-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THDPwqi6xQpHeNDJeX4m2fnKmCno3GKSwBG4ULOZlXXZ2u/Ikqn93Vd7IArUc3j0 pnyCvGhnr2dJ+UW4EkfaYQ== 0000950146-96-001900.txt : 19961030 0000950146-96-001900.hdr.sgml : 19961030 ACCESSION NUMBER: 0000950146-96-001900 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961029 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE GROWTH & INCOME FUND S-1 CENTRAL INDEX KEY: 0000055624 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042394424 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00098 FILM NUMBER: 96649414 BUSINESS ADDRESS: STREET 1: 200 BERKELEY ST CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6173383200 MAIL ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116 N-30D 1 ANNUAL REPORT PAGE 1 - -------------------------------------- Keystone Growth and Income Fund (S-1) Seeks growth of capital and long-term growth of income. Dear Shareholder: We are writing to report to you on the performance of Keystone Growth and Income Fund (S-1) for the twelve- month period which ended August 31, 1996. Following our letter is a discussion with your Fund's manager and complete financial information. Performance For the fiscal year which ended August 31, 1996, your Fund returned 17.31%. For the same period, the Standard & Poor's 500 Index (S&P 500), a broad-based index of common stocks, returned 18.72%. These returns reflect the strong performance of the markets and our careful stock selection during the twelve- month period. We believe your Fund's results were partly the result of your Fund's emphasis on stocks of established, high quality companies. Market environment The market was led by blue chip stocks--securities that comprised a significant share of your Fund's holdings. These stocks provided excellent returns to investors during the twelve-month period. Strong corporate earnings and a favorable economic environment sent blue chip stocks to new highs in 1996. However, this performance was not steady throughout the period. In the Spring of 1996, stronger than expected employment and economic reports raised fears of inflation and higher interest rates. This, in turn, worried stock investors who had been depending on low interest rates to support stock valuations. Investors reacted to this uncertainty in June and July by selling stocks, which resulted in a short-term market correction. The declines were short-lived, as indications of slower economic growth appeared and stocks rallied in August. The effects of this volatile market were more apparent for small- and mid-sized company stocks, which experienced sharp price declines in June and July. Investment strategy In managing your Fund, we maintained a significant emphasis on stocks of established, high quality companies with dominant market positions, experienced management teams, and solid balance sheets. We focused on companies with earnings growth rates which exceeded the average growth rate of companies contained in the S&P 500. These companies are highly visible and represent some of the most well managed business enterprises in the world. A conservative strategy in a volatile market We maintained a conservative strategy in managing your Fund even though the fundamentals for many of the companies in which your Fund invested remained favorable. We emphasized diversification and kept our industry weightings relatively close to the weightings of the S&P 500 for most of the period. As a result, the Fund had a higher weighting of blue chip stocks than other growth and income funds, which we believed helped to limit price declines this summer. (continued) PAGE 2 - -------------------------------------- Keystone Growth and Income Fund (S-1) Our outlook We are expecting the favorable economic fundamentals of 1996 to continue into 1997. However the stronger-than- expected economic growth of the first half of 1996 should slow to more moderate levels. Inflation should remain under control, despite some wage pressures, which should allow interest rates to remain relatively stable. For investors with long-term goals, we continue to believe that stocks offer the best potential returns. However, we are now in the sixth year of a stock market rally--the longest since the end of World War II. While we have a favorable outlook for next year, history has shown that strong performance does not persist indefinitely. Stocks periodically experience price declines. We witnessed this type of "correction" in June and July, followed by a recovery in August. With this in mind, we encourage you to keep the above average stock market returns of the last few years in perspective. We are pleased to inform you that Keystone has agreed to be acquired by First Union Corporation. The acquisition is subject to a number of conditions, including approvals of investment advisory agreements with Keystone by fund shareholders. First Union is a financial services firm based in Charlotte, North Carolina. It is the nation's sixth largest bank holding company with assets of approximately $140 billion. First Union, through its wholly- owned subsidiary Evergreen Asset Management Corp., manages more than $16 billion in 36 mutual funds. Keystone will remain a separate entity after its acquisition and will continue to provide investment advisory and management services to the Fund. We believe First Union's acquisition of Keystone should strengthen the investment management services we provide to you. Thank you for your continued support of Keystone Growth and Income Fund (S-1). If you have any questions or comments about your investment, we encourage you to write to us. Sincerely, [PHOTO [PHOTO] AND CAPTION AND CAPTION /s/ Albert H. Elfner, III ALBERT H. EFNER, III] CAPTION: GEORGE S. BISSELL] - ------------------------- Albert H. Elfner, III Chairman and President Keystone Investments, Inc. /s/ George S. Bissell - -------------------------- George S. Bissell Chairman of the Board Keystone Funds October 1996 PAGE 3 - -------------------------------------- A Discussion With Your Fund Manager [PHOTO OF JUDITH A. WARNERS] [CAPTION] Your Fund is managed by Judith A. Warners, vice president and portfolio manager. A member of the Boston Security Analysts Society, Ms. Warners has over 14 years of investment management experience. She holds a BA from Curry College and an MBA from Babson College. Together with Keystone's core equity group headed by Walter McCormick, she selects stocks of established