<PAGE>
PAGE 1
KEYSTONE HIGH INCOME BOND FUND (B-4)
SEEKS GENEROUS INCOME PRIMARILY FROM HIGH YIELD CORPORATE BONDS.
Dear Shareholders:
We are pleased to report to you on the Keystone High Income Bond Fund (B-4) for
the fiscal year that ended on July 31, 1997.
PERFORMANCE
Your Fund produced a total return of 15.32% for the 12-month period. This
compares favorably with the Lehman Aggregate Bond Index, a broad index of U.S.
corporate, government and mortgage securities, which returned 10.76% for the 12
months. During the same period, the Merrill Lynch High Yield Index returned
16.25%.
We believe your Fund performed well during a period in which high yield bonds,
in general, outperformed the general bond market. During this period, Fund
management took advantage of the favorable environment to reduce the overall
risk by gradually upgrading credit quality and maintaining careful
diversification of the portfolio.
We believe that as a result of these steps, your Fund is extremely well
positioned to continue to participate in an anticipated favorable high yield
market. At the same time, we believe it is prepared for any short-term
volatility in the markets.
ENVIRONMENT
During the 12 months, the high yield market performed very well, outperforming
the general bond market in an environment of moderate economic growth and low
inflation. As stock prices rose in a bull market, rising equity values of high
yield bond issuers reduced the risk of their debt by improving their
market-adjusted equity-to-debt ratios. This reduced risk was reflected in the
tightening of yield spreads that high yield investors were willing to accept,
versus Treasuries. During the 12 months, for example, the yield premium paid by
high yield bonds over 10-year U.S. Treasuries declined 80 basis points (.80%),
as investors perceived less risk than earlier in high yield issues.
The performance of high yield bonds also was supported by strong cash flows.
The average net cash flow into the market was about $300 million per week during
the fiscal year. In fact, money flowed out of high yield mutual funds during
only one week of the 52-week period that ended July 31. The healthy economy and
strong investor interest in high yield bonds also sparked a rise in the new
issuance of high yield securities. New issues for the first six months of 1997
totaled $57.6 billion, relative to $41.6 billion for the comparable period in
1996.
All these factors contributed to investors' enthusiasm for high yield
securities.
STRATEGY
We believe the environment of the past 12 months was an exceptional period not
only to realize handsome returns for mutual fund investors, but also to
strengthen your Fund's ability to manage risk by focusing on investments in the
bonds of companies with high asset values and strong cash flows.
During the year, we upgraded the credit quality of the portfolio to an average
rating of B. We also reduced equity-related securities in the portfolio. We
believe this will increase the Fund's potential to deliver more consistent
returns by focusing on securities that pay regular dividends.
At the same time, we moved to maintain broad diversification of the Fund, by
setting a target of about 100 different securities, with an average weighting of
1% of net assets.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE HIGH INCOME BOND FUND (B-4)
OUTLOOK
We continue to see opportunities in the high yield bond market. Continued
economic strength and no signs of serious inflationary problems have combined
with strong equity valuations to create a favorable outlook. At the same time,
we expect the strong investor demand for the income offered by high yield bonds
will continue.
We believe this favorable outlook and Fund management's investment discipline
give the Keystone High Income Bond Fund (B-4) an excellent opportunity to
continue to provide quality performance for the future.
Thank you for your support of Keystone High Income Bond Fund (B-4).
Sincerely,
(Signature of Albert H. Elfner, III)
Albert H. Elfner, III
CHAIRMAN AND PRESIDENT
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Signature of George S. Bissell)
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<TABLE>
<S> <C>
(Picture of (Picture of
Alber H. Elfner, III) George S. Bissell)
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
September 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
PRESCOTT CROCKER, A SENIOR VICE PRESIDENT AND HEAD OF KEYSTONE'S HIGH
YIELD BOND TEAM, IS PORTFOLIO MANAGER OF KEYSTONE HIGH INCOME BOND FUND
(B-4). A CHARTERED FINANCIAL ANALYST, MR. CROCKER HAS MORE THAN 25 YEARS
OF SENIOR INVESTMENT EXPERIENCE. HE IS A GRADUATE OF HARVARD COLLEGE AND
HOLDS AN M.B.A. IN INTERNATIONAL FINANCE FROM HARVARD BUSINESS SCHOOL.
(Q)WHAT WERE YOUR PRINCIPAL STRATEGIES IN MANAGING THE FUND DURING THE FISCAL
PERIOD?
(A)We had the benefit of a favorable environment in the high yield bonds, which
was the best performing sector in the domestic fixed income market. We wanted to
take advantage of that environment to improve our ability to manage risk in the
Fund so we would be able to provide consistent returns.
One way we did that was to upgrade the overall credit quality of the
portfolio. The Fund now has a solid average credit rating of B, with 62% of the
portfolio holding that rating. Only 3% of the portfolio was rated CCC or lower
at the end of the fiscal period.
Another way we sought to manage the Fund's risk exposure was to maintain a
manageable, consolidated portfolio of about 100 different securities, with an
average weighting of 1% of net assets and moving toward no security having more
than 2% of net assets. This diversification helps control the Fund's exposure to
any one high yield issuer.
We also have maintained careful guidelines for non-rated securities and
preferred stock.
(Q)HOW DID THESE STRATEGIES AFFECT THE FUND'S PERFORMANCE?
(A)We believe these strategies will help the Fund deliver consistent performance
over the longer term. During the year, adjusted for expenses, the Fund performed
in line with the high yield market and other high yield funds. The limits on
equity-related securities in the portfolio, however, held back relative
performance during the past six months as the equity market performed very well.
Longer-term, we believe the focus on high yield bonds will support performance
and reduce the volatility, or price fluctuations, of the portfolio. The Fund is
now purely a high yield bond fund.
(Q)DID YOU CONCENTRATE ON ANY PARTICULAR SECTORS IN THE HIGH YIELD MARKET?
(A)There were two areas in particular that we emphasized.
