PAGE 1
- -------------------
Keystone Growth and Income Fund (S-1)
Seeks growth of capital and income from a careful selection of seasoned
companies.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Growth and
Income Fund (S-1) for the six-month period which ended February 29, 1996.
Performance
Your Fund returned 14.09% for the six-month period and 31.74% for the
twelve-month period. The Standard & Poor's 500 Index (S&P 500), an unmanaged
index of common stocks, returned 15.31% for the six-month period and 34.70%
for the twelve-month period. We believe your Fund's strong performance was
the result of our careful selection of established companies with attractive
earnings growth rates and an excellent market environment.
Large-Caps Led The Stock Market Rally
For most of the period, several positive economic factors contributed to an
attractive environment for stocks. Economic growth continued to slow,
interest rates declined and inflation remained under control. In addition,
corporate earnings were generally strong. In this environment, stock prices
across the board produced attractive returns, with stocks of well established
companies generating the best gains. Toward the end of the period, the market
environment changed. Higher interest rates and concerns about the short-term
prospects for corporate earnings caused stock prices to fluctuate broadly.
Despite the temporary pullback in stock prices at the end of the period, we
believe high quality U.S. corporations continued to benefit from a relatively
stable domestic economy and increased demand for goods and services around
the world. After years of cost cutting and restructuring, many large U.S.
corporations--like the ones in which your Fund invests--have achieved
dominant positions in the global economy. Their stature as leaders has fueled
earnings growth and boosted stock prices.
In selecting stocks for your Fund, we emphasized well established companies
with the following attributes: attractive earnings growth, high quality
management, solid finances, and market leadership. This strategy resulted in
an emphasis on a variety of industries, including the capital goods, drugs,
foods, and finance and insurance sectors.
Our Outlook
We are optimistic about the economy and the stock market over the long term.
We expect moderate economic growth, low inflation and positive corporate
earnings. This should be favorable for stocks of established companies in
which your Fund primarily invests. However, in the short term we are
expecting some market unevenness as investors attempt to judge the strength
of the economy.
Investors have already witnessed some stock price fluctuations since the
close of the period. We believe this is a temporary condition in view of the
continued positive fundamentals we anticipate for stocks. We are not
expecting a repeat of 1995's strong performance. However, we think selected
established companies that have solid earnings histories have the potential
to perform well in this environment. We will attempt to identify and invest
in these companies for your Fund.
(continued)
<PAGE>
PAGE 2
- -------------------
Keystone Growth and Income Fund (S-1)
Thank you for your continued confidence in Keystone Growth and Income Fund
(S-1). As always, we welcome your comments and letters.
Sincerely,
[signature and picture of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature and picture of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
April 1996
Dalbar
Honors Commitment to:
Investors
1995
Dalbar Key Honors
Honoring Commitment to Excellence
Keystone was recently recognized by Dalbar, an independent mutual fund rating
organization, for demonstrating a commitment to serving the needs of
customers. The award is intended to distinguish companies who are committed
to investors and have a proven ability to provide good service.
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear senior portfolio
manager Walter McCormick discuss his latest strategy and outlook for Keystone
equity funds. You can also listen to Keystone's overall market outlook from
James McCall, chief investment officer. The service is available 24 hours a
day, seven days a week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
Keystone Equity Funds Update Press 6
<PAGE>
PAGE 3
- -------------------
A Discussion With
Your Fund's Manager
[picture of Judith A. Warners]
Judith A. Warners is portfolio manager of Keystone Growth and Income Fund
(S-1). A member of the Security Analyst Society, Ms. Warners has over 14
years of investment management experience. She holds a BA from Curry College
and an MBA from Babson College. Together with Keystone's core equity team
headed by Walter McCormick, senior portfolio manager, they select stocks of
established companies for your Fund.
Q. How did the economic environment affect the stock market during the
six-month period?
A. Positive economic fundamentals had a favorable effect on stocks overall.
Slower economic growth, declining interest rates, moderate inflation, and
solid corporate profits all contributed to strong performance for stocks.
However, toward the end of the period, an increase in long-term interest
rates and concerns that corporate earnings might slow, triggered a decline in
stock prices. The pullback in stock prices was a short term event, and we
believe it was a normal part of the investment cycle.
