Keystone Mid-Cap Growth Fund (S-3)
Seeks capital appreciation from a diversified portfolio of growth-oriented
companies.
Dear Shareholder:
We are writing to you to report on the activities of Keystone Mid-Cap Growth
Fund (S-3) for the six-month period which ended February 29, 1996.
Performance
Your Fund returned 8.39% for the six-month period and 33.20% for the
twelve-month period. The Standard & Poor's 400 MidCap Index (S&P 400), an
unmanaged index of common stocks, returned 8.97% for the six-month period and
29.17% for the twelve-month period. Among its peers, your Fund's one-year
returns slightly outperformed the Lipper Mid-Cap Stock Index of 32.48% for
the same period. We believe your Fund's strong performance was the result of
our careful selection of companies with attractive earnings growth rates and
an excellent market environment.
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, prices of
mid-cap stocks generated solid 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.
We believe your Fund benefitted from our thorough research and our careful
selection of mid-cap stocks. We invested primarily in medium-sized (mid-cap)
stocks with market capitalizations from $750 million to $3 billion. We
concentrated on businesses in growing or changing industries that we believed
had the following characteristics: accelerating earnings growth rates,
innovative or leading products and services, strong finances, and superior
management. This strategy resulted in an emphasis on a variety of industries,
including the healthcare, technology and finance 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 mid-cap stocks. 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
continued positive fundamentals we anticipate for stocks. We are not
expecting a repeat of 1995's strong performance. However, we think many
medium-sized companies have the flexibility to adapt quickly to a changing
market and business environment. By emphasizing companies with strong
earnings growth, we believe that the mid-cap stocks in which your Fund
invests should provide attractive returns.
--continued--
1
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
Thank you for your continued confidence in Keystone Mid-Cap Growth Fund
(S-3). As always, we welcome your comments and letters.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
April 1996
[photo of Albert H. Elfner, III]
Albert H. Elfner, III
[photo of George S. Bissell]
George S. Bissell
[Dalbar logo]
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 Walter McCormick, head
of Keystone's core equity team, 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
2
<PAGE>
A Discussion With
Your Fund's Manager
[photo Margery C. Parker]
Margery C. Parker is portfolio manager of Keystone Mid-Cap
Growth Fund (S-3). Ms. Parker has more than 15 years of
investment management experience. She holds a BA from Wellesley
College and an MBA from Babson College. Together with senior
portfolio manager Maureen Cullinane, head of Keystone's growth
stock group, they select mid-cap stocks 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 the Fund perform?
A We are very pleased with the Fund's performance. For the twelve-month
period which ended February 29, 1996, the Fund outperformed its benchmark,
the Standard & Poor's 400 MidCap Index. At the beginning of 1995, we modified
the Fund's strategy to improve flexibility and increase the focus of the
portfolio. We believe this revised strategy 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 well managed companies with market capitalizations primarily
between $750 million and $3 billion. We selected companies that we believed
had the following characteristics: the potential to grow at least 20%,
superior management, solid balance sheets, and market leadership. This
approach resulted in selected investments in technology, healthcare, finance,
and other areas.
Q Technology stocks were an important contributor to performance during the
period. In what types of technology companies did you invest?
A Technology stocks overall provided excellent performance to investors in
1995. At the end of the period, about 17% of net assets were invested in
technology stocks. In September 1995 we had been emphasizing commodity
technology companies--such as computer chip makers. As the period progressed,
we began to shift the portfolio's emphasis toward content companies, or
companies that provide value added software products. We continue to believe
that technology companies should grow, contributing positively to Fund
performance.
Q Were there any new themes in the portfolio?
A We increased the drug and healthcare sectors from 5% of net assets on
August 31, 1995 to 17% by Feb-
Fund Profile
Objective: Seeks capital appreciation from a diversified portfolio of
growth-oriented companies.
