PAGE 1
- --------------------------------------
Keystone High Income Bond Fund (B-4)
Seeks generous income primarily from high yield corporate bonds.
Dear Shareholder:
We are writing to report to you on the performance of Keystone High Income Bond
Fund (B-4) for the six-month period which ended January 31, 1997.
Performance
Your Fund produced a total return of 7.88% for the six months and 10.24% for the
twelve months which ended January 31, 1997. The Lehman Aggregate Bond Index--a
broad index of U.S. corporate, government and mortgage securities--returned
4.94% for the six months and 3.25% for the twelve months. The Merrill Lynch High
Yield Index returned 7.82% and 9.92% for the same six- and twelve-month periods.
We were pleased with your Fund's progress during this six-month period. We
believe two major objectives were achieved. First, the Fund outperformed its
benchmark indices. Second, the price volatility of the portfolio was
substantially reduced.
We think the restructuring of the portfolio between February and May of
1996 was successful. Our primary objective was to increase the quality and
liquidity of the Fund's holdings to lay the foundation for stronger and more
consistent performance. To that end, we increased the number of the Fund's
holdings, thereby reducing the concentration of securities, upgraded the quality
of the largest holdings, and reduced the number of private placements, which
tend to be less liquid, or may involve higher credit risks. The first signs of
improvement in the performance were visible during our last report to you in
July 1996. During the subsequent six months your Fund gathered an even stronger
momentum.
Favorable market environment
High-yield bonds were the bright spot in the generally lackluster bond market
during 1996. Stronger-than-expected economic growth, which hurt investment-
grade corporate bonds and Treasuries, had a positive impact on the ability of
the issuers of high-yield bonds to pay their debt. Bond investors, hungry for
higher yields, flocked to the high-yield issues. The brisk demand drove the
prices up and the yields, which move in the opposite direction, lower. Although
the average difference in yield between high-yield bonds and Treasuries had
narrowed during the year, the spread, which was 3.42 percentage points on
December 26, 19961 was still high enough to adequately compensate the investors
for the additional risk.
Portfolio well positioned for the future
We think 1997 potentially could be a good year for the high-yield market. The
economy should continue to grow at a moderate rate, helping to keep inflation at
bay. The growing numbers of corporate acquisitions and consolidations are bound
to spur more issuance of high-yield debt and keep investor confidence at high
levels.
We think your Fund's upgraded portfolio is well aligned with this positive
outlook. The Fund owns companies with strong assets and cashflows, which bodes
well for their ability to make timely payments on their debt and withstand a
potential economic downturn. We believe shareholders will have attractive
opportunities for total return available in the high-yield market, while
experiencing relatively low volatility of share prices.
- ------------
1 Source: The Merrill Lynch Master II Index.
-continued-
<PAGE>
PAGE 2
- --------------------------------------
Keystone High Income Bond Fund (B-4)
Prescott B. Crocker to take over the Fund's management
We are pleased to inform you that Senior Vice President and group leader of the
High Yield Bond Team Prescott B. Crocker took the Fund's helm effective March 1,
1997. Richard Cryan, who successfully restructured the portfolio and
strengthened the Fund's performance during the past fiscal year, is moving on to
manage Evergreen Keystone's institutional assets.
The new portfolio manager brings more than 25 years' experience and an
impressive track record managing fixed-income assets. More information about Mr.
Crocker and a brief interview about his investment philosophy and outlook
follows this letter.
Keystone acquired by First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired by
First Union Corporation. First Union, based in Charlotte, N.C., is the nation's
sixth largest bank holding company with assets of approximately $130 billion.
Keystone Investment Management Company will continue to be the investment
adviser, responsible for managing your Fund's portfolio. First Union also owns
another mutual fund management company, Evergreen Asset Management Corp.
Together, Evergreen and Keystone oversee approximately $30 billion in assets.
Some services will now be provided under the "Evergreen Keystone Funds"
umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
We appreciate your continued support of Keystone funds. As always, we
welcome your questions and comments.
Sincerely,
[Signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman
[Picture of Albert H. Elfner, III]
[Signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
[Picture of George S. Bissell]
March 1997
<PAGE>
PAGE 3
- --------------------------------------------------------------------
A Discussion With
Your Fund Manager
[Picture of Prescott Crocker]
Senior Vice President and Head of the High Yield Bond Team Prescott Crocker is
portfolio manager of Keystone High Income Bond Fund (B-4). A Chartered Financial
Analyst, Mr. Crocker has 25 years of senior-level investment experience. He is a
graduate of Harvard College and holds an M.B.A. in international finance from
Harvard Business School.
Q How would you describe your investment style and philosophy?
A I started my career in the financial industry as a banker. In that
environment I looked at companies not as a buyer but rather a lender.
Having come from that broader perspective, as a high yield manager, I
always try to understand how I am going to get my money back.
I value working with a team. I interact with the people by asking them the
"what ifs" of the future in their areas. What can happen in the future to affect
this credit? To what extent is the market understanding or even perceiving these
possibilities?
Q What are the key factors in your selection process?
A There are three elements that we consider of greatest value in selecting
securities. The first is the quality of the management. We believe the most
reliable indication of the management's commitment to the business is a high
equity stake in the company. The degree of the management's experience and
understanding of the business is also an important factor.
The second element of key importance in our analysis is the value of
assets. We closely follow stock valuations, so that when we analyze the quality
and the future potential of the issuers under consideration, we can derive our
own assessment of the level of risk in that debt. This process is similar to
that of a bank evaluating the value of a house in order to determine the extent
of the loan. If the loan is perceived to be risky, the amount of the loan will
be lower than it would be for a higher-
quality loan.
The third element is cashflow. We try to be forward looking, to have an
understanding of how margins might change and how cashflows might develop.
Consequently, we generally invest in companies that have tangible assets and
real cashflows rather than in start-up companies.
Q How do you ensure diversification and quality of the portfolio?
A We want to keep our average holding at approxi mately 1% of total net assets
to prevent any one investment from having too much of an impact on the overall
portfolio. We participate in a broad base of industries, although there are some
we are avoiding, such as restaurants, or underweighting, such as retail and
steel. Otherwise, we seek to be no more than 30% overweighted relative to index
averages per industry. Currently, we are overweighted in energy and cable
communications and we feel that both of these are defensive industries in that
their strong and growing cashflows will support prices in good markets as well
as bad.
