60% for the six-month period and 5.71% for the
twelve-month period.
Class C shares returned 2.61% for the six-month period and 5.72% for the
twelve-month period.
The six-month U.S. Treasury bill, a benchmark for short-term income-oriented
obligations, returned 2.58% for the six-month period and 5.27% for the
twelve-month period which ended March 31, 1997.
We believe your Fund performed very well, consistent with its objective of
providing investors with a relatively stable net asset value, combined with
current income. Also, due to its risk adjusted performance, your Fund earned a
**** (four stars) rating as of March 31, 1997-- its second highest rating-- by
Morningstar, an independent mutual fund rating organization.(1)
FUND STRATEGY
Your Fund achieved these strong results by taking advantage of the higher
interest rate environment which developed over the past six months. We did this
by raising the portfolio's investment in adjustable-rate mortgage securities
(ARMS) and reducing holdings in fixed-rate securities. This enabled your Fund to
generate more income as interest rates rose; ARMS coupons adjust to reflect
changes in short-term interest rates. In contrast, the coupons of fixed-rate
mortgage securities do not change and typically perform better when interest
rates decline.
Your Fund also demonstrated the stability it was designed to provide. For
example, the net asset value (NAV) of Class A shares moved within a range of
$9.74 to $9.79 during the six-month period which ended March 31, 1997. The other
share classes exhibited similar stability.
(1)SOURCE: MORNINGSTAR, INC. MORNINGSTAR'S PROPRIETARY RATINGS REFLECT THE
FUND'S HISTORICAL RISK-ADJUSTED PERFORMANCE AS OF MARCH 31, 1997. RATINGS ARE
SUBJECT TO CHANGE MONTHLY. THEY ARE CALCULATED BASED ON THE FUND'S 1-,3-,5- AND
10-YEAR AVERAGE ANNUAL RETURN IN EXCESS OR BELOW THE 90-DAY TREASURY BILL
RETURN. RATINGS ARE NOT ADJUSTED FOR SALES CHARGES, BUT ARE ADJUSTED FOR OTHER
FEES. THE TOP 10% OF THE FUNDS IN AN INVESTMENT CATEGORY RECEIVE 5 STARS, THE
NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS, THE NEXT 22.5%
RECEIVE 2 STARS AND THE BOTTOM 10% RECEIVE 1 STAR. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
-- CONTINUED--
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PAGE 2
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
OUTLOOK
We believe that interest rates could continue to fluctuate over the near-term,
within an overall trend that is biased upward, as the Federal Reserve and market
participants monitor developing economic strength. We recognize and are closely
watching these pockets of strength. However, we think this rise in interest
rates is cyclical and temporary in nature; and that inflation will not become
embedded in the economy. Later in 1997, we anticipate a return to moderate
economic growth, well-contained inflation and a stable-to-declining interest
rate environment. Historically, this has been positive for fixed-income
securities.
We appreciate your continued support of Keystone Capital Preservation and
Income Fund. We encourage you to write to us with your questions or comments
about your Keystone investment.
Sincerely,
/s/ Albert H. Elfner, III (Photo of Albert H. Elfner, III)
Albert H. Elfner, III ALBERT H. ELFNER, III
CHAIRMAN (Photo of George S. Bissell)
KEYSTONE INVESTMENT MANAGEMENT COMPANY GEORGE S. BISSELL
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
May 1997
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PAGE 3
A Discussion With
Your Fund Manager
(Photo of Christopher P. Conkey)
CHRISTOPHER P. CONKEY IS CHIEF INVESTMENT OFFICER OF KEYSTONE'S FIXED
INCOME GROUP AND WAS THE SENIOR PORTFOLIO MANAGER OF YOUR FUND FOR THE
SIX-MONTH PERIOD ENDED MARCH 31, 1997. GARY E. PZEGEO IS THE NEW PORTFOLIO
MANAGER OF YOUR FUND. MR. PZEGEO IS A CHARTERED FINANCIAL ANALYST WITH 7
YEARS PROFESSIONAL EXPERIENCE. HE HAS SERVED AS SENIOR RESEARCH ASSOCIATE
AND ANALYST FOR KEYSTONE'S FIXED INCOME GROUP SINCE 1994.
