KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
Annual Report
for the year ended
February 28, 1997
Evergreen Keystone
(logo) Funds (logo)
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Evergreen Keystone
(logo) Funds (logo)
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 for the five-month period which ended February 28, 1997.
Performance
Since the last annual report dated September 30, 1996, both Class Y and Class Z
shares returned 2.97% for the five-month period ended February 28, 1997. The
six-month U.S. Treasury bill, a benchmark for short-term income-oriented
obligations, returned 2.26% for the same five-month period. For the twelve-month
period ended February 28, 1997, Class Y shares returned 6.77% and Class Z shares
returned 6.92%. The six-month U.S. Treasury bill returned 5.24% for the same
twelve-month period.
The performance of the Fund was consistent with its objective of providing
institutional investors with a relatively stable net asset value combined with
current income. We are pleased with the results given the volatile nature of
interest rates over this time period. Your Fund's Z shares ranked 7th and Y
shares ranked 10th, out of 46 funds within their competitive group, according to
Lipper Analytical Services for the twelve-month period which ended February 28,
1997. Due to its superior risk adjusted performance, your Fund earned the second
highest rating, **** (four stars), by Morningstar(1), an independent mutual fund
rating organization.
Fund Strategy
Over the past five months, investors witnessed an end to the declining interest
rate environment that existed during mid-1996. Increasing strength in the
economy caused concerns about future inflation; and prompted investors to push
interest rates higher toward the end of 1996 and early 1997.
(1) Source: Morningstar, Inc. Morningstar's proprietary ratings reflect the
Fund's historical risk-adjusted performance as of February 28, 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. In the fixed-income category, Class Z
shares received a 4-star rating for the 1-year period, 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 1685 funds in the 1-year category, 1142 funds in the 3-year category,
and 615 funds in the 5-year category. Past performance is no guarantee of future
results.
Annual Report 1
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During this time, we structured your Fund to take advantage of these higher
interest rates, by raising the portfolio's investment in adjustable-rate
mortgage securities (ARMS) from 84% at the end of September 1996 to 93% by the
end of February 1997; as well as reducing holdings in fixed-rate securities from
14% to 4% over the same time frame. This enabled your Fund to generate more
income as interest rates rose. Fixed-rate securities lock-in interest rates and
typically perform better when interest rates are declining.
Your Fund also demonstrated the stability it was designed to provide. The net
asset value (NAV) of Class Y shares moved within a range of $9.68 to $9.72
during the five-month period which ended February 28, 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. We did not invest in any derivative
securities during this five-month period.
In our opinion, adjustable-rate mortgage securities (ARMS) presented attractive
relative value and performed well during this time. The coupons of these
securities change, reflecting adjustments in short-term interest rate indexes.
By their nature, then, adjustable-rate mortgage securities (ARMS) are attractive
investment vehicles when short-term interest rates are flat or rising.
Outlook
In March 1997, after the close of your Fund's reporting period, the Federal
Reserve Board raised short-term interest rates by 1/4%. We believe that interest
rates could continue to experience some volatility over the short-term, as
investors monitor developing economic strength. We recognize and are closely
watching these pockets of strength. However, we think this rise in interest
rates is cyclical in nature and that inflation will not become embedded in the
economy. Over the longer term, we expect inflation to remain well-contained and
interest rates to regain stability.
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.
Sincerely,
/s/ Albert H. Elfner, III /s/ George S. Bissell
Albert H. Elfner, III George S. Bissell
Chairman Chairman of the Board
Keystone Investment Management Company Keystone Funds
April 1997
Annual Report 2
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Fund Performance
Five-Month Performance as of February 28, 1997
Class Y Class Z
Total returns 2.97% 2.97%
Net asset value 9/30/96 $9.68 $9.68
2/28/97 $9.72 $9.71
Distributions $0.24 $0.25
Capital Gains None None
Historical Record
Cumulative total returns Class Y Class Z
1-year 6.77% 6.92%
3-year - 17.79%
5-year - 29.61%
Since inception 17.49% 32.65%
Average annual returns
1-year 6.77% 6.92%
3-year - 5.61%
5-year - 5.32%
Since inception 5.99% 5.35%
Commencement of operations 5/23/94 10/1/91
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.
Annual Report 3
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Comparison of change in value of a $10,000 investment in Keystone
Institutional Adjustable Rate Fund-Class Y, 6-month Treasury Bill
and the Consumer Price Index.
