-----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, Q9+t/2X4oizjjM3ugpIwUSKZ1U7TKcZug86ws6MNG6bieUdxlLpbVm42ak3cAsUq xAEa3WI/incHZVgLWxlEDg== 0000950168-97-002851.txt : 19971002 0000950168-97-002851.hdr.sgml : 19971002 ACCESSION NUMBER: 0000950168-97-002851 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971001 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: SEC FILE NUMBER: 811-00095 FILM NUMBER: 97689316 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 EVERGREEN HIGH INCOME AR PAGE 1 KEYSTONE HIGH INCOME BOND FUND (B-4) SEEKS GENEROUS INCOME PRIMARILY FROM HIGH YIELD CORPORATE BONDS. Dear Shareholders: We are pleased to report to you on the Keystone High Income Bond Fund (B-4) for the fiscal year that ended on July 31, 1997. PERFORMANCE Your Fund produced a total return of 15.32% for the 12-month period. This compares favorably with the Lehman Aggregate Bond Index, a broad index of U.S. corporate, government and mortgage securities, which returned 10.76% for the 12 months. During the same period, the Merrill Lynch High Yield Index returned 16.25%. We believe your Fund performed well during a period in which high yield bonds, in general, outperformed the general bond market. During this period, Fund management took advantage of the favorable environment to reduce the overall risk by gradually upgrading credit quality and maintaining careful diversification of the portfolio. We believe that as a result of these steps, your Fund is extremely well positioned to continue to participate in an anticipated favorable high yield market. At the same time, we believe it is prepared for any short-term volatility in the markets. ENVIRONMENT During the 12 months, the high yield market performed very well, outperforming the general bond market in an environment of moderate economic growth and low inflation. As stock prices rose in a bull market, rising equity values of high yield bond issuers reduced the risk of their debt by improving their market-adjusted equity-to-debt ratios. This reduced risk was reflected in the tightening of yield spreads that high yield investors were willing to accept, versus Treasuries. During the 12 months, for example, the yield premium paid by high yield bonds over 10-year U.S. Treasuries declined 80 basis points (.80%), as investors perceived less risk than earlier in high yield issues. The performance of high yield bonds also was supported by strong cash flows. The average net cash flow into the market was about $300 million per week during the fiscal year. In fact, money flowed out of high yield mutual funds during only one week of the 52-week period that ended July 31. The healthy economy and strong investor interest in high yield bonds also sparked a rise in the new issuance of high yield securities. New issues for the first six months of 1997 totaled $57.6 billion, relative to $41.6 billion for the comparable period in 1996. All these factors contributed to investors' enthusiasm for high yield securities. STRATEGY We believe the environment of the past 12 months was an exceptional period not only to realize handsome returns for mutual fund investors, but also to strengthen your Fund's ability to manage risk by focusing on investments in the bonds of companies with high asset values and strong cash flows. During the year, we upgraded the credit quality of the portfolio to an average rating of B. We also reduced equity-related securities in the portfolio. We believe this will increase the Fund's potential to deliver more consistent returns by focusing on securities that pay regular dividends. At the same time, we moved to maintain broad diversification of the Fund, by setting a target of about 100 different securities, with an average weighting of 1% of net assets. -- CONTINUED-- PAGE 2 KEYSTONE HIGH INCOME BOND FUND (B-4) OUTLOOK We continue to see opportunities in the high yield bond market. Continued economic strength and no signs of serious inflationary problems have combined with strong equity valuations to create a favorable outlook. At the same time, we expect the strong investor demand for the income offered by high yield bonds will continue. We believe this favorable outlook and Fund management's investment discipline give the Keystone High Income Bond Fund (B-4) an excellent opportunity to continue to provide quality performance for the future. Thank you for your support of Keystone High Income Bond Fund (B-4). Sincerely, (Signature of Albert H. Elfner, III) Albert H. Elfner, III CHAIRMAN AND PRESIDENT KEYSTONE INVESTMENT MANAGEMENT COMPANY (Signature of George S. Bissell) George S. Bissell CHAIRMAN OF THE BOARD KEYSTONE FUNDS (Picture of (Picture of Alber H. Elfner, III) George S. Bissell) ALBERT H. ELFNER, III GEORGE S. BISSELL
