-----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, HbpVtG1YjLeTJyHufDu/jFRJkSz4z+8dZld+XJpGv8fNfEi1y8Cd+nza8yggmAXG PGaTBwM05yUIOPZlR4i/7Q== 0000950146-96-001693.txt : 19960927 0000950146-96-001693.hdr.sgml : 19960927 ACCESSION NUMBER: 0000950146-96-001693 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960926 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE HIGH INCOME BOND FUND B-4 CENTRAL INDEX KEY: 0000055614 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042394421 FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00095 FILM NUMBER: 96634704 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 HIGH INCOME BOND FUND (B-4) PAGE 1 - ------------------------------------ Keystone High Income Bond Fund (B-4) Seeks generous income primarily from high yield corporate bonds. Dear Shareholder: We are writing to report to you on the performance of Keystone High Income Bond Fund (B-4) for the twelve-month period which ended July 31, 1996. Performance Your Fund produced a total return of 2.19% for the six-month period and 1.38% for the twelve-month period which both ended July 31, 1996. The Lehman Aggregate Bond Index--a broad index of U.S. corporate, government and mortgage securities--returned -1.61% for the six-month period and 5.53% for the twelve-month period. We were not satisfied with your Fund's one year performance. However, we believe we have seen signs of improvement in 1996 as the portfolio has been restructured. The past year represented a period of transition as Richard Cryan assumed responsibility as portfolio manager at the beginning of 1996. Our primary objective has been to restructure and upgrade the Fund's portfolio and increase diversification and liquidity. We believe this long-term strategy has laid the foundation for stronger and more consistent performance. Mr. Cryan discusses this strategy in more detail beginning on page three. Market environment Market conditions were favorable for high yield bond investors, especially over the past six months. Strong economic growth in the first half of 1996 was positive for many companies that had issued high yield bonds. High yield bonds also benefitted in the first half of the period from the bond market rally. Investors were attracted to the high income of high yield bonds in the lower interest rate environment. In the second half of the period, strong cash flow and investor demand provided some support to high yield bond prices. This was during a time when prices in the overall fixed-income markets declined. Though the prices of high yield bonds declined in 1996, they held their value better than any other sector of the fixed-income market. Although your Fund continued to pay a competitive dividend, it was necessary to reduce the Fund's dividend in October 1995 and June 1996. There were two reasons for these reductions: declines in market rates in 1995 and early 1996, and our emphasis on higher quality bonds. Throughout most of 1995 interest rates declined, lowering yields to nearly every bond investor. In this environment, many investors attempted to reach for higher yields by investing in lower rated bonds. In the interest of long-term performance, we chose not to downgrade quality and continued to upgrade the portfolio. These higher quality bonds tend to have lower yields, but have historically provided better price stability in a slower economic environment. Our outlook We believe that the stronger economic growth environment of the first half will moderate for the remainder of the year. Combined with well contained inflation, long-term bonds should remain in a trading range. This should provide a satisfactory environment for high yield bonds. We believe your Fund is well positioned for this environment, with its emphasis on higher quality, high yield bonds and broad diversification. 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 -continued- PAGE 2 - ------------------------------------ Keystone High Income Bond Fund (B-4) 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 High Income Bond Fund (B-4). We encourage you to write to us with questions or comments about your investment. 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 September 1996 [PHOTO: Albert H. Elfner, III] [PHOTO: George S. Bissell] [DALBAR HONORS COMMITMENT TO 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 Keystone portfolio managers discuss their latest strategies, or listen to Keystone's overall market outlook from James McCall, chief investment officer. Of course, your financial adviser can provide you with more complete information on Keystone Funds. This 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 after the greeting PAGE 3 - ----------------------------------- A Discussion With Your Fund's Manager [PHOTO OF RICHARD CRYAN] Richard Cryan is portfolio manager of the Fund and heads Keystone's high yield bond team. Mr. Cryan has more than 16 years of investment experience, and served as president of Wasserstein Perella Asset Management and also as a portfolio manager at Fidelity Investments. Dick received his BS from the University of Colorado and his MBA from Columbia University. Mr. Cryan's team researches, analyzes and evaluates high yield bonds for the Fund. Q Tell us about the strategy change you implemented in Keystone High Income Bond Fund (B-4) at the beginning of 1996. A We attempted to generate more consistent performance and attractive income by upgrading the portfolio's credit quality and increasing diversification and liquidity. These were significant changes that were made over the last six months, taking market conditions and the potential long-term benefits into consideration. Q Please describe the changes you made to the portfolio. A We upgraded quality by raising the percentage of net assets invested in BB rated bonds. The BB rating is the strongest credit rating available in the high yield sector. As of July 31, 1996, over one-third of net assets were invested in BB rated securities, compared to less than a quarter of net assets last year at this time (see pie charts on page four). To build diversification, we increased the number of bonds in the portfolio and reduced positions which comprised more than 1% of assets. We increased liquidity by selling many of the smaller issues and reinvesting in bond issues with market capitalizations of greater than $100 million. Finally, we eliminated equity positions that had been related to older bond issues. We reinvested the proceeds in higher yielding, income-producing securities. Q How have these changes affected performance? A While we were only six months into the new strategy at the end of the period, we believe we have begun to see some promising signs. As of July 31, the Fund's price volatility has been reduced by one-third since the beginning of the year. Further, the portfolio has kept pace with its peers through much of 1996. While we were pleased with these