Q WHAT WAS THE FIXED-INCOME INVESTMENT ENVIRONMENT LIKE OVER THE PAST SIX
MONTHS?
A The environment was favorable in the first part of the reporting period, but
weakened at the end of 1996 and into 1997. Market interest rates rose. Further,
the Federal Reserve Board raised the federal funds rate by 1/4% in March 1997.
The "Fed Funds Rate", as it is known to investors, represents the rate at which
banks lend to each other overnight. The administration of a change in this rate
is the primary vehicle that the Federal Reserve Board has to influence interest
rates. As of March 31, 1997, the benchmark 30-year U.S. Treasury bond yielded
7.20% versus 6.96% on September 30, 1996.
Q WHAT CAUSED THE INTEREST RATE CLIMATE TO CHANGE?
A As we entered last year's fourth quarter, interest rates were stable. The
economy was growing at a moderate rate and inflation was low. There also was
substantial global liquidity. This created strong demand from foreign investors,
who were attracted to the positive investment and economic climate in the U.S.
The economy began to exhibit signs of strength, particularly in the housing
and manufacturing sectors and in consumer confidence as we approached year-end.
This strength has carried into the new year, with investors closely monitoring
robust employment and consumer spending data.
Q IN WHAT SECURITIES DID THE FUND INVEST?
A The Fund invests primarily in adjustable-rate mortgage securities (ARMS) and
fixed-rate mortgage-backed and U.S. government and agency securities. The
securities are analyzed and selected with regard to geographic diversification
and mortgage-rate adjustment dates, among other attributes. In our opinion,
adjustable-rate mortgage securities (ARMS) presented attractive relative value
and performed well during this time. We did not invest in any derivative
securities during this six-month period.
FUND PROFILE
OBJECTIVE: Seeks a high level of current income consistent with low volatility
of principal primarily from adjustable-rate mortgage securities (ARMS).
COMMENCEMENT OF INVESTMENT OPERATIONS: July 1, 1991
AVERAGE QUALITY: AAA
NET ASSETS: $55.3 million
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PAGE 4
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
Q WHAT STRATEGIES DID YOU USE OVER THE PAST SIX MONTHS?
A We increased your Fund's ability to benefit from higher interest rates. We did
this by increasing the portfolio's investment in adjustable-rate mortgage
securities (ARMS) from 84% on September 30, 1996 to 95% on March 31, 1997 and
decreasing the Fund's net assets in fixed-rate securities from 14% to 3% over
the same period. The coupons of ARMS change, reflecting adjustments in various
short-term rate indexes. By their nature then, ARMS are attractive investment
vehicles when short-term interest rates are rising. In contrast, the coupons of
fixed-rate mortgages do not change, so these securities typically perform better
when interest rates are declining.
Q WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A We think the U.S. economy is in a prolonged moderate growth cycle, with
periodic overheating and recessionary scares. We believe these scares are
temporary and that inflation has not become embedded into the U.S. economy.
Over the near-term, we expect the Federal Reserve will attempt to engineer a
return to a level of sustainable non-inflationary growth through moderate
increases in short term interest rates. Longer term, however, we anticipate a
slowdown in economic growth, well-contained inflation and a stable-to-declining
interest rate environment. We see the recent rise in yields as an opportunity to
capture higher income and the potential for price inflation for later in 1997.
(diamond)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS, 22ND FLOOR
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034.
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PAGE 5
Your Fund's
Performance
(Graph appears here with the following plot points.)
Growth of an investment in
Keystone Capital Preservation and Income Fund Class B
In Thousands
7/91 3/93 3/95 3/97
Reinvestment Distributions (PLEASE FILL IN)
Initial Investment (PLEASE FILL IN)
Total Value $12,795
A $10,000 investment in Keystone Capital Preservation and Income Fund Class B
made on July 1, 1991 with all distributions reinvested was worth $12,795 on
March 31, 1997. Past performance is no guarantee of future results.