September 1997 PAGE 3 A Discussion With Your Fund Manager PRESCOTT CROCKER, A SENIOR VICE PRESIDENT AND HEAD OF KEYSTONE'S HIGH YIELD BOND TEAM, IS PORTFOLIO MANAGER OF KEYSTONE HIGH INCOME BOND FUND (B-4). A CHARTERED FINANCIAL ANALYST, MR. CROCKER HAS MORE THAN 25 YEARS OF SENIOR INVESTMENT EXPERIENCE. HE IS A GRADUATE OF HARVARD COLLEGE AND HOLDS AN M.B.A. IN INTERNATIONAL FINANCE FROM HARVARD BUSINESS SCHOOL. (Q)WHAT WERE YOUR PRINCIPAL STRATEGIES IN MANAGING THE FUND DURING THE FISCAL PERIOD? (A)We had the benefit of a favorable environment in the high yield bonds, which was the best performing sector in the domestic fixed income market. We wanted to take advantage of that environment to improve our ability to manage risk in the Fund so we would be able to provide consistent returns. One way we did that was to upgrade the overall credit quality of the portfolio. The Fund now has a solid average credit rating of B, with 62% of the portfolio holding that rating. Only 3% of the portfolio was rated CCC or lower at the end of the fiscal period. Another way we sought to manage the Fund's risk exposure was to maintain a manageable, consolidated portfolio of about 100 different securities, with an average weighting of 1% of net assets and moving toward no security having more than 2% of net assets. This diversification helps control the Fund's exposure to any one high yield issuer. We also have maintained careful guidelines for non-rated securities and preferred stock. (Q)HOW DID THESE STRATEGIES AFFECT THE FUND'S PERFORMANCE? (A)We believe these strategies will help the Fund deliver consistent performance over the longer term. During the year, adjusted for expenses, the Fund performed in line with the high yield market and other high yield funds. The limits on equity-related securities in the portfolio, however, held back relative performance during the past six months as the equity market performed very well. Longer-term, we believe the focus on high yield bonds will support performance and reduce the volatility, or price fluctuations, of the portfolio. The Fund is now purely a high yield bond fund. (Q)DID YOU CONCENTRATE ON ANY PARTICULAR SECTORS IN THE HIGH YIELD MARKET? (A)There were two areas in particular that we emphasized. The first was the area of broadcasting, cable industry and telecommunications industries. In general, the cable industry has been reducing its debt and improving its operating cash flow. Broadcasting has been helped by higher equity values and reduced borrowing risks since passage of the Telecommunications Act of 1996. The Telecommunications Act has resulted in a rapid expansion of interest in telecommunications companies in general. Another area that we overweighted was the hotel industry. Very tight hotel occupancy rates have enabled this industry to raise overnight room rates and have a favorable impact on finances. PAGE 4 KEYSTONE HIGH INCOME BOND FUND (B-4) (Q)WHAT IS YOUR OUTLOOK FOR THE HIGH YIELD MARKET? (A)We have a generally positive outlook for the high yield market, despite some short-term uncertainties about the equity and general fixed income markets. Equity prices could enter a period of consolidation during the upcoming six months as investors take some of their gains during the bull market. In addition, improvements in capital gains tax rates could cause a pause in the stock market. The bond market, as a whole, could experience some short-term volatility in anticipation of the Federal Reserve Board tightening to hold inflation. The longer-term fundamentals are very good in the fixed income market. The tightness in supply in Treasuries and the very limited inflation prospect, as indicated by the prices of gold and the U.S. dollar, give reason for optimism. The high yield markets continue to provide a cushioned and less volatile experience, due to their higher coupon and their dramatically lower maturities than other parts of the bond market. The positive signs of continued growth in the economy and strong equity valuations bode well for the high yield market. When you consider these factors and the fact that the Fund has focused on issuing companies with high asset values and strong cash flow, we believe the Fund is well positioned for the future. (Diamond) THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND. IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO: EVERGREEN KEYSTONE INVESTMENT SERVICES, INC. ATTN: SHAREHOLDER COMMUNICATIONS 201 SOUTH COLLEGE ST., SUITE 400 CHARLOTTE, N.C. 28288-1195 PAGE 5 Your Fund's Performance Growth of an investment in Keystone High Income Bond Fund (B-4) (IN THOUSANDS) Total Value: $18,519 Initial Investment Dividend Reinvestment 7/87 10.0 10.0 7/88 9.021 10.166 7/89 8.329 10.669 7/90 6.554 9.832 7/91 5.470 9.835 7/92 6.188 12.516 7/93 6.697 15.054 7/94 6.110 14.992 7/95 5.770 15.841 7/96 5.352 16.059 7/97 5.705 18.519 A $10,000 investment in Keystone High Income Bond Fund (B-4) made on July 31, 1987 with all distributions reinvested was worth $18,519 on July 31, 1997. Past performance is no guarantee of future results. The cumulative and average annual total returns with sales charge calculations reflect the deduction of the 3% contingent deferred sales charge (CDSC) for those investors who sold Fund shares after one calendar year. Investors who retained their investment earned the returns in the without sales charge lines. 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 Classic fund by phone or in writing. The Fund reserves the right to change or terminate the exchange offer. 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, 1987 through July 31, 1997 CPI FUND LABI 7/87 10.000 10.000 10.000 7/88 10.399 10.166 10.757 7/89 10.934 10.669 12.392 7/90 11.461 9.832 13.266 7/91 11.971 9.835 14.683 7/92 12.349 12.516 16.854 7/93 12.690 15.054 18.569 7/94 13.042 14.992 18.584 7/95 13.403 15.841 20.463 7/96 13.797 16.059 21.593 7/97 14.102 18.519 23.918 Past performance is no guarantee of future results. The Lehman Aggregate Bond Index is an unmanaged market index. This index does not include transaction costs associated with buying and selling securities nor any management fees. The Consumer Price Index, a measure of inflation, is through July 31, 1997. [CAPTION]
HISTORICAL RECORD CUMULATIVE TOTAL RETURN 1 year w/o sales charge 15.32% 1 year with sales charge 12.32% 5 years 47.97% 10 years 85.19% AVERAGE ANNUAL TOTAL RETURN 1 year w/o sales charge 15.32% 1 year with sales charge 12.32% 5 years 8.15% 10 years 6.36%
