PAGE 1
Keystone America Hartwell Emerging Growth Fund, Inc.
Seeks capital appreciation from growth stocks of small
companies with above-average appreciation potential.
Dear Shareholder:
We would like to take this opportunity to report on your Fund's performance
for the six-month period which ended March 31, 1996. Following our letter to
you, we have included a discussion by John M. Hartwell, portfolio manager of
your Fund, about his recent strategy.
Performance
Class A shares returned -1.80% for the six-month period and 23.69% for the
twelve-month period.
Class B shares returned -2.23% for the six-month period and 22.59% for the
twelve-month period.
Class C shares returned -2.14% for the six month period and 22.70% for the
twelve-month period.
The Russell 2000 index, a broad-based index of small company stocks returned
7.42% and 29.10% for the same six- and twelve-month periods, respectively.
During the six-month period, your Fund's Management, J.M. Hartwell, LP,
stayed with its investment strategy of employing a fundamental philosophy of
evaluating stocks on a company-by-company basis. The Fund invested in a
limited number of stocks in a few industries. The Fund's manager selected
companies with above-average earnings growth, industry leadership, and unique
products and services. Historically, this approach has delivered attractive
long-term performance. Your Fund's manager believes that the companies in the
portfolio have the potential for strong growth and attractive returns over
the long term.
On March 31, 1996, after a distinguished career in investment management,
John M. Hartwell retired from J.M. Hartwell, LP. A pioneer in the growth
style of investing, Mr. Hartwell had earned the industry's respect as a
successful investment manager of stocks of high-growth companies.
Adrian S. Dawes, who has worked closely with John for the past 18 months,
will succeed him as portfolio manager of your Fund. A vice president at J.M.
Hartwell, LP, Mr. Dawes has 11 years' experience in North American growth
stock investing. Adrian joined the Hartwell organization in September 1994
following nine years' service with Ivory & Sime PLC, a Scottish-based global
investment management firm specializing in growth investing. His duties at
Ivory & Sime included serving as Head of U.S. Research, a role in which he
directed a four-member investment team that managed more than $400 million in
growth stock portfolios for institutional investors throughout the world. He
also served on the firm's Global Asset Allocation Committee.
Mr. Dawes plans to continue to manage your Fund with the same fundamental
security selection approach that has resulted in the Fund's successful
long-term record. We look forward to his contribution as portfolio manager of
your Fund.
(continued)
<PAGE>
PAGE 2
Keystone America Hartwell Emerging Growth Fund, Inc.
We appreciate your continued support of Keystone America Hartwell Emerging
Growth Fund, Inc. If you have any questions or comments about your Fund, we
encourage you to write to us.
Sincerely,
[SIG] [PICTURE]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[SIG [PICTURE]
George S. Bissell
Chairman of the Board
Keystone Funds
May 1996
[DALBAR LOGO]
Dalbar Key Honors
Honoring Commitment to Excellence
Keystone was recently recognized by Dalbar, an independent mutual fund rating
organization, for demonstrating a commitment to serving the needs of
customers. The award is intended to distinguish companies who are committed
to investors and have a proven ability to provide good service.
<PAGE>
PAGE 3
A Report From
Your Fund Manager
[PHOTO]
John M. Hartwell is one of the investment industry's best known stock
managers. He is the founder of J.M. Hartwell, LP and portfolio manager of
your Fund. Mr. Hartwell holds a BA from Harvard College and an MBA from
Harvard Business School.
To the Fund's Shareholders:
During the six-month period which ended March 31, 1996, we continued to
pursue an investment strategy that focused on the specific strengths of
individual companies. We emphasized stocks that met our criteria for rapid
and consistent earnings growth, industry leadership, and unique products and
services.
We eliminated stocks from the portfolio for one or more reasons when the
fundamentals had deteriorated. We also cut back on some investments that were
strong performers which, through capital appreciation, had become a
substantial portion of portfolio assets. We continued to find some of the
most attractive investments among technology and health care companies, but
we also uncovered opportunities in selected oil service companies and
biotechnology businesses.
Technology stocks cooled
Technology stocks, which accounted for 39.6% of the Fund's net assets on
March 31, 1996, produced mixed results. While selected telecommunications
companies, software businesses, and firms involved with the Internet provided
relatively solid returns, other technology stocks, such as those of
semiconductor companies, were disappointments and hampered your Fund's
performance.
In the telecommunications equipment industry, we held two leading
companies--Alantec, a new addition to the portfolio, and StrataCom, a
portfolio holding since 1994. We had held shares of Alantec several months
ago and sold it when it failed to live up to our expectations. When our more
recent research indicated an accelerating demand for the types of
telecommunications equipment Alantec produces, we reinvested in the company.
The growth of computer networks in offices and telephone companies has
increased the need for switching equipment that can transmit voice, video and
data at high speeds. Alantec and StrataCom produce such equipment. Shortly
after we purchased Alantec, FORE Systems--another telecommunications
company--acquired Alantec. The acquisition boosted Alantec's stock price.
