PAGE 1
Keystone High Income Bond Fund (B-4)
Seeks generous income primarily from high yield corporate bonds.
Dear Shareholder:
We are writing to report to you on the performance of Keystone High Income
Bond Fund (B-4) for the six-month period which ended January 31, 1996.
Performance
Keystone High Income Bond Fund (B-4) produced a total return of -0.79% for
the six-month period and 10.87% for the twelve months which ended January 31,
1996. The Lehman Aggregate Bond Index returned 7.25% and 16.94% for the same
six- and twelve-month periods.
Despite positive performance from most of your Fund's holdings, problems
with several bond holdings held back Fund returns during the six-month
period. Our strategy of upgrading the overall portfolio quality and
increasing the trading liquidity of portfolio holdings contributed positively
to Fund performance. But these gains were limited by price declines of a few
issues. We have been making efforts to reduce our exposure to these issues by
continuing our policy of upgrading the quality and liquidity of the portfolio
and by reducing selected holdings. We think this approach has been
appropriate, especially in light of slowing economic growth.
We have continued to make changes to the portfolio to reduce the potential
for price fluctuations. During the period, we reduced the Fund's equity
holdings to 6% of the portfolio, replacing these holdings with income-
producing bonds. We also have increased the diversification of the portfolio
to reduce the affect of individual holdings on overall Fund performance. This
process has involved both increasing the number of issues and reducing the
size of some of your Fund's largest holdings. At the same time, we also
decreased holdings of less liquid positions whenever possible to improve
trading liquidity.
We believe these changes, which focus on higher quality, more liquid
holdings and a more diversified portfolio, give your Fund greater opportunity
to achieve consistent performance.
Attractive income in a low rate environment
In today's environment, we think high yield corporate bonds continue to offer
investors relatively good yields. As interest rates declined during the
period, many investors moved into the high yield market to maintain income.
In fact, after subtracting inflation, real yields have been near historical
highs.
The changes to the Fund's asset allocation should provide the opportunity
for relatively high income and consistent total returns. We have continued to
select bonds based on what we think are good values, weighing the opportunity
for higher yield against a careful examination of liquidity and credit risk.
Our goal remains to provide shareholders with above average yield and
consistent performance over the long term.
-continued-
<PAGE>
PAGE 2
Keystone High Income Bond Fund (B-4)
Outlook
As we move into 1996, we have attempted to position your Fund for the
environment. Over the next twelve months we expect interest rates to remain
low and economic growth should be slow. Historically, this type of
environment has not favored high yield bonds because they tend to be affected
by the economic cycle. Based on this outlook, high yield bonds may experience
some price declines. We expect that your Fund's total returns may be slightly
less than the Fund's dividend. Nevertheless, we believe we are prepared for
this environment by our emphasis on higher quality bonds with good liquidity
and improved diversification.
On January 31, 1996, Donald Keller retired from Keystone Investments after
many years of distinguished service at Keystone and as portfolio manager of
your Fund. Mr. Keller shared responsibility for leading Keystone's high yield
bond group with Richard Cryan, who has assumed responsibility for managing
your Fund. Mr. Cryan has more than 16 years of investment experience and is
also portfolio manager of Keystone Strategic Income Fund. We look forward to
Mr. Cryan's contribution as portfolio manager of your Fund.
Thank you for your continued support of Keystone High Income Bond Fund
(B-4). We encourage you to write to us with questions or comments about your
investment.
Sincerely,
[signature]Albert H Elfner III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature]George S Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
March 1996
[photo] [photo]
Albert H. Elfner, III George S. Bissell
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear
senior portfolio manager Richard Cryan discuss his latest strategy for
Keystone's high yield bond funds. You can also listen to
Keystone's overall market outlook from James McCall, chief investment
officer. The service is available 24 hours a day, seven days
a week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
Keystone High Yield Bond Update Press 5
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
[photo]
Richard Cryan is a portfolio manager of the Fund and heads Keystone's high
yield bond team. Mr. Cryan has more than 16 years of investment experience,
and served as president of Wasserstein Perella Asset Management and also as
portfolio manager at Fidelity Investments. Dick received his BS from the
University of Colorado and his MBA from Columbia University. With the six
members of the high yield bond team, Mr. Cryan and his team research, analyze
and evaluate high yield bonds for the Fund.
[Q] How would you characterize the investment climate for bonds over the past
six months?
[A] The market environment was generally positive for government and
investment grade corporate bonds, but less so for high yield corporate
issues. The decline in interest rates and slower economy were a boon for
Treasury bonds. For high yield bond investors, however, slower economic
growth correlates with a higher possibility of defaults. In addition,
volatility in certain sectors of the stock market, notably high technology
stocks, affected the high yield bonds issued by those companies.
[Q] What was your strategy in this environment?
[A] With prospects of slower growth on the horizon, we used a three-part
strategy in managing your Fund:
1) We continued upgrading the portfolio with higher quality bonds to
increase liquidity and reduce exposure to default risk, a defensive strategy
we initiated about two years ago. Higher quality bonds have tended to be more
liquid than lower quality issues. As of January 31, 1996, higher quality
BB-rated bonds accounted for about 28% of portfolio holdings, up from 23% on
July 31, 1995.