Commencement of investment operations: September 11, 1935
Net assets: $304 million
Newspaper listing: "MidCapS3"
3
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
Your Fund Invests In
(bullet) Dynamic companies with earnings growth rates of 20% or more
(bullet) Companies with strong management, a leading market position and
solid balance sheets
(bullet) Primarily medium-sized companies, with market capitalizations
between $750 million and $3 billion
(bullet) U.S. stocks and stocks of established foreign companies
ruary 29, 1996. Our holdings in these areas included biotechnology companies,
medical device firms, and medical services businesses.
In the biotechnology area, we invested in companies that were close to
receiving approval from the Food & Drug Administration (FDA) to market new
drugs. We look for companies that are developing important new drugs which
address unmet needs in the medical field. One company that met our criteria
for investment was Gilead Sciences. Gilead has developed a compound that
could have widespread applications in combatting viral diseases. If this
formulation is approved by the FDA as we expect, the company should be able
to develop other formulations for approval. In Gilead's case, relatively
modest profits from the first compound could lead to approval of several
other more profitable compounds.
Q What were some of the medical device and medical services companies in
which you invested?
A In the medical device sector, Boston Scientific continued to contribute to
your Fund's performance. As a developer of medical instrumentation, Boston
Scientific is particularly prominent in the cardiovascular area. The company
has been acquiring medical device companies and broadening its product lines.
IDEXX Laboratories, a company that sells medical instruments to veterinarians
has done extremely well. IDEXX has been expanding internationally and has had
a consistent 35% growth rate. We also added Medaphis, a medical services
company, to the portfolio.
Mediphis provides administrative services to physicians. In an effort to
increase its productivity, Medaphis
Top 5 Industries
as of February 29, 1996
Percent of
Industry net assets
Healthcare services 9.4
Business services 9.2
Software services 9.2
Finance* 8.5
Drugs 7.1
* Includes common and preferred stock
has consolidated some of its operations, established cost cutting procedures,
and is making greater use of computer technology.
Q You also focused on financial companies. Why were these attractive?
A On February 29, 1996, finance stocks accounted for 8.5% of net assets.
Financial companies benefitted from the decline in interest rates and the
trend toward consolidation in the building industry. The Fund's largest
holding in the financial area was TCF Financial, a midwestern bank. TCF
offers its customers a variety of products and services, including checking
accounts, mortgages, and investment products. The bank has been expanding its
geographic boundaries. We also invested in Bank of Boston. Recently, Bank of
Boston purchased Bay Bank, and we believe when the sale is finalized, Bank of
Boston's expanded business opportunities could increase its earnings growth
rate.
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 mid-cap companies should be
positive and this should help stock prices. We also believe that our careful
selection of mid-cap stocks and the portfolio's focused approach should
result in attractive returns for shareholders.
4
<PAGE>
Growth of an Investment
**************************[mountain chart]***********************************
Growth of an investment in
Keystone Mid-Cap Growth Fund (S-3)
$ In Thousands
Initial Reinvested
Investment Distributions
2/86 10000 10000
2/87 9834 12489
2/88 7277 11252
2/89 7952 12553
2/90 8680 14087
2/91 8909 15941
2/92 10156 19805
2/93 9647 20318
2/94 10000 22544
2/95 8732 21717
2/96 9366 28927
A $10,000 investment in Keystone Mid-Cap Growth Fund (S-3)
made on February 28, 1986 with all distributions reinvested
was worth $28,927 on February 29, 1996. Past performance
is no guarantee of future results.
*******************************************************************************
Top 10 Holdings
as of February 29, 1996
Percentage of
Company Industry net assets
BMC Software Software services 2.4
EMC Office and business equipment 2.4
TCF Financial Finance 2.2
CUC International Consumer goods 2.2
America Online Software services 2.2
Gilead Sciences Drugs 2.2
Standard Federal Bancorp Finance 2.1
Thermo Electron Business services 2.0
Fastenal Building materials 2.0
Medaphis Healthcare services 1.9
Six-Month Performance as of February 29, 1996
Total return* 8.39%
Net asset value 8/31/95 $ 9.22
2/29/96 $ 9.01
Dividends None
Capital gains $ 0.92
* 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 30.20% 33.20%
5-year 81.46% 81.46%
10-year 189.27% 189.27%
Average annual total return
1-year 30.20% 33.20%
5-year 12.66% 12.66%
10-year 11.21% 11.21%
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.