short-term results, we realize that a record of long-term, consistent performance can take time to build. We intend to continue to work hard toward this goal every day. Q What was the environment like for high yield bonds over the past twelve months? A The environment was favorable, although investors dealt with two different interest rate climates. Last year was favorable for fixed-income securities in general. Slow economic growth and low inflation drove interest rates close to historically low levels. High Fund Profile Objective: Seeks generous income primarily from high yield corporate bonds. Commencement of investment operations: September 11, 1935 Number of bonds: 140 Net assets: $594 million Newspaper listing: "HiIncB4" PAGE 4 - ------------------------------------ Keystone High Income Bond Fund (B-4) Portfolio Quality Summary (July 31, 1995)(1) [PIE CHART 1] B (47%) BB (23%) Other(2) (16%) Not rated (13%) CCC or lower (1%) (percentage of portfolio assets) Portfolio Quality Summary (July 31, 1996) [PIE CHART 2] B (51%) BB (37%) BBB (2%) Other(2) (6%) Not rated (3%) CCC or lower (1%) 1 Where Standard & Poor's (S&P) ratings were not available, we have used ratings from Moody's Investor Service, Inc., Fitch Investor's Service, Inc. or ratings assigned by another nationally recognized statistical rating organization. 2 Includes common stocks and warrants, short-term investments, and other assets and liabilities. yield bonds participated in that rally to some extent. Then, interest rates rose in early 1996. The economy gained strength and investors grew concerned about future inflation. The prices of fixed-income securities in general fell. However, the prices of high yield bonds held their value better than other fixed-income securities. [LINE CHART] High Yield Default Rate 0-5% 1985 1989 1995 1996 through 3/31 Source: Merrill Lynch & Co. Plot Points 1.708 4.285 1.896 0.174 Q What caused high yield bonds to outperform other types of bonds? A Higher yields and the potential for price appreciation attracted many investors to the high yield bond market during the low interest rate environment. This demand forced yields on high yield bonds to historically low levels relative to U.S. Treasuries, a benchmark we look at in determining the relative attractiveness of high yield bonds. Refinancings and takeovers in the health care and broadcasting industries also were positive factors for high yield bonds. Q What is your economic outlook for the next six months? A We share the view of Federal Reserve Board Chairman Alan Greenspan that the economy will grow more slowly through the beginning of 1997 and that there will be few inflationary pressures. That should provide a neutral environment for high yield bonds. Slow growth and an aging economic cycle, however, puts pressure on many high yield issuers. Default rates have been relatively low and we would not be surprised to see them rise (see chart at the bottom of PAGE 5 - ------------------------------------ page four). Further, the peak time for a bond to default is three to five years from issuance. Many new bonds came to market in the early 1990s after a period of limited supply. We don't expect the default rate to soar, but the potential for an increase in the default rate exists. Q What other factors do you expect to effect the high yield bond market? A We believe that some of the favorable trends currently in place in the high yield market will continue. We think investors have begun to emphasize quality over yield. This trend should continue in light of the recent volatility in the stock and bond markets and the anticipated weaker economy. Because the portfolio has had a relatively high concentration of higher quality bonds, we think this should be positive for the Fund's holdings. We have continued to believe that higher quality high yield bonds should provide greater investment value as we move into a positive, but slow growth environment. Q What are the benefits of investing in high yield bonds? A High yield bonds offer long-term investors above average income and the potential for capital appreciation. They provide a more generous stream of income to compensate for the increased risk associated with investment in lower quality bonds. We attempt to reduce risk through careful credit research and analysis, and portfolio diversification. Careful diversification helps to reduce the risk associated with individual holdings. Keystone's team of high yield analysts meet with company managements and monitor portfolio holdings on an ongoing basis. We will continue to seek bonds with generous yields at attractive values that we believe provide the optimal balance of risk and reward given current market conditions. Top 5 Industries as of July 31, 1996 Percentage Industry of net assets Cable/Other Video Distribution 9.5 Energy 8.6 Gaming 8.4 Forest products/containers 5.6 Wireless communications 5.4 Q What factors influence the performance of high yield bonds the most? A The cyclical movements of the economy, inflation, and interest rates are the most significant influences on the performance of high yield bonds. By nature, high yield bonds are less affected by the direction of interest rates than high grade corporate and government bonds. Consequently, when interest rates declined during 1995, high yield bonds appreciated to a lesser extent than high grade bonds. Conversely, as interest rates rose in early 1996, high yield bonds were affected less by price declines than many high grade bonds. [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 6 - ------------------------------------ Keystone High Income Bond Fund (B-4) Your Fund's Performance [MOUNTAIN CHART] Growth of an investment in Keystone High Income Bond Fund (B-4) 0-$24 Reinvested Distributions Initial Investment Total Value: $17,207 7/86 7/88 7/90 7/92 7/94 7/96 PLOT POINTS 10000 10000 9480 10715 8552 10892 7896 11432 6213 10535 5186 10538 5866 13410 6349 16129 5792 16063 5470 16973 5074 17207 A $10,000 investment in Keystone High Income Bond Fund (B-4) made on July 31, 1986 with all distributions reinvested was worth $17,207 on July 31, 1996. Past performance is no guarantee of future results. Twelve-Month Performance as of July 31, 1996 - --------------------------------------------------- Total return* 1.38% Net asset value 7/31/95 $4.42 7/31/96 $4.10 Dividends $0.37 Capital gains None * Before deduction of contingent deferred sales charge (CDSC). Historical Record as of July 31, 1996 - --------------------------------------------------------------- If you If you did Cumulative total return redeemed not redeem 1-year -1.41% 1.38% 5-year 63.28% 63.28% 10-year 72.07% 72.07% Average annual total return 1-year -1.41% 1.38% 5-year 10.30% 10.30% 10-year 5.58% 5.58% Top 10 Holdings as of July 31, 1996 Percentage Bonds of net assets Ampex (preferred stock) 2.5 Iowa Select Farms 1.4 AK Steel 1.0 Teleport Communications Group 1.0 Park Broadcasting 1.0 American Life 1.0 Showboat 1.0 Conseco 1.0 Rexene 0.9 Schuller International 0.9 The "If you redeemed" returns reflect the deduction of the 3% contingent deferred sales charge (CDSC) for those investors who bought and 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 the original cost. You may exchange your shares for another Keystone fund by phone or in writing for a $10 fee. 