<PAGE>
KEYSTONE INSTITUTIONAL
ADJUSTABLE RATE FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
AUGUST 31, 1997
Evergreen Keystone
(Evergreen Tree appears here) FUNDS(SM) (Keystone symbol appears here)
<PAGE>
PAGE 1
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
SEEKS A HIGH LEVEL OF CURRENT INCOME CONSISTENT WITH LOW VOLATILITY OF
PRINCIPAL.
To the Fund's Investors:
We are writing to report on the activities of Keystone Institutional Adjustable
Rate Fund and review the market events that occurred during the six-month period
ended August 31, 1997.
PERFORMANCE
Class Y shares returned 3.63% for the six-month period.
Class Z shares returned 3.76% for the six-month period.
The U.S. Treasury bill, a benchmark for short-term obligations, returned 2.79%
for the six-month period.
We were pleased with your Fund's performance. We attribute its strong results
to effective implementation of market strategies and careful security selection.
For the five-years which ended August 31, 1997, Class Z shares ranked 2nd out of
the 28 funds in its competitive group, Adjustable Rate Mortgage funds, according
to Lipper Analytical Services1. Further, your Fund earned the second highest
rating, HHHH, by Morningstar2 for its superior risk-adjusted performance.
Morningstar is a widely-followed independent mutual fund rating organization and
rated the fund among fixed income funds for the 3-year period ending August 31,
1997.
MARKET REVIEW AND FUND STRATEGY
Interest rates moved within a well-defined range over the last six months,
ending the reporting period unchanged to modestly lower than where they stood on
February 28, 1997. In the year's first quarter, investors' concerns about
stronger-than-expected economic growth pushed interest rates higher. The Federal
Reserve Board validated these concerns by raising the Federal Funds rate-- the
rate at which banks lend to each other overnight-- by 1/4% in March 1997. As we
approached mid-year, however, the economy began to show signs of slowing and
interest rates fell. Inflation remained well-contained throughout the period,
despite some preliminary signs of wage-inflation.
This atmosphere of low interest-rate volatility and stable inflation created a
favorable investment environment for adjustable-rate mortgage securities (ARMS).
We structured your Fund to take advantage of the higher interest rates available
early in the period, locking in income when it appeared that interest rates
would fall. We reduced your Fund's investment in adjustable-rate mortgage
securities (ARMS) from approximately 93% on February 28, 1997 to approximately
86% on August 31, 1997. Another part of this strategy was to increase net assets
in fixed-rate securities from approximately 4% on February 28, 1997 to
approximately 11% on August 31, 1997. We focused in particular on U.S.
Treasuries with 5-year maturities. Earlier in the year, we had emphasized U.S.
Treasuries with 2 to 3 year maturities. We believe this extension preserved
income and enhanced the Fund's total return.
1 THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE. FOR THE 1 YEAR PERIOD ENDING AUGUST 31, 1997 THE FUND RANKED 8
OUT OF 46 FUNDS.
2 SOURCE: MORNINGSTAR, INC. MORNINGSTAR'S PROPRIETARY RATINGS REFLECT THE FUND'S
HISTORICAL RISK-ADJUSTED PERFORMANCE AS OF AUGUST 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 OF OR BELOW THE 90-DAY U.S.
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. IN THE
FIXED-INCOME CATEGORY, CLASS Z SHARES RECEIVED A 5-STAR RATING FOR THE 3-YEAR
PERIOD AND A 4-STAR RATING FOR THE 5-YEAR PERIOD. CLASS Z WAS NOT RATED FOR
THE TEN-YEAR PERIOD BECAUSE IT DID NOT HAVE A TEN-YEAR PERFORMANCE RECORD.
THERE WERE 1,142 FUNDS IN THE 3-YEAR CATEGORY AND 615 FUNDS IN THE 5-YEAR
CATEGORY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
Your Fund also demonstrated the price stability it was designed to provide.
The net asset value (NAV) of Class Z shares moved within a range of $9.71 to
$9.74 during the six months ended August 31, 1997.
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, as well as our outlook for the general level
of interest rates and their volatility. During the reporting period, we invested
in seasoned, adjustable-rate mortgage securities. Seasoned, adjustable-rate
mortgage securities have been in existence longer than newly issued securities.
They have an established prepayment history and typically offer higher coupons.