The first was the area of broadcasting, cable industry and telecommunications
industries. In general, the cable industry has been reducing its debt and
improving its operating cash flow. Broadcasting has been helped by higher equity
values and reduced borrowing risks since passage of the Telecommunications Act
of 1996. The Telecommunications Act has resulted in a rapid expansion of
interest in telecommunications companies in general.
Another area that we overweighted was the hotel industry. Very tight hotel
occupancy rates have enabled this industry to raise overnight room rates and
have a favorable impact on finances.
<PAGE>
PAGE 4
KEYSTONE HIGH INCOME BOND FUND (B-4)
(Q)WHAT IS YOUR OUTLOOK FOR THE HIGH YIELD MARKET?
(A)We have a generally positive outlook for the high yield market, despite some
short-term uncertainties about the equity and general fixed income markets.
Equity prices could enter a period of consolidation during the upcoming six
months as investors take some of their gains during the bull market. In
addition, improvements in capital gains tax rates could cause a pause in the
stock market. The bond market, as a whole, could experience some short-term
volatility in anticipation of the Federal Reserve Board tightening to hold
inflation.
The longer-term fundamentals are very good in the fixed income market. The
tightness in supply in Treasuries and the very limited inflation prospect, as
indicated by the prices of gold and the U.S. dollar, give reason for optimism.
The high yield markets continue to provide a cushioned and less volatile
experience, due to their higher coupon and their dramatically lower maturities
than other parts of the bond market. The positive signs of continued growth in
the economy and strong equity valuations bode well for the high yield market.
When you consider these factors and the fact that the Fund has focused on
issuing companies with high asset values and strong cash flow, we believe the
Fund is well positioned for the future.
(Diamond)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE ST., SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 5
Your Fund's Performance
Growth of an investment in
Keystone High Income Bond Fund (B-4)
(IN THOUSANDS)
Total Value: $18,519
Initial Investment Dividend Reinvestment
7/87 10.0 10.0
7/88 9.021 10.166
7/89 8.329 10.669
7/90 6.554 9.832
7/91 5.470 9.835
7/92 6.188 12.516
7/93 6.697 15.054
7/94 6.110 14.992
7/95 5.770 15.841
7/96 5.352 16.059
7/97 5.705 18.519
A $10,000 investment in Keystone High Income Bond Fund (B-4)
made on July 31, 1987 with all distributions reinvested was worth
$18,519 on July 31, 1997. Past performance is no guarantee of
future results.
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the without sales charge lines.
The investment return and principal value will fluctuate, so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
Comparison of change in value of a $10,000 investment in
Keystone High Income Bond Fund (B-4), the Lehman Aggregate
Bond Index and the Consumer Price Index.
In Thousands July 31, 1987 through July 31, 1997
CPI FUND LABI
7/87 10.000 10.000 10.000
7/88 10.399 10.166 10.757
7/89 10.934 10.669 12.392
7/90 11.461 9.832 13.266
7/91 11.971 9.835 14.683
7/92 12.349 12.516 16.854
7/93 12.690 15.054 18.569
7/94 13.042 14.992 18.584
7/95 13.403 15.841 20.463
7/96 13.797 16.059 21.593
7/97 14.102 18.519 23.918
Past performance is no guarantee of future results. The Lehman Aggregate Bond
Index is an unmanaged market index. This index does not include transaction
costs associated with buying and selling securities nor any management fees.
The Consumer Price Index, a measure of inflation, is through July 31, 1997.
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD
<S> <C>
CUMULATIVE TOTAL RETURN
1 year w/o sales charge 15.32%
1 year with sales charge 12.32%
5 years 47.97%
10 years 85.19%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 15.32%
1 year with sales charge 12.32%
5 years 8.15%
10 years 6.36%
</TABLE>
<PAGE>
PAGE 6
KEYSTONE HIGH INCOME BOND FUND (B-4)
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- 92.2%
AEROSPACE & DEFENSE-- 2.8%
$ 4,000,000 Airplanes Pass Thru Trust,
Sr. Notes,
10.88%, 3/15/19.............. $ 4,740,440
3,000,000 BE Aerospace, Incorporated,
Sr. Notes (Subord.),
9.88%, 2/1/06................ 3,187,500
778,634 Continental Airlines,
Incorporated, Sr. Equip.