Class A shares were introduced on December 30, 1994. Performance is reported
after deducting the maximum front-end sales charge of 3.25%.
Class B shares were introduced on July 1, 1991. Performance reflects the
deduction of the maximum contingent deferred sales charge of 5% assuming shares
were redeemed at the end of the period. If you have not redeemed, your return
was greater than the figure listed.
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 that period.
<TABLE>
<CAPTION>
SIX-MONTH PERFORMANCE AS OF MARCH 31, 1997
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
Total returns* 3.09% 2.60% 2.61%
Net asset value 9/30/96 $9.74 $9.75 $9.74
3/31/97 $9.76 $9.76 $9.75
Dividends $0.28 $0.24 $0.24
Capital gains None None None
</TABLE>
* BEFORE DEDUCTION OF FRONT-END OR CONTINGENT DEFERRED SALES CHARGE (CDSC), IF
APPLICABLE.
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD AS OF MARCH 31, 1997
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURNS CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-year
Without sales charge 6.50% 5.71% 5.72%
With sales charge 3.04% 0.71% 4.72%
Since inception
Without sales charge 16.84% 27.95% 19.46%
With sales charge 13.05% 26.98% 19.46%
AVERAGE ANNUAL RETURNS
1-year
Without sales charge 6.50% 5.71% 5.72%
With sales charge 3.04% 0.71% 4.72%
Since inception 5.59% 4.24% 4.36%
</TABLE>
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 may 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 CAPITAL PRESERVATION AND INCOME FUND
SCHEDULE OF INVESTMENTS-- MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (94.7%)
FHLMC (40.4%)
FHLMC Pool #605386, Cap 12.89%, Margin 2.12% + CMT, Resets Annually 7.94% 09/01/17 $1,557,032 $ 1,626,616
FHLMC Pool #605343, Cap 13.60%, Margin 2.13% + CMT, Resets Annually 7.84 03/01/19 1,696,764 1,750,849
FHLMC Pool #645062, Cap 14.11%, Margin 2.31% + CMT, Resets Annually 7.78 05/01/19 141,896 146,286
FHLMC Pool #785114, Cap 13.23%, Margin 2.13% + CMT, Resets Annually 7.57 07/01/19 156,168 163,294
FHLMC Pool #865220, Cap 15.05%, Margin 2.35% + CMT, Resets Annually 8.37 04/01/20 880,126 902,957
FHLMC Pool #785147, Cap 12.79%, Margin 2.02% + CMT, Resets Annually 7.68 05/01/20 69,859 71,889
FHLMC Pool #606541, Cap 13.56%, Margin 2.04% + CMT, Resets Annually 7.56 03/01/21 748,461 779,567
FHLMC Pool #845039, Cap 12.50%, Margin 2.09% + CMT, Resets Annually 7.76 10/01/21 2,340,916 2,412,607
FHLMC Pool #606679, Cap 12.07%, Margin 2.16% + CMT, Resets Annually 7.98 10/01/21 1,418,557 1,480,619
FHLMC Pool #845063, Cap 12.05%, Margin 2.18% + CMT, Resets Annually 7.86 11/01/21 2,064,693 2,134,376
FHLMC Pool #845070, Cap 11.84%, Margin 2.12% + CMT, Resets Annually 7.73 01/01/22 2,320,515 2,403,183
FHLMC Pool #845082, Cap 12.34%, Margin 1.98% + CMT, Resets Annually 7.52 03/01/22 1,854,858 1,902,389
FHLMC Pool #607352, Cap 13.62%, Margin 2.17% + CMT, Resets Annually 7.69 04/01/22 4,218,625 4,412,429
FHLMC Pool #846298, Cap 13.04%, Margin 1.85% + CMT, Resets Annually 7.22 08/01/22 2,083,691 2,149,452
TOTAL FHLMC 22,336,513