OUR OUTLOOK
As we head into the final months of 1997, we anticipate a continuation of the
favorable investment atmosphere we have experienced over the past six months. We
expect moderate economic growth of approximately 3%, buoyed by low unemployment,
strong consumer activity and benign inflation. Historically, this type of
environment has provided a positive supply/demand relationship for fixed-income
assets. The financial condition of borrowers typically improves, creating solid
demand and reducing the need for debt issuance.
We also expect good news on the fiscal front. The federal budget deficit
continues to decline. Congress demonstrated the political resolve that was
necessary to reach a bipartisan budget agreement in August 1997. Further, we
anticipate strong economic growth to generate higher tax revenues, helping to
offset the need to borrow.
We appreciate your continued support of Keystone Institutional Adjustable Rate
Fund. If you have any questions or comments about your Fund, we encourage you to
write to us.
<TABLE>
<CAPTION
<S> <C> <C>
Sincerely, (Photo of Albert H. (Photo of George S.
/s/ Albert H. Elfner, III Elfner, III appears here) Bissell appears here)
Albert H. Elfner, III ALBERT H. ELFNER, III GEORGE S. BISSELL
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
October 1997
</TABLE>
<PAGE>
PAGE 3
SCHEDULE OF INVESTMENTS
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (85.5%)
FHLMC (40.0%)
FHLMC Pool #605343, Cap 13.604%, Margin 2.125% + CMT, Resets
Annually 7.915% 03/01/19 $1,709,103 $ 1,772,126
FHLMC Pool #605386, Cap 12.890%, Margin 2.112% + CMT, Resets
Annually 7.986 09/01/17 1,500,518 1,575,304
FHLMC Pool #606541, Cap 13.560%, Margin 2.041% + CMT, Resets
Annually 7.775 03/01/21 772,166 808,118
FHLMC Pool #606679, Cap 12.070%, Margin 2.159% + CMT, Resets
Annually 7.974 10/01/21 837,052 879,039
FHLMC Pool #607352, Cap 13.620%, Margin 2.175% + CMT, Resets
Annually 7.927 04/01/22 1,855,085 1,942,329
FHLMC Pool #845039, Cap 12.500%, Margin 2.084% + CMT, Resets
Annually 7.838 10/01/21 2,102,610 2,177,516
FHLMC Pool #845063, Cap 12.050%, Margin 2.185% + CMT, Resets
Annually 7.941 11/01/21 1,920,458 1,996,076
FHLMC Pool #845070, Cap 11.839%, Margin 2.115% + CMT, Resets
Annually 7.831 01/01/22 2,284,646 2,383,171
FHLMC Pool #845082, Cap 12.340%, Margin 1.970% + CMT, Resets
Annually 7.062 03/01/22 1,774,848 1,830,312
FHLMC Pool #846163, Cap 13.065%, Margin 1.985% + CMT, Resets
Annually 7.732 07/01/30 1,087,549 1,135,129
FHLMC Pool #846298, Cap 13.040%, Margin 1.849% + CMT, Resets
Annually 7.456 08/01/22 3,338,220 3,472,282
FHLMC Pool #865220, Cap 15.080%, Margin 3.000% + CMT, Resets
Annually 8.369 04/01/20 287,764 297,747
TOTAL FHLMC 20,269,149
FNMA (45.5%)
FNMA Pool #070119, Cap 12.010%, Margin 2.000% + CMT, Resets Annually 7.771 11/01/17 1,359,187 1,415,253
FNMA Pool #090678, Cap 13.136%, Margin 2.177% + CMT, Resets Annually 7.913 09/01/18 2,761,053 2,912,911
FNMA Pool #092086, Cap 15.470%, Margin 2.075% + CMT, Resets Annually 7.849 10/01/16 463,386 482,718
FNMA Pool #094564, Cap 15.860%, Margin 1.975% + CMT, Resets Annually 7.702 01/01/16 1,062,683 1,111,173
FNMA Pool #095405, Cap 13.700%, Margin 2.087% + CMT, Resets Annually 7.869 12/01/19 1,045,451 1,085,309
FNMA Pool #102905, Cap 13.114%, Margin 2.818% + CMT, Resets Annually 7.758 07/01/20 273,427 287,653
FNMA Pool #124015, Cap 13.230%, Margin 1.815% + CMT, Resets Annually 7.598 11/01/18 897,650 933,413
FNMA Pool #124204, Cap 13.600%, Margin 2.011% + CMT, Resets Annually 7.731 01/01/22 819,842 861,859
FNMA Pool #124289, Cap 13.440%, Margin 2.005% + CMT, Resets Annually 7.717 09/01/21 6,591,868 6,918,364