Q. How did stocks of established companies perform?
A. Well established, large growth companies with records of consistent
earnings led the rise in stock prices. These companies benefitted from
positive economic growth in both developed and emerging countries. Most of
the Fund's holdings have a significant foreign component to their businesses
and are dominant suppliers of goods and services to markets around the world.
Q. How did the Fund perform?
A. We were very pleased with the Fund's performance. At the beginning of
1995, we modified the Fund's strategy to invest in a broader range of stocks
including stocks in the Standard and Poor's 500 Index and the Standard &
Poor's 400 Mid Cap Index. We also reduced the number of portfolio holdings to
create a more focused portfolio. We believe this more flexible strategy has
helped the Fund achieve impressive returns in a relatively short period of
time.
Q. How did you manage the Fund during the period?
A. We emphasized large, well established companies with the following
characteristics: stable or accelerating earnings growth, solid balance
sheets, high quality management, and market leadership. This approach
resulted in selected investments in capital goods, foods, drugs, and finance
and insurance, and other areas.
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: $231 million
Newspaper listing: "GrIncS1"
<PAGE>
PAGE 4
- -------------------
Keystone Growth and Income Fund (S-1)
Your Fund Invests In
[bullet] Established companies with attractive earnings growth
[bullet] Companies with experienced management, a dominant market position
and solid balance sheets
[bullet] 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. What were some of these companies?
A. In the capital goods sector, we invested in Foster Wheeler, a company that
supplies boiler engines to industrial plants. As countries in Europe and Asia
rebuild their infrastructure, orders for Foster Wheeler's products have
increased. Deere & Company is an example of a company that is benefitting
from a favorable agricultural cycle in the U.S. and from the export of grain
and finished products overseas. Because U.S. farmers are planting more
acreage and exporting more products to countries that are upgrading their
living standards, Deere has experienced greater demand for its products.
Q. At 15% of net assets, financial and insurance companies were the largest
weighting in the Fund. Why was this sector attractive?
A. The financial component of the portfolio includes large banks, brokerages,
insurance companies and Real Estate Investment Trusts (REITs). Restructuring
initiatives, industry consolidation, and lower interest rates contributed to
the strong performance of businesses in these sectors.
Allstate Insurance Company, a property and casualty insurer, is a good
example of what we look for in a financial company. Allstate has streamlined
its business and has become more efficient in its day-to-day operations. In
addition, declining interest rates have been positive for Allstate, because
lower rates generally have boosted the value of the company's investment
portfolios.
Q. Foreign stocks were a new addition to the portfolio. What is your criteria
for investing in foreign stocks?
A. Foreign stocks accounted for 6.5% of net assets at the end of the period.
We look for the same characteristics in foreign companies that we seek in
domestic businesses: large, well established companies, high quality
management, solid finances, and good product lines. We found these elements
in selected Japanese companies, such as Mitsubishi Electronics, Toyota, and
Victor of Japan, a consumer electronics company. These companies are large
exporters and have benefitted from a stronger U.S. dollar and a weaker yen. A
weaker yen makes Japanese products less expensive. In addition, after several
years of struggle, we believe the Japanese economy is turning around. We
believed selected foreign stocks had the potential to provide attractive
returns and diversification to the Fund.
Top 5 Industries
as of February 29, 1996
Percentage of
Industry net assets
Finance 9.2
Capital goods 7.9
Drugs 7.1
Foods 6.3
Insurance 6.0
<PAGE>
PAGE 5
- -------------------
Q. What is your outlook?
A. We have a positive outlook for the stock market. We expect moderate
economic growth and low inflation, with interest rates staying in a narrow
range. However, we are not expecting a repeat of 1995's returns and think
investors should expect increased price volatility in 1996. In this
environment, we believe earnings growth rates for large company stocks should
be positive and this should help stock prices. We have focused the Fund's
investments on high quality companies, and we believe these companies have
the potential to generate attractive returns over the long term.
