Page 1
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
Seeks generous income primarily from high yield corporate bonds.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone High Income Bond Fund (B-4) for the twelve-month period, which ended
July 31, 1995.
Performance
The Fund provided a total return of 11.75% for the six-month period and 5.66%
for the twelve-month period which both ended July 31, 1995.
The Fund's performance rebounded sharply in 1995 as a result of an
improved investment environment for high yield bonds and careful issue
selection. Last year we began upgrading the portfolio with higher quality
high yield corporate bonds for two primary reasons: to improve liquidity and
to prepare for an expected slowdown in economic growth.
An Emphasis on Higher Quality Bonds
After a period of strong economic growth in 1994--an environment that is
generally favorable for high yield corporate bonds--we expected economic
growth to eventually slow. Given this scenario, we had methodically increased
the Fund's weighting of BB-rated bonds throughout the period. These bonds are
the highest rated and most liquid within the high yield spectrum. Typically,
they offer greater marketability and an element of stability in times of
slowing economic growth. They also, however, have a greater degree of
interest-rate sensitivity than lower-rated, high-yield bonds. While our
strategy may have been a bit premature in 1994 when rates were still rising,
it has since bolstered the Fund's performance in 1995 as the economy slowed.
A Fundamentally Sound Market
An encouraging characteristic of the high yield market today is its increased
size. With a market capitalization of $240 billion, we believe the high yield
market offers greater diversity and more responsibly structured issues than a
decade ago. Many companies now finance growth and capital needs by coming
directly to the high yield market. Furthermore, corporate America has
revitalized itself in the last few years. Continued cost-cutting efforts have
improved the financial conditions of many companies, enabling them to compete
more effectively in the global markets. Going forward, we expect these
tangible changes should help high yield bonds retain both their appeal as a
proven investment vehicle and their ability to generate high income--even in
an environment of subdued economic growth.
Intensive Research
Prior to adding a new issue to the Fund's portfolio, Keystone's high yield
bond team carefully scrutinizes each issue. We conduct our own stringent
credit research and invest many hours meeting with industry analysts and
company managements to review financial statements, as well as earnings and
cash flow projections. We believe this in-depth analysis can be particularly
valuable because of the unique characteristics of each issue.
-continued-
<PAGE>
Page 2
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
Our Outlook
It seems the Fed has achieved its desired "soft-landing" scenario of
controlled inflation within a sustainable, slow-growth economy. Admittedly,
a slow growing economy may not be as ideal an environment for high yield
bonds as the one which characterized this sector's spectacular gains during
the past several years. However, given the new attitude toward reduced
spending, increased saving, and smaller government now emerging in
Washington, we see the possibility for positive influences on the market--and
on investing in general. We remain confident in the ability of high yield
bonds to generate relatively attractive income and look forward to uncovering
further opportunities in this sector throughout fiscal 1996.
We appreciate your continued support, and we encourage you to write to us with
any questions or comments about your Keystone investment.
Sincerely,
[Signature of Albert H. Elfner, III]
Albert H. Elfner, III
President
[Signature of George S. Bissell]
George S. Bissell
Chairman
September 1995
{Photo of Albert H. Elfner, III] [Photo of George S. Bissell]
Albert H. Elfner, III George S. Bissell
<PAGE>
Page 3
- ------------------------------------
A Discussion With
Your Fund's Manager
[Photo of Donald M. Keller]
Keystone High Income Bond Fund (B-4) is managed by Donald M. Keller, senior
vice president and senior portfolio manager. Mr. Keller is co-head of
Keystone's high yield bond team. This team consists of eight professionals
dedicated to research and security recommendations for the Fund.
Q. How has the market environment changed
during the period?
A The market environment in which the Fund operated during the past twelve
months grew more hospitable as fiscal 1995 progressed. The robust economic
growth and rising interest rates of calendar 1994 had given way to more
subdued growth, diminished inflation fears, and lower long-term rates by
period's end. This change positively affected the performance of most
fixed-income securities, including high yield bonds. As a result, the Fund
was able to provide shareholders with positive performance for the twelve
months which ended July 31, 1995.
Q What factors influenced the performance of
high yield bonds the most?
A The cyclical movements of the economy, inflation, and interest rates are the
primary influences on the performance of most bonds. By nature, high yield
bonds are less affected by the direction of interest rates than higher-grade
government and corporate bonds. Consequently, when interest rates rose in
1994, high yield bonds declined less in price than their higher grade
counterparts. Conversely, as interest rates declined during the past few
months, high yield bonds, while participating in the ensuing rally,
appreciated less than many investment grade bonds.
Credit quality and profitability of issuing companies--both of which have
improved significantly since the mid-1980s--are more important factors to
consider when investing in high yield bonds. The outlook for the economy
plays an influential role, as well. For instance, as economic data this past
spring pointed toward further slowing, high yield investors grew concerned
about the possibility of a recession and its implication for corporate
earnings. This resulted in a brief drag on performance to which higher grade
bonds were not as susceptible. In our opinion, recessionary fears have since
abated and high yield bonds have resumed their upward momentum.
Q What strategies did you pursue throughout
the period?
A There are three layers to the Fund's portfolio: income, performance, and
liquidity. The income layer is comprised of relatively high coupon bonds; the
performance layer is comprised of issues that we hold for price appreciation
potential; and the liquidity layer is comprised of relatively high quality
issues that tend to
Fund Profile
Objective: Seeks generous income primarily for high yield
corporate bonds.
Inception date: September 11, 1935
Number of issues: 135
Average quality: B+
Net assets: $765 million
Newspaper listing: HiIncB4
<PAGE>
Page 4
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
[Tabular representation of pie chart]
Asset Allocation as of July 31, 1995
Performance (25%)
Income (40%)
Liquidity (35%)
(as a percent of portfolio assets)
have larger market capitalizations. While we strive to maintain a broad mix of
securities within each of these layers, we sometimes change or add to the mix of
one layer more than the other two in response to prevailing market conditions.
As the fiscal year progressed, we added significantly to the liquidity
layer, seeking to fortify our defensive posture with more BB-rated bonds in
anticipation of an eventual economic slowdown. By the period's end, the
portfolio's weighting in these higher quality bonds was increased to roughly
30% of the Fund's net assets. Because of their more conservative nature,
BB-rated bonds tend to offer greater liquidity and stability in uncertain
market environments, in addition to attractive income. Historically, they
have been the first high yield bonds investors sell when interest rates rise
and the first to rally when rates decline. While this strategy detracted from
the Fund's performance during the market tumult this past fall, it provided
an added boost to performance this spring as demand increased when rates
declined and the economy slowed.