Trust Cert. (b),
16.00%, 4/19/99.............. 778,634
3,500,000 Moog, Incorporated,
Sr. Notes (Subord.) (f),
10.00%, 5/1/06............... 3,727,500
3,000,000 Sequa Corporation,
Sr. Notes (Subord.),
9.38%, 12/15/03.............. 3,082,500
15,516,574
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 2.5%
1,250,000 Amphenol Corporation,
Sr. Notes (Subord.),
9.88%, 5/15/07............... 1,331,250
2,650,000 Central Tractor Farm and
Country, Incorporated,
Sr. Notes,
10.63%, 4/1/07............... 2,769,250
4,000,000 Chatwins Group, Incorporated,
Sr. Exchange Notes,
13.00%, 5/1/03............... 4,200,000
2,000,000 JPS Automotive Products
Corporation,
Sr. Notes,
11.13%, 6/15/01.............. 2,195,000
3,000,000 Motors and Gears, Incorporated,
Sr. Notes (f),
10.75%, 11/15/06............. 3,150,000
13,645,500
CABLE/OTHER VIDEO DISTRIBUTION-- 9.8%
2,750,000 Adelphia Communications
Corporation,
Sr. Notes,
12.50%, 5/15/02.............. 2,921,875
2,000,000 Adelphia Communications
Corporation,
Sr. Notes (f),
9.88%, 3/1/07................ 2,025,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
CABLE/OTHER VIDEO DISTRIBUTION-- CONTINUED
$ 750,000 Adelphia Communications
Corporation,
Sr. Notes (f),
10.50%, 7/15/04.............. $ 785,625
3,125,000 Cablevision Systems
Corporation,
Sr. Deb. (Subord.),
10.50%, 5/15/16.............. 3,484,375
5,000,000 Charter Communications, South
Eastern Capital Limited
Partnership,
Sr. Notes (f),
11.25%, 3/15/06.............. 5,487,500
2,500,000 Comcast Corporation,
Sr. Deb. (Subord.),
10.63%, 7/15/12.............. 3,075,000
3,000,000 Diamond Cable Communications
Company,
Sr. Disc. Notes,
(Eff. Yield 10.48%) (c),
0.00%, 2/15/07............... 1,785,000
6,000,000 Diamond Cable Communications
Company,
Sr. Disc. Notes,
(Eff. Yield 11.57%) (c),
0.00%, 9/30/04............... 4,965,000
2,250,000 Frontiervision,
Sr. Notes (Subord.),
11.00%, 10/15/06............. 2,407,500
4,825,000 Fundy Cable Limited,
Sr. Secd. 2nd Priority Notes,
11.00%, 11/15/05............. 5,307,500
5,000,000 Lenfest Communications,
Incorporated,
Sr. Notes (Subord.),
10.50%, 6/15/06.............. 5,575,000
6,000,000 Marcus Cable Operations Limited
Partnership,
Gtd. Sr. Disc. Notes
(Subord.),
(Eff. Yield 12.06%) (c),
0.00%, 8/1/04................ 5,340,000
3,500,000 TCI Satellite Entertainment,
Incorporated,
Sr. Disc. Notes (Subord.),
(Eff. Yield 11.73%) (c) (f),
0.00%, 2/15/07............... 2,117,500
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
CABLE/OTHER VIDEO DISTRIBUTION-- CONTINUED
$ 2,750,000 TCI Satellite Entertainment,
Incorporated,
Sr. Notes (Subord.) (f),
10.88%, 2/15/07.............. $ 2,832,500
7,000,000 Telewest Communications PLC,
Sr. Disc. Deb.,
(Eff. Yield 9.86%) (c),
0.00%, 10/1/07............... 5,215,000
53,324,375
CHEMICAL & AGRICULTURAL
PRODUCTS-- 2.3%
3,750,000 Astor Corporation,
Sr. Notes (Subord.) (f),
10.50%, 10/15/06............. 3,989,063
4,985,000 Freedom Chemicals,
Incorporated, Sr. Notes
(Subord.) (f),
10.63%, 10/15/06............. 5,234,250
1,500,000 Lanesborough Corporation,
Sr. Secd. Notes (a),
10.00%, 4/15/00.............. 1,147,500
2,000,000 Texas Petrochemical
Corporation, Sr. Notes (f),
11.13%, 7/1/06............... 2,155,000
12,525,813
CONSUMER PRODUCTS & SERVICES-- 6.0%
1,750,000 Consumers International,
Incorporated,
Sr. Secd. Notes (f),
10.25%, 4/1/05............... 1,890,000
2,950,000 Drypers Corporation,
Sr. Notes (f),
10.25%, 6/15/07.............. 2,957,375
2,000,000 Dyncorp, Incorporated,
Sr. Notes (Subord.) (f),
9.50%, 3/1/07................ 2,020,000
1,650,000 Exide Corporation,
Sr. Notes,
10.75%, 12/15/02............. 1,757,250
5,833,000 Exide Corporation,
Sr. Notes (f),
2.90%, 12/15/05.............. 3,682,723
6,750,000 McLeod, Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.88%) (c) (f),
0.00%, 3/1/07................ 4,522,500
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
CONSUMER PRODUCTS & SERVICES-- CONTINUED
$ 3,000,000 McLeod, Incorporated,
Sr. Notes (f),
9.25%, 7/15/07............... $ 3,082,500
2,750,000 North Atlantic Trading,
Incorporated,
Sr. Notes (f),
11.00%, 6/15/04.............. 2,860,000
2,275,000 Revlon Worldwide Corporation,
Sr. Secd. Disc. Notes,
(Eff. Yield 13.00%) (c),
0.00%, 3/15/98............... 2,155,562
11,030,000 Revlon Worldwide Corporation,
Sr. Secd. Disc. Notes,
(Eff. Yield 9.82%) (c) (f),
0.00%, 3/15/01............... 7,858,875
32,786,785
DIVERSIFIED COMPANIES-- 2.2%
5,000,000 Affinity Group, Incorporated,
Sr. Notes (Subord.),
11.50%, 10/15/03............. 5,375,000
5,000,000 Cinemark USA, Incorporated,
Sr. Notes (Subord.),
9.63%, 8/1/08................ 5,100,000
1,500,000 Dawson Production Services,
Incorporated,
Sr. Notes,
9.38%, 2/1/07................ 1,545,000
12,020,000
ENERGY-- 7.4%
5,000,000 Clark USA, Incorporated,
Sr. Notes,
10.88%, 12/1/05.............. 5,337,500
