<PAGE>
KEYSTONE AMERICA HARTWELL
EMERGING GROWTH FUND, INC.
PROSPECTUS JANUARY 30, 1996
Keystone America Hartwell Emerging Growth Fund, Inc. (the "Fund") is a non-
diversified, open-end management investment company, commonly known as a
mutual fund.
The Fund's investment objective is capital appreciation. The Fund pursues
this objective by investing primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the over-
the-counter market.
Generally, the Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the Fund's
fee table, "Alternative Sales Options," "Contingent Deferred Sales Charge and
Waiver of Sales Charges," "Distribution Plans" and "Fund Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future
reference.
Additional information about the Fund, including information about
securities ratings, is contained in a statement of additional information
dated January 30, 1996, which has been filed with the Securities and Exchange
Commission and are incorporated by reference into this prospectus. For a free
copy, or for other information about the Fund, write to the address or call
the telephone number listed below.
KEYSTONE AMERICA HARTWELL EMERGING
GORWTH FUND INC.
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 7
Pricing Shares 8
Dividends and Taxes 9
Fund Management and Expenses 9
How to Buy Shares 12
Alternative Sales Options 12
Contingent Deferred Sales Charge and
Waiver of Sales Charges 17
Distribution Plans 18
How to Redeem Shares 19
Shareholder Services 21
Performance Data 23
Fund Shares 24
Additional Information 24
Additional Investment Information (i)
Exhibit A A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plans"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- -------------- -------------
<S> <C> <C> <C>
Sales Charge ...................................... 5.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or declining to 1.00% in year and 0.00%
market value of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(as a percentage of average net assets)
Management Fees ................................... 0.84%<F7> 0.84%<F7> 0.84%<F7>
12b-1 Fees ........................................ 0.19% 1.00%<F8> 1.00%<F8>
Other Expenses .................................... 0.78% 0.74% 0.74%
---- ---- ----
Total Fund Operating Expenses ..................... 1.81% 2.58% 2.58%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES<F9> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
<S> <C> <C> <C> <C>
Class A ................................................................... $75.00 $111.00 $150.00 $258.00
Class B ................................................................... $76.00 $110.00 $157.00 N/A
Class C ................................................................... $36.00 $ 80.00 $137.00 $291.00
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A ................................................................... $75.00 $111.00 $150.00 $258.00
Class B ................................................................... $26.00 $ 80.00 $137.00 N/A
Class C ................................................................... $26.00 $ 80.00 $137.00 $291.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ----------
<F1> Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See "Class B
Shares" for more information.
<F2> Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement
or other plans are not subject to a sales charge but may be subject to a contingent deferred sales charge of 0.25%. See
the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for
an explanation of the charge.
<F5> There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated
Response Line ("KARL"). (For a description of KARL, see "Shareholder Services").
<F6> Expense ratios are for the year ended September 30, 1995.
<F7> The Fund pays a basic advisory fee which is subject to adjustment up or down by up to 1/2 of 1% of the average daily net
asset value during the latest 12 months depending upon the performance of the Fund relative to the Standard and Poor's
Index of 500 stocks. See "Fund Management and Expenses."
<F8> Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by the
National Association of Securities Dealers, Inc. ("NASD").
<F9> The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
return for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains significant financial information with respect
to the Fund. The condensed financial information for the years ended September
30, 1991 through September 30, 1995 has been audited by KPMG Peat Marwick LLP,
the Fund's independent auditors. The financial highlights for the fiscal years
ended September 30, 1986 through September 30, 1990 were audited by other
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report of KPMG Peat Marwick LLP,
in the Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are included in the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR .. $ 21.41 $ 28.56 $ 20.80 $ 22.91 $ 14.13 $ 15.96 $ 11.56 $ 24.37 $ 14.94 $ 11.17
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations
Net investment loss . (0.38) (0.37) (0.34) (0.26) (0.22) (0.29) (0.21) (0.20) (0.23) (0.26)
Net gain (loss) on
investments ........ 8.14 (4.43) 8.10 0.05 9.13 (1.45) 4.61 (6.03) 9.66 4.03
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
7.76 (4.80) 7.76 (0.21) 8.91 (1.74) 4.40 (6.23) 9.43 3.77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions
from:
Net realized gain on (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions . (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END $ 26.28 $ 21.41 $ 28.56 $ 20.80 $ 22.91 $ 14.13 $ 15.96 $ 11.56 $ 24.37 $ 14.94
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN<F1> ..... 37.20% (17.86%) 37.31% (1.12%) 63.51% (10.95%) 38.06% (16.40%) 63.12% 33.75%
RATIOS/SUPPLEMENTAL
DATA
Ratios to average net
assets:
Total expenses .... 1.81%<F3> 1.80% 1.60% 1.63% 1.70% 2.50% 2.40% 2.40% 1.90%<F2> 2.00%
Net investment loss (1.58%) (1.62%) (1.34%) (1.18%) (1.18%) (1.80%) (1.60%) (1.70%) (1.20%) (1.70%)
Portfolio turnover
rate ................ 164% 156% 155% 152% 137% 96% 136% 110% 224% 123%
Net assets, end of
period (thousands) $111,791 $120,689 $195,708 $152,714 $72,602 $21,855 $25,131 $23,596 $41,440 $24,883
Per share calculation based on average weighted shares outstanding.
<FN>
- ------------
<F1> Excluding applicable sales charges.
<F2> Figure is net of expense reimbursement by Hartwell Keystone in connection with voluntary expense limitations. Before the
expense reimbursement the "Ratio of operating and management expenses to average net assets" would have been 2.00% for
the year ended September 30, 1987.
<F3> "Ratio of total expenses to average net assets" for the year ended September 30, 1995 includes indirectly paid expenses.
Excluding indirectly paid expenses for the year ended September 30, 1995, the expense ratio would have been 1.78%
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains significant financial information with
respect to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. The table appears in the Fund's Annual Report and should
be read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the
Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are included in the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
AUGUST 2, 1993
YEAR ENDED SEPTEMBER 30, (DATE OF INITIAL
--------------------------- PUBLIC OFFERING)
1995 1994 TO SEPTEMBER 30, 1993
---- ---- ---------------------
NET ASSET VALUE,
BEGINNING OF PERIOD.. $21.22 $28.56 $26.69
------ ------ ------
Income from investment
operations
Net investment
loss ................ (0.56) (0.49) (0.05)
Net gain (loss) on
investments ......... 7.92 (4.50) 1.92
------ ------ ------
Total from investment
operations .......... 7.36 (4.99) 1.87
------ ------ ------
Less distributions from:
Net realized gain on
investments ......... (2.89) (2.35) 0
------ ------ ------
Total distributions .. (2.89) (2.35) 0
------ ------ ------
NET ASSET VALUE, END
OF PERIOD ........... $25.69 $21.22 $28.56
====== ====== ======
TOTAL RETURN(a) ...... 35.61% (18.58)% 7.01 %
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ..... 2.58%(c) 2.49% 3.70 %(b)
Net investment
loss .............. (2.34%) (2.27)% (3.40)%(b)
Portfolio turnover
rate ................ 164% 156% 155 %
Net assets end of
period (thousands) .. $6,970 $3,801 $ 823
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 year ended
September 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended September 30, 1995, the expense ratio
would have been 2.55%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains significant financial information with
respect to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. The table appears in the Fund's Annual Report and should
be read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the
Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are included in the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
AUGUST 2, 1993
YEAR ENDED SEPTEMBER 30, (DATE OF INITIAL
--------------------------- PUBLIC OFFERING)
1995 1994 TO SEPTEMBER 30, 1993
---- ---- ---------------------
NET ASSET VALUE,
BEGINNING OF PERIOD .. $21.26 $28.56 $26.69
------ ------ ------
Income from investment operations
Net investment loss .. (0.56) (0.47) (0.08)
Net gain (loss) on
investments .......... 7.99 (4.48) 1.95
------ ------ ------
Total from investment
operations .......... 7.43 (4.95) 1.87
------ ------ ------
Less distributions from:
Net realized gain on
investments .......... (2.89) (2.35) 0
------ ------ ------
Total distributions .. (2.89) (2.35) 0
------ ------ ------
NET ASSET VALUE, END
OF PERIOD ........... $25.80 $21.26 $28.56
------ ------ ------
TOTAL RETURN(a) ...... 35.89% (18.42)% 7.01 %
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ..... 2.58%(c) 2.47% 3.09 %(b)
Net investment
loss .............. (2.37%) (2.25)% (2.80)%(b)
Portfolio turnover
rate ................ 164% 156% 155 %
Net assets end of
period (thousands) .. $2,400 $1,679 $ 297
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 year ended
September 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended September 30, 1995, the expense ratio
would have been 2.55%.