PAGE 6 KEYSTONE HIGH INCOME BOND FUND (B-4) SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- 92.2% AEROSPACE & DEFENSE-- 2.8% $ 4,000,000 Airplanes Pass Thru Trust, Sr. Notes, 10.88%, 3/15/19.............. $ 4,740,440 3,000,000 BE Aerospace, Incorporated, Sr. Notes (Subord.), 9.88%, 2/1/06................ 3,187,500 778,634 Continental Airlines, Incorporated, Sr. Equip. Trust Cert. (b), 16.00%, 4/19/99.............. 778,634 3,500,000 Moog, Incorporated, Sr. Notes (Subord.) (f), 10.00%, 5/1/06............... 3,727,500 3,000,000 Sequa Corporation, Sr. Notes (Subord.), 9.38%, 12/15/03.............. 3,082,500 15,516,574 AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 2.5% 1,250,000 Amphenol Corporation, Sr. Notes (Subord.), 9.88%, 5/15/07............... 1,331,250 2,650,000 Central Tractor Farm and Country, Incorporated, Sr. Notes, 10.63%, 4/1/07............... 2,769,250 4,000,000 Chatwins Group, Incorporated, Sr. Exchange Notes, 13.00%, 5/1/03............... 4,200,000 2,000,000 JPS Automotive Products Corporation, Sr. Notes, 11.13%, 6/15/01.............. 2,195,000 3,000,000 Motors and Gears, Incorporated, Sr. Notes (f), 10.75%, 11/15/06............. 3,150,000 13,645,500 CABLE/OTHER VIDEO DISTRIBUTION-- 9.8% 2,750,000 Adelphia Communications Corporation, Sr. Notes, 12.50%, 5/15/02.............. 2,921,875 2,000,000 Adelphia Communications Corporation, Sr. Notes (f), 9.88%, 3/1/07................ 2,025,000 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED CABLE/OTHER VIDEO DISTRIBUTION-- CONTINUED $ 750,000 Adelphia Communications Corporation, Sr. Notes (f), 10.50%, 7/15/04.............. $ 785,625 3,125,000 Cablevision Systems Corporation, Sr. Deb. (Subord.), 10.50%, 5/15/16.............. 3,484,375 5,000,000 Charter Communications, South Eastern Capital Limited Partnership, Sr. Notes (f), 11.25%, 3/15/06.............. 5,487,500 2,500,000 Comcast Corporation, Sr. Deb. (Subord.), 10.63%, 7/15/12.............. 3,075,000 3,000,000 Diamond Cable Communications Company, Sr. Disc. Notes, (Eff. Yield 10.48%) (c), 0.00%, 2/15/07............... 1,785,000 6,000,000 Diamond Cable Communications Company, Sr. Disc. Notes, (Eff. Yield 11.57%) (c), 0.00%, 9/30/04............... 4,965,000 2,250,000 Frontiervision, Sr. Notes (Subord.), 11.00%, 10/15/06............. 2,407,500 4,825,000 Fundy Cable Limited, Sr. Secd. 2nd Priority Notes, 11.00%, 11/15/05............. 5,307,500 5,000,000 Lenfest Communications, Incorporated, Sr. Notes (Subord.), 10.50%, 6/15/06.............. 5,575,000 6,000,000 Marcus Cable Operations Limited Partnership, Gtd. Sr. Disc. Notes (Subord.), (Eff. Yield 12.06%) (c), 0.00%, 8/1/04................ 5,340,000 3,500,000 TCI Satellite Entertainment, Incorporated, Sr. Disc. Notes (Subord.), (Eff. Yield 11.73%) (c) (f), 0.00%, 2/15/07............... 2,117,500
PAGE 7 SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED CABLE/OTHER VIDEO DISTRIBUTION-- CONTINUED $ 2,750,000 TCI Satellite Entertainment, Incorporated, Sr. Notes (Subord.) (f), 10.88%, 2/15/07.............. $ 2,832,500 7,000,000 Telewest Communications PLC, Sr. Disc. Deb., (Eff. Yield 9.86%) (c), 0.00%, 10/1/07............... 5,215,000 53,324,375 CHEMICAL & AGRICULTURAL PRODUCTS-- 2.3% 3,750,000 Astor Corporation, Sr. Notes (Subord.) (f), 10.50%, 10/15/06............. 3,989,063 4,985,000 Freedom Chemicals, Incorporated, Sr. Notes (Subord.) (f), 10.63%, 10/15/06............. 5,234,250 1,500,000 Lanesborough Corporation, Sr. Secd. Notes (a), 10.00%, 4/15/00.............. 1,147,500 2,000,000 Texas Petrochemical Corporation, Sr. Notes (f), 11.13%, 7/1/06............... 2,155,000 12,525,813 CONSUMER PRODUCTS & SERVICES-- 6.0% 1,750,000 Consumers International, Incorporated, Sr. Secd. Notes (f), 10.25%, 4/1/05............... 1,890,000 2,950,000 Drypers Corporation, Sr. Notes (f), 10.25%, 6/15/07.............. 2,957,375 2,000,000 Dyncorp, Incorporated, Sr. Notes (Subord.) (f), 9.50%, 3/1/07................ 2,020,000 1,650,000 Exide Corporation, Sr. Notes, 10.75%, 12/15/02............. 1,757,250 5,833,000 Exide Corporation, Sr. Notes (f), 2.90%, 12/15/05.............. 3,682,723 6,750,000 McLeod, Incorporated, Sr. Disc. Notes, (Eff. Yield 9.88%) (c) (f), 0.00%, 3/1/07................ 4,522,500 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED CONSUMER PRODUCTS & SERVICES-- CONTINUED $ 3,000,000 McLeod, Incorporated, Sr. Notes (f), 9.25%, 7/15/07............... $ 3,082,500 2,750,000 North Atlantic Trading, Incorporated, Sr. Notes (f), 11.00%, 6/15/04.............. 2,860,000 2,275,000 Revlon Worldwide Corporation, Sr. Secd. Disc. Notes, (Eff. Yield 13.00%) (c), 0.00%, 3/15/98............... 2,155,562 11,030,000 Revlon Worldwide Corporation, Sr. Secd. Disc. Notes, (Eff. Yield 9.82%) (c) (f), 0.00%, 3/15/01............... 7,858,875 32,786,785 DIVERSIFIED COMPANIES-- 2.2% 5,000,000 Affinity Group, Incorporated, Sr. Notes (Subord.), 11.50%, 10/15/03............. 5,375,000 5,000,000 Cinemark USA, Incorporated, Sr. Notes (Subord.), 9.63%, 8/1/08................ 5,100,000 1,500,000 Dawson Production Services, Incorporated, Sr. Notes, 9.38%, 2/1/07................ 1,545,000 12,020,000 ENERGY-- 7.4% 5,000,000 Clark USA, Incorporated, Sr. Notes, 10.88%, 12/1/05.............. 5,337,500 5,000,000 Crown Central Petroleum Corporation, Sr. Notes, 10.88%, 2/1/05............... 5,275,000 4,750,000 Energy Corporation of America, Sr. Notes (Subord.) (f), 9.50%, 5/15/07............... 4,773,750 4,500,000 EV International, Incorporated, Sr. Notes (Subord.) (f), 11.00%, 3/15/07.............. 4,792,500 4,850,000 Ferrellgas Partners Limited Partnership, Sr. Secd. Notes (f), 9.38%, 6/15/06............... 5,007,625
