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Keystone Hartwell Growth Fund
Seeks capital appreciation from growth stocks with above-average appreciation
potential.
Dear Shareholder:
We would like to take this opportunity to report on your Fund's performance
for the twelve-month period which ended September 30, 1995.
Performance
For the twelve-month period which ended September 30, 1995, your Fund
produced the following total returns.
Class A shares returned 23.28%.
Class B shares returned 22.10%.
Class C shares returned 22.04%.
The Standard & Poor's 500 Index (S&P 500), a broad index of common stocks,
returned 29.75% for the same period.
Your Fund appreciated solidly throughout the twelve-month period, with the
strongest gains coming in the last six months. At the beginning of 1995, the
market environment became more favorable, with strong results reported by
multinational companies. Many of these companies derive significant revenues
from foreign operations. As the U.S. dollar declined at the start of the
year, many multinational companies reported stronger than expected earnings.
Your Fund continued to focus on attractive growth companies but had fewer
multinationals that benefited from the favorable foreign currency effects.
Nevertheless, we think your Fund provided very good returns for the period.
Your Fund's portfolio manager, William C. Miller, IV, president of J.M.
Hartwell, LP, has refined a time-tested approach to investing in growth
companies. His strategy includes a stock-by-stock analysis of company
finances, products, management, and markets. During the twelve-month period,
a large portion of your Fund's returns came from the broad area of
technology, which encompasses software, semiconductor, and communications and
equipment manufacturers. Following our letter to you, Mr. Miller discusses
his recent strategy.
We appreciate your continued support of Keystone Hartwell Growth Fund. If
you have any questions or comments about your Fund, we encourage you to write
us.
Sincerely,
[Elfner, III Signature] [Bissell Signature]
Albert H. Elfner, III George S. Bissell
Chairman and President Chairman of the Board
Keystone Investments, Inc. Keystone Funds
November 1995
<PAGE>
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Keystone Hartwell Growth Fund
A Report From
Your Fund Manager
William C. Miller, IV, president of J.M. Hartwell, LP, is portfolio
manager of your Fund. Mr. Miller has more than 25 years of
investment management experience. He holds a BA from Williams
College and MBA from Harvard Business School.
To the Fund's Shareholders:
During the twelve-month period, growth stocks rose in value. Returns were
affected by changes in the economic environment and fluctuations in interest
rates. In the fourth quarter of 1994, strong economic growth and higher
interest rates generated wide stock price fluctuations. In the second quarter
of 1995, the economic environment took a more positive turn for growth
stocks. The pace of economic growth slowed, interest rates declined, and
prices of growth stocks rose in value.
Throughout the twelve-month period, we maintained our strategy of
investing in the stocks of rapidly growing companies that we believe have the
potential to provide earnings growth rates of at least 20% a year. We
continued to base our investment decisions on the merits of individual
companies and found attractive opportunities in several industries. These
included companies in the technology, finance, business services operations,
and media industries.
The Reindustrialization Of America
Throughout the 1990s, many American companies have made major changes in the
way they conduct business. To be more competitive in the global economy,
these companies have streamlined their businesses, cut costs, reduced their
labor forces, and have turned to technology in order to become more
productive. Many of the companies in which we invested have benefited from
this trend toward productivity. In numerous instances, these technology
companies are developing the products and services that enhance the
productivity of corporate America. At the end of the twelve-month period,
approximately 38% of your Fund's net assets were invested in technology
companies. We include software, semiconductor, and communications and
equipment in the technology sector.
Intel and Motorola continued to be among your Fund's largest holdings.
These two companies produce semiconductors--electronic microcomputer
components--that are an integral part of personal computers, automobiles,
appliances and other products. Intel's Pentium chip is the basis for the
fastest new personal computers. In addition to semiconductors, Motorola also
makes a wide range of products for the communications industry including
wireless communications products such as phones and pagers.
Microsoft, which was profiled in previous reports, has been a staple in
the portfolio for more than eighteen months. The company continues to be an
industry leader and dominates the personal computer software market. We
expect Microsoft's newest software product, Windows '95, which was introduced
in the third quarter of 1995, to boost the company's profits.
We added to the Fund's position in Cabletron Systems. This company is an
equipment manufacturer that produces networking devices that can transmit
data at high speeds among computers. Because more and more businesses want
their computers connected with one another, we believe Cabletron's products
are in demand. We think Cabletron has the potential to grow at a rate of 30%
a year.
While most technology stocks produced strong gains during the twelve
months, some failed to live up to our expectations. Compuware, a producer of
soft-
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Fund Profile
Objective: Seeks capital appreciation from growth stocks with
above-average appreciation potential.
