-----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, OuoxKcGMZZgECKM6SrEqYVlxVt7ECOhNy+7WKbPySmI2nBM64/PAQqxvm6tiDDAW hVqsUbx6zQseqaV3u4siJg== 0000950146-97-000441.txt : 19970328 0000950146-97-000441.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950146-97-000441 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970327 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: 97565636 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 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 six-month period which ended January 31, 1997. Performance Your Fund produced a total return of 7.88% for the six months and 10.24% for the twelve months which ended January 31, 1997. The Lehman Aggregate Bond Index--a broad index of U.S. corporate, government and mortgage securities--returned 4.94% for the six months and 3.25% for the twelve months. The Merrill Lynch High Yield Index returned 7.82% and 9.92% for the same six- and twelve-month periods. We were pleased with your Fund's progress during this six-month period. We believe two major objectives were achieved. First, the Fund outperformed its benchmark indices. Second, the price volatility of the portfolio was substantially reduced. We think the restructuring of the portfolio between February and May of 1996 was successful. Our primary objective was to increase the quality and liquidity of the Fund's holdings to lay the foundation for stronger and more consistent performance. To that end, we increased the number of the Fund's holdings, thereby reducing the concentration of securities, upgraded the quality of the largest holdings, and reduced the number of private placements, which tend to be less liquid, or may involve higher credit risks. The first signs of improvement in the performance were visible during our last report to you in July 1996. During the subsequent six months your Fund gathered an even stronger momentum. Favorable market environment High-yield bonds were the bright spot in the generally lackluster bond market during 1996. Stronger-than-expected economic growth, which hurt investment- grade corporate bonds and Treasuries, had a positive impact on the ability of the issuers of high-yield bonds to pay their debt. Bond investors, hungry for higher yields, flocked to the high-yield issues. The brisk demand drove the prices up and the yields, which move in the opposite direction, lower. Although the average difference in yield between high-yield bonds and Treasuries had narrowed during the year, the spread, which was 3.42 percentage points on December 26, 19961 was still high enough to adequately compensate the investors for the additional risk. Portfolio well positioned for the future We think 1997 potentially could be a good year for the high-yield market. The economy should continue to grow at a moderate rate, helping to keep inflation at bay. The growing numbers of corporate acquisitions and consolidations are bound to spur more issuance of high-yield debt and keep investor confidence at high levels. We think your Fund's upgraded portfolio is well aligned with this positive outlook. The Fund owns companies with strong assets and cashflows, which bodes well for their ability to make timely payments on their debt and withstand a potential economic downturn. We believe shareholders will have attractive opportunities for total return available in the high-yield market, while experiencing relatively low volatility of share prices. - ------------ 1 Source: The Merrill Lynch Master II Index. -continued- PAGE 2 - -------------------------------------- Keystone High Income Bond Fund (B-4) Prescott B. Crocker to take over the Fund's management We are pleased to inform you that Senior Vice President and group leader of the High Yield Bond Team Prescott B. Crocker took the Fund's helm effective March 1, 1997. Richard Cryan, who successfully restructured the portfolio and strengthened the Fund's performance during the past fiscal year, is moving on to manage Evergreen Keystone's institutional assets. The new portfolio manager brings more than 25 years' experience and an impressive track record managing fixed-income assets. More information about Mr. Crocker and a brief interview about his investment philosophy and outlook follows this letter. Keystone acquired by First Union Corporation On another note, we are pleased to inform you that Keystone has been acquired by First Union Corporation. First Union, based in Charlotte, N.C., is the nation's sixth largest bank holding company with assets of approximately $130 billion. Keystone Investment Management Company will continue to be the investment adviser, responsible for managing your Fund's portfolio. First Union also owns another mutual fund management company, Evergreen Asset Management Corp. Together, Evergreen and Keystone oversee approximately $30 billion in assets. Some services will now be provided under the "Evergreen Keystone Funds" umbrella. We believe the partnership between Evergreen and Keystone will strengthen our ability to offer you outstanding investment management services. We appreciate your continued support of Keystone funds. As always, we welcome your questions and comments. Sincerely, [Signature of Albert H. Elfner, III] Albert H. Elfner, III Chairman [Picture of Albert H. Elfner, III] [Signature of George S. Bissell] George S. Bissell Chairman of the Board Keystone Funds [Picture of George S. Bissell] March 1997 PAGE 3 - -------------------------------------------------------------------- A Discussion With Your Fund Manager [Picture of Prescott Crocker] Senior Vice President and Head of the High Yield Bond Team Prescott Crocker is portfolio manager of Keystone High Income Bond Fund (B-4). A Chartered Financial Analyst, Mr. Crocker has 25 years of senior-level investment experience. He is a graduate of Harvard College and holds an M.B.A. in international finance from Harvard Business School. Q How would you describe your investment style and philosophy? A I started my career in the financial industry as a banker. In that environment I looked at companies not as a buyer but rather a lender. Having come from that broader perspective, as a high yield manager, I always try to understand how I am going to get my money back. I value working with a team. I interact with the people by asking them the "what ifs" of the future in their areas. What can happen in the future to affect this credit? To what extent is the market understanding or even perceiving these possibilities? Q What are the key factors in your selection process? A There are three elements that we consider of greatest value in selecting securities. The first is the quality of the management. We believe the most reliable indication