5,000,000 Crown Central Petroleum
Corporation,
Sr. Notes,
10.88%, 2/1/05............... 5,275,000
4,750,000 Energy Corporation of America,
Sr. Notes (Subord.) (f),
9.50%, 5/15/07............... 4,773,750
4,500,000 EV International, Incorporated,
Sr. Notes (Subord.) (f),
11.00%, 3/15/07.............. 4,792,500
4,850,000 Ferrellgas Partners Limited
Partnership,
Sr. Secd. Notes (f),
9.38%, 6/15/06............... 5,007,625
</TABLE>
<PAGE>
PAGE 8
KEYSTONE HIGH INCOME BOND FUND (B-4)
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
ENERGY-- CONTINUED
$ 5,150,000 HS Resources, Incorporated,
Sr. Notes (Subord.) (f),
9.25%, 11/15/06.............. $ 5,265,875
2,500,000 Parker Drilling Company,
Sr. Notes (f),
9.75%, 11/15/06.............. 2,681,250
2,025,000 Transamerican Energy
Corporation,
Sr. Secd. Notes (f),
11.50%, 6/15/02.............. 2,025,000
5,000,000 Triton Energy Limited,
Sr. Notes,
9.25%, 4/15/05............... 5,402,500
40,561,000
ENVIRONMENTAL SERVICES-- 0.9%
7,000,000 Allied Waste Industries,
Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.85%) (c) (f),
0.00%, 6/1/07................ 4,637,500
FINANCE & INSURANCE-- 3.2%
4,200,000 First Nationwide Parent
Holdings,
Sr. Exchange Notes,
12.50%, 4/15/03.............. 4,777,500
4,000,000 Olympic Financial Limited,
Sr. Notes,
11.50%, 3/15/07.............. 4,050,000
1,550,000 Polytama International,
Gtd. Secd. Notes,
11.25%, 6/15/07.............. 1,561,625
2,000,000 Presley Companies,
Sr. Notes,
12.50%, 7/1/01............... 1,995,000
5,000,000 Reliance Group Holdings,
Incorporated,
Sr. Deb. (Subord.),
9.75%, 11/15/03.............. 5,275,000
17,659,125
FOOD & BEVERAGE
PRODUCTS-- 6.6%
5,000,000 Aurora Foods, Incorporated,
Sr. Notes (Subord.) (f),
9.88%, 2/15/07............... 5,150,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
FOOD & BEVERAGE PRODUCTS-- CONTINUED
$ 5,000,000 Chiquita Brands International,
Incorporated,
Sr. Notes,
9.63%, 1/15/04............... $ 5,237,500
3,500,000 Cott Corporation,
Sr. Notes,
9.38%, 7/1/05................ 3,640,000
4,300,000 Fleming Companies,
Incorporated, Sr. Notes
(Subord.) (f),
10.50%, 12/1/04.............. 4,407,500
5,000,000 FRD Acquisition Company,
Sr. Notes,
12.50%, 7/15/04.............. 5,337,500
11,450,000 Iowa Select Farms,
Sr. Notes,
(Eff. Yield 15.26%)(c)
(8/02/94-$6,433,830) (b) (e),
0.00%, 2/15/04............... 8,240,107
2,000,000 Marsh Supermarket,
Incorporated, Sr. Notes
(Subord.) (f),
8.88%, 8/1/07................ 2,027,500
2,000,000 Ralphs Grocery Company,
Sr. Notes (Subord.),
11.00%, 6/15/05.............. 2,215,000
36,255,107
FOREST PRODUCTS/CONTAINERS-- 4.5%
4,000,000 Affiliated Newspaper
Investments, Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.20%) (c),
0.00%, 7/1/06................ 3,590,000
5,000,000 Asia Pulp and Paper
International
Finance Company,
Gtd. Secd. Notes,
11.75%, 10/1/05.............. 5,437,500
2,875,000 Equimar Shipholdings Limited,
Gtd. 1st Priority Mtge. (f),
9.88%, 7/1/07................ 2,831,875
2,000,000 Four M Corporation,
Sr. Secd. Notes (f),
12.00%, 6/1/06............... 2,130,000
2,000,000 Iron Mountain, Incorporated,
Sr. Notes (Subord.),
10.13%, 10/1/06.............. 2,170,000
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
FOREST PRODUCTS/CONTAINERS-- CONTINUED
$ 3,150,000 Printpack, Incorporated,
Sr. Notes (Subord.),
10.63%, 8/15/06.............. $ 3,394,125
2,000,000 Riverwood International
Corporation,
Sr. Notes,
10.25%, 4/1/06............... 2,005,000
3,000,000 Riverwood International
Corporation,
Sr. Notes (f),
10.63%, 8/1/07............... 3,052,500
24,611,000
GAMING-- 10.1%
5,000,000 Casino America, Incorporated,
Sr. Secd. Notes,
12.50%, 8/1/03............... 5,300,000
8,571,123 Grand Palais Casinos,
Incorporated,
Sr. PIK Notes,
(8/15/94-$8,571,123) (a) (b)
(d),
18.25%, 11/1/97.............. 86
1,250,000 HMH Properties, Incorporated,
Sr. Notes (f),
8.88%, 7/15/07............... 1,293,750
5,000,000 HMH Properties, Incorporated,
Sr. Secd. Notes,
9.50%, 5/15/05............... 5,275,000
1,250,000 Horseshoe Gaming,
Sr. Notes (f),
9.38%, 6/15/07............... 1,293,750
5,600,000 Horseshoe Gaming,
Sr. Notes, Series B,
12.75%, 9/30/00.............. 6,272,000
2,000,000 Livingwell, Incorporated,
Sr. Deb. (Subord.) (a) (b)
(d),
13.13%, 4/15/01.............. 20
4,500,000 Lodgenet Entertainment
Corporation,
Sr. Notes (f),
10.25%, 12/15/06............. 4,601,250
2,000,000 Majestic Star Casino LLC,
Sr. Notes,
12.75%, 5/15/03.............. 2,210,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
GAMING-- CONTINUED
$ 2,500,000 Prime Hospitality Corporation,
1st Mtge. Notes,
9.25%, 1/15/06............... $ 2,637,500
2,000,000 Prime Hospitality Corporation,
Sr. Notes (Subord.), Series
B,
9.75%, 4/1/07................ 2,140,000
5,000,000 Showboat, Incorporated,
Sr. Notes (Subord.),
13.00%, 8/1/09............... 5,750,000