After the acquisition, we continued to own FORE Systems. We believe demand
for telecommunications products continues to be very robust on a global
basis.
Fund profile
Objective: Seeks capital appreciation from growth stocks of small companies
with above-average appreciation potential.
Commencement of investment operations: September 1968
Number of stocks: 28
Net assets: $104 million
Newspaper listing: "HrtEmGr"
<PAGE>
PAGE 4
Keystone America Hartwell Emerging Growth Fund, Inc.
The Year 2000
In the software area, we invested in Viasoft. Viasoft has developed a
solution to a problem that will affect virtually all large mainframe computer
users in the year 2000. Typically, mainframe systems have two-digit year
codes that can accommodate dates up to the turn of the century, but will not
go forward to 2000. There is a universal need to solve this problem before
the end of 1999. Financial services companies, order entry businesses, and
nearly any business that produces information on a mainframe computer that is
automatically dated each day may need to address this problem. Viasoft makes
software that can identify the problem and fix it.
Locking in profits
We sold portions of some of the Fund's largest technology holdings. By taking
profits in some large positions we were able to increase the Fund's
diversification, which helped the Fund become less susceptible to the stock
price movements of any one company. We reduced McAfee Associates, an
antivirus software company, from 7% of net assets to 3.4% of net assets. We
also trimmed holdings in PictureTel, the leading global video conferencing
company. At 3.6% of net assets, PictureTel remained among the Fund's top ten
holdings. Demand for the PictureTel's products continued to be strong, and
its profit outlook remained attractive, in our opinion. Going forward, we
expect it to be a relatively strong performer, and we believe your Fund will
continue to benefit from its inclusion in the portfolio. We eliminated
NetCom--an Internet service provider--from the portfolio. We first invested
in NetCom in 1995, and we sold it at a significant profit.
Some smaller technology stocks presented a problem for us during the period.
Because some were illiquid, we were not able to eliminate them from the
portfolio as quickly as we would have liked when their fundamentals changed.
This was particularly true of some of the semiconductor stocks in the
portfolio. After producing strong gains during most of 1995, semiconductor
stock prices peaked and experienced a sell-off. The decline in semiconductor
stock prices hampered your Fund's performance during the six-month period.
Health care was a bright spot
Health care stocks, which included health care services and biotechnology
companies, accounted for nearly 20.7% of the Fund's net assets. The largest
holding in the Fund was Dura Pharmaceuticals, a recent addition to the
portfolio. On March 31, 1996, it accounted for 7% of the Fund's net assets.
Dura develops and markets prescription pharmaceuticals for the treatment of
asthma, allergies, colds, and other respiratory ailments. The company has
developed a device called the "Dryhaler"--an inhaler that helps asthma
sufferers take medicine in a more efficient manner than the inhalers
currently available. Dryhaler is still in clinical trials, but we expect it
to come to market in late 1996 or early 1997 following FDA approval. Dura
also markets selected patented antihistamine and respiratory pharmaceuticals
from other drug companies. The company's most significant deal was with
Abbott Labs in mid-1995 in which it marketed a variety of cold and aspirin
products. Typically these deals are done on an earnings "accretive" basis.
This means when the deal is completed, Dura adds to its earnings estimates.
We continued to favor medical supply companies, such as Gulf South Medical
Supply, Physicians Sales & Service, and Capstone Pharmaceuticals. Like the
other medical supply distribution companies in the portfolio, Capstone, a
recent addition, is a single-source provider of medical and surgical
supplies. These companies are instrumental in helping medical institutions,
such as nursing homes, hospitals, and clinics, streamline their
administrative burdens and thus reduce costs.
<PAGE>
PAGE 5
Top 10 Holdings
as of March 31, 1996
Percentage of
Stock Industry net assets
Dura Pharmaceuticals Health care services 7.1
Sunglass Hut International Specialty retail 4.9
Phycor Health care services 4.6
Gulf South Medical Supply Health care services 4.5
FORE Systems Communications equipment/
service 4.5
StrataCom Communications equipment/
service 4.0
Objective System Integrators Software/business 3.8
Alternative Resource Group Software/business 3.7
PeopleSoft Software/business 3.6
PictureTel Video conferencing 3.6
We took profits in a number of medical information systems companies, most
notably Cycare and Phamis. Because this segment of the medical industry is
starting to consolidate, it is increasingly difficult for some of the smaller
companies to compete with large businesses for the big systems contracts that
become available. Recognizing these emerging trends, we sold our holdings.
New areas of opportunity
During the six-month period, we uncovered new investment opportunities in the
biotechnology area. Biotechnology stocks accounted for 5.1% of the health
care position in the portfolio. One company we found attractive was Biochem
Pharma, a Canadian firm that develops and manufactures vaccines. We believe
Biochem has an interesting portfolio of AIDS and Hepatitis B products, some
of which are still in the trial phase.