We have a gifted staff of analysts who seek to obtain first-hand knowledge
of each company they
<PAGE>
PAGE 4
- --------------------------------------------------------------------
Keystone High Income Bond Fund (B-4)
follow for the Fund. The extent of knowledge and experience of Keystone's
analysts helps to ensure the quality of our holdings.
Q What is your outlook for the high-yield market?
A High-yield bonds have been a top-performing asset class in the fixed-income
market, largely due to a relatively strong economy and the accompanying stock
bull market. As the stock market raised asset values, it has made high-yield
lending less risky and thus improved loan-to-value relationships. Revlon is a
good illustration. During the same time that Revlon's stock went from $15 to
$40, the company's bonds increased from 5 to 100 percent of par value.
There seems to be enough liquidity in our economy and banking system to
provide a good basis for corporate profitability. Corporate health has never
been better, as measured by the declining numbers of defaults and the growing
numbers of bond upgrades versus downgrades. Given our expectation that stable
economic growth will continue, we think that the high-yield market can provide
attractive relative returns to investors going forward.
Q What should investors reasonably expect from the Fund over the long-term?
A Traditionally, high yield bonds have provided about twice the return of money
market instruments with about half the volatility of a 10-year government bond.2
We expect that in 1997, the portfolio should provide returns in line with that
trend.
Looking long-term, I think the Fund is well positioned to meet its
objective of providing generous income. I have been in this industry for many
years and have had the good fortune of building a track record of consistently
above-average results. So, while there are no guarantees about the future, I
think that my experience, combined with the expertise of Keystone investment
analysts, provides a good basis for expecting to see above-average long-term
returns.
-
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
- -------------------------
2 Keystone Investment Management Company's research.
<PAGE>
PAGE 5
- --------------------------------------
Your Fund's Performance
Growth of an investment in
Keystone High Income Bond Fund (B-4)
In Thousands
<TABLE>
<CAPTION>
1/87 1/88 1/89 1/90 1/91 1/92
<S> <C> <C> <C> <C> <C> <C>
Initial Investment 10000 8513.01 8376.7 6468.4 4324.66 5600.99
Reinvested Distributions 10000 9544.54 10626.2 9441.92 7557.61 11372.3
1/93 1/94 1/95 1/96 1/97
Initial Investment 5836.43 6716.23 5229.24 5192.07 5266.42
Reinvested Distributions 13201.1 16727.5 14227.7 15774.1 17389.5
A $10,000 investment in Keystone High Income Bond (B-4) made on
January 31, 1987 with all distributions reinvested was worth $17,390
on January 31, 1997. Past performance is no guarantee of future results.
</TABLE>
Six-Month Performance as of January 31, 1997
- ----------------------------------------------
<TABLE>
<S> <C> <C>
Total return* 7.88%
Net asset value 7/31/96 $4.10
1/31/97 $4.25
Dividends $0.17
Capital gains None
</TABLE>
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of January 31, 1997
- ----------------------------------------------
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year 7.24% 10.24%
5-year 52.91% 52.91%
10-year 73.90% 73.90%
Average annual total return
1-year 7.24% 10.24%
5-year 8.86% 8.86%
10-year 5.69% 5.69%
</TABLE>
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who bought and sold Fund shares
after one calendar year. Investors who retained their fund investment earned the
returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange shares for another Keystone fund by phone or in writing.
You may also exchange funds through Keystone's Automated Response Line (KARL).
The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 6
- --------------------------------------------------------------------
Keystone High Income Bond Fund (B-4)
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 7
- --------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (88.6%)
INDUSTRIAL BONDS & NOTES (86.5%)
AEROSPACE (4.1%)
Airplanes Pass Thru Trust Bond (Subord.) 10.875% 2019 $4,000,000 $ 4,436,400
BE Aerospace, Incorporated Sr. Notes (Subord.) 9.875 2006 3,000,000 3,135,000
CHC Helicopter Corporation Sr. Notes (Subord.) 11.500 2002 2,500,000 2,593,750
Continental Airlines, Incorporated (b) Sr. Equip. Trust Cert. 16.000 1999 932,845 932,845
Greenwhich Air Services, Incorporated Sr. Notes 10.500 2006 2,725,000 2,915,750
Moog, Incorporated (g) Sr. Notes (Subord.) 10.000 2006 3,500,000 3,675,000
Sequa Corporation Sr. Notes 9.375 2003 3,000,000 3,060,000
UNC, Incorporated (g) Sr. Notes (Subord.) 11.000 2006 2,500,000 2,675,000
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
23,423,745
-------------
BROADCASTING (6.3%)
Ackerly Communications, Incorporated Sr. Notes 10.750 2003 3,850,000 4,081,000
Benedek Communications Corporation
(Eff. Yield 11.79%) (c) Sr. Disc. Notes 0.000 2006 7,000,000 4,252,500
EZ Communications, Incorporated Sr. Notes (Subord.) 9.750 2005 3,000,000 3,105,000
K-III Communications Corporation (g) Sr. Notes 8.500 2006 3,325,000 3,275,125
Nextel Communications, Incorporated
(Eff. Yield 11.12%) (c) Sr. Disc. Notes 0.000 2004 2,000,000 1,410,000
Park Broadcasting, Incorporated (g) Sr. Notes 11.750 2004 3,687,000 4,461,270
Paxson Communications Corporation Sr. Notes (Subord.) 11.625 2002 5,000,000 5,250,000
SFX Broadcasting, Incorporated (g) Sr. Notes (Subord.) 10.750 2006 5,000,000 5,300,000
Sinclair Broadcast Group, Incorporated Sr. Notes (Subord.) 10.000 2005 5,000,000 5,125,000
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
36,259,895
-------------
CABLE/OTHER VIDEO DISTRIBUTION (9.9%)
Adelphia Communications Corporation Sr. Notes 12.500 2002 1,765,000 1,809,125
Cablevision Systems Corporation Sr. Deb. (Subord.) 9.875 2013 2,800,000 2,744,000
Cablevision Systems Corporation Sr. Deb. (Subord.) 10.500 2016 2,700,000 2,781,000
Charter Communications, South Eastern
Capital Limited Partnership (g) Sr. Notes 11.250 2006 5,000,000 5,300,000
Comcast Corporation Sr. Deb. (Subord.) 10.625 2012 2,500,000 2,762,500
Diamond Cable Communications Company
(Eff. Yield 11.57%) (c) Sr. Disc. Notes 0.000 2004 6,000,000 4,860,000
Frontiervision Sr. Notes (Subord.) 11.000 2006 2,250,000 2,317,500
Fundy Cable Limited Sr. Notes 11.000 2005 4,825,000 5,114,500
Lenfest Communications, Incorporated Sr. Notes 10.500 2006 5,000,000 5,300,000
Marcus Cable Operations Limited Partnership
(Eff. Yield 12.06%) (c) Sr. Disc. Notes (Subord.) 0.000 2004 6,000,000 4,950,000
People's Choice T.V. Corporation
(Eff. Yield 12.47%) (c) Unit (Sr. Disc. Notes/Wts.) 0.000 2004 6,000,000 2,400,000
</TABLE>
(continued on next page)
<PAGE>
PAGE 8
- --------------------------------------
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
CABLE/OTHER VIDEO DISTRIBUTION (continued)
Rogers Cablesystems Limited Sr. Notes
Telewest Communications PLC
(Eff. Yield 9.86%) (c) Sr. Disc. Deb.