of the management's commitment to the business is a high equity stake in the company. The degree of the management's experience and understanding of the business is also an important factor. The second element of key importance in our analysis is the value of assets. We closely follow stock valuations, so that when we analyze the quality and the future potential of the issuers under consideration, we can derive our own assessment of the level of risk in that debt. This process is similar to that of a bank evaluating the value of a house in order to determine the extent of the loan. If the loan is perceived to be risky, the amount of the loan will be lower than it would be for a higher- quality loan. The third element is cashflow. We try to be forward looking, to have an understanding of how margins might change and how cashflows might develop. Consequently, we generally invest in companies that have tangible assets and real cashflows rather than in start-up companies. Q How do you ensure diversification and quality of the portfolio? A We want to keep our average holding at approxi mately 1% of total net assets to prevent any one investment from having too much of an impact on the overall portfolio. We participate in a broad base of industries, although there are some we are avoiding, such as restaurants, or underweighting, such as retail and steel. Otherwise, we seek to be no more than 30% overweighted relative to index averages per industry. Currently, we are overweighted in energy and cable communications and we feel that both of these are defensive industries in that their strong and growing cashflows will support prices in good markets as well as bad. We have a gifted staff of analysts who seek to obtain first-hand knowledge of each company they PAGE 4 - -------------------------------------------------------------------- Keystone High Income Bond Fund (B-4) follow for the Fund. The extent of knowledge and experience of Keystone's analysts helps to ensure the quality of our holdings. Q What is your outlook for the high-yield market? A High-yield bonds have been a top-performing asset class in the fixed-income market, largely due to a relatively strong economy and the accompanying stock bull market. As the stock market raised asset values, it has made high-yield lending less risky and thus improved loan-to-value relationships. Revlon is a good illustration. During the same time that Revlon's stock went from $15 to $40, the company's bonds increased from 5 to 100 percent of par value. There seems to be enough liquidity in our economy and banking system to provide a good basis for corporate profitability. Corporate health has never been better, as measured by the declining numbers of defaults and the growing numbers of bond upgrades versus downgrades. Given our expectation that stable economic growth will continue, we think that the high-yield market can provide attractive relative returns to investors going forward. Q What should investors reasonably expect from the Fund over the long-term? A Traditionally, high yield bonds have provided about twice the return of money market instruments with about half the volatility of a 10-year government bond.2 We expect that in 1997, the portfolio should provide returns in line with that trend. Looking long-term, I think the Fund is well positioned to meet its objective of providing generous income. I have been in this industry for many years and have had the good fortune of building a track record of consistently above-average results. So, while there are no guarantees about the future, I think that my experience, combined with the expertise of Keystone investment analysts, provides a good basis for expecting to see above-average long-term returns. - 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, Inc., Attn: Shareholder Communications, 22nd Floor, 200 Berkeley Street, Boston, Massachusetts 02116-5034. - ------------------------- 2 Keystone Investment Management Company's research. PAGE 5 - -------------------------------------- Your Fund's Performance Growth of an investment in Keystone High Income Bond Fund (B-4) In Thousands
1/87 1/88 1/89 1/90 1/91 1/92 Initial Investment 10000 8513.01 8376.7 6468.4 4324.66 5600.99 Reinvested Distributions 10000 9544.54 10626.2 9441.92 7557.61 11372.3 1/93 1/94 1/95 1/96 1/97 Initial Investment 5836.43 6716.23 5229.24 5192.07 5266.42 Reinvested Distributions 13201.1 16727.5 14227.7 15774.1 17389.5 A $10,000 investment in Keystone High Income Bond (B-4) made on January 31, 1987 with all distributions reinvested was worth $17,390 on January 31, 1997. Past performance is no guarantee of future results.
Six-Month Performance as of January 31, 1997 - ---------------------------------------------- Total return* 7.88% Net asset value 7/31/96 $4.10 1/31/97 $4.25 Dividends $0.17 Capital gains None
*Before deduction of contingent deferred sales charge (CDSC). Historical Record as of January 31, 1997 - ----------------------------------------------
If you If you did Cumulative total return redeemed not redeem 1-year 7.24% 10.24% 5-year 52.91% 52.91% 10-year 73.90% 73.90% Average annual total return 1-year 7.24% 10.24% 5-year 8.86% 8.86% 10-year 5.69% 5.69%
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 shares for another Keystone fund by phone or in writing. You may also exchange funds through Keystone's Automated Response Line (KARL). The Fund reserves the right to change or terminate the exchange offer. PAGE 6 - -------------------------------------------------------------------- Keystone High Income Bond Fund (B-4) Glossary of Mutual Fund Terms MUTUAL FUND--A company which combines the investment money of many people whose financial goals are similar, and invests that money in a variety of securities. A mutual fund allows the smaller investor the benefits of diversification, professional management and constant supervision usually available only to large investors. PORTFOLIO MANAGER--An investment professional who is responsible for managing a portfolio's assets prudently and making appropriate investment decisions, such as which securities to buy, hold and sell, based on the investment objectives of the portfolio. STOCK--Equity or ownership interest in a corporation, which represents a claim on the corporation's assets and earnings. BOND--Security issued by a government or corporation to those from whom it has borrowed money. A bond usually promises to pay interest income to the bondholder at regular intervals and to repay the entire amount borrowed at maturity date. CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds) that is exchangeable for a set number of another security type (usually common stocks) at a pre-stated price. MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified portfolio of short- term securities, including commercial paper, bankers' acceptances, certificates of deposit and other short-term instruments. The fund pays income which can fluctuate daily. Liquidity and safety of principal are primary objectives. NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The NAV per share is determined by subtracting a fund's total liabilities from its total assets, and dividing that amount by the number of fund shares outstanding. DIVIDEND--A per share distribution of the income earned from the fund's portfolio holdings. When a dividend distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets. CAPITAL GAIN--The profit from the sale of securities, less any losses. Capital gains are paid to fund shareholders on a per share basis. When a capital gain distribution is made, the fund's net asset value drops by the amount of the distribution because the distribution is no longer considered part of the fund's assets. YIELD--The annualized rate of income as measured against the current net asset value of fund shares. TOTAL RETURN--The change in value of a fund investment over a specified period of time, taking into account the change in a fund's market price and the reinvestment of all fund distributions. SHORT-TERM--An investment with a maturity of one year or less. LONG-TERM--An investment with a maturity of greater than one year. AVERAGE MATURITY--The average number of days until the notes, drafts, acceptances, bonds or other debt instruments in a portfolio become due and payable. OFFERING PRICE--The offering price of a share of a mutual fund is the price at which the share is sold to the public. PAGE 7 - -------------------------------------- SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- -------------- FIXED INCOME (88.6%) INDUSTRIAL BONDS & NOTES (86.5%) AEROSPACE (4.1%) Airplanes Pass Thru Trust Bond (Subord.) 10.875% 2019 $4,000,000 $ 4,436,400 BE Aerospace, Incorporated Sr. Notes (Subord.) 9.875 2006 3,000,000 3,135,000 CHC Helicopter Corporation Sr. Notes (Subord.) 11.500 2002 2,500,000 2,593,750 Continental Airlines, Incorporated (b) Sr. Equip. Trust Cert. 16.000 1999 932,845 932,845 Greenwhich Air Services, Incorporated Sr. Notes 10.500 2006 2,725,000 2,915,750 Moog, Incorporated (g) Sr. Notes (Subord.) 10.000 2006 3,500,000 3,675,000 Sequa Corporation Sr. Notes 9.375 2003 3,000,000 3,060,000 UNC, Incorporated (g) Sr. Notes (Subord.) 11.000 2006 2,500,000 2,675,000 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- 23,423,745 ------------- BROADCASTING (6.3%) Ackerly Communications, Incorporated Sr. Notes 10.750 2003 3,850,000 4,081,000 Benedek Communications Corporation (Eff. Yield 11.79%) (c) Sr. Disc. Notes 0.000 2006 7,000,000 4,252,500 EZ Communications, Incorporated Sr. Notes (Subord.) 9.750 2005 3,000,000 3,105,000 K-III Communications Corporation (g) Sr. Notes 8.500 2006 3,325,000 3,275,125 Nextel Communications, Incorporated (Eff. Yield 11.12%) (c) Sr. Disc. Notes 0.000 2004 2,000,000 1,410,000 Park Broadcasting, Incorporated (g) Sr. Notes 11.750 2004 3,687,000 4,461,270 Paxson Communications Corporation Sr. Notes (Subord.) 11.625 2002 5,000,000 5,250,000 SFX Broadcasting, Incorporated (g) Sr. Notes (Subord.) 10.750 2006 5,000,000 5,300,000 Sinclair Broadcast Group, Incorporated Sr. Notes (Subord.) 10.000 2005 5,000,000 5,125,000 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- 36,259,895 ------------- CABLE/OTHER VIDEO DISTRIBUTION (9.9%) Adelphia Communications Corporation Sr. Notes 12.500 2002 1,765,000 1,809,125 Cablevision Systems Corporation Sr. Deb. (Subord.) 9.875 2013 2,800,000 2,744,000 Cablevision Systems Corporation Sr. Deb. (Subord.) 10.500 2016 2,700,000 2,781,000 Charter Communications, South Eastern Capital Limited Partnership (g) Sr. Notes 11.250 2006 5,000,000 5,300,000 Comcast Corporation Sr. Deb. (Subord.) 10.625 2012 2,500,000 2,762,500 Diamond Cable Communications Company (Eff. Yield 11.57%) (c) Sr. Disc. Notes 0.000 2004 6,000,000 4,860,000 Frontiervision Sr. Notes (Subord.) 11.000 2006 2,250,000 2,317,500 Fundy Cable Limited Sr. Notes 11.000 2005 4,825,000 5,114,500 Lenfest Communications, Incorporated Sr. Notes 10.500 2006 5,000,000 5,300,000 Marcus Cable Operations Limited Partnership (Eff. Yield 12.06%) (c) Sr. Disc. Notes (Subord.) 0.000 2004 6,000,000 4,950,000 People's Choice T.V. Corporation (Eff. Yield 12.47%) (c) Unit (Sr. Disc. Notes/Wts.) 0.000 2004 6,000,000 2,400,000
(continued on next page) PAGE 8 - -------------------------------------- Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
CABLE/OTHER VIDEO DISTRIBUTION (continued) Rogers Cablesystems Limited Sr. Notes Telewest Communications PLC (Eff. Yield 9.86%) (c) Sr. Disc. Deb. Videotron Group Limited Deb. (Subord.) Voting Conv. Videotron Holdings PLC (Eff. Yield 9.70%) (c) Sr. Disc. Notes - ----------------------------------------------- ----------------------------- CHEMICALS (4.4%) Astor Corporation (g) Sr. Notes (Subord.) Freedom Chemicals, Incorporated (g) Sr. Notes (Subord.) ISP Holdings, Incorporated (g) Sr. Notes Lanesborough Corporation Sr. Secd. Notes NL Industries, Incorporated Sr. Notes Rexene Corporation Sr. Notes Scotts Company Sr. Notes (Subord.) Sifto Canada, Incorporated Sr. Notes Texas Petrochemical Corporation (g) Sr. Notes (Subord.) - ----------------------------------------------- ----------------------------- CONSUMER (3.6%) Dominion Textile USA Sr. Notes Exide Corporation Sr. Notes Harvard Industries, Incorporated Sr. Notes International Semi-Tech Electronics, Incorporated (Eff. Yield 11.96%) (c) Sr. Disc. Notes Revlon Consumer Products Corporation (g) Sr. Notes (Subord.) Revlon Worldwide Corporation (Eff. Yield 13.00%) (c) Sr. Disc. Notes - ----------------------------------------------- ----------------------------- DIVERSIFIED MEDIA (2.6%) Affinity Group, Incorporated Sr. Notes (Subord.) Cinemark USA, Incorporated Sr. Notes (Subord.) Lamar Advertising Company Sr. Secd. Notes Viacom, Incorporated Deb. (Subord.) Exchangeable - ----------------------------------------------- ----------------------------- ENERGY (10.5%) Clark USA, Incorporated Sr. Notes Cliffs Drilling (g) Sr. Notes Crown Central Petroleum Corporation Sr. Notes Dual Drilling Company Sr. Notes (Subord.) Falcon Drilling Sr. Notes