Other companies that met our investment criteria were oil services
businesses. We invested in Input/Output and Falcon Drilling. Input/Output
manufactures land-based seismic equipment. The three dimensional seismic data
and other software programs that the company produces provide oil companies
with more accurate ways of locating and drilling for oil. Falcon Drilling is
a leading oil service supply company that supports oil companies' exploration
and production efforts.
A reduced retail position
We significantly reduced the Fund's exposure to retail and restaurant stocks.
We eliminated the Fund's positions in Hollywood Entertainment and Movie
Gallery, two video store chains. Hollywood Entertainment did not meet its
earnings projections, and its stock declined significantly. Because we
believed the decline in Hollywood Gallery could affect the prospects for
Movie Gallery, we sold both positions. We sold Apple South and DF&R
Restaurants at a significant profit. We also sold Daka International, after
it made an acquisition that we believed negatively affected the company's
near-term fundamentals. We invested in Manhattan Bagel, a franchisor and
manufacturer of bagels. The company is expanding rapidly throughout the
United States, and we expect earnings growth to be close to 50%.
One stock that has been a consistent performer for two years is Sunglass Hut
International, a specialty retailer of Sunglasses. At 4.9% of net assets, it
is the Fund's second largest holding. The company has about 1400 stores
around the world, and has continued to grow at a very rapid rate. Sunglass
Hut continued to exceed its earnings estimates, and this was reflected in its
stock price. The company recently announced a new retailing concept--selling
watches. We believe this should provide additional future growth.
<PAGE>
PAGE 6
Keystone America Hartwell Emerging Growth Fund, Inc.
Our outlook
Our stock selection strategy is not based on broad macroeconomic projections
or stock market timing, but rather on the specific attributes of individual
companies. We believe we have invested in some of the best small-company
stocks which, over the long-term, should be strong performers.
We believe the economic environment should remain favorable for
small-company stocks. However, some small-company investors have become
concerned about the direction of interest rates. An increase in interest
rates could lower earnings estimates on some small-company stocks, and this
could trigger a short-term decline in prices. Small growth companies have
underperformed larger growth companies since September 1995, as substantial
money has flowed into mutual funds. We believe small-company stocks now
appear to be more attractively valued than larger company stocks. This
undervaluation should stimulate more interest in smaller companies.
Final Thoughts
As always, we encourage you to take a long-term view with respect to your
investment in this Fund. Investing in small company stocks has historically
been very rewarding, but the path to such performance can be uneven over the
short term. We have found in our years of investing and talking to investors
that the most consistently successful strategy is to set realistic investment
goals and invest regularly. A professional financial adviser can help you
design a plan to meet your individual needs. We believe he or she can save
you time, and has the experience and resources to help you develop an
effective plan to achieve your financial goals.
In closing, effective April 1, 1996, I will hand over the reigns to the very
capable Mr. Adrian Dawes. Mr. Dawes has been managing investments for more
than eleven years and has been with J.M. Hartwell LP for over eighteen months
assisting me with the management of the Fund. We have been impressed by his
ability to identify and select small, rapidly growing companies that meet our
stringent investment requirements. Together with our investment analysts and
investment team, I think he should be able to carry on the tradition of
successful investing that we pioneered.
Finally, I would like to thank each of our shareholders, especially those of
you who have been with us for many years. I have certainly enjoyed the
experience and privilege of managing this Fund from its small beginnings in
1968. We would not have been able to achieve the Fund's impressive results
without the long-term commitment that many of you have made to the Fund.
While I intend to retire from managing the Fund, I believe that your Fund's
fundamental approach to selecting stocks of small rapidly growing companies
continues to offer some of the best investment opportunities to long term
investors.
I wish you continued success investing and thank you for your support over
the 27-year life of the fund.
Sincerely,
[SIG]
John M. Hartwell
Portfolio Manager and Founder
J.M. Hartwell, LP
<PAGE>
PAGE 7
The J.M. Hartwell, LP
Investment Discipline
Purchase Strategy--criteria used to evaluate the purchase of a stock for your
Fund:
(bullet) Bottoms-up approach, individual company analysis
(bullet) Fast growing, emerging companies; minimum 30% earnings growth rate
(bullet) Durable and consistent earnings growth
(bullet) Long-term approach to investing; not influenced by short-term price
swings
(bullet) Under $500 million market capitalization at time of purchase,
companies with an established and reliable earnings record
(bullet) Strong #1 or close #2 market position within industry
(bullet) Avoid cyclical businesses or heavily regulated industries
Sell Strategy--criteria used to evaluate when to eliminate a stock owned by
your Fund:
(bullet) Deteriorating financial situation
(bullet) Original purchase determinants no longer valid
(bullet) Price-to-earnings per share ratio exceeds growth rate by 50%
(bullet) Price decline of greater than 15% with a rise in trading volume
without new information
Overall Management Strategy
(bullet) Hands-on approach, meet/in contact with company management regularly
(bullet) Focus on the limited number of companies that are leaders in their
field
(bullet) Ignore short-term market fluctuations
(bullet) Concentrate on companies that will provide above-average capital
appreciation over the long-term
<PAGE>
PAGE 8
Keystone America Hartwell Emerging Growth Fund, Inc.