Top 10 Holdings
as of February 29, 1996 Percentage of
Stock Industry net assets
General Electric Capital goods 2.6
Microsoft Software services 2.2
Exxon Oil 1.9
CUC International Consumer goods 1.8
Walt Disney Amusements 1.7
Amgen Drugs 1.7
Estee Lauder Consumer goods 1.7
Merrill Lynch Finance 1.6
BankAmerica Finance 1.6
GTE Telecommunications 1.6
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: Shareholder Communications,
22nd Floor, 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
- -------------------
Keystone Growth and Income Fund (S-1)
Your Fund's Performance
Growth of an investment in
Keystone Growth and Income Fund (S-1)
Initial Reinvested
Investment Distributions
2/86 10000 10000
2/87 9807 12376
2/88 8470 11572
2/89 8817 12413
2/90 10060 14624
2/91 9931 16490
2/92 10399 18856
2/93 10214 19302
2/94 10107 20758
2/95 9194 20274
2/96 10484 26709
A $10,000 investment in Keystone Growth and Income Fund (S-1)
made on February 28, 1986 with all distributions reinvested was worth
$26,709 on February 29, 1996. Past performance is no guarantee of
future results.
Six-Month Performance as of February 29, 1996
Total return* 14.09%
Net asset value 8/31/95 $22.98
2/29/96 $24.46
Dividends $ 0.10
Capital gains $ 1.54
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of February 29, 1996
If you If you did
Cumulative total return redeemed not redeem
1-year 28.74% 31.74%
5-year 61.97% 61.97%
10-year 167.09% 167.09%
Average annual total return
1-year 28.74% 31.74%
5-year 10.13% 10.13%
10-year 10.32% 10.32%
The one-year return reflects the deduction of the 3% contingent deferred
sales charge for those investors who sold Fund shares after one calendar
year. Investors who retained their fund investment received the one-year
return reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares to another Keystone fund for a $10 fee by
contacting Keystone directly. The exchange fee is waived for individual
investors who make an exchange using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 7
- -------------------
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 8
- -------------------
Keystone Growth and Income Fund (S-1)
SCHEDULE OF INVESTMENTS--February 29, 1996
Market
Shares Value
- -------------------------------------------------------------
COMMON STOCKS (91.8%)
ADVERTISING & PUBLISHING (0.5%)
Dun & Bradstreet Corp. 17,500 $ 1,106,875
- -------------------------------------------------------------
AEROSPACE (1.4%)
Boeing Co. (The) 40,000 3,245,000
- -------------------------------------------------------------
AMUSEMENTS (1.7%)
Disney (Walt) Co. 59,500 3,897,250
- -------------------------------------------------------------
AUTOMOTIVE (4.3%)
Chrysler Corp. 50,000 2,818,750
General Motors Corp. 46,810 2,399,013
Lear Seating Corp. (a) 75,000 2,390,625
Toyota Motor Corp. 100,000 2,159,950
Volvo AB, ADR, Class B 4,400 93,775
- -------------------------------------------------------------
9,862,113
- -------------------------------------------------------------
BUILDING MATERIALS (1.0%)
Pulte Corp. 75,000 2,240,625
- -------------------------------------------------------------
CAPITAL GOODS (7.9%)
Deere & Co. 78,000 3,051,750
Emerson Electric Co. 36,300 2,826,863
Foster Wheeler Corp. 75,000 3,300,000
General Electric Co. 80,200 6,055,100
Thermo Electron Corp. (a) 55,000 3,011,250
- -------------------------------------------------------------
18,244,963
- -------------------------------------------------------------
CHEMICALS (1.0%)
Potash Corp. of Saskatchewan, Inc. 20,000 1,485,000
Union Carbide Corp. 20,000 900,000
- -------------------------------------------------------------
2,385,000
- -------------------------------------------------------------
CONSUMER GOODS (5.1%)
CUC International, Inc. (a) 125,000 4,046,875