To achieve the increase in the liquidity layer, we pulled back slightly on
the income and performance layers--both of which also contributed to the
Fund's price appreciation potential, particularly during the last six months
of the fiscal year.
Q Have you emphasized any particular industries?
A While we take an issue-by-issue approach to security selection, we also
emphasize selected sectors. Two themes that have surfaced in the past several
months have been the possibility of favorable regulatory developments in the
cable and telecommunication industries and increased consolidation in
broadcasting/media. We've attempted to position the Fund to benefit from the
likelihood of these events by adding to the number of portfolio holdings in
these sectors, which have been performing quite well this year. Other sectors
on which we've focused include consumer manufacturing, supermarkets, and
chemicals.
We've also brought the Fund's total cyclical exposure down while
selectively increasing its allocation to certain late stage cyclicals, such
as paper and packaging. Cyclicals are those securities whose performance
moves in tandem with the economic cycle. Our retail focus is high, however
its performance recently has been hindered by fears of recession and lack of
consumer demand. We are now intensively researching companies that stand to
benefit from lower rates, like banks, insurance companies, and utilities.
Top 5 Industries
as of July 31, 1995
Percent of
Industry net assets
- ------------------------------------
Telecommunications 14.4
- -----------------------------------
Retail 7.3
- -----------------------------------
Foods 5.4
- -----------------------------------
Oil 5.0
- -----------------------------------
Consumer goods 4.7
- -----------------------------------
<PAGE>
Page 5
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[Tabular representation of bar chart]
High Yield Default Rate (1)
1985 1.708
1989 4.285
1995 0.773
(1) 1995 rate is from January 1 through June 30, 1995.
Source: Merrill Lynch, and Edward Altman, NYU Stern School
Q Since 1990, price appreciation and income have combined to give high yield
bonds a nice run. Do you expect this trend to continue?
A Although we anticipate that high yield bonds will continue to provide
attractive performance potential throughout fiscal 1996, we believe they are
close to being fairly valued. Going forward, this means that price
appreciation will most likely play a lesser role than income in the near-term
performance of high yield bonds. In the event further price appreciation
fails to materialize, the income generated by these bonds should continue to
be the highest among fixed-income securities.
Q What is your outlook for the next six-to twelve-months?
A From our perspective, it appears we are now in the "soft-landing" which
the Fed has endeavored to achieve. We believe the stage has been set for a
period of sustainable, moderate economic growth with low inflation and lower
long-term interest rates. We think such a scenario seems attainable in 1996,
boding well for stock and bond market performance over the long term. By
winter, we believe we may witness renewed economic strength followed by a
longer stretch of slow economic growth.
Looking ahead, we are convinced that high yield bonds, and mutual funds
which own them, will remain attractive investment vehicles for investors who
seek high income.
[diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Manager, Shareholder Communications, Keystone Distributors, Inc.,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
Your Fund's Performance
[Tabular representation of mountain graph]
Growth of an investment in
Keystone High Income Bond Fund (B-4)
Reinvested Initial
Distribution Investment
7/85 10,000 10,000
7/87 9,660 12,351
7/89 8,045 13,178
7/91 5,284 12,148
7/93 6,469 18,593
7/95 5,574 19,566
A $10,000 investment in Keystone High Income Bond Fund (B-4)
made on July 31, 1985 with all distributions reinvested was worth $19,566
on July 31, 1995. Past performance is no guarantee of future results.
Twelve-Month Performance as of July 31, 1995
============================================
Total return* 5.66%
Net asset value 7/31/94 $4.68
7/31/95 $4.42
Dividends $.490
Capital gains None
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of July 31, 1995
=====================================
If you If you did
Cumulative total return redeemed not redeem
1-year 2.83% 5.66%
5-year 61.11% 61.11%
10-year 95.66% 95.66%
Average annual total return
1-year 2.83% 5.66%
5-year 10.01% 10.01%
10-year 6.94% 6.94%
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who bought and sold Fund
shares after one calendar year. Investors who retained their fund investment
earned the returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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Growth of an Investment
[Line Graph]
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, 1985 through July 31, 1995
Fund Average Annual Total Return
- --------------------------------
1 Year 5 Year 10 Year
2.83% 10.01% 6.94%
Fund Average Annual Total Return
Fund LABI CPI
10,000 10,000 10,000
11,527 12,197 10,158
7/87 12,351 12,699 10,557
12,556 13,660 10,993
7/89 13,178 15,737 11,540
12,144 16,847 12,096
7/91 12,148 18,645 12,634
15,458 21,402 13,033
7/93 18,593 23,580 13,395
18,517 23,599 13,766
7/95 19,566 25,985 14,147
Past performance is no guarantee of future results.
The one-year return reflects the deduction of the
Fund's 3% contingent deferred sales charge for
shares held for at least one year.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone High Yield Bond Fund (B-4)
The Fund seeks generous income primarily from high yield corporate bonds. Total
return quotations are stated after deducting sales charges (if applicable), fund
expenses and transaction costs, and assumes reinvestment of all distributions.
2. Lehman Aggregate Bond Index (LABI)
The LABI is a broad-based, unmanaged fixed-income index of US government,
corporate and mortgage-backed securities. It represents the price change and
coupon income of several thousand securities of various credit qualities and
maturities. Securities are selected and compiled by Lehman Brothers, Inc.