2,150,000 Six Flags Theme Parks,
Incorporated,
Sr. Notes (Subord.),
(Eff. Yield 10.70%) (c),
0.00%, 6/15/05............... 2,219,875
6,925,000 Starcraft Corporation,
Sr. Notes (a) (b) (d),
16.50%, 1/15/98.............. 138,500
5,000,000 Station Casinos, Incorporated,
Sr. Notes (Subord.),
10.13%, 3/15/06.............. 5,037,500
2,000,000 Sun International Hotels,
Sr. Notes (Subord.),
9.00%, 3/15/07............... 2,065,000
4,000,000 Sun World International,
Incorporated,
1st Mtge. Notes (f),
11.25%, 4/15/04.............. 4,310,000
4,000,000 Wyndham Hotel Corporation,
Sr. Notes (Subord.),
10.50%, 5/15/06.............. 4,545,000
55,089,231
HEALTHCARE PRODUCTS &
SERVICES-- 2.1%
4,000,000 Genesis Health,
Sr. Notes (Subord.),
9.75%, 6/15/05............... 4,220,000
2,100,000 Integrated Health Services,
Incorporated,
Sr. Notes (Subord.) (f),
9.50%, 9/15/07............... 2,226,000
5,000,000 Vencor, Incorporated,
Sr. Notes (Subord.) (f),
8.63%, 7/15/07............... 5,112,500
11,558,500
</TABLE>
<PAGE>
PAGE 10
KEYSTONE HIGH INCOME BOND FUND (B-4)
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
MANUFACTURING-- DISTRIBUTING-- 3.7%
$ 1,000,000 Cambridge Industries,
Incorporated,
Sr. Notes (Subord.) (f),
10.25%, 7/15/07.............. $ 1,040,000
4,000,000 Colorado Prime Corporation,
Sr. Notes (f),
12.50%, 5/1/04............... 4,040,000
4,000,000 Interlake Corporation,
Sr. Notes,
12.00%, 11/15/01............. 4,420,000
3,100,000 Polymer Group, Incorporated,
Sr. Notes (Subord.) (f),
9.00%, 7/1/07................ 3,177,500
2,000,000 Thermadyne Holdings
Corporation,
Sr. Notes (Subord.),
10.75%, 11/1/03.............. 2,120,000
5,000,000 Unisys Corporation,
Sr. Notes,
11.75%, 10/15/04............. 5,512,500
20,310,000
METAL PRODUCTS &
SERVICES-- 2.0%
5,000,000 Algoma Steel, Incorporated,
1st Mtge. Notes,
12.38%, 7/15/05.............. 5,775,000
5,000,000 Bethlehem Steel Corporation,
Sr. Notes,
10.38%, 9/1/03............... 5,275,000
11,050,000
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 8.4%
3,850,000 Ackerly Communications,
Incorporated,
Sr. Secd. Notes,
10.75%, 10/1/03.............. 4,119,500
7,000,000 Benedek Communications
Corporation,
Sr. Disc. Notes (Subord.),
(Eff. Yield 11.79%) (c),
0.00%, 5/15/06............... 4,392,500
4,000,000 Big Flower Press Holdings,
Incorporated,
Sr. Notes (Subord.) (f),
8.88%, 7/1/07................ 3,955,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- CONTINUED
$ 6,925,000 Capstar Broadcasting Partners,
Sr. Disc. Notes (f),
12.75%, 2/1/09............... $ 4,639,750
5,000,000 Citadel Broadcasting Company,
Sr. Notes (Subord.) (f),
10.25%, 7/1/07............... 5,400,000
4,000,000 Echostar Communications
Corporation,
Sr. Disc. Notes,
(Eff. Yield 9.14%) (c),
0.00%, 6/1/04................ 3,425,000
4,000,000 Echostar Satellite Broadcast
Corporation,
Sr. Secd. Disc. Notes,
(Eff. Yield 10.05%) (c),
0.00%, 3/15/04............... 2,940,000
3,325,000 K-III Communications
Corporation,
Sr. Notes (f),
8.50%, 2/1/06................ 3,341,625
3,000,000 SFX Broadcasting, Incorporated,
Sr. Notes (Subord.) (f),
10.75%, 5/15/06.............. 3,360,000
5,000,000 Sinclair Broadcast Group,
Incorporated,
Sr. Notes (Subord.) (f),
9.00%, 7/15/07............... 4,975,000
5,000,000 Spanish Broadcasting Systems,
Incorporated,
Sr. Notes,
7.50%, 6/15/02............... 5,650,000
46,198,375
RETAILING & WHOLESALE-- 2.5%
4,000,000 Cole National Group,
Incorporated,
Sr. Notes,
11.25%, 10/1/01.............. 4,380,000
2,000,000 Finlay Enterprises,
Sr. Disc. Deb.,
(Eff. Yield 9.12%) (c),
0.00%, 5/1/05................ 1,920,000
5,000,000 Finlay Fine Jewelry
Corporation, Sr. Notes,
10.63%, 5/1/03............... 5,275,000
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
RETAILING & WHOLESALE-- CONTINUED
$ 2,000,000 French Fragrances,
Incorporated, Sr. Notes,
Series B,
10.38%, 5/15/07.............. $ 2,072,500
13,647,500
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 5.3%
2,350,000 AFC Enterprises, Incorporated,
Sr. Notes (Subord.) (f),
10.25%, 5/15/07.............. 2,432,250
7,000,000 Brooks Fiber Properties,
Incorporated,
Sr. Disc. Notes,
(Eff. Yield 11.10%) (c),
0.00%, 11/1/06............... 4,987,500
4,000,000 Econophone, Incorporated,
Sr. Notes (f),
13.50%, 7/15/07.............. 4,040,000
5,000,000 Iridium Corporation,
Sr. Disc. Notes (f),
14.00%, 7/15/05.............. 5,037,500
2,500,000 Jordan Telecommunication
Products,
Sr. Notes (f),
9.88%, 8/1/07................ 2,500,000
750,000 Metronet Communications
Corporation,
Sr. Notes,
12.00%, 8/15/07.............. 799,688
3,000,000 Talton Holdings, Incorporated,
Sr. Notes (f),
11.00%, 6/30/07.............. 3,097,500
4,750,000 Teleport Communications Group,
Sr. Disc. Notes,
(Eff. Yield 8.98%) (c),
0.00%, 7/1/07................ 3,621,875
2,175,000 Teleport Communications Group,
Sr. Notes,
9.88%, 7/1/06................ 2,376,187