5
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
SCHEDULE OF INVESTMENTS--February 29, 1996
(Unaudited)
Market
Shares Value
- ----------------------------------- ---------- ------------
COMMON STOCKS (94.0%)
ADVERTISING & PUBLISHING (1.8%)
Clear Channel Communications,
Inc. (a) 108,800 $ 5,508,000
- ----------------------------------- -------- ----------
AEROSPACE (0.4%)
Rohr Industries, Inc. (a) 69,500 1,251,000
- ----------------------------------- -------- ----------
AIR TRANSPORTATION (0.6%)
America West Airlines, Inc., Class
B (a) 83,600 1,724,250
- ----------------------------------- -------- ----------
AMUSEMENTS (3.1%)
Harrahs Entertainment, Inc. (a) 150,000 4,068,750
La Quinta Inns, Inc. 200,000 5,400,000
- ----------------------------------- -------- ----------
9,468,750
- ------------------------------------------------- ----------
AUTOMOTIVE (3.5%)
Danaher Corp. 140,000 4,760,000
Lear Seating Corp. (a) 175,000 5,578,125
Volvo Atkiebolagct, ADR, Class B 9,700 206,731
- ----------------------------------- -------- ----------
10,544,856
- ------------------------------------------------- ----------
BUILDING MATERIALS (3.0%)
Fastenal Co. 164,100 5,917,856
Oakwood Homes Corp. 72,900 3,253,163
- ----------------------------------- -------- ----------
9,171,019
- ------------------------------------------------- ----------
BUSINESS SERVICES (9.2%)
G & K Services, Class A 200,500 5,313,250
Molten Metal Technology,
Inc. (a) 149,900 5,396,400
Thermo Electron Corp. 108,900 5,962,275
US Filter Corp. (a) 200,000 5,650,000
USA Waste Services, Inc. (a) 260,000 5,557,500
- ----------------------------------- -------- ----------
27,879,425
- ------------------------------------------------- ----------
CAPITAL GOODS (2.1%)
AGCO Corp. 131,000 3,553,375
Industrie Natuzzi SPA 58,300 2,915,000
- ----------------------------------- -------- ----------
6,468,375
- ------------------------------------------------- ----------
CHEMICALS (2.1%)
Potash Corp. of Saskatchewan, Inc. 39,600 $ 2,940,300
Praxair, Inc. 100,000 3,450,000
- ----------------------------------- -------- ----------
6,390,300
- ------------------------------------------------- ----------
CONSUMER GOODS (5.9%)
CUC International, Inc. (a) 206,800 6,695,150
Estee Lauder Cos., Inc. (The) 155,400 5,691,525
Mohawk Industries, Inc. (a) 190,700 2,705,556
Players International, Inc. (a) 274,700 2,708,370
- ----------------------------------- -------- ----------
17,800,601
- ------------------------------------------------- ----------
DRUGS (7.1%)
Amgen, Inc. (a) 80,000 4,775,000
Amylin Pharmaceuticals,
Inc. (a) 300,000 3,337,500
Centocor, Inc. (a) 78,600 2,284,313
Genzyme Corp. (a) 24,300 1,679,738
Gilead Sciences, Inc. (a) 183,900 6,574,425
Magainin Pharmaceuticals,
Inc. (a) 225,000 2,896,875