FNMA (54.3%)
FNMA Pool #094564, Cap 15.86%, Margin 1.98% + CMT, Resets Annually 7.69 01/01/16 1,166,669 1,214,246
FNMA Pool #092086, Cap 15.47%, Margin 2.08% + CMT, Resets Annually 7.44 10/01/16 471,036 486,490
FNMA Pool #070033, Cap 14.35%, Margin 1.75% + CMT, Resets Annually 7.50 10/01/17 769,516 795,610
FNMA Pool #070119, Cap 12.01%, Margin 2.00% + CMT, Resets Annually 7.64 11/01/17 3,421,302 3,541,047
FNMA Pool #062610, Cap 12.75%, Margin 2.13% + CMT, Resets Annually 7.75 06/01/18 304,348 315,904
FNMA Pool #090678, Cap 13.14%, Margin 2.18% + CMT, Resets Annually 7.91 09/01/18 2,695,797 2,829,320
FNMA Pool #114714, Cap 12.62%, Margin 1.75% + CMT, Resets Annually 7.37 03/01/19 316,525 327,109
FNMA Pool #105007, Cap 13.13%, Margin 2.03% + CMT, Resets Annually 7.67 07/01/19 312,617 321,899
FNMA Pool #095405, Cap 13.70%, Margin 2.08% + CMT, Resets Annually 7.66 12/01/19 1,299,009 1,342,039
FNMA Pool #103183, Cap 13.08%, Margin 2.00% + COFI, Resets Annually 6.07 06/01/20 2,305,133 2,273,078
FNMA Pool #102905, Cap 13.08%, Margin 2.00% + CMT, Resets Annually 7.40 07/01/20 842,085 879,844
FNMA Pool #107661, Cap 13.44%, Margin 2.01% + COFI, Resets Annually 6.07 09/01/20 2,010,621 1,982,661
FNMA Pool #124289, Cap 13.44%, Margin 2.01% + CMT, Resets Annually 7.61 09/01/21 6,777,713 7,066,851
FNMA Pool #124204, Cap 13.60%, Margin 2.01% + CMT, Resets Annually 7.63 01/01/22 1,077,535 1,125,011
FNMA Pool #065344, Cap 13.60%, Margin 2.01% + COFI, Resets Annually 6.09 09/01/27 3,560,097 3,510,589
FNMA Pool #124945, Cap 12.73%, Margin 2.11% + CMT, Resets Annually 7.69 01/01/31 1,969,244 2,062,783
TOTAL FNMA 30,074,481
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES
(COST-- $52,209,692) 52,410,994
</TABLE>
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PAGE 7
SCHEDULE OF INVESTMENTS-- MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
FIXED RATE MORTGAGE SECURITIES (2.2%)
FHLMC (0.0%)
FHLMC CMO, Series 11 Class 11C (Est. Mat. 1999) (b) 9.50% 04/15/19 $ 27,032 $ 27,716
FNMA (2.2%)
FNMA Pool #100051 (Est. Mat. 1999) (b) 9.50 04/01/05 379,123 393,340
FNMA Pool #002497 (Est. Mat. 2001) (b) 11.00 01/01/16 485,661 537,044
FNMA Pool #058442 (Est. Mat. 2002) (b) 11.00 01/01/18 236,192 260,562
TOTAL FNMA 1,190,946
TOTAL FIXED RATE MORTGAGE SECURITIES (COST-- $1,216,108) 1,218,662
U.S. TREASURY NOTES (1.1%) (COST-- $595,841)
U.S. Treasury Notes 6.00 08/15/99 600,000 593,064
<CAPTION>
MATURITY
VALUE
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (0.8%) (COST-- $437,000)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, purchased 3/31/97) (a) 6.47 04/1/97 437,079 437,000
TOTAL INVESTMENTS (COST-- $54,458,641) 54,659,720
OTHER ASSETS AND LIABILITIES-- NET (1.2%) 670,670
NET ASSETS-- (100%) $55,330,390
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at March 31, 1997.
(b) The estimated maturity of a Collateralized Motgage Obligation ("CMO") is
based on current and projected prepayment rates.
Changes in interest rates can cause the estimated maturity to differ from the
listed dates.