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- -------------- CABLE/OTHER VIDEO DISTRIBUTION (continued) Rogers Cablesystems Limited 10.000% 2005 $5,000,000 $ 5,275,000 Telewest Communications PLC (Eff. Yield 9.86%) (c) 0.000 2007 7,000,000 4,795,000 Videotron Group Limited 10.625 2005 1,000,000 1,110,000 Videotron Holdings PLC (Eff. Yield 9.70%) (c) 0.000 2005 7,000,000 5,530,000 - ----------------------------------------------- -------- ------ ----------- ------------- 57,048,625 ------------- CHEMICALS (4.4%) Astor Corporation (g) 10.500 2006 3,750,000 3,909,375 Freedom Chemicals, Incorporated (g) 10.625 2006 2,250,000 2,379,375 ISP Holdings, Incorporated (g) 9.750 2002 4,816,000 4,936,400 Lanesborough Corporation 10.000 2000 1,500,000 1,200,000 NL Industries, Incorporated 11.750 2003 1,500,000 1,582,500 Rexene Corporation 11.750 2004 3,375,000 3,788,437 Scotts Company 9.875 2004 3,000,000 3,135,000 Sifto Canada, Incorporated 8.500 2000 3,000,000 2,970,000 Texas Petrochemical Corporation (g) 11.125 2006 1,250,000 1,343,750 - ----------------------------------------------- -------- ------ ----------- ------------- 25,244,837 ------------- CONSUMER (3.6%) Dominion Textile USA 9.250 2006 4,075,000 4,156,500 Exide Corporation 10.000 2005 4,500,000 4,651,875 Harvard Industries, Incorporated 11.125 2005 5,000,000 3,800,000 International Semi-Tech Electronics, Incorporated (Eff. Yield 11.96%) (c) 0.000 2003 5,250,000 3,097,500 Revlon Consumer Products Corporation (g) 11.000 2003 2,750,000 2,901,250 Revlon Worldwide Corporation (Eff. Yield 13.00%) (c) 0.000 1998 2,275,000 2,047,500 - ----------------------------------------------- -------- ------ ----------- ------------- 20,654,625 ------------- DIVERSIFIED MEDIA (2.6%) Affinity Group, Incorporated 11.500 2003 5,000,000 5,200,000 Cinemark USA, Incorporated 9.625 2008 5,000,000 5,087,500 Lamar Advertising Company 9.625 2006 2,200,000 2,249,500 Viacom, Incorporated 8.000 2006 2,735,000 2,652,950 - ----------------------------------------------- -------- ------ ----------- ------------- 15,189,950 ------------- ENERGY (10.5%) Clark USA, Incorporated 10.875 2005 5,000,000 5,050,000 Cliffs Drilling (g) 10.250 2003 1,650,000 1,773,750 Crown Central Petroleum Corporation 10.875 2005 5,000,000 5,112,500 Dual Drilling Company 9.875 2004 4,550,000 4,914,000 Falcon Drilling 8.875 2003 5,000,000 5,225,000
PAGE 9 - -------------------------------------- SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- -------------- ENERGY (continued) Ferrellgas Partners Limited Partnership (g) Sr. Notes 9.375% 2006 $4,850,000 $ 4,904,562 Gerrity Oil & Gas Corporation Sr. Notes (Subord.) 11.750 2004 2,400,000 2,616,000 Gulf Canada Resources Limited Sr. Notes (Subord.) 9.250 2004 2,000,000 2,115,000 HS Resources, Incorporated (g) Sr. Notes (Subord.) 9.250 2006 2,450,000 2,499,000 Maxus Energy Corporation Notes 9.375 2003 850,000 886,125 Mesa Operating Company Sr. Notes (Subord.) 10.625 2006 3,500,000 3,788,750 National Energy Group, Incorporated (g) Sr. Notes 10.750 2006 4,000,000 4,280,000 Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 3,000,000 3,165,000 Parker Drilling Company (g) Gtd. Deb. 9.750 2006 2,500,000 2,637,500 Plains Resources, Incorporated (g) Sr. Notes (Subord.) 10.250 2006 2,500,000 2,700,000 Seagull Energy Corporation Sr. Notes (Subord.) 8.625 2005 4,000,000 4,060,000 TransTexas Gas Corporation Sr. Notes 11.500 2002 1,500,000 1,646,250 Vintage Petroleum, Incorporated Sr. Notes (Subord.) 9.000 2005 2,750,000 2,825,625 - --------------------------------------------- -------------------------- ------- ------ ----------- ------------- 60,199,062 ------------- FINANCIAL (3.2%) Chartwell Reinsurance Holdings Corporation Sr. Notes 10.250 2004 3,575,000 3,865,469 Conseco, Incorporated Sr. Notes 10.500 2004 3,750,000 4,423,687 First Nationwide Parent Holdings Sr. Notes (Exchangeable) 12.500 2003 4,200,000 4,683,000 Reliance Group Holdings, Incorporated Sr. Deb. (Subord.) 9.750 2003 5,000,000 5,250,000 - --------------------------------------------- -------------------------- ------- ------ ----------- ------------- 18,222,156 ------------- FOODS/TOBACCO/BEVERAGES (4.6%) Chiquita Brands International, Incorporated Sr. Notes 10.250 2006 5,000,000 5,250,000 Cott Corporation Sr. Notes 9.375 2005 3,500,000 3,605,000 Eagle Food Centers, Incorporated Sr. Notes 8.625 2000 4,000,000 3,870,000 Iowa Select Farms (Eff. Yield 15.26%) (8/02/94--$5,923,869) (b) (c) (e) Sr. Disc. Notes 0.000 2004 11,450,000 7,377,235 Ralphs Grocery Company Sr. Notes 10.450 2004 1,100,000 1,157,750 TLC Beatrice International Holdings, Incorporated Sr. Notes 11.500 2005 5,000,000 5,275,000 - --------------------------------------------- -------------------------- ------- ------ ----------- ------------- 26,534,985 ------------- FOREST PRODUCTS/CONTAINERS (5.9%) Asia Pulp and Paper International Finance Company Secd. Notes 11.750 2005 5,000,000 5,431,250 Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 2,500,000 2,512,500 Buckeye Cellulose Corporation Sr. Notes (Subord.) 9.250 2008 2,500,000 2,587,500 Container Corporation of America Sr. Notes 11.250 2004 3,000,000 3,270,000 Four M Corporation (g) Sr. Notes 12.000 2006 2,000,000 2,100,000 Iron Mountain, Incorporated Sr. Notes (Subord.) 10.125 2006 2,000,000 2,120,000 Owens-Illinois, Incorporated Sr. Notes (Subord.) 10.500 2002 2,700,000 2,855,250 Packaging Resources, Incorporated (g) Sr. Notes (Subord.) 11.625 2003 2,000,000 2,100,000
(continued on next page) PAGE 10 - -------------------------------------- Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- -------------- FOREST PRODUCTS/CONTAINERS (continued) Printpack, Incorporated (g) Sr. Notes (Subord.) 10.625% 2006 $3,150,000 $ 3,307,500 Riverwood International Corporation Sr. Notes 10.875 2008 2,000,000 1,730,000 Tembec Finance Corporation Sr. Notes 9.875 2005 5,500,000 5,238,750 U.S. Can Corporation (g) Sr. Notes (Subord.) 10.125 2006 750,000 787,500 - -------------------------------------------- -------------------------- -------- ------ ----------- ------------- 34,040,250 ------------- GAMING (7.6%) California Hotel Finance Corporation Liquid Real Estate Trust 11.000 2002 5,000,000 5,237,500 Casino America, Incorporated Sr. Notes 12.500 2003 4,250,000 4,186,250 Grand Palais Casino, Incorporated (8/15/94-$7,750,000) (a) (b) (d) Sr. Secd. PIK Notes 18.250 1997 8,571,123 86 HMH Properties, Incorporated Sr. Notes 9.500 2005 5,000,000 5,212,500 Livingwell, Incorporated (a)(b)(d) Sr. Deb. (Subord.) 13.125 2001 2,000,000 20 Lodgenet Entertainment Corporation (g) Sr. Notes 10.250 2006 4,500,000 4,494,375 Prime Hospitality Corporation 1st Mtg. Notes 9.250 2006 2,500,000 2,525,000 Showboat, Incorporated Sr. Notes (Subord.) 13.000 2009 5,000,000 5,737,500 Six Flags Theme Parks, Incorporated Sr. Notes (Subord.) 12.250 2005 2,150,000 2,058,625 Starcraft Corporation (a) (b) (d) Notes (Subord.) 16.500 1998 6,925,000 138,500 Station Casinos, Incorporated Sr. Notes (Subord.) 10.125 2006 5,000,000 5,125,000 Trump Atlantic City Associates 1st Mtg. Notes 11.250 2006 5,000,000 4,825,000 Wyndham Hotel Corporation Sr. Notes (Subord.) 