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 7 - ------------------------------------------- Growth of an Investment [LINE CHART] Comparison of change in value of a $10,000 investment in Keystone High Income Bond Fund (B-4), the Lehman Aggregate Bond Index and the Consumer Price Index. In Thousands July 31, 1986 through July 31, 1996 0-$30 Fund Average Annual Total Return - -------------------------------- 1 Year 5 Year 10 Year - -1.41% 10.30% 5.58% LABI $22,481 Fund $17,207 CPI $14,338 7/86 7/88 7/90 7/92 7/94 7/96 [PLOT POINTS] 7/86 10000 10000 10000 10715 10411 10393 7/88 10892 11199 10822 11432 12902 11361 7/90 10535 13812 11909 10538 15286 12438 7/92 13410 17546 12831 16129 19332 13187 7/94 16063 19348 13552 16973 21304 13927 7/96 17207 22481 14338 [line] Fund [line] Lehman Aggregate Bond Index (LABI) [line] Consumer Price Index (CPI) Past performance is no guarantee of future results. The one-year return reflects the deduction of the Fund's 3% contingent deferred sales charge for shares held for at least one year. 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 High Income Bond Fund (B-4) The Fund seeks generous income primarily from high yield corporate bonds. Total return quotations are stated after deducting sales charges (if applicable), fund expenses and transaction costs, and assumes reinvestment of all distributions. 2. Lehman Aggregate Bond Index (LABI) The LABI is a broad-based, unmanaged fixed-income index of U.S. government, corporate and mortgage-backed securities. It represents the price change and coupon income of several thousand securities of various credit qualities and maturities. Securities are selected and compiled by Lehman Brothers, Inc. according to criteria that may be unrelated to your Fund's investment objective. It would be difficult for most individual investors to duplicate this index. 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 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. PAGE 8 - ------------------------------------ Keystone High Income Bond Fund (B-4) Limitations of the chart The chart, however, limits the evaluation of Fund performance in several ways. Because the measurement is based on total returns over an extended period of time, the comparison often favors those funds which emphasize capital appreciation when the market is rising. Likewise, when the market is declining, the comparison usually favors those funds which take less risk. Performance can be distorted Funds which are more conservative in their orientation and which place an emphasis on capital preservation will tend to compare less favorably when the market is rising. In addition, funds which have income as one of their objectives also will tend to compare less favorably to relevant indexes. Indexes may also reflect the performance of some securities which a fund may be prohibited from buying. A bond fund, for example, may be limited to investments in only high quality bonds, or a stock fund may only be able to buy stocks that have been traded on a stock exchange for a minimum number of years or stocks that have a certain market capitalization. Indexes usually do not have the same investment restrictions as your Fund. Indexes do not include the 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 9 - -------------------------------------- SCHEDULE OF INVESTMENTS--July 31, 1996
Interest Maturity Par Market Rate Date Value Value - ---------------------------------------------------------------------------------------------------------------- FIXED INCOME (91.7%) INDUSTRIAL BONDS & NOTES (90.5%) AEROSPACE (4.5%) Airplane Pass Thru Trust Bond (Subord.) 10.875% 2019 $5,000,000 $ 5,200,000 BE Aerospace, Incorporated Sr. Notes (Subord.) 9.875 2006 5,000,000 4,987,500 CHC Helicopter Corporation Sr. Notes (Subord.) 11.500 2002 2,500,000 2,387,500 Continental Airlines, Incorporated (c) Sr. Equip. Trust Cert. 16.000 1999 1,075,275 1,075,275 Greenwhich Air Services, Incorporated Sr. Notes 10.500 2006 5,000,000 5,025,000 Moog, Incorporated (h) Sr. Notes (Subord.) 10.000 2006 3,500,000 3,526,250 Sequa Corporation Sr. Notes 8.750 2001 1,000,000 972,500 UNC Inc. (h) Sr. Notes (Subord.) 11.000 2006 2,500,000 2,537,500 Valujet, Incorporated (h) Sr. Notes 10.250 2001 1,000,000 755,000 - ----------------------------------------------------------------------------------------------------------------- 26,466,525 - ----------------------------------------------------------------------------------------------------------------- BROADCASTING (5.0%) Ackerly Communications, Incorporated Sr. Notes 10.750 2003 3,850,000 3,984,750 EZ Communications, Incorporated Sr. Notes (Subord.) 9.750 2005 3,000,000 2,955,000 K-III Communications Corporation (h) Sr. Notes 8.500 2006 5,000,000 4,575,000 Park Broadcasting, Incorporated (h) Sr. Notes 11.750 2004 5,000,000 5,750,000 Paxson Communications Corporation Sr. Notes (Subord.) 11.625 2002 5,000,000 5,200,000 SFX Broadcasting, Incorporated (h) Sr. Notes (Subord.) 10.750 2006 4,000,000 4,020,000 Sinclair Broadcast Group, Incorporated Sr. Notes (Subord.) 10.000 2005 3,000,000 2,947,500 - ----------------------------------------------------------------------------------------------------------------- 29,432,250 - ----------------------------------------------------------------------------------------------------------------- CABLE/OTHER VIDEO DISTRIBUTION (9.5%) Adelphia Communications Corporation Sr. Notes 12.500 2002 4,000,000 4,110,000 Cablevision Systems Corporation Sr. Notes (Subord.) 10.500 2016 5,500,000 5,280,000 Charter Communications, South Eastern Capital Limited Partnership (h) Sr. Notes 11.250 2006 5,000,000 4,900,000 Comcast Corporation Sr. Notes (Subord.) 10.625 2012 4,000,000 4,180,000 Diamond Cable Communications Company (Eff. Yield 11.57%) (d) Sr. Disc. Notes 0.000 2004 7,000,000 5,040,000 Fundy Cable Limited Sr. Notes 11.000 2005 4,825,000 4,897,375 Lenfest Communications, Incorporated Sr. Notes 8.375 2005 5,000,000 4,550,000 Marcus Cable Operations Limited Sr. Disc. Notes Partnership (Eff. Yield 12.06%) (d) (Subord.) 0.000 2004 7,000,000 5,040,000 People's Choice T.V. Corporation Unit (Sr. Disc. (Eff. Yield 12.47%) (d) Notes/Wts.) 0.000 2004 6,000,000 3,450,000 Rogers Cablesystems Limited Sr. Notes 10.000 2005 5,000,000 4,975,000 Videotron Group Limited Sr. Notes (Subord.) 10.250 2002 1,350,000 1,390,500 Videotron Group Limited Deb.