LEGEND OF PORTFOLIO ABBREVIATIONS
CMT-- 1, 3, or 5 year Constant Maturity Treasury Index
COFI-- 11th District Cost of Funds Index
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 8
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
FINANCIAL HIGHLIGHTS-- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
DECEMBER 30, 1994
(DATE OF INITIAL
PUBLIC OFFERING)
SIX MONTHS ENDED YEAR ENDED TO
MARCH 31, 1997 SEPTEMBER 30, 1996 (D) SEPTEMBER 30, 1995
<S> <C> <C> <C>
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $ 9.74 $ 9.68 $ 9.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.31 0.61 0.46
Net realized and unrealized gain (loss) on
investments (0.01) 0.01 0.14
Total from investment operations 0.30 0.62 0.60
LESS DISTRIBUTIONS FROM:
Net investment income (0.28) (0.53) (0.42)
In excess of net investment income 0 0 (0.01)
Tax basis return of capital 0 (0.03) 0
Total distributions (0.28) (0.56) (0.43)
NET ASSET VALUE END OF PERIOD $ 9.76 $ 9.74 $ 9.68
TOTAL RETURN (A) 3.09% 6.56% 6.36%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 0.92%(b)(c) 0.91%(b) 0.86%(b)(c)
Total expenses excluding reimbursement 1.39%(c) 1.33% 1.27%(c)
Net investment income 6.21%(c) 6.31% 6.37%(c)
Portfolio turnover rate 23% 74% 67%
NET ASSETS END OF PERIOD (THOUSANDS) $15,370 $22,684 $19,293
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 0.90% (annualized) for the six months ended March 31, 1997, 0.90% for
the year ended September 30, 1996 and 0.82% (annualized) for the period
December 30, 1994 (Date of Initial Public Offering) to September 30, 1995.
(c) Annualized.
(d) Calculation based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 9
FINANCIAL HIGHLIGHTS-- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
1997 1996 (D) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF PERIOD $9.75 $9.68 $9.62 $9.91 $9.88 $10.06
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.26 0.55 0.52 0.47 0.45 0.58
Net realized and unrealized
gain (loss) on
investments (0.01) 0.01 0.03 (0.41) (0.05) (0.21)
Total from investment
operations 0.25 0.56 0.55 0.06 0.40 0.37
LESS DISTRIBUTIONS FROM:
Net investment income (0.24) (0.46) (0.48) (0.34) (0.37) (0.55)
In excess of net investment
income 0 0 (0.01) (0.01) 0 0
Tax basis return of capital 0 (0.03) 0 0 0 0
Total distributions (0.24) (0.49) (0.49) (0.35) (0.37) (0.55)
NET ASSET VALUE END OF
PERIOD $9.76 $9.75 $9.68 $9.62 $9.91 $9.88
TOTAL RETURN (A) 2.60% 5.90% 5.81% 0.58% 4.16% 3.71%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 1.67%(b)(c) 1.63%(b) 1.53%(b) 1.50% 1.50% 1.36%
Total expenses excluding
reimbursement 2.17%(c) 2.09% 2.09% 1.93% 1.94% 2.03%
Net investment income 5.50%(c) 5.63% 5.46% 4.05% 4.44% 5.50%
Portfolio turnover rate 23% 74% 67% 34% 60% 41%
NET ASSETS END OF PERIOD
(THOUSANDS) $35,628 $44,096 $62,998 $95,761 $144,725 $186,742
<CAPTION>
JULY 1, 1991
(COMMENCEMENT
OF OPERATIONS) TO
SEPTEMBER 30, 1991
<S> <C>
<S> <C>
NET ASSET VALUE BEGINNING
OF PERIOD $10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.18
Net realized and unrealized
gain (loss) on
investments 0.06
Total from investment
operations 0.24
LESS DISTRIBUTIONS FROM:
Net investment income (0.18)
In excess of net investment
income 0
Tax basis return of capital 0
Total distributions (0.18)
NET ASSET VALUE END OF
PERIOD $10.06
TOTAL RETURN (A) 2.43%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 1.19%(c)
Total expenses excluding
reimbursement 3.19%(c)
Net investment income 6.42%(c)
Portfolio turnover rate 2%
NET ASSETS END OF PERIOD
(THOUSANDS) $25,769
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.65% (annualized) for the six months ended March 31, 1997, and 1.62%
and 1.50% for the years ended September 30, 1996 and 1995, respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
FINANCIAL HIGHLIGHTS-- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
SIX MONTHS (DATE OF INITIAL
ENDED PUBLIC OFFERING)
MARCH 31, YEAR ENDED SEPTEMBER 30, TO