according to criteria that may be unrelated to your Fund's investment
objective. It would be difficult for most individual investors to duplicate
this index.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other
<PAGE>
PAGE 8
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
important financial considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 9
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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>
PAGE 10
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
SCHEDULE OF INVESTMENTS--July 31, 1995
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
FIXED INCOME (84.1%)
INDUSTRIAL BONDS & NOTES (81.6%)
ADVERTISING & PUBLISHING (0.7%)
Lamar Advertising Co. Sr. Secd. Notes 11.000% 2003 $ 5,000,000 $ 5,050,000
- -----------------------------------------------------------------------------------------------------------------------------------
AEROSPACE (1.7%)
SabreLiner, Inc. Sr. Notes 12.500 2003 10,000,000 8,800,000
Transdigm, Inc. Sr. Notes (Subord.) 13.000 2000 5,000,000 4,575,000
- -----------------------------------------------------------------------------------------------------------------------------------
13,375,000
- -----------------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION (2.3%)
CHC Helicopter Corp. Sr. Notes (Subord.) 11.500 2002 10,500,000 9,135,000
Continental Airlines, Inc. Sr. Equip. Trust Cert. 16.000 1999 1,328,323 1,328,323
Northwest Airlines Trust #2 Aircraft Notes (Subord.) 13.875 2008 5,000,000 5,600,000
US Africa Airways (6/02/94--$3,500,000)
(b) (c) (e) (f) Sr. Secd. Notes 12.000 1999 3,500,000 1,610,000
- -----------------------------------------------------------------------------------------------------------------------------------
17,673,323
- -----------------------------------------------------------------------------------------------------------------------------------
AMUSEMENTS (3.8%)
Affinity Group, Inc. Gtd. Sr. Notes (Subord.) 11.500 2003 7,000,000 7,017,500
El Comandante Capital Corp. 1st Mtge. Notes 11.750 2003 7,500,000 7,050,000
Grand Palais Casinos, Inc. (8/15/94--
$7,750,000) (c) (f) Sr. Secd. PIK Notes 18.250 1997 7,750,000 7,750,000
Hemmeter Enterprises, Inc. (12/14/93--
$8,000,000) (c) (e) Unit (Sr. Secd .PIK Notes/Wts.) 12.000 2000 16,097,838 6,922,070
Starcraft Corp. (b) (c) (e) Notes (Subord.) 16.500 1998 6,925,000 138,500
- -----------------------------------------------------------------------------------------------------------------------------------
28,878,070
- -----------------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE (0.1%)
Exide Corp. (h) Sr. Notes 10.000 2005 1,000,000 1,037,500
- -----------------------------------------------------------------------------------------------------------------------------------
BROADCASTING (1.0%)
Outlet Broadcast, Inc. Sr. Notes (Subord. 10.875 2003 4,000,000 4,120,000
People's Choice T.V. Corp.
(Eff. Yield 12.47%) (d) Sr. Disc. Notes 0.000 2004 8,000,000 3,800,000
- -----------------------------------------------------------------------------------------------------------------------------------
7,920,000
- -----------------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (4.6%)
Alpine Group, Inc. (h) Sr. Notes 12.250 2003 6,000,000 5,520,000
Associated Materials, Inc. Sr. Notes (Subord.) 11.500 2003 10,000,000 9,200,000
HMH Properties, Inc. (5/18/95-$7,706,960) (c) Sr. Secd. Notes 9.500 2005 8,000,000 7,860,000
Koppers Industries, Inc. Sr. Notes 8.500 2004 8,000,000 7,760,000
Schuller International Group, Inc. Sr. Notes 10.875 2004 4,500,000 4,916,250
- -----------------------------------------------------------------------------------------------------------------------------------
35,256,250
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 11
- -----------------------------------
SCHEDULE OF INVESTMENTS--July 31, 1995
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
CAPITAL GOODS (1.0%)
Lanesborough Corp. (f) Sr. Secd. Notes (Subord.) 10.000% 2000 $11,026,000 $ 7,718,200
- -----------------------------------------------------------------------------------------------------------------------------------
CHEMICALS (2.5%)
Key Plastics, Inc. Sr. Notes, Series B 14.000 1999 8,500,000 8,585,000
Scotts Co. Sr. Notes (Subord.) 9.875 2004 3,000,000 3,195,000
Sherritt Gordon Ltd. Sr. Notes 9.750 2003 7,000,000 7,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
18,780,000
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER GOODS (4.7%)
Drypers Corp. Sr. Notes, Series B 12.500 2002 9,601,000 9,024,940
International Semi-Tech Electronics, Inc.
(Eff. Yield 11.96%) (d) Sr. Secd. Disc. Notes 0.000 2003 14,000,000 7,455,000
Pathmark Stores, Inc. Sr. Notes (Subord.) 9.625 2003 3,000,000 2,970,000
Revlon Worldwide Corp. (Eff. Yield 15.52%) (d) Sr. Secd. Disc. Notes 0.000 1998 10,000,000 7,125,000
Revlon Consumer Products Corp. Sr. Notes (Subord.) 10.500 2003 9,000,000 9,045,000
- -----------------------------------------------------------------------------------------------------------------------------------
35,619,940
- -----------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.9%)
Jordan Industries, Inc. S. Notes 10.375 2003 7,500,000 7,068,750
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCE (2.0%)
American Life Holding Co. Sr. Notes (Subord.) 11.250 2004 3,770,000 3,958,500
PMI Acquisition Corp. Sr. Notes (Subord.) 10.250 2003 1,750,000 1,798,125
Premium Standard Farms (9/29/93-- $11,033,649)
(Eff. Yield 12.00%) (c) (d) Sr. Sec. Disc. Notes 0.000 2003 7,124,000 5,200,520
Sahara Finance Corp. Gtd. 1st Mtge. Notes 12.125 1996 3,953,541 4,032,612
- -----------------------------------------------------------------------------------------------------------------------------------
14,989,757
- -----------------------------------------------------------------------------------------------------------------------------------
FOODS (5.4%)
Cott Corp. Sr. Notes 9.375 2005 5,000,000 5,025,000
Iowa Select Farms (Eff. Yield 13.72%)
(2/04/94--$14,480,865) (c) (d) (f) Unit (Sr. Disc. Notes/Wts.) 0.000 2004 34,470,000 16,618,332
Iowa Select Farms (Eff. Yield 15.26%)
(8/02/94--$8,977,379) (c) (d) (f) Unit (Sr. Disc. Notes/Wts.) 0.000 2004 21,370,000 10,302,691
PM Holdings Corp. (Eff. Yield 11.62%) (d) Unit (Sr. Disc. Notes/Wts.) 0.000 2005 8,812,000 4,560,210
Specialty Foods Acquisition Corp.
