-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DNEU1/u0SegK1rCpU9s0C2weogMBTI4qheSfNewl4ZHrwfUQoZJbnN8Az2FIcfuY 1Vhbc3OXWTi1qF7wFEB8gA== 0000950168-97-001793.txt : 19970709 0000950168-97-001793.hdr.sgml : 19970709 ACCESSION NUMBER: 0000950168-97-001793 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970708 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE QUALITY BOND FUND B-1 CENTRAL INDEX KEY: 0000055611 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042394419 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00092 FILM NUMBER: 97637401 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6173383200 MAIL ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116 N-30D 1 KEYSTONE FQUALITY BOND FUND (B-1) PAGE 1 KEYSTONE QUALITY BOND FUND (B-1) SEEKS GENEROUS INCOME AND CAPITAL PRESERVATION FROM HIGH QUALITY BONDS. Dear Shareholder: We are writing to report on the activities of Keystone Quality Bond Fund (B-1) for the six-month period which ended April 30, 1997. Following our letter is a discussion with your Fund's manager and complete financial information. PERFORMANCE Your Fund returned 0.80% for the six-month period and 5.92% for the twelve-month period which ended April 30, 1997. For the same periods, the Lehman Aggregate Bond Index-- a widely recognized index of corporate, government and mortgage securities-- returned 1.71% and 7.08%, respectively. We believe your Fund performed satisfactorily in a difficult interest rate environment, where interest rates rose in the first three months of the period and declined in the last three months. MARKET ENVIRONMENT While interest rates finished the period at approximately the same level at which they started, they experienced significant fluctuations during the six months. During the period, the yield of the benchmark 30-year U.S. Treasury bond swung from a low yield of 6.35% to a high yield of 7.17%. These fluctuations resulted from investors' responses to reports of spurts and slowdowns in economic growth. As investors monitored changes in economic activity, they adjusted their outlooks for future inflation and Federal Reserve interest rate policy, creating fluctuations in both interest rates and bond prices. PORTFOLIO STRATEGY We continued our strategy of focusing on bonds that would generate a high level of income and present attractive relative value. Throughout, we emphasized high credit quality. We downplayed strategies designed to anticipate interest rate movements. This was particularly appropriate in light of the interest rate environment over the past six months. As of April 30, 1997, the average maturity of the Fund's portfolio was 11.9 years. The Fund's structure reflects a thorough analysis of price relationships between various fixed-income sectors and securities, as well as their potential for capital appreciation. In terms of sectors, we invested primarily in corporate bonds, mortgage-backed and asset-backed securities and foreign government bonds, all of which tend to provide higher yields than U.S. government securities. All of the Fund's foreign transactions were currency-hedged into U.S. dollars to protect the portfolio from currency fluctuations. While your Fund also invested in U.S. government securities, it was usually done to maintain a neutral interest rate stance or to build liquidity in anticipation of opportunity in other fixed-income sectors. Keystone Quality Bond Fund (B-1) is designed for conservative, income-oriented investors. We invest in a selection of high quality fixed-income securities, which include among others, U.S. government obligations, mortgage-backed and asset-backed securities, and high quality corporate bonds. As of April 30, 1997 the average quality of the Fund was AA. OUTLOOK Going forward, we expect further strength in employment growth, disposable income and consumer confidence, which could lead to temporarily higher interest rates. Longer-term, we believe the Federal Reserve Board's dedication to prevent rising inflation will prove beneficial to fixed-income investors. We expect to see solid, yet tempered economic growth and low inflation to create a positive environment for high quality bonds. -- CONTINUED-- PAGE 2 KEYSTONE QUALITY BOND FUND (B-1) We appreciate your continued support of Keystone Quality Bond Fund (B-1). If you have any questions or comments about your investment, we encourage you to write to us. Sincerely, /s/ Albert H. Elfner, III (photo of (photo of Albert H. Elfner, III Albert H. George S. PRESIDENT Elfner, III Bissell KEYSTONE INVESTMENT MANAGEMENT COMPANY appears here) appears here) /s/ George S. Bissell George S. Bissell CHAIRMAN KEYSTONE FUNDS June 1997 PAGE 3 A Discussion With Your Fund Manager (photo of Christopher P. Conkey appears