Your Fund's Performance
mountain chart
Growth of an investment in Keystone America Hartwell Emerging Growth Fund, Inc.
Class A
Initial Investment Reinvested Distributions
3/86 9425 9425
13600 13600
3/88 6164 10865
7039 12405
3/90 9137 16199
11777 21055
3/92 13560 26416
14255 27771
3/94 12553 26797
13335 28628
3/96 14698 35409
Six-Month Performance as of March 31, 1996
Class A Class B Class C
Total returns* -1.80% -2.23% -2.14%
Net asset value 9/30/95 $26.28 $25.69 $25.80
3/31/96 $25.56 $24.87 $25.00
Dividends None None None
Capital gains $ 0.25 $ 0.25 $ 0.25
* Before deducting front-end or contingent deferred sales charge (CDSC), if
applicable.
Historical Record as of March 31, 1996
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 23.69% 22.59% 22.70%
1-year 16.58% 18.59% 22.70%
5-year 58.50% -- --
10-year 254.09% -- --
Life of Class -- 12.73% 16.08%
Average annual returns
1-year w/o sales charge 23.69% 22.59% 22.70%
1-year 16.58% 18.59% 22.70%
5-year 9.65% -- --
10-year 13.48% -- --
Life of Class -- 4.60% 5.76%
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 on shares held for at least one year and
redeeming after the end of the 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>
PAGE 9
SCHEDULE OF INVESTMENTS--March 31, 1996
(Unaudited)
Number Market
of Shares Value
----------------------------------- ---------- ------------
COMMON STOCKS (82.4%)
BIOTECHNOLOGY (5.1%)
BioChem Pharma 85,000 $ 3,485,000
Liposome Co. 85,000 1,774,375
----------------------------------- -------- ----------
5,259,375
----------------------------------- -------- ----------
CELLULAR/WIRELESS (2.2%)
Pronet, Inc. 92,500 2,283,594
----------------------------------- -------- ----------
COMMUNICATIONS EQUIPMENT/
SERVICE (13.3%)
Evergreen Media Corp. 60,000 2,160,000
FORE Systems 65,800 4,704,700
PMT Services, Inc. 102,500 2,460,000
StrataCom, Inc. 115,000 4,211,875
Xylan Corp. 6,000 312,000
----------------------------------- -------- ----------
13,848,575
----------------------------------- -------- ----------
HEALTHCARE SERVICES (20.7%)
Capstone Pharmacy Services, Inc. 89,500 805,500
Dura Pharmaceuticals, Inc. 150,000 7,443,750
Gulf South Medical Supply, Inc. 125,000 4,718,750
Physician Sales & Service, Inc. 150,000 3,712,500
PhyCor, Inc. 110,000 4,840,000
----------------------------------- -------- ----------
21,520,500
----------------------------------- -------- ----------
MISCELLANEOUS (3.0%)
Uniphase Corp. 80,000 3,100,000
----------------------------------- -------- ----------
OIL/OIL SERVICES (4.4%)
Falcon Drilling 90,000 2,002,500
Input/Output, Inc. 86,000 2,666,000
----------------------------------- -------- ----------
4,668,500
----------------------------------- -------- ----------
RESTAURANTS (1.1%)
Manhattan Bagel, Inc. 50,000 1,162,500
----------------------------------- -------- ----------
SOFTWARE/BUSINESS (18.2%)
Alternative Resources Group 120,000 3,900,000
McAfee Associates, Inc. 65,000 3,558,750
Objective System Integrators 87,500 3,981,250
PeopleSoft, Inc. 65,000 3,737,500
Rational Software Corp. 22,500 888,750
Verity, Inc. 85,000 2,868,750
----------------------------------- -------- ----------
18,935,000
----------------------------------- -------- ----------
SOFTWARE/MANUFACTURING (5.9%)
Catalyst International, Inc. 150,000 1,087,500
HNC Software, Inc. 30,000 2,040,000
VIASOFT, Inc. 110,000 3,093,750
----------------------------------- -------- ----------
6,221,250
----------------------------------- -------- ----------
SPECIALTY RETAIL (4.9%)
Sunglass Hut International, Inc. 155,000 5,134,375
----------------------------------- -------- ----------
VIDEO CONFERENCING (3.6%)
PictureTel Corp. 120,000 3,720,000
----------------------------------- -------- ----------
TOTAL COMMON STOCKS
(COST--$57,006,818) 85,853,669
----------------------------------- -------- ----------
Maturity
Value
----------------------------------- -------- ----------
REPURCHASE AGREEMENT (18.9%)
State Street Bank & Trust Co.,
4.75%, purchased 03/31/96,
(Collateralized by $19,345,000
U.S. Treasury Bond, 7.125%, due
02/15/23), maturing 04/01/96
(Cost $19,664,000) $19,671,784 19,664,000
----------------------------------- -------- ----------
TOTAL SHORT-TERM INVESTMENTS
(COST--$19,664,000) 19,664,000
------------------------------------------------- ----------
TOTAL INVESTMENTS
(COST--$76,670,818) 105,517,669
OTHER ASSETS AND
LIABILITIES--NET (-1.3%) (1,385,373)
------------------------------------------------- ----------
NET ASSETS (100%) $104,132,296
------------------------------------------------- ----------
See Notes to Financial Statements.