10.500 2006 4,000,000 4,240,000 - -------------------------------------------- -------------------------- -------- ------ ----------- ------------- 43,780,356 ------------- HEALTHCARE (2.2%) Genesis Health Sr. Notes (Subord.) 9.750 2005 4,000,000 4,200,000 Regency Health Services, Incorporated Sr. Notes (Subord.) 9.875 2002 5,000,000 5,100,000 Universal Health Services, Incorporated Sr. Notes 8.750 2005 3,200,000 3,272,000 - -------------------------------------------- -------------------------- -------- ------ ----------- ------------- 12,572,000 ------------- HOUSING (1.7%) Continental Homes Holding Corporation Sr. Notes 10.000 2006 5,000,000 5,162,500 Schuller International Group, Incorporated Sr. Notes 10.875 2004 4,025,000 4,447,625 - -------------------------------------------- -------------------------- -------- ------ ----------- ------------- 9,610,125 ------------- MANUFACTURING (3.6%) AAF McQuay, Incorporated Sr. Notes 8.875 2003 4,000,000 3,955,000 Chatwins Group, Incorporated Sr. Notes 13.000 2003 4,000,000 3,760,000 Hayes Wheels International, Incorporated Sr. Notes (Subord.) 11.000 2006 2,500,000 2,737,500 JPS Automotive Products Corporation Sr. Notes 11.125 2001 2,000,000 2,160,000 Mark IV Industries, Incorporated Sr. Notes (Subord.) 7.750 2006 5,000,000 4,893,750 Motors and Gears, Incorporated (g) Sr. Notes 10.750 2006 3,000,000 3,075,000 - -------------------------------------------- -------------------------- -------- ------ ----------- ------------- 20,581,250 -------------
PAGE 11 - -------------------------------------- SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- -------------- METALS/MINERALS (3.1%) AK Steel Corporation Sr. Notes 10.750% 2004 $5,000,000 $ 5,425,000 Bethlehem Steel Corporation Sr. Notes 10.375 2003 5,000,000 5,300,000 Commonwealth Aluminum Corporation Sr. Notes (Subord.) 10.750 2006 4,750,000 4,963,750 Jorgensen Earle Sr. Notes 10.750 2000 2,000,000 2,030,000 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- 17,718,750 ------------- RETAIL (4.1%) Cole National Group, Incorporated Sr. Notes 11.250 2001 4,000,000 4,420,000 Finlay Enterprises (Eff. Yield 9.12%) (c) Sr. Disc. Deb. 0.000 2005 2,000,000 1,800,000 Finlay Fine Jewelry Corporation Sr. Notes 10.625 2003 5,000,000 5,300,000 Hills Stores Company (g) Sr. Notes 12.500 2003 4,000,000 2,960,000 Michaels Stores, Incorporated Sr. Notes 10.875 2006 1,625,000 1,600,625 Pamida, Incorporated Sr. Notes (Subord.) 11.750 2003 3,000,000 2,520,000 Service Merchandise Company Sr. Deb. (Subord.) 9.000 2004 3,750,000 2,812,500 Southland Corporation Sr. Deb. (Subord.) 5.000 2003 2,500,000 2,050,000 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- 23,463,125 ------------- TECHNOLOGY (0.2%) Webb (Del E.) Corporation Sr. Notes (Subord.) 9.750 2008 1,500,000 1,518,750 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- TELECOMMUNICATIONS (2.8%) Bell Cablemedia PLC (Eff. Yield 10.67%) (c) Sr. Disc. Notes 0.000 2005 6,675,000 5,323,312 Dial Call Communications, Incorporated (Eff. Yield 10.55%) (c) Sr. Disc. Notes 0.000 2005 1,000,000 715,000 Dial Call Communications, Incorporated (Eff. Yield 12.59%) (c) Sr. Disc. Notes 0.000 2004 3,000,000 2,265,000 MFS Communication (Eff. Yield 8.49%) (c) Sr. Disc. Notes 0.000 2004 6,000,000 5,235,000 Teleport Communications Group Sr. Notes 9.875 2006 2,175,000 2,300,062 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- 15,838,374 ------------- TRANSPORTATION (0.4%) Eletson Holdings, Incorporated 1st Pfd. Mtg. Notes 9.250 2003 2,500,000 2,506,250 - --------------------------------------------- ----------------------------- -------- ------ ----------- ------------- WIRELESS COMMUNICATIONS (5.7%) Centennial Cellular Corporation Sr. Notes 8.875 2001 5,000,000 4,900,000 Comcast Cellular Corporation (Eff. Yield 13.42%) (c) Part. Disc. Notes 0.000 2000 7,000,000 5,040,000 Heartland Wireless Communications, Incorporated Sr. Notes 13.000 2003 1,425,000 1,396,500 Heartland Wireless Communications, Incorporated (g) Sr. Notes 14.000 2004 3,000,000 3,112,500 Mobile Telecommunication Technology Sr. Notes 13.500 2002 650,000 637,000 Pagemart Nationwide, Incorporated (Eff. Yield 10.80%) (c) Unit (Sr. Disc. Notes/Wts.) 0.000 2005 6,980,000 4,886,000
(continued on next page) PAGE 12 - -------------------------------------- Keystone High Income Bond Fund (B-4) SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Par Market Rate Date Value Value ---------- ----------- ------------- ------------ WIRELESS COMMUNICATIONS (continued) Pricecellular Wireless Corporation (Eff. Yield 10.64%) (c) Sr. Disc. Notes 0.000% 2003 $5,750,000 $ 5,031,250 Rogers Cantel Sr. Deb. 9.375 2008 2,500,000 2,600,000 Vanguard Cellular Systems, Incorporated Deb. 9.375 2006 5,000,000 5,037,500 - ----------------------------------------------- ------------------------ ------- ------ ----------- ------------ 32,640,750 ------------ TOTAL INDUSTRIAL BONDS & NOTES (Cost--$496,848,036) 497,047,860 - --------------------------------------------------------------------------------------------------------------- ------------ FOREIGN BONDS (U.S. DOLLARS) (2.1%) Intermedia Capital Partners (g) Sr. Notes 11.250 2006 5,000,000 5,275,000 Tansportacion Maritima Mexicana Sr. Notes 10.000 2006 3,000,000 3,022,500 Yacimientos Petroliferos Fiscales S.A. (YPF) Notes 8.000 2004 3,750,000 3,637,500 - ----------------------------------------------- ------------------------ ------- ------ ----------- ------------ TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$11,446,802) 11,935,000 - --------------------------------------------------------------------------------------------------------------- ------------ TOTAL FIXED INCOME (Cost $508,294,838) 508,982,860 - --------------------------------------------------------------------------------------------------------------- ------------ - --------------------------------------------------------------------------------------------------------------- ------------ Shares -------- COMMON STOCKS/WARRANTS (1.2%) Casino America, Incorporated (d) 254,790 708,635 Casino America, Incorporated, wts. (d) 47,778 478 Chatwins Group, Incorporated, wts. (b) (d) 9,500 9,500 CHC Helicopter Corporation, wts. (d) 76,000 38,000 Colorado Gaming and Entertainment Company (d) 410,062 1,845,279 Grand Palais Casinos, Incorporated, Series A, wts. (8/15/94--$2,507) (a) (b) (d) 250,735 251 Grand Palais Casinos, Incorporated, Series B, wts. (8/15/94--$1,368) (a) (b) (d) 136,765 137 Grand Palais Casinos, Incorporated, Series C, wts. (8/15/94--$12,080) (a) (b) (d) 1,208,088 1,208 Grand Palais Casinos, Incorporated, Series D, wts. (8/15/94--$680,643) (a) (b) (d) 680,643 681 Grand Palais