-----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, H9bHOReDVcPPyVEj+BQttKjfx1s3e9vXqGT7Cvg+w1JFQkDN7cQlc6uOaLHOvF1c W2ZbkxNarzvpMqdBRxy3LQ== 0000950168-97-002940.txt : 19971010 0000950168-97-002940.hdr.sgml : 19971010 ACCESSION NUMBER: 0000950168-97-002940 CONFORMED SUBMISSION TYPE: N-30D CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971009 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: SEC FILE NUMBER: 811-00098 FILM NUMBER: 00000000 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 KEYSTONE GROWTH AND INCOME FUND (S-1) PAGE 1 KEYSTONE GROWTH AND INCOME FUND (S-1) SEEKS GROWTH OF CAPITAL AND LONG-TERM GROWTH OF INCOME. Dear Shareholders: We are pleased to report to you on the Keystone Growth and Income Fund (S-1) for the fiscal year that ended on August 31, 1997. Following our letter to you, we have included a discussion with your Fund's portfolio manager and complete financial information. PERFORMANCE Keystone Growth and Income Fund (S-1) produced a total return of 34.76% for the 12 months that ended on August 31. The benchmark Standard & Poors 500 Index, an unmanaged index generally representative of the domestic stock market, returned 40.65% during the same period. We believe your Fund performed satisfactorily in a strong environment favoring large capitalization "blue chip" stocks. In a year in which market leadership tended to be confined to a relatively narrow band of the stocks of the largest companies with leadership rotating from sector to sector, your Fund successfully provided generous returns while seeking its objective through investments in a broadly diversified portfolio. ENVIRONMENT The 12-month period was an extremely rewarding time for investments in the stocks of the nation's largest companies. An environment of moderate growth, restrained inflation, relatively low interest rates, and strong corporate earnings encouraged investor confidence, and the broad market indices soared to new highs. The market did fall into a temporary correction from late February through early April 1997, as investors became concerned about the possibility of an over-heated economy that potentially could lead to revived inflation and higher interest rates. These concerns receded, however, by mid-April as reports of strong first quarter corporate profits and modest inflation reassured investors. The stock market resumed its ascent through the spring and early summer before drawing back somewhat toward the close of the fiscal year in August. Over the full 12 months, the strongest performance was turned in by many of the nation's largest, brand name companies that enjoyed national, and even international, leadership in their industries. INVESTMENT STRATEGY Throughout the period, the Keystone Growth and Income Fund (S-1) continued its emphasis on larger capitalization, high quality growth companies that have been at the core of the Fund's portfolio. In fact, the Fund has increased its emphasis on companies such as General Electric and Microsoft, which have been consistent strong performers and which have shown an ability to capitalize on their international franchises and industry leadership to increase their profitability. During the summer, your Fund also modestly increased its investments in medium-size companies, consistent with the Fund's discipline of investing in companies with strong earnings, solid managements and market leadership. We believe these mid-cap stock investments, which accounted for approximately 15% of net assets at the end of the fiscal year, have the potential to enhance performance should market leadership broaden beyond the largest capitalization stocks. The emphasis of the Fund, however, remains with the world class, blue chip growth companies on which the Fund traditionally has concentrated. -- CONTINUED-- PAGE 2 KEYSTONE GROWTH AND INCOME FUND (S-1) OUTLOOK We believe that as long as inflation remains subdued, interest rates can remain relatively stable and the favorable environment for stocks should continue. The outlook for large, blue chip stocks remains favorable, especially for those companies that have demonstrated an ability to capitalize on their industry leadership and strong franchises to grow their profitability. At the same time, the stock valuations of many of these companies have approached record levels, and it would not be unexpected if well managed, mid-sized companies show renewed market strength. A word of caution is in order. We believe that mutual fund investors should moderate their expectations about future returns, and not anticipate an