<PAGE>
THE FUND
The Fund is a non-diversified, open-end management investment company,
commonly known as a mutual fund. The Fund was incorporated in New York on April
8, 1968 and began operations on September 10, 1968. The Fund is one of more than
30 funds advised by Keystone Investment Management Company (formerly named
Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment adviser.
Keystone has retained the services of J.M. Hartwell Limited Partnership
("Hartwell") to provide the Fund with subadvisory services, subject to the
supervision of the Fund's Board of Directors and Keystone.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is capital appreciation. In seeking to
achieve its investment objective, the Fund's investment advisers select for
investment not only those few companies whose unique characteristics or
proprietary advantages, they believe, offer the best prospects for well above
average increases in revenues and earnings, but also those companies that tend
to be grouped in industries that, from time to time, are judged to be less
likely to be affected by the business cycle and to have strong prospects for
revenue growth. The Fund's advisers continuously monitor these companies and
their industries to make certain the companies retain the characteristics that
led to their selection in the first place.
The Fund seeks to achieve its objective through a program based on
substantially full investment in equity securities of companies in a relatively
early stage of development that are principally traded in the over-the-counter
("OTC") market (emerging growth companies). Such emerging growth companies are
small to medium-sized companies (generally under $500 million in market
capitalization) that the Fund's advisers believe have strong potential for (1)
earnings growth over time that is well above the growth rate of the economy and
(2) becoming more widely recognized as growth companies.
Under normal conditions, at least 65% of the value of the Fund's assets will
be invested in common stocks and other securities convertible into or
exchangeable for common stocks of emerging growth companies. The percentage of
assets invested in such issues may exceed 90% under favorable conditions.
While it is anticipated that equity securities will constitute all or most of
the Fund's investment portfolio, the Fund may also invest in convertible
preferred stocks and debt securities when it appears desirable in light of the
Fund's objective.
Although it is not the policy of the Fund to invest in securities of companies
with no operating history, as much as 10% of the value of the Fund's net assets
may be invested in securities of companies with an operating history of less
than three years ("unseasoned companies"). Furthermore, investments in the
securities of unseasoned companies may involve an even greater degree of risk
than investments in securities of companies with longer operating histories.
In addition, in pursuing its objective, the Fund may also invest in foreign
securities, and American Depository Receipts whose underlying securities are
issued by issuers located in developed countries as well as emerging markets
countries. For this purpose, countries with emerging markets are generally those
where the per capita income is in the low to middle ranges, as determined, from
time to time, by the International Bank for Reconstruction and Development
("World Bank").
When, in the judgment of the Fund's advisers, a defensive or conservative
posture is appropriate, the Fund may hold a portion of its assets in short-term
U.S. Government obligations, cash or cash equivalents. The adoption of such
defensive or conservative positions does not constitute a change in the Fund's
investment objective.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of total assets.
The Fund may invest in restricted securities, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act"). Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund may purchase Rule 144A
securities when such securities present an attractive investment opportunity and
otherwise meet the Fund's selection criteria. The Board of Directors has adopted
guidelines and procedures pursuant to which the liquidity of the Fund's Rule
144A securities is determined by Keystone and the Board of Directors monitors
Keystone's implementation of such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Directors will consider what action, if any, is appropriate.
The Fund may enter into repurchase agreements for the purpose of investing
cash balances held by the Fund.
For further information about the types of investments and investment
techniques available to the Fund, and the risks associated therewith, see the
"Risk Factors" and "Additional Investment Information" sections of this
prospectus and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
NON-FUNDAMENDAL NATURE OF INVESTMENT OBJECTIVE
The Fund's investment objective is not fundamental and may be changed without
the vote of a majority (as defined in the Investment Company Act of 1940 ("1940
Act")) of the Fund's outstanding shares. If the Fund's investment objective is
changed and a shareholder determines that the Fund is no longer an appropriate
investment, the shareholder may redeem his shares, but may be subject to a
contingent deferred sales charge upon redemption.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restriction summarized below, which may
not be changed without the approval of a majority (as defined in the 1940 Act)
of the Fund's outstanding shares. This restriction and certain other fundamental
and nonfundamental restrictions are set forth in the statement of additional
information.
The Fund may not borrow, except from banks for temporary or emergency
purposes, provided that, immediately after any such borrowing there is asset
coverage of at least 300% for all borrowings.
RISK FACTORS
Like any investment, your investment in the Fund involves some degree of risk.
Before you buy shares of the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
The Fund seeks to provide capital appreciation by investing principally in
small and medium market capitalizations in a relatively early stage of
development, and within industries that, from time to time, are judged less
likely to be affected by the business cycle and to have strong prospects for
revenue growth.
The Fund is best suited to patient investors who can afford to maintain their
investment over a relatively long period of time, and who are seeking a fund
which is aggressive and has the potential for high returns. The Fund involves a
high degree of risk and is not an appropriate investment for conservative
investors who are seeking preservation of capital and/or income.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information".
FUND RISKS. Investing in a non-diversified fund, as opposed to a diversified
fund, may result in a greater degree of exposure to the economic movements of
the particular market sector in which the Fund invests. Investing in emerging
growth companies with small and medium market capitalizations involves greater
risk than investing in larger established companies. The stock prices of
emerging growth companies can rise very quickly and drop dramatically in a short
period of time. This volatility results from a number of factors, including
reliance by these companies on limited product lines, markets, and financial and
management resources.
These and other factors may make small and mid cap companies more susceptible
to setbacks or downturns. These companies may experience higher rates of
bankruptcy or other failures than larger companies. They may be more likely to
be negatively affected by changes in management. In addition, the stock of small
and medium cap companies may be thinly traded.
A need for cash due to large liquidations from the Fund when the prices of
emerging growth company stocks are declining could result in losses to the Fund.
Investing in the Fund involves the risk common to investing in any security,
that is that the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or public expectations about those
securities. The net asset value of the Fund's shares will change accordingly.
OTHER CONSIDERATIONS. The Fund, which is nondiversified, does not, by itself,
constitute a balanced investment plan. The Fund may be appropriate as part of an
overall investment program. Investors may wish to consult their financial
advisers when considering what portion of their total assets to invest in such a
nondiversified fund.
Past performance should not be considered representative of results for any
future period of time.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing fund
shares) except on days when changes in the value of the Fund's portfolio
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is arrived at by determining the value
of the Fund's assets, subtracting its liabilities and dividing the result by the
number of its shares outstanding.
For the purposes of calculating the net asset value of a Fund share on any
given day, securities traded on national securities exchanges or reported on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ") National Market are valued at the last sale price. If there were no
transactions on that day, securities will be valued at the mean of the closing
bid and asked prices or at such other value as shall be determined in good
faith, by or under the direction of the Fund's Board of Directors, to be the
fair market value of such securities. Commercial paper is valued at cost, which
approximates market.
Other securities, including unlisted securities, are valued at the last
reported bid price if such prices are available. Prices for such securities are
considered to be unavailable if, for example, the securities are restricted
securities, or if there exists a "thin market" in the securities. In such
situations, the value is determined in good faith by, or under the direction of,
the Fund's Board of Directors.
DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending October 31 of such calendar year. Any
taxable dividend declared in October, November, or December to shareholders of
record in such a month and paid by the following January 31 will be includable
in the taxable income of the shareholder as if paid on December 31 of the year
in which the dividend was declared. If the Fund qualifies and if it distributes
all of its net investment income and net capital gains, if any, to shareholders,
it will be relieved of any federal income tax liability. The Fund will make
distributions from its net investment income annually and net capital gains, if
any, at least annually. Because Class A shares bear most of the costs of
distribution of such shares through payment of a front end sales charge, while
Class B and Class C shares bear such expenses through a higher annual
distribution fee, expenses attributable to Class B shares and Class C shares
will generally be higher, and income distributions paid by the Fund with respect
to Class A shares will generally be greater than those paid with respect to
Class B and Class C shares.
Shareholders receive Fund distributions in the form of additional shares of
that class of shares upon which the distribution is based or, at the
shareholder's option, in cash. Fund distributions in the form of additional
shares are made at net asset value without the imposition of a sales charge.
