Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
Seeks growth of capital and income from a careful selection of seasoned
companies.
Dear Shareholder:
We are pleased to report on the activities of Keystone Growth and Income Fund
(S-1) for the Fund's fiscal year which ended August 31, 1995. At the
beginning of 1995, your Fund's investment strategy was revised to include
increased flexibility to invest in a broader range of established growth
companies. These strategic changes have not altered your Fund's investment
objective or Keystone's fundamental investment discipline.
Performance
Your fund returned 13.87% for the twelve-month period which ended August 31,
1995. For the same period, the Standard & Poor's 500, a broad-based index of
common stocks, returned 21.45%. We are particularly heartened by your Fund's
performance over the most recent six months. Your Fund returned 15.47% during
this period, nearly matching the results of the S&P 500 which returned
16.82%. The twelve-month return reflects both the new and old investment
strategies; the six-month return represents only the Fund's revised strategy.
We were encouraged by the early results from your Fund's modified
investment strategy. However, we believe the Fund's twelve-month returns were
restrained during the first six months of the fiscal year. During this
period, stock sectors quickly moved in and out of favor despite good
fundamentals and strong earnings for many companies. This was a difficult
environment for investors, and most investment managers underperformed the
broad market averages in 1994.
While we believe investors should not be unduly influenced by short-term
performance, we would like to acknowledge the improving trend of your Fund so
far in 1995.
The market favored established, high quality companies
When we last reported to you in February, the stock market had already begun
to climb. Investors, confident that the Federal Reserve Board's actions in
1994 to curb inflation were successful, had reentered the market. Although
small- to mid-size companies have recently experienced the strongest price
appreciation, the predominant beneficiaries of investors' renewed interest
were established, high quality U.S. corporations--the types of companies in
which the Fund primarily invests. These included a number of companies with
leadership positions in finance and consumer industries, as well as companies
with significant operations overseas.
More stocks from which to choose
Early in 1995, your Fund's investment universe was expanded to include a
wider variety of stocks. The Fund's main focus remains on selecting stocks of
well established, growing companies. However, the Fund now invests not just
in the largest companies in the S&P 500, but in companies in the entire S&P
500 and established medium-sized companies such as those in the S&P 400. In
addition, we expect to make greater use of the Fund's flexibility to invest
in foreign companies. Your Fund's new strategy actively considers established
foreign companies that we believe have many of the attractive characteristics
we seek in our U.S. holdings. While no strategy provides any guarantees, we
believe this new approach gives your Fund valuable flexibility and the
potential to provide superior returns over the long term.
(continued)
1
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
The stock selection process
In managing your Fund, we pursue a disciplined approach to investing that
begins with the setting of investment policy. This policy is based upon a
detailed evaluation of economic trends. Within this context, Keystone's
managers and analysts seek to invest in companies that it believes are
leaders in their industries. We seek companies that, in our opinion, have
strong growth records, good management, and solid financial bases. We also
evaluate other important indicators of long-term success that may affect an
individual company. We consistently strive to invest in a broad range of
industries to reduce price volatility and risk.
Patience and a long-term view
The stock market's exceptional rally during the first eight months of 1995 is
testimony to the dramatic turnarounds stocks can experience over a relatively
short period. As The Wall Street Journal reported in early July: "In only six
months, investors now have reaped a year and a half of gains, based on the
historical return on stocks of about 10% a year. The year to date
[performance of stocks] is vindication for investors who stuck to their guns
in dismal 1994, when stock funds lost money."(1) Indeed, the returns so far
in 1995 validate the importance of maintaining a long-term view when
investing in stocks and stock funds.
As we begin fiscal 1996, a period of moderate economic growth, low
inflation, and stable interest rates seems to await us. We think this
environment bodes well for stock investing. Of course, no guarantees can be
made and there exists the potential for a slowdown in the rate of corporate
profit and earnings growth. We will continue to adhere to our strict
investment discipline of searching for established companies that we believe
can provide your investment with attractive growth of capital and income.
We appreciate your continued support, and we encourage you to write to us
with any questions or comments about your Keystone investment.
Sincerely,
[signature-Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature-George S. Bissell]
George S. Bissell [picture] [picture]
Chairman of the Board
Keystone Funds Albert H. Elfner, III George S. Bissell
October 1995
(1) The Wall Street Journal, "Mutual Funds Quarterly Review", July 7, 1995.
2
<PAGE>
A Discussion With
Your Fund Manager
[picture of Judith A. Warners]
Keystone Growth and Income Fund (S-1) 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.