Videotron Group Limited Deb. (Subord.) Voting Conv.
Videotron Holdings PLC (Eff. Yield 9.70%) (c) Sr. Disc. Notes
- ----------------------------------------------- -----------------------------
CHEMICALS (4.4%)
Astor Corporation (g) Sr. Notes (Subord.)
Freedom Chemicals, Incorporated (g) Sr. Notes (Subord.)
ISP Holdings, Incorporated (g) Sr. Notes
Lanesborough Corporation Sr. Secd. Notes
NL Industries, Incorporated Sr. Notes
Rexene Corporation Sr. Notes
Scotts Company Sr. Notes (Subord.)
Sifto Canada, Incorporated Sr. Notes
Texas Petrochemical Corporation (g) Sr. Notes (Subord.)
- ----------------------------------------------- -----------------------------
CONSUMER (3.6%)
Dominion Textile USA Sr. Notes
Exide Corporation Sr. Notes
Harvard Industries, Incorporated Sr. Notes
International Semi-Tech Electronics,
Incorporated (Eff. Yield 11.96%) (c) Sr. Disc. Notes
Revlon Consumer Products Corporation (g) Sr. Notes (Subord.)
Revlon Worldwide Corporation
(Eff. Yield 13.00%) (c) Sr. Disc. Notes
- ----------------------------------------------- -----------------------------
DIVERSIFIED MEDIA (2.6%)
Affinity Group, Incorporated Sr. Notes (Subord.)
Cinemark USA, Incorporated Sr. Notes (Subord.)
Lamar Advertising Company Sr. Secd. Notes
Viacom, Incorporated Deb. (Subord.) Exchangeable
- ----------------------------------------------- -----------------------------
ENERGY (10.5%)
Clark USA, Incorporated Sr. Notes
Cliffs Drilling (g) Sr. Notes
Crown Central Petroleum Corporation Sr. Notes
Dual Drilling Company Sr. Notes (Subord.)
Falcon Drilling Sr. Notes
</TABLE>
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
CABLE/OTHER VIDEO DISTRIBUTION (continued)
Rogers Cablesystems Limited 10.000% 2005 $5,000,000 $ 5,275,000
Telewest Communications PLC
(Eff. Yield 9.86%) (c) 0.000 2007 7,000,000 4,795,000
Videotron Group Limited 10.625 2005 1,000,000 1,110,000
Videotron Holdings PLC (Eff. Yield 9.70%) (c) 0.000 2005 7,000,000 5,530,000
- ----------------------------------------------- -------- ------ ----------- -------------
57,048,625
-------------
CHEMICALS (4.4%)
Astor Corporation (g) 10.500 2006 3,750,000 3,909,375
Freedom Chemicals, Incorporated (g) 10.625 2006 2,250,000 2,379,375
ISP Holdings, Incorporated (g) 9.750 2002 4,816,000 4,936,400
Lanesborough Corporation 10.000 2000 1,500,000 1,200,000
NL Industries, Incorporated 11.750 2003 1,500,000 1,582,500
Rexene Corporation 11.750 2004 3,375,000 3,788,437
Scotts Company 9.875 2004 3,000,000 3,135,000
Sifto Canada, Incorporated 8.500 2000 3,000,000 2,970,000
Texas Petrochemical Corporation (g) 11.125 2006 1,250,000 1,343,750
- ----------------------------------------------- -------- ------ ----------- -------------
25,244,837
-------------
CONSUMER (3.6%)
Dominion Textile USA 9.250 2006 4,075,000 4,156,500
Exide Corporation 10.000 2005 4,500,000 4,651,875
Harvard Industries, Incorporated 11.125 2005 5,000,000 3,800,000
International Semi-Tech Electronics,
Incorporated (Eff. Yield 11.96%) (c) 0.000 2003 5,250,000 3,097,500
Revlon Consumer Products Corporation (g) 11.000 2003 2,750,000 2,901,250
Revlon Worldwide Corporation
(Eff. Yield 13.00%) (c) 0.000 1998 2,275,000 2,047,500
- ----------------------------------------------- -------- ------ ----------- -------------
20,654,625
-------------
DIVERSIFIED MEDIA (2.6%)
Affinity Group, Incorporated 11.500 2003 5,000,000 5,200,000
Cinemark USA, Incorporated 9.625 2008 5,000,000 5,087,500
Lamar Advertising Company 9.625 2006 2,200,000 2,249,500
Viacom, Incorporated 8.000 2006 2,735,000 2,652,950
- ----------------------------------------------- -------- ------ ----------- -------------
15,189,950
-------------
ENERGY (10.5%)
Clark USA, Incorporated 10.875 2005 5,000,000 5,050,000
Cliffs Drilling (g) 10.250 2003 1,650,000 1,773,750
Crown Central Petroleum Corporation 10.875 2005 5,000,000 5,112,500
Dual Drilling Company 9.875 2004 4,550,000 4,914,000
Falcon Drilling 8.875 2003 5,000,000 5,225,000
</TABLE>
<PAGE>
PAGE 9
- --------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ENERGY (continued)
Ferrellgas Partners Limited Partnership (g) Sr. Notes 9.375% 2006 $4,850,000 $ 4,904,562
Gerrity Oil & Gas Corporation Sr. Notes (Subord.) 11.750 2004 2,400,000 2,616,000
Gulf Canada Resources Limited Sr. Notes (Subord.) 9.250 2004 2,000,000 2,115,000
HS Resources, Incorporated (g) Sr. Notes (Subord.) 9.250 2006 2,450,000 2,499,000
Maxus Energy Corporation Notes 9.375 2003 850,000 886,125
Mesa Operating Company Sr. Notes (Subord.) 10.625 2006 3,500,000 3,788,750
National Energy Group, Incorporated (g) Sr. Notes 10.750 2006 4,000,000 4,280,000
Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 3,000,000 3,165,000
Parker Drilling Company (g) Gtd. Deb. 9.750 2006 2,500,000 2,637,500
Plains Resources, Incorporated (g) Sr. Notes (Subord.) 10.250 2006 2,500,000 2,700,000