Commencement of investment operations: March 31, 1966
Number of stocks: 25
Net assets: $22 million
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Top 10 Holdings
as of September 30, 1995
<TABLE>
<CAPTION>
Percent
of net
Stock Industry assets
- -----------------------------------------------------------------------------
<S> <C> <C>
Motorola Communications & equipment 10.0
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Intel Semiconductor 8.0
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Microsoft Computer software 7.3
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Vodafone ADR Cellular 6.6
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Cabletron Systems Communications & equipment 6.2
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Great Lakes Chemical Chemicals 5.6
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Capital Cities/ABC Cable/media 5.2
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Reuters Holding ADR Business services 4.9
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American International Group Insurance 4.5
- -----------------------------------------------------------------------------
DSC Communications Communications & equipment 4.5
- -----------------------------------------------------------------------------
</TABLE>
ware for mainframe computers, made an acquisition which we believed would be
beneficial to the company over the long term. But, as it became apparent that
the acquisition was not going to work out, we sold the stock. As part of our
selling discipline, when the reasons for holding a stock are no longer valid,
we are quick to remove it from the portfolio.
Mortgage Companies Benefit From Deregulation
At the end of the period, about 10% of net assets were invested in mortgage
companies. We added Federal National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac), and MGIC Investment
Corporation to the portfolio. We believe these stocks were undervalued and
should benefit from lower interest rates and from government deregulation.
Until recently, the government looked as though it would interfere in the
operations of Fannie Mae and Freddie Mac. The intrusion of government now
appears less likely. Both companies are benefitting from the increased use of
technology to lower mortgage origination costs.
MGIC provides private mortgage insurance to home buyers. Generally, home
buyers are required to make down payments of 20% of the purchase price on a
new home or they must purchase mortgage insurance. For many years, U.S. armed
forces personnel who couldn't meet the 20% requirement could have their
mortgages guaranteed by the Veterans Administration (VA). Over the past
several years, the VA has been reducing the number of mortgages it
guarantees, creating a new market for private mortgage insurers. Because
relatively few buyers make 20% down payments on homes, MGIC's business and
market share are rapidly increasing.
Other Additions To The Portfolio
We invested in Ceridian, a business services company, that serves two
different areas. Ceridian has a funds transfer business--a data bank which
transfers money for stores, truck drivers, and gambling casinos to banks. It
also has a subsidiary which provides payroll tax processing services for
companies. Ceridian is attempting to capitalize on the trend by many
companies to "outsource" specific tasks or operations. Outsourced functions
are often performed more efficiently by smaller firms and at a lower cost
than in-house departments.
We also added Tele-Communications/Liberty Media Group to the portfolio.
The company creates programming for a variety of cable television networks,
including the Discovery Channel. It also invests in and manages a number of
companies that develop products for the movies, cable television, and videos.
It owns a 20% position in Turner Broadcasting. We believe the stock is
attractive because we expect it to benefit from the deregulation trend in the
media industry and from the growth of cable television.
<PAGE>
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Keystone Hartwell Growth Fund
Taking Profits
We reduced the Fund's position in Great Lakes Chemical from 23% on March 31
to about 6% of net assets on September 30, 1995. The company continues to be
among your Fund's top ten holdings. However, the smaller position makes the
Fund less susceptible to the stock's price movements. Great Lakes, a
manufacturer of bromine and brominated chemicals, has been part of the
portfolio for more than ten years. It has been a solid contributor to your
Fund's returns, and we expect it will continue to have a positive effect on
your Fund, although at a reduced position in the portfolio.
Our Outlook
Going forward, we believe that the economy should provide a positive backdrop
for growth stocks. We expect to see a continuation of the trend we've
experienced over the past six months--slower economic growth, but not a
recession, stable to declining interest rates, and moderate inflation.
While this may be a positive economic environment for growth stocks, we
will continue to evaluate companies on their individual merits. Investing in
growth stocks can result in stock price changes in the short term. However,
over the 29-year history of this Fund, we believe long-term investors have
been rewarded for their commitment.
Sincerely,
[Miller, IV Signature]
William C. Miller, IV
Portfolio Manager and President
J.M. Hartwell, LP
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The J.M. Hartwell
Investment Discipline
Purchase Strategy--criteria used to evaluate the purchase of a stock for your
Fund:
* Bottoms up approach, individual company analysis
* Fast growing companies; minimum 20% earnings growth rate
* Durable and consistent earnings growth
* Long-term approach to investing; not influenced by short-term price swings
* $500 million market capitalization or larger
* Companies with an established and reliable earnings record
* Strong #1 or close #2 market position within industry
* Avoid cyclical businesses or heavily regulated industries
Sell Strategy--criteria used to evaluate when to eliminate a stock owned by
your Fund:
* Deteriorating financial situation
* Original purchase determinants no longer valid
Overall Management Strategy
* Hands-on approach, meet/in contact with company management regularly
* Focus on the limited number of companies that are industry
leaders
* Ignore short-term market fluctuations
* Concentrate on companies that will provide above-average capital
appreciation over the long-term
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PAGE 5
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Your Fund's Performance
[typeset representation of mountain chart]