Q The Fund has provided shareholders with an attractive double digit return.
What were the contributing factors?
A We attribute the Fund's positive performance over the past twelve months
to a combination of factors. First, the general market environment grew
increasingly hospitable as the fiscal year progressed. The rising interest
rates and robust economic growth of 1994 were supplanted by declining
interest rates and much slower growth in 1995. With renewed confidence in the
possibility of an economic "soft landing", investors enthusiastically
reentered the stock market in 1995, pushing the broad market averages to
record highs.
Q How did the Fund perform?
A Fund performance was distinctly different during the first six months
compared to the last six months of the period. During the first half, the
uncertainties about the economy caused stock sectors to quickly move in and
out of favor despite strong earnings for many companies. We also held a
higher cash level to help cushion price volatility. As the environment
improved at the beginning of 1995, we became more fully invested, and Fund
performance accelerated strongly.
In addition to the market's about-face, the Fund underwent its own changes.
To enhance its performance potential, the Fund's investment strategy was
modified to allow for more flexibility in security selection. While
maintaining its original investment objective, we increased the Fund's
ability to invest in an expanded universe of companies (see "Your Fund
Invests In" on page 4). We believe this also contributed to the Fund's
improved performance during the twelve-month period.
Q The U.S. stock market has performed very well in 1995. Was the change in
the economic environment the only cause?
A The change in market dynamics certainly set the stage for this year's
spectacular rally. However, we believe greater productivity, increased
capital spending, and product innovation on the part of many U.S. companies
have renewed investors' faith and interest in the long-term growth potential
of U.S. stocks. After years of cost-cutting and restructuring, we believe the
United States, as a business enterprise, has regained its ominant position
globally. This, in turn, has fueled corporate profit growth and earnings
above analysts' expectations. Investors have simply begun to take notice.
- --------------------------------------------------------------------------------
Fund Profile
Objective: Seeks growth of capital and income from a careful selection of
seasoned companies.
Commencement of investment operations: September 11, 1935
Net assets: $199 million
Newspaper listing: GrIncS1
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series 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) Turnaround situations and undervalued stocks
(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
- --------------------------------------------------------------------------------
Q Do you have company names that exemplify this strategy?
A Certainly. Gillette, a consumer stock, is one example of a company that has
grown its business both at home and abroad. Highly focused on the consumer
market, Gillette's commitment to research and new product development has
enabled the company to introduce 20 new products in 1994 alone. A Fortune 500
company, Gillette enjoys a global market presence, generating roughly
two-thirds of its sales beyond U.S. borders.
American Express, another portfolio holding, is one of the U.S.'s largest
financial services companies. Still undergoing an extensive restructuring,
American Express is firming up its balance sheets with aggressive plans to
elevate its international financial services operations, reduce costs, and
improve productivity.
A final example, is Merck & Co., the world's largest pharmaceutical
company. The stock has benefited this past year from the fizzling out of
national healthcare reform, the company's ability to deliver innovative
products, and enhancements to its global operations.
Q Each of the companies you mentioned have targeted overseas markets for much
of their growth and profit potential. Is there a trend here?
A We believe so. Many of the world's nations, industrialized and emerging,
are experiencing varying degrees of economic expansion. And, as the global
economy continues to grow, companies that can adapt and develop a dominant
market presence should do well. Whether a company is a multinational or a
domestic firm, we believe its financial health and earnings growth potential
will increasingly rely on its ability to provide competitive services and
products to markets around the world. We believe our stock selection criteria
complement this emerging trend.
Q Has there been a shift in the portfolio's industry weightings since last
August?
A We've been capitalizing on the wave of restructuring, consolidations, and
mergers within the financial services industry. The Fund's finance holdings
comprised about 13% of net assets at the end of the period. A concerted
effort to minimize overhead and maximize profit potential has enabled many
regional banks and larger financial powerhouses to generate tremendous cash
flows, which, in turn, are being used to buy back shares or acquire other
banks. Merger and acquisition
Top 5 Industries
as of August 31, 1995
Percentage of
Industry net assets
Finance 12.5
Telecommunications 8.6
Capital goods 8.1
Software services 6.1
Oil 5.3
4
<PAGE>
activity seems to be a growing trend in various industries--an area we expect
to take advantage of as appropriate opportunities arise.
The capital goods industries have continued to be an emphasis for us. These
are companies involved in the raw materials, construction, industrial and
manufacturing industries. With the combination of the Federal Reserve Board
taking pressure off interest rates, expansion of world economies, and
infrastructure building in emerging countries, we believe many U.S.
industrial companies that have emerged successfully from restructuring and
have further room to grow. We think John Deere and General Electric, are good
examples.