(Eff. Yield 10.70%) (d) Sr. Secd. Disc. Deb. 0.000 2005 8,750,000 4,484,375
- -----------------------------------------------------------------------------------------------------------------------------------
40,990,608
- -----------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE SERVICES (0.8%)
Community Health Systems, Inc. Sr. Deb. (Subord.) 10.250 2003 6,000,000 6,390,000
(continued on next page)
<PAGE>
PAGE 12
- ------------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
SCHEDULE OF INVESTMENTS--July 31, 1995
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
HEALTHCARE SERVICES (continued)
Livingwell, Inc. (5/28/86--$1,972,500)(b)(c)(e) Sr. Deb. (Subord.) 14.125% 1996 $ 2,200,000 $ 44,000
Livingwell, Inc. (5/28/86--$2,153,250)(b)(c)(e) Sr. Deb. (Subord.) 13.125 2001 2,000,000 40,000
- -----------------------------------------------------------------------------------------------------------------------------------
6,474,000
- -----------------------------------------------------------------------------------------------------------------------------------
HOTELS (0.2%)
Santa Fe Hotel, Inc. Unit (1st Mtge. Notes/Wts.) 11.000 2000 1,970,000 1,753,300
- -----------------------------------------------------------------------------------------------------------------------------------
INSURANCE (2.7%)
Chartwell Re Corp. Sr. Notes 10.250 2004 5,500,000 5,252,500
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 16,000,000 5,680,000
- -----------------------------------------------------------------------------------------------------------------------------------
20,932,500
- -----------------------------------------------------------------------------------------------------------------------------------
METALS & MINING (3.8%)
Algoma Steel, Inc. 1st Mtge. Notes 12.375 2005 5,500,000 5,170,000
Inland Steel Co. Unsecd. Notes 12.750 2002 10,000,000 11,175,000
NS Group, Inc. Units (Sr. Secd. Notes/Wts.) 13.500 2003 4,000,000 3,845,000
Russell Metals, Inc. Sr. Notes 10.250 2000 7,890,000 7,416,600
UCAR Global Enterprises, Inc. Sr. Secd. Notes 12.000 2005 1,000,000 1,101,250
- -----------------------------------------------------------------------------------------------------------------------------------
28,707,850
- -----------------------------------------------------------------------------------------------------------------------------------
NATURAL GAS (2.0%)
TransTexas Gas Corp. Sr. Secd. Notes 11.500 2002 14,500,000 15,080,000
- -----------------------------------------------------------------------------------------------------------------------------------
OIL (5.0%)
Chatwins Group, Inc. Sr. Notes 13.000 2003 9,500,000 7,885,000
Crown Central Petroleum Corp. Sr. Notes 10.875 2005 5,250,000 5,565,000
errity Oil & Gas Corp. Sr. Notes (Subord.) 11.750 2004 1,000,000 910,000
Kelley Oil & Gas Sr. Notes 13.500 1999 7,000,000 6,860,000
Plains Resources, Inc. Sr. Notes (Subord.) 12.000 1999 10,000,000 10,400,000
Wainoco Oil Corp. Sr. Notes 12.000 2002 6,000,000 6,240,000
- -----------------------------------------------------------------------------------------------------------------------------------
37,860,000
- -----------------------------------------------------------------------------------------------------------------------------------
OIL SERVICES (1.4%)
Dual Drilling Co. Sr. Notes (Subord.) 9.875 2004 5,550,000 5,217,000
Gulf Canada Resources Ltd. Sr. Deb. (Subord.) 9.625 2005 5,175,000 5,226,750
- -----------------------------------------------------------------------------------------------------------------------------------
10,443,750
- -----------------------------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING (3.8%)
Container Corp. of America Gtd. Sr. Notes, Series B 10.750 2002 6,000,000 6,390,000
Gaylord Container Corp. (Eff. Yield 8.25%) (d) Sr. Notes 0.000 2005 8,000,000 8,100,000
Gaylord Container Corp. Sr. Notes 11.500 2001 3,000,000 3,232,500
Owens-Ilinois, Inc. Sr. Deb. 11.000 2003 2,000,000 2,205,000
Rainy River Forest Products, Inc. Sr. Secd. Notes 10.750 2001 2,750,000 2,915,000
See Notes to Schedule of Investments.
<PAGE>
PAGE 13
- -------------------------------------
SCHEDULE OF INVESTMENTS--July 31, 1995
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
PAPER & PACKAGING (continued)
Stone Container Corp. 1st Mtge. Notes 10.750% 2002 $ 5,990,000 $ 6,349,400
- -----------------------------------------------------------------------------------------------------------------------------------
29,191,900
- -----------------------------------------------------------------------------------------------------------------------------------
RESTAURANTS (3.6%)
Boston Chicken, Inc. (Eff. Yield 8.32%) (d) Liquid Yld. Option Notes 0.000 2015 20,000,000 4,975,000
Flagstar Corp. Sr. Notes 10.875 2002 7,200,000 6,768,000
Great American Cookie Co., Inc. Sr. Secd. Notes 10.875 2001 10,000,000 8,600,000
Pantry, Inc. Sr. Notes 12.000 2000 7,500,000 7,425,000
- -----------------------------------------------------------------------------------------------------------------------------------
27,768,000
- -----------------------------------------------------------------------------------------------------------------------------------
RETAIL (7.3%)
Big 5 Holdings, Inc. Sr. Notes (Subord.) 13.625 2002 4,800,000 4,920,000
Cole National Group, Inc. Sr. Notes 11.250 2001 5,000,000 4,875,000
Finlay Fine Jewelry Corp. Sr. Notes 10.625 2003 6,000,000 5,820,000
Hills Stores Co. Sr. Notes 10.250 2003 5,000,000 4,781,250
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 9,475,000 8,432,750
Penn Traffic Co. Sr. Notes 8.625 2003 5,000,000 4,575,000
Penn Traffic Co. Sr. Notes (Subord.) 9.625 2005 4,000,000 3,590,000
Service Merchandise Co. Sr. Deb. (Subord.) 9.000 2004 10,000,000 8,450,000
Southland Corp. 1st Priority Sr. Deb.Subord.) 5.000 2003 13,000,000 10,010,000
- -----------------------------------------------------------------------------------------------------------------------------------
55,454,000
- -----------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (1.9%)
Ampex Corp. (Eff. Yield 9.56%) (c) (d) (f) Disc. Conv. Bonds, Series C 0.000 1997 10,273,000 14,279,470
- -----------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (14.4%)
Adelphia Communications Corp. Sr. Notes 12.500 2002 12,000,000 12,360,000
American Media Operations, Inc. Sr. Notes (Subord.) 11.625 2004 7,000,000 7,455,000
Bell Cablemedia PLC (Eff. Yield 10.67%) (d) Sr. Disc. Notes 0.000 2004 5,000,000 3,325,000
Cablevision Systems Corp. Sr. Disc. Notes 9.875 2013 3,400,000 3,706,000
Cencall Communications Corp.