companies for your Fund. Q What was the economic environment like during the twelve-month period? A This was a generally favorable environment for stocks. At the end of 1995, economic growth was moderate, inflation was contained, and interest rates had declined. At the beginning of 1996, this environment changed. While stock prices rose, they fluctuated broadly as virtually every new economic statistic triggered a debate over growth and inflation and whether or not the Federal Reserve Board would raise interest rates. In June and July, stock prices experienced significant declines. We believe this short-term correction helped wring out the excesses in the market and bring stock prices back to more reasonable levels. Q How did you manage the portfolio in this environment? A As it became apparent that we were moving into a new environment, we pursued a strategy aimed at minimizing the effects of price changes on the portfolio. We reduced our under- and overweightings of specific sectors and stocks, and emphasized companies at the higher end of the quality range. These tended to be larger companies with solid records of earnings growth and dividend payments. We also increased the Fund's diversification and focused on companies that dominate their markets and have been in business for a long time. Many of the Fund's holdings are household names. Coca-Cola, General Electric, Microsoft, and Gillette are just a few of the highly visible companies in which we invested. We think this helped us to minimize price declines experienced by mid- and small-cap stocks during June and July. Q Where did you find attractive opportunities? A We found a number of large pharmaceutical companies attractive during the twelve-month period. As of August 31, 1996, the Fund's drug holdings accounted for 8.2% of net assets. Some of the companies that met our investment criteria were Rhone- Poulenc Rorer, American Home Products, and Pharmacia & Upjohn. All of these are international companies. We believe they have promising new products in the pipeline and should benefit from cost efficiencies following major acquisitions or mergers. In Fund Profile Objective: Seeks growth of capital and long-term growth of income. Commencement of investment operations: September 11, 1935 Stocks: 94 Net assets: $225 million Newspaper listing: "GrIncS1" PAGE 4 - -------------------------------------- Keystone Growth and Income Fund (S-1) Your Fund Invests In . . . (bullet) Established companies with attractive earnings growth (bullet) Companies with experienced management, a dominant market position and solid balance sheets (bullet) Undervalued stocks and restructuring situations (bullet) Primarily large and mid-sized companies, such as those contained in the S&P 500 and the S&P 400 MidCap indexes (bullet) U.S. stocks and stocks of established foreign companies - -------------------------------------- addition, we thought the stocks of these companies were inexpensive relative to their potential earnings growth. After the close of the fiscal period we took profits in selected holdings which reduced our weighting in this area. Q Finance has been a continuing theme in the portfolio. In what types of financial companies did you invest? A At 14.1% of net assets on August 31, 1996, finance stocks comprised the Fund's largest industry sector. We invested in a variety of financial companies. In the banking area, we emphasized stocks that we believed would benefit from consolidation in the industry. These included Bank of Boston and BankAmerica. We also invested in leading financial services companies, including Associates First Capital, a well-capitalized mortgage company, 80% of which is owned by Ford. In the new issue market, we took advantage of the initial public offering for Travelers/Aetna Property Casualty. Top 5 Industries as of August 31, 1996 Percentage of Industry net assets ------------------ -------------- Finance 14.1 Drugs 8.2 Telecommunications 7.1 Foods 7.0 Capital goods 6.1 Top 10 Holdings as of August 31, 1996 Percentage Stock Industry of net assets --------------------------------- ------------------- --------------- General Electric Capital goods 2.9 Coca-Cola Foods 2.6 Exxon Oil 2.0 Royal Dutch Petroleum Oil 1.9 Microsoft Software Services 1.9 American Home Products Drugs 1.8 Federal National Mortgage Assoc. Finance 1.8 Intel Electronics products 1.8 Beacon Properties(1) Finance 1.6 GCR Holdings Insurance 1.5 Q Energy stocks accounted for 10.1% of net assets on August 31, 1996. In what types of stocks did you invest? A We were attracted to companies in the oil services business. These companies support the drilling part of the industry. They may supply the oil rigs, tool bits, boats, pumping equipment or seismology services. Many of these companies undertook major restructuring programs over the last several years. They have become more streamlined and productive and have more aggressive and efficient managements. In addition, demand for their expertise has increased. This is because, after several years of overcapacity, demand for energy has come in line with supply. In order to rebuild inventories, the major oil companies have enlisted the help of oil services firms. Schlumberger and Tidewater are two of the energy services companies in which we invested. - -------------------------- (1)Real estate invesmtent trust PAGE 5 - -------------------------------------- Q You also invested in some of the major oil companies. Tell us about them. A We held shares of Exxon, Mobil, and Royal Dutch Petroleum. We believe these companies should continue to benefit from the restructuring efforts they have undertaken over the past several years. Stocks in this sector have historically provided attractive dividends and relatively consistent performance. We believe their more cost-effective way of conducting business should be a positive contributor to earnings growth rates. Q Prices of technology stocks fluctuated broadly over the twelve-month period. What was your strategy in this sector? A Our investment criteria was the same for technology stocks as for stocks in other industry sectors. We focused on large, well known companies with strong earnings histories, established product lines, and recognized brand names. Microsoft, Sun MicroSystems, Lucent Technologies, and MFS Communications were some of the technology stocks we held in the portfolio. While the technology sector has been volatile this year, we