28,892,500
WIRELESS COMMUNICATIONS-- 5.0%
5,000,000 Centennial Cellular
Corporation,
Sr. Notes,
8.88%, 11/1/01............... 5,050,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-- CONTINUED
WIRELESS COMMUNICATIONS-- CONTINUED
$ 6,000,000 Comcast Cellular Holdings,
Incorporated,
Sr. Notes (f),
9.50%, 5/1/07................ $ 6,255,000
6,980,000 Pagemart Nationwide, Inc.,
Sr. Disc. Notes,
(Eff. Yield 10.80%) (c),
0.00%, 2/1/05................ 5,479,300
5,750,000 Pricecellular Wireless
Corporation, Sr. Disc. Notes
(Subord.),
(Eff. Yield 10.64%) (c),
0.00%, 10/1/03............... 5,563,125
5,000,000 Vanguard Cellular Systems,
Incorporated,
Sr. Deb.,
9.38%, 4/15/06............... 5,200,000
27,547,425
FOREIGN BONDS-- US DOLLAR
DENOMINATED-- 4.9%
1,675,000 Azteca Holdings SA DE CV,
Sr. Secd. Notes (f),
11.00%, 6/15/02.............. 1,758,750
2,000,000 Consorcio Ecuatoriano,
Notes (f),
14.00%, 5/1/02............... 2,165,000
3,000,000 Grupo Televisa SA DE CV,
Sr. Disc. Notes,
(Eff. Yield 10.61%) (c),
0.00%, 5/15/08............... 2,160,000
5,000,000 Intermedia Capital Partners,
Sr. Notes (f),
11.25%, 8/1/06............... 5,456,250
10,150,000 Intermedia Communications,
Incorporated,
Sr. Disc. Notes,
(Eff. Yield 9.85%) (c) (f),
0.00%, 7/15/07............... 6,521,375
5,000,000 Rogers Communications,
Incorporated,
Sr. Notes,
8.75%, 7/15/07............... 3,654,389
1,250,000 Tjiwi Kimia FN Mauritius,
Gtd. Sr. Notes (f),
10.00%, 8/1/04............... 1,260,937
</TABLE>
<PAGE>
PAGE 12
KEYSTONE HIGH INCOME BOND FUND (B-4)
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS-- CONTINUED
<C> <S> <C>
FOREIGN BONDS-- US DOLLAR
DENOMINATED-- CONTINUED
$ 3,500,000 TV Azteca SA DE CV,
Sr. Notes (f),
10.50%, 2/15/07.............. $ 3,718,750
26,695,451
TOTAL CORPORATE BONDS
(COST $494,825,886).......... 504,531,761
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
COMMON STOCKS AND WARRANTS-- 1.5%
AEROSPACE & DEFENSE-- 0.0%
76,000 CHC Helicopter Corporation,
Warrants (d)................. 171,000
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.0%
9,500 Chatwins Group, Incorporated,
Warrants (d)................. 9,500
BUILDING, CONSTRUCTION &
FURNISHINGS-- 0.6%
197,000 Specialty Equipment Companies,
Incorporated,
Common Stock (d)............. 3,016,562
CHEMICAL & AGRICULTURAL
PRODUCTS-- 0.0%
2,056 Lanesborough Corporation,
Common Stock (b) (d)......... 21
DIVERSIFIED COMPANIES-- 0.2%
2,964 PM Holdings Corporation,
Common Stock (d)............. 1,037,400
FOOD & BEVERAGE PRODUCTS-- 0.1%
298,530 Iowa Select Farms,
Warrants,
(2/04/94-- $2,420,481) (b)
(d) (e)...................... 746,325
131,250 Specialty Foods Acquisition
Corporation,
Common Stock (d)............. 32,812
779,137
GAMING-- 0.6%
254,790 Casino America, Incorporated,
Common Stock (d)............. 569,296
47,778 Casino America, Incorporated,
Warrants (b) (d)............. 478
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS AND WARRANTS-- CONTINUED
GAMING-- CONTINUED
410,062 Colorado Gaming and
Entertainment Company,
Common Stock (d)............. $ 2,460,372
10,775,000 Gold River Hotel and Casino
Corporation (b) (d).......... 107,750
931,379 Grand Palais Casinos,
Incorporated,
Limited Liability Interest,
(8/15/94-- $0) (a) (b) (d)... 931
250,735 Grand Palais Casinos,
Incorporated,
Series A, Warrants,
(8/15/94-- $2,507) (a) (b)
(d).......................... 251
136,765 Grand Palais Casinos,
Incorporated,
Series B, Warrants,
(8/15/94-- $1,368) (a) (b)
(d).......................... 137
1,208,088 Grand Palais Casinos,
Incorporated,
Series C, Warrants,
(8/15/94-- $12,081) (a) (b)
(d).......................... 1,208
680,643 Grand Palais Casinos,
Incorporated,
Series D, Warrants,
(8/15/94-- $646) (a) (b)
(d).......................... 681
3,141,104
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.0%
9,510 Nextel Communications,
Incorporated,
Warrants (d)................. 95
TOTAL COMMON STOCKS AND
WARRANTS
(COST $8,633,203)............ 8,154,819
<CAPTION>
PREFERRED STOCKS-- 3.8%
<C> <S> <C>
CABLE/OTHER VIDEO DISTRIBUTION-- 1.5%
26,000 Adelphia Communications
Corporation,
Preferred Stock (f).......... 2,834,000
52,820 Cablevision Systems
Corporation,
Series M, Preferred Stock.... 5,572,540
8,406,540
FINANCE & INSURANCE-- 2.3%
24,562 Ampex Corporation,
Preferred Stock (b) (d)...... 12,452,934
TOTAL PREFERRED STOCKS
(COST $31,142,332)........... 20,859,474
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS-- JULY 31, 1997
<TABLE>
<CAPTION>
VALUE
<C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $534,601,421) 97.5 % $533,546,054
OTHER ASSETS AND
LIABILITIES-- NET 2.5 13,843,947
NET ASSETS 100.0 % $547,390,001
</TABLE>
(a) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on those so identified. At July 31,
1997, the fair value of these securities was $1,289,314 (0.24% of the
Fund's net asset value).