Seagull Energy Corporation Sr. Notes (Subord.) 8.625 2005 4,000,000 4,060,000
TransTexas Gas Corporation Sr. Notes 11.500 2002 1,500,000 1,646,250
Vintage Petroleum, Incorporated Sr. Notes (Subord.) 9.000 2005 2,750,000 2,825,625
- --------------------------------------------- -------------------------- ------- ------ ----------- -------------
60,199,062
-------------
FINANCIAL (3.2%)
Chartwell Reinsurance Holdings Corporation Sr. Notes 10.250 2004 3,575,000 3,865,469
Conseco, Incorporated Sr. Notes 10.500 2004 3,750,000 4,423,687
First Nationwide Parent Holdings Sr. Notes (Exchangeable) 12.500 2003 4,200,000 4,683,000
Reliance Group Holdings, Incorporated Sr. Deb. (Subord.) 9.750 2003 5,000,000 5,250,000
- --------------------------------------------- -------------------------- ------- ------ ----------- -------------
18,222,156
-------------
FOODS/TOBACCO/BEVERAGES (4.6%)
Chiquita Brands International, Incorporated Sr. Notes 10.250 2006 5,000,000 5,250,000
Cott Corporation Sr. Notes 9.375 2005 3,500,000 3,605,000
Eagle Food Centers, Incorporated Sr. Notes 8.625 2000 4,000,000 3,870,000
Iowa Select Farms (Eff. Yield 15.26%)
(8/02/94--$5,923,869) (b) (c) (e) Sr. Disc. Notes 0.000 2004 11,450,000 7,377,235
Ralphs Grocery Company Sr. Notes 10.450 2004 1,100,000 1,157,750
TLC Beatrice International Holdings,
Incorporated Sr. Notes 11.500 2005 5,000,000 5,275,000
- --------------------------------------------- -------------------------- ------- ------ ----------- -------------
26,534,985
-------------
FOREST PRODUCTS/CONTAINERS (5.9%)
Asia Pulp and Paper International
Finance Company Secd. Notes 11.750 2005 5,000,000 5,431,250
Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 2,500,000 2,512,500
Buckeye Cellulose Corporation Sr. Notes (Subord.) 9.250 2008 2,500,000 2,587,500
Container Corporation of America Sr. Notes 11.250 2004 3,000,000 3,270,000
Four M Corporation (g) Sr. Notes 12.000 2006 2,000,000 2,100,000
Iron Mountain, Incorporated Sr. Notes (Subord.) 10.125 2006 2,000,000 2,120,000
Owens-Illinois, Incorporated Sr. Notes (Subord.) 10.500 2002 2,700,000 2,855,250
Packaging Resources, Incorporated (g) Sr. Notes (Subord.) 11.625 2003 2,000,000 2,100,000
</TABLE>
(continued on next page)
<PAGE>
PAGE 10
- --------------------------------------
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
FOREST PRODUCTS/CONTAINERS (continued)
Printpack, Incorporated (g) Sr. Notes (Subord.) 10.625% 2006 $3,150,000 $ 3,307,500
Riverwood International Corporation Sr. Notes 10.875 2008 2,000,000 1,730,000
Tembec Finance Corporation Sr. Notes 9.875 2005 5,500,000 5,238,750
U.S. Can Corporation (g) Sr. Notes (Subord.) 10.125 2006 750,000 787,500
- -------------------------------------------- -------------------------- -------- ------ ----------- -------------
34,040,250
-------------
GAMING (7.6%)
California Hotel Finance Corporation Liquid Real Estate Trust 11.000 2002 5,000,000 5,237,500
Casino America, Incorporated Sr. Notes 12.500 2003 4,250,000 4,186,250
Grand Palais Casino, Incorporated
(8/15/94-$7,750,000) (a) (b) (d) Sr. Secd. PIK Notes 18.250 1997 8,571,123 86
HMH Properties, Incorporated Sr. Notes 9.500 2005 5,000,000 5,212,500
Livingwell, Incorporated (a)(b)(d) Sr. Deb. (Subord.) 13.125 2001 2,000,000 20
Lodgenet Entertainment Corporation (g) Sr. Notes 10.250 2006 4,500,000 4,494,375
Prime Hospitality Corporation 1st Mtg. Notes 9.250 2006 2,500,000 2,525,000
Showboat, Incorporated Sr. Notes (Subord.) 13.000 2009 5,000,000 5,737,500
Six Flags Theme Parks, Incorporated Sr. Notes (Subord.) 12.250 2005 2,150,000 2,058,625
Starcraft Corporation (a) (b) (d) Notes (Subord.) 16.500 1998 6,925,000 138,500
Station Casinos, Incorporated Sr. Notes (Subord.) 10.125 2006 5,000,000 5,125,000
Trump Atlantic City Associates 1st Mtg. Notes 11.250 2006 5,000,000 4,825,000
Wyndham Hotel Corporation Sr. Notes (Subord.) 10.500 2006 4,000,000 4,240,000
- -------------------------------------------- -------------------------- -------- ------ ----------- -------------
43,780,356
-------------
HEALTHCARE (2.2%)
Genesis Health Sr. Notes (Subord.) 9.750 2005 4,000,000 4,200,000
Regency Health Services, Incorporated Sr. Notes (Subord.) 9.875 2002 5,000,000 5,100,000
Universal Health Services, Incorporated Sr. Notes 8.750 2005 3,200,000 3,272,000
- -------------------------------------------- -------------------------- -------- ------ ----------- -------------
12,572,000
-------------
HOUSING (1.7%)
Continental Homes Holding Corporation Sr. Notes 10.000 2006 5,000,000 5,162,500
Schuller International Group, Incorporated Sr. Notes 10.875 2004 4,025,000 4,447,625
- -------------------------------------------- -------------------------- -------- ------ ----------- -------------
9,610,125
-------------
MANUFACTURING (3.6%)