2) We decreased our equity exposure and reinvested the proceeds in higher
quality corporate bonds. We reduced the percentage of equity holdings from
12% to 6% of net assets during the six-month period. Traditionally, higher
quality high yield bonds, such as those rated BB, offer greater liquidity and
stability in uncertain market environments.
3) We increased diversification, both by adding to holdings and reducing
large positions. The total number of issues rose from 135 on July 31, 1995 to
139 as of January 31, 1996 and individual holdings are more evenly
distributed. We believe that greater diversification should help reduce the
affect of any one credit on the Fund's performance.
Fund Profile
Objective: Seeks generous income primarily from high yield
corporate bonds
Commencement of investment operations: September 11, 1935
Number of issues: 139
Average quality: B+
Net assets: $668 million
Newspaper listing: "HiIncB4"
<PAGE>
PAGE 4
Keystone High Income Bond Fund (B-4)
[Q] How did the Fund fare during the six months?
[A] Despite positive performance for most of the Fund's holdings, a few
issues were disappointing, which held back overall Fund performance. In
September, AMPEX, our largest holding, lost about 25% of its value when the
company's stock experienced a significant price decline. Since the end of the
period, the Fund's holding of AMPEX stock has rebounded strongly. The
following month, Drypers, another significant holding, was hit with
unanticipated credit problems. Although it was very thinly traded, we were
able to sell it and limit our exposure to further losses. A third issue,
Grand Palais, provided an unpleasant surprise to many experienced investors.
The bonds were part of a high profile partnership to build the world's
largest casino in downtown New Orleans. In November, senior management of one
of the partners filed comments with the Securities and Exchange Commission
indicating that the project was on track. Four days later, the bank pulled
the project's construction loan and Grand Palais bonds essentially lost
their value.
These events had a dampening effect on the Fund's performance during the
six-month period. An experience like this demonstrates that despite the most
thorough research and ongoing monitoring of Fund holdings, business and
credit problems do occasionally arise in this segment of the bond market.
Lower-rated corporate bonds historically have provided high yields, but they
also entail greater risks than other bond investments. By upgrading the
quality of the Fund's holdings and increasing our level of diversification,
we believe we can minimize but not necessarily eliminate the possibility of
similar events in the future.
[Q] What types of bonds did you emphasize?
[A] We emphasized bonds in several areas. Many of our holdings were in media
and cable issues, such as wireless communications and telecommunications. We
believe these industries offer attractive opportunities for steady growth,
regardless of economic conditions. We also increased our holdings in the
health care area. This sector has improving fundamentals and defensive
characteristics which we like in a slow growth economy. We also emphasized
several transportation issues which we think should benefit from worldwide
shipping and from increased global trade. Packaging is another area of
interest which we believe has been experiencing improving fundamentals and
cost cutting.
[Q] What is your outlook?
[A] Supply and demand characteristics remain positive for high yield bonds.
Investor demand is very heavy, because rates on other income investments are
close to historic lows. Heading into 1996, we expect supply to be plentiful,
but not overwhelming. New issues have recently been well-received and seem
favorably priced. We will continue to pay careful attention to research and
credit quality as we move into this slower growth environment. We expect that
most of investors' returns will come from income rather than appreciation in
the coming months.
[Q] Are high yield bonds still a good investment?
[A] We believe high yield bonds will continue to be valuable for long-term
investors who want to maximize income. The greater risk associated with high
yield bonds requires investors to be more prepared for the possibility of
price changes than investors in high quality bonds. It also argues for the
professional management and diversification provided by mutual funds.
<PAGE>
PAGE 5
Your Fund's Performance
***************************[mountain chart]***********************************
Growth of an investment in
Keystone High Income Bond Fund (B-4)
In Thousands
Initial Reinvested
Investment Distributions
1/86 10000 10000
9988 11337
1/88 8502 10821
8366 12047
1/90 6460 10705
4319 8568
1/92 5594 12893
5829 14967
1/94 6708 18965
5223 16131
1/96 5186 17884
Total Value: $17,884
A $10,000 investment in Keystone High Income Bond (B-4) made on January 31,
1986 with all distributions reinvested was worth $17,884 on January 31, 1996.
Past performance is no guarantee of future results.