PAGE 8 KEYSTONE HIGH INCOME BOND FUND (B-4) SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED ENERGY-- CONTINUED $ 5,150,000 HS Resources, Incorporated, Sr. Notes (Subord.) (f), 9.25%, 11/15/06.............. $ 5,265,875 2,500,000 Parker Drilling Company, Sr. Notes (f), 9.75%, 11/15/06.............. 2,681,250 2,025,000 Transamerican Energy Corporation, Sr. Secd. Notes (f), 11.50%, 6/15/02.............. 2,025,000 5,000,000 Triton Energy Limited, Sr. Notes, 9.25%, 4/15/05............... 5,402,500 40,561,000 ENVIRONMENTAL SERVICES-- 0.9% 7,000,000 Allied Waste Industries, Incorporated, Sr. Disc. Notes, (Eff. Yield 9.85%) (c) (f), 0.00%, 6/1/07................ 4,637,500 FINANCE & INSURANCE-- 3.2% 4,200,000 First Nationwide Parent Holdings, Sr. Exchange Notes, 12.50%, 4/15/03.............. 4,777,500 4,000,000 Olympic Financial Limited, Sr. Notes, 11.50%, 3/15/07.............. 4,050,000 1,550,000 Polytama International, Gtd. Secd. Notes, 11.25%, 6/15/07.............. 1,561,625 2,000,000 Presley Companies, Sr. Notes, 12.50%, 7/1/01............... 1,995,000 5,000,000 Reliance Group Holdings, Incorporated, Sr. Deb. (Subord.), 9.75%, 11/15/03.............. 5,275,000 17,659,125 FOOD & BEVERAGE PRODUCTS-- 6.6% 5,000,000 Aurora Foods, Incorporated, Sr. Notes (Subord.) (f), 9.88%, 2/15/07............... 5,150,000 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED FOOD & BEVERAGE PRODUCTS-- CONTINUED $ 5,000,000 Chiquita Brands International, Incorporated, Sr. Notes, 9.63%, 1/15/04............... $ 5,237,500 3,500,000 Cott Corporation, Sr. Notes, 9.38%, 7/1/05................ 3,640,000 4,300,000 Fleming Companies, Incorporated, Sr. Notes (Subord.) (f), 10.50%, 12/1/04.............. 4,407,500 5,000,000 FRD Acquisition Company, Sr. Notes, 12.50%, 7/15/04.............. 5,337,500 11,450,000 Iowa Select Farms, Sr. Notes, (Eff. Yield 15.26%)(c) (8/02/94-$6,433,830) (b) (e), 0.00%, 2/15/04............... 8,240,107 2,000,000 Marsh Supermarket, Incorporated, Sr. Notes (Subord.) (f), 8.88%, 8/1/07................ 2,027,500 2,000,000 Ralphs Grocery Company, Sr. Notes (Subord.), 11.00%, 6/15/05.............. 2,215,000 36,255,107 FOREST PRODUCTS/CONTAINERS-- 4.5% 4,000,000 Affiliated Newspaper Investments, Incorporated, Sr. Disc. Notes, (Eff. Yield 9.20%) (c), 0.00%, 7/1/06................ 3,590,000 5,000,000 Asia Pulp and Paper International Finance Company, Gtd. Secd. Notes, 11.75%, 10/1/05.............. 5,437,500 2,875,000 Equimar Shipholdings Limited, Gtd. 1st Priority Mtge. (f), 9.88%, 7/1/07................ 2,831,875 2,000,000 Four M Corporation, Sr. Secd. Notes (f), 12.00%, 6/1/06............... 2,130,000 2,000,000 Iron Mountain, Incorporated, Sr. Notes (Subord.), 10.13%, 10/1/06.............. 2,170,000
PAGE 9 SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED FOREST PRODUCTS/CONTAINERS-- CONTINUED $ 3,150,000 Printpack, Incorporated, Sr. Notes (Subord.), 10.63%, 8/15/06.............. $ 3,394,125 2,000,000 Riverwood International Corporation, Sr. Notes, 10.25%, 4/1/06............... 2,005,000 3,000,000 Riverwood International Corporation, Sr. Notes (f), 10.63%, 8/1/07............... 3,052,500 24,611,000 GAMING-- 10.1% 5,000,000 Casino America, Incorporated, Sr. Secd. Notes, 12.50%, 8/1/03............... 5,300,000 8,571,123 Grand Palais Casinos, Incorporated, Sr. PIK Notes, (8/15/94-$8,571,123) (a) (b) (d), 18.25%, 11/1/97.............. 86 1,250,000 HMH Properties, Incorporated, Sr. Notes (f), 8.88%, 7/15/07............... 1,293,750 5,000,000 HMH Properties, Incorporated, Sr. Secd. Notes, 9.50%, 5/15/05............... 5,275,000 1,250,000 Horseshoe Gaming, Sr. Notes (f), 9.38%, 6/15/07............... 1,293,750 5,600,000 Horseshoe Gaming, Sr. Notes, Series B, 12.75%, 9/30/00.............. 6,272,000 2,000,000 Livingwell, Incorporated, Sr. Deb. (Subord.) (a) (b) (d), 13.13%, 4/15/01.............. 20 4,500,000 Lodgenet Entertainment Corporation, Sr. Notes (f), 10.25%, 12/15/06............. 4,601,250 2,000,000 Majestic Star Casino LLC, Sr. Notes, 12.75%, 5/15/03.............. 2,210,000 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED GAMING-- CONTINUED $ 2,500,000 Prime Hospitality Corporation, 1st Mtge. Notes, 9.25%, 1/15/06............... $ 2,637,500 2,000,000 Prime Hospitality Corporation, Sr. Notes (Subord.), Series B, 9.75%, 4/1/07................ 2,140,000 5,000,000 Showboat, Incorporated, Sr. Notes (Subord.), 13.00%, 8/1/09............... 5,750,000 2,150,000 Six Flags Theme Parks, Incorporated, Sr. Notes (Subord.), (Eff. Yield 10.70%) (c), 0.00%, 6/15/05............... 2,219,875 6,925,000 Starcraft Corporation, Sr. Notes (a) (b) (d), 16.50%, 1/15/98.............. 138,500 5,000,000 Station Casinos, Incorporated, Sr. Notes (Subord.), 10.13%, 3/15/06.............. 5,037,500 2,000,000 Sun International Hotels, Sr. Notes (Subord.), 9.00%, 3/15/07............... 2,065,000 4,000,000 Sun World International, Incorporated, 1st Mtge. Notes (f), 11.25%, 4/15/04.............. 4,310,000 4,000,000 Wyndham Hotel Corporation, Sr. Notes (Subord.), 10.50%, 5/15/06.............. 4,545,000 55,089,231 HEALTHCARE PRODUCTS & SERVICES-- 2.1% 4,000,000 Genesis Health, Sr. Notes (Subord.), 9.75%, 6/15/05............... 4,220,000 2,100,000 Integrated Health Services, Incorporated, Sr. Notes (Subord.) (f), 9.50%, 9/15/07............... 2,226,000 5,000,000 Vencor, Incorporated, Sr. Notes (Subord.) (f), 8.63%, 7/15/07............... 5,112,500 11,558,500