Gillette Co. 30,000 1,623,750
Lauder Estee Cos, Inc. 103,900 3,805,338
Victor Company of Japan 180,000 2,209,429
- -------------------------------------------------------------
11,685,392
- -------------------------------------------------------------
DIVERSIFIED COMPANIES (1.1%)
AlliedSignal, Inc. 60,000 3,337,500
- -------------------------------------------------------------
DRUGS (7.1%)
Amgen, Inc. (a) 65,000 3,879,688
Johnson & Johnson 28,300 2,646,050
Lilly Eli & Co. 37,500 2,268,750
Merck & Co., Inc. 41,250 2,732,813
DRUGS (continued)
Schering-Plough Corp. 45,000 $ 2,525,625
SmithKline Beecham PLC 40,000 2,190,000
- -------------------------------------------------------------
16,242,926
- -------------------------------------------------------------
ELECTRONICS PRODUCTS (1.0%)
Mitsubishi Electronics CP 325,000 2,381,178
- -------------------------------------------------------------
FINANCE (9.2%)
American Express Co. 27,000 1,242,000
Bank of Boston Corp. 42,300 2,056,838
BankAmerica Corp. 52,000 3,705,000
Beacon Properties, REIT 102,400 2,688,000
Camden Property Trust, REIT 45,000 1,063,125
MBNA Corp. 87,000 2,457,750
Merrill Lynch & Co., Inc. 65,000 3,745,625
Norwest Corp. 75,000 2,737,500
Patriot Amer Hospitality, Inc., REIT 50,000 1,418,750
- -------------------------------------------------------------
21,114,588
- -------------------------------------------------------------
FOODS (6.3%)
Coca-Cola Co. 36,000 2,907,000
ConAgra, Inc. 59,000 2,485,375
CPC International, Inc. 40,600 2,811,550
Philip Morris Cos., Inc. 34,000 3,366,000
Sara Lee Corp. 89,000 2,881,375
- -------------------------------------------------------------
14,451,300
- -------------------------------------------------------------
HEALTHCARE SERVICES (3.6%)
Columbia/HCA Healthcare Corp. 60,000 3,285,000
Medtronic, Inc. 46,000 2,639,250
St. Jude Medical, Inc. (a) 62,600 2,347,500
- -------------------------------------------------------------
8,271,750
- -------------------------------------------------------------
INSURANCE (6.0%)
Allstate Corp. 70,000 3,001,250
American International Group, Inc. 20,000 1,932,500
GCR Hldgs., Inc. 150,000 3,543,750
PMI Group, Inc. 65,000 2,973,750
Progressive Corp. Ohio 50,000 2,300,000
- -------------------------------------------------------------
13,751,250
- -------------------------------------------------------------
METALS & MINING (2.3%)
Aluminum Company of America 28,800 1,634,400
Phelps Dodge Corp. 40,000 2,445,000
USX US Steel 35,000 1,146,250
- -------------------------------------------------------------
5,225,650
- -------------------------------------------------------------
<PAGE>
PAGE 9
- -------------------
NATURAL GAS (2.2%)
Anadarko Petroleum Corp. 40,000 $ 2,180,000
Louisiana Land & Exploration Co. 70,000 2,922,500
- -------------------------------------------------------------
5,102,500
- -------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (3.9%)
Compaq Computer Corp. (a) 60,000 3,037,500
Hewlett Packard Co. 33,500 3,375,125
Xerox Corp. 19,000 2,474,750
- -------------------------------------------------------------
8,887,375
- -------------------------------------------------------------
OIL (4.9%)
Amoco Corp. 27,120 1,884,840
Exxon Corp. 55,000 4,372,500
Mobil Corp. 21,100 2,313,088
Occidental Petroleum Corp. 65,000 1,495,000
Royal Dutch Petroleum Co. 8,500 1,170,875
- -------------------------------------------------------------
11,236,303
- -------------------------------------------------------------
OIL SERVICES (1.6%)
Schlumberger, Ltd. 50,805 3,702,414
- -------------------------------------------------------------
RESTAURANTS (1.0%)
McDonald's Corp. 43,500 2,175,000
- -------------------------------------------------------------
RETAIL (3.3%)
Federated Department Stores, Inc.