*******************************************************************************
Six-Month Performance as of January 31, 1996
Total return* -0.79%
Net asset value 7/31/95 $ 4.42
1/31/96 $ 4.19
Dividends $ 0.19
Capital gains None
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of January 31, 1996
If you If you did
Cumulative total return redeemed not redeem
1-year 7.89% 10.87%
5-year 108.72% 108.72%
10-year 78.84% 78.84%
Average annual total return
1-year 7.89% 10.87%
5-year 15.85% 15.85%
10-year 5.99% 5.99%
Top 10 Holdings
as of January 31, 1996
Percent of
Security/Yield/Maturity date net assets
Ampex 2.3
Specialty Equipment (common stock) 2.0
Ampex 9.56%,* 1997 1.8
Iowa Select Farms, 15.26%,* 2004 1.6
Reliance Group Holdings, 9.750%, 2003 1.6
Comcast Cellular, 13.42%,* 2000 1.5
Arcadian Partners LP, 10.750%, 2005 1.5
Iowa Select Farms, 13.72%,* 2004 1.3
Great American Cookie, 10.875%, 2001 1.2
Key Plastics, 14.000%, 1999 1.2
* effective yield
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 6
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (90.2%)
INDUSTRIAL BONDS & NOTES (88.3%)
ADVERTISING & PUBLISHING (2.6%)
EZ Communications, Inc. Sr. Notes (Subord.) 9.750% 2005 $ 3,000,000 $ 3,060,000
K III Communications Corp. (g) Sr. Notes 8.500 2006 4,000,000 4,015,000
Lamar Advertising Co. Sr. Secd. Notes 11.000 2003 4,000,000 4,120,000
Sinclair Broadcast Group, Inc. Sr. Notes (Subord.) 10.000 2005 6,000,000 6,210,000
- ----------------------------------------------------------------------------------------------------------------
17,405,000
- ----------------------------------------------------------------------------------------------------------------
AEROSPACE (1.0%)
SabreLiner, Inc. Sr. Notes 12.500 2003 7,600,000 6,992,000
- ----------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION (2.7%)
Atlas Air, Inc. Pass thru Cert. 12.250 2002 4,000,000 4,200,000
CHC Helicopter Corp. Sr. Notes (Subord.) 11.500 2002 7,500,000 6,693,750
Continental Airlines, Inc. Sr. Equip.Trust Cert. 16.000 1999 1,206,824 1,206,824
Northwest Airlines Trust Notes (Subord.) 13.875 2008 5,000,000 5,900,000
- ----------------------------------------------------------------------------------------------------------------
18,000,574
- ----------------------------------------------------------------------------------------------------------------
AMUSEMENTS (4.1%)
Affinity Group, Inc. Gtd. Sr. Notes
(Subord.) 11.500 2003 7,000,000 7,175,000
Grand Casinos, Inc. 1st Mtg. Notes 10.125 2003 4,000,000 4,320,000
Hemmeter Enterprises, Inc. (a) Unit (Sr. Secd. PIK
(d) (g) Notes/Wts.) 12.000 2000 16,097,838 5,634,329
Resorts International Hotel 1st Mtge. Notes 11.000 2003 6,000,000 5,820,000
Six Flags Theme Parks, Inc. Sr. Notes (Subord.) 12.250 2005 5,000,000 4,250,000
Starcraft Corp. (01/13/88--
$1,378,018) (a) (b) (d) Notes (Subord.) 16.500 1998 6,925,000 138,500
- ----------------------------------------------------------------------------------------------------------------
27,337,829
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING (1.5%)
Fundy Cable LTD Sr. Notes 11.000 2005 4,825,000 5,078,311
People's Choice T.V. Corp. Unit (Sr. Disc.
(Eff. Yield 12.47%) (c) Notes/Wts.) 0.000 2004 8,000,000 5,080,000
- ----------------------------------------------------------------------------------------------------------------
10,158,311
- ----------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (4.2%)
Alpine Group, Inc. (g) Sr. Notes 12.250 2003 7,000,000 6,860,000
HMH Properties, Inc. Sr. Secd. Notes 9.500 2005 7,000,000 7,210,000
Koppers Industries, Inc. Sr. Notes 8.500 2004 4,000,000 3,920,000
Schuller International Group,
Inc. Sr. Notes 10.875 2004 6,000,000 6,750,000
Teekay Shipping Corp. 1st Pfd. Ship. Mtge.
Notes 8.320 2008 3,000,000 3,015,000
- ----------------------------------------------------------------------------------------------------------------
27,755,000
- ----------------------------------------------------------------------------------------------------------------
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
CABLE (7.0%)
Adelphia Communications Corp. Sr. Notes 12.500% 2002 $ 6,000,000 $ 6,045,000
Bell Cablemedia PLC (Eff. Yield
10.67%) (c) Sr. Disc. Notes 0.000 2005 6,675,000 4,397,156
Cablevision Systems Corp. Sr. Disc. Notes 9.875 2013 5,000,000 5,350,000
Comcast Celluar Corp. (Eff. Yield
13.42%) (c) Part. Disc. Notes 0.000 2000 13,000,000 10,010,000
Comcast Corp. Sr. (Subord.)(Deb.) 10.625 2012 7,000,000 7,980,000
Continental Cablevision, Inc. Sr. Deb. 9.000 2008 1,000,000 1,052,500
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 6,000,000 6,495,000
Marcus Cable (Eff. Yield 12.06%)
(c) Sr. Disc. Notes 0.000 2004 7,000,000 5,267,500
- ----------------------------------------------------------------------------------------------------------------
46,597,156
- ----------------------------------------------------------------------------------------------------------------
CAPITAL GOODS (0.8%)
Lanesborough Corp. (e) Sr. Secd. Notes
(Subord.) 10.000 2000 6,601,000 5,346,810
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS (6.4%)
Arcadian Partners LP Sr. Notes 10.750 2005 9,000,000 9,990,000
G I Holdings, Inc. (Eff. Yield
8.70%) (c) Sr. Notes 0.000 1998 6,500,000 5,216,250
Harris Chemicals North America,
Inc.
(Eff. Yield 10.56%) (c) Sr. Sec. Disc. Notes 0.000 2001 7,000,000 6,965,000
Key Plastics, Inc. Sr. Notes, Series B 14.000 1999 8,000,000 8,180,000
Scotts Co. Sr. Notes (Subord.) 9.875 2004 3,000,000 3,255,000
Sherritt Gordon Ltd. Sr. Notes 9.750 2003 6,000,000 6,502,500
Sifto Canada, Inc. Sr. Notes 8.500 2000 3,000,000 2,977,500
- ----------------------------------------------------------------------------------------------------------------
43,086,250
- ----------------------------------------------------------------------------------------------------------------
CONSUMER GOODS (1.7%)
International Semi-Tech
Electronics, Inc.