(Eff. Yield 13.42%) (d) Sr. Disc. Notes 0.000 2004 10,000,000 5,350,000
Continental Cablevision, Inc. Sr. Deb. 9.000 2008 5,000,000 5,150,000
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 7,000,000 7,350,000
Comcast Celluar Corp. (Eff. Yield 13.42%) (d) Part. Disc. Notes 0.000 2000 18,000,000 13,230,000
Diamond Cable (Eff. Yield 11.57%) (d) Sr. Disc. Notes 0.000 2004 5,000,000 3,275,000
Marcus Cable (Eff. Yield 13.15%) (d) Sr. (Subord.) Disc. Notes 0.000 2005 6,000,000 3,420,000
Marcus Cable (Eff. Yield12.06%) (d) Sr. Disc. Notes 0.000 2004 12,000,000 8,115,000
MFS Communication (Eff. Yield 8.60%) (d) Sr. Disc. Notes 0.000 2004 10,000,000 7,200,000
Mobile Telecommunication Technology Sr. (Subord.) Disc. Notes 13.500 2002 10,000,000 10,950,000
Pagemart, Inc. (Eff. Yield 10.36%) (d) Unit (Sr. Disc. Notes/Wts.) 0.000 2003 18,050,000 11,732,500
Paging Network Inc. Sr. Notes (Subord.) 10.125 2007 2,500,000 2,550,000
Rogers Cablesystems Ltd. Sr. Secd. 2nd Priority Note 10.000 2005 1,000,000 1,047,500
(continued on next page)
<PAGE>
PAGE 14
- ------------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
SCHEDULE OF INVESTMENTS--July 31, 1995
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS (continued)
Videotron Group Ltd. Deb. (Subord.) Voting Co 10.625% 2005 $ 3,750,000 $ 3,993,750
- -----------------------------------------------------------------------------------------------------------------------------------
110,209,750
- -----------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION (3.0%)
Eletson Holdings, Inc. 1st Mtge. Notes 9.250 2003 8,000,500 7,680,480
Gearbulk Holding Ltd. Sr. Notes 11.250 2004 7,000,000 7,350,000
Viking Star Shipping, Inc. 1st Pfd. Ship. Mtge. Notes 9.625 2003 8,000,000 8,160,000
- -----------------------------------------------------------------------------------------------------------------------------------
23,190,480
- -----------------------------------------------------------------------------------------------------------------------------------
UTILITIES (1.0%)
Consolidated Hydro, Inc. (6/15/93--
$8,811,783) (Eff. Yield 12.26%) (c) (d) Sr. Disc. Notes 0.000 2003 13,400,000 7,437,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES
(Cost--$633,454,626) 623,139,398
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (2.5%)
Indah Kiat International Finance Co. B.V. Gtd. Secd. Notes 11.875 2002 8,000,000 8,080,000
Polsindo Eka Perkasa Sr. Notes 13.000 2004 6,000,000 6,120,000
Telefonica de Argentina S.A. Unsecd. Deb. 11.875 2004 2,775,000 2,761,125
YPF Sociedad Anonima Unsecd. Deb. 8.000 2004 3,000,000 2,610,180
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$19,369,496) 19,571,305
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$652,824,122) 642,710,703
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Shares
<S> <C> <C>
===================================================================================================================================
COMMON STOCKS/RIGHTS/WARRANTS (10.8%)
Ampex Corp. (e) (f) 512 2,224
Ampex Corp., Class A (e) (f) 196,392 834,666
Ampex Corp., Class C (e) (f) 3,629,294 15,424,500
Ampex Corp., wts. (e) (f) 1,007,308 4,281,059
Chatwins Group, Inc., wts.(e) 9,500 4,750
CHC Helicopter Corp., wts.(e) 84,000 84,000
Cookies USA, Inc., wts. (e) 1,800 72,000
Dial Page, Inc., wts. (e) 9,510 19,020
Dimac Corp. (e) 55,481 880,761
EMC Corp. (e) 341,836 7,819,499
Finlay Enterprises, Inc. (e) 4,533 70,261
Grand Palais Casinos, Inc., Series A, wts. (8/15/94--$2,507) (c) (e) (f) 250,735 1,895,559
Grand Palais Casinos, Inc., Series B, wts. (8/15/94--$1,368) (c) (e) (f) 136,765 1,033,941
Grand Palais Casinos, Inc., Series C, wts. (8/15/94--$12,080) (c) (e) (f) 1,208,088 12,081
Grand Palais Casinos, Inc., Ltd. Liab. Int.(8/15/94--$0) (c) (e) (f) 931,379 9,314
Grand Palais Casinos, Inc., wts. (1/28/93--$680,643) (c) (e) (f) 680,643 5,145,661
HDA Management Corp., wts. (e) 5,500 29,150
</TABLE>
See Notes to Schedule of Investments.
<PAGE>
PAGE 15
- -------------------------------------
SCHEDULE OF INVESTMENTS--July 31, 1995
<TABLE>
<CAPTION>
Market
Shares Value
<S> <C> <C>
===================================================================================================================================
COMMON STOCKS/RIGHTS/WARRANTS (continued)
Hemmeter Enterprises Inc., wts. (12/14/93--$140,400) (c) (e) 270,532 $ 271
Hemmeter Enterprises, Inc., wts. (12/22/93--$846,280) (c) (e) 695,643 696
Hollywood Casino Corp., Class A (e) 971,665 66,443
Lanesborough Corp. (e) (f) 15,141 151
Pagemart, Inc., wts. (e) 83,030 98,180
PM Holdings Corp. (e) 2,964 3
Purity Supreme, Inc. wts. (11/30/92-$4,330) (c) (e) 22,525 225
Sabreliner Corp., wts. (e) 10,000 10
Specialty Equipment Cos., Inc. (e) (f) 1,860,700 23,607,631
Specialty Foods Acquisition Corp. (8/10/93-$0) (c) (e) 131,250 229,688
Transdigm Inc., wts. (e) 39,894 398,940
UCC Investors Holding Inc., Class A (e) 1,178,622 11,491,563
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/RIGHTS/WARRANTS (Cost--$23,421,865) 82,712,247
===================================================================================================================================
PREFERRED STOCK (1.4%)
Ampex Corp. (11/22/92--$23,987,332) (c) (e) (f) 24,562 11,052,911
US Africa Airways (6/02/94--$11,000,000) (b) (c) (e) (f) 11,000 0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost--$34,987,331) 11,052,911
===================================================================================================================================
MISCELLANEOUS INVESTMENT (0.0%)
Gold River Hotel and Casino Corp.