indefinite continuation of the extraordinary, above-average returns that have characterized the market for the past 12 months. Moreover, it would not be unusual if the market experiences a major correction in stock prices. Such a correction may be painful when it occurs, but is a normal event in a market cycle. Investors experiencing them should remind themselves of their long-term objectives and not be overly influenced by short-term events. We thank you for your support of Keystone Growth and Income Fund (S-1). Sincerely, /s/ Albert H. Elfner, III Albert H. Elfner, III CHAIRMAN KEYSTONE INVESTMENT MANAGEMENT CO. /s/ George S. Bissell George S. Bissell CHAIRMAN OF THE BOARD KEYSTONE FUNDS [Photos of Albert H. Elfner, III and George S. Bissell appear here] PAGE 3 A Discussion With Your Fund Manager [Photo of Judith A. Warners appears here] JUDITH A. WARNERS IS PORTFOLIO MANAGER OF KEYSTONE GROWTH AND INCOME FUND (S-1). A MEMBER OF THE SECURITY ANALYSTS SOCIETY, MS. WARNERS HAS MORE THAN 17 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE. SHE HOLDS A BA FROM CURRY COLLEGE AND AN MBA FROM BABSON COLLEGE. SHE IS A MEMBER OF THE KEYSTONE GROWTH AND INCOME TEAM. Q WHAT WAS THE ENVIRONMENT LIKE DURING THE YEAR THAT ENDED ON AUGUST 31? A Basically, it was an environment that favored large cap stocks. In fact, while the overall market indices recorded very substantial increases over the 12 months, much of that was due to the performance of the largest 50 stocks. We started the fiscal year with a very supportive environment of strong economic growth and rising corporate profits. Early in 1997, however, investors became concerned that the growth might become too strong, and that inflation could return. The fear was that this could cause an increase in interest rates, which eventually would cut into corporate profits. The Federal Reserve Board did raise short-term rates once in late March. The anticipation and reaction to this one-time tightening of the money supply caused a sharp correction in March and early April. However, as evidence grew at the end of the first quarter that growth was slowing down and inflation did not appear to be a problem, the stock market took off again, with a very strong rally from mid-April through July. In fact, the Standard & Poors 500 Index rose 7% in July 1997 alone. Things started cooling a little bit in August, as some blue chip companies, most notably Gillette Co. and Coca-Cola Co., warned of earnings that will be disappointing to Wall Street. However, if you look at the period from August 31, 1996 through August 31, 1997, you would have to say generally that large capitalization, industry-leading companies with national and international franchises were the big winners in stock performance. Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT? A We concentrated, and even increased our holdings, in the high quality, growth companies that have consistently been the core of our portfolio. If you look at our major investments, you will see names like General Electric Co., Microsoft Corp., IBM Corp., and Bristol-Myers Squibb Co. These are quality companies, with histories of demonstrable earnings growth, strong managements, and visible name brands. These blue chip companies consistently have made up 65% or more of the portfolio, and they have been an excellent investment over the past two years. This summer, we have increased somewhat our holdings in mid-cap companies that also have histories of earnings growth, strong managements, PAGE 4 KEYSTONE GROWTH AND INCOME FUND (S-1) TOP 10 STOCK HOLDINGS AUGUST 31, 1997
% OF COMPANY NET ASSETS General Electric Co. 3.3% Microsoft Corp. 2.1% International Business Machines Corp. 2.1% Bristol-Myers Squibb Co. 2.0% Merck & Co., Inc. 1.8% SLM Holding Corp. 1.7% American Home Products Corp. 1.7% Exxon Corp. 1.7% Procter & Gamble Co. 1.6% Intel Corp. 1.5%
and leadership positions in their industries. We have added to our positions in companies such as HBO & Co.; Kohl's Corp., a mid-western retailer; and Falcon Drilling, a company involved in offshore energy exploration. We believe that as the market broadens out and investors start looking for more growth niche stocks, these companies have the potential to do very well. In fact, we have started to see some evidence of a possible broadening out of market leadership in late summer. These mid-cap stocks, however, are not expected to account for more than 20-to-25% of the portfolio. The fund has been and will remain a blue chip-oriented fund. Q IN THE LAST REPORT, YOU DISCUSSED AN EMPHASIS ON INTEREST-RATE