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Growth of an investment in
Keystone Hartwell Growth Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
9/85 9425 9425
11268 12400
9/87 17862 21839
13786 16855
9/89 19629 23999
15572 19039
9/91 18442 26250
20646 30426
9/93 24143 35578
19915 32475
9/95 21900 40035
Total Value: $40,034
A $10,000 investment in Keystone Hartwell Growth Fund Class A made on September
30, 1985 with all distributions reinvested was worth $40,034 on September 30,
1995. Past performance is no guarantee of future results.
- -------------------------------------------------------------------------------
Twelve-Month Performance as of September 30, 1995
- -------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Total returns* 23.28% 22.10% 22.04%
Net asset value 9/30/94 $20.96 $20.80 $20.71
9/30/95 $23.05 $22.63 $22.51
Dividends None None None
Capital gains $ 2.20 $ 2.20 $ 2.20
</TABLE>
* Before deducting front-end or contingent deferred sales charge (CDSC) if
applicable.
Historical Record as of September 30, 1995
- ------------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 23.28% 22.10% 22.04%
1-year 16.19% 18.10% 22.04%
5-year 98.19% -- --
10-year 300.34% -- --
Life of Class -- 15.00% 17.29%
Average Annual Returns
1-year w/o sales charge 23.28% 22.10% 22.04%
1-year 16.19% 18.10% 22.04%
5-year 14.66% -- --
10-year 14.88% -- --
Life of Class -- 6.67% 7.65%
</TABLE>
Class A shares were introduced on September 10, 1968. Performance is reported
at the current maximum front-end sales charge of 5.75%.
Class B shares were introduced on August 2, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on August 2, 1993. Performance reflects the
return you would have received after holding shares for one year or more and
redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
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Keystone Hartwell Growth Fund
[typeset representation of line chart]
Growth of an Investment
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Comparison of change in value of a $10,000 investment
in Keystone Hartwell Growth Fund Class A, the
Standard & Poor's 500 Stock Index and the Consumer
Price Index.
In Thousands September 30, 1985 through September 30, 1995
Standard & Poor's Consumer
500 Index Price
Class A (S&P 500) Index
9/85 9425 10000 10000
12400 13162 10175
9/87 21839 18836 10619
16855 16480 11062
9/89 23999 21828 11542
19039 19766 12253
9/91 26250 25928 12668
30426 28810 13047
9/93 35578 32552 13398
32475 33754 13795
9/95 40035 43796 14146
S&P 500 $43,796
CPI $14,146
Class A $40,034
Average Annual Total Return
---------------------------
1 Year 5 Year 10 Year
Class A 16.19% 14.66% 14.88%
Class B 18.10% - 6.67%*
Class C 22.04% - 7.65%*
Past performance is no guarantee of future results. The performance of Class B
or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid the shareholder investing in the different
classes.
*Class B and Class C shares were introduced August 2, 1993; performance is for
life of class.
- -------------------------------------------------------------------------------
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Hartwell Growth Fund Class A
The Fund seeks capital appreciation from growth stocks with above-average
appreciation potential. The return is quoted after deducting sales charges
(if applicable), fund expenses, and transaction costs and assumes
reinvestment of all distributions.
2. Standard & Poor's 500 Index (S&P 500)
The S&P 500 is a broad-based unmanaged index of common stock prices. It is
comprised of stocks of the largest U.S. companies. These stocks are selected
and compiled by Standard & Poor's Corporation according to criteria that may
be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the
<PAGE>
PAGE 7
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other important financial considerations such as safety, stability and
consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future
returns.