(Subord.) Voting Conv.10.625 2005 3,750,000 3,956,250 Videotron Holdings PLC (Eff. Yield 9.70%) (d) Sr. Disc. Notes 0.000 2005 7,000,000 4,567,500 - ----------------------------------------------------------------------------------------------------------------- 56,336,625 - ----------------------------------------------------------------------------------------------------------------- (continued on next page) PAGE 10 - ----------------------------------- Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--July 31, 1996 Interest Maturity Par Market Rate Date Value Value - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (4.2%) G I Holdings, Incorporated Sr. Notes 10.000% 2006 $4,816,000 $ 4,647,440 Lanesborough Corporation Sr. Secd. Notes 10.000 2000 1,500,000 1,290,000 Rexene Corporation Sr. Notes 11.750 2004 5,000,000 5,462,500 Scotts Company Sr. Notes (Subord.) 9.875 2004 3,000,000 3,075,000 Sifto Canada, Incorporated Sr. Notes 8.500 2000 3,000,000 2,910,000 Texas Petrochemical Corporation (h) Sr. Notes (Subord.) 11.125 2006 2,500,000 2,575,000 Viridian, Incorporated Notes 9.750 2003 5,000,000 5,137,500 - ----------------------------------------------------------------------------------------------------------------- 25,097,440 - ----------------------------------------------------------------------------------------------------------------- CONSUMER (3.0%) Dominion Textile USA Sr. Notes 9.250 2006 4,075,000 3,962,935 Exide Corporation Sr. Notes 10.000 2005 5,000,000 4,900,000 International Semi-Tech Electronics, Incorporated (Eff. Yield 11.96%) (d) Sr. Notes 0.000 2003 8,000,000 4,520,000 Revlon Worldwide Corporation (Eff. Yield 13.00%) (d) Sr. Disc. Notes 0.000 1998 5,000,000 4,181,250 - ----------------------------------------------------------------------------------------------------------------- 17,564,185 - ----------------------------------------------------------------------------------------------------------------- DIVERSIFIED MEDIA (2.7%) Affinity Group, Incorporated Sr. Notes (Subord.) 11.500 2003 5,000,000 5,100,000 American Media Operations, Incorporated Sr. Notes (Subord.) 11.625 2004 2,000,000 2,030,000 Lamar Advertising Company Sr. Secd. Notes 11.000 2003 4,000,000 4,160,000 Viacom, Incorporated Deb. (Subord.) 8.000 2006 5,000,000 4,575,000 Exchangeable - ----------------------------------------------------------------------------------------------------------------- 15,865,000 - ----------------------------------------------------------------------------------------------------------------- ENERGY (8.6%) Clark USA, Incorporated Sr. Notes 10.875 2005 5,000,000 5,037,500 Cliffs Drilling (h) Sr. Notes 10.250 2003 2,000,000 1,995,000 Crown Central Petroleum Corporation Sr. Notes 10.875 2005 5,000,000 5,075,000 Dual Drilling Company Sr. Notes (Subord.) 9.875 2004 4,550,000 4,777,500 Falcon Drilling Sr. Notes 8.875 2003 5,000,000 4,800,000 Ferrellgas Partners Limited Partnership (h) Sr. Notes 9.375 2006 3,850,000 3,715,250 Gerrity Oil & Gas Corporation Sr. Notes (Subord.) 11.750 2004 2,400,000 2,544,000 Gulf Canada Resources Limited Sr. Notes (Subord.) 9.625 2005 5,175,000 5,213,813 Mesa Operating Company Sr. Notes (Subord.) 10.625 2006 3,500,000 3,578,750 Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 3,000,000 2,940,000 Plains Resources, Incorporated (h) Sr. Notes (Subord.) 10.250 2006 2,500,000 2,475,000 Seagull Energy Corporation Sr. Notes (Subord.) 8.625 2005 1,000,000 960,000 TransTexas Gas Corporation Sr. Notes 11.500 2002 3,000,000 2,985,000 Vintage Petroleum, Incorporated Sr. Notes (Subord.) 9.000 2005 5,000,000 4,812,500 - ----------------------------------------------------------------------------------------------------------------- 50,909,313 - ----------------------------------------------------------------------------------------------------------------- PAGE 11 - -------------------------------------- SCHEDULE OF INVESTMENTS--July 31, 1996 Interest Maturity Par Market Rate Date Value Value - ----------------------------------------------------------------------------------------------------------------- FINANCIAL (4.1%) American Life Holding Company Sr. Notes (Subord.) 11.250% 2004 $ 5,500,000 $ 5,747,500 Chartwell Reinsurance Holdings Corporation Sr. Notes 10.250 2004 3,575,000 3,753,750 Conseco, Incorporated Sr. Notes 10.500 2004 5,000,000 5,685,000 First Nationwide Parent Holdings Sr. Notes 12.500 2003 4,200,000 4,410,000 (Exchangeable) Reliance Group Holdings, Incorporated Sr. Deb. (Subord.) 9.750 2003 5,000,000 4,950,000 - ----------------------------------------------------------------------------------------------------------------- 24,546,250 - ----------------------------------------------------------------------------------------------------------------- FOODS/TOBACCO/BEVERAGES (4.2%) American Rice, Incorporated Mtg. Notes 13.000 2002 2,550,000 2,346,000 Chiquita Brands International, Incorporated Sr. Notes 10.250 2006 3,000,000 2,985,000 Cott Corporation Sr. Notes 9.375 2005 3,500,000 3,377,500 Iowa Select Farms (Eff. Yield 15.26%) (8/02/94--$8,977,379) (c) (d) (f) Sr. Disc. Notes 0.000 2004 15,000,000 8,328,000 PM Holdings Corporation (Eff. Yield Unit (Sr. Disc. 11.62%) (d) Notes/Wts.) 0.000 2005 1,812,000 1,001,130 PMI Acquisition Corporation Sr. Notes (Subord.) 12.250 2003 1,750,000 1,697,500 TLC Beatrice International Holdings, Incorporated Sr. Notes 11.500 2005 5,000,000 5,075,000 - ----------------------------------------------------------------------------------------------------------------- 24,810,130 - ----------------------------------------------------------------------------------------------------------------- FOREST PRODUCTS/CONTAINERS (5.6%) Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 5,000,000 4,762,500 Calmar, Incorporated Sr. Notes (Subord.) 11.500 2005 4,000,000 3,890,000 Container Corporation of America Sr. Notes 11.250 2004 2,500,000 2,600,000 Four M Corporation (h) Sr. Notes 12.000 2006 2,500,000 2,550,000 Owens-Illinois, Incorporated Sr. Deb. 11.000 2003 5,000,000 5,387,500 Packaging Resources, Incorporated (h) Sr. Notes (Subord.) 11.625 2003 4,000,000 4,040,000 Riverwood International Corporation Sr. Notes 10.250 2006 5,000,000 4,925,000 Tembec Finance Corporation Sr. Notes 9.875 2005 5,500,000 5,115,000 - ----------------------------------------------------------------------------------------------------------------- 33,270,000 - ----------------------------------------------------------------------------------------------------------------- GAMING (8.4%) California Hotel Finance Corporation Liquid Real Estate Trust 11.000 2002 5,000,000 5,212,500 Colorado Gaming and Entertainment Company (f) Sr. Secd. PIK Notes 12.000 2003 4,778,393 4,443,905 Grand Casinos, Incorporated 1st Mtg. Notes 10.125 2003 5,000,000 4,900,000 Grand Palais Casino, Incorporated (8/15/94--$7,750,000) (b) (c) (e) Sr. Secd. PIK Notes 18.250 1997 8,571,123 86 HMH Properties, Incorporated Sr. Notes 9.500 2005 5,000,000 4,800,000 Livingwell, Incorporated (b) (c) (e) Sr. Deb. (Subord.) 