AAF McQuay, Incorporated Sr. Notes 8.875 2003 4,000,000 3,955,000
Chatwins Group, Incorporated Sr. Notes 13.000 2003 4,000,000 3,760,000
Hayes Wheels International, Incorporated Sr. Notes (Subord.) 11.000 2006 2,500,000 2,737,500
JPS Automotive Products Corporation Sr. Notes 11.125 2001 2,000,000 2,160,000
Mark IV Industries, Incorporated Sr. Notes (Subord.) 7.750 2006 5,000,000 4,893,750
Motors and Gears, Incorporated (g) Sr. Notes 10.750 2006 3,000,000 3,075,000
- -------------------------------------------- -------------------------- -------- ------ ----------- -------------
20,581,250
-------------
</TABLE>
<PAGE>
PAGE 11
- --------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
METALS/MINERALS (3.1%)
AK Steel Corporation Sr. Notes 10.750% 2004 $5,000,000 $ 5,425,000
Bethlehem Steel Corporation Sr. Notes 10.375 2003 5,000,000 5,300,000
Commonwealth Aluminum Corporation Sr. Notes (Subord.) 10.750 2006 4,750,000 4,963,750
Jorgensen Earle Sr. Notes 10.750 2000 2,000,000 2,030,000
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
17,718,750
-------------
RETAIL (4.1%)
Cole National Group, Incorporated Sr. Notes 11.250 2001 4,000,000 4,420,000
Finlay Enterprises (Eff. Yield 9.12%) (c) Sr. Disc. Deb. 0.000 2005 2,000,000 1,800,000
Finlay Fine Jewelry Corporation Sr. Notes 10.625 2003 5,000,000 5,300,000
Hills Stores Company (g) Sr. Notes 12.500 2003 4,000,000 2,960,000
Michaels Stores, Incorporated Sr. Notes 10.875 2006 1,625,000 1,600,625
Pamida, Incorporated Sr. Notes (Subord.) 11.750 2003 3,000,000 2,520,000
Service Merchandise Company Sr. Deb. (Subord.) 9.000 2004 3,750,000 2,812,500
Southland Corporation Sr. Deb. (Subord.) 5.000 2003 2,500,000 2,050,000
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
23,463,125
-------------
TECHNOLOGY (0.2%)
Webb (Del E.) Corporation Sr. Notes (Subord.) 9.750 2008 1,500,000 1,518,750
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
TELECOMMUNICATIONS (2.8%)
Bell Cablemedia PLC (Eff. Yield 10.67%) (c) Sr. Disc. Notes 0.000 2005 6,675,000 5,323,312
Dial Call Communications, Incorporated
(Eff. Yield 10.55%) (c) Sr. Disc. Notes 0.000 2005 1,000,000 715,000
Dial Call Communications, Incorporated
(Eff. Yield 12.59%) (c) Sr. Disc. Notes 0.000 2004 3,000,000 2,265,000
MFS Communication (Eff. Yield 8.49%) (c) Sr. Disc. Notes 0.000 2004 6,000,000 5,235,000
Teleport Communications Group Sr. Notes 9.875 2006 2,175,000 2,300,062
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
15,838,374
-------------
TRANSPORTATION (0.4%)
Eletson Holdings, Incorporated 1st Pfd. Mtg. Notes 9.250 2003 2,500,000 2,506,250
- --------------------------------------------- ----------------------------- -------- ------ ----------- -------------
WIRELESS COMMUNICATIONS (5.7%)
Centennial Cellular Corporation Sr. Notes 8.875 2001 5,000,000 4,900,000
Comcast Cellular Corporation
(Eff. Yield 13.42%) (c) Part. Disc. Notes 0.000 2000 7,000,000 5,040,000
Heartland Wireless Communications,
Incorporated Sr. Notes 13.000 2003 1,425,000 1,396,500
Heartland Wireless Communications,
Incorporated (g) Sr. Notes 14.000 2004 3,000,000 3,112,500
Mobile Telecommunication Technology Sr. Notes 13.500 2002 650,000 637,000
Pagemart Nationwide, Incorporated
(Eff. Yield 10.80%) (c) Unit (Sr. Disc. Notes/Wts.) 0.000 2005 6,980,000 4,886,000
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
- --------------------------------------
Keystone High Income Bond Fund (B-4)
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
WIRELESS COMMUNICATIONS (continued)
Pricecellular Wireless Corporation
(Eff. Yield 10.64%) (c) Sr. Disc. Notes 0.000% 2003 $5,750,000 $ 5,031,250
Rogers Cantel Sr. Deb. 9.375 2008 2,500,000 2,600,000
Vanguard Cellular Systems, Incorporated Deb. 9.375 2006 5,000,000 5,037,500
- ----------------------------------------------- ------------------------ ------- ------ ----------- ------------
32,640,750
------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$496,848,036) 497,047,860
- --------------------------------------------------------------------------------------------------------------- ------------
FOREIGN BONDS (U.S. DOLLARS) (2.1%)
Intermedia Capital Partners (g) Sr. Notes 11.250 2006 5,000,000 5,275,000
Tansportacion Maritima Mexicana Sr. Notes 10.000 2006 3,000,000 3,022,500
Yacimientos Petroliferos Fiscales S.A. (YPF) Notes 8.000 2004 3,750,000 3,637,500
- ----------------------------------------------- ------------------------ ------- ------ ----------- ------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$11,446,802) 11,935,000
- --------------------------------------------------------------------------------------------------------------- ------------
TOTAL FIXED INCOME (Cost $508,294,838) 508,982,860
- --------------------------------------------------------------------------------------------------------------- ------------