<PAGE>
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Keystone Hartwell Growth Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
<TABLE>
<CAPTION>
Number
of Market
Shares Value
- --------------------------------- -------- -----------
<S> <C> <C>
COMMON STOCKS (99.4%)
BUSINESS SERVICES (13.7%)
Ceridian Corp. (a) 9,000 $ 399,375
Fritz Companies (a) 12,000 884,250
General Motors Corp., Class E 15,000 682,500
Reuters Holdings ADR B 21,000 1,110,375
- --------------------------------- ------ ---------
3,076,500
- --------------------------------- ------ ---------
CABLE/MEDIA (15.3%)
Capital Cities/ABC, Inc. 10,000 1,176,250
Lin Television Corp. (a) 3,942 122,202
Tele Communications, Inc., TCI
Group, Class A (a) 51,800 906,500
Tele Communications, Inc.,
Liberty Media Group, Class A
(a) 17,950 480,162
Viacom, Inc., Class A (a) 10,000 497,500
Viacom, Inc., Class B (a) 5,000 248,750
- --------------------------------- ------ ---------
3,431,364
- --------------------------------- ------ ---------
CELLULAR (11.0%)
Airtouch Communications (a) 20,000 612,500
Vanguard Cellular Systems, Inc.,
Class A (a) 15,000 384,375
Vodafone Group ADR 36,000 1,476,000
- --------------------------------- ------ ---------
2,472,875
- --------------------------------- ------ ---------
CHEMICALS (5.6%)
Great Lakes Chemical Corp. 18,600 1,257,825
- --------------------------------- ------ ---------
COMMUNICATIONS & EQUIPMENT (20.7%)
Cabletron Systems, Inc. (a) 21,000 1,383,375
DSC Communications Corp. (a) 17,000 1,007,250
Motorola, Inc. 29,500 2,253,063
- --------------------------------- ------ ---------
4,643,688
- --------------------------------- ------ ---------
COMPUTER SOFTWARE (9.6%)
BMC Software, Inc. (a) 10,000 460,000
Indigo N.V. (a) 3,200 74,000
Microsoft Corp. (a) 18,000 1,629,000
- --------------------------------- ------ ---------
2,163,000
- --------------------------------- ------ ---------
FINANCIAL SERVICES (9.6%)
Federal Home Loan Mortgage Corp. 10,700 $ 739,638
Federal National Mortgage
Association 7,000 724,500
MGIC Investment Corporation 12,000 687,000
- --------------------------------- ------ ---------
2,151,138
- --------------------------------- ------ ---------
HEALTHCARE SERVICES (1.3%)
Apria Healthcare (a) 12,000 297,000
- --------------------------------- ------ ---------
INSURANCE (4.6%)
American International Group,
Inc. 12,000 1,020,000
- --------------------------------- ------ ---------
SEMICONDUCTOR (8.0%)
Intel Corp. 30,000 1,803,750
- --------------------------------- ------ ---------
TOTAL COMMON STOCKS
(Cost--$12,822,923) 22,317,140
- --------------------------------- ------ ---------
Maturity
Value
- --------------------------------- ------ ---------
REPURCHASE AGREEMENTS (0.6%)
State Street Bank and Trust Co.,
5.250%, purchased 09/29/95
(Collateralized by $115,000,
U.S. Treasury Bonds, 8.875%,
02/15/19) maturing 10/02/95
(Cost--$140,000) $140,061 140,000
- --------------------------------- ------ ---------
TOTAL INVESTMENTS
(Cost--$12,962,923) (b) 22,457,140
OTHER ASSETS AND LIABILITIES--NET
(0.0%) 2,299
- --------------------------------- ------ ---------
NET ASSETS (100%) $22,459,439
- --------------------------------- ------ ---------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing security.
(b) The cost of investments for federal income tax purposes is $12,980,476.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at September 30, 1995 are as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $9,611,777
Gross unrealized depreciation (135,113)
---------
Net unrealized appreciation $9,476,664
=========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 9
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FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
January 1,
1990 through
Year Ended September 30, September 30,
1995 1994 1993 1992 1991 1990
- ------------------------------------- ------ ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 20.96 $ 25.41 $ 21.73 $ 19.41 $ 16.39 $ 19.98
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Income from investment operations:
Net investment loss (0.24) (0.33) (0.29) (0.25) (0.20) (0.19)
Net gains (losses) on securities 4.53 (1.75) 3.97 3.27 5.59 (3.40)
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Total from investment operations 4.29 (2.08) 3.68 3.02 5.39 (3.59)
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Less distributions:
Distributions from capital gains (2.20) (2.37) 0.00 (0.70) (2.37) 0.00
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Total distributions (2.20) (2.37) 0.00 (0.70) (2.37) 0.00
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Net asset value end of period $ 23.05 $ 20.96 $ 25.41 $ 21.73 $ 19.41 $ 16.39
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Total return (c) 23.28% (8.72%) 16.94% 15.91% 37.88% (17.97%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.85%(d) 2.05% 1.89% 2.11% 2.38% 3.00%(b)
Net investment loss (1.15%) (1.49%) (1.27%) (1.18%) (1.15%) (1.30%)(b)
Portfolio turnover rate 34% 27% 42% 32% 53% 80%
- ------------------------------------- ---- ---- ---- ---- ---- ------------
Net assets end of period (thousands) $20,600 $19,971 $26,198 $25,697 $17,952 $13,960
- ------------------------------------- ---- ---- ---- ---- ---- ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1989 1988 1987 1986
- ------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 14.82 $ 14.35 $ 12.01 $ 11.40
- ------------------------------------- -------- -------- -------- ----------
Income from investment operations:
Net investment loss (0.24) (0.28) (0.11) (0.21)
Net gains (losses) on securities 5.40 0.75 2.93 2.77
- ------------------------------------- -------- -------- -------- ----------
Total from investment operations 5.16 0.47 2.82 2.56
- ------------------------------------- -------- -------- -------- ----------
Less distributions:
Distributions from capital gains 0.00 0.00 (0.48) (1.95)
- ------------------------------------- -------- -------- -------- ----------
Total distributions 0.00 0.00 (0.48) (1.95)
- ------------------------------------- -------- -------- -------- ----------
Net asset value end of period $ 19.98 $ 14.82 $ 14.35 $ 12.01
- ------------------------------------- -------- -------- -------- ----------
Total return (c) 35.00% 3.14% 23.60% 24.51%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.30%(a) 3.20% 2.70% 2.90%
Net investment loss (1.30%) (2.00%) (0.90%) (1.70%)
Portfolio turnover rate 45% 39% 100% 102%
- ------------------------------------- -------- -------- -------- ----------
Net assets end of period (thousands) $18,590 $14,610 $25,887 $11,993
- ------------------------------------- -------- -------- -------- ----------
</TABLE>
Per share calculations for all periods are based on weighted average shares
outstanding.