- ----------------------------------- -------- ----------
21,547,851
- ------------------------------------------------- ----------
ELECTRONICS PRODUCTS (4.6%)
Altera Corp. (a) 72,400 4,737,675
Analog Devices, Inc. (a) 150,000 4,031,250
Maxim Integrated Products, Inc. (a) 146,900 5,334,306
- ----------------------------------- -------- ----------
14,103,231
- ------------------------------------------------- ----------
FINANCE (7.7%)
Bank of Boston Corp. 119,600 5,815,550
Standard Federal Bancorp.,
Inc. 155,000 6,413,125
TCF Financial Corp. 179,300 6,746,163
Washington Mutual, Inc. 150,000 4,518,750
- ----------------------------------- -------- ----------
23,493,588
- ------------------------------------------------- ----------
FOODS (0.4%)
PanAmerican Beverages, Inc. 27,900 1,129,950
- ----------------------------------- -------- ----------
6
<PAGE>
SCHEDULE OF INVESTMENTS--February 29, 1996
(Unaudited)
Market
Shares Value
- ----------------------------------- ---------- ------------
HEALTHCARE SERVICES (9.4%)
Boston Scientific Corp. (a) 115,000 $ 5,520,000
Heartstream, Inc. (a) 140,300 2,104,500
IDEXX Laboratories, Inc. (a) 116,500 5,577,438
Lifecore Biomedical, Inc. (a) 185,000 3,353,125
Medaphis Corp. (a) 150,000 5,859,375
St. Jude Medical, Inc. (a) 83,500 3,131,250
Ventritex, Inc. (a) 170,000 3,070,625
- ----------------------------------- -------- ----------
28,616,313
- ------------------------------------------------- ----------
INSURANCE (4.0%)
Ace, Ltd. 60,000 2,805,000
American Re Corp. 110,000 4,221,250
Progressive Corp. 110,000 5,060,000
- ----------------------------------- -------- ----------
12,086,250
- ------------------------------------------------- ----------
NATURAL GAS (2.5%)
Anadarko Petroleum Corp. 56,400 3,073,800
Louisiana Land & Exploration Co. 105,000 4,383,750
- ----------------------------------- -------- ----------
7,457,550
- ------------------------------------------------- ----------
OFFICE & BUSINESS EQUIPMENT (4.0%)
EMC Corp. (a) 325,000 7,150,000
Synopsys, Inc. (a) 150,000 4,950,000
- ----------------------------------- -------- ----------
12,100,000
- ------------------------------------------------- ----------
RESTAURANTS (0.3%)
The Cheesecake Factory (a) 36,400 900,900
- ----------------------------------- -------- ----------
RETAIL (3.7%)
Nautica Enterprises, Inc. (a) 80,900 3,327,013
Mossimo, Inc. (a) 26,700 654,150
Petsmart, Inc. (a) 60,300 2,102,963
Staples, Inc. (a) 202,500 5,252,344
- ----------------------------------- -------- ----------
11,336,470
- ------------------------------------------------- ----------
SOFTWARE SERVICES (9.2%)
America Online, Inc. (a) 135,000 $ 6,657,188
BMC Software, Inc. (a) 130,000 7,263,750
Cognex Corp. (a) 210,000 4,777,500
Parametric Technology Corp. (a) 65,000 4,834,375
System Software Association, Inc.