(Eff. Yield 11.96%) (c) Sr. Secd. Disc. Notes 0.000 2003 11,000,000 6,435,000
Revlon Consumer Products Corp. Sr. Notes (Subord.) 10.500 2003 5,000,000 5,175,000
- ----------------------------------------------------------------------------------------------------------------
11,610,000
- ----------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.4%)
Jordan Industries, Inc. Sr. Notes 10.375 2003 3,000,000 2,703,750
- ----------------------------------------------------------------------------------------------------------------
FINANCE (2.7%)
American Life Holding Co. Sr. Notes (Subord.) 11.250 2004 5,500,000 5,830,000
APP International Finance Co.
B.V. Gtd. Secd. Sr. Notes 11.750 2005 5,000,000 4,925,000
PMI Acquisition Corp. Sr. Notes (Subord.) 10.250 2003 1,750,000 1,820,000
Tembec Finance Corp. Gtd. Sr. Notes 9.875 2005 5,500,000 5,307,500
- ----------------------------------------------------------------------------------------------------------------
17,882,500
- ----------------------------------------------------------------------------------------------------------------
(continued on next page)
<PAGE>
PAGE 8
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
FOODS (6.5%)
American Rice, Inc. Mtg. Notes 13.000% 2002 $ 7,500,000 $ 7,050,000
Bruno's Supermarket, Inc. Sr. Notes 10.500 2005 5,000,000 4,925,000
Cott Corp. Sr. Notes 9.375 2005 3,500,000 3,552,500
Iowa Select Farms (Eff. Yield
13.72%) (2/04/94--$14,480,865)
(b) (c) (e) Sr. Disc. Notes 0.000 2004 17,063,000 8,487,989
Iowa Select Farms (Eff. Yield
15.26%) (8/02/94--$8,977,379) Sr. Disc. Notes,
(b) (c) (e) Series A 0.000 2004 21,370,000 10,630,507
PM Holdings Corp. (Eff. Yield Unit (Sr. Disc.
11.62%) (c) Notes/Wts.) 0.000 2005 8,812,000 4,758,480
TLC Beatrice International
Holdings, Inc. Sr. Secd. Notes 11.500 2005 4,000,000 4,000,000
- ----------------------------------------------------------------------------------------------------------------
43,404,476
- ----------------------------------------------------------------------------------------------------------------
HEALTHCARE SERVICES (4.2%)
Community Health Systems, Inc. Sr. Deb. (Subord.) 10.250 2003 6,000,000 6,540,000
Dynacare, Inc. Sr. Notes 10.750 2006 2,400,000 2,472,000
Livingwell, Inc. (5/28/86--
$1,972,500) (a) (b) (d) Sr. Deb. (Subord.) 13.875 1996 2,200,000 44,000
Livingwell, Inc. (5/28/86--
$2,153,250) (a) (b) (d) Sr. Deb. (Subord.) 13.125 2001 2,000,000 40,000
Prime Hospitality Corp. 1st Mtge. Notes 9.250 2002 5,000,000 5,006,250
Quorum Health Group, Inc. Sr. (Subord.) Notes 8.750 2005 7,000,000 7,437,500
Tenet Healthcare Corp. Sr. Notes 8.625 2003 6,150,000 6,595,875
- ----------------------------------------------------------------------------------------------------------------
28,135,625
- ----------------------------------------------------------------------------------------------------------------
INSURANCE (3.6%)
CCP Insurance Sr. Notes 10.500 2004 7,000,000 7,717,500
Chartwell Re Corp. Sr. Notes 10.250 2004 5,500,000 5,843,750
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 10,000,000 10,350,000
- ----------------------------------------------------------------------------------------------------------------
23,911,250
- ----------------------------------------------------------------------------------------------------------------
METALS & MINING (3.5%)
Algoma Steel, Inc. 1st Mtge. Notes 12.375 2005 2,000,000 1,840,000
Bethlehem Steel Corp. Sr. Notes 10.375 2003 4,000,000 4,300,000
Inland Steel Co. Unsecd. Notes 12.750 2002 5,000,000 5,700,000
NS Group, Inc. Units (Sr. Secd.
Notes/Wts.) 13.500 2003 1,675,000 1,524,250
WCI Steel, Inc. Sr. Notes, Series B 10.500 2002 5,000,000 4,968,750
Wheeling Pittsburgh Corp. Sr. Notes 9.375 2003 5,000,000 4,800,000
- ----------------------------------------------------------------------------------------------------------------
23,133,000
- ----------------------------------------------------------------------------------------------------------------
NATURAL GAS (1.1%)
TransTexas Gas Corp. Sr. Notes 11.500 2002 7,000,000 7,175,000
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
OIL (4.3%)
Chatwins Group, Inc. Sr. Notes 13.000% 2003 $ 4,500,000 $ 3,735,000
Crown Central Petroleum Corp. Sr. Notes 10.875 2005 7,000,000 7,385,000
Plains Resources, Inc. Sr. Notes (Subord.) 12.000 1999 5,000,000 5,250,000
Stena AB Sr. Notes 10.500 2005 7,000,000 7,262,500
Vintage Pete, Inc. Sr. Notes (Subord.) 9.000 2005 5,000,000 5,150,000
- ----------------------------------------------------------------------------------------------------------------
28,782,500
- ----------------------------------------------------------------------------------------------------------------
OIL SERVICES (1.6%)
Dual Drilling Co. Sr. Notes (Subord.) 9.875 2004 4,550,000 5,016,375
Gulf Canada Resources Ltd. Sr. Notes (Subord.) 9.625 2005 5,175,000 5,524,313
- ----------------------------------------------------------------------------------------------------------------
10,540,688
- ----------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING (3.7%)
Calmar, Inc. (g) Sr. (Subord.) Notes 11.500 2005 7,000,000 7,087,500
Gaylord Container Corp. (Eff.