(a) Figure is net of expense reimbursement by Hartwell Keystone in connection
with voluntary expense limitations. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.70% for
the year ended December 31, 1989.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The annualized expense ratio includes indirectly paid expenses for the
year ended September 30, 1995. Excluding indirectly paid expenses, the
annualized expense ratio would have been 1.84%.
See Notes to Financial Statements.
<PAGE>
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Keystone Hartwell Growth Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
August 2, 1993
(Date of Initial
Year Ended September 30, Public Offering) to
1995 1994 September 30, 1993
- ------------------------------------- ---------- ---------- --------------------
<S> <C> <C> <C>
Net asset value beginning of period $20.80 $25.41 $23.85
- ------------------------------------- -------- -------- ------------------
Income from investment operations:
Net investment loss (0.41) (0.52) (0.07)
Net gains (losses) on securities 4.44 (1.72) 1.63
- ------------------------------------- -------- -------- ------------------
Total from investment operations 4.03 (2.24) 1.56
- ------------------------------------- -------- -------- ------------------
Less distributions:
Distributions from capital gains (2.20) (2.37) 0.00
- ------------------------------------- -------- -------- ------------------
Total distributions (2.20) (2.37) 0.00
- ------------------------------------- -------- -------- ------------------
Net asset value end of period $22.63 $20.80 $25.41
- ------------------------------------- -------- -------- ------------------
Total return (b) 22.10% (9.40%) 6.54%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.78%(c) 3.04% 3.42%(a)
Net investment loss (2.06%) (2.45%) (2.80%)(a)
Portfolio turnover rate 34% 27% 42%
- ------------------------------------- -------- -------- ------------------
Net assets end of period (thousands) $1,150 $498 $44
- ------------------------------------- -------- -------- ------------------
</TABLE>
Per share calculations for all periods are based on weighted average shares
outstanding.
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The annualized expense ratio includes indirectly paid expenses for the
year ended September 30, 1995. Excluding indirectly paid expenses, the
annualized expense ratio would have been 2.77%.
See Notes to Financial Statements.
<PAGE>
PAGE 11
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FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
August 2, 1993
(Date of Initial
Year Ended September 30, Public Offering) to
1995 1994 September 30, 1993
- ------------------------------------- ---------- ---------- --------------------
<S> <C> <C> <C>
Net asset value beginning of period $20.71 $25.41 $23.85
- ------------------------------------- -------- -------- ------------------
Income from investment operations:
Net investment loss (0.41) (0.51) (0.01)
Net gains (losses) on securities 4.41 (1.82) 1.57
- ------------------------------------- -------- -------- ------------------
Total from investment operations 4.00 (2.33) 1.56
- ------------------------------------- -------- -------- ------------------
Less distributions:
Distributions from capital gains (2.20) (2.37) 0.00
- ------------------------------------- -------- -------- ------------------
Total distributions (2.20) (2.37) 0.00
- ------------------------------------- -------- -------- ------------------
Net asset value end of period $22.51 $20.71 $25.41
- ------------------------------------- -------- -------- ------------------
Total return (b) 22.04% (9.80%) 6.54%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.78%(c) 3.11% 0.37%(a)
Net investment loss (2.06%) (2.47%) (0.14%)(a)
Portfolio turnover rate 34% 27% 42%
- ------------------------------------- -------- -------- ------------------
Net assets end of period (thousands) $709 $224 $27
- ------------------------------------- -------- -------- ------------------
</TABLE>
Per share calculations for all periods are based on weighted average shares
outstanding.
(a) Annualized
(b) Excluding applicable sales charges.
(c) The annualized expense ratio includes indirectly paid expenses for the
year ended September 30, 1995. Excluding indirectly paid expenses, the
annualized expense ratio would have been 2.77%.
See Notes to Financial Statements.