FNMA Pool #124497, Cap 13.100%, Margin 2.070% + CMT, Resets Annually 7.800 09/01/22 1,205,069 1,264,009
FNMA Pool #124945, Cap 12.730%, Margin 2.107% + CMT, Resets Annually 7.823 01/01/31 1,420,528 1,494,878
FNMA Pool #142963, Cap 10.990%, Margin 1.950% + CMT, Resets Annually 7.449 01/01/22 821,534 847,724
FNMA Pool #313663, Cap 12.944%, Margin 2.814% + CMT, Resets Annually 7.620 05/01/22 3,090,571 3,234,959
FNMA Pool #391290, Cap 12.657%, Margin 2.715% + CMT, Resets Annually 7.755 02/01/17 160,319 164,353
TOTAL FNMA 23,014,576
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES
(COST-- $43,059,233) 43,283,725
</TABLE>
<PAGE>
PAGE 4
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
SCHEDULE OF INVESTMENTS-- (CONTINUED)
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
FIXED RATE MORTGAGE SECURITIES (6.2%)
FHLMC (0.1%)
FHLMC Pool #277831 7.250% 11/01/08 $ 38,212 $ 38,435
FNMA (3.3%)
FNMA Pool #004534 10.750 10/01/12 783,385 857,031
FNMA Pool #100051 9.500 04/01/05 165,728 172,929
FNMA Pool #058442 11.000 01/01/18 584,407 644,127
TOTAL FNMA 1,674,087
GNMA (2.8%)
GNMA Pool #268164 10.250 11/15/29 1,290,570 1,395,648
TOTAL FIXED RATE MORTGAGE SECURITIES (COST-- $3,060,385) 3,108,170
U. S. TREASURY NOTES (4.6%) (COST-- $ 2,323,849)
U.S. Treasury Notes 6.625 04/30/02 2,300,000 2,335,213
REPURCHASE AGREEMENT (2.1%) (COST-- $1,059,000)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, purchased 8/29/97) (a) 5.584 9/02/97 1,059,657 1,059,000
TOTAL INVESTMENTS (COST-- $49,502,467) 98.4% 49,786,108
OTHER ASSETS AND LIABILITIES-- NET 1.6 816,600
NET ASSETS-- 100.0% $50,602,708
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at August 31, 1997.
LEGEND OF PORTFOLIO ABBREVIATIONS:
CMT 1, 3 or 5 year Constant Maturity Treasury Index
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 5
FINANCIAL HIGHLIGHTS-- CLASS Y SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
AUGUST 31, 1997 FIVE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED) FEBRUARY 28, 1997(A) 1996(B) 1995
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $9.72 $9.68 $9.65 $9.61
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.30 0.28 0.65 0.64
Net realized and unrealized gain (loss)
on investments 0.05 0(d) (0.03) (0.02)
Total from investment operations 0.35 0.28 0.62 0.62
LESS DISTRIBUTIONS FROM:
Net investment income (0.32) (0.22) (0.58) (0.53)
In excess of net investment income 0 (0.02) (0.01) (0.05)
Total distributions (0.32) (0.24) (0.59) (0.58)
NET ASSET VALUE END OF PERIOD $9.75 $9.72 $9.68 $9.65
TOTAL RETURN 3.63% 2.97% 6.60% 6.60%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 0.55%(c) 0.55%(c) 0.55% 0.55%
Net investment income 6.45%(c) 6.39%(c) 6.64% 6.70%
PORTFOLIO TURNOVER RATE 51% 44% 85% 56%
NET ASSETS END OF PERIOD (THOUSANDS) $8,424 $3,564 $14,361 $2,871
<CAPTION>
MAY 23, 1994 (DATE OF
INITIAL PUBLIC OFFERING)
TO SEPTEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD $9.73
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.17
Net realized and unrealized gain (loss)
on investments (0.13)
Total from investment operations 0.04
LESS DISTRIBUTIONS FROM:
Net investment income (0.16)
In excess of net investment income 0
Total distributions (0.16)
NET ASSET VALUE END OF PERIOD $9.61
TOTAL RETURN 0.35%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 0.43%(c)
Net investment income 5.03%(c)
PORTFOLIO TURNOVER RATE 63%
NET ASSETS END OF PERIOD (THOUSANDS) $1
</TABLE>
(a) The Fund changed its fiscal year end from September 30 to February 28.
(b) Per share calculations based on weighted average shares outstanding.
(c) Annualized.