emphasized established companies which have provided more consistent performance than smaller technology firms. On August 31, 1996, the Fund's technology holdings accounted for 13.2% of net assets. Q The capital goods sector comprised 6.1% of net assets at the end of the period. What was attractive there? A The Fund's weighting in the capital goods sector is a bit misleading because of the Fund's number one stock holding, General Electric, which comprised 2.9% of net assets on August 31, 1996. This industrial company has been a solid contributor to your Fund's returns for several years. GE has changed into a more diversified and globally competitive company that we think excels in each of its many business lines. Today the company's businesses range from power generating equipment and jet engines to financial services; these products appeal to many developed countries. GE's products also include television broadcasting (NBC) and financial services products (credit cards). In the balance of the capital goods sector we emphasized high quality companies that we believed would benefit from the strong economic growth reported earlier this year. These companies included Deere & Co., Emerson Electric, and Foster Wheeler. Q What is your outlook? A We believe the economy should continue to grow at a moderate rate, inflation should remain relatively low, and long-term interest rates should stay within a range of 6.50% to 7.50%. In the months ahead, we will continue with our strategy of investing in well- established companies with strong records of earnings growth. We believe the Fund's high quality portfolio should provide it with the potential to produce solid returns over the long term. [diamond] This column is intended to answer questions about your Fund. If you have a question you would like answered, please write to: Keystone Investment Distributors Company Attn: Shareholder Communications, 22nd Floor 200 Berkeley Street, Boston, Massachusetts 02116-5034. PAGE 6 - -------------------------------------- Keystone Growth and Income Fund (S-1) Your Fund's Performance Growth of an investment in Keystone Growth and Income Fund (S-1) In Thousands [mountain chart] Initial Investment Reinvested Distributions 8/86 10000 10000 10678 13480 8/88 7424 10170 9737 13729 8/90 9004 13102 9851 16354 8/92 9086 16417 9969 18766 8/94 9102 18631 9012 21214 8/96 9824 24886 Total Value: $24,886 A $10,000 investment in Keystone Growth and Income Fund (S-1) made on August 31, 1986 with all distributions reinvested was worth $24,886 on August 31, 1996. Past performance is no guarantee of future results. Twelve-Month Performance as of August 31, 1996 Total return* 17.31% Net asset value 8/31/95 $22.98 8/31/96 $25.05 Dividends $ 0.20 Capital gains $ 1.54 * Before deduction of contingent deferred sales charge (CDSC). Historical Record as of August 31, 1996 If you If you did Cumulative total return redeemed not redeem 1-year 14.31% 17.31% 5-year 52.17% 52.17% 10-year 148.86% 148.86% Average annual total return 1-year 14.31% 17.31% 5-year 8.76% 8.76% 10-year 9.55% 9.55% There is no sales charge when you buy Fund shares. The Fund currently imposes a contingent deferred sales charge that declines from 4% to 1% if you redeem shares within four years of purchase. The one- year return reflects the deduction of the 3% contingent deferred sales charge for those investors who sold Fund shares after one calendar year. Investors who retained their fund investment received the one-year return reported in the second column of the 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. You may exchange your shares to another Keystone fund for a $10 fee by contacting Keystone directly. The exchange fee is waived for individual investors who make an exchange using Keystone's Automated Response Line (KARL). The Fund reserves the right to change or terminate the exchange offer. PAGE 7 - -------------------------------------- Growth of an Investment Comparison of change in value of a $10,000 investment in Keystone Growth and Income Fund (S-1), Standard and Poor's 500 Index and the Consumer Price Index. In Thousands August 31, 1986 through August 31, 1996 [line chart] Standard & Poor's Consumer Price Fund 500 Index (S&P 500) Index (CPI) 8/86 10000 10000 10000 13480 13428 10428 8/88 10170 11015 10848 13729 15277 11358 8/90 13102 14491 11996 16354 18382 12452 8/92 16417 19854 12844 18766 22874 13200 8/94 18631 24126 13583 21214 29301 13938 8/96 24886 34794 14312 S&P 500 $34,794 Fund $24,886 CPI $14,312 Fund Average Annual Total Returns 1 Year 5 Year 10 Year 14.31% 8.76% 9.55% Past performance is no guarantee of future results. The one-year return reflects the deduction of the Fund's 3% contingent deferred sales charge for shares held for more than one year. Consumer Price Index is through August 31, 1996. This chart graphically compares your Fund's total return performance to certain investment indexes. It is the result of fund performance guidelines issued by the Securities and Exchange Commission. The intent is to provide investors with more information about their investment. Components of the chart The chart is composed of several lines that represent the accumulated value of an initial $10,000 investment for the period indicated. The lines illustrate a hypothetical investment in: 1. Keystone Growth and Income Fund (S-1) The Fund seeks growth of capital and long-term growth of income. The return is quoted after deducting sales charges (if applicable), fund expenses and transaction costs and assumes reinvestment of all distributions. 2. Standard & Poor's 500 Index (S&P 500) The S&P 500 is a broad-based unmanaged index of common stock prices. It is comprised of stocks of the largest U.S. companies. These stocks are selected and compiled by Standard & Poor's Corporation according to criteria that may be unrelated to your Fund's investment objective. 