Del (a) 66,000 1,996,500
Gap, Inc. 22,000 1,179,750
Sears, Roebuck and Co. 79,000 3,584,625
Wal-Mart Stores, Inc. 43,000 913,750
- -------------------------------------------------------------
7,674,625
- -------------------------------------------------------------
SOFTWARE SERVICES (3.8%)
BMC Software, Inc. (a) 30,000 1,676,250
Microsoft Corp. (a) 50,400 4,973,850
System Software Associates, Inc. 100,000 2,112,500
- -------------------------------------------------------------
8,762,600
- -------------------------------------------------------------
TELECOMMUNICATIONS (4.3%)
AT&T Corp. 50,000 3,181,250
Bell South Corp. 50,000 1,993,750
GTE Corp. 86,400 3,704,400
SBC Communications, Inc. 20,000 1,097,500
- -------------------------------------------------------------
9,976,900
- -------------------------------------------------------------
TRANSPORTATION (1.5%)
Burlington Northern Santa Fe 17,234 $ 1,378,722
Canadian National Railway Co. 120,000 2,070,000
- -------------------------------------------------------------
3,448,722
- -------------------------------------------------------------
UTILITIES (5.8%)
Allegheny Power Systems, Inc. 45,000 1,310,625
Carolina Power & Light Co. 42,000 1,533,000
Central & South West Corp. 101,000 2,802,750
Dominion Res., Inc. VA 35,500 1,402,250
Duke Power Co. 37,000 1,808,375
Florida Progress Corp. 35,000 1,238,125
Pinnacle West Capital Corp. 59,000 1,674,125
Scana Corp. 60,000 1,650,000
- -------------------------------------------------------------
13,419,250
- -------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$177,159,121) 211,829,049
- -------------------------------------------------------------
PREFERRED STOCKS (0.4%)
TELECOMMUNICATIONS (0.4%)
Sprint Corp. 25,000 990,625
- -------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost--$818,144) 990,625
- -------------------------------------------------------------
Par
Value
- -------------------------------------------------------------
FIXED INCOME (1.3%)
CONVERTIBLE BONDS (1.3%)
OFFICE EQUIPMENT
Solectron Corp., Notes, 6.000%, 2006 $1,000,000 1,025,000
- -------------------------------------------------------------
TELECOMMUNICATIONS (0.9%)
Telecommunications International,
Inc., Sub. Debentures, 4.500%,
2006 2,000,000 1,990,000
- -------------------------------------------------------------
TOTAL FIXED INCOME
(Cost--$3,020,000) 3,015,000
- -------------------------------------------------------------
<PAGE>
PAGE 10
- -------------------
Keystone Growth and Income Fund (S-1)
Maturity Market
Value Value
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENTS (4.3%)
Investments in repurchase agreements, in a
joint trading account purchased 02/29/96,
5.415%, maturing 03/01/96. $9,911,491 $ 9,910,000
- -----------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$9,910,000) (b) 9,910,000
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$190,907,265) 225,744,674
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (2.2%) 4,919,421
- -----------------------------------------------------------------------
NET ASSETS (100%) $230,664,094
- -----------------------------------------------------------------------
(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 February 29, 1996.
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
REIT--Real Estate Investment Trust
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Exchange U.S. Value at In Exchange Appreciation/
Date February 29, 1996 for U.S. $ Depreciation
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Forward Foreign Currency Exchange Contracts to Sell
Contracts to Deliver
-------------------------------------------------
2/15/96 354,715,200 Japanese Yen $3,410,966 $3,400,000 ($10,966)
--------
Net Unrealized Depreciation on Forward Foreign Currency Exchange Contracts ($10,966)
========
</TABLE>
<PAGE>
PAGE 11
- -------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended August 31,
Ended ---------------------------------------------------
February 29, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $ 22.98 $ 23.21 $ 25.42 $ 23.17 $ 25.12 $ 22.97
- ------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.01 0.25 0.16 0.11 0.15 0.19
Net gain (loss) on
investments and foreign
currency related
transactions 3.11 2.66 (0.35) 3.11 (0.11) 4.72
- ------------------------------------------------------------------------------------------------------
Total from investment
operations 3.12 2.91 (0.19) 3.22 0.04 4.91
- ------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.03) (0.25) (0.23) (0.11) (0.15) (0.26)
In excess of net
investment income (0.07) (0.11) (0.05) (0.17) (0.17) (0.25)
Net realized gain on
investments (1.54) (2.78) (1.74) (0.69) (1.67) (2.25)
- ------------------------------------------------------------------------------------------------------
Total distributions (1.64) (3.14) (2.02) (0.97) (1.99) (2.76)
- ------------------------------------------------------------------------------------------------------
Net asset value end of
period $ 24.46 $ 22.98 $ 23.21 $ 25.42 $ 23.17 $ 25.12
- ------------------------------------------------------------------------------------------------------
Total return (a) 14.09% 13.87% -0.72% 14.31% 0.38% 24.82%
Ratios/supplemental data
Ratios to average net
assets:
Total Expenses 1.98%(b) 1.75% 2.07% 2.28% 2.08% 2.33%
Net investment income 0.28% 1.09% 0.67% 0.47% 0.61% 0.93%
Portfolio turnover rate 71% 115% 73% 96% 95% 64%
Average commission rate
paid $ 0.0649 N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $230,664 $199,456 $208,532 $234,688 $204,004 $176,985
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) "Ratio of total expenses to average net assets" for the six months ended
February 29, 1996 includes indirectly paid expenses. Excluding directly
paid expenses for the six months ended February 29, 1996, the expense
ratio would have been 1.97%.