(d) Amount represents less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 6
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
FINANCIAL HIGHLIGHTS-- CLASS Z SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, 1997 FIVE MONTHS ENDED YEAR ENDED SEPTEMBER 30,
(UNAUDITED) FEBRUARY 28, 1997(A) 1996(B) 1995 1994 1993(B) 1992
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
PERIOD $9.71 $9.68 $9.65 $9.61 $9.93 $9.88 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.34 0.28 0.64 0.63 0.63 0.54 0.67
Net realized and unrealized gain
(loss) on investments 0.02 0(d) 0(d) 0.01 (0.49) (0.01) (0.15)
Total from investment operations 0.36 0.28 0.64 0.64 0.14 0.53 0.52
LESS DISTRIBUTIONS FROM:
Net investment income (0.33) (0.23) (0.60) (0.55) (0.44) (0.48) (0.64)
In excess of net investment income 0 (0.02) (0.01) (0.05) (0.02) 0 0
Total distributions (0.33) (0.25) (0.61) (0.60) (0.46) (0.48) (0.64)
NET ASSET VALUE END OF PERIOD $9.74 $9.71 $9.68 $9.65 $9.61 $9.93 $9.88
TOTAL RETURN 3.76% 2.97% 6.86% 6.87% 1.43% 5.53% 5.46%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 0.30%(c) 0.30%(c) 0.30% 0.30% 0.30% 0.30% 0.30%
Net investment income 6.75%(c) 6.79%(c) 6.84% 6.61% 5.15% 5.46% 6.83%
PORTFOLIO TURNOVER RATE 51% 44% 85% 56% 63% 81% 88%
NET ASSETS END OF PERIOD
(THOUSANDS) $42,179 $70,264 $65,974 $23,616 $25,200 $60,035 $51,625
</TABLE>
(a) The Fund changed its fiscal year end from September 30 to February 28.
(b) Per share calculations based on weighted average shares outstanding.
(c) Annualized.
(d) Amount represents less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 7
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value (identified cost--
$49,502,467) $49,786,108
Cash 19,459
Interest receivable 465,970
Receivable for principal paydowns 315,474
Receivable for Fund shares sold 40,593
Total assets 50,627,604
LIABILITIES
Management fee payable 24,781
Distribution fee payable 115
Total liabilities 24,896
NET ASSETS $50,602,708
NET ASSETS REPRESENTED BY
Paid-in capital $51,199,270
Undistributed net investment income 26,405
Accumulated net realized loss on investments (906,608)
Net unrealized appreciation on investments 283,641
Total net assets $50,602,708
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
Class Y Shares
Net assets of $8,423,689 4 863,982 shares
outstanding $ 9.75
Class Z Shares
Net assets of $42,179,019 4 4,329,698 shares
outstanding $ 9.74
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $2,071,107
EXPENSES
Management fee 88,146
Distribution Plan expenses 5,869
Total expenses 94,015
Net investment income 1,977,092
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 48,824
Net change in unrealized appreciation
(depreciation) on investments 127,551
Net realized and unrealized gain on
investments 176,375
Net increase in net assets resulting
from operations $2,153,467
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 8
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED FIVE MONTHS ENDED
AUGUST 31, 1997 ENDED SEPTEMBER 30,
(UNAUDITED) FEBRUARY 28, 1997* 1996
<S> <C> <C> <C>
OPERATIONS
Net investment income $ 1,977,092 $ 2,283,405 $ 2,748,371
Net realized gain (loss) on investments 48,824 27,179 (269,386)
Net change in unrealized appreciation on investments 127,551 38,889 170,926
Net increase in net assets resulting from operations 2,153,467 2,349,473 2,649,911
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class Y (149,902) (197,984) (563,993)
Class Z (1,800,535) (1,744,950) (1,945,801)
In excess of net investment income:
Class Y 0 (16,346) (8,481)
Class Z 0 (144,070) (29,260)
Total distributions to shareholders (1,950,437) (2,103,350) (2,547,535)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class Y 4,782,839 8,545,059 24,782,061
Class Z 0 10,000,000 41,798,486
Payments for shares redeemed:
Class Y (77,552) (19,610,398) (13,818,826)
Class Z (30,091,008) (8,073,653) (962,799)
Shares issued in reinvestment of distributions:
Class Y 148,915 240,365 519,458
Class Z 1,808,799 2,145,897 1,426,821
Net increase (decrease) in net assets resulting from
capital share transactions (23,428,007) (6,752,730) 53,745,201
Total increase (decrease) in net assets (23,224,977) (6,506,607) 53,847,577
NET ASSETS:
Beginning of period 73,827,685 80,334,292 26,486,715
End of period $50,602,708 $ 73,827,685 $80,334,292
Undistributed net investment income (accumulated
distributions in excess of net investment income) $ 26,405 $ (250) $ (168,733)
</TABLE>
*The Fund changed its fiscal year from September 30 to February 28.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 9
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Keystone Institutional Adjustable Rate 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 Y and Class Z shares to institutional investors. Both
classes of shares are sold at net asset value and are not subject to contingent
deferred sales charges. Class Y shares pay ongoing distribution fees.