SENSITIVE STOCKS, SUCH AS BANKS AND REAL ESTATE INVESTMENT TRUSTS. DO YOU STILL EMPHASIZE THIS AREA? A We remain heavily weighted in interest-rate sensitive stocks. While we continue to have a heavy emphasis in real estate investment trusts, or REITs, we have cut back there a little bit primarily because that area was such a strong performer in 1996 and early 1997 that we decided to take some profits. We probably have increased our overall emphasis in the finance sector, including banks, insurance and security industries. However, we have taken some profits from the very big bank stocks, and redeployed into some mid-cap banking stocks. This is an area in the market that is benefiting from industry consolidation. Among the names we have added are First Commerce Corp., First American Corp., and Mellon Bank Corp. As long as the economy is moving along well and interest rates and inflation are stable, the finance sector is a good place to be. Q IN WHAT OTHER AREAS DO YOU HAVE AN EMPHASIS? A We have remained committed to the general pharmaceutical area, consistent with that industry's weighting in the S&P 500. In the drug area, we tend to own top-line growth companies with a consistent flow of new products to keep revenues growing. We hold positions in companies such as Bristol-Myers Squibb Co., Merck & Co., Inc., and American Home Products Corp. We are overweighted in telecommunications, which we believe has tremendous market opportunities. We own more integrated companies, such as Worldcom Inc., a leading Internet access provider company; equipment companies such as Northern Telecom Ltd.; and Cisco Systems, Inc., a systems router for telecommunications carriers. Other telecommunications-related holdings include Motorola Inc., GTE Corp, Loral Space and Communications, Ltd., and Iridium World Communications. The last two companies are involved in satellite communications. PAGE 5 TOP 5 INDUSTRIES AUGUST 31, 1997
% OF INDUSTRY NET ASSETS Healthcare Products & Services 10.8% Finance & Insurance 10.8% Banks 8.3% Oil 6.6% Telecommunications Services & Equipment 6.4%
Q WHAT IS YOUR OUTLOOK? A We continue to feel we are in a growth environment, with interest rates trending downward and inflation still under control. We are watching closely for signs of any pickup in inflation, but up until now productivity enhancements have offset any potential inflationary pressures. In this environment, we remain flexible, with a major commitment to the large cap stocks that have been market leaders, but with an eye to see if market movement toward mid-cap stocks becomes a sustained trend. [Graphic appears here] THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND. IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO: EVERGREEN KEYSTONE INVESTMENT SERVICES, INC. ATTN: SHAREHOLDER COMMUNICATIONS 201 SOUTH COLLEGE STREET, SUITE 400 CHARLOTTE, N.C. 28288-1195 PAGE 6 KEYSTONE GROWTH AND INCOME FUND (S-1) Growth of an Investment [Graph appears below with the following information:] Growth of an investment in Keystone Growth and Income Fund (S-1) (In Thousands) August 31, 1987 through August 31, 1997 Initial Investment Dividend Reinvestment 8/87 $10,000.00 $10,000.00 8/88 $ 6,952.00 $ 7,545.00 8/89 $ 9,119.00 $10,185.00 8/90 $ 8,432.00 $ 9,721.00 8/91 $ 9,225.00 $12,133.00 8/92 $ 8,509.00 $12,179.00 8/93 $ 9,335.00 $13,922.00 8/94 $ 8,524.00 $13,822.00 8/95 $ 8,439.00 $14,739.00 8/96 $ 9,199.00 $18,463.00 8/97 $10,940.00 $24,879.00 [Line Graph appears below with the following information:] Fund CPI S&P 500 8/87 $10,000.00 $10,000.00 $10,000.00 8/88 $ 7,545.00 $10,402.00 $ 8,218.00 8/89 $10,185.00 $10,891.00 $11,262.00 8/90 $ 9,721.00 $11,502.00 $10,237.00 8/91 $12,133.00 $11,939.00 $12,985.00 8/92 $12,179.00 $12,315.00 $14,013.00 8/93 $13,922.00 $12,655.00 $16,140.00 8/94 $13,822.00 $13,021.00 $17,019.00 8/95 $15,739.00 $13,363.00 $20,663.00 8/96 $18,463.00 $13,747.00 $24,531.00 8/97 $24,879.00 $14,052.00 $34,496.00 The cumulative and average annual total returns with sales charge calculations reflect the deduction of the 3% contingent deferred sales charge (CDSC) for those investors who sold Fund shares after one calendar year. Investors who retained their investment earned the returns in the lines marked "w/o sales charge." The investment return and principal value will fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Past performance is no guarantee of future results. You may exchange your shares for another Keystone Classic fund by phone or in writing. The Fund reserves the right to change or terminate the exchange offer.