In Thousands May 23, 1994 through February 28, 1997
Average Annual Total Return
1 Year Life of Class
Class Y 6.77% 5.99%
(Graph appears here with the following plot points.)
<TABLE>
<CAPTION>
5/94 2/95 2/96 2/97
<S> <C> <C> <C> <C>
Keystone Institutional Adjustable Rate Fund-Class Y $11,749
6-month Treasury Bill (6-mo. T-bill) $11,606
Consumer Price Index(CPI) $10,828
</TABLE>
Past performance is no guarantee of future results. The performance of Class Z
shares will be greater or less than the line shown based on differences in fees
paid by the shareholder. The 6-month Treasury Bill and the Consumer Price Index
are from April 30, 1994.
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Growth of an investment in
Keystone Institutional Adjustable Rate Fund-Class Y
In Thousands
(Graph appears here with the following plot points.)
5/94 2/95 2/96 2/97
Reinvested Distributions
Initial Investment
Total Value $11,749
A $10,000 investment in Keystone Institutional Adjustable Rate Fund-Class Y
made on May 23, 1994 with all distributions reinvested was worth $11,749 on
February 28, 1997. Past performance is no guarantee of future results.
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Comparison of change in value of a $10,000 investment in Keystone
Institutional Adjustable Rate Fund-Class Z, 6-month Treasury Bill
and the Consumer Price Index.
In Thousands October 1, 1991 through February 28, 1997
Average Annual Total Return
1 Year 5 Years Life of Class
Class Z 6.92% 5.32 5.35%
(Graph appears here with the following plot points.)
<TABLE>
<CAPTION>
10/91 2/93 2/95 2/97
<S> <C> <C> <C> <C>
Keystone Institutional Adjustable Rate Fund-Class Z $13,265
6-month Treasury Bill (6-mo. T-bill) $12,698
Consumer Price Index(CPI) $11,632
</TABLE>
Past performance is no guarantee of future results. The performance of Class Y
shares will be greater or less than the line shown based on differences in fees
paid by the shareholder. The 6-month Treasury Bill and the Consumer Price Index
are from September 30, 1991.
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Growth of an investment in
Keystone Institutional Adjustable Rate Fund-Class Z
In Thousands
(Graph appears here with the following plot points.)
10/91 2/93 2/95 2/97
Reinvested Distributions
Initial Investment
Total Value $13,265
A $10,000 investment in Keystone Institutional Adjustable Rate Fund-Class Z
made on October 1, 1991 with all distributions reinvested was worth $13,265 on
February 28, 1997. Past performance is no guarantee of future results.
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<TABLE>
<CAPTION>
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Keystone Institutional Adjustable Rate Fund
SCHEDULE OF INVESTMENTS
February 28, 1997
Interest Maturity Par Market
Rate Date Value Value
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<S> <C> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (92.8%)
FHLMC (35.8%)
FHLMC Pool #605343, Cap 13.604%, Margin 2.125% + CMT, Resets Annually 7.838% 03/01/19 $1,825,941 $1,887,566
FHLMC Pool #605386, Cap 12.890%, Margin 2.112% + CMT, Resets Annually 7.943 09/01/17 1,583,565 1,651,611
FHLMC Pool #606541, Cap 13.560%, Margin 2.041% + CMT, Resets Annually 7.561 03/01/21 865,105 899,847
FHLMC Pool #606679, Cap 12.070%, Margin 2.159% + CMT, Resets Annually 7.976 10/01/21 874,231 915,346
FHLMC Pool #607352, Cap 13.620%, Margin 2.175% + CMT, Resets Annually 7.687 04/01/22 5,695,705 5,951,100
FHLMC Pool #845039, Cap 12.500%, Margin 2.084% + CMT, Resets Annually 7.761 10/01/21 2,419,303 2,499,442
FHLMC Pool #845063, Cap 12.050%, Margin 2.185% + CMT, Resets Annually 7.856 11/01/21 2,162,238 2,239,268
FHLMC Pool #845070, Cap 11.839%, Margin 2.115% + CMT, Resets Annually 7.726 01/01/22 2,403,552 2,493,685
FHLMC Pool #845082, Cap 12.340%, Margin 1.970% + CMT, Resets Annually 7.509 03/01/22 1,173,592 1,207,333
FHLMC Pool #846163, Cap 13.065%, Margin 1.985% + CMT, Resets Annually 7.466 07/01/30 2,522,319 2,614,535