Dividends and distributions are taxable whether they are received in cash or in
shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. The Fund advises its shareholders annually as to the
federal tax status of all distributions made during the year.
FUND MANAGEMENT AND EXPENSES
BOARD OF DIRECTORS
Subject to the authority of the Fund's Board of Directors, Keystone provides
investment advice, management and administrative services to the Fund.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. ("Keystone Investments"), located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Investments common stock beneficially owned by management are held in a number
of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner,
III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments provides
accounting, bookkeeping, legal, personnel and general corporate services to
Keystone, its affiliates and the Keystone Investments Family of Funds.
Pursuant to its Investment Management and Advisory Agreement (the "Advisory
Agreement") with the Fund, Keystone provides investment advisory and management
services to the Fund. Keystone manages the investment and reinvestment of the
Fund's assets, supervises the operation of the Fund, provides all necessary
office space, facilities, equipment and personnel and arranges at the request of
the Fund for its employees to serve as officers or agents of the Fund.
The Advisory Agreement provides that, for its services to the Fund, the Fund
pays Keystone a basic monthly fee at the following annual rates of the Fund's
average daily net asset value during the latest 12 months (a moving average
method): 1% of such net assets up to and including $100,000,000, .90% of such
net assets over $100,000,000 up to and including $200,000,000, .80% of such net
assets over $200,000,000 up to and including $300,000,000, .70% of such net
assets over $300,000,000 up to and including $400,000,000, and .65% of such net
assets over $400,000,000.
Under the Advisory Agreement, the basic management fee 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 of the Fund during the latest
12 months (a moving average method) of the Fund, depending on the performance of
the Fund relative to the Standard and Poor's Index of 500 Stocks ("S&P 500").
A fee of 1% or more is higher than the fees paid by most other investment
companies.
For the fiscal year ended September 30, 1995: the Fund paid or accrued to
Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), which served as the
Fund's investment adviser prior to January 30, 1995, $223,747 in management
fees; and the Fund paid or accrued to Keystone, which has served as the Fund's
investment adviser since January 31, 1995, $419,530 in management fees, which in
the aggregate represented 0.84% of the Fund's average net assets.
The Advisory Agreement contains provisions permitting Keystone to enter into
an agreement with J.M. Hartwell Limited Partnership ("Hartwell"), under which
Hartwell, as Subadviser, may, for compensation paid by Keystone, provide
substantially all the advisory services to be provided by Keystone under the
Advisory Agreement, and may delegate to Hartwell substantially all of Keystone's
rights, duties and obligations to provide investment advisory services under the
Advisory Agreement. Keystone has entered into such an agreement with Hartwell.
The Advisory Agreement provides that it will continue only if approved at
least annually by the Board of Directors of the Fund or by a vote of a majority
of the outstanding Shares, and such renewal has been approved by the vote of a
majority of the Independent Directors cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated,
without penalty, on 60 days' written notice by the Board of Directors or by a
vote of a majority of the outstanding Shares. The Advisory Agreement will
terminate automatically upon its "assignment" as that term is defined in the
1940 Act.
SUBADVISER
Hartwell, the Fund's subadviser, located at 515 Madison Avenue, New York, New
York 10022, is a majority-owned subsidiary of JMH Management Corporation.
Under the SubInvestment Advisory Agreement ("Subadvisory Agreement"), Hartwell
provides the Fund and Keystone with investment research, advice, information and
recommendations concerning securities to be acquired, held or sold by the Fund.
For its services for each calendar month, Hartwell receives from Keystone,
after calculation of the monthly fee due Keystone, 40% of Keystone's basic
monthly management fee as described above on all assets and 60% of Keystone's
incentive adjustment as described above on all assets, provided that Hartwell's
total fee will always equal at least 25% of the combined total fee paid by the
Fund. The Fund has no responsibility to pay Hartwell's fee.
During the fiscal year ended September 30, 1995: Hartwell Keystone paid or
accrued to Hartwell Management Company, Inc., the former subadviser under the
then existing Subadvisory Agreement $89,914, for the period October 1, 1994
through January 30, 1995; and Keystone paid Hartwell $296,954 for the period
from January 31, 1995 through September 30, 1995 for its services as subadviser
under the Subadvisory Agreement.
The Subadvisory Agreement is automatically renewed for successive one-year
periods unless either party to it has given the other at least sixty days'
written notice of its intention to terminate the Subadvisory Agreement at the
end of the contract period then in effect, provided, however, that the
continuation of the Subadvisory Agreement for more than two years is subject to
the receipt of annual approvals of the Fund's Board of Directors or stockholders
in accordance with the 1940 Act and the rules thereunder. The Subadvisory
Agreement may be terminated at any time, without penalty, by the Fund's Board of
Directors or a majority of the Fund's outstanding Shares, on 60 days' written
notice to Hartwell. The Subadvisory Agreement automatically terminates upon its
"assignment" (as defined in the 1940 Act) by either party.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
John M. Hartwell is one of the investment industry's best known growth stock
managers. He is the founder of Hartwell and portfolio manager of the Fund, with
more than 57 years of investment management experience.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that the Fund is
expected to pay include, but are not limited to: expenses of certain of its
Directors; transfer, dividend disbursing and shareholder servicing agent
expenses; custodian expenses; fees of its independent auditors and legal counsel
to its Independent Directors; fees payable to government agencies, including
registration and qualification fees of the Fund and its shares under federal and
state securities laws; and certain extraordinary expenses. In addition, each
class will pay all of the expenses attributable to it. Such expenses are
currently limited to Distribution Plan expenses. The Fund also pays its
brokerage commissions, interest charges and taxes.
For the fiscal year ended September 30, 1995, the Fund's Class A, Class B and
Class C shares paid 1.81%, 2.58% and 2.58% of their average net assets in
expenses, respectively.
During the fiscal year ended September 30, 1995, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer agent and
dividend disbursing agent and Keystone Investments, $22,382 for certain
accounting and printing services and $604,182 for shareholder services. KIRC is
a wholly-owned subsidiary of Keystone.
SECURITIES TRANSACTIONS
Under policies established by the Board of Directors, the Fund's advisers
select broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Fund, the advisers may consider as a factor the number of shares of the Fund
sold by the broker-dealer. In addition, broker-dealers executing portfolio
transactions, from time to time, may be affiliated with the Fund, Keystone,
Hartwell, the Fund's principal underwriter, or their affiliates.
The Fund may pay higher commissions to broker-dealers which provide research
services. Keystone and/or Hartwell may use these services in advising the Fund
as well as in advising their other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended September 30,
1994 and 1995 were 156% and 164%, respectively. High portfolio turnover may
involve correspondingly greater brokerage commissions and other transactions
costs, which would be borne directly by the Fund, as well as additional realized
gains and/or losses to shareholders. For further information about brokerage and
distributions, see the statement of additional information.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund by
mailing to the Fund c/o Keystone Investor Resource Center, Inc., P.O. Box 2121,
Boston, Massachusetts 02106-2121, a completed account application and a check
payable to the Fund, or you may telephone 1-800-343-2898 to obtain the number of
an account to which you can wire or electronically transfer funds and then send
in a completed account application. Subsequent investments in any amount may be
made by check, by wiring Federal funds or by an electronic funds transfer
("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by the Principal Underwriter (generally as of the close
of the Exchange on that day) plus, in the case of Class A shares, the front end
sales charge. Orders received by dealers or other firms prior to the close of
the Exchange and received by the Principal Underwriter prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. The Fund reserves the right to determine the net
asset value more frequently than once a day if deemed desirable. Dealers and
other financial services firms are obligated to transmit orders promptly.
Orders for shares received by broker-dealers prior to that day's close of
trading on the Exchange and transmitted to the Fund prior to its close of
business that day will receive the offering price equal to the net asset value
per share computed at the close of trading on the Exchange on the same day plus,
in the case of Class A shares, the front end sales charge. Orders received by
broker-dealers after that day's close of trading on the Exchange and transmitted
to the Fund prior to the close of business on the next business day will receive
the next business day's offering price.