here) CHRISTOPHER P. CONKEY IS CHIEF INVESTMENT OFFICER OF KEYSTONE'S FIXED INCOME GROUP AND WAS THE SENIOR PORTFOLIO MANAGER OF YOUR FUND FOR THE SIX-MONTH PERIOD ENDING APRIL 30, 1997. MR. CONKEY IS ASSISTED BY GARY PZEGEO, A KEYSTONE VICE PRESIDENT AND PORTFOLIO MANAGER. Q WHAT DID INTEREST RATES DO OVER THE PAST SIX MONTHS? A Interest rates fluctuated within a wide but well defined range, ending the period at about where they started. The driving force behind this movement was changing investor expectations of economic strength and its effect on future inflation. Economic activity accelerated in both the fourth quarter of 1996 and the first quarter of 1997, raising concerns that stronger growth would stimulate future inflation. The Federal Reserve Board validated these concerns when it raised the Federal Funds rate by 1/4% in March 1997. The Federal Funds rate is the rate at which banks lend to each other overnight and is a benchmark for short-term interest rates. Despite this widespread anticipation of higher prices, inflation has remained well contained. However, we continue to monitor signs of upward pressure on wages. Q WHAT STRATEGIES DID YOU USE IN MANAGING THE FUND? A We continued to implement our strategy of emphasizing bonds that would maximize the yield of the Fund and avoided trying to anticipate interest rate movements. This was especially important over the last six months, as interest rates first fell and then rose, before finishing largely unchanged. We based our sector and security selections on relative value, as well as outlook for capital appreciation. We chose what we believed to be the optimal mix of U.S. government securities, corporate bonds, asset-backed and mortgage-backed securities and foreign government bonds. Q SPECIFICALLY, HOW DID YOU ALLOCATE THE FUND'S ASSETS? A In terms of sectors, we emphasized corporate bonds, mortgage-backed and asset-backed securities and foreign bonds. These sectors enhanced the income of the Fund. We selected each sector-- as well as the bonds within each sector-- based on relative value and the potential for capital appreciation. While we also invested in U.S. government securities, we used that sector primarily to maintain a neutral interest rate stance; and to enhance liquidity in anticipation of opportunity in other sectors. FUND PROFILE OBJECTIVE: Seeks generous income and capital preservation from high quality bonds. INCEPTION DATE: September 11, 1935 AVERAGE MATURITY: 11.9 years NET ASSETS: $192,920,024 PAGE 4 KEYSTONE QUALITY BOND FUND (B-1) During the period, 5%-15% of the Fund's net assets were invested in the government bonds of Canada, Germany, Spain and the United Kingdom. All of these transactions were currency-hedged. Foreign bonds outperformed many domestic investment alternatives. Providing higher yields and solid capital appreciation, they benefited from their countries' positive economic fundamentals which included declining fiscal deficits and low inflation. During the period, we took profits in the foreign sector and reallocated assets to U.S. government securities. At that time, we believed the U.S. offered better relative value and greater potential for declining interest rates. Q WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS? A We believe that interest rates could rise over the near-term and decline longer-term. Employment, income growth and consumer activity continue to be strong; and investors remain concerned that this strength creates pressures for future inflation. With this sentiment in the market, we would not be surprised to see investors nudge interest rates higher. We also think the Federal Reserve Board may raise interest rates again, in a preemptive move to keep inflation low. Longer-term, we think that economic activity will remain solid, but that there will be a tempering in its rate of growth. We expect inflation to be well-contained. Historically, a climate of steady economic growth and low inflation has provided a positive environment for bonds. (Diamond appears here) THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND. IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO: EVERGREEN KEYSTONE INVESTMENT SERVICES, INC. ATTN: SHAREHOLDER COMMUNICATIONS 201 SOUTH COLLEGE STREET, SUITE 400, CHARLOTTE, N.C. 28288-1195 PAGE 5 Your Fund's Performance (Chart appears here with the following head and plot points:) Growth of an investment in Keystone Quality Bond Fund (B-1) 4/87 4/89 4/91 4/93 4/95 4/97 Reinvested Distributions (Customer to fill in plot points) Initial Investment A $10,000 investment in Keystone Quality Bond Fund (B-1) made on April 30, 1987 with all distributions reinvested was worth $18,652 on April 30, 1997. Past performance is no guarantee of future results.