- --------------------------------------------------------------------------------------------------------------- ------------
Shares
--------
COMMON STOCKS/WARRANTS (1.2%)
Casino America, Incorporated (d) 254,790 708,635
Casino America, Incorporated, wts. (d) 47,778 478
Chatwins Group, Incorporated, wts. (b) (d) 9,500 9,500
CHC Helicopter Corporation, wts. (d) 76,000 38,000
Colorado Gaming and Entertainment Company (d) 410,062 1,845,279
Grand Palais Casinos, Incorporated, Series A, wts. (8/15/94--$2,507) (a) (b) (d) 250,735 251
Grand Palais Casinos, Incorporated, Series B, wts. (8/15/94--$1,368) (a) (b) (d) 136,765 137
Grand Palais Casinos, Incorporated, Series C, wts. (8/15/94--$12,080) (a) (b) (d) 1,208,088 1,208
Grand Palais Casinos, Incorporated, Series D, wts. (8/15/94--$680,643) (a) (b) (d) 680,643 681
Grand Palais Casinos, Incorporated, Ltd. Liab. Int. (8/15/94--$0) (a) (b) (d) 931,379 931
Iowa Select Farms, wts. (2/04/94--$2,420,481) (b) (d) (e) 298,530 298,530
Lanesborough Corporation (b) (d) 2,056 21
Nextel Communications, Incorporated, wts. (d) 9,510 95
PM Holdings Corporation (d) 2,964 3
Specialty Equipment Cos., Incorporated (d) 300,000 4,087,500
Specialty Foods Acquisition Corporation (d) 131,250 32,813
- ------------------------------------------------------------------------------------- ----------- ------------
TOTAL COMMON STOCKS/WARRANTS (Cost--$8,451,726) 7,024,062
- --------------------------------------------------------------------------------------------------------------- ------------
- --------------------------------------------------------------------------------------------------------------- ------------
PREFERRED STOCK (2.4%)
Ampex Corporation (Cost--$23,987,332) (b) (d) 24,562 13,509,100
- ------------------------------------------------------------------------------------- ----------- ------------
MISCELLANEOUS INVESTMENT (0.0%)
Gold River Hotel and Casino Corporation
(Cost--$424,084) (b) (d) Liquidating R.E. Trust 10,775,000 107,750
- ----------------------------------------------- ------------------------ ----------- ------------
</TABLE>
<PAGE>
PAGE 13
- --------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Maturity Market
Rate Date Value Value
---------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (4.9%) (Cost--$28,022,000)
Keystone Joint Repurchase Agreement
(Investments in repurchase agreements, in a
joint trading account, purchased 1/31/97) (f) 5.580% 02/03/97 $28,035,030 $28,022,000
- ----------------------------------------------- -------- ---------- ------------ ------------
TOTAL INVESTMENTS (Cost--$569,179,980) 557,645,772
OTHER ASSETS AND LIABILITIES--NET (2.9%) 16,825,212
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS (100.0%) $574,470,984
- ---------------------------------------------------------------------------------------------------- ------------
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
(a) Securities which have defaulted on payment of interest and/or principal. The
Fund has stopped accruing income on those so identified. At January 31, 1997,
the face value of these securities was $141,814 (0.02% of the Fund's net asset
value).
(b) All or a portion of these securities are either (1) restricted (i.e.,
securities which may not be publicly sold without registration under the Federal
Securities Act of 1933) or (2) illiquid securities, and are valued using market
quotations where readily available. In the absence of market quotations, the
securities are valued based upon their fair value determined under procedures
approved by the Board of Trustees. The Fund may make investments in an amount up
to 15% of the value of the Fund's net assets in such securities. The date of
acquisition and costs are set forth in parentheses after the title of each
restricted security. On the date of acquisition there were no market quotations
on similar securities and the above securities were valued at acquisition cost.
At January 31, 1997, the fair value of these restricted securities was
$7,679,059 (1.34% of the Fund's net assets).
(c) Effective yield (calculated at date of purchase) is the yield at which the
bond accretes on an annual basis until maturity date.
(d) Non-income-producing security.
(e) Affiliated issuers are those in which the Fund's holdings of an issuer
represents 5% or more of the outstanding voting securities of the issuer. The
Fund has never owned enough of the outstanding voting securities of any issuer
to have control (as defined in the Investment Company Act of 1940) of that
issuer. At January 31, 1997, the fair value of these securities was $7,675,765
(1.34% of the Fund's net assets).
(f) The repurchase agreements are fully collateralized by U.S. Government and/or
agency obligations based on market prices at January 31, 1997.