3. Consumer Price Index (CPI) This index is a widely recognized measure of the cost of goods and services produced in the U.S. The index contains factors such as prices of services, housing, food, transportation and electricity which are compiled by the U.S. Bureau of Labor Statistics. The CPI is generally considered a valuable benchmark for investors who seek to outperform increases in the cost of living. These indexes do not include transaction costs associated with buying and selling securities, and do not hold cash to meet redemptions. It would be difficult for most individual investors to duplicate these indexes. Understanding what the chart means The chart demonstrates your Fund's total return performance in relation to a well known investment index and to increases in the cost of living. It is important to understand what the chart shows and does not show. This illustration is useful because it charts Fund and index performance over the same time frame and over a long period. Long-term performance is a more reliable and useful measure of performance than measurements of short-term returns or temporary swings in the market. Your financial adviser can help you evaluate fund performance in conjunction with the other important financial considerations such as safety, stability and consistency. Limitations of the chart The chart, however, limits the evaluation of Fund performance in several ways. Because the measurement is PAGE 8 - -------------------------------------- Keystone Growth and Income Fund (S-1) based on total returns over an extended period of time, the comparison often favors those funds which emphasize capital appreciation when the market is rising. Likewise, when the market is declining, the comparison usually favors those funds which take less risk. Performance can be distorted Funds which are more conservative in their orientation and which place an emphasis on capital preservation will tend to compare less favorably when the market is rising. In addition, funds which have income as one of their objectives also will tend to compare less favorably to relevant indexes. Indexes may also reflect the performance of some securities which a fund may be prohibited from buying. A bond fund, for example, may be limited to investments in only high quality bonds, or a stock fund may only be able to buy stocks that have been traded on a stock exchange for a minimum number of years or stocks that have a certain market capitalization. Indexes usually do not have the same investment restrictions as your Fund. Indexes do not include costs of investing The comparison is further limited in its utility because the indexes do not take into account any deductions for sales charges, transaction costs or other fund expenses. Your Fund's performance figures do reflect such deductions. Sales charges--whether up-front or deferred--pay for the cost of the investment advice of your financial adviser. Transaction costs pay for the costs of buying and selling securities for your Fund's portfolio. Fund expenses pay for the costs of investment management and various shareholder services. None of these costs are reflected in index total returns. The comparison is not completely realistic because an index cannot be duplicated by an investor--even an unmanaged index--without incurring some charges and expenses. One of several measures The chart is one of several tools you can use to understand your investment. It should be read in conjunction with the Fund's prospectus, and annual and semiannual reports. Also, your financial adviser, who understands your personal financial situation, can best explain the features of your Keystone fund and how it applies to your financial needs. Future returns may be different Shareholders also should be mindful that the long-run performance of either the Fund or the indexes is not representative of what shareholders should expect to receive from their Fund investment in the future; it is presented to illustrate only past performance and is not a guarantee of future returns. PAGE 9 - ------------------------------------- SCHEDULE OF INVESTMENTS--August 31, 1996
Market Shares Value - -------------------------------------- ------- -------------- COMMON STOCKS (93.8%) ADVERTISING & PUBLISHING (1.0%) Tribune Co. 30,000 $ 2,156,250 - -------------------------------------- ------- -------------- AEROSPACE (1.5%) Boeing Co. (The) 25,000 2,262,500 United Technologies Corp. 10,300 1,161,325 - -------------------------------------- ------- -------------- 3,423,825 - -------------------------------------- ------- -------------- AMUSEMENTS (0.7%) American General Hospitality Corp. 90,000 1,586,250 - -------------------------------------- ------- -------------- AUTOMOTIVE (4.1%) Chrysler Corp. 67,600 1,968,850 Danaher Corp. 55,000 2,282,500 Ford Motor Co. Del 60,000 2,010,000 General Motors Corp. 12,000 597,000 Toyota Motor Corp. 100,000 2,411,191 - -------------------------------------- ------- -------------- 9,269,541 - -------------------------------------- ------- -------------- BUSINESS SERVICES (2.7%) Thermo Electron Corp. 82,500 3,269,063 USA Waste Services, Inc. (b) 100,000 2,750,000 - -------------------------------------- ------- -------------- 6,019,063 - -------------------------------------- ------- -------------- CAPITAL GOODS (6.1%) Deere & Co. 53,000 2,106,750 Emerson Electric Co. 36,300 3,040,125 Foster Wheeler Corp. 50,000 2,156,250 General Electric Co. 77,000 6,400,625 - -------------------------------------- ------- -------------- 13,703,750 - -------------------------------------- ------- -------------- CHEMICALS (1.9%) Du Pont De Nemours & Co. 35,000 2,874,375 Union Carbide Corp. 30,000 1,297,500 - -------------------------------------- ------- -------------- 4,171,875 - -------------------------------------- ------- -------------- CONSUMER GOODS (4.3%) CUC International, Inc. (b) 60,000 2,062,500 Gillette Co. 35,000 2,231,250 Proctor & Gamble, Inc. 35,000 3,110,625 Victor Company of Japan, Ltd. 180,000 2,219,768 - -------------------------------------- ------- -------------- 9,624,143 - -------------------------------------- ------- -------------- DIVERSIFIED COMPANIES (1.1%) AlliedSignal, Inc. 40,000 2,470,000 - -------------------------------------- ------- -------------- DRUGS (8.2%) American Home Products Corp. 70,000 $ 4,147,500 Johnson & Johnson 62,000 3,053,500 Lilly (Eli) & Co. 10,000 572,500 Merck & Co., Inc. 30,000 1,968,750 Pharmacia & Upjohn 70,000 2,940,000 Rhone-Poulenc Rorer, Inc. 44,750 3,149,281 SmithKline Beecham PLC, ADR 45,000 2,621,250 - -------------------------------------- ------- -------------- 18,452,781 - -------------------------------------- ------- -------------- ELECTRONICS PRODUCTS (1.8%) Intel Corp. 50,000 3,990,625 - -------------------------------------- ------- -------------- FINANCE (13.8%) Associates First Capital Corp., Class A 50,800 2,006,600 Bank of Boston Corp. 57,000 3,006,750 BankAmerica Corp. 25,000 1,937,500 Beacon Properties, REIT 132,000 