Casinos, Incorporated, Ltd. Liab. Int. (8/15/94--$0) (a) (b) (d) 931,379 931 Iowa Select Farms, wts. (2/04/94--$2,420,481) (b) (d) (e) 298,530 298,530 Lanesborough Corporation (b) (d) 2,056 21 Nextel Communications, Incorporated, wts. (d) 9,510 95 PM Holdings Corporation (d) 2,964 3 Specialty Equipment Cos., Incorporated (d) 300,000 4,087,500 Specialty Foods Acquisition Corporation (d) 131,250 32,813 - ------------------------------------------------------------------------------------- ----------- ------------ TOTAL COMMON STOCKS/WARRANTS (Cost--$8,451,726) 7,024,062 - --------------------------------------------------------------------------------------------------------------- ------------ - --------------------------------------------------------------------------------------------------------------- ------------ PREFERRED STOCK (2.4%) Ampex Corporation (Cost--$23,987,332) (b) (d) 24,562 13,509,100 - ------------------------------------------------------------------------------------- ----------- ------------ MISCELLANEOUS INVESTMENT (0.0%) Gold River Hotel and Casino Corporation (Cost--$424,084) (b) (d) Liquidating R.E. Trust 10,775,000 107,750 - ----------------------------------------------- ------------------------ ----------- ------------
PAGE 13 - -------------------------------------- SCHEDULE OF INVESTMENTS--January 31, 1997 (Unaudited)
Interest Maturity Maturity Market Rate Date Value Value ---------- ----------- -------------- -------------- REPURCHASE AGREEMENT (4.9%) (Cost--$28,022,000) Keystone Joint Repurchase Agreement (Investments in repurchase agreements, in a joint trading account, purchased 1/31/97) (f) 5.580% 02/03/97 $28,035,030 $28,022,000 - ----------------------------------------------- -------- ---------- ------------ ------------ TOTAL INVESTMENTS (Cost--$569,179,980) 557,645,772 OTHER ASSETS AND LIABILITIES--NET (2.9%) 16,825,212 - ---------------------------------------------------------------------------------------------------- ------------ NET ASSETS (100.0%) $574,470,984 - ---------------------------------------------------------------------------------------------------- ------------ - ---------------------------------------------------------------------------------------------------- ------------
(a) Securities which have defaulted on payment of interest and/or principal. The Fund has stopped accruing income on those so identified. At January 31, 1997, the face value of these securities was $141,814 (0.02% of the Fund's net asset value). (b) 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 January 31, 1997, the fair value of these restricted securities was $7,679,059 (1.34% of the Fund's net assets). (c) Effective yield (calculated at date of purchase) is the yield at which the bond accretes on an annual basis until maturity date. (d) Non-income-producing security. (e) 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 January 31, 1997, the fair value of these securities was $7,675,765 (1.34% of the Fund's net assets). (f) The repurchase agreements are fully collateralized by U.S. Government and/or agency obligations based on market prices at January 31, 1997. (g) 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 14 - -------------------------------------- Keystone High Income Bond Fund (B-4) FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
Six Months Ended January 31, 1997 - ---------------------------------------- ---------------------- (Unaudited) Net asset value beginning of period $ 4.10 - ---------------------------------------- -------------- Income from investment operations Net investment income 0.16 Net realized and unrealized gain (loss) on investments 0.16 - ---------------------------------------- -------------- Total from investment operations 0.32 - ---------------------------------------- -------------- Less distributions from: Net investment income (0.17) In excess of net investment income 0.00 Tax basis return of capital 0.00 - ---------------------------------------- -------------- Total distributions (0.17) - ---------------------------------------- -------------- Net asset value end of period $ 4.25 - ---------------------------------------- -------------- Total return (a) 7.88% Ratios/supplemental data Ratios to average net assets: Total expenses 1.93%(b)(c) Net investment income 7.59%(c) Portfolio turnover rate 52% - ---------------------------------------- -------------- Net assets end of period (thousands) $ 574,471 - ---------------------------------------- -------------- Year Ended July 31, 1996 1995 1994 1993 1992 - ---------------------------------------- -------- ------- -------- ------- ------- Net asset value beginning of period $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19 - ---------------------------------------- -------- ------- --------- ------- ------- Income from investment operations Net investment income 0.32 0.38 0.38 0.45 0.49 Net realized and unrealized gain (loss) on investments (0.27) (0.15) (0.38) 0.44 0.58 - ---------------------------------------- -------- ------- --------- ------- ------- Total from investment operations 0.05 0.23 0.00 0.89 1.07 - ---------------------------------------- -------- ------- --------- ------- ------- Less distributions from: Net investment income (0.31) (0.37) (0.38) (0.45) (0.50) In excess of net investment income (0.06) (0.02) (0.07) (0.05) (0.02) Tax basis return of capital 0.00 (0.10) 0.00 0.00 0.00 - ---------------------------------------- -------- ------- --------- ------- ------- Total distributions (0.37) (0.49) (0.45) (0.50) (0.52) - ---------------------------------------- -------- ------- --------- ------- ------- Net asset value end of period $ 4.10 $ 4.42 $ 4.68 $ 5.13 $ 4.74 - ---------------------------------------- -------- ------- --------- ------- ------- Total return (a) 1.38% 5.66% (0.41%) 20.28% 27.25% Ratios/supplemental data Ratios to average net assets: Total expenses 1.94%(b) 2.03% 1.84% 2.06% 2.17% Net investment income 7.92% 8.64% 7.57% 9.30% 10.86% Portfolio turnover rate 116% 82% 110% 125% 94% - ---------------------------------------- -------- ------- --------- ------- ------- Net assets end of period (thousands) $593,681 $764,965 $766,283 $972,164 $841,757 - ---------------------------------------- -------- ------- --------- ------- -------