SIX-MONTH PERFORMANCE AS OF APRIL 30, 1997 Total return* 0.80% Net asset value 10/31/96 $15.19 4/30/97 $14.92 Dividends $0.39 Capital gains None
* BEFORE DEDUCTION OF CONTINGENT DEFERRED SALES CHARGE (CDSC). [CAPTION]
HISTORICAL RECORD AS OF APRIL 30, 1997 IF YOU IF YOU DID CUMULATIVE TOTAL RETURN REDEEMED NOT REDEEM 1-year 2.92% 5.92% 5-year 29.37% 29.37% 10-year 86.52% 86.52% AVERAGE ANNUAL TOTAL RETURN 1-year 2.92% 5.92% 5-year 5.29% 5.29% 10-year 6.43% 6.43%
The "if you redeemed" returns reflect 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 earned the returns 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 their original cost. You may exchange shares for another Keystone fund by phone or in writing. You may also exchange funds through the Evergreen Keystone Express Line. The Fund reserves the right to change or terminate the exchange offer. PAGE 6 KEYSTONE QUALITY BOND FUND (B-1) SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
PRINCIPAL AMOUNT VALUE FIXED INCOME (96.1%) CORPORATE BONDS & NOTES (31.0%) AIRCRAFT (1.1%) $ 2,000,000 Boeing Co., 7.88%, 4/15/43.............. $ 2,080,060 BANK & FINANCE (13.4%) 2,000,000 ABN AMRO Holdings N.V., 7.30%, 12/1/26.............. 1,843,280 3,500,000 AmSouth Bancorp., Subord. Deb. 6.75%, 11/1/25.............. 3,378,375 1,500,000 Associates Corp. North America, Sr. Notes, 7.63%, 3/1/00............... 1,535,205 1,250,000 Commercial Credit Corp. Putable Asset Trust, 6.45%, 10/18/99 (c)......... 1,241,000 2,000,000 Export Import Bank of Korea, Notes, 7.10%, 3/15/07.............. 2,001,800 5,000,000 General Motors Acceptance Corp., Notes, 7.13%, 5/1/01............... 5,009,050 2,485,000 International Lease Finance Corp., Notes, 6.25%, 10/15/00............. 2,440,543 2,000,000 Mellon Bank Capital II, 8.00%, 1/15/27.............. 1,960,860 4,500,000 Sun Canada Financial Co., 6.63%, 12/15/07 (c)......... 4,275,180 2,265,000 Wachovia Corp., Subord. Notes, 6.61%, 10/1/25.............. 2,207,492 25,892,785 CONSUMER GOODS (1.8%) 3,500,000 Mattel, Inc., Notes, 6.75%, 5/15/00.............. 3,493,280 DIVERSIFIED COMPANIES (0.6%) 2,000,000 Grand Metro Investment Corp., Co. Gtd., 0.00%, 1/6/04 (Eff. Yield 8.13%) (d)...... 1,245,400 PRINCIPAL AMOUNT VALUE CORPORATE BONDS & NOTES (CONTINUED) INSURANCE (1.2%) $ 2,000,000 AMBAC, Inc., Deb., 9.38%, 8/1/11............... $ 2,340,700 OIL (5.2%) 3,000,000 Occidental Petroleum Corp., Deb., 10.13%, 9/15/09............. 3,609,120 2,452,474 Oslo Seismic Services, Inc., 1st Pfd. Mtg. Notes, 8.28%, 6/1/11 (c)........... 2,490,929 4,000,000 Tennessee Gas Pipeline Co., Deb., 7.50%, 4/1/17............... 3,964,966 10,065,015 RETAIL (1.3%) 2,500,000 Kohl's Corp., Notes, 7.38%, 10/15/11............. 2,448,700 TELECOMMUNICATIONS (1.8%) 3,000,000 GTE Corp., Notes, 8.75%, 11/1/21.............. 3,391,500 TOBACCO (1.5%) 3,000,000 Philip Morris Companies, Inc., Sr. Notes, 7.20%, 2/1/07............... 2,877,000 TRANSPORTATION (1.5%) 3,000,000 Golden State Petroleum Transportation Corp., Deb., 8.04%, 2/1/19 (c)........... 2,922,656 UTILITIES (1.6%) 2,000,000 Citizens Utilities Co., 7.05%, 10/1/46.............. 1,838,740 1,250,000 Korea Electric & Power Corp., Deb., 7.00%, 2/1/27............... 1,215,650 3,054,390 TOTAL CORPORATE BONDS & NOTES (COST-- $60,710,386)........................ 59,811,486
PAGE 7 SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
PRINCIPAL AMOUNT VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (22.7%) Asset Securitization Corp.: $ 1,000,000 Series 1997-D4 Class A2, 7.41%, 4/14/27 (Est. Mat. 2011) (a)........ $ 1,013,906 1,416,414 Series 1996-D3 Class A3, 7.71%, 10/13/26 (Est. Mat. 2009) (a)........ 1,426,594 888,227 Criimi Mae Financial Corp., Series 1 Class A, 7.00%, 1/1/33, (Est. Mat. 2005) (a)........ 847,424 FHLMC: 3,500,000 Series 1701 Class PH, 6.50%, 3/15/09 (Est. Mat. 2005) (a)........ 3,377,500 1,650,000 Series 117 Class G, 8.50%, 1/15/21 (Est. Mat. 2009) (a)........ 1,718,146 FNMA REMIC Trust: 3,500,000 Series 1996-17 Class A, 6.00%, 8/25/04 (Est. Mat. 2002) (a)........ 3,352,344 2,800,000 Series 1993-156 Class B, 6.50%, 4/25/18 (Est. Mat. 2003) (a)........ 2,649,500 5,000,000 Series 1993-G09 Class H, 7.00%, 12/25/20 (Est. Mat. 2004) (a)........ 4,846,875 2,500,000 Series 1993-38 Class L, 5.00%, 8/25/22 (Est. Mat. 2007) (a)........ 2,076,550 1,850,000 GS Mortgage Security Corp., Series 1996-PL Class A2, 7.41%, 2/15/27 (Est. Mat. 2006) (a)........ 