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>
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>
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>
PAGE 4
KEYSTONE GROWTH AND INCOME FUND (S-1)
TOP 10 STOCK HOLDINGS
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
COMPANY NET ASSETS
<S> <C>
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%
</TABLE>
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>
PAGE 5
TOP 5 INDUSTRIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
% OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare Products & Services 10.8%
Finance & Insurance 10.8%
Banks 8.3%
Oil 6.6%
Telecommunications Services & Equipment 6.4%
</TABLE>
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>
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.
<TABLE>
<CAPTION>
HISTORICAL RECORD
CUMULATIVE TOTAL RETURN
<S> <C>
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%
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- 94.5%
<S> <C> <C> <C>
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
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
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
</TABLE>
<PAGE>
PAGE 8
KEYSTONE GROWTH AND INCOME FUND (S-1)
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
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
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
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
<CAPTION>
CONVERTIBLE PREFERRED-- 1.7%
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
RIGHTS-- 0.0% (B)
<S> <C> <C> <C>
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
</TABLE>
* 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>
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:
<TABLE>
<CAPTION>
MARKET PERCENTAGE OF
COUNTRY VALUE NET ASSETS
<S> <C> <C>
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%
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(a) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE GROWTH AND INCOME FUND (S-1)
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
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>
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:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
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
</TABLE>
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>
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>
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>
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>
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.
<PAGE>
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.
<TABLE>
<C> <S>
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]
</TABLE>
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