(a) Excluding applicable sales charges. (b) The expense ratio includes indirectly paid expenses. Excluding indirectly paid expenses, the expense ratio would have been 1.92% (annualized) for the six months ended January 31, 1997 and 1.93% for the year ended July 31, 1996. (c) Annualized. See Notes to Financial Statements. PAGE 15 - -------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES January 31, 1997 (Unaudited) Assets (Note 2) Investments at market value Unaffiliated issuers (identified cost--$560,835,630) $ 549,970,007 Affiliated issuers (identified cost--$8,344,350) 7,675,765 - --------------------------------------------------------- ------------- Total investments 557,645,772 - --------------------------------------------------------- ------------- Cash 3,966 Receivable for: Investments sold 13,163,368 Interest 12,111,784 Fund shares sold 215,106 Prepaid expenses and other assets 471,442 - --------------------------------------------------------- ------------- Total assets 583,611,438 - --------------------------------------------------------- ------------- Liabilities (Notes 2, 4 and 5) Payable for: Investments purchased 6,301,562 Distributions to shareholders 1,547,469 Fund shares redeemed 709,597 Due to related parties 499,109 Other accrued expenses 82,717 - --------------------------------------------------------- ------------- Total liabilities 9,140,454 - --------------------------------------------------------- ------------- Net assets $ 574,470,984 ========================================================= ============= Net assets represented by Paid-in capital $1,094,447,053 Accumulated distributions in excess of net investment income (2,361,464) Accumulated net realized loss on investments and foreign currency related transactions (506,080,397) Net unrealized depreciation on investments (11,534,208) - --------------------------------------------------------- ------------- Total net assets $ 574,470,984 ========================================================= ============= Net Asset Value per share (Note 2) Net asset value of $574,470,984 [divided by] 135,232,353 outstanding shares of beneficial interest $4.25 ========================================================= =============
See Notes to Financial Statements. STATEMENT OF OPERATIONS Six Months Ended January 31, 1997 (Unaudited) Investment income Interest: Unaffiliated issuers $27,894,156 Affiliated issuers 611,007 Other income 228,063 - -------------------------------------- ----------- Total income 28,733,226 - -------------------------------------- ----------- Expenses (Notes 4, 5 and 6) Distribution Plan expenses $3,014,920 Management fee 1,703,672 Transfer agent fees 834,247 Custodian fees 149,606 Accounting, auditing and legal 38,705 Trustees' fees and expenses 20,945 Other 70,475 - -------------------------------------- ---------- Total expenses 5,832,570 Less: Expenses paid indirectly (29,350) - -------------------------------------- ---------- Net expenses 5,803,220 - -------------------------------------- ----------- Net investment income 22,930,006 - -------------------------------------- ----------- Net realized and unrealized gain on investments (Note 3) Net realized loss on investments (826,722) Net change in unrealized appreciation (depreciation) on investments 22,640,430 - -------------------------------------- ----------- Net realized and unrealized gain on investments 21,813,708 - -------------------------------------- ----------- Net increase in net assets resulting from operations $44,743,714 ====================================== ===========
PAGE 16 - -------------------------------------- Keystone High Income Bond Fund (B-4) STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended Year Ended January 31, 1996 July 31, 1996 ------------------- --------------- (Unaudited) Operations Net investment income $ 22,930,006 $ 53,347,924 Net realized gain (loss) on investments and foreign currency related transactions (826,722) 12,528,472 Net change in unrealized appreciation (depreciation) on investments 22,640,430 (59,100,847) - ---------------------------------------------------------------------- ------------- ------------- Net increase in net assets resulting from operations 44,743,714 6,775,549 - ---------------------------------------------------------------------- ------------- ------------- Distributions to shareholders from (Note 1) Net investment income (23,591,016) (49,946,109) In excess of net investment income 0 (9,344,299) - ---------------------------------------------------------------------- ------------- ------------- Total distributions to shareholders (23,591,016) (59,290,408) - ---------------------------------------------------------------------- ------------- ------------- Capital share transactions (Note 2) Proceeds from shares sold 83,660,074 162,907,187 Payments for shares redeemed (137,460,832) (315,113,110) Net asset value of shares issued in reinvestment of dividends and distributions 13,438,298 33,436,642 - ---------------------------------------------------------------------- ------------- ------------- Net decrease in capital share transactions (40,362,460) (118,769,281) - ---------------------------------------------------------------------- ------------- ------------- Total decrease in net assets (19,209,762) (171,284,140) - ---------------------------------------------------------------------- ------------- ------------- Net assets Beginning of period 593,680,746 764,964,886 - ---------------------------------------------------------------------- ------------- ------------- End of period [Including accumulated distributions in excess of net investment income as follows: 1997--($2,361,464) and 1996--($1,700,454)] (Note 1) $ 574,470,984 $ 593,680,746 - ---------------------------------------------------------------------- ------------- -------------
See Notes to Financial Statements. PAGE 17 - -------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Significant Accounting Policies Keystone High Income Bond Fund (B-4) (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 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 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. 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 exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency transactions. PAGE 18 - -------------------------------------- Keystone High Income Bond Fund (B-4) 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. 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. Dividend income is recorded on the ex-dividend date. E. 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. F. 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 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:
Six months ended Year ended January 31, 1997 July 31, 1996 ------------------- --------------- Shares sold 19,916,411 38,767,387 Shares redeemed (32,686,436) (74,982,398) Shares issued in reinvestment of dividends and distributions 3,205,323 7,959,753 - ----------------- ------------ ------------ Net decrease (9,564,702) (28,255,258) - ----------------- ------------ ------------ - ----------------- ------------ ------------
