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