3,597,000 Camden Property Trust, REIT 45,000 1,147,500 Chase Manhattan Corp. 15,000 1,115,625 Federal National Mortgage Association 130,000 4,030,000 Keycorp 50,000 2,006,250 Merrill Lynch & Co., Inc. 30,000 1,837,500 Nationsbank Corp. 30,000 2,553,750 Norwest Corp. 75,000 2,821,875 Patriot Amer Hospitality, Inc., REIT 100,000 3,050,000 TCF Financial Corp. 50,000 1,868,750 - -------------------------------------- ------- -------------- 30,979,100 - -------------------------------------- ------- -------------- FOODS (7.0%) Anheuser Busch Cos., Inc. 29,000 2,196,750 CPC International, Inc. 17,000 1,170,875 Coca-Cola Co. 115,000 5,750,000 ConAgra, Inc. 45,000 1,895,625 Philip Morris Cos., Inc. 21,000 1,884,750 Sara Lee Corp. 89,000 2,803,500 - -------------------------------------- ------- -------------- 15,701,500 - -------------------------------------- ------- -------------- HEALTHCARE SERVICES (0.9%) Medtronic, Inc. 40,000 2,080,000 - -------------------------------------- ------- -------------- INSURANCE (4.0%) Allstate Corp. 15,000 669,375 American International Group, Inc. 30,000 2,850,000 GCR Hldgs., Ltd. 150,000 3,431,250 Travelers/Aetna Property Casualty Corp., Class A 75,000 2,062,500 - -------------------------------------- ------- -------------- 9,013,125 - -------------------------------------- ------- -------------- (continued on next page) PAGE 10 - ------------------------------------- Keystone Growth and Income Fund (S-1) SCHEDULE OF INVESTMENTS--August 31, 1996 Market Shares Value - -------------------------------------- ------- -------------- METALS & MINING (1.6%) Aluminum Company of America 34,800 $ 2,161,950 Phelps Dodge Corp. 25,000 1,512,500 - -------------------------------------- ------- -------------- 3,674,450 - -------------------------------------- ------- -------------- NATURAL GAS (1.7%) Anadarko Petroleum Corp. 40,000 2,110,000 Louisiana Land & Exploration Co. 30,000 1,706,250 - -------------------------------------- ------- -------------- 3,816,250 - -------------------------------------- ------- -------------- OFFICE & BUSINESS EQUIPMENT (1.2%) Sun Microsystems, Inc. (b) 50,000 2,715,625 - -------------------------------------- ------- -------------- OIL (5.8%) Amoco Corp. 27,120 1,871,280 Exxon Corp. 55,000 4,475,625 Mobil Corp. 21,100 2,379,025 Royal Dutch Petroleum Co. 29,000 4,331,875 - -------------------------------------- ------- -------------- 13,057,805 - -------------------------------------- ------- -------------- OIL SERVICES (2.6%) Schlumberger, Ltd. 35,000 2,953,125 Tidewater, Inc. 75,000 2,878,125 - -------------------------------------- ------- -------------- 5,831,250 - -------------------------------------- ------- -------------- PAPER & PACKAGING (1.5%) Georgia Pacific Corp. 30,000 2,231,250 International Paper Co. 30,000 1,200,000 - -------------------------------------- ------- -------------- 3,431,250 - -------------------------------------- ------- -------------- RESTAURANTS (0.7%) McDonald's Corp. 35,000 1,623,125 - -------------------------------------- ------- -------------- RETAIL (3.8%) Federated Department Stores, Inc. Del (b) 53,000 1,835,125 The Gap, Inc. 44,000 1,540,000 Home Depot, Inc. 19,000 1,009,375 Sears, Roebuck and Co. 30,000 1,320,000 Wal-Mart Stores, Inc. 105,000 2,782,500 - -------------------------------------- ------- -------------- 8,487,000 - -------------------------------------- ------- -------------- SOFTWARE SERVICES (4.3%) BMC Software, Inc. (b) 38,000 2,840,500 Electronic Data Systems Corp. 50,000 2,725,000 Microsoft Corp. (b) 34,000 4,167,125 - -------------------------------------- ------- -------------- 9,732,625 - -------------------------------------- ------- -------------- TELECOMMUNICATIONS (6.7%) AT&T Corp. 35,000 $ 1,837,500 Ameritech Corp. 25,000 1,290,625 Bell South Corp. 50,000 1,812,500 Cisco Systems, Inc. (b) 50,000 2,634,375 GTE Corp. 30,000 1,181,250 Lucent Technologies, Inc. 49,800 1,836,375 MFS Communications, Inc. (b) 50,000 2,115,625 Telefonica Del Peru S.A., ADR 57,900 1,353,412 Teleport Communications Group, Inc. (b) 46,700 1,074,100 - -------------------------------------- ------- -------------- 15,135,762 - -------------------------------------- ------- -------------- TRANSPORTATION (1.8%) Burlington Northern Santa Fe 17,234 1,378,720 Canadian National Railway Co. 135,000 2,581,875 - -------------------------------------- ------- -------------- 3,960,595 - -------------------------------------- ------- -------------- UTILITIES (3.0%) Allegheny Power Systems, Inc. 45,000 1,333,125 Carolina Power & Light Co. 30,000 1,046,250 Central & South West Corp. 76,000 2,004,500 Florida Progress Corp. 35,000 1,211,875 Scana Corp. 40,000 1,090,000 - -------------------------------------- ------- -------------- 6,685,750 - -------------------------------------- ------- -------------- TOTAL COMMON STOCKS (COST--$185,256,644) 210,793,315 - -------------------------------------- ------- -------------- PREFERRED STOCKS (0.6%) RETAIL (0.2%) Kmart Financing, Inc. 10,000 503,750 - -------------------------------------- ------- -------------- TELECOMMUNICATIONS (0.4%) Sprint Corp. 25,000 900,000 - -------------------------------------- ------- -------------- TOTAL PREFERRED STOCKS (COST--$1,398,744) 1,403,750 - -------------------------------------- ------- --------------
Par Value ---------------------------------- ------- ------------- FIXED INCOME (0.5%) CONVERTIBLE BONDS & NOTES (0.5%) FINANCE (0.3%) Sumitomo Bank International N.V., 7.500%, 2001, ADN (d) 596,714 640,250 ---------------------------------- ------- ------------- INSURANCE (0.2%) Republic of Italy, 5.000%, 2001 500,000 500,000 ---------------------------------- ------- ------------- PAGE 11 - ------------------------------------- SCHEDULE OF INVESTMENTS--August 31, 1996 Market Value ---------------------------------- ------- ------------- TOTAL FIXED INCOME (COST--$1,096,714) $ 1,140,250 ---------------------------------- ------- -------------
Maturity Value ------------------------------- ----------- ------------- SHORT-TERM INVESTMENTS (4.9%) REPURCHASE AGREEMENTS (4.9%) Investments in repurchase agreements, in a joint trading account purchased 08/30/96, 5.243%, maturing 09/03/96 $11,018,415 11,012,000 ------------------------------- ----------- ------------- TOTAL SHORT-TERM INVESTMENTS (COST--$11,012,000) (C) 11,012,000 ---------------------------------------------- ------------- TOTAL INVESTMENTS (COST--$198,764,102) (A) 224,349,315 ---------------------------------------------- ------------- OTHER ASSETS AND LIABILITIES-- NET (0.2%) 469,949 ---------------------------------------------- ------------- NET ASSETS (100%) $224,819,264 ---------------------------------------------- -------------