PAGE 10 KEYSTONE HIGH INCOME BOND FUND (B-4) SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED MANUFACTURING-- DISTRIBUTING-- 3.7% $ 1,000,000 Cambridge Industries, Incorporated, Sr. Notes (Subord.) (f), 10.25%, 7/15/07.............. $ 1,040,000 4,000,000 Colorado Prime Corporation, Sr. Notes (f), 12.50%, 5/1/04............... 4,040,000 4,000,000 Interlake Corporation, Sr. Notes, 12.00%, 11/15/01............. 4,420,000 3,100,000 Polymer Group, Incorporated, Sr. Notes (Subord.) (f), 9.00%, 7/1/07................ 3,177,500 2,000,000 Thermadyne Holdings Corporation, Sr. Notes (Subord.), 10.75%, 11/1/03.............. 2,120,000 5,000,000 Unisys Corporation, Sr. Notes, 11.75%, 10/15/04............. 5,512,500 20,310,000 METAL PRODUCTS & SERVICES-- 2.0% 5,000,000 Algoma Steel, Incorporated, 1st Mtge. Notes, 12.38%, 7/15/05.............. 5,775,000 5,000,000 Bethlehem Steel Corporation, Sr. Notes, 10.38%, 9/1/03............... 5,275,000 11,050,000 PUBLISHING, BROADCASTING & ENTERTAINMENT-- 8.4% 3,850,000 Ackerly Communications, Incorporated, Sr. Secd. Notes, 10.75%, 10/1/03.............. 4,119,500 7,000,000 Benedek Communications Corporation, Sr. Disc. Notes (Subord.), (Eff. Yield 11.79%) (c), 0.00%, 5/15/06............... 4,392,500 4,000,000 Big Flower Press Holdings, Incorporated, Sr. Notes (Subord.) (f), 8.88%, 7/1/07................ 3,955,000 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED PUBLISHING, BROADCASTING & ENTERTAINMENT-- CONTINUED $ 6,925,000 Capstar Broadcasting Partners, Sr. Disc. Notes (f), 12.75%, 2/1/09............... $ 4,639,750 5,000,000 Citadel Broadcasting Company, Sr. Notes (Subord.) (f), 10.25%, 7/1/07............... 5,400,000 4,000,000 Echostar Communications Corporation, Sr. Disc. Notes, (Eff. Yield 9.14%) (c), 0.00%, 6/1/04................ 3,425,000 4,000,000 Echostar Satellite Broadcast Corporation, Sr. Secd. Disc. Notes, (Eff. Yield 10.05%) (c), 0.00%, 3/15/04............... 2,940,000 3,325,000 K-III Communications Corporation, Sr. Notes (f), 8.50%, 2/1/06................ 3,341,625 3,000,000 SFX Broadcasting, Incorporated, Sr. Notes (Subord.) (f), 10.75%, 5/15/06.............. 3,360,000 5,000,000 Sinclair Broadcast Group, Incorporated, Sr. Notes (Subord.) (f), 9.00%, 7/15/07............... 4,975,000 5,000,000 Spanish Broadcasting Systems, Incorporated, Sr. Notes, 7.50%, 6/15/02............... 5,650,000 46,198,375 RETAILING & WHOLESALE-- 2.5% 4,000,000 Cole National Group, Incorporated, Sr. Notes, 11.25%, 10/1/01.............. 4,380,000 2,000,000 Finlay Enterprises, Sr. Disc. Deb., (Eff. Yield 9.12%) (c), 0.00%, 5/1/05................ 1,920,000 5,000,000 Finlay Fine Jewelry Corporation, Sr. Notes, 10.63%, 5/1/03............... 5,275,000
PAGE 11 SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED RETAILING & WHOLESALE-- CONTINUED $ 2,000,000 French Fragrances, Incorporated, Sr. Notes, Series B, 10.38%, 5/15/07.............. $ 2,072,500 13,647,500 TELECOMMUNICATION SERVICES & EQUIPMENT-- 5.3% 2,350,000 AFC Enterprises, Incorporated, Sr. Notes (Subord.) (f), 10.25%, 5/15/07.............. 2,432,250 7,000,000 Brooks Fiber Properties, Incorporated, Sr. Disc. Notes, (Eff. Yield 11.10%) (c), 0.00%, 11/1/06............... 4,987,500 4,000,000 Econophone, Incorporated, Sr. Notes (f), 13.50%, 7/15/07.............. 4,040,000 5,000,000 Iridium Corporation, Sr. Disc. Notes (f), 14.00%, 7/15/05.............. 5,037,500 2,500,000 Jordan Telecommunication Products, Sr. Notes (f), 9.88%, 8/1/07................ 2,500,000 750,000 Metronet Communications Corporation, Sr. Notes, 12.00%, 8/15/07.............. 799,688 3,000,000 Talton Holdings, Incorporated, Sr. Notes (f), 11.00%, 6/30/07.............. 3,097,500 4,750,000 Teleport Communications Group, Sr. Disc. Notes, (Eff. Yield 8.98%) (c), 0.00%, 7/1/07................ 3,621,875 2,175,000 Teleport Communications Group, Sr. Notes, 9.88%, 7/1/06................ 2,376,187 28,892,500 WIRELESS COMMUNICATIONS-- 5.0% 5,000,000 Centennial Cellular Corporation, Sr. Notes, 8.88%, 11/1/01............... 5,050,000 PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED WIRELESS COMMUNICATIONS-- CONTINUED $ 6,000,000 Comcast Cellular Holdings, Incorporated, Sr. Notes (f), 9.50%, 5/1/07................ $ 6,255,000 6,980,000 Pagemart Nationwide, Inc., Sr. Disc. Notes, (Eff. Yield 10.80%) (c), 0.00%, 2/1/05................ 5,479,300 5,750,000 Pricecellular Wireless Corporation, Sr. Disc. Notes (Subord.), (Eff. Yield 10.64%) (c), 0.00%, 10/1/03............... 5,563,125 5,000,000 Vanguard Cellular Systems, Incorporated, Sr. Deb., 9.38%, 4/15/06............... 5,200,000 27,547,425 FOREIGN BONDS-- US DOLLAR DENOMINATED-- 4.9% 1,675,000 Azteca Holdings SA DE CV, Sr. Secd. Notes (f), 11.00%, 6/15/02.............. 1,758,750 2,000,000 Consorcio Ecuatoriano, Notes (f), 14.00%, 5/1/02............... 2,165,000 3,000,000 Grupo Televisa SA DE CV, Sr. Disc. Notes, (Eff. Yield 10.61%) (c), 0.00%, 5/15/08............... 2,160,000 5,000,000 Intermedia Capital Partners, Sr. Notes (f), 11.25%, 8/1/06............... 5,456,250 10,150,000 Intermedia Communications, Incorporated, Sr. Disc. Notes, (Eff. Yield 9.85%) (c) (f), 0.00%, 7/15/07............... 6,521,375 5,000,000 Rogers Communications, Incorporated, Sr. Notes, 8.75%, 7/15/07............... 3,654,389 1,250,000 Tjiwi Kimia FN Mauritius, Gtd. Sr. Notes (f), 10.00%, 8/1/04............... 1,260,937
PAGE 12 KEYSTONE HIGH INCOME BOND FUND (B-4) SCHEDULE OF INVESTMENTS-- JULY 31, 1997