1,794,789 2,997,109 Independent National Mortgage Corp., Series 1997-A Class A, 7.84%, 11/1/26 (Est. Mat. 2006) (a)........ 2,929,674 1,317,367 KS Mortgage Capital LP, Series 1995-1 Class A1, 7.04%, 4/20/02 (Est. Mat. 1999) (a) (c).... 1,314,897 PRINCIPAL AMOUNT VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) $ 2,700,000 Merrill Lynch Trust, Series 35 Class G, 8.45%, 11/1/18 (Est. Mat. 2007) (a)........ $ 2,826,549 1,000,000 Morgan Stanley Capital I, Series 1996-WF Class 1B, 6.59%, 11/15/28 (Est. Mat. 2005) (a) (c).... 949,062 1,106,788 Paine Webber Mortgage Acceptance Corp. IV, Series 1993-5 Class A3, 6.88%, 6/25/08 (Est. Mat. 1998) (a)........ 1,104,713 3,000,000 RASTA, Series 1996-AS Class A3, 7.75%, 9/25/26 (Est. Mat. 1999) (a)........ 3,003,517 3,500,000 Residential Accredit Loans, Inc., Series 1996-QS4 Class AI10, 7.90%, 8/25/26 (Est. Mat. 2014) (a)........ 3,496,582 2,212,212 Residential Funding Corp., Series 1994-S15 Class A1, 7.75%, 7/25/24 (Est. Mat. 1998) (a)........ 2,219,114 2,793,863 Ryland Acceptance Corp., Series 1988-E, 2 PAC, 7.95%, 1/1/19 (Est. Mat. 2005) (a)........ 2,800,848 TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST-- $44,099,671)........... 43,748,584 ASSET-BACKED SECURITIES (16.2%) 2,000,000 Auto Receivables Trust, Series 1995-D, 6.40%, 4/20/03.............. 1,981,945 1,000,000 ContiMortgage Home Equity Loans, Inc., Series 1996-4 Class A9, 6.88%, 1/15/28.............. 967,870 3,100,000 CoreStates Home Equity Trust, Series 1996-1 Class A4, 7.00%, 6/15/12.............. 3,019,594 4,400,000 Ford Credit Auto Owner Trust, Series 1996-B Class A4, 6.30%, 1/15/01.............. 4,378,000
PAGE 8 KEYSTONE QUALITY BOND FUND (B-1) SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
PRINCIPAL AMOUNT VALUE ASSET-BACKED SECURITIES (CONTINUED) $ 4,000,000 Headlands Mortgage Securities, Inc., Series 1997-2 Class A10, 7.75%. 5/25/27.............. $ 4,012,500 Merrill Lynch Mortgage Investors, Inc.: 371 Series 1991-D Class A, 9.00%, 7/15/11.............. 378 3,420,522 Series 1991-G Class B, 9.15%, 10/15/11............. 3,566,955 1,867,508 Series 1992-B Class B, 8.50%, 4/15/12.............. 1,906,015 2,170,712 Series 1992-D Class B, 8.50%, 6/15/17.............. 2,236,593 3,000,000 Olympic Auto Receivables, Series 1996-C, 6.80%, 3/15/02.............. 3,008,130 3,300,000 Southern Pacific Secured Assets Corp., Series 1996-3 Class A4, 7.60%, 10/25/27............. 3,262,875 765,000 University Support Services, Inc., Series 1992-D, 9.07%, 11/1/07.............. 764,522 2,100,000 World Omni Automobile Lease Trust, Series 1997 Class A4, 6.90%, 5/5/20............... 2,114,112 TOTAL ASSET-BACKED SECURITIES (COST-- $30,926,386)....................... 31,219,489 UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (13.3%) 1,000,000 FHLB, Deb., 8.70%, 1/12/05.............. 1,014,530 FHLMC: 2,250,000 Deb., 6.70%, 1/5/07............... 2,211,322 2,000,000 Deb., 7.80%, 9/12/16.............. 2,029,380 PRINCIPAL AMOUNT VALUE UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (CONTINUED) U.S. Treasury Bonds: $ 1,000,000 6.50%, 11/15/26............. $ 939,220 1,200,000 7.88%, 2/15/21.............. 1,311,744 U.S. Treasury Notes: 1,600,000 6.50%, 10/15/06............. 1,573,744 16,500,000 6.63%, 3/31/02.............. 16,530,855 TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (COST-- $25,607,659)....................... 25,610,795 FOREIGN BONDS (NON U.S. DOLLARS) (8.3%) 7,250,000 CD Canadian Government, Deb., 8.75%,12/1/05............... 5,926,110 Germany (Republic of), Deb.: 6,652,000 DM 6.50%, 7/15/03................ 4,100,364 9,750,000 DM 6.88%, 5/12/05................ 6,080,942 TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (COST-- $17,577,850).............. 16,107,416 MORTGAGE-BACKED SECURITIES (3.1%) $ 7,633 FHLMC Pool #303865, 8.50%, 10/1/97.............. 7,865 6,220,971 FNMA Pool #303664, 6.50%, 12/1/08.............. 6,076,458 TOTAL MORTGAGE-BACKED SECURITIES (COST-- $6,242,370)........................ 6,084,323 FOREIGN BONDS (U.S. DOLLARS) (1.5%) (COST-- $3,098,550) 3,000,000 Bayer Corp., Notes, 7.13%, 10/1/15 (c).......... 2,838,000 TOTAL FIXED INCOME (COST-- $188,262,872)...................... 185,420,093
PAGE 9 SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