(Cost--$424,084) Liquidating R.E. Trust 10,775,000 107,750
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL MISCELLANEOUS INVESTMENT (Cost--$424,084) 107,750
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Interest Maturity Maturity
Rate Date Value
===================================================================================================================================
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS (1.8%)
REPURCHASE AGREEMENT (1.8%)
Keystone Joint Repurchase Agreement
(Investments in repurchase agreements, in a
joint trading account, purchased 7/31/95)
(Cost--$13,939,000) (g) 5.833% 08/01/95 $13,941,258 3,939,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$13,939,000) 13,939,000
===================================================================================================================================
TOTAL INVESTMENTS (Cost--$725,596,402) (A) 750,522,611
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (1.9%) 14,442,275
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $764,964,886
===================================================================================================================================
(continued on next page)
</TABLE>
<PAGE>
PAGE 16
- -----------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
Notes to Schedule of Investments:
(a) The cost of investments for federal income tax purposes amounted to
$729,582,378. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at July 31, 1995,
are as follows:
Gross unrealized appreciation $ 81,927,902
Gross unrealized depreciation $(60,987,669)
------------
Net unrealized appreciation $ 20,940,233
============
(b) Securities which have defaulted on payment of interest and/or principal.
The Fund has ceased accruing income on those so identified. At
July 31, 1995, the fair value of these securities was $1,832,500 (0.2%
of the Fund's net assets).
(c) All or a portion of these securities are restricted securities (i.e.,
securities which may not be publicly sold without registration under the
Federal Securities Act of 1933) which 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. Dates of
acquisition and costs are set forth in parentheses after the title of the
restricted securities. 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, 1995, the fair value of these restricted
securities was $97,582,930 (13% of the Fund's net assets at July 31, 1995).
The Fund will not pay the cost of disposition of the above restricted
securities other than ordinary brokerage fees, if any.
(d) Effective yield (calculated at date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(e) Non-income-producing security.
(f) Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
The Fund has never owned enough of the outstanding voting securities of any
issuer to have control (as defined in the Investment Company Act of 1940)
of that issuer. At July 31, 1995, the fair value of these securities was
$121,578,391 (16% of the Fund's net assets).
(g) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at July 31, 1995.
(h) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- --------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of year $4.68 $5.13 $4.74 $4.19 $5.02
- -----------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.38 0.38 0.45 0.49 0.61
Net gain (loss) on
investments and foreign
currency related
transactions (0.15) (0.38) 0.44 0.58 (0.72)
Net commissions paid on
fund share sales (a) 0 0 0 0 0
- -----------------------------------------------------------------------------------------------
Total from investment
operations 0.23 0 0.89 1.07 (0.11)
- -----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.37) (0.38) (0.45) (0.50) (0.72)
In excess of net
investment income (0.02) (0.07) (0.05) (0.02) 0
Tax basis return of
capital (0.10) 0 0 0 0
Net realized gain
on investments 0 0 0 0 0
- -----------------------------------------------------------------------------------------------
Total distributions (0.49) (0.45) (0.50) (0.52) (0.72)
- -----------------------------------------------------------------------------------------------
Net asset value end of
year $4.42 $4.68 $5.13 $4.74 $4.19
- -----------------------------------------------------------------------------------------------
Total return (b) 5.66% (0.41%) 20.28% 27.25% 0.03%
Ratios/supplemental
data
Ratios to average
net assets:
Total expenses 2.03% 1.84% 2.06% 2.17% 2.34%
Net investment income 8.64% 7.57% 9.30% 10.86% 14.64%
Portfolio turnover rate 82% 110% 125% 94% 78%
- -----------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $764,965 $766,283 $972,164 $841,757 $710,590
- -----------------------------------------------------------------------------------------------
<CAPTION>
Year Ended July 31,
----------------------------------------------------------------------
1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of year $6.38 $6.91 $7.66 $8.08 $7.92
- -----------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.68 0.83 0.80 0.81 0.89
Net gain (loss) on
investments and foreign
currency related
transactions (1.18) (0.51) (0.71) (0.26) 0.35
Net commissions paid on
fund share sales (a) 0 0 0 0 (0.08)
- -----------------------------------------------------------------------------------------------------
Total from investment
operations (0.50) 0.32 0.09 0.55 1.16
- -----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.78) (0.85) (0.84) (0.90) (1.00)
In excess of net
investment income (0.08) 0 0 0 0
Tax basis return of
capital 0 0 0 0 0
Net realized gain
on investments 0 0 0 (0.07) 0
- -----------------------------------------------------------------------------------------------------
Total distributions (0.86) (0.85) (0.84) (0.97) (1.00)
- -----------------------------------------------------------------------------------------------------
Net asset value end of
year $5.02 $6.38 $6.91 $7.66 $8.08
- -----------------------------------------------------------------------------------------------------
Total return (b) (7.84%) 4.95% 1.66% 7.15% 15.27%
Ratios/supplemental
data
Ratios to average
net assets:
Total expenses 2.06% 1.97% 1.82% 1.65% 0.86%
Net investment income 12.77% 12.36% 11.29% 10.26% 10.93%
Portfolio turnover rate 45% 75% 81% 135% 87%
- -----------------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $820,940 $1,188,660 $1,274,673 $1,464,891 $1,569,038
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both financial
statement and tax purposes as capital charges. On June 11, 1987, the
Securities and Exchange Commission adopted a rule which required for
financial statements for the periods ended on or after June 30, 1987, that
net commissions paid under Rule 12b-1 be treated as operating expenses
rather than capital charges. Accordingly, beginning with the year ended July
31, 1987, the Fund's financial statements reflect 12b-1 Distribution Plan
expenses (i.e., shareholder service fees plus commissions paid net of
deferred sales charges received by the Fund) as a component of net
investment income.