Orders for shares received directly by the Fund from you will receive the
offering price equal to the net asset value per share next computed after the
Fund receives the purchase order plus, in the case of Class A shares, the front
end sales charge.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, the Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed except
as follows: Class A shares purchased on or after April 10, 1995 (1) in an amount
equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan
or a non-qualified deferred compensation plan sponsored by a corporation having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front end sales charge, will be subject to a contingent deferred sales charge
for the 24 month period following the date of purchase. Certain Class A shares
purchased prior to April 10, 1995 may be subject to a deferred sales charge upon
redemption during the one year period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
they are redeemed. Class B shares purchased on or after June 1, 1995 are subject
to a contingent deferred sales charge if redeemed during the 72 month period
commencing with and including the month of purchase. Class B shares purchased
prior to June 1, 1995 are subject to a deferred sales charge upon redemption
during the four calendar years following purchase. Class B shares purchased on
or after June 1, 1995 that have been outstanding for eight years from and
including the month of purchase will automatically convert to Class A shares
without the imposition of a front-end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will retain their existing conversion
rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan or other plan, pays an
annual service fee of 0.25% of the Fund's average daily net assets attributable
to that class. In addition to the 0.25% service fee, the Class B and C
Distribution Plans provide for the payment of an annual distribution fee of up
to 0.75% of the average daily net assets attributable to their respective
classes. As a result, income distributions paid by the Fund with respect to
Class B and Class C shares will generally be less than those paid with respect
to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the amount
of $250,000 or more and will not normally accept any purchase of Class C shares
in the amount of $1,000,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
AMOUNT OF PURCHASE AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $50,000 ....... 5.75% 6.10% 5.25%
$50,000 but less than
$100,000 .............. 4.75% 4.99% 4.25%
$100,000 but less than
$250,000 .............. 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 .............. 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000 ............ 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax sheltered
annuity plan sponsored by a public educational entity having 5,000 or more
eligible employees (a "TSA Plan") will be at net asset value without the
imposition of a front-end sales charge (each such purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment
amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount
over $4,999,999.
With the exception of Class A shares acquired by a TSA Plan, Class A shares
acquired on or after April 10, 1995 in an NAV Purchase are subject to a
contingent deferred sales charge of 1.00% upon redemption during the 24 month
period commencing on the date the shares were originally purchased. Class A
shares acquired by a TSA Plan in an NAV Purchase are not subject to a contingent
deferred sales charge. Certain Class A shares purchased without a front-end
sales charge prior to April 10, 1995 are subject to a contingent deferred sales
charge of 0.25% upon redemption during the one year period commencing on the
date such shares were originally purchased.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares maintained by such recipient
outstanding on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
which are included in a broker-dealer or investment adviser managed fee based
program (a "wrap account") with broker dealers or investment advisers who have
entered into special agreements with the Principal Underwriter. Initial sales
charges may be reduced or eliminated for persons or organizations purchasing
Class A shares of the Fund alone or in combination with Class A shares of other
Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment, where the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates, where the
amount invested represents redemption proceeds from such unrelated registered
open-end investment company, and the shareholder either (1) paid a front end
sales charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently being offered on a calendar month
by month basis and may be modified or terminated in the future.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers), as
service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipients outstanding on the books of
the Fund for specified periods.
Since January 1, 1996 through March 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission based on
the price paid for each Class A Fund share sold, at the following rates: full
reallowance plus an additional .50% for each Class A Fund share sold with
respect to purchases in an amount not exceeding $499,999, and full reallowance
for each Class A Fund share sold with respect to purchases in an amount in
excess of $499,999. Such payments will be made to those dealers and others
selling such shares who pay to their registered representatives making such
sales a portion of the additional amount payable under this special dealer
offer, determined in accordance with their regular payment arrangements with
such persons for sales not made under a special dealer offer.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period ........................ 5.00%
Second twelve month period ....................... 4.00%
Third twelve month period ........................ 3.00%
Fourth twelve month period ....................... 3.00%
Fifth twelve month period ........................ 2.00%
Sixth twelve month period ........................ 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plan are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales
Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee.
(Conversion of Class B shares represented by stock certificates will require the
return of the stock certificates to KIRC.) Under current law, it is the Fund's
opinion that such a conversion will not constitute a taxable event under federal
income tax law. In the event that this ceases to be the case, the Board of
Trustees will consider what action, if any, is appropriate and in the best
interests of such Class B shareholders.
In addition to the exchange privileges described in the section of the
prospectus entitled "Exchanges," Class B shares purchased prior to June 1, 1995
that have been outstanding during seven calendar years, as a general matter, may
be exchanged for Class A shares of the Fund without imposition of a front end
sales charge.
The Class B shares so converted or exchanged will no longer be subject to the
higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion or exchange,
although the dollar value will be the same, a shareholder may receive more or
fewer Class A shares than the number of Class B shares converted or exchanged.
For more information on current exchange privileges, see "Exchanges."
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans and other plans with respect to its
Class B shares (all such plans collectively, "Class B Distribution Plans") that
provide, in the aggregate, for expenditures by the Fund at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Payments under the Class B Distribution
Plans are currently made to the Principal Underwriter (which may reallow all or
part to others, such as dealers) (1) as commissions for Class B shares sold and
(2) as shareholder service fees. Amounts paid or accrued to the Principal
Underwriter under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
equal to 4.00% of the price paid for each Class B share sold plus the first
year's service fee in advance in the amount 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 broker 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 share
maintained by the recipient outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
Since January 1, 1996 through March 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission equal to
4.75% of the price paid for each Class B Fund share sold as well as payment in
advance of a shareholder service fee at a rate of 0.25% per annum of the net
asset value of shares maintained by such recipients outstanding on the books of
the Fund for specified periods, as described in each Fund's prospectus. Such
payments will be made to those dealers and others selling such shares who pay to
their registered representatives making such sales a portion of the additional
amount payable under this special dealer offer, determined in accordance with
their regular payment arrangements with such persons for sales not made under a
special dealer offer.
CLASS C SHARES
Class C shares are offered only through dealers who have special distribution
agreements with the Principal Underwriter. Class C shares are offered at net
asset value, without an initial sales charge. With certain exceptions, the Fund
imposes a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by the Principal Underwriter. See "Contingent Deferred Sales Charge and
Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures by the Fund 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. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) (1) as commissions for Class
C shares sold and (2) as shareholder service fees. Amounts paid or accrued to
the Principal Underwriter under (1) and (2) in the aggregate may not exceed the
annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
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 sold, and, beginning approximately fifteen months after
purchase, a commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") plus service fees, which are paid at the annual rate of
0.25%, respectively, of the average daily net asset value of each Class C share
maintained by the recipients outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares.
No contingent deferred sales charge is imposed when you redeem amounts derived
from (1) increases in the value of your account above the net cost of such
shares due to increases in the net asset value per share of such shares; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held more than four consecutive calendar years or more than 72 months after the
month of purchase, as the case may be; or (5) Class C shares held for more than
one year from the date of purchase. Upon request for redemption, shares not
subject to the contingent deferred sales charge will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old; (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000; (5) automatic withdrawals under an automatic
withdrawal plan of up to 1 1/2% per month of the shareholder's initial account
balance; (6) withdrawals consisting of loan proceeds to a retirement plan
participant; (7) financial hardship withdrawals made by a retirement plan
participant; or (8) withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan participant.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, officers and employees of the Fund and Keystone and certain
of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of Fund shares. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may also provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency such as the NASD. Dealers to whom substantially the entire sales charge
on Class A shares is reallowed may be deemed to be underwriters as that term is
defined under the 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers which satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of the Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Directors will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, 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 1940 Act.
The NASD limits the amount that a fund may pay annually in distribution costs
for the sale of its shares and shareholder service fees. The NASD limits annual
expenditures to 1% of the aggregate average daily net asset value of its shares,
of which 0.75% may be used to pay such distribution costs and 0.25% may be used
to pay shareholder service fees. The NASD also limits the aggregate amount that
the Fund may pay for such distribution costs to 6.25% of gross share sales since
the inception of the 12b-1 Distribution Plan, plus interest at the prime rate
plus 1% on such amounts (less any deferred sales charges paid by shareholders to
the Principal Underwriter), remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund. The Principal Underwriter intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Directors authorize such payments, the effect would
be to extend the period of time during which the Fund incurs the maximum amount
of costs allowed by a Distribution Plan. If a Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Directors to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Directors or by vote of a majority of the outstanding voting shares
of the respective class. Unpaid distribution costs at fiscal year end September
30, 1995 were: $312,791 for Class B shares purchased prior to June 1, 1995
(4.49% of net class assets of such Class B shares); $96,072 for Class B shares
purchased on or after June 1, 1995 (1.38% of net class assets of such Class B
shares); and $167,847 for Class C shares (6.99% of Class C net class assets).