PRINCIPAL AMOUNT VALUE REPURCHASE AGREEMENT (2.6%) (COST-- $4,961,000) $ 4,961,000 Keystone Joint Repurchase Agreement, (Investments in repurchase agreements in a joint trading account, purchased 4/30/97, maturity value $4,961,758) 5.50%, 5/1/97 (b).......... $ 4,961,000 VALUE TOTAL INVESTMENTS (COST-- $193,223,872) 98.7% $190,381,093 OTHER ASSETS AND LIABILITIES-- NET 1.3% 2,538,931 NET ASSETS 100.0% $192,920,024
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is based on current and projected prepayment rates. Changes in interest rates can cause the estimated maturity to differ from the listed dates. (b) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at April 30, 1997. (c) Securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4(2) of the Federal Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. (d) Effective yield (calculated at date of purchase) is the yield at which the bond accretes on an annualized basis until maturity date. LEGEND OF PORTFOLIO ABBREVIATIONS: CD-- Canadian Dollar DM-- German Deutsche Mark FHLB-- Federal Home Loan Bank FHLMC-- Federal Home Loan Mortgage Corporation FNMA-- Federal National Mortgage Association PAC-- Planned Amortization Class RASTA-- Residential Asset Securitization Trust Association REMIC-- Real Estate Mortgage Investment Conduit FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
EXCHANGE U.S. $ VALUE AT IN EXCHANGE UNREALIZED DATE APRIL 30, 1997 FOR U.S. $ APPRECIATION Foward Foreign Currency Exchange Contracts to Sell: Contracts to Deliver 5/9/97 18,688,000 German Deutsche Marks 10,797,750 11,409,941 $612,191 5/27/97 8,530,350 Canadian Dollars 6,117,884 6,303,835 185,951 $798,142
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 10 KEYSTONE QUALITY BOND FUND (B-1) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED APRIL 30, 1997 YEAR ENDED OCTOBER 31, (UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989 NET ASSET VALUE BEGINNING OF PERIOD $15.19 $15.42 $14.44 $16.40 $15.92 $15.92 $15.11 $15.85 $15.71 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.38 0.75 0.87 0.76 0.96 1.04 1.08 1.11 1.21 Net realized and unrealized gain (loss) on investments and foreign currency related transactions (0.26) (0.16) 1.05 (1.76) 0.66 0.15 0.99 (0.53) 0.25 Total from investment operations 0.12 0.59 1.92 (1.00) 1.62 1.19 2.07 0.58 1.46 LESS DISTRIBUTIONS FROM: Net investment income (0.39) (0.76) (0.87) (0.76) (0.96) (1.04) (1.08) (1.18) (1.32) In excess of net investment income 0 0 (0.05) (0.09) (0.18) (0.15) (0.18) (0.14) 0 Tax basis return of capital 0 (0.06) (0.02) (0.11) 0 0 0 0 0 Total distributions (0.39) (0.82) (0.94) (0.96) (1.14) (1.19) (1.26) (1.32) (1.32) NET ASSET VALUE END OF PERIOD $14.92 $15.19 $15.42 $14.44 $16.40 $15.92 $15.92 $15.11 $15.85 TOTAL RETURN (A) 0.80% 3.99% 13.69% (6.27%) 10.50% 7.71% 14.09% 3.93% 9.82% RATIOS/SUPPLEMENTAL DATA Ratios to average net assets: Total expenses 2.01%(b) 1.95% 1.96% 1.86% 1.94% 2.01% 2.04% 1.95% 1.82% Expenses excluding indirectly paid expenses 2.00%(b) 1.93% 1.94% -- -- -- -- -- -- Net investment income 5.09%(b) 5.06% 5.86% 5.05% 5.85% 6.40% 6.95% 7.45% 7.61% Portfolio turnover rate 99% 231% 244% 169% 190% 102% 158% 117% 116% NET ASSETS END OF PERIOD (THOUSANDS) $192,920 $228,649 $310,791 $327,276 $458,925 $456,912 $453,528 $408,330 $462,425 1988 NET ASSET VALUE BEGINNING OF PERIOD $15.52 INCOME FROM INVESTMENT OPERATIONS: Net investment income 1.19 Net realized and unrealized gain (loss) on investments and foreign currency related transactions 0.32 Total from investment operations 1.51 LESS DISTRIBUTIONS FROM: Net investment income (1.32) In excess of net investment income 0 Tax basis return of capital 0 Total distributions (1.32) NET ASSET VALUE END OF PERIOD $15.71 TOTAL RETURN (A) 10.09% RATIOS/SUPPLEMENTAL DATA Ratios to average net assets: Total expenses 1.64% Expenses excluding indirectly paid expenses -- Net investment income 7.49% Portfolio turnover rate 153% NET ASSETS END OF PERIOD (THOUSANDS) $447,454
(a) Excluding applicable sales charges. (b) Annualized. SEE NOTES TO FINANCIAL STATEMENTS. PAGE 11 STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1997 (UNAUDITED)