3. Securities Transactions Cost of purchases and proceeds from sales of investment securities (excluding short-term securities and U.S. government securities) for the six months ended January 31, 1997 were $287,250,386 and $351,076,929, respectively. As of July 31, 1996, the Fund had 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 Plans The Fund bears some of the costs of selling its shares under a Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan, the Fund pays its principal underwriter amounts which are calculated and paid monthly. PAGE 19 - -------------------------------------- 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 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 Distribution 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 shareholder service fees. The Distribution Plan may be terminated at any time by vote of the Independent Trustees or by vote of a majority of the outstanding voting shares. However, after the termination of the Distribution Plan, and subject to the discretion of the Independent Trustees, payments to EKIS and/or EKD may continue as compensation for services which had been earned while the Distribution 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 by the Fund would be within permitted limits. Total unpaid distribution costs at January 31, 1997 amounted to $3,644,570. 5. Investment Management Agreement and Other Affiliated Transactions Under an investment advisory 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 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 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 January 31, 1997, the Fund paid or accrued $13,974 to Keystone for certain accounting services. The Fund paid or accrued $834,247 to Evergreen Keystone Service Company (formerly, Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services rendered 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 January 31, 1997, the Fund incurred total custody fees of $149,606 and received a credit of $29,350 pursuant to this expense offset arrangement, resulting in a net custody expense of $120,256. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. PAGE 20 - -------------------------------------- Keystone High Income Bond Fund (B-4) 7. Subsequent Distribution to Shareholders Distributions from net investment income of $.028 per share were declared payable by March 6, 1997 to shareholders of record on February 25, 1997. This distribution is not reflected in the accompanying financial statements. PAGE 21 - -------------------------------------- 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, beside each proposal are the results of that vote.
Affirmative Withheld -------------- ----------- 1. To elect the following Trustees: Frederick Amling 88,203,225 2,803,431 Laurence B. Ashkin 88,106,990 2,899,666 Charles A. Austin III 88,180,572 2,826,083 Foster Bam 88,168,550 2,838,106 George S. Bissell 88,132,935 2,873,720 Edwin D. Campbell 88,179,049 2,827,606 Charles F. Chapin 88,196,593 2,810,062 K. Dun Gifford 88,198,636 2,808,019 James S. Howell 88,168,222 2,838,433 Leroy Keith, Jr. 88,208,456 2,798,199 F. Ray Keyser, Jr. 88,139,504 2,867,151 Gerald M. McDonell 88,194,797 2,811,859 Thomas L. McVerry 88,192,473 2,814,183 William Walt Pettit 88,206,512 2,800,144 David M Richardson 88,171,815 2,834,841 Russell A. Salton, III M.D. 88,178,791 2,827,865 Michael S. Scofield 88,200,322 2,806,333 Richard J. Shima 88,162,459 2,844,196 Andrew J. Simons 88,195,228 2,811,427 2. To approve an Investment Advisory and Management Agreement between the Fund and Keys Management Company. Affirmative 85,400,357 Against 1,738,774 Abstain 3,867,525
PAGE 22 - -------------------------------------------------------------------- Keystone High Income Bond Fund (B-4) Keystone's Services for Shareholders KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account information on your balance, last transaction and recent Fund distribution. You may also process transactions such as investments, redemptions and exchanges using a touch-tone telephone as well as receive quotes on price, yield, and total return of your Keystone Fund. Call toll-free, 1-800-346-3858. EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone account is available 24 hours a day through KARL. To speak with a Shareholder Services representative about your account, call toll-free 1-800-343-2898 between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should call 1-800-247-4075. ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at any time, with no minimum additional investment. REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your investment by automatically reinvesting your Fund's distributions at net asset value with no sales charge. EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone family quickly and easily for a nominal service fee. KARL gives you the added ability to move your money any time of day, any day of the week. Keystone offers a variety of funds with different investment objectives for your changing investment needs. ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less transaction," EFT allows you to take advantage of a variety of preauthorized account transactions, including automatic monthly investments and systematic monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move money between your bank account and your Keystone account. CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check writing privilege to draw from their accounts. EASY REDEMPTION--KARL makes redemption services available to you 24 hours a day, every day of the year. The amount you receive may be more or less than your original account value depending on the value of fund shares at time of redemption. RETIREMENT PLANS--Keystone offers a full range of retirement plans, including IRA, SEP-IRA, profit sharing, money purchase, and defined contribution plans. For more information, please call Retirement Plan Services, toll-free at 1-800-247-4075. Keystone is committed to providing you with quality, responsive account service. We will do our best to assist you and your financial adviser in carrying out your investment plans. THIS PAGE INTENTIONALLY LEFT BLANK [Front Cover/Back Cover] KEYSTONE FAMILY OF FUNDS [diamond] Balanced Fund (K-1) Diversified Bond Fund (B-2) Growth aznd 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. Rreead 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. [Evergreen Keystone Funds Logo] P.O. Box 2121 Boston, Massachusetts 02106-2121 B-4-R-3/97 47M [Recycle Logo} KEYSTONE HIGH INCOME BOND FUND (B-4) [Evergreen Keystone Funds Logo] SEMIANNUAL REPORT JANUARY 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----