14.125 1996 2,200,000 22 Livingwell, Incorporated (b) (c) (e) Sr. Deb. (Subord.) 13.125 2001 2,000,000 20 Prime Hospitality Corporation 1st Mtg. Notes 9.250 2006 5,000,000 4,868,750 Resorts International Hotels 1st Mtg. Notes 11.000 2003 2,500,000 2,550,000 Showboat, Incorporated Sr. Notes (Subord.) 13.000 2009 5,000,000 5,700,000 Six Flags Theme Parks, Incorporated Sr. Notes (Subord.) 12.250 2005 5,000,000 4,250,000 (continued on next page) PAGE 12 - ----------------------------------- Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--July 31, 1996 Interest Maturity Par Market Rate Date Value Value -------------------------------------------------------------------------------------------------------------- GAMING (continued) Starcraft Corporation (b) (c) (e) Notes (Subord.) 16.500% 1998 $6,925,000 $ 138,500 Station Casinos, Incorporated Sr. Notes (Subord.) 10.125 2006 5,000,000 4,850,000 Trump Atlantic City Associates 1st Mtg. Notes 11.250 2006 5,000,000 4,875,000 Wyndham Hotel Corporation Sr. Notes (Subord.) 10.500 2006 3,500,000 3,508,750 - --------------------------------------------------------------------------------------------------------------- 50,097,533 - --------------------------------------------------------------------------------------------------------------- HEALTHCARE (3.6%) Dynacare, Incorporated Sr. Notes 10.750 2006 5,000,000 5,006,250 Genesis Health Sr. Notes (Subord.) 9.750 2005 5,000,000 5,025,000 Quorum Health Group, Incorporated Sr. Notes (Subord.) 8.750 2005 2,500,000 2,437,500 Regency Health Services, Incorporated Sr. Notes (Subord.) 9.875 2002 5,000,000 4,850,000 Universal Health Services, Incorporated Sr. Notes 8.750 2005 4,000,000 3,900,000 - --------------------------------------------------------------------------------------------------------------- 21,218,750 - --------------------------------------------------------------------------------------------------------------- HOUSING (1.7%) Continental Homes Holding Corporation Sr. Notes 10.000 2006 5,000,000 4,750,000 Schuller International Group, Incorporated Sr. Notes 10.875 2004 5,000,000 5,400,000 - --------------------------------------------------------------------------------------------------------------- 10,150,000 - --------------------------------------------------------------------------------------------------------------- MANUFACTURING (5.2%) AAF McQuay, Incorporated Sr. Notes 8.875 2003 5,000,000 4,800,000 Alpine Group, Incorporated Sr. Notes 12.250 2003 4,000,000 4,080,000 Chatwins Group, Incorporated Sr. Notes 13.000 2003 4,000,000 3,560,000 Collins & Aikman Products Company Sr. Notes (Subord.) 11.500 2006 5,000,000 5,112,500 Hayes Wheels International, Incorporated Sr. Notes (Subord.) 11.000 2006 2,500,000 2,543,750 Key Plastics, Incorporated (c) Sr. Notes 14.000 1999 3,500,000 3,517,500 Koppers Industries, Incorporated Sr. Notes 8.500 2004 3,000,000 2,857,500 Mark IV Industries, Incorporated Sr. Notes (Subord.) 7.750 2006 5,000,000 4,637,500 - --------------------------------------------------------------------------------------------------------------- 31,108,750 - --------------------------------------------------------------------------------------------------------------- METALS/MINERALS (4.6%) AK Steel Corporation Sr. Notes 10.750 2004 5,750,000 6,224,375 Bethlehem Steel Corporation Sr. Notes 10.375 2003 5,000,000 5,200,000 GS Technologies Operations, Incorporated Sr. Notes 12.250 2005 4,000,000 4,110,000 Jorgensen Earle Sr. Notes 10.750 2000 4,000,000 3,960,000 WCI Steel, Incorporated Sr. Notes 10.500 2002 5,000,000 5,075,000 Weirton Steel Corporation (h) Sr. Notes 10.750 2005 3,000,000 2,812,500 - --------------------------------------------------------------------------------------------------------------- 27,381,875 - --------------------------------------------------------------------------------------------------------------- RETAIL (4.5%) Cole National Group, Incorporated Sr. Notes 11.250 2001 3,500,000 3,675,000 Finlay Enterprises (Eff. Yield 9.12%) (d) Sr. Disc. Deb. 0.000 2005 2,000,000 1,595,000 Finlay Fine Jewelry Corporation Sr. Notes 10.625 2003 3,000,000 2,962,500 PAGE 13 - -------------------------------------- SCHEDULE OF INVESTMENTS--July 31, 1996 Interest Maturity Par Market Rate Date Value Value - ----------------------------------------------------------------------------------------------------------------- RETAIL (continued) Hills Stores Company (h) Sr. Notes 12.500% 2003 $3,500,000 $ 3,150,000 Michaels Stores, Incorporated Sr. Notes 10.875 2006 4,500,000 4,455,000 Pamida, Incorporated Sr. Notes (Subord.) 11.750 2003 3,000,000 2,550,000 Pantry, Incorporated Sr. Notes 12.000 2000 3,500,000 3,150,000 Service Merchandise Company Sr. Deb. (Subord.) 9.000 2004 3,750,000 3,225,000 Southland Corporation Sr. Deb. (Subord.) 5.000 2003 2,500,000 1,950,000 - ----------------------------------------------------------------------------------------------------------------- 26,712,500 - ----------------------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS (3.3%) Bell Cablemedia PLC (Eff. Yield 10.67%) (d) Sr. Disc. Notes 0.000 2005 6,675,000 4,138,500 MFS Communication (Eff. Yield 8.49%) (d) Sr. Disc. Notes 0.000 2004 7,000,000 5,250,000 Teleport Communications Group Sr. Notes 9.875 2006 6,200,000 5,952,000 Telewest PLC (Eff. Yield 9.86%) (d) Sr. Disc. Deb. 0.000 2007 7,000,000 4,095,000 - ----------------------------------------------------------------------------------------------------------------- 19,435,500 - ----------------------------------------------------------------------------------------------------------------- TRANSPORTATION (2.4%) Eletson Holdings, Incorporated 1st Pfd. Mtg. Notes 9.250 2003 3,000,000 2,865,000 Gearbulk Holding Limited Sr. Notes 11.250 2004 5,000,000 5,200,000 Stena AB Sr. Notes 10.500 2005 5,000,000 4,962,500 Teekay Shipping Corporation 1st Mtg. Notes 8.320 2008 1,500,000 1,410,000 - ----------------------------------------------------------------------------------------------------------------- 14,437,500 - ----------------------------------------------------------------------------------------------------------------- WIRELESS COMMUNICATIONS (5.4%) Centennial Cellular Corporation Sr. Notes 8.875 2001 5,000,000 4,650,000 Comcast Celluar Corporation (Eff. Yield 13.42%) (d) Part. Disc. Notes 0.000 2000 7,000,000 4,777,500 Mobile Telecommunication Technology Sr. Notes (Subord.) 13.500 2002 4,500,000 4,747,500 Pagemart Nationwide, Inc. (Eff. Yield Unit (Sr. Disc. 10.80%) (d) Notes/Wts.) 0.000 2005 7,000,000 4,445,000 Pricecellular Wireless Corporation (Eff. Yield 10.64%) (d) Sr. Disc. Notes 0.000 2003 5,750,000 4,542,500 Rogers Cantel Sr. Deb. 9.375 2008 4,500,000 4,365,000 Vanguard Celluar Systems, Incorporated Deb. 9.375 2006 5,000,000 4,825,000 - ----------------------------------------------------------------------------------------------------------------- 32,352,500 - ----------------------------------------------------------------------------------------------------------------- TOTAL INDUSTRIAL BONDS & NOTES (Cost--$560,951,237) 537,192,626 - ----------------------------------------------------------------------------------------------------------------- FOREIGN BONDS (U.S. DOLLARS) (1.2%) Intermedia Capital Partners (h) Sr. Notes 11.250 2006 3,000,000 3,007,500 Yacimientos Petroliferos Fiscales S.A. (YPF) Unsecd. Notes 8.000 2004 4,500,000 3,993,750 - ----------------------------------------------------------------------------------------------------------------- TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$7,056,779) 7,001,250 - ----------------------------------------------------------------------------------------------------------------- TOTAL FIXED INCOME (Cost $568,008,016) 544,193,876 - ----------------------------------------------------------------------------------------------------------------- (continued on next page)