Yield 8.25%) (c) Sr. Notes 0.000 2005 6,000,000 5,940,000
Owens--Illinois, Inc. Sr. Deb. 11.000 2003 6,000,000 6,795,000
Repap New Brunswick, Inc. Sr. Notes 10.625 2005 5,000,000 4,850,000
- ----------------------------------------------------------------------------------------------------------------
24,672,500
- ----------------------------------------------------------------------------------------------------------------
RESTAURANTS (2.3%)
Great American Cookie Co., Inc. Sr. Secd. Notes,
(12/01/93--$9,950,000) (b) Series B 10.875 2001 10,000,000 8,250,000
Pantry, Inc. Sr. Notes, Series B 12.000 2000 7,000,000 6,877,500
- ----------------------------------------------------------------------------------------------------------------
15,127,500
- ----------------------------------------------------------------------------------------------------------------
RETAIL (4.6%)
Big 5 Holdings, Inc. Sr. Notes (Subord.) 13.625 2002 5,500,000 4,812,500
Cole National Group, Inc. Sr. Notes 11.250 2001 4,500,000 4,556,250
Finlay Fine Jewelry Corp. Sr. Notes 10.625 2003 5,000,000 4,825,000
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 7,000,000 5,180,000
Ralphs Grocery Co. Sr. Notes 10.450 2004 5,500,000 5,472,500
Service Merchandise Co. Sr. Deb. (Subord.) 9.000 2004 7,000,000 5,775,000
- ----------------------------------------------------------------------------------------------------------------
30,621,250
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY (1.8%)
Ampex Corp. (Eff. Yield 9.56%)
(03/22/94--$9,380,778) (b) (c) Disc. Conv. Bonds,
(e) Series C 0.000 1997 10,273,000 11,998,864
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (11.8%)
American Media Operations, Inc. Sr. Notes (Subord.) 11.625 2004 6,000,000 6,225,000
Centennial Cellular Corp. Sr. Notes 8.875 2001 5,000,000 4,962,500
Diamond Cable Communications
(Eff. Yield 11.35%) (c) Sr. Disc. Notes 0.000 2005 2,175,000 1,326,750
(continued on next page)
<PAGE>
PAGE 10
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED)
Diamond Cable (Eff. Yield 11.57%)
(c) Sr. Disc. Notes 0.000% 2004 $ 7,000,000 $ 5,092,500
MFS Communication (Eff. Yield
8.60%) (c) Sr. Disc. Notes 0.000 2006 5,000,000 3,281,250
MFS Communication (Eff. Yield
8.49%) (c) Sr. Disc. Notes 0.000 2004 8,000,000 6,340,000
Mobile Telecommunication Sr. (Subord.) Disc.
Technology Notes 13.500 2002 7,000,000 7,787,500
One Communications Corp. (Eff.
Yield 13.42%) (c) Sr. Disc. Notes 0.000 2004 10,000,000 5,525,000
Pagemart, Inc. (Eff. Yield Unit (Sr. Disc.
10.36%) (c) Notes/Wts.) 0.000 2003 9,000,000 6,840,000
Pagemart Nationwide, Inc. (Eff. Unit (Sr. Disc.
Yield 10.80%) (c) Notes/Wts.) 0.000 2005 7,000,000 4,672,500
Paxson Communications Corp. (g) Sr. Notes (Subord.) 11.625 2002 4,000,000 4,210,000
Pricecellular Wireless Corp.
(Eff. Yield 10.64%) (c) Sr. Disc. Notes 0.000 2003 5,750,000 4,628,750
Telewest PLC (Eff. Yield 9.86%)
(c) Sr. Disc. Deb. 0.000 2007 11,000,000 6,765,000
Videotron Group Ltd. Deb. (Subord.) Voting
Conv. 10.625 2005 3,750,000 4,096,875
Videotron Holdings PLC (Eff.
Yield 9.97%) (c) Sr. Disc. Notes 0.000 2005 11,000,000 7,150,000
- ----------------------------------------------------------------------------------------------------------------
78,903,625
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION (3.0%)
Eletson Holdings, Inc. 1st Pfd. Mtge. Notes 9.250 2003 6,000,500 6,030,503
Gearbulk Holding Ltd. Sr. Notes 11.250 2004 6,500,000 7,036,250
Viking Star Shipping, Inc. 1st Pfd. Ship. Mtge.
Notes 9.625 2003 7,000,000 7,332,500
- ----------------------------------------------------------------------------------------------------------------
20,399,253
- ----------------------------------------------------------------------------------------------------------------
UTILITIES (1.2%)
Consolidated Hydro, Inc.