HISTORICAL RECORD CUMULATIVE TOTAL RETURN 1 year w/o sales charge 34.76% 1 year w/ sales charge 31.76% 5 years 104.28% 10 years 148.79% AVERAGE ANNUAL TOTAL RETURN 1 year w/o sales charge 34.76% 1 year w/ sales charge 31.76% 5 years 15.36% 10 years 9.54%
PAGE 7 SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
SHARES VALUE COMMON STOCKS-- 94.5% AEROSPACE & DEFENSE-- 1.0% 25,000 Boeing Co..................... $ 1,360,938 20,600 United Technologies Corp...... 1,608,087 2,969,025 AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 4.3% 93,000 Federal-Mogul Corp............ 3,324,750 65,000 Ford Motor Co................. 2,795,000 40,000 Goodyear Tire & Rubber Co..... 2,465,000 75,000 * Lear Corp..................... 3,435,937 50,000 Toyota Motor Corp............. 1,304,024 13,324,711 BANKS-- 8.3% 46,000 BankAmerica Corp.............. 3,027,375 36,500 BankBoston Corp............... 3,034,062 30,081 Chase Manhattan Corp.......... 3,344,631 76,000 First American Corp........... 3,206,250 64,000 First Commerce Corp........... 3,404,000 89,000 Firstar Corp.................. 2,998,188 76,000 Mellon Bank Corp.............. 3,657,500 30,000 NationsBank Corp.............. 1,781,250 27,500 Norwest Corp.................. 1,579,531 26,032,787 BUILDING, CONSTRUCTION & FURNISHINGS-- 0.5% 275,000 * Cemex SA...................... 1,515,706 BUSINESS EQUIPMENT & SERVICES-- 0.5% 40,000 * USA Waste Services, Inc....... 1,680,000 CAPITAL GOODS-- 5.6% 75,000 Deere & Co.................... 4,200,000 50,000 Emerson Electric Co........... 2,734,375 167,000 General Electric Co........... 10,437,500 17,371,875 CHEMICAL & AGRICULTURAL PRODUCTS-- 2.2% 70,000 Du Pont (E. I.) De Nemours & Co.......................... 4,361,875 80,000 Morton International, Inc..... 2,660,000 7,021,875 SHARES VALUE COMMON STOCKS-- CONTINUED CONSUMER PRODUCTS & SERVICES-- 3.2% 32,000 Gillette Co................... $ 2,650,000 37,000 Procter & Gamble Co........... 4,923,312 65,400 Stewart Enterprises, Inc...... 2,579,213 10,152,525 DIVERSIFIED COMPANIES-- 2.2% 50,000 AlliedSignal, Inc............. 4,128,125 35,000 Tyco International Ltd........ 2,745,313 6,873,438 ELECTRICAL EQUIPMENT & SERVICES-- 4.1% 90,000 * Analog Devices, Inc........... 2,981,250 52,000 Intel Corp.................... 4,782,375 40,000 Motorola, Inc................. 2,935,000 20,000 Texas Instruments, Inc........ 2,272,500 12,971,125 FINANCE & INSURANCE-- 10.0% 32,500 * American Express Co........... 2,526,875 45,000 American International Group, Inc......................... 4,246,875 60,800 Associates First Capital Corp........................ 3,530,200 55,000 Federal National Mortgage Association................. 2,420,000 71,900 Greenpoint Financial Corp..... 4,426,344 65,000 Hartford Life, Inc. Cl. A..... 2,425,312 70,000 Nationwide Financial Services, Inc. Cl. A.................. 1,942,500 40,000 SLM Holding Corp.............. 5,420,000 45,000 * Travelers Group, Inc.......... 2,857,500 22,500 Washington Mutual, Inc........ 1,345,781 31,141,387 FOOD & BEVERAGE PRODUCTS-- 3.0% 53,000 Coca Cola Co.................. 3,037,563 70,000 Pepsico, Inc.................. 2,520,000 90,000 Philip Morris Companies, Inc......................... 3,926,250 9,483,813
PAGE 8 KEYSTONE GROWTH AND INCOME FUND (S-1) SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
SHARES VALUE COMMON STOCKS-- CONTINUED HEALTHCARE PRODUCTS & SERVICES-- 10.8% 75,000 American Home Products Corp... $ 5,400,000 83,300 Bristol-Myers Squibb Co....... 6,330,800 140,000 * Healthsouth Corp.............. 3,491,250 70,000 Johnson & Johnson............. 3,968,125 33,000 Medtronic, Inc................ 2,982,375 60,000 Merck & Co., Inc.............. 5,508,750 60,000 Pfizer, Inc................... 3,322,500 66,000 SmithKline Beecham Plc ADS.... 2,858,625 33,862,425 INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 0.9% 75,000 * United States Filter Corp..... 2,700,000 INFORMATION SERVICES & TECHNOLOGY-- 4.0% 58,000 * BMC Software, Inc............. 3,628,625 30,000 * HBO & Co...................... 2,146,875 50,600 * Microsoft Corp................ 6,690,269 12,465,769 METAL PRODUCTS & SERVICES-- 2.4% 37,000 Aluminum Co. of America....... 3,043,250 25,000 Phelps Dodge Corp............. 2,010,938 110,000 Vale Do Rio Doce Navegacao SA.......................... 2,560,249 7,614,437 OFFICE EQUIPMENT & SUPPLIES-- 2.9% 40,000 Hewlett-Packard Co............ 2,452,500 66,000 International Business Machines Corp............... 6,657,750 9,110,250 OIL-- 6.6% 25,000 Anadarko Petroleum Corp....... 1,835,937 38,000 * British Petroleum Plc......... 3,215,750 86,000 Exxon Corp.................... 5,262,125 30,000 Mobil Corp.................... 2,182,500 92,000 Royal Dutch Petroleum Co...... 4,669,000 30,000 Texaco, Inc................... 3,457,500 20,622,812 SHARES VALUE COMMON STOCKS-- CONTINUED OIL FIELD SERVICES-- 2.3% 47,100 Diamond Offshore Drilling, Inc......................... $ 2,572,838 100,000 * Falcon Drilling............... 