(g) Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone High Income Bond Fund (B-4)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended
January 31, 1997
- ---------------------------------------- ----------------------
(Unaudited)
<S> <C>
Net asset value beginning of period $ 4.10
- ---------------------------------------- --------------
Income from investment operations
Net investment income 0.16
Net realized and unrealized gain (loss)
on investments 0.16
- ---------------------------------------- --------------
Total from investment operations 0.32
- ---------------------------------------- --------------
Less distributions from:
Net investment income (0.17)
In excess of net investment income 0.00
Tax basis return of capital 0.00
- ---------------------------------------- --------------
Total distributions (0.17)
- ---------------------------------------- --------------
Net asset value end of period $ 4.25
- ---------------------------------------- --------------
Total return (a) 7.88%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.93%(b)(c)
Net investment income 7.59%(c)
Portfolio turnover rate 52%
- ---------------------------------------- --------------
Net assets end of period (thousands) $ 574,471
- ---------------------------------------- --------------
<CAPTION>
Year Ended July 31,
1996 1995 1994 1993 1992
- ---------------------------------------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19
- ---------------------------------------- -------- ------- --------- ------- -------
Income from investment operations
Net investment income 0.32 0.38 0.38 0.45 0.49
Net realized and unrealized gain (loss)
on investments (0.27) (0.15) (0.38) 0.44 0.58
- ---------------------------------------- -------- ------- --------- ------- -------
Total from investment operations 0.05 0.23 0.00 0.89 1.07
- ---------------------------------------- -------- ------- --------- ------- -------
Less distributions from:
Net investment income (0.31) (0.37) (0.38) (0.45) (0.50)
In excess of net investment income (0.06) (0.02) (0.07) (0.05) (0.02)
Tax basis return of capital 0.00 (0.10) 0.00 0.00 0.00
- ---------------------------------------- -------- ------- --------- ------- -------
Total distributions (0.37) (0.49) (0.45) (0.50) (0.52)
- ---------------------------------------- -------- ------- --------- ------- -------
Net asset value end of period $ 4.10 $ 4.42 $ 4.68 $ 5.13 $ 4.74
- ---------------------------------------- -------- ------- --------- ------- -------
Total return (a) 1.38% 5.66% (0.41%) 20.28% 27.25%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.94%(b) 2.03% 1.84% 2.06% 2.17%
Net investment income 7.92% 8.64% 7.57% 9.30% 10.86%
Portfolio turnover rate 116% 82% 110% 125% 94%
- ---------------------------------------- -------- ------- --------- ------- -------
Net assets end of period (thousands) $593,681 $764,965 $766,283 $972,164 $841,757
- ---------------------------------------- -------- ------- --------- ------- -------
</TABLE>
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.92% (annualized) for the
six months ended January 31, 1997 and 1.93% for the year ended July 31,
1996.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
<TABLE>
<S> <C>
Assets (Note 2)
Investments at market value
Unaffiliated issuers (identified cost--$560,835,630) $ 549,970,007
Affiliated issuers (identified cost--$8,344,350) 7,675,765
- --------------------------------------------------------- -------------
Total investments 557,645,772
- --------------------------------------------------------- -------------
Cash 3,966
Receivable for:
Investments sold 13,163,368
Interest 12,111,784
Fund shares sold 215,106
Prepaid expenses and other assets 471,442
- --------------------------------------------------------- -------------
Total assets 583,611,438
- --------------------------------------------------------- -------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Investments purchased 6,301,562
Distributions to shareholders 1,547,469
Fund shares redeemed 709,597
Due to related parties 499,109
Other accrued expenses 82,717
- --------------------------------------------------------- -------------
Total liabilities 9,140,454
- --------------------------------------------------------- -------------
Net assets $ 574,470,984
========================================================= =============
Net assets represented by
Paid-in capital $1,094,447,053
Accumulated distributions in excess of net
investment income (2,361,464)
Accumulated net realized loss on investments
and foreign currency related transactions (506,080,397)
Net unrealized depreciation on investments (11,534,208)
- --------------------------------------------------------- -------------
Total net assets $ 574,470,984
========================================================= =============
Net Asset Value per share (Note 2)
Net asset value of $574,470,984 [divided by] 135,232,353
outstanding shares of beneficial interest $4.25
========================================================= =============
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
Investment income
Interest:
Unaffiliated issuers $27,894,156
Affiliated issuers 611,007
Other income 228,063
- -------------------------------------- -----------
Total income 28,733,226
- -------------------------------------- -----------
Expenses (Notes 4, 5 and 6)
Distribution Plan expenses $3,014,920
Management fee 1,703,672
Transfer agent fees 834,247
Custodian fees 149,606
Accounting, auditing and legal 38,705
Trustees' fees and expenses 20,945
Other 70,475
- -------------------------------------- ----------
Total expenses 5,832,570
Less: Expenses paid indirectly (29,350)
- -------------------------------------- ----------
Net expenses 5,803,220
- -------------------------------------- -----------
Net investment income 22,930,006
- -------------------------------------- -----------
Net realized and unrealized
gain on investments (Note 3)
Net realized loss on investments (826,722)
Net change in unrealized
appreciation (depreciation) on
investments 22,640,430
- -------------------------------------- -----------
Net realized and unrealized gain on
investments 21,813,708
- -------------------------------------- -----------
Net increase in net assets resulting
from operations $44,743,714
====================================== ===========
</TABLE>
<PAGE>
PAGE 16
- --------------------------------------
Keystone High Income Bond Fund (B-4)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1996 July 31, 1996
------------------- ---------------
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 22,930,006 $ 53,347,924
Net realized gain (loss) on investments and foreign currency related
transactions (826,722) 12,528,472
Net change in unrealized appreciation (depreciation) on investments 22,640,430 (59,100,847)
- ---------------------------------------------------------------------- ------------- -------------
Net increase in net assets resulting from operations 44,743,714 6,775,549
- ---------------------------------------------------------------------- ------------- -------------
Distributions to shareholders from (Note 1)
Net investment income (23,591,016) (49,946,109)
In excess of net investment income 0 (9,344,299)
- ---------------------------------------------------------------------- ------------- -------------
Total distributions to shareholders (23,591,016) (59,290,408)
- ---------------------------------------------------------------------- ------------- -------------
Capital share transactions (Note 2)
Proceeds from shares sold 83,660,074 162,907,187
Payments for shares redeemed (137,460,832) (315,113,110)
Net asset value of shares issued in reinvestment of dividends and
distributions 13,438,298 33,436,642
- ---------------------------------------------------------------------- ------------- -------------
Net decrease in capital share transactions (40,362,460) (118,769,281)
- ---------------------------------------------------------------------- ------------- -------------
Total decrease in net assets (19,209,762) (171,284,140)
- ---------------------------------------------------------------------- ------------- -------------
Net assets
Beginning of period 593,680,746 764,964,886
- ---------------------------------------------------------------------- ------------- -------------
End of period [Including accumulated distributions in excess of net
investment income as follows: 1997--($2,361,464)
and 1996--($1,700,454)] (Note 1) $ 574,470,984 $ 593,680,746
- ---------------------------------------------------------------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 17
- --------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Keystone High Income Bond Fund (B-4) (the "Fund") is a Pennsylvania common law
trust for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone was formerly a wholly-owned subsidiary
of Keystone Investments, Inc. ("KII") and is currently a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly-
owned subsidiary of First Union National Bank of North Carolina which in turn is
a wholly-owned subsidiary of First Union Corporation ("First Union"). The Fund
is registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end investment company. The Fund's investment
objective is to achieve the highest possible income by investing in high
yielding securities.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage and
other asset-backed securities, and other related securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Securities
for which valuations are not available from an independent pricing service
(including restricted securities) are valued at fair value as determined in good
faith according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily rate
of exchange; purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gain (loss) resulting from changes in foreign
currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions.