1997 1996 (D) 1995 1994 SEPTEMBER 30, 1993
<S> <C> <C> <C> <C> <C>
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $ 9.74 $ 9.67 $ 9.60 $ 9.90 $ 9.82
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.27 0.54 0.52 0.40 0.23
Net realized and unrealized gain (loss) on
investments (0.02) 0.02 0.04 (0.35) 0.09
Total from investment operations 0.25 0.56 0.56 0.05 0.32
LESS DISTRIBUTIONS FROM:
Net investment income (0.24) (0.46) (0.48) (0.34) (0.24)
In excess of net investment income 0 0 (0.01) (0.01) 0
Tax basis return of capital 0 (0.03) 0 0 0
Total distributions (0.24) (0.49) (0.49) (0.35) (0.24)
NET ASSET VALUE END OF PERIOD $ 9.75 $ 9.74 $ 9.67 $ 9.60 $ 9.90
TOTAL RETURN (A) 2.61% 5.91% 5.93% 0.48% 3.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.67%(b)(c) 1.64%(b) 1.53%(b) 1.50% 1.50%(c)
Total expenses excluding reimbursement 2.19%(c) 2.09% 2.08% 1.94% 1.67%(c)
Net investment income 5.50%(c) 5.60% 5.51% 4.08% 2.91%(c)
Portfolio turnover rate 23% 74% 67% 34% 60%
NET ASSETS END OF PERIOD (THOUSANDS) $4,332 $4,152 $2,755 $2,874 $2,077
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.65% (annualized) for the six months ended March 31, 1997, and 1.62%
and 1.50% for the years ended September 30, 1996 and 1995, respectively.
(c) Annualized.
(d) Calculations based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS (NOTES 2 AND 5)
Investments at market value
(identified cost-- $54,458,641) $54,659,720
Cash 385
Interest receivable 476,946
Principal paydowns receivable 289,625
Receivable for Fund shares sold 186,105
Due from investment adviser 30,670
Prepaid expenses and other assets 31,838
Total assets 55,675,289
LIABILITIES (NOTES 2, 4 AND 5)
Payable for Fund shares redeemed 204,770
Distributions to shareholders 93,398
Due to related parties 7,100
Distribution fee payable 6,843
Other accrued expenses 32,788
Total liabilities 344,899
NET ASSETS $55,330,390
NET ASSETS REPRESENTED BY (NOTE 2)
Paid-in capital $62,408,402
Accumulated distributions in excess of net
investment income (138,788)
Accumulated net realized loss on investments (7,140,303)
Net unrealized appreciation on investments 201,079
TOTAL NET ASSETS $55,330,390
NET ASSET VALUE (NOTE 2)
CLASS A
Net assets of $15,370,035 / 1,575,579 shares
outstanding $ 9.76
Offering price per share ($9.76 / 0.9675)
(based on a sales charge of 3.25% of the
offering price at March 31, 1997) $ 10.09
CLASS B
Net assets of $35,627,924 / 3,649,390 shares
outstanding $ 9.76
CLASS C
Net assets of $4,332,431 / 444,139 shares
outstanding $ 9.75
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $2,208,829
EXPENSES (NOTES 4, 5 AND 6)
Distribution Plan expenses $ 241,742
Management fee 198,982
Transfer agent fees 64,745
Custodian fees 30,933
Accounting, auditing and legal fees 28,415
Other 39,977
Reimbursement from investment
adviser (153,096)
Total expenses 451,698
Less: Indirectly paid expenses (7,337)
Net expenses 444,361
Net investment income 1,764,468
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (NOTE 3)
Net realized gain on investments 8,948
Net change in unrealized
appreciation (depreciation) on
investments (61,809)
Net realized and unrealized loss on
investments (52,861)
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,711,607
</TABLE>
<PAGE>
PAGE 12
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1997 SEPTEMBER 30, 1996
<S> <C> <C>
<CAPTION>
(UNAUDITED)
<S> <C> <C>
OPERATIONS
Net investment income $ 1,764,468 $ 4,442,259
Net realized gain (loss) on investments 8,948 (549,777)
Net change in unrealized appreciation (depreciation) on investments (61,809) 648,310
Net increase in net assets resulting from operations 1,711,607 4,540,792
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1)
Net investment income:
Class A (497,392) (1,089,444)
Class B (994,417) (2,568,398)
Class C (105,639) (147,748)
Tax basis return of capital:
Class A 0 (52,292)
Class B 0 (123,279)
Class C 0 (7,092)
Total distributions to shareholders (1,597,448) (3,988,253)