(b) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- -----------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995
===================================================================
Assets: (Note 1):
Investments at market value:
Unaffiliated issuers (identified cost--
$615,784,470) $ 628,944,220
Affiliated issuers (identified
cost--$109,811,932) 121,578,391
- -------------------------------------------------------------------
Total investments 750,522,611
- -------------------------------------------------------------------
Cash 464
Receivable for:
Investments sold 5,703,655
Fund shares sold 615,775
Interest 12,376,289
Prepaid expenses 114,771
Other assets 2,730,610
- -------------------------------------------------------------------
Total assets 772,064,175
- -------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 2,835,296
Fund shares redeemed 1,484,812
Distributions to shareholders 2,427,260
Due to related parties 64,597
Other accrued expenses 287,324
- -------------------------------------------------------------------
Total liabilities 7,099,289
- -------------------------------------------------------------------
Net assets $ 764,964,886
===================================================================
Net assets represented by (Note 1):
Paid-in capital $1,267,014,064
Accumulated distributions in excess of net
investment income (5,828,773)
Accumulated net realized gain (loss) on
investments
and foreign currency related transactions (521,146,614)
Net unrealized appreciation (depreciation) on
investments 24,926,209
- -------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($4.42 a share on
173,052,313 shares outstanding) $ 764,964,886
===================================================================
STATEMENT OF OPERATIONS
Year Ended July 31, 1995
===================================================================
Investment income (Note 1):
Interest:
Unaffiliated issuers (net of
withholding taxes of $40,615) $ 71,311,621
Affiliated issuers 4,336,292
- ---------------------------------------------------------------------
Total income 75,647,913
- ---------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 4,040,007
Transfer agent fees 2,189,924
Accounting, auditing and legal 675,522
Custodian fees 255,265
Printing 29,440
Trustees' fees and expenses 36,136
Distribution Plan expenses 7,072,929
Registration fees 80,171
Miscellaneous 35,167
- ---------------------------------------------------------------------
Total expenses 14,414,561
- ---------------------------------------------------------------------
Net investment income 61,233,352
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions (Notes 1 and 3):
Net realized gain (loss) on:
Investments (88,173,005)
Foreign currency related
transactions (3,645,039)
- ---------------------------------------------------------------------
Net realized gain (loss) on
investments and foreign currency
related transactions (91,818,044)
- ---------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments 71,736,709
- ---------------------------------------------------------------------
Net gain (loss) on investments and
foreign currency related
transactions (20,081,335)
- ---------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 41,152,017
=====================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 19
- -----------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------
1995 1994
===============================================================================================================
<S> <C> <C>
Operations: (Note 1):
Net investment income $ 61,233,352 $ 70,189,475
Net realized gain (loss) on investments and foreign currency related
transactions (91,818,044) (62,808,562)
Net change in unrealized appreciation (depreciation) on investments 71,736,709 2,197,734
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 41,152,017 9,578,647
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Notes 1 and 5):
Net investment income (60,319,059) (70,189,475)
In excess of net investment income (3,043,529) (13,314,817)
Tax basis return of capital (17,099,886) 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions to shareholder (80,462,474) (83,504,292)
- ---------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold 233,171,940 407,409,983
Payments for shares redeemed (240,425,711) (587,387,928)
Net asset value of shares issued in reinvestment of dividends and
distributions 45,245,958 48,023,003
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions 37,992,187 (131,954,942)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,318,270) (205,880,587)
- ---------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 766,283,156 972,163,743
- ---------------------------------------------------------------------------------------------------------------
End of year [including accumulated distributions in excess of net investment
income as follows: 1995--($5,828,773)
and 1994--($3,533,049)] (Note 1) $ 764,964,886 $ 766,283,156
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 20
- -----------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone High Income Bond Fund (B-4) (formerly Keystone Custodian Fund,
Series B-4), (the "Fund") is a common law trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the Investment Adviser. The Fund is registered under the Investment Company
Act of 1940 as a diversified, open-end investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments Inc.
(fomerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former members of management of Keystone and its affiliates. Keystone
Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of
Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing sales price or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a) securities (including restricted
securities) for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value or if no sale occurred. Short-term investments
maturing in sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.)
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest,
approximates market. Short-term investments denominated in a foreign currency
are adjusted daily to reflect changes in exchange rates. Market quotations
are not considered to be readily available for long-term corporate bonds and
notes; such investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, which determines
valuations for normal institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency rates. A futures contract is an
agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at a set price on a future date. Upon entering into a futures contract
the Fund is required to deposit with a broker an amount ("initial margin")
equal to a certain percentage of the purchase price indicated in the futures
contract. Subsequent payments ("variation margin") are made or received by
the Fund each day, as the value of the underlying instrument or index
fluctuates, and are recorded for book purposes as unrealized gains or losses
by the Fund. For federal tax purposes, any futures contracts which remain
open at fiscal year-end
<PAGE>
PAGE 21
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are marked-to-market and the resultant net gain or loss is included in
federal taxable income. In addition to market risk, the Fund is subject to
the credit risk that the other party will not be able to complete the
obligations of the contract.
Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily
rate of exchange, purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. All discounts are
amortized for both financial reporting and federal income tax purposes.
Distributions to shareholders are recorded at the close of business on the
record date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of
securities whereby the seller agrees to repurchase the securities at a
mutually agreed upon date and price) the repurchase price of the securities
will generally equal the amount paid by the Fund plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide
securities ("collateral") to the Fund whose value will be maintained at an
amount not less than the repurchase price, and which generally will be
maintained at 101% of the repurchase price. The Fund monitors the value of
collateral on a daily basis, and if the value of the collateral falls below
required levels, the Fund intends to seek additional collateral from the
seller or terminate the repurchase agreement. If the seller defaults, the
Fund would suffer a loss to the extent that the proceeds from the sale of the
underlying securities were less than the repurchase price. Any such loss
would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agreement, the realization on the collateral may be delayed or limited.