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. 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. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. 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. The Fund will only enter into repurchase agreements with banks
and other financial institutions which are deemed by the investment advisor to
be creditworthy pursuant to guidelines established by the Board of Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other funds managed by Keystone, may
transfer uninvested cash balances into a joint trading account. These balances
are invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or federal agency obligations.
C. REVERSE REPURCHASE AGREEMENTS
To obtain short-term financing, the Fund may enter 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 the 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 income is recorded on the accrual basis and includes accretion
of discounts.
<PAGE>
PAGE 10
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income, 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
Distributions from net investment income for the Fund are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid 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. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for paydown
gains and 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 Plan for Class Y shares.
2. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with no par
value authorized. Shares of beneficial interest of the Fund are currently
divided into Class Y and Class Z. Transactions in shares of the Fund were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
ENDED ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28, SEPTEMBER 30,
1997 1997 1996
<S> <C> <C> <C>
CLASS Y
Shares sold 490,124 879,121 2,560,589
Shares redeemed.... (7,953) (2,020,244) (1,428,881)
Shares issued in
reinvestment of
distributions.... 15,277 24,800 53,718
Net increase
(decrease) 497,448 (1,116,323) 1,185,426
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
ENDED ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28, SEPTEMBER 30,
1997 1997 1996
<S> <C> <C> <C>
CLASS Z
Shares sold 0 1,030,429 4,318,022
Shares redeemed (3,089,660) (830,759) (99,669)
Shares issued in
reinvestment of
distributions... 185,860 221,061 147,411
Net increase
(decrease) (2,903,800) 420,731 4,365,764
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. Government securities
(excluding short-term securities) were $28,961,333 and $50,851,108,
respectively.
As of February 28, 1997, the Fund had a capital loss carryover for federal
income tax purposes of approximately $949,000 which expires as follows:
$139,000-- 2000, $486,000-- 2001, $281,000-- 2002 and $43,000-- 2004.
<PAGE>
PAGE 11
4. DISTRIBUTION PLAN
Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS"), serves as principal underwriter to the Fund. Prior
to December 11, 1996, Fiduciary Investment Company, Inc. ("FICO"), a
wholly-owned subsidiary of Keystone Management Company ("Keystone"), served as
the Fund's principal underwriter.
The Fund has adopted a Distribution Plan for its Class Y shares as allowed by
Rule 12b-1 of the 1940 Act. The Distribution Plan permits the Fund to reimburse
its principal underwriter for costs related to selling shares of the Fund and
for various other services. These costs, which consist primarily of commissions
and services fees to broker-dealers who sell shares of the Fund, are paid by
shareholders through expenses called "Distribution Plan expenses". Class Y
shares pay a distribution fee which is limited to 0.25% of its average daily net
assets. Distribution Plan expenses are calculated daily and paid monthly.
The Distribution Plan may be terminated at any time by vote of the Independent
Trustees or by vote of a majority of the outstanding Class Y voting shares.
However, after the termination of the Distribution Plan, and subject to the
discretion of the Independent Trustees, payments to EKD may continue as
compensation for services which had been provided while the Distribution Plan
was in effect.
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Keystone, a subsidiary of First Union Corporation ("First Union"), is the
investment adviser for the Fund. In return for providing investment management
and administrative services to the Fund, the Fund pays Keystone a management fee
that is calculated daily and paid monthly. The management fee is computed at an
annual rate of 0.30% of the average daily net asset value of the Fund.
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Fund.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Fund. Currently, the Independent Trustees of the Fund receive no
compensation for their services.
<PAGE>
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
<TABLE>
<S> <C> <C> <C>
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
</TABLE>
Evergreen Keystone Distributor, Inc.
Evergreen Keystone(SM) is a Service Mark of Evergreen Keystone Investment
Services, Inc. Copyright 1997.
(Recycle logo appears here)