PRINCIPAL AMOUNT VALUE CORPORATE BONDS-- CONTINUED FOREIGN BONDS-- US DOLLAR DENOMINATED-- CONTINUED $ 3,500,000 TV Azteca SA DE CV, Sr. Notes (f), 10.50%, 2/15/07.............. $ 3,718,750 26,695,451 TOTAL CORPORATE BONDS (COST $494,825,886).......... 504,531,761
SHARES COMMON STOCKS AND WARRANTS-- 1.5% AEROSPACE & DEFENSE-- 0.0% 76,000 CHC Helicopter Corporation, Warrants (d)................. 171,000 AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 0.0% 9,500 Chatwins Group, Incorporated, Warrants (d)................. 9,500 BUILDING, CONSTRUCTION & FURNISHINGS-- 0.6% 197,000 Specialty Equipment Companies, Incorporated, Common Stock (d)............. 3,016,562 CHEMICAL & AGRICULTURAL PRODUCTS-- 0.0% 2,056 Lanesborough Corporation, Common Stock (b) (d)......... 21 DIVERSIFIED COMPANIES-- 0.2% 2,964 PM Holdings Corporation, Common Stock (d)............. 1,037,400 FOOD & BEVERAGE PRODUCTS-- 0.1% 298,530 Iowa Select Farms, Warrants, (2/04/94-- $2,420,481) (b) (d) (e)...................... 746,325 131,250 Specialty Foods Acquisition Corporation, Common Stock (d)............. 32,812 779,137 GAMING-- 0.6% 254,790 Casino America, Incorporated, Common Stock (d)............. 569,296 47,778 Casino America, Incorporated, Warrants (b) (d)............. 478
SHARES VALUE COMMON STOCKS AND WARRANTS-- CONTINUED GAMING-- CONTINUED 410,062 Colorado Gaming and Entertainment Company, Common Stock (d)............. $ 2,460,372 10,775,000 Gold River Hotel and Casino Corporation (b) (d).......... 107,750 931,379 Grand Palais Casinos, Incorporated, Limited Liability Interest, (8/15/94-- $0) (a) (b) (d)... 931 250,735 Grand Palais Casinos, Incorporated, Series A, Warrants, (8/15/94-- $2,507) (a) (b) (d).......................... 251 136,765 Grand Palais Casinos, Incorporated, Series B, Warrants, (8/15/94-- $1,368) (a) (b) (d).......................... 137 1,208,088 Grand Palais Casinos, Incorporated, Series C, Warrants, (8/15/94-- $12,081) (a) (b) (d).......................... 1,208 680,643 Grand Palais Casinos, Incorporated, Series D, Warrants, (8/15/94-- $646) (a) (b) (d).......................... 681 3,141,104 PUBLISHING, BROADCASTING & ENTERTAINMENT-- 0.0% 9,510 Nextel Communications, Incorporated, Warrants (d)................. 95 TOTAL COMMON STOCKS AND WARRANTS (COST $8,633,203)............ 8,154,819 PREFERRED STOCKS-- 3.8% CABLE/OTHER VIDEO DISTRIBUTION-- 1.5% 26,000 Adelphia Communications Corporation, Preferred Stock (f).......... 2,834,000 52,820 Cablevision Systems Corporation, Series M, Preferred Stock.... 5,572,540 8,406,540 FINANCE & INSURANCE-- 2.3% 24,562 Ampex Corporation, Preferred Stock (b) (d)...... 12,452,934 TOTAL PREFERRED STOCKS (COST $31,142,332)........... 20,859,474
PAGE 13 SCHEDULE OF INVESTMENTS-- JULY 31, 1997
VALUE TOTAL INVESTMENTS-- (COST $534,601,421) 97.5 % $533,546,054 OTHER ASSETS AND LIABILITIES-- NET 2.5 13,843,947 NET ASSETS 100.0 % $547,390,001
(a) Securities which have defaulted on payment of interest and/or principal. The Fund has stopped accruing income on those so identified. At July 31, 1997, the fair value of these securities was $1,289,314 (0.24% 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 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, 1997, the fair value of these restricted securities was $8,989,726 (1.64% of the Fund's net assets). (c) Effective yield (calculated at the date of purchase) is the yield at which the bond accretes on an annual basis until maturity date. Securities may have future interest rate resets that have been considered in the effective yield calculation. (d) Non-income-producing security. (e) Affiliated issuers are those in which the Fund's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. The Fund has never owned enough of the outstanding securities of any issuer to have control (as defined in the Investment Company Act of 1940) of that issuer. At July 31, 1997, the fair value of these securities was $8,986,432 (1.64% of the Fund's net assets). (f) 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 YEAR)
YEAR ENDED JULY 31, 1997 1996 1995 1994 1993 NET ASSET VALUE BEGINNING OF YEAR $4.10 $4.42 $4.68 $5.13 $4.74 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.32 0.32 0.38 0.38 0.45 Net realized and unrealized gain (loss) on investments and foreign currency related transactions 0.28 (0.27) (0.15) (0.38) 0.44 Total from investment operations 0.60 0.05 0.23 0.00 0.89 LESS DISTRIBUTIONS FROM: Net investment income (0.32) (0.31) (0.37) (0.38) (0.45) In excess of net investment income (0.01) (0.06) (0.02) (0.07) (0.05) Tax basis return of capital 0 0 (0.10) 0 0 Total distributions (0.33) (0.37) (0.49) (0.45) (0.50) NET ASSET VALUE END OF YEAR $4.37 $4.10 $4.42 $4.68 $5.13 TOTAL RETURN (A) 15.32% 1.38% 5.66% (0.41%) 20.28% RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Expenses 1.96% 1.94% 2.03% 1.84% 2.06% Expenses excluding indirectly paid expenses 1.95% 1.93% -- -- -- Net investment income 7.63% 7.92% 8.64% 7.57% 9.30% PORTFOLIO TURNOVER RATE 138% 116% 82% 110% 125% NET ASSETS END OF YEAR (THOUSANDS) $547,390 $593,681 $764,965 $766,283 $972,164
YEAR ENDED JULY 31, 1992 1991 1990 1989 1988 NET ASSET VALUE BEGINNING OF YEAR $4.19 $5.02 $6.38 $6.91 $7.66 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.49 0.61 0.68 0.83 0.80 Net realized and unrealized gain (loss) on investments and foreign currency related transactions 0.58 (0.72) (1.18) (0.51) (0.71) Total from investment operations 1.07 (0.11) (0.50) 0.32 0.09 LESS DISTRIBUTIONS FROM: Net investment income (0.50) (0.72) (0.78) (0.85) (0.84) In excess of net investment income (0.02) 0 (0.08) 0 0 Tax basis return of capital 0 0 0 0 0 Total distributions (0.52) (0.72) (0.86) (0.85) (0.84) NET ASSET VALUE END OF YEAR $4.74 $4.19 $5.02 $6.38 $6.91 TOTAL RETURN (A) 27.25% 0.03% (7.84%) 4.95% 1.66% RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Expenses 2.17% 2.34% 2.06% 1.97% 1.82% Expenses excluding indirectly paid expenses -- -- -- -- -- Net investment income 10.86% 14.64% 12.77% 12.36% 11.29% PORTFOLIO TURNOVER RATE 94% 78% 45% 75% 81% NET ASSETS END OF YEAR (THOUSANDS) $841,757 $710,590 $820,940 $1,188,660 $1,274,673