During the fiscal year ended September 30, 1995, the Fund paid the Principal
Underwriter; $231,932 under its Class A Distribution Plan; $52,294 for Class B
shares sold prior to June 1, 1995; $1,470 for Class B shares sold on or after
June 1, 1995; and $20,002 under its Class C Distribution Plan. These amounts
were used to pay commissions and service fees. The Fund makes no payments in
connection with the sale of its shares other than the fee paid to it's Principal
Underwriter.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net asset value upon written
order by you to the Fund, c/o KIRC and presentation to the Fund of a properly
endorsed share certificate (if certificates have been issued). Your signature
(s) on the written order and certificates must be guaranteed as described below.
In order to redeem by telephone or to engage in telephone transactions
generally, you must complete the authorization in your account application.
Proceeds for shares redeemed on telephonic order will be deposited by wire or
EFT only to the bank account designated in your account application.
The redemption value equals the net asset value per share then determined and
may be more or less than your cost depending upon changes in the value of the
Fund's portfolio securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay may be avoided by purchasing shares either with a certified
check or by Federal Reserve or bank wire of funds or by EFT. Although the
mailing of a redemption check, wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers and will calculate the net asset value on the
same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. If imposed, the deferred sales
charge is retained by the Principal Underwriter. The Principal Underwriter
charges no fees for this service. Your broker-dealer, however, may charge a
service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSON ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may waive this
requirement, but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute your
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemption section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for all
redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself under the 1940 Act,
however, to redeem for cash all shares presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share. Shareholders receiving such securities would incur brokerage costs when
these securities are sold.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch tone telephone, 24 hours a day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange shares
of the Fund for shares of certain other Keystone America Funds and Keystone
Liquid Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares, except as noted below, may be exchanged for the same type of
Class B shares of other Keystone America Funds and the same type of Class B
shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation & Income Fund during the 24
month period commencing with and including the month of original purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(i) Class A shares acquired in an NAV Purchase or otherwise without a front
end sales charge,
(ii) Class B shares that have been held for less than 72 months or four years,
as the case may be, or
(iii) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by writing or
calling Keystone. The exchange fee is waived for individual investors who make
an exchange using KARL. Shares purchased by check are eligible for exchange
after 15 days. If the shares being tendered for exchange have been held for less
than four years and are still subject to a deferred sales charge, such charge
will carry over to the shares being acquired in the exchange transaction. The
Fund reserves the right to terminate this exchange offer or to change its terms,
including the right to change the service charge for any exchange.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
KLT shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. eastern time
on any day the funds are open for business will be executed at the respective
net asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. eastern time on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone account. Once proper authorization is given, your bank account will be
debited to purchase shares in the Fund. You will receive confirmation from the
Principal Underwriter for every transaction.
To change the amount or terminate a Keystone America Money Line service (which
could take up to 30 days), you must write to KIRC and include your account
numbers.
RETIREMENT PLANS
The Fund has various retirement plans available to investors, including
Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee
Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"); 403(b) Plans;
401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money Purchase
Pension Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Because of the effect of the
applicable sales charge, a Class A investor should not make continuous purchases
of the Fund's shares while participating in an Automatic Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the net asset value of the selected class is relatively low and
fewer shares being purchased when the fund's net asset value is relatively high,
which may result in a lower average cost per share than a less systematic
investment approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund. If you are a Class A investor and paid a sales
charge on your initial purchase, the shares purchased will be eligible for
Rights of Accumulation and the sales charge applicable to the purchase will be
determined accordingly. In addition, the value of shares purchased will be
included in the total amount required to fulfill a Letter of Intent. If a sales
charge was not paid on the initial purchase, a sales charge will be imposed at
the time of subsequent purchases, and the value of shares purchased will become
eligible for Rights of Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on the application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances you may, within 30
days after a redemption, reinstate your account in the same class of shares that
you redeemed at current net asset value.
PERFORMANCE DATA
From time to time, the Fund may advertise "total return" and "current yield".
ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. Total return and current yield are computed separately for each
class of shares of the Fund. Total return refers to average annual compounded
rates of return over specified periods determined by comparing the initial
amount invested in a particular class to the ending redeemable value of that
amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.
FUND SHARES
Generally, the Fund currently issues three classes of shares that participate
in dividends and distributions and have equal voting, liquidation and other
rights except that (1) expenses related to the distribution of each class of
shares or other expenses that the Board of Trustees may designate as class
expenses from time to time are borne solely by each class; (2) each class of
shares has exclusive voting rights with respect to its Distribution Plan; (3)
each class has different exchange privileges; and (4) each class generally has a
different designation. When issued and paid for, the shares will be fully paid
and nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are transferable, redeemable and freely assignable
as collateral. There are no sinking fund provisions. The Fund is authorized to
issue additional classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by series or class. The Fund does not have
annual meetings. The Fund will have special meetings from time to time as
required under its Declaration of Trust and under the 1940 Act. As provided in
the Declaration of Trust of the Fund, shareholders have the right to remove
Trustees by an affirmative vote of two-thirds of the outstanding shares. A
special meeting of the shareholders will be held when 10% of the outstanding
shares request a meeting. Shareholders may be eligible for shareholder
communication assistance in connection with the special meeting.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as the
Fund's transfer agent and dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders, the Fund intends, when an
annual report or semi-annual report of the Fund is required to be furnished, to
mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities principally traded
in securities markets outside the United States. While investment in foreign
securities is intended to reduce risk by providing further diversification,
such investments involve sovereign risk in addition to the credit and market
risks normally associated with domestic securities. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company, particularily emerging market country companies, than about a
U.S. company, and foreign companies may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign
brokerage commissions and custodian fees are generally higher than in the
United States. Investments in foreign securities may also be subject to other
risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of
assets, imposition of withholding taxes on dividend or interest payments and
currency blockage (which would prevent cash from being brought back to the
United States).
Investing in securities of foreign issuers generally involves greater risk
than investing in securities of domestic issuers for the following reasons:
(1) there may be less public information available about foreign companies
than is available about U.S. companies; (2) foreign companies are not
generally subject to the uniform accounting, auditing and financial reporting
standards and practices applicable to U.S. companies; (3) foreign stock
markets have less volume than the U.S. market, and the securities of some
foreign companies are much less liquid and much more volatile than the
securities of comparable U.S. companies; (4) foreign securities transactions
may involve higher brokerage commissions; (5) there may be less government
regulation of stock markets, brokers, listed companies and banks in foreign
countries than in the U.S.; (6) the Fund may incur fees on currency exchanges
when it changes investments from one country to another; (7) the Fund's
foreign investments could be affected by expropriation, confiscatory taxation,
nationalization, establishment of currency exchange controls, political or
social instability or diplomatic developments; (8) fluctuations in foreign
exchange rates will affect the value of the Fund's investments, the value of
dividends and interest earned, gains and losses realized on the sale of
securities, net investment income and unrealized appreciation or depreciation
of investments; and (9) interest and dividends on foreign securities may be
subject to withholding taxes in a foreign country that could result in a
reduction of net investment income available for distribution.
Investing in securities of issuers in emerging markets countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging markets countries may also
involve exposure to national policies that may restrict investment by
foreigners and undeveloped legal systems governing private and foreign
investments and private property. The typically small size of the markets for
securities issued by companies in emerging markets countries and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those
securities. These risks are carefully considered by Keystone prior to purchase
of these securities.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase American Depositary Receipts ("ADRs"). ADRs are
negotiable certificates issued by a United States ("U.S.") bank representing
the right to receive securities of a foreign issuer deposited in that bank or
a foreign correspondent bank. The Fund may invest in ADRs representing
securities of issuers located in developed countries as well as the emerging
markets countries. Although the ADRs in which the Fund invests are typically
listed on a major U.S. exchange, there are variations as to marketability.
Investing in ADRs carries almost all of the risks of investing in the
underlying foreign securities themselves, and therefore, an investment in the
Fund involves greater risk than investing in a fund with a portfolio
consisting solely of securities issued by domestic companies.