3,150,000 30,000 Halliburton Co................ 1,432,500 7,155,338 PAPER & PACKAGING-- 2.4% 50,000 * Bowater, Inc.................. 2,559,375 55,000 * Champion International Corp... 3,255,313 30,000 International Paper Co........ 1,582,500 7,397,188 PUBLISHING, BROADCASTING & ENTERTAINMENT-- 1.6% 20,000 Disney (Walt) Co.............. 1,536,250 140,000 Westinghouse Electric Corp.... 3,605,000 5,141,250 REAL ESTATE-- 4.4% 70,000 Arden Realty, Inc. REIT....... 2,021,250 80,000 Beacon Properties REIT........ 2,880,000 45,000 Camden Property Trust REIT.... 1,327,500 80,000 First Industrial Realty Trust, Inc. REIT................... 2,470,000 100,001 Patriot American Hospitality, Inc. REIT................... 2,437,524 70,000 TriNet Corporate Realty Trust, Inc. REIT................... 2,489,375 13,625,649 RETAILING & WHOLESALE-- 4.8% 52,500 * Costco Companies., Inc........ 1,891,641 42,000 * Dollar General Corp........... 1,740,375 72,000 Home Depot, Inc............... 3,397,500 45,000 * Kohls Corp.................... 3,102,187 60,000 Sears, Roebuck & Co........... 3,405,000 40,000 Wal-Mart Stores, Inc.......... 1,420,000 14,956,703
PAGE 9 SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
SHARES VALUE COMMON STOCKS-- CONTINUED TELECOMMUNICATION SERVICES & EQUIPMENT-- 5.5% 40,000 * Cisco Systems, Inc............ $ 3,013,750 90,000 GTE Corp...................... 4,010,625 100,000 * Iridium World Communications.. 3,581,250 33,700 Northern Telecom Ltd.......... 3,340,512 105,000 * WorldCom, Inc................. 3,146,719 17,092,856 TRANSPORTATION-- 1.0% 65,000 Canadian National Railway Co.......................... 3,229,688 TOTAL COMMON STOCKS (COST $235,141,913)......... 295,512,632 CONVERTIBLE PREFERRED-- 1.7% FINANCE & INSURANCE-- 0.8% 60,000 SunAmerica, Inc. $3.188, PERCS............... 2,658,750 TELECOMMUNICATION SERVICES & EQUIPMENT-- 0.9% 50,000 Loral Space & Communications Ltd. 6.00%, Series 144A.......... 2,693,750 TOTAL CONVERTIBLE PREFERRED (COST $4,775,425)........... 5,352,500
SHARES VALUE RIGHTS-- 0.0% (B) METAL PRODUCTS & SERVICES-- 0.0% (B) $ 110,000 Vale Rio Doce Cia 12/31/99.................... $ 10 TOTAL RIGHTS (COST $0)................... 10 REPURCHASE AGREEMENT-- 3.6% 11,311,000 Keystone Joint Repurchase Agreement, Investments in repurchase agreements, in a joint trading account purchased 8/27/97, 5.5847%, maturing 9/2/97, maturing value $11,318,019 (a) (cost, $11,311,000)......... 11,311,000 TOTAL INVESTMENTS-- (COST $251,228,338) 99.8% 312,176,142 OTHER ASSETS AND LIABILITIES-- NET 0.2 759,339 NET ASSETS 100.0% $312,935,481
* Non-income producing securities. (a) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at August 31, 1997. (b) Less than one-tenth of a percent. 144A-- Rule 144A securities are restricted as to resale to qualified institutional investors. ADS-- American Depository Shares. PERCS-- Preferred Equity Redemption Cumulative Stock. REIT-- Real Estate Investment Trust. PAGE 10 GEOGRAPHIC DIVERSIFICATION The Fund may invest in securities principally traded in markets outside the United States. While investments in such securities are intended to reduce risk by providing further diversification, foreign investments involve sovereign risk in addition to the credit and market risks normally associated with domestic securities. Foreign investments may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. At August 31, 1997, the Fund had investments, excluding short-term investments, in the following countries:
MARKET PERCENTAGE OF COUNTRY VALUE NET ASSETS United States.................................................... $274,590,328 87.8% Bermuda.......................................................... 3,581,250 1.1% Brazil........................................................... 2,560,259 0.8% Canada........................................................... 6,570,200 2.1% Japan............................................................ 1,304,024 0.4% Mexico........................................................... 1,515,706 0.5% The Netherlands.................................................. 4,669,000 1.5% United Kingdom................................................... 6,074,375 2.0% $300,865,142 96.2%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. PAGE 11 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