ASSETS Investments at market value (identified cost-- $193,223,872) $190,381,093 Cash 37,094 Foreign currency (cost-- $3,505) 3,492 Receivable for investments sold 7,063,719 Interest receivable 2,595,196 Net unrealized appreciation on forward foreign currency exchange contracts 798,142 Receivable for closed forward foreign currency exchange contracts 72,557 Receivable for Fund shares sold 9,747 Prepaid expenses and other assets 91,815 Total assets 201,052,855 LIABILITIES Payable for investments purchased 7,082,738 Payable for Fund shares redeemed 516,018 Distributions to shareholders 311,189 Distribution fees payable 150,764 Due to related parties 36,387 Accrued expenses and other liabilities 35,735 Total liabilities 8,132,831 NET ASSETS $192,920,024 NET ASSETS REPRESENTED BY Paid-in capital $223,406,039 Accumulated distributions in excess of net investment income (452,062) Accumulated net realized loss on investments and foreign currency related transactions (27,921,856) Net unrealized depreciation on investments and foreign currency related transactions (2,112,097) Total net assets $192,920,024 NET ASSET VALUE PER SHARE Net assets of $192,920,024 4 12,927,464 shares outstanding $ 14.92
STATEMENT OF OPERATIONS SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
INVESTMENT INCOME Interest (net of withholding taxes of $2,920) $7,446,588 EXPENSES Distribution Plan expenses $1,048,603 Management fee 641,936 Transfer agent fees 276,715 Custodian fees 62,086 Professional fees 21,869 Trustees' fees and expenses 19,998 Other 43,670 Total expenses 2,114,877 Less: Expenses paid indirectly (13,174) Net expenses 2,101,703 Net investment income 5,344,885 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS Net realized gain on: Investments 2,043,813 Foreign currency related transactions 1,342,440 Net realized gain on investments and foreign currency related transactions 3,386,253 Net change in unrealized appreciation (depreciation) on: Investments (7,628,379) Foreign currency related transactions 689,048 Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions (6,939,331) Net realized and unrealized loss on investments and foreign currency related transactions (3,553,078) Net increase in net assets resulting from operations $1,791,807
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 12 KEYSTONE QUALITY BOND FUND (B-1) STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED APRIL 30, 1997 YEAR ENDED (UNAUDITED) OCTOBER 31, 1996 OPERATIONS Net investment income $ 5,344,885 $ 13,390,061 Net realized gain (loss) on investments and foreign currency related transactions 3,386,253 (2,183,664) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions (6,939,331) (1,936,653) Net increase in net assets resulting from operations 1,791,807 9,269,744 DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income (5,396,962) (13,289,851) Tax basis return of capital 0 (950,184) Total distributions to shareholders (5,396,962) (14,240,035) CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 13,436,496 44,210,094 Payments for shares redeemed (48,890,087) (130,171,813) Net asset value of shares issued in reinvestment of dividends and distributions 3,329,611 8,789,681 Net decrease in net assets resulting from capital share transactions (32,123,980) (77,172,038) Total decrease in net assets (35,729,135) (82,142,329) NET ASSETS Beginning of period 228,649,159 310,791,488 End of period [including accumulated distributions in excess of net investment income as follows: 1997-- ($452,062) and 1996-- ($399,985)] $192,920,024 $228,649,159
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 13 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Keystone Quality Bond Fund (B-1) (the "Fund") is a Pennsylvania common law trust for which Keystone Investment Management Company ("Keystone") is the Investment Adviser and Manager. Keystone was formerly a wholly-owned subsidiary of Keystone Investments, Inc. ("KII") and is currently a subsidiary of First Union Keystone, Inc. First Union Keystone, Inc. is a wholly-owned subsidiary of First Union National Bank of North Carolina which in turn is a wholly-owned subsidiary of First Union Corporation ("First Union"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end investment management company. The Fund's investment objective is to provide the highest possible income consistent with preservation of principal. 