<PAGE>
PAGE 10
Keystone America Hartwell Emerging Growth Fund, Inc.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Year Ended September 30,
Ended ---------------------------------------------------
March 31,
1996 1995 1994 1993 1992 1991
--------------------------------------- ----------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $26.28 $21.41 $28.56 $20.80 $22.91 $14.13
--------------------------------------- --------- ----- ----- ----- ----- ------
Income from investment operations
Net investment loss (0.28) (0.38) (0.37) (0.34) (0.26) (0.22)
Net gain (loss) on investments (0.19) 8.14 (4.43) 8.10 0.05 9.13
--------------------------------------- --------- ----- ----- ----- ----- ------
Total from investment operations (0.47) 7.76 (4.80) 7.76 (0.21) 8.91
--------------------------------------- --------- ----- ----- ----- ----- ------
Less distributions from
Net realized gain on investments (0.25) (2.89) (2.35) 0 (1.90) (0.13)
--------------------------------------- --------- ----- ----- ----- ----- ------
Total distributions (0.25) (2.89) (2.35) 0 (1.90) (0.13)
--------------------------------------- --------- ----- ----- ----- ----- ------
Net asset value end of period $25.56 $26.28 $21.41 $28.56 $20.80 $22.91
--------------------------------------- --------- ----- ----- ----- ----- ------
Total return (a) (1.80%) 37.20% (17.86%) 37.31% (1.12%) 63.51%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.69%(b)(c) 1.81% 1.80% 1.60% 1.63% 1.70%
Net investment loss (1.11%)(b) (1.58%) (1.62%) (1.34%) (1.18%) (1.18%)
Portfolio turnover rate 85% 164% 156% 155% 152% 137%
Average commission rate paid $0.0432 N/A N/A N/A N/A N/A
--------------------------------------- --------- ----- ----- ----- ----- ------
Net assets end of period (thousands) $95,035 $111,791 $120,689 $195,708 $152,714 $72,602
--------------------------------------- --------- ----- ----- ----- ----- ------
</TABLE>
Per share calculation based on average weighted shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
(c) "Ratio of total expenses to average net assets" for the six months ended
March 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses for the six months ended March 31, 1996, the expense ratio
would have been 1.67%.
See Notes to Financial Statements.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Six Months Public Offering)
Ended Year Ended September 30, to
March 31, ------------------------ September 30,
1996 1995 1994 1993
--------------------------------------- ----------- ------------ -------- -----------------
<S> <C> <C> <C> <C>
Net asset value beginning of period $25.69 $21.22 $28.56 $26.69
--------------------------------------- --------- ---------- ------- ---------------
Income from investment operations
Net investment loss (0.47) (0.47) (0.49) (0.05)
Net gain (loss) on investments (0.10) 7.83 (4.50) 1.92
--------------------------------------- --------- ---------- ------- ---------------
Total from investment operations (0.57) 7.36 (4.99) 1.87
--------------------------------------- --------- ---------- ------- ---------------
Less distributions from
Net realized gain on investments (0.25) (2.89) (2.35) 0
--------------------------------------- --------- ---------- ------- ---------------
Total distributions (0.25) (2.89) (2.35) 0
--------------------------------------- --------- ---------- ------- ---------------
Net asset value end of period $24.87 $25.69 $21.22 $28.56
--------------------------------------- --------- ---------- ------- ---------------
Total return (a) (2.23%) 35.61% (18.58%) 7.01%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.53%(b)(c) 2.49% 2.49% 3.70%(b)
Net investment loss (1.91%)(b) (2.34%) (2.27%) (3.42%)(b)
Portfolio turnover rate 85% 164% 156% 155%
Average commission rate paid $0.0432 N/A N/A N/A
--------------------------------------- --------- ---------- ------- ---------------
Net assets end of period (thousands) $6,810 $6,970 $3,801 $823
--------------------------------------- --------- ---------- ------- ---------------
</TABLE>
Per share calculation based on average weighted shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
(c) "Ratio of total expenses to average net assets" for the six months ended
March 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses for the six months ended March 31, 1996, the expense ratio
would have been 2.51%.
See Notes to Financial Statements.