In the first quarter of 1995 we increased the Fund's weighting in technology
stocks, and continued to increase the Fund's weighting as we identified
attractive opportunities. Overall, technology has rallied quite a bit in
1995. We tapped into that growth potential by investing in Hewlett-Packard
and Microsoft as well as selected medium-sized companies. At roughly a $4
billion market capitalization, Informix Corporation, a database management
software developer, is one new addition to the portfolio.
Q What is your outlook?
A It appears we may be in the midst of a "soft landing," an environment of
moderate economic growth, stable-to-declining interest rates, and low
inflation. We think this scenario, along with the potential for spending cuts
and tax-cut initiatives in Washington, should combine to have a positive
influence on the stock market over the next six to twelve months.
Top 10 Holdings
as of August 31 , 1995
Percentage of
Stock Industry net assets
General Electric Capital goods 2.4
Microsoft Software services 2.2
BankAmerica Finance 2.1
Time Warner Advertising & publishing 2.1
Xerox Office & business equipment 2.1
Norwest Finance 2.0
GTE Telecommunications 2.0
McDonald's Restaurants 1.8
Thermo Electron Capital goods 1.8
Intel Electronics products 1.7
While there exists speculation about the continued strength of corporate
profit growth in the face of a slowing economy, we remain optimistic about
the growth potential of U.S. companies and, in particular, the earnings
growth rates of the companies we have chosen for the Fund's portfolio. We
base our stock selection on a company's fundamental outlook--the health of
its finances, the competitiveness of its products and services, and its
ability to grow its business over the long term. We believe this investment
strategy should serve the Fund well in the months ahead.
[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, Inc.,
Attn: Manager, Shareholder Communications,
22nd Floor, 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
5
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
Your Fund's Performance
Growth of an investment in
Keystone Growth and Income Fund (S-1)
In Thousands
Initial Reinvested
Investment Distributions
8/85 10000 10000
8/86 12537 13453
8/87 13387 18134
8/88 9307 13682
8/89 12207 18469
8/90 11288 17626
8/91 12350 22001
8/92 11391 22085
8/93 12498 25245
8/94 11411 25063
8/95 11298 28539
A $10,000 investment in Keystone Growth and Income Fund (S-1)
made on August 31, 1985 with all distributions reinvested was
worth $28,539 on August 31, 1995. Past performance is no
guarantee of future results.
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.
for font download only
Twelve-Month Performance as of August 31, 1995
Total return* 13.87%
Net asset value 8/31/94 $23.21
8/31/95 $22.98
Dividends $ 0.36
Capital gains $ 2.78
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of August 31, 1995
If you If you did
Cumulative total return redeemed not redeem
1-year 10.90% 13.87%
5-year 61.91% 61.91%
10-year 185.39% 185.39%
Average annual total return
1-year 10.90% 13.87%
5-year 10.12% 10.12%
10-year 11.06% 11.06%
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.
6
<PAGE>
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.
August 31, 1985 through August 31, 1995
In Thousands
S&P
Fund 500 CPI
8/85 10000 10000 10000
8/86 13453 13873 10157
8/87 18134 18627 10593
8/88 13682 15280 11019
8/89 18469 21192 11537
8/90 17626 20102 12185
8/91 22001 25500 12648
8/92 22085 27542 13046
8/93 25245 31730 13407
8/94 25063 33467 13796
8/95 28539 40647 14120
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 at least one year. Consumer Price Index is
through July 31, 1995.
Average Annual Total Returns
1 Year 5 Year 10 Year
10.90% 10.12% 11.06%
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 income from a careful selection of
seasoned companies. 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
7
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
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 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.