PAGE 14 - ------------------------------------ Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--July 31, 1996
Market Shares Value - -------------------------------------------------------------------------------------------------------------- COMMON STOCKS/WARRANTS (1.4%) Casino America, Incorporated (e) 269,890 $ 1,838,626 Casino America, Incorporated, wts. (e) 47,778 47,778 Chatwins Group, Incorporated, wts. (c) (e) 9,500 9,500 CHC Helicopter Corporation, wts. (e) 76,000 38,000 Colorado Gaming and Entertainment Company (e) (f) 477,839 1,552,977 Grand Palais Casinos, Incorporated, Series A, wts. (8/15/94--$2,507) (c) (e) 250,735 251 Grand Palais Casinos, Incorporated, Series B, wts. (8/15/94--$1,368) (c) (e) 136,765 137 Grand Palais Casinos, Incorporated, Series C, wts. (8/15/94--$12,080) (c) (e) 1,208,088 1,208 Grand Palais Casinos, Incorporated, Series D, wts. (8/15/94--$680,643) (c) (e) 680,643 681 Grand Palais Casinos, Incorporated, Ltd. Liab. Int. (8/15/94--$0) (c) (e) 931,379 931 Iowa Select Farm, wts. (2/04/94--$2,462,581) (c) (e) (f) 298,530 298,530 Lanesborough Corporation (c) (e) 2,056 21 Nextel Communications Incorporated, wts. (e) 9,510 95 Pagemart, Inc., wts. (e) (h) 83,030 498,180 PM Holdings Corporation (e) 2,964 3 Specialty Equipment Cos., Incorporated (e) 351,900 3,694,950 Specialty Foods Acquisition Corporation (e) 131,250 65,625 - -------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS/WARRANTS (Cost--$9,108,637) 8,047,493 - -------------------------------------------------------------------------------------------------------------- PREFERRED STOCK (2.5%) Ampex Corp. (Cost--$23,987,332) (c) (e) 24,562 15,004,312 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- MISCELLANEOUS INVESTMENT (0.0%) Gold River Hotel and Casino Corporation (Cost--$424,084) (c) (e) Liquidating R.E. Trust 10,775,000 107,750 - --------------------------------------------------------------------------------------------------------------
Interest Maturity Maturity Rate Date Value - -------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (1.2%) Keystone Joint Repurchase Agreement (Investments in repurchase agreements, in a joint trading account, purchased 7/31/96) (Cost--$7,200,000) (g) 5.687% 08/01/96 $7,201,137 7,200,000 - -------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (Cost--$608,728,069) (a) 574,553,431 - -------------------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES--NET (3.2%) 19,127,315 - -------------------------------------------------------------------------------------------------------------- NET ASSETS (100.0%) $593,680,746 - --------------------------------------------------------------------------------------------------------------
PAGE 15 - ------------------------------------------------------------------------------- (a) The cost of investments for federal income tax purposes amounted to $612,891,254. Gross unrealized appreciation and depreciation of investments, based on identified tax cost at July 31, 1996 are as follows:
Gross unrealized appreciation $ 10,298,740 Gross unrealized depreciation $(48,636,563) -------------- Net unrealized depreciation $(38,337,823) ==============
(b) Securities which have defaulted on payment of interest and/or principal. The Fund has stopped accruing income on those so identified. At July 31, 1996, the fair value of these securities was $138,628. (c) All or a portion of these securities are either (1) restricted (i.e., securities which may not be publicly sold without registration under the Federal Securities Act of 1933) or (2) illiquid securities, and are valued using market quotations where readily available. In the absence of market quotations, the securities are valued based upon their fair value determined under procedures approved by the Board of Trustees. The Fund may make investments in an amount up to 15% of the value of the Fund's net assets in such securities. The date of acquisition and costs are set forth in parentheses after the title of each restricted security. On the date of acquisition there were no market quotations on similar securities and the above securities were valued at acquisition cost. At July 31, 1996, the fair value of these restricted securities was $8,629,824. (d) Effective yield (calculated at date of purchase) is the yield at which the bond accretes on an annual basis until maturity date. (e) Non-income-producing security. (f) Affiliated issuers are those in which the Fund's holdings of an issuer represents 5% or more of the outstanding voting securities of the issuer. The Fund has never owned enough of the outstanding voting securities of any issuer to have control (as defined in the Investment Company Act of 1940) of that issuer. At July 31, 1996, the fair value of these securities was $14,623,412 (2.5% of the Fund's net assets). (g) The repurchase agreements are fully collateralized by U.S. Government and/or agency obligations based on market prices at July 31, 1996. (h) Securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. See Notes to Financial Statements. PAGE 16 - ------------------------------------ Keystone High Income Bond Fund (B-4) FINANCIAL HIGHLIGHTS (For a share outstanding throughout each year)