<PAGE>
PAGE 12
- -------------------
Keystone Growth and Income Fund (S-1)
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996
- ----------------------------------------------------------
Assets (Note 1)
Investments at market value
(identified cost--$190,907,265) $225,744,674
Cash 983
Receivable for:
Investments sold 7,142,187
Fund shares sold 286,354
Dividends and interest 514,391
Other assets 19,493
- ----------------------------------------------------------
Total assets 233,708,082
- ----------------------------------------------------------
Liabilities (Note 4)
Payable for:
Investments purchased 2,940,010
Fund shares redeemed 40,467
Net unrealized depreciation on forward
foreign currency exchange contracts 10,966
Accrued reimbursable expenses 8,667
Other accrued expenses 43,878
- ----------------------------------------------------------
Total liabilities 3,043,988
- ----------------------------------------------------------
Net assets $230,664,094
- ----------------------------------------------------------
Net assets represented by (Note 1)
Paid-in capital $179,721,904
Undistributed net investment income 3,072,356
Accumulated net realized gain (loss) on
investments 13,043,391
Net unrealized appreciation on investments 34,837,409
Net unrealized depreciation on foreign
currency related transactions (10,966)
- ----------------------------------------------------------
Total net assets applicable to
outstanding shares of beneficial
interest ($24.46 per share on
9,431,668 shares outstanding) $230,664,094
- ----------------------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended February 29, 1996
- ----------------------------------------------------------------------
Investment income (Note 1)
Dividends (net of withholding taxes
of $5,748) $ 2,212,250
Interest 225,688
- ----------------------------------------------------------------------
Total income 2,437,938
- ----------------------------------------------------------------------
Expenses (Notes 2 and 4)
Management fee $ 719,325
Transfer agent fees 289,751
Accounting, auditing and legal 23,901
Custodian fees 61,938
Printing 16,752
Distribution Plan expenses 1,019,799
Registration fees 12,126
Miscellaneous expenses 2,771
- ----------------------------------------------------------------------
Total expenses 2,146,363
Less: Expenses paid indirectly
(Note 4) (12,639)
- ----------------------------------------------------------------------
Net expenses 2,133,724
- ----------------------------------------------------------------------
Net investment income 304,214
- ----------------------------------------------------------------------
Net realized gain (loss) on investments
sold (Notes 1 and 3) 20,881,121
- ----------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 6,917,663
Foreign currency related transactions (10,966)
- ----------------------------------------------------------------------
Net change in unrealized appreciation on
investments 6,906,697
- ----------------------------------------------------------------------
Net gain (loss) on investments 27,787,818
- ----------------------------------------------------------------------
Net increase in net assets resulting from
operations $28,092,032
- ----------------------------------------------------------------------
<PAGE>
PAGE 13
- -------------------
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
February 29, 1996 August 31, 1996
- -------------------------------------------------------------------------------
Operations
Net investment income $ 304,214 $ 2,132,379
Net realized gain (loss) on investments 20,881,121 21,450,785
Net change in unrealized appreciation on
investments 6,906,697 1,448,539
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 28,092,032 25,031,703
- -------------------------------------------------------------------------------
Distributions to shareholders from (Notes 1
and 5)
Net investment income (304,214) (2,132,379)
In excess of net investment income (565,373) (998,558)
Net realized gain on investments (13,474,251) (23,335,489)
- -------------------------------------------------------------------------------
Total distributions to shareholders (14,343,838) (26,466,426)
- -------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold 30,293,088 24,297,348
Payment for shares redeemed (25,150,366) (54,390,106)
Net asset value of shares issued in
reinvestment of dividends and
distributions 12,317,051 22,451,463
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
capital share transactions 17,459,773 (7,641,295)
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets 31,207,967 (9,076,018)
- -------------------------------------------------------------------------------
Net assets:
Beginning of period 199,456,127 208,532,145
- -------------------------------------------------------------------------------
End of period [including undistributed net
investment income as follows:
1996--$3,072,356 and 1995--$3,637,729]
(Note 1) $230,664,094 $199,456,127
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -------------------
Keystone Growth and Income Fund (S-1)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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.
The Fund's objective is to provide shareholders with the best possible growth
of capital and long-term growth of income.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
known as Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
predominantly owned by current and former members of management of Keystone
and its affiliates. KMI is a wholly-owned subsidiary 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
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 relative to the
net assets of the Fund.