ZERO COUPON BONDS
A zero coupon (interest) "stripped" bond represents ownership in serially
maturing interest or principal payments on specific underlying notes and
bonds, including coupons relating to such notes and bonds. The interest and
principal payments are direct obligations of the issuer. These bonds mature on
the payment dates of the interest on principal which they represent. Each zero
coupon bond entitles the holder to receive a single payment at maturity. There
are no periodic interest payments on a zero coupon bond. Zero coupon bonds
are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights
and privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individally against the issuer and are not required to act in concert with
other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds
or coupon zero coupon bond (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required
to take into income each year as ordinary income an allocaable portion of such
discounts determined on a "constant yield" method. Any such income increases
the holder's tax basis for the zero coupon bond, and any gain or loss on a
sale of the zero coupon bonds relative to the holder's basis, as so adjusted,
is a capital gain or loss. If the holder owns coupon bonds and coupon zero
bonds representing separate interests in the coupon (interest) payments and
the principal payments from the same underlying issue of securities, a special
basis allocation rule (requiring the aggregate basis to be allocated among the
items sold and retained based on their relative fair market value at the time
of sale) may apply to determine the gain or loss on a sale of any such zero
coupon bonds.
If and when the Fund invests in zero coupon bonds, the Fund does not expect
to have enough zero coupon bonds to have a material effect on dividends. The
Fund has undertaken to a state securities authority to disclose that zero
coupon securities pay no interest to holders prior to maturity, and the
interest on these securities is reported as income to the Fund and distributed
to its shareholders. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
The Fund will not be able to purchase additional income producing securities
with cash used to make such distributions and its current income ultimately
may be reduced as a result.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements; i.e., the Fund purchases a
security subject to the Fund's obligation to resell and the seller's
obligation to repurchase that security at an agreed upon price and date, such
date usually being not more than seven days from the date of purchase. The
resale price is based on the purchase price plus an agreed upon current market
rate of interest that (for purposes of the transaction) is generally unrelated
to the coupon rate or maturity of the purchased security. A repurchase
agreement imposes an obligation on the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security.
The value of the underlying security is at least equal to the amount of the
agreed upon resale price and marked to market daily to cover such amount. The
Fund may enter into such agreements only with respect to U.S. government and
foreign government securities, which may be denominated in U.S. or foreign
currencies. The Fund may enter into such repurchase agreements with foreign
banks and securities dealers approved in advance by the Fund's Directors.
Whether a repurchase agreement is the purchase and sale of a security or a
collateralized loan has not been definitively established. This might become
an issue in the event of the bankruptcy of the other party to the transaction.
It does not presently appear possible to eliminate all risks involved in
repurchase agreements. These risks include the possibility of an increase in
the market value of the underlying securities or inability of the repurchaser
to perform its obligation to repurchase coupled with an uncovered decline in
the market value of the collateral, including the underlying securities, as
well as delay and costs to the Fund in connection with enforcement or
bankruptcy proceedings. Therefore, it is the policy of the Fund to enter into
repurchase agreements only with large, well-capitalized banks that are members
of the federal Reserve System and with primary dealers in U.S. government
securities (as designated by the Federal Reserve Board) whose creditworthiness
has been reviewed and found satisfactory by the Fund's advisers.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Keystone America Funds. Only Class A shares
subject to an initial or a deferred sales charge are eligible for inclusion in
reduced sales charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her
spouse and children under the age of 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501 (c)(3) or
(13) of the Internal Revenue Code; a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal
Revenue Code; or other organized groups of persons, whether incorporated or
not, provided the organization has been in existence for at least six months
and has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount. In order to qualify for a lower
sales charge, all orders from an organized group will have to be placed
through a single investment dealer or other firm and identified as originating
from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more of the
"Eligible Funds," as defined below. For example, if a Purchaser concurrently
invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund,
the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75%
of the offering price, as indicated in the Sales Charge Schedule in the
Prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the
Fund's Class A shares, a Purchaser is entitled to accumulate current purchases
with the current value of previously purchased Class A shares of the Fund and
Class A shares of certain other eligible funds that are still held in (or
exchanged for shares of and are still held in) the same or another eligible
fund ("Eligible Fund(s)"). The Eligible Funds are the Keystone America Funds
and Keystone Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the
next lower sales charge of 3.75% of the offering price as indicated in the
Sales Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be
granted subject to confirmation of the Purchaser's holdings. The Right of
Accumulation may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount
specified on the application, as described in this prospectus. The Letter of
Intent does not obligate the Purchaser to purchase, nor the Fund to sell, the
amount indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated
on the application. The Letter of Intent may be back-dated up to ninety days
so that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not
apply toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to
the difference between the sales charge paid and the sales charge applicable
to purchases actually made. Out of the initial purchase (or subsequent
purchases, if necessary) 5% of the dollar amount specified on the application
will be held in escrow by KIRC in the form of shares registered in the
Purchaser's name. The escrowed shares will not be available for redemption,
transfer or encumbrance by the Purchaser until the Letter of Intent is
completed or the higher sales charge paid. All income and capital gains
distributions on escrowed shares will be paid to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser
will be notified and the escrowed shares will be released. If the intended
investment is not completed, the Purchaser will be asked to remit to the
Principal Underwriter any difference between the sales charge on the amount
specified and on the amount actually attained. If the Purchaser does not
within 20 days after written request by the Principal Underwriter or his
dealer pay such difference in sales charge, KIRC will redeem an appropriate
number of the escrowed shares in order to realize such difference. Shares
remaining after any such redemption will be released by KIRC. Any redemptions
made by the Purchaser during the thirteen-month period will be subtracted from
the amount of the purchases for purposes of determining whether the Letter of
Intent has been completed. In the event of a total redemption of the account
prior to completion of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption and the balance will be
forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
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
[logo]
KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5045
HEGF-P 1/96 [RECYCLE LOGO]
KEYSTONE
HARTWELL
EMERGING GROWTH
FUND
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 30, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
America Hartwell Emerging Growth Fund, Inc. (the "Fund") dated January 30, 1996.
A copy of the prospectus may be obtained from Keystone Investment Distributors
Company (formerly named Keystone Distributors, Inc.) (the "Principal
Underwriter"), the Fund's principal underwriter, 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Policies 2
Investment Methods 2
Investment Restrictions 4
Distributions and Taxes 6
Valuation of Securities 7
Sales Charges 8
Distribution Plans 11
Investment Adviser 15
SubAdviser 18
Directors and Officers 19
Principal Underwriter 23
Brokerage 24
Capital Stock 26
Standardized Total Return
and Yield Quotations 27
Additional Information 28
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-13
<PAGE>
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THE FUND
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The Fund is a non-diversified open-end investment company commonly
known as a mutual fund. The Fund's investment objective is capital appreciation.
The Fund was incorporated in New York on April 8, 1968 and began operations on
September 10, 1968. The Fund is one of 30 funds advised by Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.) ("Keystone").
Keystone has retained the services of J.M. Hartwell Limited Partnership
("Hartwell") to provide the Fund with subadvisory services, subject to the
supervision of the Fund's Board of Directors and Keystone. Effective July 27,
1993, the Fund changed its name from Hartwell Emerging Growth Fund, Inc. to
Keystone America Hartwell Emerging Growth Fund, Inc.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT POLICIES
- -------------------------------------------------------------------------------
In seeking to achieve the Fund's investment objective of capital
appreciation, the Fund's advisers select for investment not only those few
companies whose unique characteristics or proprietary advantages, they believe,
offer the best prospects for well above average increases in revenues and
earnings, but also companies that tend to be grouped in industries that, from
time to time, are judged to be less likely to be affected by the business cycle
and to have strong prospects for revenue growth. The Fund's advisers
continuously monitor these companies and their industries to make certain the
companies retain the characteristics that led to their selection in the first
place. Ratings criteria applicable to the Fund are more fully explained in the
Appendix to this statement of additional information.
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INVESTMENT METHODS
- -------------------------------------------------------------------------------
The Fund considers a number of factors when selecting investments,
including the growth prospects for a company's products, the economic outlook
for its industry, its new product development, its operating management
capabilities, utilization and reinvestment of earnings, the relationship between
the price of the security and estimated fundamental values and an analysis of
the market, economic and political environments. Before a company is selected
for the Fund's portfolio, it is subjected to a 20-point test developed by the
Fund's subadviser. The test includes such objective criteria as position in the
marketplace (normally only companies ranking first or a close second will be
considered), average gross profit margin (will normally average at least 45%
over three years), ratio of long-term debt to total capital (will generally be
under 25%) as well as more subjective criteria including breadth of product
line, proprietary product position, distribution strength and pricing
flexibility.