Year Ended July 31, 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------- Net asset value beginning of year $4.42 $4.68 $5.13 $4.74 - -------------------------------------------------------------------------------------------- Income from investment operations Net investment income 0.32 0.38 0.38 0.45 Net realized and unrealized gain (loss) on investments (0.27) (0.15) (0.38) 0.44 - -------------------------------------------------------------------------------------------- Total from investment operations 0.05 0.23 0 0.89 - -------------------------------------------------------------------------------------------- Less distributions from: Net investment income (0.31) (0.37) (0.38) (0.45) In excess of net investment income (0.06) (0.02) (0.07) (0.05) Tax basis return of capital 0 (0.10) 0 0 Net realized gain on investments 0 0 0 0 - -------------------------------------------------------------------------------------------- Total distributions (0.37) (0.49) (0.45) (0.50) - -------------------------------------------------------------------------------------------- Net asset value end of year $4.10 $4.42 $4.68 $5.13 - -------------------------------------------------------------------------------------------- Total return (a) 1.38% 5.66% (0.41%) 20.28% Ratios/supplemental data Ratios to average net assets: Total expenses 1.94%(b) 2.03% 1.84% 2.06% Net investment income 7.92% 8.64% 7.57% 9.30% Portfolio turnover rate 116% 82% 110% 125% - -------------------------------------------------------------------------------------------- Net assets end of year (thousands) $593,681 $764,965 $766,283 $972,164 - --------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------ Net asset value beginning of year $4.19 $5.02 $6.38 $6.91 $7.66 $8.08 - ------------------------------------------------------------------------------------------------------------ Income from investment operations Net investment income 0.49 0.61 0.68 0.83 0.80 0.81 Net realized and unrealized gain (loss) on investments 0.58 (0.72) (1.18) (0.51) (0.71) (0.26) - ------------------------------------------------------------------------------------------------------------ Total from investment operations 1.07 (0.11) (0.50) 0.32 0.09 0.55 - ------------------------------------------------------------------------------------------------------------ Less distributions from: Net investment income (0.50) (0.72) (0.78) (0.85) (0.84) (0.90) In excess of net investment income (0.02) 0 (0.08) 0 0 0 Tax basis return of capital 0 0 0 0 0 0 Net realized gain on investments 0 0 0 0 0 (0.07) - ------------------------------------------------------------------------------------------------------------ Total distributions (0.52) (0.72) (0.86) (0.85) (0.84) (0.97) - ------------------------------------------------------------------------------------------------------------ Net asset value end of year $4.74 $4.19 $5.02 $6.38 $6.91 $7.66 - ------------------------------------------------------------------------------------------------------------ Total return (a) 27.25% 0.03% (7.84%) 4.95% 1.66% 7.15% Ratios/supplemental data Ratios to average net assets: Total expenses 2.17% 2.34% 2.06% 1.97% 1.82% 1.65% Net investment income 10.86% 14.64% 12.77% 12.36% 11.29% 10.26% Portfolio turnover rate 94% 78% 45% 75% 81% 135% - ------------------------------------------------------------------------------------------------------------ Net assets end of year (thousands) $841,757 $710,590 $820,940 $1,188,660 $1,274,673 $1,464,891 - ------------------------------------------------------------------------------------------------------------
(a) Excluding applicable sales charges. (b) The expense ratio includes indirectly paid expenses for the year ended July 31, 1996. Excluding indirectly paid expenses, the expense ratio would have been 1.93%. See Notes to Financial Statements. PAGE 17 - ----------------------------------- STATEMENT OF ASSETS AND LIABILITIES July 31, 1996
Assets (Note 1) Investments at market value: Unaffiliated issuers (identified cost-- $588,842,978) $ 559,930,019 Affiliated issuers (identified cost--$19,885,091) 14,623,412 - -------------------------------------------------------------------------- Total investments 574,553,431 - -------------------------------------------------------------------------- Cash 737 Receivable for: Investments sold 9,582,742 Interest 12,625,275 Fund shares sold 343,102 Prepaid expenses and other assets 2,086,207 - -------------------------------------------------------------------------- Total assets 599,191,494 - -------------------------------------------------------------------------- Liabilities (Notes 1, 2 and 5) Payable for: Investments purchased 2,989,677 Fund shares redeemed 688,552 Distributions to shareholders 1,700,454 Due to related parties 2,000 Other accrued expenses 130,065 - -------------------------------------------------------------------------- Total liabilities 5,510,748 - -------------------------------------------------------------------------- Net assets $ 593,680,746 ========================================================================== Net assets represented by (Note 1) Paid-in capital $1,134,809,513 Accumulated distributions in excess of net investment income (1,700,454) Accumulated net realized loss on investments and foreign currency related transactions (505,253,675) Net unrealized depreciation on investments (34,174,638) - -------------------------------------------------------------------------- Total net assets $ 593,680,746 ========================================================================== Net Asset Value per share (Note 2) Net asset value of $593,680,746 / 144,797,055 outstanding shares of beneficial interest $4.10 ==========================================================================
STATEMENT OF OPERATIONS Year Ended July 31, 1996
Investment income (Note 1) Interest: Unaffiliated issuers $ 62,440,581 Affiliated issuers 3,196,008 Other income 710,336 - --------------------------------------------------------------------------- Total income 66,346,925 - --------------------------------------------------------------------------- Expenses (Notes 4 and 5) Management fee $ 3,788,171 Transfer agent fees 1,927,228 Accounting, auditing and legal 90,061 Custodian fees 349,176 Trustees' fees and expenses 42,995 Distribution Plan expenses 6,747,276 Miscellaneous expenses 157,119 - --------------------------------------------------------------------------- Total expenses 13,102,026 Less: Expenses paid indirectly (Note 6) (103,025) - --------------------------------------------------------------------------- Net expenses 12,999,001 - --------------------------------------------------------------------------- Net investment income 53,347,924 - --------------------------------------------------------------------------- Net realized and unrealized loss on investments (Notes 1 and 3) Net realized gain on investments 12,528,472 Net change in unrealized depreciation on investments (59,100,847) - --------------------------------------------------------------------------- Net realized and unrealized loss on investments (46,572,375) - --------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 6,775,549 ===========================================================================
See Notes to Financial Statements. PAGE 18 - ------------------------------------ Keystone High Income Bond Fund (B-4) STATEMENTS OF CHANGES IN NET ASSETS