FHLMC Pool #846298, Cap 13.040%, Margin 1.849% + CMT, Resets Annually 7.211 08/01/22 3,974,407 4,097,375
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TOTAL FHLMC 26,457,108
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FNMA (57.0%)
FNMA Pool #065344, Cap 12.980%, Margin 1.250% + CMT, Resets Annually 6.086 09/01/27 4,400,000 4,361,500
FNMA Pool #070119, Cap 12.010%, Margin 2.000% + CMT, Resets Annually 7.637 11/01/17 4,608,582 4,775,643
FNMA Pool #090678, Cap 13.136%, Margin 2.177% + CMT, Resets Annually 7.906 09/01/18 2,951,104 3,094,056
FNMA Pool #092086, Cap 15.470%, Margin 2.075% + CMT, Resets Annually 7.443 10/01/16 542,961 562,731
FNMA Pool #094564, Cap 15.860%, Margin 1.975% + CMT, Resets Annually 7.676 01/01/16 1,274,697 1,325,685
FNMA Pool #095405, Cap 13.700%, Margin 2.087% + CMT, Resets Annually 7.659 12/01/19 1,169,230 1,209,423
FNMA Pool #103183, Cap 13.100%, Margin 1.250% + CMT, Resets Annually 6.092 06/01/20 3,030,251 3,003,736
FNMA Pool #107661, Cap 13.150%, Margin 1.250% + CMT, Resets Annually 6.092 09/01/20 2,564,155 2,541,718
FNMA Pool #124015, Cap 13.230%, Margin 1.815% + CMT, Resets Annually 7.454 11/01/18 2,103,493 2,171,520
FNMA Pool #124204, Cap 13.600%, Margin 2.011% + CMT, Resets Annually 7.626 01/01/22 937,031 977,445
FNMA Pool #124289, Cap 13.440%, Margin 2.005% + CMT, Resets Annually 7.603 09/01/21 9,414,874 9,800,318
FNMA Pool #124497, Cap 13.100%, Margin 2.070% + CMT, Resets Annually 7.614 09/01/22 2,684,762 2,804,314
FNMA Pool #124945, Cap 12.730%, Margin 2.107% + CMT, Resets Annually 7.687 01/01/31 3,799,551 3,974,102
FNMA Pool #142963, Cap 10.990%, Margin 1.950% + CMT, Resets Annually 7.449 01/01/22 1,422,867 1,466,222
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TOTAL FNMA 42,068,413
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TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost - $68,385,952) 68,525,521
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FIXED RATE MORTGAGE SECURITIES (1.7%)
FHLMC (0.1%)
FHLMC Pool #277831 7.250 11/01/08 57,431 58,028
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FNMA (1.6%)
FNMA Pool #004534 10.750 10/01/12 884,069 971,513
FNMA Pool #100051 9.500 04/01/05 189,719 198,256
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TOTAL FIXED RATE MORTGAGE SECURITIES (Cost - $1,205,283) 1,227,797
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U. S. TREASURY OBLIGATIONS (2.1%)
U.S. Treasury Notes 5.750 02/28/99 1,050,000 1,045,737
U.S. Treasury Notes 6.000 08/15/99 500,000 497,970
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TOTAL U. S. TREASURY OBLIGATIONS (Cost - $1,549,700) 1,543,707
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8
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Keystone Institutional Adjustable Rate Fund
SCHEDULE OF INVESTMENTS (continued)
February 28, 1997
Interest Maturity Maturity Market
Rate Date Value Value
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REPURCHASE AGREEMENT (3.4%)
Keystone Joint Repurchase Agreement (Investments in repurchase agreements,
in a joint trading account, purchased 2/28/97) (Cost - $2,547,000) (a) 5.413% 3/03/97 $2,548,149 $2,547,000
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TOTAL INVESTMENTS (Cost - $73,687,935 ) (b) 73,844,025
OTHER ASSETS AND LIABILITIES -- NET (0.0%) (16,340)
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NET ASSETS -- (100.0%) $73,827,685
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</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at February 28, 1997.
(b) The cost of investments for federal income tax purposes is $73,693,583.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost at February 28, 1997 are as follows:
Gross unrealized appreciation $218,520
Gross unrealized depreciation (68,078)
-------------
Net unrealized appreciation $150,442
=============
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
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See Notes to Financial Statements.