(b) All or a portion of these securities are either (1) restricted (i.e.
securities which may not be publicly sold without registration under the
Securities Act of 1933) or (2) illiquid securities, and are valued using
market quotations where readily available. In the absence of market
quotations, the securities are valued based upon their fair value determined
under procedures approved by the Board of Trustees. The Fund may make
investments in an amount up to 15% of the value of the Fund's net assets in
such securities. The date of acquisition and costs are set forth in
parentheses after the title of each restricted security. On the date of
acquisition there were no market quotations on similar securities and the
above securities were valued at acquisition cost. At July 31, 1997, the fair
value of these restricted securities was $8,989,726 (1.64% of the Fund's net
assets).
(c) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date. Securities may
have future interest rate resets that have been considered in the effective
yield calculation.
(d) Non-income-producing security.
(e) Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
The Fund has never owned enough of the outstanding securities of any issuer
to have control (as defined in the Investment Company Act of 1940) of that
issuer. At July 31, 1997, the fair value of these securities was $8,986,432
(1.64% of the Fund's net assets).
(f) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
KEYSTONE HIGH INCOME BOND FUND (B-4)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $4.10 $4.42 $4.68 $5.13 $4.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.32 0.32 0.38 0.38 0.45
Net realized and unrealized gain (loss)
on investments and foreign currency related transactions 0.28 (0.27) (0.15) (0.38) 0.44
Total from investment operations 0.60 0.05 0.23 0.00 0.89
LESS DISTRIBUTIONS FROM:
Net investment income (0.32) (0.31) (0.37) (0.38) (0.45)
In excess of net investment income (0.01) (0.06) (0.02) (0.07) (0.05)
Tax basis return of capital 0 0 (0.10) 0 0
Total distributions (0.33) (0.37) (0.49) (0.45) (0.50)
NET ASSET VALUE END OF YEAR $4.37 $4.10 $4.42 $4.68 $5.13
TOTAL RETURN (A) 15.32% 1.38% 5.66% (0.41%) 20.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.96% 1.94% 2.03% 1.84% 2.06%
Expenses excluding indirectly paid expenses 1.95% 1.93% -- -- --
Net investment income 7.63% 7.92% 8.64% 7.57% 9.30%
PORTFOLIO TURNOVER RATE 138% 116% 82% 110% 125%
NET ASSETS END OF YEAR (THOUSANDS) $547,390 $593,681 $764,965 $766,283 $972,164
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $4.19 $5.02 $6.38 $6.91 $7.66
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.49 0.61 0.68 0.83 0.80
Net realized and unrealized gain (loss)
on investments and foreign currency related transactions 0.58 (0.72) (1.18) (0.51) (0.71)
Total from investment operations 1.07 (0.11) (0.50) 0.32 0.09
LESS DISTRIBUTIONS FROM:
Net investment income (0.50) (0.72) (0.78) (0.85) (0.84)
In excess of net investment income (0.02) 0 (0.08) 0 0
Tax basis return of capital 0 0 0 0 0
Total distributions (0.52) (0.72) (0.86) (0.85) (0.84)
NET ASSET VALUE END OF YEAR $4.74 $4.19 $5.02 $6.38 $6.91
TOTAL RETURN (A) 27.25% 0.03% (7.84%) 4.95% 1.66%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.17% 2.34% 2.06% 1.97% 1.82%
Expenses excluding indirectly paid expenses -- -- -- -- --
Net investment income 10.86% 14.64% 12.77% 12.36% 11.29%
PORTFOLIO TURNOVER RATE 94% 78% 45% 75% 81%
NET ASSETS END OF YEAR (THOUSANDS) $841,757 $710,590 $820,940 $1,188,660 $1,274,673
</TABLE>
(a) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 15
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value
Unaffiliated issuers (identified
cost-- $525,747,110) $ 524,559,622
Affiliated issuers (identified
cost-- $8,854,311) 8,986,432
Total investments $ 533,546,054
Cash 2,345,910
Receivable for investments sold 12,309,999
Interest receivable 9,225,984
Receivable for Fund shares sold 163,040
Prepaid expenses and other assets 170,184
Total assets 557,761,171
LIABILITIES
Payable for investments purchased 7,676,756
Distributions to shareholders 1,456,046
Payable for Fund shares redeemed 667,567
Distribution fee payable 437,836
Due to related parties 14,558
Accrued expenses and other liabilities 118,407
Total liabilities 10,371,170
NET ASSETS $ 547,390,001
NET ASSETS REPRESENTED BY
Paid-in capital $1,013,342,157
Accumulated distributions in excess of net
investment income (1,468,219)
Accumulated net realized loss on
investments and foreign currency related
transactions (463,428,580)
Net unrealized depreciation on investments
and foreign currency related transactions (1,055,357)
Total net assets $ 547,390,001
NET ASSET VALUE PER SHARE
Net asset value of $547,390,001/125,390,766
outstanding shares of beneficial interest $ 4.37
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest:
Unaffiliated issuers (Net of
foreign withholding taxes of
$693) $52,953,592
Affiliated issuers 1,118,767
Other income 466,791
Total income 54,539,150
EXPENSES
Distribution Plan expenses $ 5,686,181
Management fee 3,259,222
Transfer agent fees 1,634,507
Custodian fees 289,359
Professional fees 67,739
Administrative services fees 50,161
Trustees' fees and expenses 48,789
Other 133,428
Total expenses 11,169,386
Less: Expenses paid indirectly (64,295)
Net expenses 11,105,091
Net investment income 43,434,059
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain on investments 3,963,269
Net change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions 33,119,281
Net realized and unrealized gain
on investments and foreign
currency related transactions 37,082,550
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $80,516,609
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
KEYSTONE HIGH INCOME BOND FUND (B-4)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 43,434,059 $ 53,347,924
Net realized gain on investments and foreign currency related transactions 3,963,269 12,528,472
Net change in unrealized appreciation or depreciation on investments and foreign
currency related transactions 33,119,281 (59,100,847)
Net increase in net assets resulting from operations 80,516,609 6,775,549
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (43,434,060) (49,946,109)
In excess of net investment income (1,323,000) (9,344,299)
Total distributions to shareholders (44,757,060) (59,290,408)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 136,045,881 162,907,187
Payments for shares redeemed (243,407,877) (315,113,110)
Net asset value of shares issued in reinvestment of dividends and distributions 25,311,702 33,436,642
Net decrease in capital share transactions (82,050,294) (118,769,281)
Total decrease in net assets (46,290,745) (171,284,140)
NET ASSETS
Beginning of year 593,680,746 764,964,886
End of year [Including accumulated distributions in excess of net investment income
as follows: 1997-- ($1,468,219) and 1996-- ($1,700,454)] $ 547,390,001 $ 593,680,746
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 17
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Keystone High Income Bond Fund (B-4) (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified,
open-end management investment company.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
U.S. government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices. Corporate bonds, other fixed-income
securities, and mortgage and other asset-backed securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
federal agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions and foreign currency related transactions.