(a) The cost of investments and foreign currency holdings for federal income tax purposes amounted to $199,189,467. Gross unrealized appreciation and depreciation on investments, based on identified tax cost, at August 31, 1996 are as follows: Gross unrealized appreciation $26,838,904 Gross unrealized depreciation (1,679,056) ------------- Net unrealized appreciation $25,159,848 ------------- (b) Non-income-producing security. (c) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at August 31, 1996. (d) Securities that may be resold to "qualified institutional buyers" under Rule 144A of the Federal Securities Act of 1933. These securities have been determined to be liquid under the guidelines established by the Board of Trustees. Legend of Portfolio Abbreviations: ADN--American Depository Notes ADR--American Depository Receipts REIT--Real Estate Investment Trust See Notes to Financial Statements. PAGE 12 - ------------------------------------- Keystone Growth and Income Fund (S-1) FINANCIAL HIGHLIGHTS (For a share outstanding throughout each year)
Year ended August 31, --------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Net asset value beginning of year $ 22.98 $ 23.21 $ 25.42 $ 23.17 $ 25.12 $ 22.97 $ 24.82 $ 18.93 $ 27.23 $ 25.49 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Income from investment operations: Net investment income 0.12 0.25 0.16 0.11 0.15 0.19 0.22 0.32 0.46 0.18 Net gain (loss) on investments and foreign currency related transactions 3.69 2.66 (0.35) 3.11 (0.11) 4.72 (1.29) 6.16 (6.77) 6.50 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Total from investment operations 3.81 2.91 (0.19) 3.22 0.04 4.91 (1.07) 6.48 (6.31) 6.68 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Less distributions from: Net investment income (0.54) (0.25) (0.23) (0.11) (0.15) (0.26) (0.65) (0.59) (0.46) (0.42) In excess of net investment income (0.22) (0.11) (0.05) (0.17) (0.17) (0.25) (0.09) 0 0 0 Net realized gain on investments (0.98) (2.78) (1.74) (0.69) (1.67) (2.25) (0.04) 0 (1.53) (4.52) -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Total distributions (1.74) (3.14) (2.02) (0.97) (1.99) (2.76) (0.78) (0.59) (1.99) (4.94) -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Net asset value end of year $ 25.05 $ 22.98 $ 23.21 $ 25.42 $ 23.17 $ 25.12 $ 22.97 $ 24.82 $ 18.93 $ 27.23 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Total return (a) 17.31% 13.87% (0.72%) 14.31% 0.38% 24.82% (4.56%) 34.99% (24.55%) 34.80% Ratios/supplemental data Ratios to average net assets: Total Expenses 1.85%(b) 1.75% 2.07% 2.28% 2.08% 2.33% 2.35% 2.05% 1.77% 2.21% Net investment income 0.52% 1.09% 0.67% 0.47% 0.61% 0.93% 1.36% 2.16% 2.28% 0.88% Portfolio turnover rate 139% 115% 73% 96% 95% 64% 47% 44% 82% 71% Average commission rate paid $ 0.0635 N/A N/A N/A N/A N/A N/A N/A N/A N/A -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- Net assets end of year (thousands) $224,819 $199,456 $208,532 $234,688 $204,004 $176,985 $154,124 $187,696 $195,375 $261,804 -------- ------- -------- -------- -------- -------- -------- -------- ------- ------- -------- ------- -------- -------- -------- -------- -------- -------- ------- -------
(a) Excluding applicable sales charges. (b) The ratio of total expenses to average net assets includes indirectly paid expenses for the year ended August 31, 1996. Excluding indirectly paid expenses the expense ratio would have been 1.84%. See Notes to Financial Statements. PAGE 13 - -------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES August 31, 1996 Assets Investments at market value (identified cost--$198,764,102) $224,349,315 Cash 351 Receivable for: Fund shares sold 111,142 Dividends and interest 541,951 Prepaid expenses 5,231 Other assets 19,564 - ------------------------------------------------------ -------------- Total assets 225,027,554 - ------------------------------------------------------ -------------- Liabilities Payable for: Fund shares redeemed 144,555 Tax withholding 2,325 Accrued reimbursable expenses 776 Other accrued expenses 60,634 - ------------------------------------------------------ -------------- Total liabilities 208,290 - ------------------------------------------------------ -------------- Net assets $224,819,264 - ------------------------------------------------------ -------------- Net assets represented by: Paid-in capital $173,170,625 Undistributed net investment income 5,624,332 Accumulated net realized gain on investments and foreign currency related transactions 20,439,094 Net unrealized appreciation on investments 25,585,213 - ------------------------------------------------------ -------------- Total net assets applicable to outstanding shares of beneficial interest ($25.05 per share on 8,974,524 shares outstanding) $224,819,264 - ------------------------------------------------------ -------------- See Notes to Financial Statements. STATEMENT OF OPERATIONS Year Ended August 31, 1996 Investment income: Dividends (net of withholding taxes of $29,150) $ 4,662,925 Interest 584,100 - ------------------------------------------ ---------- ----------- Total income 5,247,025 - ------------------------------------------ ---------- ----------- Expenses (Notes 4 and 5): Management fee $1,492,757 Transfer agent fees 611,194 Accounting, auditing and legal 53,941 Custodian fees 129,018 Trustee fees and expenses 9,311 Printing 33,610 Distribution Plan expenses 1,738,556 Registration fees 32,160 Miscellaneous expenses 9,802 - ------------------------------------------ ---------- ----------- Total expenses 4,110,349 Less: Expenses paid indirectly (Note 6) (22,223) - ------------------------------------------ ---------- ----------- Net expenses 4,088,126 - ------------------------------------------ ---------- ----------- Net investment income 1,158,899 - ------------------------------------------ ---------- ----------- Net realized gain (loss) on investments and foreign currency related transactions 35,400,173 - ------------------------------------------ ---------- ----------- Net change in unrealized appreciation on investments (2,334,533) - ------------------------------------------ ---------- ----------- Net realized and unrealized gain on investments and foreign currency related transactions 33,065,640 - ------------------------------------------ ---------- ----------- Net increase in net assets resulting from operations $34,224,539 - ------------------------------------------ ---------- ----------- PAGE 14 - --------------------------------------------- Keysone Growth and Income Fund (S-1) STATEMENTS OF CHANGES IN NET ASSETS