<PAGE>
PAGE 12
Keystone America Hartwell Emerging Growth Fund, Inc.
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Six Months Year Ended September 30, Public Offering)
Ended ----------------------- to
March 31, September 30,
1996 1995 1994 1993
--------------------------------------- ----------- ---------- ------- -----------------
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 25.80 $21.26 $28.56 $26.69
--------------------------------------- --------- -------- ----- ---------------
Income from investment operations
Net investment loss (0.48) (0.56) (0.47) (0.08)
Net gain (loss) on investments (0.07) 7.99 (4.48) 1.95
--------------------------------------- --------- -------- ----- ---------------
Total from investment operations (0.55) 7.43 (4.95) 1.87
--------------------------------------- --------- -------- ----- ---------------
Less distributions from
Net realized gain on investments (0.25) (2.89) (2.35) 0
--------------------------------------- --------- -------- ----- ---------------
Total distributions (0.25) (2.89) (2.35) 0
--------------------------------------- --------- -------- ----- ---------------
Net asset value end of period $ 25.00 $25.80 $ 21.26 $ 28.56
--------------------------------------- --------- -------- ----- ---------------
Total return (a) (2.14%) 35.89% (18.42%) 7.01%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.53%(b)(c) 2.58% 2.47% 3.09%(b)
Net investment loss (1.93%)(b) (2.37%) (2.25%) (2.80%)(b)
Portfolio turnover rate 85% 164% 156% 155%
Average commission rate paid $0.0432 N/A N/A N/A
--------------------------------------- --------- -------- ----- ---------------
Net assets end of period (thousands) $ 2,287 $2,400 $1,679 $ 297
--------------------------------------- --------- -------- ----- ---------------
</TABLE>
Per share calculation based on average weighted shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
(c) "Ratio of total expenses to average net assets" for the six months ended
March 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses for the six months ended March 31, 1996, the expense ratio
would have been 2.51%.
See Notes to Financial Statements.
<PAGE>
PAGE 13
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1996 (Unaudited)
Assets: (Note 1)
Investments at market value
(identified cost--$57,006,818) $ 85,853,669
Repurchase Agreements at market value
(identified cost--19,664,000) 19,664,000
----------------------------------------------------------- -----------
Total investments at market value
(identified cost--76,670,818) 105,517,669
Cash 225
Receivable for:
Fund shares sold 90,599
Dividends and interest 7,785
Other assets 1,803
----------------------------------------------------------- -----------
Total assets 105,618,081
----------------------------------------------------------- -----------
Liabilities (Note 4)
Payable for:
Investments purchased 1,198,123
Fund shares redeemed 140,043
Accrued reimbursable expenses 1,628
Other expenses 715
Other accrued expenses 145,276
----------------------------------------------------------- -----------
Total liabilities 1,485,785
----------------------------------------------------------- -----------
Net assets $104,132,296
----------------------------------------------------------- -----------
Net assets represented by (Note 1)
Paid-in capital $ 72,014,614
Accumulated distributions in excess of net investment
income (639,822)
Accumulated net realized gains on investments 3,910,653
Net unrealized appreciation on investments 28,846,851
----------------------------------------------------------- -----------
Total net assets $104,132,296
----------------------------------------------------------- -----------
Net asset value and redemption price per share (Note 2)
Class A Shares
Net assets of $95,035,341/3,718,370 shares outstanding $ 25.56
Offering price per share ($25.56/0.9425)
(based on a sales charge of 5.75% of the offering price
March 31, 1996) $ 27.12
Class B Shares
Net assets of $6,809,898/273,870 shares outstanding $ 24.87
Class C Shares
Net assets of $2,287,056/91,465 shares outstanding $ 25.00
----------------------------------------------------------- -----------
STATEMENT OF OPERATIONS--
Six Months Ended March 31, 1996 (Unaudited)
Investment income (Note 1)
Dividend $ 780
Interest 323,302
------------------------------------------------- ----- ----------
Total income 324,082
------------------------------------------------- ----- ----------
Expenses (Notes 2, 4 and 5)
Management fee $506,618
Shareholder services 185,854
Accounting, auditing, and legal 38,188
Custodian fee expense 17,418
Printing 24,949
Distribution Plan expenses 137,260
Registration fees 27,449
Miscellaneous expenses 36,757
------------------------------------------------- ----- ----------
Total expenses 974,493
Less: Expenses paid indirectly (Note 4) (10,589)
------------------------------------------------- ----- ----------
Net expenses 963,904
------------------------------------------------- ----- ----------
Net investment loss (639,822)
------------------------------------------------- ----- ----------
Net realized gain (loss) on investments sold
(Notes 1 and 3) 3,951,479
------------------------------------------------- ----- ----------
Net change in unrealized appreciation
(depreciation) on investments (6,147,547)
------------------------------------------------- ----- ----------
Net gain (loss) on investments (2,196,068)
------------------------------------------------- ----- ----------
Net decrease in net assets resulting from
operations ($ 2,835,890)
------------------------------------------------- ----- ----------
See Notes to Financial Statements.