9
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<TABLE>
<CAPTION>
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Keystone Institutional Adjustable Rate Fund
FINANCIAL HIGHLIGHTS - CLASS Y SHARES
(For a share outstanding throughout each period)
May 23, 1994 (Date of
Five Months Ended Year Ended September 30, Initial Public Offering)
February 28, 1997 (a) 1996 (b) 1995 to September 30, 1994
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<S> <C> <C> <C> <C>
Net asset value beginning of period $9.68 $9.65 $9.61 $9.73
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Income from investment operations:
Net investment income 0.28 0.65 0.64 0.17
Net realized and unrealized gain (loss) on investments 0(d) (0.03) (0.02) (0.13)
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Total from investment operations 0.28 0.62 0.62 0.04
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Less distributions from:
Net investment income (0.22) (0.58) (0.53) (0.16)
In excess of net investment income (0.02) (0.01) (0.05) 0
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Total distributions (0.24) (0.59) (0.58) (0.16)
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Net asset value end of period $9.72 $9.68 $9.65 $9.61
==================================================================================================================================
Total return 2.97% 6.60% 6.60% 0.35%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.55%(c) 0.55% 0.55% 0.43%(c)
Net investment income 6.39%(c) 6.64% 6.70% 5.03%(c)
Portfolio turnover rate 44% 85% 56% 63%
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Net assets end of period (thousands) $3,564 $14,361 $2,871 $1
==================================================================================================================================
</TABLE>
(a) The Fund changed its fiscal year end from September 30 to February 28 during
the current period.
(b) Per share calculations based on weighted average shares outstanding.
(c) Annualized.
(d) Amount represents less than $0.01 per share.
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See Notes to Financial Statements.
10
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<TABLE>
<CAPTION>
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Keystone Institutional Adjustable Rate Fund
FINANCIAL HIGHLIGHTS - CLASS Z SHARES
(For a share outstanding throughout each period)
Five Months Ended Year Ended September 30,
------------------------------------------------------
February 28, 1997 (a) 1996 (b) 1995 1994 1993 (b) 1992
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<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $9.68 $9.65 $9.61 $9.93 $9.88 $10.00
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Income from investment operations:
Net investment income 0.28 0.64 0.63 0.63 0.54 0.67
Net realized and unrealized gain (loss)
on investments 0(d) 0(d) 0.01 (0.49) (0.01) (0.15)
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Total from investment operations 0.28 0.64 0.64 0.14 0.53 0.52
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Less distributions from:
Net investment income (0.23) (0.60) (0.55) (0.44) (0.48) (0.64)
In excess of net investment income (0.02) (0.01) (0.05) (0.02) 0 0
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Total distributions (0.25) (0.61) (0.60) (0.46) (0.48) (0.64)
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Net asset value end of period $9.71 $9.68 $9.65 $9.61 $9.93 $9.88
================================================================================================================================
Total return 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% 0.30% 0.30% 0.30% 0.30%
Net investment income 6.79%(c) 6.84% 6.61% 5.15% 5.46% 6.83%
Portfolio turnover rate 44% 85% 56% 63% 81% 88%
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Net assets end of period (thousands) $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 during
the current period.
(b) Per share calculations based on weighted average shares outstanding.
(c) Annualized.
(d) Amount represents less than $0.01 per share.
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See Notes to Financial Statements.
11
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<TABLE>
<CAPTION>
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Keystone Institutional Adjustable Rate Fund
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997
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<S> <C>
Assets
Investments at market value (identified cost -- $73,687,935) $73,844,025
Receivable for:
Interest 613,674
Principal paydowns 439,874
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Total assets 74,897,573
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Liabilities
Due to custodian 1,049,638
Payable for:
Fund shares redeemed 20,000
Distributions to shareholders 250
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Total liabilities 1,069,888
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Net assets $73,827,685
===================================================================================================================
Net assets represented by
Paid-in capital $74,627,277
Accumulated distributions in excess of net investment income (250)
Accumulated net realized loss on investments (955,432)
Net unrealized appreciation on investments 156,090
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Total net assets $73,827,685
===================================================================================================================
Net asset value and redemption price per share
Class Y Shares
Net assets of $3,563,540 - 366,534 shares outstanding $9.72
Class Z Shares
Net assets of $70,264,145 - 7,233,498 shares outstanding $9.71
===================================================================================================================
</TABLE>
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See Notes to Financial Statements.