Year Ended August 31, ------------------------------ 1996 1995 ------------ --------------- Operations: Net investment income $ 1,158,899 $ 2,132,379 Net realized gain on investments and foreign currency related transactions 35,400,173 21,450,785 Net change in unrealized appreciation on investments (2,334,533) 1,448,539 - -------------------------------------------------------------------------------- ------------ -------------- Net increase in net assets resulting from operations 34,224,539 25,031,703 - -------------------------------------------------------------------------------- ------------ -------------- Distributions to shareholders from: Net investment income (4,796,628) (2,132,379) In excess of net investment income (1,898,638) (998,558) Net realized gain on investments (8,574,523) (23,335,489) - -------------------------------------------------------------------------------- ------------ -------------- Total distributions to shareholders (15,269,789) (26,466,426) - -------------------------------------------------------------------------------- ------------ -------------- Capital share transactions (Note 2): Proceeds from shares sold 54,640,514 24,297,348 Payment for shares redeemed (61,283,587) (54,390,106) Net asset value of shares issued in reinvestment of distributions 13,051,460 22,451,463 - -------------------------------------------------------------------------------- ------------ -------------- Net increase (decrease) in net assets resulting from capital share transactions 6,408,387 (7,641,295) - -------------------------------------------------------------------------------- ------------ -------------- Total increase (decrease) in net assets 25,363,137 (9,076,018) - -------------------------------------------------------------------------------- ------------ -------------- Net assets: Beginning of year 199,456,127 208,532,145 - -------------------------------------------------------------------------------- ------------ -------------- End of year [including undistributed net investment income as follows: 1996--$5,624,332 and 1995--$3,637,729] $224,819,264 $199,456,127 ================================================================================ ============ ==============
See Notes to Financial Statements. PAGE 15 - -------------------------------------- NOTES TO FINANCIAL STATEMENTS (1.) Significant Accounting Policies Keystone Growth and Income Fund (S-1), (the "Fund") is a common law trust for which Keystone Management, Inc. ("KMI") is the Investment Manager and Keystone Investment Management Company ("Keystone") is the Investment Adviser. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII") and KMI is in turn a wholly-owned subsidiary of Keystone. 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's investment objective is growth of capital and long-term growth of income. 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 Investments are usually valued at the closing sales price, or, in the absence of sales and for over-the- counter securities, the mean of the bid and asked prices. 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 combined with interest, 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. Foreign Currency The books and records of the Fund are maintained in United States ("U.S.") dollars. Foreign currency amounts are translated into U.S. dollars as follows: market value of investments, assets and liabilities at the daily rate of exchange; purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) resulting from changes in foreign currency exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency transactions. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions and the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received. The portion of foreign currency gains and losses related to fluctuations in exchange PAGE 16 - ----------------------------------------------- Keystone Growth and Income Fund (S-1) rates between the initial purchase trade date and subsequent sale trade date is included in realized gain (loss) on foreign currency transactions D. Forward Foreign Currency Exchange Contracts The Fund may enter into forward foreign currency exchange contracts ("forward contracts") to settle portfolio purchases and sales of securities denominated in a foreign currency and to hedge certain foreign currency assets or liabilities. Forward contracts are recorded at the forward rate and are marked-to-market daily. Realized gains and losses arising from such transactions are included in net realized gain (loss) on foreign currency related transactions. The Fund bears the risk of an unfavorable change in the foreign currency exchange rate underlying the forward contract and is subject to the credit risk that the other party will not fulfill their obligations under the contract. Forward contracts involve elements of market risk in excess of the amount reflected in the statement of assets and liabilities. E. Security Transactions and Investment Income Securities transactions are accounted for no later than one business day after the trade date. Realized gains and losses are computed on the identified cost basis. Interest income is recorded on the accrual basis and includes amortization of discounts and premiums. Dividend income is recorded on the ex-dividend date. F. 