8
<PAGE>
SCHEDULE OF INVESTMENTS--August 31, 1995
Market
Shares Value
========================================================
COMMON STOCKS (95.9%)
ADVERTISING & PUBLISHING (2.6%)
Time Warner, Inc. 100,000 $ 4,212,500
Viacom, Inc. (a) 20,000 972,500
- --------------------------------------------------------
5,185,000
- --------------------------------------------------------
AEROSPACE (1.9%)
Boeing Co. (The) 32,000 2,040,000
Loral Corp. 35,000 1,916,250
- --------------------------------------------------------
3,956,250
- --------------------------------------------------------
AMUSEMENTS (0.5%)
Disney (Walt) Co. 19,500 1,094,437
- --------------------------------------------------------
AUTOMOTIVE (4.8%)
Chrysler Corp. 50,000 2,693,750
Ford Motor Co. 46,200 1,414,875
General Motors Corp. 46,810 2,200,070
Goodyear Tire & Rubber Co. 44,000 1,760,000
Volvo AB, ADR, Class B 75,400 1,512,712
- --------------------------------------------------------
9,581,407
- --------------------------------------------------------
BUILDING MATERIALS (1.0%)
Pulte Corp. 75,000 2,025,000
- --------------------------------------------------------
CAPITAL GOODS (8.1%)
Caterpillar, Inc. 32,000 2,148,000
Deere & Co. 26,000 2,223,000
Emerson Electric Co. 48,300 3,447,412
General Electric Co. 80,200 4,721,775
Thermo Electron Corp. (a) 82,750 3,568,594
- --------------------------------------------------------
16,108,781
- --------------------------------------------------------
CHEMICALS (3.4%)
Dow Chemical Co. 28,500 2,109,000
Potash Corp. of Saskatchewan,
Inc. 30,000 1,706,250
PPG Industries, Inc. 70,000 2,992,500
- --------------------------------------------------------
6,807,750
- --------------------------------------------------------
CONSUMER GOODS (3.0%)
CUC International, Inc. (a) 75,000 2,559,375
Eastman Kodak Co. 25,000 1,440,625
Gillette Co. 30,000 1,252,500
Melville Corp. 25,000 834,375
- --------------------------------------------------------
6,086,875
- --------------------------------------------------------
DIVERSIFIED COMPANIES (1.0%)
AlliedSignal, Inc. 45,600 2,023,500
- --------------------------------------------------------
DRUGS (3.2%)
Abbott Laboratories 31,500 $ 1,220,625
Amgen, Inc. (a) 2,000 95,875
Johnson & Johnson 20,000 1,380,000
Merck & Co., Inc. 42,500 2,119,687
Schering-Plough Corp. 32,000 1,492,000
- --------------------------------------------------------
6,308,187
- --------------------------------------------------------
ELECTRONICS PRODUCTS (4.2%)
Applied Materials, Inc. (a) 15,000 1,563,750
Intel Corp. 56,200 3,452,787
KLA Instruments Corp. (a) 15,000 1,278,750
Texas Instruments, Inc. 28,400 2,126,450
- --------------------------------------------------------
8,421,737
- --------------------------------------------------------
FINANCE (12.5%)
American Express Co. 53,000 2,139,875
Bank of Boston Corp. 77,000 3,388,000
BankAmerica Corp. 75,000 4,237,500
Beacon Properties, REIT 50,000 1,075,000
Camden Property Trust, REIT 45,000 984,375
Citicorp 21,000 1,393,875
Fleet Financial Group, Inc. 60,000 2,220,000
MBNA Corp. 51,500 1,828,250
Merrill Lynch & Co., Inc. 40,000 2,305,000
Norwest Corp. 135,000 4,066,875
Oasis Residential, Inc., REIT 42,000 950,250
- --------------------------------------------------------
24,589,000
- --------------------------------------------------------
FOODS (4.8%)
Coca-Cola Co. 13,500 867,375
ConAgra, Inc. 59,000 2,234,625
CPC International, Inc. 40,600 2,552,725
Philip Morris Cos., Inc. 25,900 1,932,788
Sara Lee Corp. 74,000 2,053,500
- --------------------------------------------------------
9,641,013
- --------------------------------------------------------
HEALTHCARE SERVICES (1.2%)
Columbia / HCA Healthcare
Corp. 45,000 2,115,000
Medtronic, Inc. 3,000 283,125
- --------------------------------------------------------
2,398,125
- --------------------------------------------------------
INSURANCE (4.5%)
Allstate Corp. 40,974 1,387,994
American General Corp. 64,000 2,256,000
American International Group,
Inc. 37,875 3,053,672
PMI Group, Inc. 50,000 2,225,000
- --------------------------------------------------------
8,922,666
- --------------------------------------------------------
See Notes to Financial Statements. (continued on next page)
9
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
SCHEDULE OF INVESTMENTS--August 31, 1995
Market
Shares Value
========================================================
METALS & MINING (1.0%)
Aluminum Company of America 8,000 $ 457,000
Phelps Dodge Corp. 25,000 1,584,375
- --------------------------------------------------------
2,041,375
- --------------------------------------------------------
NATURAL GAS (1.2%)
Anadarko Petroleum Corp. 50,000 2,387,500