12
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<TABLE>
<CAPTION>
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Keystone Institutional Adjustable Rate Fund
STATEMENT OF OPERATIONS
Five Months Ended February 28, 1997*
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<S> <C>
Investment income
Interest $2,393,978
Expenses (Notes 4 and 5)
Management fee 101,412
Distribution Plan expenses 9,161
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Total expenses 110,573
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Net investment income 2,283,405
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Net realized and unrealized gain on investments (Notes 1 and 3)
Net realized gain on investments 27,179
Net change in unrealized appreciation on investments 38,889
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Net realized and unrealized gain on investments 66,068
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Net increase in net assets resulting from operations $2,349,473
=================================================================================================================
</TABLE>
* The Fund changed its fiscal year end from September 30 to February 28 during
the current period.
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See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
Keystone Institutional Adjustable Rate Fund
STATEMENTS OF CHANGES IN NET ASSETS
Five Months Ended Year Ended
February 28, 1997* September 30, 1996
<S> <C> <C>
Operations
Net investment income $ 2,283,405 $2,748,371
Net realized gain (loss) on investments 27,179 (269,386)
Net change in unrealized appreciation on investments 38,889 170,926
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Net increase in net assets resulting from operations 2,349,473 2,649,911
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Distributions to shareholders from (Note 1)
Net investment income:
Class Y (197,984) (563,993)
Class Z (1,744,950) (1,945,801)
In excess of net investment income:
Class Y (16,346) (8,481)
Class Z (144,070) (29,260)
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Total distributions to shareholders (2,103,350) (2,547,535)
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Capital share transactions (Note 2)
Proceeds from shares sold:
Class Y 8,545,059 24,782,061
Class Z 10,000,000 41,798,486
Payments for shares redeemed:
Class Y (19,610,398) (13,818,826)
Class Z (8,073,653) (962,799)
Shares issued in reinvestment of
dividends and distributions:
Class Y 240,365 519,458
Class Z 2,145,897 1,426,821
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Net increase (decrease) in net assets resulting from capital
share transactions (6,752,730) 53,745,201
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Total increase (decrease) in net assets (6,506,607) 53,847,577
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Net assets:
Beginning of period 80,334,292 26,486,715
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End of period [including accumulated distributions in excess of net investment
income as follows: 1997-($250) and 1996-($168,733)] (Note 1) $73,827,685 $80,334,292
--------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund changed its fiscal year end from September 30 to February 28 during
the current period.
-------------------------------------------------------------------------------
See Notes to Financial Statements.
14
<PAGE>
Keystone Institutional Adjustable Rate Fund
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies Keystone Institutional Adjustable Rate Fund
(the "Fund") is a Massachusetts business trust for which Keystone Investment
Management Company ("Keystone") is the investment adviser and manager. Keystone
was formerly a wholly-owned subsidiary of Keystone Investments, Inc. ("KII") and
is currently a subsidiary of First Union Keystone, Inc. First Union Keystone,
Inc. is a wholly-owned subsidiary of First Union National Bank of North
Carolina, which, in turn, is a wholly-owned subsidiary of First Union
Corporation ("First Union"). The Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as a diversified, open-end investment
company. The Fund offers two classes of shares. The Fund is designed for
institutional investors and seeks to provide a high level of current income
consistent with low volatility of principal.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage and
other asset-backed securities, and other related securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and various relationships between
securities 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 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 the custodian containing liquid assets having a value
not less than the repurchase price
15
<PAGE>
(including accrued interest). If the counter party 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 on the trade date. Realized gains and
losses are computed on the identified cost basis. Interest income is recorded on
the accrual basis and includes amortization of discounts.
E. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
F. Distributions
The Fund declares distributions from net investment income daily and distributes
it monthly. The Fund also declares and distributes its 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 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 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. Transactions in shares of the Fund were as follows:
Five months ended Year ended
February 28, 1997 September 30, 1996
Class Y
Shares sold 879,121 2,560,589
Shares redeemed (2,020,244) (1,428,881)
Shares issued in
reinvestment of
dividends and
distributions 24,800 53,718
Net increase
(decrease) (1,116,323) 1,185,426
Class Z
Shares sold 1,030,429 4,318,022
Shares redeemed (830,759) (99,669)
Shares issued in
reinvestment of
dividends and
distributions 221,061 147,411
Net increase 420,731 4,365,764
3. Securities Transactions
Cost of purchases and proceeds from sales of U.S. Government related securities
(excluding short-term securities) were $34,269,674 and $41,975,605,
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.