<PAGE>
PAGE 12
------------------------------------------------------------------
Keystone Hartwell Growth Fund
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<S> <C>
-------------------------------------------------------------------
Assets:
Investments at market value (identified cost--
$12,962,923) (Note 1) $22,457,140
Cash 2,149
Receivable for:
Fund shares sold 3,000
Dividends and interest 8,860
Prepaid expenses and other assets 27,576
-------------------------------------------------------------------
Total assets 22,498,725
-------------------------------------------------------------------
Liabilities:
Payable for:
Fund shares redeemed 6,835
Due to Investment Adviser (Note 4) 21,860
Accrued reimbursable expenses (Note 4) 2,008
Other accrued expenses 8,583
-------------------------------------------------------------------
Total liabilities 39,286
-------------------------------------------------------------------
Net assets $22,459,439
-------------------------------------------------------------------
Net assets represented by (Notes 1 and 3):
Paid-in-capital $ 9,823,811
Accumulated net realized gains (losses) on
investment transactions 3,141,411
Net unrealized appreciation (depreciation) on
investments 9,494,217
-------------------------------------------------------------------
Total net assets $22,459,439
-------------------------------------------------------------------
Net asset value (Notes 1 and 2):
Class A Shares
Net assets of $20,600,309 / 893,553 shares
outstanding $23.05
Offering price per share ($23.05 / 0.9425) (based
on sales charge of 5.75% of the offering price
at September 30, 1995) $24.46
Class B Shares
Net assets of $1,150,095 / 50,813 shares
outstanding $22.63
Class C Shares
Net assets of $709,035 / 31,500 shares outstanding $22.51
-------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
<TABLE>
<S> <C> <C>
Investment income: (Note 1)
Dividends (less foreign withholding
tax of $6,730) $ 116,114
Interest 26,850
-----------------------------------------------------------
Total income 142,964
-----------------------------------------------------------
Expenses (Notes 2, 4, and 5):
Management fee $160,769
Transfer agent fees 83,519
Accounting, auditing, and legal 28,917
Printing 22,027
Custodian fees 22,908
Distribution Plan expenses 27,379
Registration fees 47,148
Miscellaneous expenses 1,502
-----------------------------------------------------------
Total expenses 394,169
Less: Expenses paid indirectly
(Note 4) (2,174)
-----------------------------------------------------------
Net expenses 391,995
-----------------------------------------------------------
Net loss from operations (249,031)
-----------------------------------------------------------
Net Realized and unrealized gain (loss)
on investment transactions (Notes 1 and 3):
Net realized gain (loss) on
investment transactions 3,551,166
-----------------------------------------------------------
Net change in unrealized
appreciation (depreciation) on
investment transactions: 1,076,375
-----------------------------------------------------------
Net gain on investments 4,627,541
-----------------------------------------------------------
Net increase in net assets
resulting from operations $4,378,510
-----------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994
========================================================================================================
<S> <C> <C>
Operations:
Net loss from operations $ (249,031) $ (352,633)
Net realized gain on investment transactions 3,551,166 2,368,697
Net change in unrealized appreciation (depreciation) on investments 1,076,375 (4,183,686)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 4,378,510 (2,167,622)
--------------------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gains on investment
transactions (Note 5):
Class A Shares (2,039,209) (2,402,151)
Class B Shares (59,908) (11,026)
Class C Shares (25,743) (7,786)
--------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,124,860) (2,420,963)
--------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold
Class A Shares 556,392 899,593
Class B Shares 718,805 532,806
Class C Shares 564,290 278,625
Payments for shares redeemed
Class A Shares (3,781,942) (4,719,055)
Class B Shares (242,274) (54,343)
Class C Shares (181,910) (64,676)
Net asset value of shares issued in reinvestment of dividends and distributions:
Class A Shares 1,798,447 2,126,056
Class B Shares 57,500 10,678
Class C Shares 23,782 2,877
--------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share transactions (486,910) (987,439)
--------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 1,766,740 (5,576,024)
Net assets:
Beginning of year 20,692,699 26,268,723
--------------------------------------------------------------------------------------------------------
End of year [including accumulated distribution in excess of net investment
income as follows: September 1995--$0 and September 1994--($352,633)] $22,459,439 $20,692,699
========================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -------------------------------------
Keystone Hartwell Growth Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Hartwell Growth Fund (formerly Keystone America Hartwell Growth
Fund, Inc.) (the "Fund") is a nondiversified, open-end investment company
(mutual fund). The Fund was incorporated in New York on November 30, 1965 and
began operations on March 31, 1966. Prior to January 30, 1995, Hartwell
Keystone Advisers, Inc. ("Hartwell Keystone"), a wholly-owned subsidiary of
Keystone Investment Management Co. (formerly Keystone Custodian Funds, Inc.)
("Keystone") was the Fund's investment adviser. Effective January 30, 1995
Keystone became the Fund's investment adviser. On May 30, 1995, the Fund was
reorganized as a Massachusetts Business Trust.
J.M. Hartwell Limited Partnership (formerly Hartwell Management Company,
Inc.) ("Hartwell") acts as subadviser to the Fund pursuant to a Sub- Advisory
Agreement with Keystone. Subject to the supervision of the Fund's Board of
Trustees and Keystone, Hartwell provides the Fund and Keystone with
investment research, advice, information and securities recommendations.