<PAGE>
PAGE 14
Keystone America Hartwell Emerging Growth Fund, Inc.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
March 31, September 30,
1996 1995
---------------------------------------------------------------------- --------- ---------------
(Unaudited)
<S> <C> <C>
Operations
Net investment loss $ (639,822) $ (2,009,451)
Net realized gain (loss) on investments 3,951,479 22,375,130
Net change in unrealized appreciation (depreciation) on investments (6,147,547) 17,446,189
---------------------------------------------------------------------- --------- ---------------
Net increase (decrease) in net assets resulting from operations (2,835,890) 37,811,868
---------------------------------------------------------------------- --------- ---------------
Distributions to shareholders from net realized gains on investments
(Note 5)
Class A Shares (1,044,732) (11,564,652)
Class B Shares (72,730) (718,070)
Class C Shares (23,366) (229,717)
---------------------------------------------------------------------- --------- ---------------
Total distributions to shareholders (1,140,828) (12,512,439)
---------------------------------------------------------------------- --------- ---------------
Capital share transactions (Note 2)
Proceeds from shares sold
Class A Shares 4,817,197 10,088,352
Class B Shares 1,668,376 27,935,012
Class C Shares 461,852 1,609,258
Payments for shares redeemed
Class A Shares (18,863,106) (52,915,813)
Class B Shares (1,629,077) (26,761,159)
Class C Shares (522,161) (1,469,796)
Net asset value of shares issued in reinvestment of distributions
Class A Shares 927,048 10,351,036
Class B Shares 66,202 634,603
Class C Shares 21,496 221,110
---------------------------------------------------------------------- --------- ---------------
Net decrease in net assets resulting from capital share transactions (13,052,173) (30,307,397)
---------------------------------------------------------------------- --------- ---------------
Total decrease in net assets (17,028,891) (5,007,968)
Net Assets:
Beginning of period 121,161,187 126,169,155
---------------------------------------------------------------------- --------- ---------------
End of period [including accumulated distributions in excess of net
investment income as follows: 1996--($639,822) and 1995--$0)]
(Note 1) $104,132,296 $121,161,187
---------------------------------------------------------------------- --------- ---------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone America Hartwell Emerging Growth Fund, Inc. (the "Fund") is a
non-diversified, open-end investment company. The Fund was incorporated in
New York on April 8, 1968 and began operations on September 10, 1968. Prior
to January 30, 1995 Hartwell Keystone Advisers, Inc. ("Hartwell Keystone") a
wholly-owned subsidiary of Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) ("Keystone") was the Fund's investment
adviser. Since January 31, 1995 Keystone has served as the Fund's investment
adviser. The Fund's investment objective is to provide shareholders with
capital appreciation.
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
Directors and Keystone, Hartwell provides the Fund and Keystone with
investment research, advice, information and securities recommendations.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is a
private corporation predominantly owned by current and former members of
management of Keystone and its affiliates. KMI is a wholly-owned subsidiary
of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, is the Fund's transfer agent.
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 payable
upon redemption which decreases 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 entered into special
distribution agreements with Keystone Investment Distributors Company
(formerly Keystone Distributors, Inc.) ("KIDCO"), the Fund's principal
underwriter and wholly-owned subsidiary of Keystone.
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
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial relative to the
net assets of the Fund.
A. Investments are usually valued at the closing sales price, or in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair by or under the direction of the Board of
Directors: (a) securities (including restricted securities) for which
complete quotations are not readily available and (b) listed securities if,
in the opinion of management, the last sales price does not reflect a current
value, or if no sale occurred.
Short-term investments, maturing in sixty days or less, are valued at
amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest,
approximates market. Short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current
market value. Short-term investments maturing in more than sixty days when
purchased which are held
<PAGE>
PAGE 16
Keystone America Hartwell Emerging Growth Fund, Inc.
on the sixtieth day prior to maturity are valued at amortized cost (market
value on the sixtieth day adjusted for amortization of premium or accretion
of discount) which, when combined with accrued interest, approximates market.
B. 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
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
ex-dividend 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 any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
E. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. Distributions from taxable net investment income and net capital
gains can exceed book basis net income and net capital gains. The significant
differences between financial statement amounts available for distribution
and distributions made in accordance with income tax regulations are
primarily due to a net investment loss and treatment of short-term capital
gains.