- --------------------------------------------------------
OFFICE & BUSINESS
EQUIPMENT (4.9%)
Hewlett-Packard Co. 33,500 2,680,000
IBM Corp. 27,800 2,873,825
Xerox Corp. 34,000 4,105,500
- --------------------------------------------------------
9,659,325
- --------------------------------------------------------
OIL (5.3%)
Amoco Corp. 27,120 1,728,900
Exxon Corp. 30,000 2,062,500
Mobil Corp. 11,100 1,057,275
Occidental Petroleum Corp. 65,000 1,413,750
Royal Dutch Petroleum Co. 8,500 1,013,625
Unocal Corp. 113,000 3,291,125
- --------------------------------------------------------
10,567,175
- --------------------------------------------------------
OIL SERVICES (2.1%)
Schlumberger, Ltd. 50,805 3,276,923
Tidewater, Inc. 40,000 990,000
- --------------------------------------------------------
4,266,923
- --------------------------------------------------------
PAPER & PACKAGING (1.4%)
Bowater, Inc. 15,000 716,250
Georgia-Pacific Corp. 23,000 2,070,000
- --------------------------------------------------------
2,786,250
- --------------------------------------------------------
RESTAURANTS (1.8%)
McDonald's Corp. 99,572 3,634,378
- --------------------------------------------------------
RETAIL (3.6%)
Home Depot, Inc. 43,500 1,734,563
Office Depot, Inc. (a) 31,500 980,438
Sears, Roebuck and Co. 44,200 1,430,975
Tandy Corp. 21,000 1,304,625
Wal-Mart Stores, Inc. 70,000 1,723,750
- --------------------------------------------------------
7,174,351
- --------------------------------------------------------
SERVICES (2.0%)
Browning Ferris Industries,
Inc. 60,000 2,017,500
Loewen Group, Inc. 50,000 1,918,750
- --------------------------------------------------------
3,936,250
- --------------------------------------------------------
SOFTWARE SERVICES (6.1%)
BMC Software, Inc. (a) 45,000 $ 1,912,500
Computer Sciences Corp. (a) 20,000 1,205,000
Informix Corp. (a) 55,000 1,529,687
Microsoft Corp. (a) 47,000 4,344,563
Novell, Inc. (a) 43,500 785,719
Oracle Systems Corp. (a) 55,000 2,203,438
- --------------------------------------------------------
11,980,907
- --------------------------------------------------------
TELECOMMUNICATIONS (8.6%)
Airtouch Communications (a) 58,500 1,901,250
AT&T Corp. 25,200 1,423,800
Bell South Corp. 44,000 3,025,000
Cabletron Systems, Inc. (a) 58,000 3,066,750
GTE Corp. 106,400 3,896,900
Motorola, Inc. 30,600 2,287,350
SBC Communications, Inc. 30,000 1,518,750
- --------------------------------------------------------
17,119,800
- --------------------------------------------------------
UTILITIES (1.2%)
Central & South West Corp. 101,000 2,474,500
- --------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$163,891,728) 191,178,462
========================================================
PREFERRED STOCKS (2.4%)
Insurance (1.4%)
AllState Corp. 30,000 1,215,000
American General Del LLC,
Series A 30,000 1,590,000
- --------------------------------------------------------
2,805,000
- --------------------------------------------------------
TELECOMMUNICATIONS (0.4%)
Sprint Corp. 25,000 846,875
- --------------------------------------------------------
TRANSPORTATION (0.6%)
Burlington Northern, Inc.,
Conv., Series A 16,200 1,190,700
- --------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost--$4,209,563) 4,842,575
========================================================
See Notes to Schedule of Investments.
10
<PAGE>
SCHEDULE OF INVESTMENTS--August 31, 1995
Maturity Market
Value Value
============================================================
SHORT-TERM INVESTMENTS (3.5%)
Investments in repurchase
agreements, in a joint
trading account purchased
08/31/95, 5.82%, maturing
09/01/95 $6,966,126 $ 6,965,000
- ------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$6,965,000) 6,965,000
============================================================
TOTAL INVESTMENTS
(Cost--$175,066,291) (b) 202,986,037
- ------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--
NET (-1.8%) (3,529,910)
- ------------------------------------------------------------
NET ASSETS (100%) $199,456,127
============================================================
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing security.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at August 31, 1995.
(c) The cost of investments for federal income tax purposes amounted to
$175,099,274. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at August 31, 1995 are as
follows:
Gross unrealized appreciation $28,746,533
Gross unrealized depreciation (859,770)
----------
Net unrealized appreciation $27,886,763
----------
Legend of Portfolio Abbreviations:
ADR--American Depository Receipts
REIT--Real Estate Investment Trust
See Notes to Financial Statements.