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. 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
<PAGE>
PAGE 15
- -------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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.
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. In addition to the
market risk, the Fund is subject to credit risk that the other party will not
be able to complete the obligations of the contract.
B. Securities transactions are accounted for no later than one business 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. Distributions to
shareholders are recorded by the Fund 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, 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, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury and/or Federal Agency obligations.
<PAGE>
PAGE 16
- -------------------
Keystone Growth and Income Fund (S-1)
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. Distributions from taxable net
investment income and net capital gains can exceed book basis net income and
net capital gains. 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 gain distributions.
(2.) Capital Share Transactions
The Trust agreement 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:
Six Months Ended Year Ended
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------
Sales 1,267,802 1,107,879
Redemptions (1,052,798) (2,449,356)
Reinvestment of dividends
and distributions 538,886 1,033,621
- ------------------------------------------------------------------------
Net increase (decrease) 753,890 (307,856)
- ------------------------------------------------------------------------
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.) ("KIDCO"), 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 KIDCO in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDCO 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
maintained by such recipients and outstanding on the books of the Fund for
specified periods.
The Distribution Plan provides that the Fund may expend up to 0.3125%
quarterly (approximately 1.25% annually) of the Fund's average daily net
assets to pay distribution costs for sale of its shares and to pay
shareholder service fees. A Rule adopted by the National Association of
Securities Dealers, Inc. ("NASD") limits the annual expenditures that the
Fund may incur under the Distribution Plan to 1.00% of the Fund's average
daily net asset value of which 0.75% may be used to pay such distribution
costs 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 share sales since the inception of the Fund's
Distribution Plan, plus interest at the prime rate plus 1.00% per annum on
unpaid amounts thereof (less any contingent deferred sales charges paid by
the shareholders to KIDCO) remaining unpaid from time to time.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and services which exceed annual maximum payments
permitted to be received by KIDCO from the Fund. KIDCO intends to seek full
payment of such amounts from the Fund (together with annual interest thereon
at the prime
<PAGE>
PAGE 17
- -------------------
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. KIDCO currently
intends to seek payment of interest only on such amounts paid or accrued by
KIDCO since January 1, 1992.
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 KIDCO rather than to the Fund.
During the six months ended February 29, 1996, the Fund recovered $15,617 in
deferred sales charges. During the six months ended February 29, 1996, the
Fund paid KIDCO $1,035,416 under the Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of deferred sales charges, was
$1,019,799 (0.47% of the Fund's average daily net asset value during the six
month period). During the six months ended February 29, 1996, KIDCO received
$287,606 after payments of commissions on new sales to dealers and others of
$747,810. Under the NASD rule, the maximum uncollected amount for which KIDCO
may seek payment from the Fund under its Distribution Plan is $83,940 (0.04%
of the Fund's assets at January 31, 1996).
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the six months ended February 29, 1996 were
$146,454,695 and $154,439,842, respectively.
(4.) Investment Management Agreement and Other 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 six months ended February 29, 1996, the Fund paid or accrued to
KMI investment management and administrative services fees of $719,325 which
represent 0.66% of the Fund's average daily net asset value during the
period. Of such amount paid to KMI, $611,426 was paid to Keystone for its
services to the Fund.
During the six months ended February 29, 1996, the Fund paid or accrued to
KII and KIRC $8,667 for certain accounting and printing services and $289,751
for transfer agent services.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended February 29, 1996, the Fund paid custody fees in the
amount of $49,299 and received a credit of $12,639 pursuant to the expense
offset arrangement, resulting in a total expense of $61,938. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in an income-producing asset.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.05 per share was declared
payable by April 4, 1996 to shareholders of record March 25, 1996. This
distribution is not reflected in the accompanying financial statements.
<PAGE>
PAGE 18
- -------------------
Keystone Growth and Income Fund (S-1)
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<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 Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
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 Keystone funds, contact
your financial adviser or call Keystone.
[KEYSTONE INVESTMENTS LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
GAI-SAR-4/96 ["Recycle" symbol]
17.1M
[FRONT COVER]
K E Y S T O N E
[Photo: Autumn leaves]
GROWTH AND
INCOME FUND (S-1)
[KEYSTONE LOGO]
SEMIANNUAL REPORT
FEBRUARY 29, 1996