YEAR ENDED AUGUST 31, 1997 1996 1995 1994 1993 NET ASSET VALUE BEGINNING OF YEAR $25.05 $22.98 $23.21 $25.42 $23.17 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.15 0.12 0.25 0.16 0.11 Net gain (loss) on investments and foreign currency related transactions 7.97 3.69 2.66 (0.35) 3.11 Total from investment operations 8.12 3.81 2.91 (0.19) 3.22 LESS DISTRIBUTIONS From net investment income (0.15) (0.54) (0.25) (0.23) (0.11) In excess of net investment income (0.05) (0.22) (0.11) (0.05) (0.17) From net realized gain on investments (3.18) (0.98) (2.78) (1.74) (0.69) Total distributions (3.38) (1.74) (3.14) (2.02) (0.97) NET ASSET VALUE END OF YEAR $29.79 $25.05 $22.98 $23.21 $25.42 TOTAL RETURN (A) 34.76% 17.31% 13.87% (0.72%) 14.31% RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 1.57% 1.85% 1.75% 2.07% 2.28% Total expenses, excluding indirectly paid expenses 1.56% 1.84% N/A N/A N/A Net investment income 0.55% 0.52% 1.09% 0.67% 0.47% PORTFOLIO TURNOVER RATE 109% 139% 115% 73% 96% AVERAGE COMMISSION RATE PAID PER SHARE $ 0.0598 $ 0.0635 N/A N/A N/A NET ASSETS END OF YEAR (THOUSANDS) $312,935 $224,819 $199,456 $208,532 $234,688 YEAR ENDED AUGUST 31, 1992 1991 1990 1989 1988 NET ASSET VALUE BEGINNING OF YEAR $25.12 $22.97 $24.82 $18.93 $27.23 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.15 0.19 0.22 0.32 0.46 Net gain (loss) on investments and foreign currency related transactions (0.11) 4.72 (1.29) 6.16 (6.77) Total from investment operations 0.04 4.91 (1.07) 6.48 (6.31) LESS DISTRIBUTIONS From net investment income (0.15) (0.26) (0.65) (0.59) (0.46) In excess of net investment income (0.17) (0.25) (0.09) 0 0 From net realized gain on investments (1.67) (2.25) (0.04) 0 (1.53) Total distributions (1.99) (2.76) (0.78) (0.59) (1.99) NET ASSET VALUE END OF YEAR $23.17 $25.12 $22.97 $24.82 $18.93 TOTAL RETURN (A) 0.38% 24.82% (4.56%) 34.99% (24.55%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 2.08% 2.33% 2.35% 2.05% 1.77% Total expenses, excluding indirectly paid expense N/A N/A N/A N/A N/A Net investment income 0.61% 0.93% 1.36% 2.16% 2.28% PORTFOLIO TURNOVER RATE 95% 64% 47% 44% 82% AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A NET ASSETS END OF YEAR (THOUSANDS) $204,004 $176,985 $154,124 $187,696 $195,375
(a) Excluding applicable sales charges. SEE NOTES TO FINANCIAL STATEMENTS. PAGE 12 KEYSTONE GROWTH AND INCOME FUND (S-1) STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1997
ASSETS Investments, at value (identified cost-- $251,228,338) $312,176,142 Cash 617 Receivable for investments sold 840,449 Dividends and interest receivable 480,647 Receivable for Fund shares sold 176,238 Prepaid expenses 43,781 Total assets 313,717,874 LIABILITIES Payable for investments purchased 296,083 Payable for Fund shares redeemed 201,603 Distribution plan expense payable 201,129 Due to affiliates 10,500 Accrued expenses and other liabilities 73,078 Total liabilities 782,393 NET ASSETS $312,935,481 NET ASSETS REPRESENTED BY Paid-in capital $214,226,655 Accumulated distributions in excess of net investment income (16,188) Accumulated net realized gain on investments and foreign currency related transactions 37,777,500 Net unrealized appreciation on investments and foreign currency related transactions 60,947,514 Total net assets applicable to outstanding shares of beneficial interest ($29.79 per share on 10,504,769 shares outstanding) $312,935,481
STATEMENT OF OPERATIONS YEAR ENDED AUGUST 31, 1997
INVESTMENT INCOME Dividends (net of foreign taxes of $58,633) $ 5,155,917 Interest 533,010 Total income 5,688,927 EXPENSES Management fee $ 1,794,364 Distribution plan expenses 1,535,556 Transfer agent fees 683,706 Accounting expenses 44,985 Trustee fees and expenses 5,931 Custodian fees 136,192 Registration fees 47,804 Auditing and legal 41,471 Printing 31,980 Miscellaneous expenses 6,423 Total expenses 4,328,412 Less: Expenses paid indirectly (20,588) Net expenses 4,307,824 Net investment income 1,381,103 NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS Net realized gain (loss) on Investments 42,390,850 Foreign currency related transactions (12,863) Net realized gain on investments and foreign currency related transactions 42,377,987 Net change in unrealized appreciation on investments and foreign currency related transactions 35,362,301 Net realized and unrealized gain on investments and foreign currency related transactions 77,740,288 Net increase in net assets resulting from operations $79,121,391
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 13 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31, 1997 1996 OPERATIONS Net investment income $ 1,381,103 $ 1,158,899 Net realized gain on investments and foreign currency related transactions 42,377,987 35,400,173 Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 35,362,301 (2,334,533) Net increase in net assets resulting from operations 79,121,391 34,224,539 DISTRIBUTIONS TO SHAREHOLDERS From net investment income (1,381,103) (4,796,628) In excess of net investment income (640,844) (1,898,638) From net realized gain on investments (30,039,258) (8,574,523) Total distributions to shareholders (32,061,205) (15,269,789) CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 103,353,377 54,640,514 Payment for shares redeemed (89,890,447) (61,283,587) Net asset value of shares issued in reinvestment of distributions 27,593,101 13,051,460 Net increase in net assets resulting from capital share transactions 41,056,031 6,408,387 Total increase in net assets 88,116,217 25,363,137 NET ASSETS: Beginning of year 224,819,264 199,456,127 End of year, including undistributed (distributions in excess of) net investment income of ($16,188) and $5,624,332, respectively $312,935,481 $224,819,264