Repurchase agreements entered into by the Fund will be limited to
transactions with dealers or domestic banks believed to present minimal
credit risks, and the Fund will take constructive receipt of all securities
underlying repurchase agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. The Fund may enter into forward foreign currency exchange contracts
("contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain foreign currency
assets. Contracts are recorded at market value and are marked-to-market
daily. Realized gains and losses arising from such transactions are included
in net realized
<PAGE>
PAGE 22
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
gain (loss) on foreign currency related transactions. The Fund is subject to
the credit risk that the other party will not complete the obligations of the
contract.
F. The Fund distributes net investment income monthly and net capital
gains, if any, annually. Distributions are determined in accordance with
income tax regulations. The significant differences between financial
statement amounts available for distribution and distributions made in
accordance with income tax regulations are primarily due to the different
treatment of 12b-1 expenses prior to April 1995 and the deferral of losses
for income tax purposes.
(2.) Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of
shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
Year Ended
1995 1994
- -------------------------------------------------------
Shares sold 53,793,683 79,109,683
Shares redeemed (55,102,608) (114,282,869)
Shares issued in
reinvestment of
dividends and
distributions 10,479,964 9,447,901
- -------------------------------------------------------
Net increase
(decrease) 9,171,039 (25,725,285)
=======================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the
principal underwriter and a wholly-owned subsidiary of Keystone, amounts
which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed above, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed above,
KIDC generally pays dealers or others a commission equal to 4.00% of the
price paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares are redeemed within four calendar years of
original issuance, the Fund may be eligible to receive a deferred sales
charge from the investor as partial reimbursement for sales commissions
previously paid on those shares. This charge is based on declining rates,
which begin at 4.00%, applied to the lesser of the net asset value of shares
redeemed or the total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar year (approximately 1.25% annually)
occuring after the inception of the Distribution Plan. A rule of the National
Association of Securities Dealers, Inc. ("NASD Rule") limits the annual
expenditures which the Fund may incur under the Distribution Plan to 1% of
which 0.75% may be used to pay such distribution expenses and 0.25% may be
used to pay shareholder service fees. The NASD Rule also will limit the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of
<PAGE>
PAGE 23
- ---------------------------------------
gross share sales since the inception of the Fund's 12b-1 Distribution Plan,
plus interest at the prime rate plus 1.00% on unpaid amounts thereof (less
any contingent deferred sales charges paid by the shareholders to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus one percent) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC subsequent to January 1, 1992.
Commencing on July 8, 1992, contingent deferred sales charges applicable
to shares of the fund issued after January 1, 1992 have, to the extent
permitted by the NASD Rule, been paid to KIDC rather than to the Fund.
During the year ended July 31, 1995, the Fund paid KIDC $7,116,706 under
its Distribution Plan. The amount paid by the Fund under its Distribution
Plan, net of deferred sales charges, was $7,072,929 (0.99% of the Fund's
average daily net asset value). During the year ended July 31, 1995, KIDC
received $4,444,407 after payments of commissions on new sales to dealers and
others of $3,857,337.
Under the NASD Rule, the maximum uncollected amount for which KIDC may
seek payment from the Fund under its distribution Plan is $8,317,347 (1.09%
of the Fund's net assets at July 31, 1995).
(3.) Securities Transactions
Realized gains and losses are recorded on the identified cost basis. As of
July 31, 1995, the Fund had a capital loss carryover for federal income tax
purposes of approximately $517,160,000 which expires as follows:
1996--$16,070,000; 1997--$43,981,000; 1998--$93,048,000; 1999--$91,149,000;
2000--$122,350,000; 2002--$44,605,000; 2003--$105,957,000). For the year
ended July 31, 1995, purchases and sales of investment securities were as
follows:
Cost of Proceeds
Purchases from Sales
- ------------------------------------------------------
Portfolio securities $ 565,320,150 $ 555,960,176
Short-term
investments 4,061,739,572 4,084,334,365
- ------------------------------------------------------
$4,627,059,722 $4,640,294,541
======================================================
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily and is
based upon both Fund net assets and gross income earned by the Fund. The fee
is calculated at a rate of 2.0% of the Fund's gross investment income plus an
amount determined by applying percentage rates, that start at 0.50% and
decline, as net assets increase to 0.25% per annum, to the net asset value of
the Fund. KMI has entered into an Investment Advisory Agreement with
Keystone, under which Keystone provides investment advisory and management
services to the Fund and receives for its services an annual fee representing
85% of the management fee received by KMI. During the year ended July 31,
1995, the Fund paid or accrued to KMI investment management and
administrative services fees of $4,040,007 which represented 0.57% of
<PAGE>
PAGE 24
- -----------------------------------
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
the Fund's average net assets. Of such amount paid to KMI, $3,434,006 was
paid to Keystone for its services to the Fund.
During the year ended July 31, 1995, the Fund paid or accrued to KII
$28,703 for certain accounting services and to KIRC $2,189,924 for transfer
agent fees.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.035 per share was declared
payable on September 7, 1995 to shareholders of record August 25, 1995. This
distribution is not reflected in the accompanying financial statements.
<PAGE>
PAGE 25
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INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
We have audited the accompanying statements of assets and liabilities of
Keystone High Income Bond Fund (B-4), including the schedule of investments,
as of July 31, 1995, 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, 1995 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, 1995, 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 1, 1995
<PAGE>
PAGE 26
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Keystone High Income Bond Fund (B-4)
(formerly Keystone Custodian Fund, Series B-4)
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS
During the fiscal year ended July 31, 1995, distributions of $0.49 per
share were paid in shares or cash. This total includes a nontaxable return of
capital equal to $0.098 per share. The remaining dividends are taxable to
shareholders as ordinary income in the year in which received by them or
credited to these accounts and are not eligible for the corporate dividend
received deduction.
In January 1996, we will send you complete information on the
distributions paid during the calendar year 1995 to help you in completing
your federal tax return.
<PAGE>
PAGE 27
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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.
<PAGE>
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
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Exempt Trust
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial advisor or call Keystone at 1-800-343-2898.
[Keystone Logo]
KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
HIB-AR-9/95
55.5M
[Recycle logo]
KEYSTONE
[Picture of Father and Son]
HIGH INCOME
BOND FUND (B-4)
[Keystone Logo]
ANNUAL REPORT
JULY 31, 1995