The average daily balance of reverse repurchase agreements outstanding during
the five months ended February 28, 1997, was $3,692,083 at an interest rate of
5.27%. The maximum amount of reverse repurchase agreements at one time during
the year was $4,011,153 (including accrued interest). There were no reverse
16
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repurchase agreements outstanding as of February 28, 1997.
4. Distribution Plans
The Fund bears some of the costs of selling its shares under a Distribution Plan
(the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Plan
the Fund pays its principal underwriter amounts which are calculated and paid
daily.
On December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of
The BISYS Group Inc. Prior to December 11, 1996, Fiduciary Investment Company,
Inc. ("FICO"), a wholly-owned subsidiary of Keystone, served as the Fund's
principal underwriter.
Under the Plan, the Class Y shares pay a distribution fee which is limited to
.25% of its average daily net assets.
The 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 Plan, and subject to the discretion of the Independent
Trustees, payments to EKD or its predecessor may continue as compensation for
services which had been earned while the Plan was in effect.
5. Investment Advisory and Management
Agreement and Other Affiliated Transactions
Under the terms of the Investment Advisory and Management Agreement, Keystone
serves as the investment adviser and manager to the Fund. Keystone provides the
Fund with investment advisory and management services. In return, Keystone is
paid a management fee, computed and paid daily, at an annual rate of 0.30% of
the average daily net assets of the Fund.
During the five months ended February 28, 1997, Keystone voluntarily limited
expenses of Class Y to 0.55% annually and Class Z to 0.30% annually of the
respective average daily net assets of each class.
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.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Institutional Adjustable Rate Fund
We have audited the accompanying statement of assets and liabilities of Keystone
Institutional Adjustable Rate Fund, including the schedule of investments, as of
February 28, 1997, and the related statement of operations for the five months
then ended, the statements of changes in net assets for the five months then
ended and the year ended September 30, 1996, and the financial highlights for
the five months ended February 28, 1997, each of the years in the two-year
period ended September 30, 1996 and the period from May 23, 1994 (date of intial
public offering) to September 30, 1994 for Class Y shares and for the five
months ended February 28, 1997 and each of the years in the five-year period
ended September 30, 1996 for Class Z 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
February 28, 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 Institutional Adjustable Rate Fund as of February 28, 1997, the results
of its operations for the five months then ended, the changes in its net assets
for the five months then ended and the year ended September 30, 1996, 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
March 31, 1997
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<PAGE>
Keystone Institutional Adjustable Rate Fund
ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below at
a special meeting of shareholders held Monday, December 9, 1996. In addition,
beside or below each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
--------------- ----------------
Frederick Amling 8,012,552 0
Laurence B. Ashkin 8,012,552 0
Charles A. Austin III 8,012,552 0
Foster Bam 8,012,552 0
George S. Bissell 8,012,552 0
Edwin D. Campbell 8,012,552 0
Charles F. Chapin 8,012,552 0
K. Dun Gifford 8,012,552 0
James S. Howell 8,012,552 0
Leroy Keith, Jr. 8,012,552 0
F. Ray Keyser 8,012,552 0
Gerald M. McDonnell 8,012,552 0
Thomas L. McVerry 8,012,552 0
William Walt Pettit 8,012,552 0
David M. Richardson 8,012,552 0
Russell A. Salton, III M.D. 8,012,552 0
Michael S. Scofield 8,012,552 0
Richard J. Shima 8,012,552 0
Andrew J. Simons 8,012,552 0
2. To approve an Investment Advisory and
Management Agreement between the Fund
and Keystone Investment Management Company.
Affirmative 8,012,552
Against 0
Abstain 0
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Keystone Institutional Adjustable Rate Fund
- -------------------------------------------------------------------------------
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:
Income
Dividends
-------------
CLASS Y SHARES 0.24
=============
CLASS Z SHARES 0.25
=============
In January 1998 complete information on calendar year 1997 distributions will be
forwarded to you to assist in completing your 1997 federal income tax return.
20