(a) Excluding applicable sales charges. SEE NOTES TO FINANCIAL STATEMENTS. PAGE 15 STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1997
ASSETS Investments at market value Unaffiliated issuers (identified cost-- $525,747,110) $ 524,559,622 Affiliated issuers (identified cost-- $8,854,311) 8,986,432 Total investments $ 533,546,054 Cash 2,345,910 Receivable for investments sold 12,309,999 Interest receivable 9,225,984 Receivable for Fund shares sold 163,040 Prepaid expenses and other assets 170,184 Total assets 557,761,171 LIABILITIES Payable for investments purchased 7,676,756 Distributions to shareholders 1,456,046 Payable for Fund shares redeemed 667,567 Distribution fee payable 437,836 Due to related parties 14,558 Accrued expenses and other liabilities 118,407 Total liabilities 10,371,170 NET ASSETS $ 547,390,001 NET ASSETS REPRESENTED BY Paid-in capital $1,013,342,157 Accumulated distributions in excess of net investment income (1,468,219) Accumulated net realized loss on investments and foreign currency related transactions (463,428,580) Net unrealized depreciation on investments and foreign currency related transactions (1,055,357) Total net assets $ 547,390,001 NET ASSET VALUE PER SHARE Net asset value of $547,390,001/125,390,766 outstanding shares of beneficial interest $ 4.37
STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 1997
INVESTMENT INCOME Interest: Unaffiliated issuers (Net of foreign withholding taxes of $693) $52,953,592 Affiliated issuers 1,118,767 Other income 466,791 Total income 54,539,150 EXPENSES Distribution Plan expenses $ 5,686,181 Management fee 3,259,222 Transfer agent fees 1,634,507 Custodian fees 289,359 Professional fees 67,739 Administrative services fees 50,161 Trustees' fees and expenses 48,789 Other 133,428 Total expenses 11,169,386 Less: Expenses paid indirectly (64,295) Net expenses 11,105,091 Net investment income 43,434,059 NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS Net realized gain on investments 3,963,269 Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 33,119,281 Net realized and unrealized gain on investments and foreign currency related transactions 37,082,550 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $80,516,609
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 16 KEYSTONE HIGH INCOME BOND FUND (B-4) STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED JULY 31, 1997 1996 OPERATIONS Net investment income $ 43,434,059 $ 53,347,924 Net realized gain on investments and foreign currency related transactions 3,963,269 12,528,472 Net change in unrealized appreciation or depreciation on investments and foreign currency related transactions 33,119,281 (59,100,847) Net increase in net assets resulting from operations 80,516,609 6,775,549 DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income (43,434,060) (49,946,109) In excess of net investment income (1,323,000) (9,344,299) Total distributions to shareholders (44,757,060) (59,290,408) CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 136,045,881 162,907,187 Payments for shares redeemed (243,407,877) (315,113,110) Net asset value of shares issued in reinvestment of dividends and distributions 25,311,702 33,436,642 Net decrease in capital share transactions (82,050,294) (118,769,281) Total decrease in net assets (46,290,745) (171,284,140) NET ASSETS Beginning of year 593,680,746 764,964,886 End of year [Including accumulated distributions in excess of net investment income as follows: 1997-- ($1,468,219) and 1996-- ($1,700,454)] $ 547,390,001 $ 593,680,746
SEE NOTES TO FINANCIAL STATEMENTS. PAGE 17 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Keystone High Income Bond Fund (B-4) (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. 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. Actual results could differ from these estimates. 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. Corporate bonds, other fixed-income securities, and mortgage and other asset-backed 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 analysis of various relationships between similar 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 U.S. dollars as follows: market value of investments, assets and liabilities at the daily rate of exchange; purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) resulting from changes in foreign currency exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency related transactions. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions and foreign currency related transactions. The foreign currency gains and losses realized from the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received are included in dividend and interest income. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gain (loss) on foreign currency related transactions. 