(2.) Capital Share Transactions
Thirty million shares each of Class A, B, C, E, and F and one-hundred 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
<PAGE>
PAGE 17
are outstanding. Transactions in shares of the Fund were as follows:
Class A Shares
---------------------------------
Six Months
Ended Year Ended
March 31, September 30,
1996 1995
--------------------- ------------ -----------------
Sales 186,381 434,450
Redemptions (757,421) (2,239,300)
Reinvestment of
dividends and
distributions 35,904 420,504
--------------------- ---------- ---------------
Net decrease (535,136) (1,384,346)
--------------------- ---------- ---------------
Class B Shares
---------------------------------
Six Months
Ended Year Ended
March 31, September 30,
1996 1995
--------------------- ------------ -----------------
Sales 67,900 1,156,468
Redemptions (67,961) (1,090,475)
Reinvestment of
dividends and
distributions 2,628 26,206
--------------------- ---------- ---------------
Net increase 2,567 92,199
--------------------- ---------- ---------------
Class C Shares
---------------------------------
Six Months
Ended Year Ended
March 31, September 30,
1996 1995
--------------------- ------------ -----------------
Sales 18,745 69,278
Redemptions (21,186) (64,325)
Reinvestment of
dividends and
distributions 848 9,114
--------------------- ---------- ---------------
Net increase
(decrease) (1,593) 14,067
--------------------- ---------- ---------------
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").
Under its Distribution Plans, the Fund pays Keystone Investment Distributors
Company (formerly Keystone Distributors, Inc.) ("KIDCO"), the principal
underwriter and wholly-owned subsidiary of Keystone, amounts which in total
may not exceed each Distribution Plans maximum.
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 KIDCO 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 daily net asset value of the shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plan provide 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 Plans are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each Class B 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 5.00% of amounts
redeemed during the first twelve-month period following the date of
<PAGE>
PAGE 18
Keystone America Hartwell Emerging Growth Fund, Inc.
purchase to 1.00% 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 normally equal to 0.75% of the
price paid for each 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 the rules of the National Association of Securities
Dealers, Inc. ("NASD") plus service fees at an annual rate of 0.25%,
respectively, of the average daily 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
Independent Directors 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 Directors, payments to
KIDCO may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and service fees which exceed annual maximum payments
permitted to be received by KIDCO from the Fund. KIDCO intends to seek full
payment of such amounts from the Fund (together with annual interest thereon
at the prime rate plus 1.0%) at such time in the future as, and to the extent
that, payment thereof by the Fund would be within permitted limits. KIDCO
currently intends to seek payment of interest only on such amounts paid or
accrued by KIDCO subsequent to January 1, 1992.
During the six months ended March 31, 1996 the Fund paid KIDCO $91,829 under
its Class A Distribution Plan. The Fund paid KIDCO $25,059 for Class B shares
sold prior to June 1, 1995 and $9,133 for Class B shares sold on or after
June 1, 1995 under its Class B Distribution Plans. The Fund paid KIDCO
$11,239 under its Class C Distribution Plan.
Under the NASD Rule, the maximum uncollected amounts for which KIDCO may seek
payment from the Fund under its Class B Distribution Plans as of March 31,
1996 were $290,272 for Class B shares purchased prior to June 1, 1995, and
$157,488 for shares purchased on or after June 1, 1995. The maximum
uncollected amount for which KIDCO may seek payment from the Fund under its
Class C Distribution Plan was $32,488 for Class C shares as of March 31,
1996.
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the six months ended March 31, 1996 were
$85,667,209 and $112,363,408, respectively.
<PAGE>
PAGE 19
(4.) Investment Management Agreement and Transactions with Affiliates
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 six months ended March 31, 1996, the Fund paid or accrued
$506,618 in management fees representing 0.92% of average daily net assets.
Of this amount $318,851 was paid or accrued to Keystone and $187,767 was paid
or accrued to Hartwell for its services to the Fund.
During the six months ended March 31, 1996, the Fund paid or accrued to KII
and KIRC $8,835 for certain accounting and printing services, and $185,854
for shareholder services.
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 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 six months ended March 31, 1996, the Fund paid or incurred total
custody fees in the amount of $17,418 and received a credit of $10,589
pursuant to the expense offset arrangement, resulting in a net custody
expense of $6,829. The assets deposited with the custodian under the expense
offset arrangement could have been invested in an income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Directors of the Fund. Officers of Keystone and affiliated Directors receive
no compensation directly from the Fund. Currently the Independent Directors
receive no compensation for their services.
(5.) Distributions to Shareholders
The Fund intends to distribute to its shareholders distributions from net
investment income, if any, annually and net capital gains, if any, at least
annually. Any distribution declared in October, November, or December and
paid by January 31 of the following year will be included in the taxable
income of the shareholder in the year declared.
(6.) Class Level Expenses
Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
For the six months ended March 31, 1996, the total amount of expenses
incurred under each class's Distribution Plan is set forth in the Note (2.)
"Capital Share Transactions".
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
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
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
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.
KEYSTONE INVESTMENTS [LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
HEG-SAR-5/96
11.9M [RECYCLE LOGO]
KEYSTONE
[Picture of Little Girl on Man's Back]
HARTWELL
EMERGING GROWTH
FUND, INC.
SEMIANNUAL REPORT
MARCH 31, 1996