(a) 202,500 4,277,813
- ----------------------------------- -------- ----------
27,810,626
- ------------------------------------------------- ----------
TELECOMMUNICATIONS (2.8%)
NewBridge Networks Corp. (a) 75,000 3,665,625
Winstar Communications, Inc. (a) 279,700 4,719,938
- ----------------------------------- -------- ----------
8,385,563
- ----------------------------------- -------- ----------
UTILITIES (6.6%)
Allegheny Power Systems, Inc. 120,000 3,495,000
Boston Edison Co. 140,000 3,867,500
Cinergy Corp. 93,861 2,804,097
Compania Bolivia de Energia 70,000 2,493,750
Hawaiian Electric Industries, Inc. 65,000 2,461,875
Teco Energy, Inc. 200,000 5,000,000
- ----------------------------------- -------- ----------
20,122,222
- ------------------------------------------------- ----------
TOTAL COMMON STOCKS
(COST--$249,216,305) 285,297,090
- ------------------------------------------------- ----------
PREFERRED STOCK (0.8%)
FINANCE (0.8%)
Banco Bradesco S.A. (a) 170,900,000 1,934,942
Banco Itau S.A. (a) 1,769,400 659,393
- ----------------------------------- -------- ----------
TOTAL PREFERRED STOCK
(COST--$2,634,577) $ 2,594,335
- ------------------------------------------------- ----------
7
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
SCHEDULE OF INVESTMENTS--February 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Maturity Market
Value Value
- ---------------------------------------------------------- ---------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (4.3%)
REPURCHASE AGREEMENTS (4.3%)
Investments in repurchase agreements, in a joint trading
account purchased 2/29/96, 5.4155%, maturing 3/01/96 (b) $12,980,952 $ 12,979,000
- ---------------------------------------------------------- -------- ----------
TOTAL SHORT-TERM INVESTMENTS (COST--$12,979,000) 12,979,000
- ------------------------------------------------------------------------ ----------
TOTAL INVESTMENTS (COST--$264,829,882) 300,870,425
- ------------------------------------------------------------------------ ----------
OTHER ASSETS AND LIABILITIES--NET (0.9%) 2,786,092
- ------------------------------------------------------------------------ ----------
NET ASSETS (100%) $303,656,517
- ------------------------------------------------------------------------ ----------
</TABLE>
(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
8
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended August 31,
------------------------------
February 29, 1996 1995 1994
- -------------------------------------- -------------------- ------------ --------------
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $9.22 $9.38 $9.92
- -------------------------------------- ------------------ ----------- ------------
Income from investment operations
Net investment income (loss) (0.09) 0.04 0.02
Net gain on investments 0.80 1.72 0.09
- -------------------------------------- ------------------ ----------- ------------
Total income from investment
operations 0.71 1.76 0.11
- -------------------------------------- ------------------ ----------- ------------
Less distributions from
Net investment income 0.00 (0.04) (0.02)
In excess of net investment income 0.00 (0.02) (0.01)
Net realized gain on investments (0.92) (1.72) (0.57)
In excess of net realized gains 0.00 (0.14) 0.00
Tax basis return of capital 0.00 0.00 (0.05)
- -------------------------------------- ------------------ ----------- ------------
Total distributions (0.92) (1.92) (0.65)
- -------------------------------------- ------------------ ----------- ------------
Net asset value end of period $9.01 $9.22 $9.38
- -------------------------------------- ------------------ ----------- ------------
Total Return (a) 8.39% 21.42% 1.21%
Ratios/supplemental data
Ratios to average net assets
Total expenses 1.91%(b) 1.32% 1.35%
Net investment income (0.93%) 0.43% 0.16%
Portfolio turnover rate 85% 172% 58%
Average commission rate paid $ 0.0635 N/A N/A
====================================== ================== =========== ============
Net assets end of period (thousands) $303,657 $276,034 $252,351
- -------------------------------------- ------------------ ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------
1993 1992 1991
- -------------------------------------- ------- ------------ -------------
<S> <C> <C> <C>
Net asset value beginning of period $8.98 $9.66 $7.87
- -------------------------------------- ----- ----------- -----------
Income from investment operations
Net investment income (loss) (0.02) (0.01) 0.05
Net gain on investments 1.69 0.10 2.23
- -------------------------------------- ----- ----------- -----------
Total income from investment
operations 1.67 0.09 2.28
- -------------------------------------- ----- ----------- -----------
Less distributions from
Net investment income 0.00 (0.03) (0.08)
In excess of net investment income 0.00 (0.05) 0.00
Net realized gain on investments (0.73) (0.69) (0.41)
In excess of net realized gains 0.00 0.00 0.00
Tax basis return of capital 0.00 0.00 0.00
- -------------------------------------- ----- ----------- -----------
Total distributions (0.73) (0.77) (0.49)
- -------------------------------------- ----- ----------- -----------
Net asset value end of period $9.92 $8.98 $9.66
- -------------------------------------- ----- ----------- -----------
Total Return (a) 19.31% 1.31% 31.42%
Ratios/supplemental data
Ratios to average net assets
Total expenses 1.74% 1.69% 1.47%
Net investment income (0.21%) (0.12%) 0.74%
Portfolio turnover rate 69% 99% 66%
Average commission rate paid N/A N/A N/A
====================================== ===== =========== ===========
Net assets end of period (thousands) $292,965 $262,696 $256,070
- -------------------------------------- ----- ----------- -----------
</TABLE>
(a) Excluding applicable sales charges.