The foreign currency gains and losses realized from the difference between the
amounts of interest and dividends recorded on the books of the Fund and the
amount actually received are included in dividend and interest income. The
portion of foreign currency gains and losses related to fluctuations in exchange
rates between the initial purchase trade date and subsequent sale trade date is
included in realized gain (loss) on foreign currency related transactions.
D. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
<PAGE>
PAGE 18
KEYSTONE HIGH INCOME BOND FUND (B-4)
accretion of discounts and amortization of premiums. Dividend income is recorded
on the ex-dividend date. Foreign income may be subject to foreign withholding
taxes which are accrued as applicable. Capital gains realized on some foreign
securities are subject to foreign taxes and are accrued as applicable.
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income, net
tax-exempt income and net capital gains, if any, to its shareholders. The Fund
also intends to avoid any excise tax liability by making the required
distributions under the Code. Accordingly, no provision for federal income taxes
is required. To the extent that realized capital gains can be offset by capital
loss carryforwards, it is the Fund's policy not to distribute such gains.
F. DISTRIBUTIONS
Distributions from net investment income for the Funds are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to the expiration of capital loss
carryovers.
2. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest authorized
with a par value of $1.00. Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1997 1996
<S> <C> <C>
Shares sold 32,280,201 38,767,387
Shares redeemed (57,681,924) (74,982,398)
Shares issued in
reinvestment of
distributions 5,995,434 7,959,753
Net decrease (19,406,289) (28,255,258)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended July 31, 1997 were $747,418,124 and
$827,179,413, respectively.
On July 31, 1997, the federal tax cost of investment securities was
$540,920,358 for federal income tax purposes. The composition of gross
unrealized appreciation, depreciation and net unrealized appreciation
(depreciation) was $28,167,214, ($35,541,518) and ($7,374,304), respectively.
As of July 31, 1997, the Fund has capital loss carryovers for federal income
tax purposes of approximately $457,110,000 which expire as follows:
$93,048,000-- 1998, $91,150,000-- 1999, $122,350,000-- 2000, $44,605,000-- 2002,
$105,957,000-- 2003.
4. DISTRIBUTION PLAN
The Fund bears some of the costs of selling its shares under a Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan,
the Fund pays its principal underwriter amounts which are calculated daily and
paid monthly.
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), has served as
principal underwriter to the Fund. Prior to December 11, 1996,
<PAGE>
PAGE 19
Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary
of Keystone Investment Management Company ("Keystone"), served as the Fund's
principal underwriter.
Under the Distribution Plan, the Fund pays a distribution fee which may not
exceed 1.00% of the Fund's average daily net assets, of which 0.75% is used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
The Distribution Plan may be terminated at any time by vote of the Independent
Trustees or by vote of a majority of the outstanding voting shares. However,
after the termination of the Distribution Plan, and subject to the discretion of
the Independent Trustees, payments to EKIS and/or EKD may continue as
compensation for services which had been provided while the Distribution Plan
was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
Under an investment advisory agreement dated December 11, 1996, Keystone, a
subsidiary of First Union Corporation ("First Union"), serves as the investment
advisor for the Fund. In return for providing investment management and
administrative services, the Fund pays Keystone a management fee that is
calculated daily and paid monthly. The management fee is computed at an annual
rate of 2.00% of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining to 0.25% per annum as
net assets increase, to the average daily net asset value of the Fund.
Effective January 1, 1997, BISYS became sub-administrator to the Fund and is
paid by Keystone for its services.
Prior to December 11, 1996, Keystone Management Inc. ("KMI"), a wholly-owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as the investment advisor
and provided investment advisory and management services to the Fund. In return
for its services, Keystone received an annual fee equal to 85% of the management
fee received by KMI.
During the year ended July 31, 1997, the Fund paid or accrued to EKIS $50,161
for certain administrative services.
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Fund.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BISYS provides the officers of the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
<PAGE>
PAGE 20
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE HIGH INCOME BOND FUND (B-4)
We have audited the accompanying statement of assets and liabilities of Keystone
High Income Bond Fund (B-4), including the schedule of investments, as of July
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the ten-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone High Income Bond Fund (B-4) as of July 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 5, 1997
<PAGE>
PAGE 21
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS
(UNAUDITED)
During the year ended July 31, 1997, distributions of $0.33 per share were paid
in shares or cash.
In January 1998 complete information on calendar year 1997 distributions will be
forwarded to you to assist in completing your 1997 federal income tax return.
<PAGE>
(This page left blank intentionally)
<PAGE>
KEYSTONE
FAMILY OF FUNDS
(diamond)
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
Evergreen Keystone
(Tree logo) FUNDS (logo)
P.O. Box 2121
Boston, Massachusetts 02106-2121
(Recycle logo)
541893
(B4-R)
KEYSTONE
(Photo Exists in Film ONLY. Will See on Dylux)
HIGH INCOME
BOND FUND (B-4)
Evergreen Keystone
(TREE LOGO) FUNDS (LOGO)
ANNUAL REPORT
JULY 31, 1997