(6/15/93--$8,811,783)
(Eff. Yield 12.26%) (b) (c) Sr. Disc. Notes 0.000 2003 13,400,000 5,360,000
KCS Energy, Inc. (g) Sr. Notes 11.000 2003 2,470,000 2,531,750
- ----------------------------------------------------------------------------------------------------------------
7,891,750
- ----------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$605,331,024) 589,572,461
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS)
(1.9%)
Indah Kiat International Finance
Co. B.V. Gtd. Secd. Notes 11.875 2002 8,000,000 8,160,000
Yacimientos Petroliteros Fiscales
S.A. (YPF) Unsecd. Deb. 8.000 2004 4,500,000 4,286,250
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$12,029,106) 12,446,250
- ----------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (COST $617,360,130) 602,018,711
- ----------------------------------------------------------------------------------------------------------------
Shares
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS/RIGHTS/WARRANTS (4.2%)
Ampex Corp., Class A
(11/20/92--$2,496,443) (b) (d) (e) 947,348 3,552,555
Ampex Corp., Class C
(11/20/92--$1,433,908) (b) (d) (e) 1,067,094 4,001,602
Chatwins Group, Inc., wts.
(d) 9,500 4,750
CHC Helicopter Corp., wts.
(d) 76,000 38,000
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
Market
Shares Value
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS/RIGHTS/WARRANTS (CONTINUED)
Cookies USA, Inc., wts. (d) 1,800 $ 22,500
Dial Page, Inc., wts. (d) 9,510 95
Dimac Corp. (d) (g) 55,481 1,525,727
Finlay Enterprises, Inc. (d) 4,533 49,863
Grand Palais Casinos, Inc., Series A, wts. (8/15/94--$2,507) (a) (b)
(d) (e) 250,735 251
Grand Palais Casinos, Inc., Series B, wts.
(8/15/94--$1,368) (a) (b) (d) (e) 136,765 137
Grand Palais Casinos, Inc., Series C, wts. (8/15/94--$12,080) (a) (b)
(d) (e) 1,208,088 1,208
Grand Palais Casinos, Inc., Series D, wts. (1/28/93--$680,643) (a)
(b) (d) (e) 680,643 681
Grand Palais Casinos, Inc., Ltd. Liab. Int. (8/15/94--$0) (a) (b) (d)
(e) 931,379 931
Hemmeter Enterprises, Inc., wts. (a) (d)
(g) 270,532 271
Hemmeter Enterprises, Inc., wts. (a) (d)
(g) 695,643 696
Hollywood Casino Corp., Class A (d) 722,865 3,162,534
Iowa Select Farm, wts. (2/04/97--$3,116,147) (b) (d) (e) 384,330 384,330
Lanesborough Corp. (d) (e) 9,065 91
Pagemart, Inc., wts. (d) (g) 83,030 332,120
PM Holdings Corp. (d) 2,964 3
Sabreliner Corp., wts. (d) 7,600 8
Specialty Equipment Cos., Inc. (d) (e) 1,183,200 13,311,000
Specialty Foods Acquisition Corp. (d) 131,250 98,437
UCC Investors Holding, Inc. (d) 199,600 1,796,400
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/RIGHTS/WARRANTS (COST--$14,086,892) 28,284,190
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK (2.2%)
Ampex Corp. (11/22/92--$23,987,332) (b) (d) (e) 24,562 15,004,312
US Africa Airways (06/02/94--$11,000,000) (a) (b) (d) (e) 11,000 11
- ----------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (COST $34,987,332) 15,004,323
- ----------------------------------------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENT (0.0%) (COST--$424,084)
Gold River Hotel and Casino Corp.
(09/01/92--$424,084) (a) (b) (d) Liquidating R.E.
Trust 10,775,000 107,750
- ----------------------------------------------------------------------------------------------------------------
Interest Maturity Maturity
Rate Date Value
- ----------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.7%)
Keystone Joint Repurchase Agreement
(Investments in repurchase agreements,
in a joint trading account, purchased
1/31/96) (Cost $4,521,000) (f) 5.939 02/01/96 $ 4,521,746 4,521,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$671,379,438) 649,935,974
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (2.7%) 17,686,911
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $ 667,622,885
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
(a) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on those securities.
(b) All or a portion of these securities are either (1) restricted (i.e.,
securities which may not be publicly sold without registration under the
Federal Securities Act of 1933) or (2) otherwise illiquid 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. Date of acquisition and cost 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 January 31,
1996, the fair value of these restricted securities was $68,003,628
(10.2% of the Fund's net assets).
(c) Effective yield (calculated at date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(d) Non-income-producing security.
(e) Affiliated issuers are those in which the Fund's holdings of an issuer
represents 5% or more of the outstanding voting securities of the issuer.
The Fund has never owned enough of the outstanding voting securities of
any issuer to have control (as defined in the Investment Company Act of
1940) of that issuer. At January 31, 1996, the fair value of these
securities was $72,721,279 (10.9% of the Fund's net assets).
(f) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at January 31, 1996.
(g) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
See Notes to Financial Statements.