(b) The annualized expense ratio includes indirectly paid expenses for the
six months ended February 29, 1996. Excluding indirectly paid expenses,
the expense ratio would have been 1.90%.
See Notes to Financial Statements.
9
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996 (Unaudited)
Assets
Investments at market value (identified cost--
$264,829,882) (Note 1) $300,870,425
Cash 102
Receivable for:
Investments sold 5,067,124
Dividends and interest 126,034
Fund shares sold 982,625
Prepaid expenses and other assets 26,258
- --------------------------------------------------- -----------
Total assets 307,072,568
- --------------------------------------------------- -----------
Liabilities (Notes 2, 4 and 5)
Payable for:
Investments purchased 3,219,554
Fund shares redeemed 130,730
Due to related parties 7,947
Other accrued expenses 57,820
- --------------------------------------------------- -----------
Total liabilities 3,416,051
- --------------------------------------------------- -----------
Net assets $303,656,517
=================================================== ===========
Net assets represented by (Note 1)
Paid-in capital $245,616,100
Net undistributed investment income 12,659,040
Accumulated net realized gain (loss) on
investments and foreign currency related
transactions 9,340,851
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions 36,040,526
- --------------------------------------------------- -----------
Total net assets $303,656,517
=================================================== ===========
Net Asset Value per share (Note 2)
Net asset value of $303,656,517 / 33,711,744
outstanding shares of beneficial interest $ 9.01
=================================================== ===========
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended February 29, 1996 (Unaudited)
Investment income (Note 1)
Dividends (net of foreign withholding
taxes of $8,182) $ 949,877
Interest 431,516
- ----------------------------------------- ------ ----------
Total income 1,381,393
- ----------------------------------------- ------ ----------
Expenses (Notes 2 and 4)
Management fee $ 933,197
Transfer agent fees 342,048
Accounting 12,241
Auditing, printing and legal fees 20,350
Custodian fees 99,905
Trustees' fees and expenses 6,075
Distribution Plan expenses 1,270,513
Registration fees 29,628
Miscellaneous expenses 7,319
- ----------------------------------------- ------ ----------
Total expenses 2,721,276
Less: Expenses paid indirectly (Note 4) (13,205)
- ----------------------------------------- ------ ----------
Net expenses 2,708,071
- ----------------------------------------- ------ ----------
Net investment loss (Note 1) (1,326,678)
- ----------------------------------------- ------ ----------
Net realized and unrealized gain (loss)
on investments and foreign currency
related transactions (Notes 1 and 3)
Net realized gain on investments and
foreign currency related transactions 28,448,738
Net change in unrealized appreciation on
investments and foreign currency
related transactions (4,150,600)
- ----------------------------------------- ------ ----------
Net realized and unrealized gain on
investments 24,298,138
- ----------------------------------------- ------ ----------
Net increase in net assets resulting from
operations $22,971,460
========================================= ====== ==========
10
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 29, August 31,
1996 1995
- --------------------------------------------------------------------- -------------- --------------
(Unaudited)
<S> <C> <C>
Operations (Notes 1 and 3)
Net investment income (loss) $ (1,326,678) $ 1,042,062
Net realized gain on investments 28,448,738 52,906,920
Net change in unrealized depreciation on investments (4,150,600) (3,702,097)
- --------------------------------------------------------------------- ------------ ------------
Net increase in net assets resulting from operations 22,971,460 50,246,885
- --------------------------------------------------------------------- ------------ ------------
Distributions to shareholders from (Notes 1 and 5)
Net investment income 0 (1,042,062)
In excess of net investment income 0 (525,125)
Net realized gain on investments (27,721,799) (49,683,115)
- --------------------------------------------------------------------- ------------ ------------
Total distributions to shareholders (27,721,799) (51,250,302)
- --------------------------------------------------------------------- ------------ ------------
Capital share transactions (Note 2)
Proceeds from shares sold 31,240,649 27,462,149
Payments for shares redeemed (23,705,490) (47,931,858)
Net asset value of shares issued in reinvestment of dividends and
distributions 24,837,685 45,156,148
- --------------------------------------------------------------------- ------------ ------------
Net increase in net assets resulting from capital share transactions 32,372,844 24,686,439
- --------------------------------------------------------------------- ------------ ------------
Total increase in net assets 27,622,505 23,683,022