The Fund currently issues three classes of shares. Class A Shares are sold
subject to a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year of purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company (formerly Keystone
Distributors, Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of management of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"),
a wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing sales price, or in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a) securities (including restricted
securities) for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value, or if no sale occurred.
Short-term investments, if purchased with maturities of sixty days or
less, are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market. Short-term investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Short-term investments maturing in more than
sixty days when purchased, which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium
<PAGE>
PAGE 15
------------------------------------------------------------------
or accretion of discount) which, when combined with accrued interest,
approximates market.
B. Securities transactions are accounted for on the day following the trade
date. Realized gains and losses are computed on the identified cost basis.
Interest income is recorded on the accrual basis and dividend income is
recorded on the ex-dividend date. Distributions to the shareholders are
recorded by the Fund at the close of business on the record date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund is relieved of any federal
income or excise tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
E. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. The significant difference between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations is due to the differing treatment of net operating losses for
financial statement and federal income tax purposes.
(2.) Capital Share Transactions
Fifteen million shares each of Class A, B, C, E, and F and fifty million
shares of Class D of the Fund, each with a par value of $1.00, are authorized
for issuance. Currently, only Class A, B, and C shares are outstanding.
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
--------------------------
Year Ended September 30,
1995 1994
================================================================
<S> <C> <C>
Shares sold 26,726 40,253
Shares redeemed (184,792) (214,184)
Shares issued in reinvestment of
dividends and distributions 98,925 95,596
----------------------------------------------------------------
Net decrease (59,141) (78,335)
----------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 16
------------------------------------------------------------------
Keystone Hartwell Growth Fund
<TABLE>
<CAPTION>
Class B Shares
--------------------------
Year Ended September 30,
1995 1994
================================================================
<S> <C> <C>
Shares sold 35,697 24,285
Shares redeemed (12,016) (2,541)
Shares issued in reinvestment of
dividends and distributions 3,194 481
----------------------------------------------------------------
Net increase 26,875 22,225
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
--------------------------
Year Ended September 30,
1995 1994
================================================================
<S> <C> <C>
Shares sold 28,600 12,767
Shares redeemed (9,229) (3,158)
Shares issued in reinvestment of
dividends and distributions 1,328 129
----------------------------------------------------------------
Net increase 20,699 9,738
----------------------------------------------------------------
</TABLE>
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B, and Class C shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act").
The Class A Distribution Plan provides for payments that are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares, to pay expenses of the distribution of Class A shares. Amounts paid
by the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of 0.25% of the
average net asset value of the shares sold by such others and remaining
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of
1.00% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by the Fund under the
Class B Distribution Plan are currently used to pay others (dealers) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each share sold plus the first year's service fee in advance of 0.25% of
the price paid for each Class B share sold. Beginning approximately 12 months
after the purchase of a Class B share, the dealer or other party will receive
service fees at an annual rate of 0.25% of the average daily net asset value
of such Class B shares maintained by such others and remaining outstanding on
the Fund's books for specified periods. A contingent deferred sales charge
will be imposed, if applicable, on Class B shares purchased on or after June
1, 1995 at rates ranging from a maximum of 5% of amounts redeemed during the
first 12 months following the date of purchase to 1% of amounts redeemed
during the sixth twelve-month period following the date of purchase. Class B
shares purchased on or after June 1, 1995 that have been outstanding for
eight years following the month of purchase will automatically convert to
Class A shares without a front end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will retain their existing conversion
rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares, to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase in the amount of 0.75% of the
price paid for each Class C share sold, plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class C share.
Beginning approximately 15 months after purchase, the dealer or other party
will receive a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by
<PAGE>
PAGE 17
- ------------------------------------------------------------------
the rules of the National Association of Securities Dealers, Inc.) ("NASD
Rule") plus service fees at an annual rate of 0.25%, respectively, of the
average net asset value of each Class C share maintained by such others and
remaining outstanding on the Fund's books for specified periods.
Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
During the year ended September 30, 1995, the Fund paid KIDC $15,075 under
its Class A Distribution Plan. The Fund paid KIDC $7,699 for Class B shares
sold prior to June 1, 1995, and $254 for Class B shares sold on or after June
1, 1995. The Fund paid KIDC $4,351 under its Class C Distribution Plan.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Class B Distribution Plans were $50,304
for Class B shares purchased prior to June 1, 1995, and $7,163 for Class B
shares purchased on or after June 1, 1995. The maximum uncollected amount for
which KIDC may seek payment from the Fund under its Class C Distribution Plan
was $45,643 as of September 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
Purchases and sales of investment securities (including proceeds received at
maturity) for the year ended September 30, 1995, were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases From Sales
======================================================
<S> <C> <C>
Portfolio securities $ 6,851,081 $ 7,993,406
Short-term investments 149,583,000 149,783,000
------------------------------------------------------
$156,434,081 $157,776,406
------------------------------------------------------
</TABLE>
(4.) Investment Management Agreement and Other Transactions
The Fund pays Keystone a basic monthly advisory fee calculated by applying
percentage rates, starting at 1.0% and declining as net assets increase, to
0.65% to the Fund's average daily net asset value during the latest 12 months
(a moving average method). The basic advisory fee of the Fund is subject to
an incentive adjustment, by which the basic fee may be increased or decreased
by up to 1/2 of 1% of the average daily net asset value during the latest 12
months (a moving average method) of the Fund depending upon the performance
of the Fund relative to the Standard and Poor's Index of 500 Stocks (S&P
500).