CAPITAL SHARE TRANSACTIONS (NOTE 2)
Proceeds from shares sold:
Class A 2,979,468 7,859,112
Class B 1,243,918 2,742,007
Class C 659,249 2,090,764
Payments from shares redeemed:
Class A (10,775,523) (5,471,951)
Class B (10,582,475) (23,865,587)
Class C (568,892) (844,271)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A 440,675 865,840
Class B 801,937 1,829,883
Class C 85,583 127,771
Net decrease in net assets resulting from capital share transactions (15,716,060) (14,666,432)
Total decrease in net assets (15,601,901) (14,113,893)
NET ASSETS
Beginning of period 70,932,291 85,046,184
END OF PERIOD [INCLUDING ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INVESTMENT
INCOME AS FOLLOWS:
1997-- ($138,788) AND 1996-- ($305,808)] (NOTE 1) $ 55,330,390 $ 70,932,291
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PAGE 13
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFCANT ACCOUNTING POLICIES
Keystone Capital Preservation and Income 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 diversifed, open-end investment company. The Fund offers several
classes of shares. The Fund's investment objective is to seek a high level of
current income consistent with low volatility of principal. The Fund pursues its
investment objective primarily by investing in adjustable-rate mortgage
securities.
The following is a summary of signifcant accounting policies consistently
followed by the Fund in the preparation of its fnancial 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 fxed 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 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. 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 may enter into reverse repurchase agreements with qualifed 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 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.
<PAGE>
PAGE 14
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
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 identifed cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts.
E. FEDERAL INCOME TAXES
The Fund has qualifed 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 declares dividends from net investment income daily and distributes
such dividend monthly and declares and distributes 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) on mortgaged-backed securities.
G. CLASS ALLOCATIONS
Effective January 1, 1997, Class A shares are currently offered at a public
offering price which includes a maximum sales charge of 3.25% payable at the
time of purchase. Prior to January 1, 1997, Class A shares were offered at a
public offering price which included a maximum sales charge of 3.0% 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 June 1,
1995 will retain their existing conversion rights.
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 specifc expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specifc expenses are limited to
expenses incurred under the Distribution Plans for each class.
<PAGE>
PAGE 15
2. CAPITAL SHARE TRANSACTIONS
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of benefcial interest with no par value. Shares of benefcial 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>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
CLASS A 1997 1996
<S> <C> <C>
Shares sold 304,938 808,295
Shares redeemed (1,102,881) (563,085)
Shares issued in
reinvestment of
dividends and
distributions 45,137 89,475
Net increase (decrease) (752,806) 334,685
CLASS B
Shares sold 127,227 282,004
Shares redeemed (1,082,405) (2,455,640)
Shares issued in
reinvestment of
dividends and
distributions 82,082 187,040
Net decrease (873,096) (1,986,596)
CLASS C
Shares sold 67,427 215,390
Shares redeemed (58,220) (86,982)
Shares issued in
reinvestment of
dividends and
distributions 8,766 12,718
Net increase 17,973 141,126
</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 March 31, 1997 were
$14,187,223 and $29,848,020, respectively.