11
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of
year $ 23.21 $ 25.42 $ 23.17 $ 25.12 $ 22.97 $ 24.82 $ 18.93 $ 27.23 $ 25.49 $ 20.34
- ------------------------------------------------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income 0.25 0.16 0.11 0.15 0.19 0.22 0.32 0.46 0.18 0.46
Net gain (loss)
on investments 2.66 (0.35) 3.11 (0.11) 4.72 (1.29) 6.16 (6.77) 6.50 6.34
Net commissions
paid on fund
share sales (a) 0 0 0 0 0 0 0 0 0 (0.23)
- -------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 2.91 (0.19) 3.22 0.04 4.91 (1.07) 6.48 (6.31) 6.68 6.57
- -------------------------------------------------------------------------------------------------------------------------------
Less
distributions
from:
Net investment
income (0.25) (0.23) (0.11) (0.15) (0.26) (0.65) (0.59) (0.46) (0.42) (0.48)
In excess of net
investment
income (0.11) (0.05) (0.17) (0.17) (0.25) (0.09) 0 0 0 0
Net realized
gain on
investments (2.78) (1.74) (0.69) (1.67) (2.25) (0.04) 0 (1.53) (4.52) (0.94)
- -------------------------------------------------------------------------------------------------------------------------------
Total
distributions (3.14) (2.02) (0.97) (1.99) (2.76) (0.78) (0.59) (1.99) (4.94) (1.42)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value
end of year $ 22.98 $ 23.21 $ 25.42 $ 3.17 $ 25.12 $ 22.97 $ 24.82 $ 18.93 $ 27.23 $ 25.49
- -------------------------------------------------------------------------------------------------------------------------------
Total return (b) 13.87% (0.72%) 14.31% 0.38% 24.82% (4.56%) 34.99% (24.55%) .80% 34.53%
Ratios/supplemental
data
Ratios to
average net
assets:
Total expenses 1.75% 2.07% 2.28% 2.08% 2.33% 2.35% 2.05% 1.77% 2.21% 1.12%
Net investment
income 1.09% 0.67% 0.47% 0.61% 0.93% .36% 2.16% 2.28% 0.88% 2.04%
Portfolio turnover
rate 115% 73% 96% 95% 64% 47% 44% 82% 71% 106%
- -------------------------------------------------------------------------------------------------------------------------------
Net assets end
of year
(thousands) $199,456 $208,532 $234,688 $204,004 $176,985 $154,124 $187,696 $195,375 $261,804 $117,625
===============================================================================================================================
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges. On June 11,
1987, the Securities and Exchange Commission adopted a rule which
required for financial statements for periods ended on or after June 30,
1987, that net commissions paid under Rule 12b-1 be treated as operating
expenses rather than capital charges. Accordingly, beginning with the
year fiscal ended August 31, 1987, the Fund's financial statements
reflect 12b-1 Distribution Plan expenses (i.e., shareholder service fees
plus commissions paid net of deferred sales charges received by the Fund)
as a component of net investment income.
(b) Excluding applicable sales charges.
See Notes to Financial Statements.
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
====================================================================
Assets (Note 1):
Investments at market value
(identified cost--$175,066,291) $202,986,037
Cash 851
Receivable for:
Fund shares sold 25,777
Dividends and interest 563,091
Foreign tax reclaim 2,653
Other assets 19,569
- --------------------------------------------------------------------
Total assets 203,597,978
- --------------------------------------------------------------------
Liabilities (Note 4):
Payable for:
Investments purchased 1,614,215
Fund shares redeemed 99,490
Capital gains distribution 2,339,033
Accrued reimbursable expenses 6,465
Other accrued expenses 82,648
- --------------------------------------------------------------------
Total liabilities 4,141,851
- --------------------------------------------------------------------
Net assets $199,456,127
====================================================================
Net assets represented by (Note 1):
Paid-in capital $162,262,131
Undistributed net investment income 3,637,729
Accumulated net realized gain (loss) on
investments 5,636,521
Net unrealized appreciation (depreciation) on
investments 27,919,746
- --------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($22.98 per
share on 8,677,778 shares outstanding) $199,456,127
====================================================================
STATEMENT OF OPERATIONS
Year Ended August 31, 1995
====================================================================
Investment income (Note 1):
Dividends (net of withholding taxes
of $7,504) $ 4,613,927
Interest 932,756
- --------------------------------------------------------------------
Total income 5,546,683
- --------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $1,318,897
Transfer agent fees 694,072
Accounting, auditing and legal 51,563
Custodian fees 90,738
Printing 18,091
Trustees' fees and expenses 36,505
Distribution Plan expenses 1,142,220
Registration fees 43,479
Miscellaneous expenses 18,739
- --------------------------------------------------------------------
Total expenses 3,414,304
- --------------------------------------------------------------------
Net investment income 2,132,379
- --------------------------------------------------------------------
Net realized gain (loss) on
investments sold (Notes 1 and 3): 21,450,785
Net change in unrealized appreciation
(depreciation) on investments 1,448,539
- --------------------------------------------------------------------
Net gain (loss) on investments 22,899,324
- --------------------------------------------------------------------
Net increase in net assets resulting
from operations $25,031,703
====================================================================
See Notes to Financial Statements.