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 intends to avoid any excise tax liability by making the required distributions under the Code. Accordingly, no provision for federal income tax is required. G. Distributions The Fund distributes net investment income quarterly and net capital gains, if any, at least annually. Distributions to shareholders are recorded at the close of business on the ex-dividend date. Income and capital gains distributions to shareholders are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due differing treatment of short-term gains. (2.) Capital Share Transactions The Fund's Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest with a par value of $1.00. Transactions in shares of the Fund were as follows: Year ended August 31, ---------------------------- 1996 1995 - ------------------------ ----------- ------------- Shares sold 2,238,539 1,107,879 Shares redeemed (2,509,938) (2,449,356) Shares issued in reinvestment of distributions 568,144 1,033,621 - ------------------------ ----------- ------------- Net increase (decrease) 296,745 (307,856) ======================== =========== ============= (3.) Securities Transactions Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) for the year ended August 31, 1996 were $295,613,081 and $311,318,832, respectively. (4.) Distribution Plan The Fund bears some of the costs of selling its shares under a Distribution Plan (the "Plan") adopted pursu- PAGE 17 - ------------------------------------------- ant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays its principal underwriter, Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of Keystone, amounts which are calculated and paid daily. Under the Plan, the Fund pays a distribution fee amount which may not exceed 1.00% of the Fund's average daily net assets. Of that amount, 0.75% is used to pay distribution expenses and 0.25% may be used to pay service fees. Contingent deferred sales charges paid by redeeming shareholders may be paid to KIDC. During the year ended August 31, 1996, the Fund received $49,734 in contingent deferred sales charges. The Plan 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 Fund. However, after the termination of the Plan, at the discretion of the Board of Trustees, payments to KIDC may continue as compensation for its services which had been earned while the Plan was in effect. KIDC intends, but is not obligated, to continue to pay distribution costs that exceed the current annual payments from the Fund. KIDC 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 Fund would be within permitted limits. (5.) Investment Management Agreement and Other Affiliated Transactions Under the terms of the Investment Management Agreement between KMI and the Fund, KMI provides investment management and administrative services to the Fund. In return, KMI is paid a management fee, computed and paid daily, which is determined by applying percentage rates starting at 0.70% and declining as net assets increase to 0.35% per annum, to the average daily net asset value of the Fund. KMI has entered into an Investment Advisory Agreement with Keystone under which Keystone provides investment advisory and management services to the Fund. In return for its services, Keystone receives an annual fee equal to 85% of the management fee received by KMI. During the year ended August 31, 1996, the Fund paid or accrued $15,735 to Keystone for certain accounting services. The Fund paid or accrued $611,194 to Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of Keystone, for services rendered as the Fund's transfer and dividend disbursing agent. Certain officers and/or Directors of Keystone are also officers and/or Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no compensation directly from the Fund. (6.) Expense Offset Arrangement The Fund has entered into an expense offset arrangement with its custodian. For the year ended August 31, 1996, the Fund incurred total custody fees of $129,018 and received a credit of $22,223 pursuant to this expense offset arrangement, resulting in a net custody expense of $106,795. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. (7.) Distributions to Shareholders A distribution from net investment income of $0.050 per share was declared payable by October 4, 1996 to shareholders of record September 25, 1996. This distribution is not reflected in the accompanying financial statements. PAGE 18 - -------------------------------------------- Keystone Growth and Income Fund (S-1) (8.) Subsequent Event On September 6, 1996, Keystone Investments, Inc. entered into an Agreement and Plan of Acquisition and Merger (the "Acquisition") with First Union Corporation and First Union National Bank of North Carolina ("First Union") whereby First Union would acquire all the assets and liabilities of Keystone Investments, Inc. in exchange for shares of First Union. Subject to the receipt of the required regulatory and shareholder approvals, the Acquisition is expected to take place in late December 1996. - ---------------------------------------------------------------------------- FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS (Unaudited) During the fiscal year ended August 31, 1996, distributions of $1.74 per share were paid in shares or cash. This total includes a taxable long-term capital gain distribution of $0.98 per share. The remaining $0.76 per share is taxable to shareholders as ordinary income in the year in which received by them or credited to their accounts. The above figures may differ from those cited elsewhere in this report due to differences in the calculation of income and capital gains for accounting (book) purposes and Internal Revenue Service (tax) purposes. In January 1997, we will send you complete information on the distributions paid during the calendar year 1996 to help you in completing your federal tax return. PAGE 19 - ---------------------------------------------- INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders Keystone Growth and Income Fund (S-1) We have audited the accompanying statement of assets and liabilities of Keystone Growth and Income Fund (S-1), including the schedule of investments, as of August 31, 1996 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended. 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 August 31, 1996 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 Growth and Income Fund (S-1), as of August 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts September 27, 1996 [covers] KEYSTONE FAMILY OF FUNDS [diamond] Balanced Fund (K-1) Diversified Bond Fund (B-2) Growth and Income Fund (S-1) High Income Bond Fund (B-4) International Fund Inc. Liquid Trust Mid-Cap Growth Fund (S-3) Precious Metals Holdings, Inc. Quality Bond Fund (B-1) Small Company Growth Fund (S-4) Strategis Growth Fund (K-2) Tax Free 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. [logo] KEYSTONE INVESTMENTS P.O. Box 2121 Boston, Massachusetts 02106-2121 S1-R-10/96 17.6M KEYSTONE [photo of leaves] GROWTH AND INCOME FUND (S-1) [LOGO] ANNUAL REPORT AUGUST 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----