Year Ended July 31, 1996 1995 -------------------------------------------------------------------------------------------------------- Operations Net investment income $ 53,347,924 $ 61,233,352 Net realized gain (loss) on investments and foreign currency related transactions 12,528,472 (91,818,044) Net change in unrealized appreciation (depreciation) on investments (59,100,847) 71,736,709 - --------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 6,775,549 41,152,017 - --------------------------------------------------------------------------------------------------------- Distributions to shareholders from (Note 1) Net investment income (49,946,109) (60,319,059) In excess of net investment income (9,344,299) (3,043,529) Tax basis return of capital 0 (17,099,886) - --------------------------------------------------------------------------------------------------------- Total distributions to shareholders (59,290,408) (80,462,474) - --------------------------------------------------------------------------------------------------------- Capital share transactions (Note 2) Proceeds from shares sold 162,907,187 233,171,940 Payments for shares redeemed (315,113,110) (240,425,711) Net asset value of shares issued in reinvestment of dividends and distributions 33,436,642 45,245,958 - --------------------------------------------------------------------------------------------------------- Net increase (decrease) in capital share transactions (118,769,281) 37,992,187 - --------------------------------------------------------------------------------------------------------- Total decrease in net assets (171,284,140) (1,318,270) - --------------------------------------------------------------------------------------------------------- Net assets Beginning of year 764,964,886 766,283,156 - --------------------------------------------------------------------------------------------------------- End of year [including accumulated distributions in excess of net investment income as follows: 1996--($1,700,454) and 1995-- ($5,828,773)] (Note 1) $ 593,680,746 $ 764,964,886 - ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. PAGE 19 - ---------------------------------- NOTES TO FINANCIAL STATEMENTS (1.) Significant Accounting Policies Keystone High Income Bond Fund (B-4) (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 to achieve the highest possible income by investing in high yielding securities. 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. 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 that are generally recognized by institutional traders. Security valuations 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. 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: 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 PAGE 20 - ------------------------------------ Keystone High Income Bond Fund (B-4) 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 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. 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 the obligations of 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 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 monthly and net capital gains, if any, 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 the expiration of capital loss carryovers. (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 July 31, 1996 1995 - ------------------------------------------------------------------------ Shares sold 38,767,387 53,793,683 Shares redeemed (74,982,398) (55,102,608) Shares issued in reinvestment of dividends and distributions 7,959,753 10,479,964 - ------------------------------------------------------------------------ Net increase (decrease) (28,255,258) 9,171,039 - ------------------------------------------------------------------------
PAGE 21 - ----------------------------- (3.) Securities Transactions Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) for the year ended July 31, 1996 were $741,296,676 and $879,000,971, respectively. As of July 31, 1996, the Fund has a capital loss carryover for federal income tax purposes of approximately $501,090,000 which expires as follows: $43,981,000--1997, $93,048,000--1998, $91,149,000--1999, $122,350,000--2000, $44,605,000--2002 and $105,957,000--2003. (4.) Distribution Plan 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, 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 which may not exceed 1.00% of the Fund's average daily net assets, of which 0.75% is used to pay distribution expenses and 0.25% may be used to pay service fees. During the year ended July 31, 1996, the Fund paid expenses under the Plan of $6,747,276. Contingent deferred sales charges paid by redeeming shareholders may be paid to KIDC. 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. Total unpaid distribution costs at July 31, 1996 amounted to $5,597,863. (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, at an annual rate of 2.00% 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 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 representing 85% of the management fee received by KMI. During the year ended July 31, 1996, the Fund paid or accrued $18,334 to Keystone for certain accounting services. The Fund paid or accrued $1,927,228 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 July 31, 1996, the PAGE 22 - ------------------------------------ Keystone High Income Bond Fund (B-4) Fund incurred total custody fees of $349,176 and received a credit of $103,025 pursuant to this expense offset arrangement, resulting in a net custody expense of $246,151. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. (7.) Subsequent Distribution to Shareholders A distribution from net investment income of $0.028 per share was declared payable on September 6, 1996 to shareholders of record on August 23, 1996. This distribution is not reflected in the accompanying financial statements. (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. 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 year ended July 31, 1996, distributions of $0.37 were paid in shares or cash. In January 1997 complete information on calendar year 1996 distributions will be forwarded to you to assist in completing your 1996 federal income tax return. PAGE 23 - ----------------------------------- INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders Keystone High Income Bond Fund (B-4) We have audited the accompanying statement of assets and liabilities of Keystone High Income Bond Fund (B-4), including the schedule of investments, as of July 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 July 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Keystone High Income Bond Fund (B-4) as of July 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 6, 1996 [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 B4-R-9/96 47M [RECYCLE LOGO] ------------------------------- K E Y S T O N E [GRAPHIC OF MOUNTAINS] HIGH INCOME BOND FUND (B-4) ------------------------------- [KEYSTONE LOGO] ANNUAL REPORT JULY 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----