In determining the companies in which to actually invest, the Fund
considers a number of additional criteria including the following:
Growth: The annual growth rate over the next two to
three years is estimated by the Fund's
advisers to be at least 1 1/2 times that of
the market as a whole.
Valuation: Total market capitalization should not be more
than twice the projected revenues and the
anticipated growth rate should be at least
twice the price earnings ratio.
Generally, the Fund will sell a stock if its current price-earnings
multiple exceeds its growth rate by more than one-half. The Fund considers
selling a stock if it experiences a price erosion of 15%. The Fund will sell a
stock whenever the reasons for which it was purchased are no longer valid or if
its fundamentals begin to deteriorate. The Fund will not invest for management
or control.
No assurance can be given that the Fund's objective will be realized.
The Fund's shares may increase or decrease in value depending upon many factors
that might produce fluctuations in the value of securities held by the Fund.
Factors generally affecting security values include changes in earnings,
dividends, growth outlook, operating gains or losses, general market conditions
or economic and political conditions.
The Fund will normally invest in common stocks of the emerging growth
category and other securities convertible into or exchangeable for such common
stocks having, in the opinion of its advisers, a potential for appreciation.
Emerging growth stocks are stocks of newer, smaller companies primarily traded
in the over-the-counter market. The emphasis of the Fund on investment in
emerging growth stocks inherently involves greater risk than is associated with
investment in stocks of larger, more established companies traded on national
exchanges.
OTHER METHODS
Although the Fund is permitted to employ the other investment methods
enumerated below, it does not currently engage in such practices and does not
intend to do so.
The Fund's policies permit it to borrow from banks and to engage in
margin transactions for the purpose of making leveraged investments, subject to
regulatory restrictions, and provided that the Fund maintains an asset coverage,
including the amount of borrowings, of at least 300% of such borrowings. The
Fund may also engage in short sale transactions in securities listed on one or
more national securities exchanges and in unlisted securities registered under
Section 12(g) of the Securities Exchange Act of 1934 or securities that are
subject to other restrictions against sale or transfer ("restricted
securities"), but does not currently do so. The Fund is also permitted to make
short sales ("Sales Against The Box"), to purchase and sell warrants and puts
and calls written by others (option contracts), to engage in margin transactions
with brokers, to invest up to 15% of its net assets in illiquid securities and
to make short-term investments for trading purposes, but does not do so.
NATURE OF INVESTMENT OBJECTIVE
Except as otherwise specified in the prospectus or statement of
additional information, the investment objective, policies and methods of the
Fund are not fundamental and may be changed without the vote of a majority of
the Fund's outstanding shares when, in the judgment of the Fund's Board of
Directors, such changes are advisable. If the Fund's investment objective is
changed and a shareholder determines that the Fund is no longer an appropriate
investment, the shareholder may redeem his shares but may be subject to a
contingent deferred sales charge upon redemption. Fundamental policies may not
be changed without the vote of a majority of the Fund's outstanding shares
(which means the lesser of (1) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (2) more than
50% of the outstanding shares).
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INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority, as defined in
the Investment Company Act of 1940 (the "1940 Act"), of the Fund's outstanding
shares. Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
The Fund may not do the following:
(1) act as underwriter of securities issued by other persons, except
insofar as the Fund may technically be deemed to be an underwriter by virtue of
the disposition of a particular block of securities;
(2) make loans, except that the purchase of bonds, debentures or other
debt securities issued by publicly held companies and the purchase of
convertible debt securities or debt securities with warrants, rights or options
attached or other such securities shall not be deemed to be the making of loans;
(3) invest in real estate (including interests in real estate
investment trusts whose securities are not readily marketable), commodities or
commodity contracts;
(4) borrow money, except that the Fund may (a) borrow from a bank as a
temporary measure for extraordinary or emergency purposes not in excess of 33
1/3% of its total assets;
(5) concentrate its investments by investing 25% or more of the total
value of its assets in the securities of issuers in any particular industry or
group of industries; or
(6) invest more than 10% of the value of the Fund's net assets in
securities of companies with an operating history of less than three years.
In connection with undertakings to the securities commissions of
various states, the Fund has adopted the following non- fundamental
restrictions, which may be changed without shareholder approval.
The Fund will not do the following:
(1) purchase securities on margin, except it may obtain short-term
credits as may be necessary for the clearance of purchases and sales of
securities;
(2) make short sales of securities, unless at the time of such sale it
owns an equal amount of such securities, or, by virtue of ownership of
convertible or exchangeable securities, it has the right to obtain through the
conversion or exchange of such other securities an amount equal to the
securities sold short;
(3) invest more than 5% of the value of the Fund's net assets in
warrants (valued at the lower of cost or market). Included within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges. Warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value for purposes of this limitation;
(4) invest in oil, gas or other mineral leases; and
(5) purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest in real
estate).
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DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually in
shares or, at the option of the shareholder, in cash. Shareholders who have not
opted, prior to the record date for any distribution, to receive cash will have
the number of distributed shares determined on the basis of the Fund's net asset
value per share computed at the end of the day on the record date after
adjustment for the distribution. Net asset value is used in computing the number
of shares in both gains and income distribution reinvestments. Account
statements and/or checks as appropriate will be mailed to shareholders within
seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder and regardless of the period of time Fund shares have been held by
the shareholder. However, if such shares are held less than six months and
redeemed at a loss, the shareholder will recognize a long-term capital loss on
such shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined, to the best of the
Fund's ability, to be taxable as ordinary income. Shareholders of the Fund will
be advised annually of the federal income tax status of distributions.
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VALUATION OF SECURITIES
- -------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) securities for which market quotations are readily
available, are valued at the mean of the bid and asked prices at
the time of valuation;
(2) short-term investments which are 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 and which reflects fair value as
determined by the Fund's Board of Directors;
(3) short-term investments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest
approximates market;
(4) short-term investments having maturities of more than sixty days,
for which market quotations are readily available, are valued at current market
value; and
(5) the following are valued at prices deemed in good faith to be fair
under procedures established by the Fund's Board of Directors: (a) securities,
including restricted securities, for which complete quotations are not readily
available, and (b) other assets.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing fixed income securities. As a result,
depending on the particular securities owned by the Fund, it is likely that most
of the valuations for such securities will be based upon their fair value
determined under procedures which have been approved by the Fund's Board of
Directors. The Fund's Board of Directors has authorized the use of a pricing
service to determine the fair value of its fixed income securities and certain
other securities. Securities for which market quotations are readily available
are valued on a consistent basis at that price quoted which, in the opinion of
the Board of Directors or the person designated by the Board of Directors to
make the determination, most nearly represents the market value of the
particular security. Any securities for which market quotations are not readily
available or other assets are valued on a consistent basis at fair value as
determined in good faith using methods prescribed by the Fund's Board of
Directors.
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SALES CHARGES
- --------------------------------------------------------------------------------
GENERAL
Generally, the Fund offers three classes of shares. Class A shares are
offered with a maximum sales charge of 5.75% payable at the time of purchase
("Front End Load Option"). Class B shares purchased on or after June 1, 1995 are
subject to a contingent deferred sales charge payable upon redemption during the
72 month period following the month of purchase. Class B shares purchased prior
to June 1, 1995 are subject to a contingent deferred sales charge upon
redemption during the four calendar years following the purchase ("Back End Load
Option"). Class B shares purchased on or after June 1, 1995 that have been
outstanding eight years from and including the month of purchase will
automatically convert to Class A shares without imposition of a front-end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995 that have
been outstanding during seven calendar years will similarly convert to Class A
shares. (Conversion of Class B shares represented by stock certificates will
require the return of the stock certificates to Keystone Investor Resource
Center, Inc. ("KIRC"), the Fund's transfer and dividend disbursing agent.) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Fund as well as a table of
applicable sales charges for Class A shares; a discussion of reduced sales
charges that may apply to subsequent purchases; and a description of applicable
contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (See "Distribution Plan"), a contingent deferred sales charge
may be imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000, and/or (2)
purchased by a corporate qualified retirement plan or a non-qualified deferred
compensation plan sponsored by a corporation having 100 or more eligible
employees (a "Qualifying Plan"), in either case without a front-end sales
charge, will be subject to a contingent deferred sales charge of 1.00% during
the 24 month period following the date of purchase. Certain Class A shares
purchased without a front-end sales charge prior to April 10, 1995 may be
subject to a contingent deferred sales charge of 0.25% upon redemption during
the one-year period commencing on the date such shares were originally
purchased. The contingent deferred sales charge will be retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of net asset value or net cost of such Class B shares redeemed during
succeeding twelve-month periods following the month of purchase as follows: 5%
during the first period; 4% during the second period; 3% during the third
period; 3% during the fourth period; 2% during the fifth period; and 1% during
the sixth period. No deferred sales charge is imposed on amounts redeemed
thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the
Fund, with certain exceptions, may impose a deferred sales charge of 3% on
shares redeemed during the calendar year of purchase and the first calendar year
after the year of purchase; 2% on shares redeemed during the second calendar
year after the year of purchase; and 1% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales charges and
Waiver of Sales Charges" below.