During the period from October 1, 1994 through January 31, 1995 the Fund
paid or accrued to Hartwell Keystone $92,468 of which $33,449 was paid to
Hartwell Management Company, Inc., the former subadviser. During the period
from January 31, 1995 through September 30, 1995 the Fund paid or accrued to
Keystone $68,301 of which $34,981 was paid to Hartwell.
During the year ended September 30, 1995, the Fund paid or accrued $18,301
to KIRC and KII for reimbursement of certain accounting services. The Fund
paid or accrued $83,519 to KIRC for transfer agent fees.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of fund
average net assets; 2.0% of the next $70 million of fund average
<PAGE>
PAGE 18
------------------------------------------------------------------
Keystone Hartwell Growth Fund
net assets; and 1.5% of fund average net assets over $100 million.
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of the applicable state expense
limit. However, Keystone is not required to make such reimbursement to an
extent which would result in the Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended September 30, 1995, the Fund paid custody fees
in the amount of $20,734 and received a credit of $2,174 pursuant to the
expense offset arrangement, resulting in a total expense of $22,908. The
assets deposited with the custodian under the expense offset arrangement
could have been invested in income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently the Independent Trustees
receive no compensation for their services.
(5.) Distributions to Shareholders
The Fund intends to distribute to its shareholders dividends from net
investment income, if any, annually and all net taxable realized long-term
capital gains, if any, at least annually. Any distribution which is declared
in December and paid before February 1 of the following year will be taxable
to shareholders in the year declared.
(6.) Shareholder Meeting
A Special Meeting of Shareholders was held on January 30, 1995. The following
is a brief description of the matters which were submitted to shareholders,
and certain information about how shareholders voted:
1. Proposal 1 was to approve the reorganization of the Fund as a
Massachusetts business trust, pursuant to which the existing Board of
Directors would become the Board of Trustees of the new entity, and the
present adviser and subadviser to the Fund would remain the same.*
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- -------------- --------- ----------
710,302.605 43,874.511 37,893.274
</TABLE>
2. Proposal 2 was to approve an Investment Advisory Agreement between the
Fund and Keystone.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- -------------- --------- ----------
633,178.701 33,372.556 55,037.624
</TABLE>
3. Proposal 3 was to approve a SubAdvisory Agreement between Keystone and
Hartwell Management.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- -------------- --------- ----------
616,559.841 46,770.513 58,258.527
</TABLE>
4. Proposal 4 was to select KPMG Peat Marwick LLP as the independent
public accountant of the Fund for the 1995 fiscal year.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- -------------- --------- ----------
667,577.826 12,108.043 41,903.012
</TABLE>
*Action on Proposal 1 was postponed and the meeting adjourned until March
29, 1995, at which time the required vote was received and the proposal
approved.
<PAGE>
PAGE 19
------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Hartwell Growth Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Hartwell Growth Fund (formerly Keystone America Hartwell Growth
Fund, Inc.), including the schedule of investments as of September 30, 1995,
and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period ended September 30, 1995 for Class A Shares and for each of
the years in the two-year period ended September 30, 1995 and the period from
August 2, 1993 (Date of Initial Public Offering) to September 30, 1993 for
Class B and Class C Shares. 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. The Class A financial highlights
for the period from January 1, 1990 to September 30, 1990, and for each of
the years in the four-year period ended December 31, 1989, were audited by
other auditors whose report dated November 7, 1990 expressed an unqualified
opinion on those financial highlights.
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 September 30, 1995 by correspondence with the
custodian. 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 Hartwell Growth Fund as of September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 27, 1995
-----------------------------------------------------------------------------
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)
A distribution of $2.20 per share of net long-term capital gains was paid
during the fiscal year ended September 30, 1995.
In January of 1996 we will send you complete information on distributions
paid during the calendar year 1995 to help you in completing your federal tax
return.
<PAGE>
[FRONT COVER]
KEYSTONE
[photo of dad & son riding bike]
HARTWELL
GROWTH FUND
[Keystone logo]
ANNUAL REPORT
SEPTEMBER 30, 1995
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone at 1-800-343-2898.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
HGF-AR-11/95 [Recycle logo]
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