- --------------------------------------------------------------------- ------------ ------------
Net assets
Beginning of period 276,034,012 252,350,990
- --------------------------------------------------------------------- ------------ ------------
End of period [Including undistributed net investment income as
follows: 1996--$12,659,040 and 1995--$13,985,718 ] (Note 1) $303,656,517 $276,034,012
- --------------------------------------------------------------------- ------------ ------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1.) Significant Accounting Policies
Keystone Mid-Cap Growth Fund (S-3) (formerly Keystone Custodian Fund, Series
S-3) (the "Fund") is a common law trust for which Keystone Management, Inc.
("KMI") is the Investment Manager and Keystone Investment Management Company
(formerly 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 investment objective is
to provide shareholders with growth of capital.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII")
(formerly Keystone Group, Inc.), a Delaware corporation. KII is a private
corporation predominately 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 requires 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. 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 by or 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
12
<PAGE>
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, 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 gains/losses are a component of unrealized
appreciation/depreciation of investments. In addition to the market risk, the
Fund is subject to the 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 computed 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 the
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 is relieved of any federal
income or excise 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 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 fully collateralized
by U.S. Treasury and/or Federal Agency Obligations.
E. The Fund intends to distribute net investment income and net capital
gains, if any, annually. Distri-
13
<PAGE>
Keystone Mid-Cap Growth Fund (S-3)
butions 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.
(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 3,464,861 3,189,451
Redemptions (2,628,177) (5,383,518)
Reinvestment of
dividends and
distributions 2,946,345 5,233,815
- ------------------ ---------------- -------------
Net increase 3,783,029 3,039,748
================== ================ =============
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
Company (formerly 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 4.0% 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 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. Rules adopted by the National Association of
Securities Dealers, Inc. ("NASD") limit 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. NASD rules also will limit
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 service fees 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 rate plus 1.0%) 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
14
<PAGE>
amounts paid or accrued by KIDCO subsequent to 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 the
NASD rule, been paid to KIDCO rather than to the Fund.
During the six months ended February 29, 1996, the Fund recovered $14,066 in
deferred sales charges. During the six months ended February 29, 1996, the
Fund paid KIDCO $1,284,579 under its Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of deferred sales charges, was
$1,270,513 (0.44% of the Fund's average daily net asset value during the six
month period). During the six months ended February 29, 1996, KIDCO received
$291,043 after payments of commissions on new sales to dealers and others of
$979,470. Under the NASD rule, the maximum uncollected amount for which KIDCO
may seek payment from the Fund under its Distribution Plan is $124,656 (0.04%
of the Fund's net assets at February 29, 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
$235,308,831 and $240,991,115, respectively.
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily. The
management fee is calculated by applying percentage rates, which start at
0.70% and decline, 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 service fees of $933,197 which
represent 0.65% of the Fund's average daily net asset value during the
period. Of such amount paid to KMI, $793,217 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 $29,642 for certain accounting and printing services and
$342,048 for transfer agent fees.
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 $86,700 and received a credit of $13,205 pursuant to the expense
offset arrangement resulting in a total expense of $99,905. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
15
<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 logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
MCG-SAR-4/96
19.5M
[recycle logo]
KEYSTONE
[picture of tree]
MID-CAP GROWTH FUND (S-3)
[Keystone logo]
SEMIANNUAL REPORT
FEBRUARY 29, 1996