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 PAGE 18 KEYSTONE HIGH INCOME BOND FUND (B-4) accretion of discounts and amortization of premiums. Dividend income is recorded on the ex-dividend date. Foreign income may be subject to foreign withholding taxes which are accrued as applicable. Capital gains realized on some foreign securities are subject to foreign taxes and are accrued as applicable. E. FEDERAL INCOME TAXES The Fund has qualified and intends to continue to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund will not incur any federal income tax liability since it is expected to distribute all of its net investment company taxable income, net tax-exempt income and net capital gains, if any, to its shareholders. The Fund also intends to avoid any excise tax liability by making the required distributions under the Code. Accordingly, no provision for federal income taxes is required. To the extent that realized capital gains can be offset by capital loss carryforwards, it is the Fund's policy not to distribute such gains. F. DISTRIBUTIONS Distributions from net investment income for the Funds are declared daily and paid monthly. Distributions from net realized capital gains, if any, are paid 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. The significant differences between financial statement amounts available for distributions and distributions made in accordance with income tax regulations are primarily due to the expiration of capital loss carryovers. 2. CAPITAL SHARE TRANSACTIONS The Fund has an unlimited number of shares of beneficial interest authorized with a par value of $1.00. Transactions in shares of the Fund were as follows:
YEAR ENDED JULY 31, 1997 1996 Shares sold 32,280,201 38,767,387 Shares redeemed (57,681,924) (74,982,398) Shares issued in reinvestment of distributions 5,995,434 7,959,753 Net decrease (19,406,289) (28,255,258)
3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) for the year ended July 31, 1997 were $747,418,124 and $827,179,413, respectively. On July 31, 1997, the federal tax cost of investment securities was $540,920,358 for federal income tax purposes. The composition of gross unrealized appreciation, depreciation and net unrealized appreciation (depreciation) was $28,167,214, ($35,541,518) and ($7,374,304), respectively. As of July 31, 1997, the Fund has capital loss carryovers for federal income tax purposes of approximately $457,110,000 which expire as follows: $93,048,000-- 1998, $91,150,000-- 1999, $122,350,000-- 2000, $44,605,000-- 2002, $105,957,000-- 2003. 4. DISTRIBUTION PLAN 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 daily and paid monthly. Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), has served as principal underwriter to the Fund. Prior to December 11, 1996, PAGE 19 Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone Investment Management Company ("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 provided 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. 5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS Under an investment advisory agreement dated December 11, 1996, Keystone, a subsidiary of First Union Corporation ("First Union"), serves as the investment advisor for the Fund. In return for providing investment management and administrative services, the Fund pays Keystone a management fee that is calculated daily and paid monthly. The management fee is computed 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 to 0.25% per annum as net assets increase, to the average daily net asset value of the Fund. Effective January 1, 1997, BISYS became sub-administrator to the Fund and is paid by Keystone for its services. 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 advisor 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 year ended July 31, 1997, the Fund paid or accrued to EKIS $50,161 for certain administrative services. Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of Keystone, serves as the transfer and dividend disbursing agent for the Fund. Officers of the Funds and affiliated Trustees receive no compensation directly from the Funds. As sub-administrator, BISYS provides the officers of the Fund. 6. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an expense offset arrangement with its custodian. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. PAGE 20 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, 1997, 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, 1997 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, 1997, 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 5, 1997 PAGE 21 FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED) During the year ended July 31, 1997, distributions of $0.33 per share were paid in shares or cash. In January 1998 complete information on calendar year 1997 distributions will be forwarded to you to assist in completing your 1997 federal income tax return. (This page left blank intentionally) 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. Precious Metals Holdings, Inc. Quality Bond Fund (B-1) Small Company Growth Fund (S-4) Strategic Growth Fund (K-2) Tax Free Fund This report was prepared primarily for the information of the Fund's shareholders. It is authorized for distribution if preceded or accompanied by the Fund's current prospectus. The prospectus contains important information about the Fund including fees and expenses. Read it carefully before you invest or send money. For a free prospectus on other Evergreen Keystone funds, contact your financial adviser or call Evergreen Keystone. Evergreen Keystone (Tree logo) FUNDS (logo) P.O. Box 2121 Boston, Massachusetts 02106-2121 (Recycle logo) 541893 (B4-R) KEYSTONE (Photo Exists in Film ONLY. Will See on Dylux) HIGH INCOME BOND FUND (B-4) Evergreen Keystone (TREE LOGO) FUNDS (LOGO) ANNUAL REPORT JULY 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----