13
<PAGE>
Keystone Growth and Income Fund (S-1)
(formerly Keystone Custodian Fund, Series S-1)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended August 31,
1995 1994
======================================================================================================
<S> <C> <C>
Operations:
Net investment income $ 2,132,379 $ 1,465,913
Net realized gain (loss) on investments 21,450,785 14,911,716
Net change in unrealized appreciation
(depreciation) on investments 1,448,539 (18,264,585)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 25,031,703 (1,886,956)
- ------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Notes 1 and 5):
Net investment income (2,132,379) (2,132,697)
In excess of net investment income (998,558) (427,099)
Net realized gain on investments (23,335,489) (15,848,242)
- ------------------------------------------------------------------------------------------------------
Total distributions to shareholders (26,466,426) (18,408,038)
- ------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold 24,297,348 28,162,081
Payment for shares redeemed (54,390,106) (49,724,383)
Net asset value of shares issued in reinvestment of
dividends and distributions 22,451,463 15,701,675
- ------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from
capital share transactions (7,641,295) (5,860,627)
- ------------------------------------------------------------------------------------------------------
Total decrease in net assets (9,076,018) (26,155,621)
- ------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 208,532,145 234,687,766
- ------------------------------------------------------------------------------------------------------
End of year [including undistributed net investment income as
follows: 1995--$3,637,729 and 1994--$1,181,883] (Note 1) $199,456,127 $208,532,145
======================================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Growth and Income Fund (S-1) (formerly known as Keystone Custodian
Fund, Series S-1), (the "Fund") is a common law trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly known as Keystone Custodian Funds, Inc.)
("Keystone") is the Investment Adviser. The Fund is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly known as Keystone Group, Inc.) ("KII"), a Delaware corporation. KII
is privately owned by an investor group consisting of current and former
members of management of Keystone. Keystone Investor Resource Center, Inc.
("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
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.
A. Investments are usually valued at the closing sales price, or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair under the direction of the Board of Trustees:
(a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value
or if no sale occurred. Short-term investments maturing in sixty days or less
are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Short-term investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Short-term investments maturing in more than
sixty days when purchased which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which when
combined with accrued interest, approximates market. Short-term investments
denominated in a foreign currency are adjusted daily to reflect changes in
exchange rates. Market quotations are not considered to be readily available
for long-term corporate bonds and notes; such investments are stated at fair
value on the basis of valuations furnished by a pricing service, approved by
the Trustees, which determines valuations for normal institutional-size
trading units of such securities using methods based on market transactions
for comparable securities and various relationships between securities which
are generally recognized by institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income.
15
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
(formerly Keystone Custodian Fund, Series S-1)
Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily
rate of exchange, purchase and sales of investment, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign currency exchange gains/losses are a component of
unrealized appreciation/depreciation of investments.
B. Securities transactions are accounted for on the day after the trade date.
Realized gains and losses are recorded on the identified cost basis. Interest
income is recorded on the accrual basis and dividend income is recorded on
the ex-dividend date. All original issue discounts are amortized for both
financial reporting and federal income tax purposes. Distributions to
shareholders are recorded at the close of business on the ex-dividend date.
C. 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 ("Internal Revenue Code"). Thus, the Fund expects to be 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 Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of the collateral
on a daily basis, and if the value of the collateral falls below required
levels, the Fund intends to seek additional collateral from the seller or
terminate the repurchase agreement. If the seller defaults, the Fund would
suffer a loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, Keystone Growth and Income Fund (S-1), 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 collateralized by U.S. Treasury and/or Federal Agency obligations.
E. The Fund distributes net investment income to shareholders quarterly and
net capital gains, if any, annually. Distributions are determined in
accordance with income tax regulations. The significant differences between
financial statement amounts available for distribution and distributions made
in accordance with income tax regulations are primarily due to differing
treatment of 12b-1 expenses prior to April 1995 and short-term capital gains.