<PAGE>
PAGE 13
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------
Six Months
Ended
January 31, 1996 1995 1994 1993 1992 1991
=================================== ================= ======= ======= ======= ======= ========
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19 $ 5.02
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Income from investment operations
Net investment income 0.18 0.38 0.38 0.45 0.49 0.61
Net realized and unrealized gain
(loss) on investments (0.22) (0.15) (0.38) 0.44 0.58 (0.72)
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Total income from investment
operations (0.04) 0.23 0.00 0.89 1.07 (0.11)
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Less distributions from
Net investment income (0.19) (0.37) (0.38) (0.45) (0.50) (0.72)
In excess of net investment income 0.00 (0.02) (0.07) (0.05) (0.02) 0.00
Tax basis return of capital 0.00 (0.10) 0.00 0.00 0.00 0.00
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Total distributions (0.19) (0.49) (0.45) (0.50) (0.52) (0.72)
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Net asset value end of period $ 4.19 $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19
=================================== =============== ===== ===== ===== ===== ======
Total Return (a) (0.79%) 5.66% (0.41%) 20.28% 27.25% 0.03%
Ratios/supplemental data
Ratios to average net assets
Total expenses 1.96%(b)(c) 2.03% 1.84% 2.06% 2.17% 2.34%
Net investment income 8.24%(c) 8.64% 7.57% 9.30% 10.86% 14.64%
Portfolio turnover rate 46% 82% 110% 125% 94% 78%
- ----------------------------------- --------------- ----- ----- ----- ----- ------
Net assets end of period
(thousands) $667,623 $764,965 $766,283 $972,164 $841,757 $710,590
=================================== =============== ===== ===== ===== ===== ======
</TABLE>
(a) Excluding applicable sales charges.
(b) The annualized expense ratio includes indirectly paid expenses for the
six months ended January 31, 1996. Excluding indirectly paid expenses,
the expense ratio would have been 1.94%.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 14
Keystone High Income Bond Fund (B-4)
STATEMENT OF ASSETS AND LIABILITIES--
January 31, 1996 (Unaudited)
Assets (Note 1)
Investments at market value
Unaffiliated issuers (identified cost--
$592,904,025) $ 577,214,695
Affiliated issuers (identified
cost--$78,475,413) 72,721,279
- ------------------------------------------------ -----------
Total investments $ 649,935,974
- ------------------------------------------------ -----------
Cash 53
Receivable for:
Investments sold 24,806,124
Dividends and interest 12,240,719
Fund shares sold 670,463
Prepaid expenses and other assets 2,109,634
- ------------------------------------------------ -----------
Total assets 689,762,967
- ------------------------------------------------ -----------
Liabilities (Notes 1, 2 and 4)
Payable for:
Investments purchased 19,238,740
Fund shares redeemed 458,743
Distributions to shareholders 2,073,054
Due to related parties 3,143
Other accrued expenses 366,402
- ------------------------------------------------ -----------
Total liabilities 22,140,082
- ------------------------------------------------ -----------
Net assets $ 667,622,885
================================================ ===========
Net assets represented by (Note 1)
Paid-in capital $1,209,073,259
Accumulated distributions in excess of net
investment income (8,317,502)
Accumulated net realized loss on investments
and foreign currency related transactions (511,689,408)
Net unrealized depreciation on investments (21,443,464)
- ------------------------------------------------ -----------
Total net assets 667,622,885
================================================ ===========
Net Asset Value per share (Note 2)
Net asset value of $667,622,885 / 159,436,210
outstanding shares of beneficial interest $ 4.19
================================================ ===========
STATEMENT OF OPERATIONS--
Six Months Ended January 31, 1996 (Unaudited)
Investment income (Note 1)
Interest:
Unaffiliated issuers (net of foreign
withholding taxes of $17,988) $ 36,270,631
Affiliated issuers 482,182
- -------------------------------------- ------- -----------
Total income 36,752,813
- -------------------------------------- ------- -----------
Expenses (Notes 2 and 4)
Management fee $2,023,753
Transfer agent fees 956,778
Accounting, auditing and legal 113,650
Printing 15,564
Custodian fees 217,866
Trustees' fees and expenses 31,745
Distribution Plan expenses 3,618,642
Registration fees 53,108
Miscellaneous expenses 35,869
- -------------------------------------- ------- -----------
Total expenses 7,066,975
Less: Expenses paid indirectly
(Note 4) (60,873)
- -------------------------------------- ------- -----------
Net expenses 7,006,102
- -------------------------------------- ------- -----------
Net investment income 29,746,711
- -------------------------------------- ------- -----------
Net realized and unrealized loss on investments and
foreign currency related transactions (Notes 1 and 3)
Net realized gain on investments and
foreign currency related
transactions 9,457,206
Net change in unrealized depreciation
on investments (46,369,673)
- -------------------------------------- ------- -----------
Net realized and unrealized loss
on investments (36,912,467)
- -------------------------------------- ------- -----------
Net decrease in net assets resulting
from operations ($ 7,165,756)
====================================== ======= ===========
See Notes to Financial Statements.