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 U.S. Government obligations held by the Fund are valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Listed corporate bonds, other fixed-income securities, mortgage and other asset-backed securities, and other related securities are valued at prices provided by an independent pricing service. In determining value for normal institutional-size transactions, the pricing service uses methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities for which valuations are not available from an independent pricing service (including restricted securities) are valued at fair value as determined in good faith according to procedures established by the Board of Trustees. Short-term investments with remaining maturities of 60 days or less are carried at amortized cost, which 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. REVERSE REPURCHASE AGREEMENTS The Fund enters into reverse repurchase agreements with qualified third-party broker-dealers. Interest on the value of reverse repurchase agreements is based upon competitive market rates at the time of issuance. At the time the Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with its custodian containing liquid assets having a value not less than the repurchase price (including accrued interest). If the counterparty to the transaction is rendered insolvent, the ultimate realization of the securities to be repurchased by the Fund may be delayed or limited. D. FOREIGN CURRENCY The books and records of the Fund are maintained in United States (U.S.) dollars. Foreign currency amounts are translated into United States dollars as follows: PAGE 14 KEYSTONE QUALITY BOND FUND (B-1) market value of investments, assets and liabilities at the daily rate of exchange; purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) resulting from changes in foreign currency exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency related transactions. Net realized foreign currency gains and losses 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 rates between the initial purchase trade date and subsequent sale trade date is included in realized gain (loss) on foreign currency related transactions. E. 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 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 amounts reflected in the statement of assets and liabilities. F. 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. G. 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 also intends to avoid excise tax liability by making the required distributions under the Code. Accordingly, no provision for federal income taxes is required. H. DISTRIBUTIONS The Fund distributes net investment income monthly and net capital gains, if any, at least annually. Distributions to shareholders are recorded at the close of business on the ex-dividend date. Income and capital gains distributions to shareholders are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatment for paydown gains (losses) and foreign currency related transactions for income tax purposes that have been recognized for financial statement purposes. PAGE 15 2. CAPITAL SHARE TRANSACTIONS The Fund's Trust Agreement, as amended and restated, 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 4/30/97 10/31/96 Shares sold 889,910 2,902,677 Shares redeemed (3,240,696) (8,577,419) Shares issued in reinvestment of dividends and distributions 222,503 581,588 Net decrease (2,128,283) (5,093,154)
3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows for the six months ended April 30, 1997:
COST OF PROCEEDS FROM PURCHASES SALES Non-U.S. Government $103,862,951 $ 148,886,635 U.S. Government 99,782,061 89,637,339
The average daily balance of reverse repurchase agreements outstanding during the six months ended April 30, 1997 was approximately $4,320,000 at a weighted average interest rate of 4.59%. The maximum amount of borrowing during the six months ended April 30, 1997 was $11,290,271 (including accrued interest). As of October 31, 1996, the Fund had a capital loss carryover for federal income tax purposes of approximately $30,627,000 which expires as follows: $2,251,000-- 1998; $20,145,000-- 2002; $6,153,000-- 2003 and $2,078,000-- 2004. 