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 14 KEYSTONE GROWTH AND INCOME FUND (S-1) NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Keystone Growth and Income Fund (S-1), (the "Fund") is a Pennsylvania 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 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'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 The Fund values securities traded on a national securities exchange or included on the NASDAQ National Market System ("NMS") at the last reported sales price on the exchange where primarily traded. The Fund values securities traded on an exchange or NMS for which there has been no sale and other securities traded in the over-the-counter market at the mean between the last reported bid and asked price. Corporate bonds, other fixed-income securities, and mortgage and other asset-backed securities are valued at prices provided by an independent pricing service. In determining value for normal institutional-size transactions, the pricing service uses methods based on market transactions for comparable securities and analysis of various relationships between similar securities which are generally recognized by institutional traders. Securities for which valuations are not available from an independent pricing service, including restricted securities, are valued at fair value as determined in good faith according to procedures established by the Board of Trustees. Short-term investments with remaining maturities of 60 days or less are carried at an amortized cost, which approximates market value. B. REPURCHASE AGREEMENTS Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with certain other funds managed by Keystone, may transfer uninvested cash balances into a joint trading account. These balances are invested in one or more repurchase agreements that are fully collateralized by U.S. Treasury and/or Federal Agency obligations. 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 related transactions. Net realized foreign currency gains and losses include foreign currency gains PAGE 15 and losses resulting from changes in exchange rates between trade date and settlement date on investment securities transactions and foreign currency transactions. Net realized foreign currency gains and losses resulting from the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received are reflected in dividend and interest income. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gain (loss) on investments. 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 accretion of discounts and amortization of 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 or excise 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 to differing treatment for net realized gains from foreign currency related transactions and certain distributions received from investments in real estate investment trusts. 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, 1997 1996 Shares sold 3,800,615 2,238,539 Shares redeemed (3,349,695) (2,509,938) Shares issued in reinvestment of dividends and distributions 1,079,325 568,144 Net increase 1,530,245 296,745
3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) for the year ended August 31, 1997 were $295,493,216 and $285,581,225, respectively. On August 31, 1997, the cost of investments for federal income tax purposes was $251,233,941, gross PAGE 16 KEYSTONE GROWTH AND INCOME FUND (S-1) unrealized appreciation of investments was $61,779,044 and gross unrealized depreciation of investments was $836,843, resulting in net unrealized appreciation of $60,942,201 for federal income tax purposes. 4. DISTRIBUTION PLAN Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as principal underwriter to the Fund. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone, served as the Fund's principal underwriter. The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940 Act. The Distribution plan permits the fund to reimburse its principal underwriter for costs related to selling shares of the fund and for various other services. These costs, which consist primarily of commissions and service fees to broker-dealers who sell shares of the fund, are paid by shareholders through expenses called "Distribution plan expenses". The Fund pays a service fee equal to 0.25% of its average daily net assets and a distribution fee equal to 0.75% of its average daily net assets. Distribution Plan expenses are calculated daily and paid monthly. With respect to the Fund's shares, the principal underwriter may incur distribution costs greater than the allowable annual amounts the Fund is permitted to pay. The Fund may reimburse the principal underwriter for such excess amounts in later years with annual interest at the prime rate plus 1.00%. 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, and subject to the discretion of the Independent Trustees, payments to EKD and/or EKIS may continue as compensation for services which had been earned while the Plan was in effect. EKD intends, but is not obligated, to continue to pay distribution costs that exceed the current annual payments from the Fund. EKD intends to seek full payment of such distribution costs from the Fund at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. Contingent deferred sales charges paid by redeeming shareholders may be paid to EKD or its predecessor. 5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS Under the terms of the investment advisory agreement dated December 11, 1996, 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 daily and paid monthly, 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. Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned subsidiary of Keystone, served as investment manager to the Fund and provided investment management and administrative services. Under the investment advisory agreement between KMI and Keystone, Keystone served as investment adviser and provided investment advisory and management services to the Fund. In return for its services, Keystone received an annual fee equal to 85% of the management fee received by KMI. During the year ended August 31, 1997, the Fund paid or accrued $44,985 to Keystone for certain accounting services. Additionally, Evergreen Keystone Services Company ("EKSC") (formerly Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend disbursing agent. Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate of EKD, began serving as the Fund's sub-administrator. As sub-administrator, BISYS provides the officers of the Fund. For this service, BISYS is paid a fee by Keystone, which is not a Fund expense. PAGE 17 Officers of the Fund 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. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. 7. DISTRIBUTIONS TO SHAREHOLDERS A dividend of $0.05 per share was declared on September 22, 1997 from net investment income. This dividend was payable on September 24, 1997 to shareholders of record at the close of business on September 22, 1997. This dividend is not reflected in these financial statements. PAGE 18 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, 1997, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period 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, 1997 by correspondence with the custodian and brokers. 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, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts September 26, 1997 PAGE 19 FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS (UNAUDITED) During the fiscal year ended August 31, 1997, The Fund paid distributions of $32,061,205. Included in these distributions are, $22,387,749 long-term capital gain distributions. The remaining $9,678,533 is taxable to shareholders as ordinary income in the year in which received by them or credited to their accounts. Of the ordinary income distributions, 42%, is eligible for the corporate dividends received deduction. The above figures may differ from those previously reported and 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 1998, we will send you complete information on the distributions paid during calendar year 1997 to help you in completing your federal tax return. KEYSTONE FAMILY OF FUNDS [Graphic appears here] Balanced Fund (K-1) Diversified Bond Fund (B-2) Growth and Income Fund (S-1) High Income Bond Fund (B-4) International Fund Inc. Precious Metals Holdings, Inc. Quality Bond Fund (B-1) Small Company Growth Fund (S-4) Strategic 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 Evergreen Keystone funds, contact your financial adviser or call Evergreen Keystone. NOT FDIC MAY LOSE VALUE INSURED NO BANK GUARANTEE EVERGREEN KEYSTONE DISTRIBUTOR, INC. Evergreen KeystoneSM is a Service Mark of Evergreen Keystone Investment Services, Inc. Copyright 1997. [Graphic appears here]
S1-R Rev 01 KEYSTONE (Photo Exists in Film ONLY. Will See on Dylux) GROWTH AND INCOME FUND (S-1) [Evergreen Keystone Funds logo appears here] ANNUAL REPORT AUGUST 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----