<PAGE>
PAGE 15
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1996 July 31, 1995
- ------------------------------------------------------------------ ------------------ --------------
(Unaudited)
<S> <C> <C>
Operations (Notes 1 and 3)
Net investment income $ 29,746,711 $ 61,233,352
Net realized gain (loss) on investments and foreign currency
related transactions 9,457,206 (91,818,044)
Net change in unrealized appreciation (depreciation) on
investments (46,369,673) 71,736,709
- ------------------------------------------------------------------ ---------------- ------------
Net increase (decrease) in net assets resulting from operations (7,165,756) 41,152,017
- ------------------------------------------------------------------ ---------------- ------------
Distributions to shareholders (Note 1)
Net investment income (32,235,440) (60,319,059)
In excess of net investment income 0 (3,043,529)
Tax basis return of capital 0 (17,099,886)
- ------------------------------------------------------------------ ---------------- ------------
Total distributions to shareholders (32,235,440) (80,462,474)
- ------------------------------------------------------------------ ---------------- ------------
Capital share transactions (Note 2)
Proceeds from shares sold 67,900,895 233,171,940
Payments for shares redeemed (144,227,933) (240,425,711)
Net asset value of shares issued in reinvestment of dividends and
distributions 18,386,233 45,245,958
- ------------------------------------------------------------------ ---------------- ------------
Net increase (decrease) in capital share transactions (57,940,805) 37,992,187
- ------------------------------------------------------------------ ---------------- ------------
Total decrease in net assets (97,342,001) (1,318,270)
- ------------------------------------------------------------------ ---------------- ------------
Net assets
Beginning of period 764,964,886 766,283,156
- ------------------------------------------------------------------ ---------------- ------------
End of period [Including accumulated distributions in excess of
net investment income as follows: 1996--($8,317,502)
and 1995--(5,828,773)] (Note 1) $ 667,622,885 $ 764,964,886
================================================================== ================ ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 16
Keystone High Income Bond Fund (B-4)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(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 amended (the "1940 Act"), as a diversified, open-end investment
company. The Fund seeks generous income primarily from high yield corporate
bonds.
Keystone is a wholly-owned subsidiary of Keystone Investments Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting predominantly of members of current and
former management of Keystone and its affiliates. Keystone Investor Resource
Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's
transfer and dividend disbursing 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
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ form these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
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.
B. 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
<PAGE>
PAGE 17
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.
C. 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 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.
D. In connection with portfolio purchases and sales denominated in foreign
currency, the Fund may enter into forward foreign currency exchange contracts
("contracts") to hedge certain foreign currency assets. Contracts are
recorded at the forward rate and are marked-to- market daily. Realized gains
and losses arising from such transactions are included in net realized gain
(loss) on foreign currency related transactions. The Fund is subject to the
credit risk that the other party will not complete the obligations of the
contract.
E. Securities transactions are accounted for on the day after trade date.
Realized gains and losses are computed 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.
F. The Fund distributes net investment income to shareholders monthly and net
capital gains, if any, annually. Distributions to shareholders are recorded
at the close of business on the ex-dividend date. Distributions are
determined from taxable net investment income and net capital gains and can
differ from book basis net investment income and net capital gains. 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 net operating losses.
<PAGE>
PAGE 18
Keystone High Income Bond Fund (B-4)
G. 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 is relieved of any federal
income tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends
to avoid any excise tax liability by making the required distributions under
the Internal Revenue Code.
(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:
Six Months Ended Year Ended
January 31, 1996 July 31, 1995
- ----------------------------------- ------------------ --------------
Sales 15,940,241 53,793,683
Redemptions (33,879,167) (55,102,608)
Reinvestment of dividends and
distributions 4,322,823 10,479,964
- ----------------------------------- ---------------- ------------
Net increase (decrease) (13,616,103) 9,171,039
=================================== ================ ============
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 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 below, 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 below,
KIDC generally pays dealers or others a commission equal to 4.00% of the
price paid to the Fund for each sale of a Fund share 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.
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)
occurring after the inception of the Distribution Plan. Rules adopted by the
National Association of Securities Dealers, Inc. ("NASD") limit the annual
expenditures that 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. NASD rules also will limit the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of 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 that 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
<PAGE>
PAGE 19
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 six months ended January 31, 1996, the Fund paid $3,618,642 under
its Distribution Plan, net of deferred sales charges, all of which was paid
to KIDC. Under the NASD Rule, the maximum uncollected amount for which KIDC
may seek payment from the Fund under its Distribution Plan is $6,942,148
(1.04% of the Fund's net assets at January 31, 1996).
(3.) Securities Transactions
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.
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the six months ended January 31, 1996 were
$318,142,439 and $382,199,879 respectively.
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily at 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 six months ended January 31, 1996, the Fund paid or accrued to
KMI investment management and administrative services fees of $2,023,753
which represented 0.56% of the Fund's average net assets on an annualized
basis. Of such amount paid to KMI, $1,720,190 was paid to Keystone for its
services to the Fund.
During the six months ended January 31, 1996, the Fund paid or accrued to
KII $6,497 for certain accounting services and to KIRC $956,778 for transfer
agent fees.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended January 31, 1996 the Fund paid custody fees in the
amount of $156,993 and received a credit of $60,873 pursuant to the expense
offset arrangement resulting in a total expense of $217,866. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.031 per share was declared
payable on March 6, 1996 to shareholders of record February 23, 1996. This
distribution is not reflected in the accompanying financial.
<PAGE>
[1 pg. cover]
[front]
KEYSTONE
[photo of man and boy w/baseball mitt]
HIGH INCOME
BOND FUND (B-4)
[keystone logo]
SEMIANNUAL REPORT
JANUARY 31, 1996
[back]
[boxed copy]
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund, Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
[logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
B-4-SAR-3/96
51M [recycled symbol]