4. DISTRIBUTION PLANS The Fund bears some of the costs of selling its shares under a Distribution Plan (the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays its principal underwriter amounts which are calculated and paid monthly. On December 11, 1996, the Fund entered into a principal underwriting agreement with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc. (formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned subsidiary of Keystone, served as the Fund's principal underwriter. Under the Plan, the Fund pays a distribution fee 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 are paid to EKD or its predecessor. The Plan may be terminated at any time by vote of the Independent Trustees or by vote of a majority of the outstanding voting shares of the Fund. However, after the termination of the Plan, and at the discretion of the Independent Trustees, payments to EKIS and/or EKD may continue as compensation for services which had been earned while the Plan was in effect. EKD intends, but is not obligated, to continue to pay distribution costs that exceed the current annual payments from the Fund. EKD intends to seek full payment of such distribution costs from the Fund at such time in the future as, and to the extent that, payment thereof would be within permitted limits. At April 30, 1997 total unpaid distribution costs were $8,422,778. 5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS Under an investment advisory and management agreement dated December 11, 1996, Keystone serves as the Investment Adviser and Manager to the Fund. Keystone provides the Fund with investment advisory and management services. In return, Keystone is paid a management fee, computed at an annual rate of 2.00% PAGE 16 KEYSTONE QUALITY BOND FUND (B-1) of the Fund's gross investment income plus an amount determined by applying percentage rates starting at 0.50% and declining as net assets increase to 0.25% per annum, to the average daily net asset value of the Fund. Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund and provided investment management and administrative services. Under an investment advisory agreement between KMI and Keystone, Keystone served as the Investment Adviser and provided investment advisory and management services to the Fund. In return for its services, Keystone received an annual fee equal to 85% of the management fee received by KMI. During the six months ended April 30, 1997, the Fund paid or accrued $14,382 to Keystone for certain accounting services. Evergreen Keystone Service Company (formerly, Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend disbursing agent. Officers of the Fund and affiliated Trustees receive no compensation directly from the Fund. 6. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an expense offset arrangement with its custodian. For the six months ended April 30, 1997, the Fund incurred total custody fees of $62,086 and received a credit of $13,174 pursuant to this expense offset arrangement, resulting in a net custody expense of $48,912. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. PAGE 17 ADDITIONAL INFORMATION (UNAUDITED) Shareholders of the Fund considered and acted upon the proposals listed below at a special meeting of shareholders held Monday, December 9, 1996. In addition, below each proposal are the results of that vote. 1. TO ELECT THE FOLLOWING TRUSTEES:
AFFIRMATIVE WITHHELD Frederick Amling 9,563,926 326,591 Laurence B. Ashkin 9,559,675 330,842 Charles A. Austin III 9,564,546 325,971 Foster Bam 9,561,429 329,088 George S. Bissell 9,557,891 332,626 Edwin D. Campbell 9,564,531 325,986 Charles F. Chapin 9,564,296 326,221 K. Dun Gifford 9,566,511 324,006 James S. Howell 9,563,039 327,478 Leroy Keith, Jr. 9,563,551 326,966 F. Ray Keyser 9,563,661 326,856 Gerald M. McDonnell 9,565,174 325,343 Thomas L. McVerry 9,564,296 326,221 William Walt Pettit 9,562,124 328,393 David M. Richardson 9,564,660 325,857 Russell A. Salton, III M.D. 9,563,049 327,468 Michael S. Scofield 9,566,481 324,036 Richard J. Shima 9,564,645 325,872 Andrew J. Simons 9,558,242 332,275
2. TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN THE FUND AND KEYSTONE INVESTMENT MANAGEMENT COMPANY: Affirmative 9,363,597 Against 187,893 Abstain 339,027
KEYSTONE FAMILY OF FUNDS (Diamond appears here) Balanced Fund (K-1) Diversified Bond Fund (B-2) Growth and Income Fund (S-1) High Income Bond Fund (B-4) International Fund Inc. 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 Evergreen Keystone funds, contact your financial adviser or call Evergreen Keystone. (Logo appears here Evergreen Keystone Funds) P.O. Box 2121 (Recycle logo appears here) Boston, Massachusetts 02106-2121 B1-R REV01 6/97 KEYSTONE (Photo of senior citizens with bikes appears here) QUALITY BOND FUND (B-1) (Logo appears here Evergreen Keystone Funds) SEMI-ANNUAL REPORT APRIL 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----