<PAGE>
PAGE 18
- --------------------------------------
Keystone High Income Bond Fund (B-4)
Net realized foreign currency gains and losses resulting from changes in
exchange rates include foreign currency gains and losses between trade date and
settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Fund and the amount actually received. The portion
of foreign currency gains and losses related to fluctuations in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in realized gain (loss) on foreign currency transactions
D. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts. Dividend income is recorded on the ex-dividend date.
E. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
F. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to the expiration of
capital loss carryovers.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
January 31, 1997 July 31, 1996
------------------- ---------------
<S> <C> <C>
Shares sold 19,916,411 38,767,387
Shares redeemed (32,686,436) (74,982,398)
Shares issued in
reinvestment of
dividends and
distributions 3,205,323 7,959,753
- ----------------- ------------ ------------
Net decrease (9,564,702) (28,255,258)
- ----------------- ------------ ------------
- ----------------- ------------ ------------
</TABLE>
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the six months ended
January 31, 1997 were $287,250,386 and $351,076,929, respectively.
As of July 31, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $501,090,000 which expires as follows:
$43,981,000--1997, $93,048,000--1998, $91,149,000--1999, $122,350,000--2000,
$44,605,000--2002 and $105,957,000--2003.
4. Distribution Plans
The Fund bears some of the costs of selling its shares under a Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan,
the Fund pays its principal underwriter amounts which are calculated and paid
monthly.
<PAGE>
PAGE 19
- --------------------------------------
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. Prior
to December 11, 1996, Evergreen Keystone Investment Services, Inc. (formerly,
Keystone Investment Distributors Company) ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
Under the Distribution Plan, the Fund pays a distribution fee which may not
exceed 1.00% of the Fund's average daily net assets, of which 0.75% is used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares.
However, after the termination of the Distribution Plan, and subject to the
discretion of the Independent Trustees, payments to EKIS and/or EKD may continue
as compensation for services which had been earned while the Distribution Plan
was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
Total unpaid distribution costs at January 31, 1997 amounted to $3,644,570.
5. Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone serves
as the Investment Adviser and Manager to the Fund. Keystone provides the Fund
with investment advisory and management services. In return, Keystone is paid a
management fee, computed and paid daily, at an annual rate of 2.00% of the
Fund's gross investment income plus an amount determined by applying percentage
rates starting at 0.50% and declining as net assets increase to 0.25% per annum,
to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as the
Investment Adviser and provided investment advisory and management services to
the Fund. In return for its services, Keystone received an annual fee equal to
85% of the management fee received by KMI.
During the six months ended January 31, 1997, the Fund paid or accrued
$13,974 to Keystone for certain accounting services. The Fund paid or accrued
$834,247 to Evergreen Keystone Service Company (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services
rendered as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended January 31, 1997, the Fund incurred total custody fees of
$149,606 and received a credit of $29,350 pursuant to this expense offset
arrangement, resulting in a net custody expense of $120,256. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
<PAGE>
PAGE 20
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Keystone High Income Bond Fund (B-4)
7. Subsequent Distribution to Shareholders
Distributions from net investment income of $.028 per share were declared
payable by March 6, 1997 to shareholders of record on February 25, 1997. This
distribution is not reflected in the accompanying financial statements.
<PAGE>
PAGE 21
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ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday, December 9, 1996. In
addition, beside each proposal are the results of that vote.
<TABLE>
<CAPTION>
Affirmative Withheld
-------------- -----------
<S> <C> <C> <C>
1. To elect the following Trustees:
Frederick Amling 88,203,225 2,803,431
Laurence B. Ashkin 88,106,990 2,899,666
Charles A. Austin III 88,180,572 2,826,083
Foster Bam 88,168,550 2,838,106
George S. Bissell 88,132,935 2,873,720
Edwin D. Campbell 88,179,049 2,827,606
Charles F. Chapin 88,196,593 2,810,062
K. Dun Gifford 88,198,636 2,808,019
James S. Howell 88,168,222 2,838,433
Leroy Keith, Jr. 88,208,456 2,798,199
F. Ray Keyser, Jr. 88,139,504 2,867,151
Gerald M. McDonell 88,194,797 2,811,859
Thomas L. McVerry 88,192,473 2,814,183
William Walt Pettit 88,206,512 2,800,144
David M Richardson 88,171,815 2,834,841
Russell A. Salton, III M.D. 88,178,791 2,827,865
Michael S. Scofield 88,200,322 2,806,333
Richard J. Shima 88,162,459 2,844,196
Andrew J. Simons 88,195,228 2,811,427
2. To approve an Investment Advisory and Management Agreement between the Fund and Keys
Management Company.
Affirmative 85,400,357
Against 1,738,774
Abstain 3,867,525
</TABLE>
<PAGE>
PAGE 22
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Keystone High Income Bond Fund (B-4)
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net asset
value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you the
added ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--
Referred to as the "paper-less transaction," EFT allows you to take advantage of
a variety of preauthorized account transactions, including automatic monthly
investments and systematic monthly or quarterly withdrawals. EFT is a quick,
safe and accurate way to move money between your bank account and your Keystone
account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined contribution
plans. For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
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<PAGE>
[Front Cover/Back Cover]
KEYSTONE FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth aznd Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Rreead it carefully before you
invest or send money. For a free prospectus on other Evergreen Keystone funds,
contact your financial adviser or call Evergreen Keystone.
[Evergreen Keystone Funds Logo]
P.O. Box 2121
Boston, Massachusetts 02106-2121
B-4-R-3/97
47M [Recycle Logo}
KEYSTONE
HIGH INCOME
BOND FUND (B-4)
[Evergreen Keystone Funds Logo]
SEMIANNUAL REPORT
JANUARY 31, 1997