(2.) Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest with
16
<PAGE>
a par value of $1.00. Transactions in shares of the Fund were as follows:
Year Ended August 31,
1995 1994
- ----------------------------------------------------------
Shares sold 1,107,879 1,188,692
Shares redeemed (2,449,356) (2,108,660)
Shares issued in
reinvestment of
dividends and
distributions 1,033,621 673,248
- ----------------------------------------------------------
Net decrease (307,856) (246,720)
==========================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Co. (formerly known as Keystone Distributors, Inc.) ("KIDC"),
the principal underwriter and a wholly-owned subsidiary of Keystone, amounts
which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays brokers or others a commission equal to 4.00% of the
price paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent fund shares purchased prior to January 1, 1992 are redeemed
within four calendar years of original issuance, the Fund may be eligible to
receive a deferred sales charge from the investor as partial reimbursement
for sales commissions previously paid on those shares. This charge is based
on declining rates, which begin at 4.00%, applied to the lesser of the net
asset value of shares redeemed or the total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar quarter (approximately 1.25% annually)
occurring after the inception of the Distribution Plan. A rule of the
National Association of Securities Dealers, Inc. ("NASD Rule") limits the
annual expenditures which the Fund may incur under the Distribution Plan to
1.00% of which 0.75% may be used to pay such distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD Rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of gross sales since the inception of the Fund's 12b-1 Distribution Plan,
plus interest at the prime rate plus 1.00% on unpaid amounts thereof (less
any contingent deferred sales charges paid by the shareholders to KIDC).
Since July 8, 1992, contingent deferred sales charges applicable to shares
of the Fund issued after January 1, 1992 have, to the extent permitted by
NASD rule, been paid to KIDC rather than to the Fund.
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus 1.00%) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC since January 1, 1992.
17
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
(formerly Keystone Custodian Fund, Series S-1)
During the year ended August 31, 1995, the Fund paid KIDC $1,267,118 under
the Distribution Plan. The amount paid by the Fund under its Distribution
Plan, net of deferred sales charge, was $1,142,220 (0.58% of the Fund's
average daily net assets). During the period, KIDC received $284,519 after
payments of commissions on new sales and service fees to dealers and others
of $982,599.
(3.) Securities Transactions
For the year ended August 31, 1995, purchases and sales of investment
securities (including proceeds received at maturity) were as follows:
Cost of Proceeds
Purchases from Sales
- ----------------------------------------------------------
Portfolio securities $ 207,116,556 $ 223,922,785
Short-term investments 3,573,851,775 3,582,837,384
- ----------------------------------------------------------
$3,780,968,331 $3,806,760,169
==========================================================
(4.) Investment Management and Transactions with Affiliates
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. The
management fee is calculated by applying percentage rates, starting at 0.70%
and declining as net assets increase to 0.35% per annum, to the 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 and receives for its services an annual fee representing
85% of the management fee received by KMI.
During the year ended August 31, 1995, the Fund paid or accrued to KMI
investment management and administrative services fees of $1,318,897 which
represented 0.68% of the Fund's average daily net asset value during the
year. Of such amount paid to KMI, $1,121,062 was paid to Keystone for its
services to the Fund.
During the year ended August 31, 1995, the Fund paid or accrued $30,194 to
KII as reimbursement for certain accounting services. The Fund paid or
accrued $694,072 to KIRC for transfer agent services.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.05 per share was declared
payable by October 5, 1995 to shareholders of record September 25, 1995. This
distribution is not reflected in the accompanying financial statements.
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)
During the fiscal year ended August 31, 1995, distributions of $3.14 per
share were paid in shares or cash. This total includes a taxable long-term
capital gain distributions of $2.78 per share. The remaining $0.36 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 1996, we will send you complete information on the
distributions paid during the calendar year 1995 to help you in completing
your federal tax return.
18
<PAGE>
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)(formerly Keystone Custodian Fund,
Series S-1), including the schedule of investments, as of August 31, 1995 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, 1995 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, 1995, 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 29, 1995
19
<PAGE>
[Back Cover]
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
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Exempt Trust
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 at 1-800-343-2898.
[Keystone Logo] KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
GAI-AR-10/95 "Recycled" symbol
17M
<PAGE>
[Front Cover]
KEYSTONE
[Photo: Man holding little child]
GROWTH AND
INCOME FUND (S-1)
[Keystone Logo]
ANNUAL REPORT
AUGUST 31, 1995