The average daily balance of reverse repurchase agreements outstanding during
the six months ended March 31, 1997 was $1,023,536 at a weighted average
interest rate of 5.47%. The maximum amount of borrowing during the six months
ended March 31, 1997 was $4,066,236 (including accrued interest).
As of September 30, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $7,121,000 which expires as follows:
$59,000-- 1999, $34,000-- 2000, $5,935,000-- 2001, $197,000-- 2002,
$642,000-- 2003 and $254,000-- 2004.
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. (formerly, Evergreen Funds
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.
<PAGE>
PAGE 16
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
During the six months ended March 31, 1997, amounts paid to EKD and/or EKIS
pursuant to the Fund's Class A, Class B and Class C Distribution Plans were as
follows:
<TABLE>
<S> <C> <C>
Class A $18,833
Class B 201,680
Class C 21,229
</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 March 31, 1997 total unpaid distribution costs were $9,156,633 for Class B
shares and $551,155 for Class C shares.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND
OTHER AFFLIATED TRANSACTIONS
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return, Keystone is paid a management
fee that is calculated by applying percentage rates, which start at 0.55% and
decline to 0.25% per annum as net assets increase, to the average daily net
asset value of the Fund.
Keystone has voluntarily limited the expenses of Class A shares to 0.90% of
its average daily net assets and has limited the expenses of Class B and C
shares to 1.65% of the average daily net assets of each respective class. For
the six months ended March 31, 1997, Keystone reimbursed the Fund $153,096.
During the six months ended March 31, 1997, the Fund paid or accrued $14,088
to Keystone for certain accounting services. Evergreen Keystone Service Company
(formerly, Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary
of Keystone, serves as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affliated Trustees receive no compensation directly
from the Fund. Currently the Independent Trustees of the Fund receive no
compensation for their services.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended March 31, 1997, the Fund incurred total custody fees of
$30,933 and received a credit of $7,337 pursuant to this expense offset
arrangement, resulting in a net custody expense of $23,596. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
<PAGE>
PAGE 17
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,
below each proposal are the results of that vote.
1. TO ELECT THE FOLLOWING TRUSTEES:
<TABLE>
<CAPTION>
AFFIRMATIVE WITHHELD
<S> <C> <C>
Frederick Amling 4,437,177 62,876
Laurence B. Ashkin 4,437,177 62,876
Charles A. Austin III 4,437,177 62,876
Foster Bam 4,437,177 62,876
George S. Bissell 4,437,177 62,876
Edwin D. Campbell 4,429,486 70,566
Charles F. Chapin 4,437,177 62,876
K. Dun Gifford 4,437,177 62,876
James S. Howell 4,437,177 62,876
Leroy Keith, Jr. 4,437,177 62,876
F. Ray Keyser, Jr. 4,437,177 62,876
Gerald M. McDonell 4,437,177 62,876
Thomas L. McVerry 4,437,177 62,876
William Walt Pettit 4,437,177 62,876
David M. Richardson 4,437,177 62,876
Russell A. Salton, III M.D. 4,436,966 63,086
Michael S. Scofield 4,437,177 62,876
Richard J. Shima 4,437,177 62,876
Andrew J. Simons 4,437,177 62,876
</TABLE>
2. TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN THE FUND
AND KEYSTONE INVESTMENT MANAGEMENT COMPANY:
<TABLE>
<S> <C>
Affirmative 4,314,358
Against 53,218
Abstain 132,476
</TABLE>
<PAGE>
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KEYSTONE AMERICA
FAMILY OF FUNDS
(diamond)
Balanced Fund II
California Insured Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources and Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Development Fund
Tax Free Income Fund
World Bond 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 Keystone funds, contact your
financial adviser or call Keystone.
Evergreen Keystone
(logo) FUNDS (logo)
P.O. Box 2121
Boston, Massachusetts 02106-2121
(recycle logo)
CPI-R REV01 5/97