CLASS C SHARES
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of such shares;
(2) certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held during more than four consecutive calendar years or more than 72 months
after the month of purchase, as the case may be; or (5) Class C shares held for
more than one year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Fund also may be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees and sales representatives of the Fund,
Keystone, Keystone Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone
Investments"), their subsidiaries and affiliates or the Principal Underwriter,
who have been such for not less than ninety days; (2) a pension and
profit-sharing plan established by such companies, their subsidiaries and
affiliates for the benefit of their Directors, Trustees, officers, full-time
employees and sales representatives; or (3) a registered representative of a
firm with a dealer agreement with the Principal Underwriter, provided all such
sales are made upon the written assurance that the purchase is made for
investment purposes and that the securities will not be resold except through
redemption by the Fund.
No initial sales charge is charged on purchases of shares of the Fund
by a bank or trust company in a single account in the name of such bank or trust
company as trustee, if the initial investment in shares of the Fund or any other
Fund in the Keystone Investments Family of Funds pursuant to this waiver is at
least $500,000 and any commission paid at the time of such purchase is not more
than 1% of the amount invested.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an Automatic Withdrawal Plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
REDEMPTION OF SHARES
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder up to the lesser of
$250,000 or 1% of the Fund's assets in any 90-day period.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1.
DISTRIBUTION PLANS IN GENERAL
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of its
shares, of which 0.75% may be used to pay such distribution costs and 0.25% may
be used to pay shareholder service fees. The NASD also limits the aggregate
amount which the Fund may pay for such distribution costs to 6.25% of gross
share sales since the inception of the 12b-1 Plan, plus interest at the prime
rate plus 1% on such amounts (less any contingent deferred sales charges paid by
shareholders to the Principal Underwriter).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
may expend daily amounts at an annual rate, which is currently limited to up to
0.25% of the Fund's average daily net asset value attributable to Class A
shares, to finance any activity which is primarily intended to result in the
sale of its shares, including without limitation, expenditures consisting of
payments to the principal underwriter of the Fund ("Principal Underwriter")
(currently the Principal Underwriter) to enable the Principal Underwriter to pay
or to have paid to others (dealers) who sell Class A shares a service or other
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class A shares maintained by any such recipients outstanding on the books of the
Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.25% of the average net asset value of Class A shares maintained by such
others outstanding on the books of the Fund for specific periods.
CLASS B DISTRIBUTION PLANS. The Fund has adopted Distribution Plans and other
plans for its Class B shares that provide, in the aggregate, that the Fund may
expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class B shares to finance any activity
which is primarily intended to result in the sale of Class B shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter (currently the Principal Underwriter) (1) to enable the Principal
Underwriter to pay to others (dealers) commissions in respect of Class B shares
sold since inception of the Distribution Plans; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class B shares maintained
by any such recipients and outstanding on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount 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 broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with a Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Fund would be within the permitted limits.
If the Fund's Independent Directors authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Directors to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
may expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class C shares to finance any activity
which is primarily intended to result in the sale of Class C shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter (currently the Principal Underwriter) (1) to enable the Principal
Underwriter to pay to others (dealers) commissions in respect of Class C shares
sold since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class C shares maintained
by any such recipients outstanding on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to brokers or others a
commission 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 sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS -- GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by a vote
of the Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Directors, including the Rule 12b-1 Directors. Unpaid distribution costs at
fiscal year end September 30, 1995 were: $312,791 for Class B shares purchased
prior to June 1, 1995 (4.49% of net class assets of such Class B shares);
$96,072 for Class B shares purchased on or after June 1, 1995 (1.38% of net
class assets of such Class B shares); and $167,847 for Class C shares (6.99% of
Class C net class assets).
During the year ended September 30, 1995, the Fund paid the Principal
Underwriter: $231,932 under its Class A Distribution Plan; $52,294 for Class B
shares sold prior to June 1, 1995; $1,470 for Class B shares sold on or after
June 1, 1995; and $20,002 under its Class C Distribution Plan.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Directors to
the discretion of the Independent Directors.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Directors quarterly. The Rule 12b-1 Directors may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by a Distribution Plan as
stated above.
The Independent Directors of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
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INVESTMENT ADVISER
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Subject to the general supervision of the Fund's Board of Directors,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
serves as investment adviser to the Fund and is responsible for the overall
management of the Fund's business and affairs. Keystone, organized in 1932, is a
wholly-owned subsidiary of Keystone Investments, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of management and certain employees of Keystone and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by management are held in a number of voting trusts, the Directors of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, their affiliates and the
Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Advisory and
Management Agreement with the Fund (the "Advisory Agreement"), and subject to
the supervision of the Fund's Board of Directors, Keystone manages and
administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objective and restrictions. The Advisory Agreement stipulates that Keystone
shall provide office space, all necessary office facilities, equipment and
personnel in connection with its services and pay or reimburse the Fund for the
compensation of Fund officers and Directors who are affiliated with the
investment adviser as well as pay all of its expenses incurred in connection
with the provisions of its services. All charges and expenses, other than those
specifically referred to as being borne by Keystone, will be paid by the Fund,
including, but not limited to, custodian charges and expenses; bookkeeping and
auditors' charges and expenses; transfer agent charges and expenses; fees of
Independent Directors; brokerage commissions, brokers' fees and expenses; issue
and transfer taxes; costs and expenses under the Distribution Plans; taxes and
trust fees payable to governmental agencies; the cost of share certificates;
fees and expenses of the registration and qualification of the Fund and its
shares with the Securities and Exchange Commission (sometimes referred to herein
as the "SEC" or the "Commission") or under state or other securities laws;
expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; expenses of shareholders' and Directors' meetings; charges and
expenses of legal counsel for the Fund and for the Directors of the Fund on
matters relating to the Fund; charges and expenses of filing annual and other
reports with the SEC and other authorities; and all extraordinary charges and
expenses of the Fund.
The Advisory Agreement permits Keystone to enter into an agreement with
J.M. Hartwell Limited Partnership ("Hartwell"), or another investment adviser,
pursuant to which Hartwell or such other investment adviser (as investment
adviser and subject to the supervision of the Fund's Board of Directors and
Keystone) will furnish an investment program for the Fund and will furnish to
the Fund and Keystone from time to time, as needed, investment research, advice,
information and recommendations concerning securities to be acquired, held or
sold by the Fund. Keystone has entered into a SubInvestment Advisory Agreement
with Hartwell.
For the services provided by Keystone, the Fund pays a basic monthly
management fee of 1/12 of 1% of that portion of the Fund's average daily net
asset value during the latest 12 months (a moving average method), up to and
including $100,000,000 (an annual rate of 1%), 1/12 of 0.90% of that portion
over $100,000,000 up to and including $200,000,000 (an annual rate of 0.90%),
1/12 of 0.80% of that portion over $200,000,000 up to and including $300,000,000
(an annual rate of 0.80%), 1/12 of 0.70% of that portion over $300,000,000 up to
and including $400,000,000 (an annual rate of 0.70%) and 1/12 of 0.65% of that
portion over $400,000,000 (an annual rate of 0.65%). For the fiscal year ended
September 30, 1995 the Fund had average daily net assets of $123,374,012. The
basic management fee is accrued daily and paid monthly.
The basic management fee payable by the Fund to Keystone is subject to
an incentive adjustment, calculated monthly, depending upon the performance of
the Fund relative to the Standard & Poor's 500 Index (the "Index"), on the basis
of 1/12 of the results during the latest 12 months (a moving average method).
The incentive adjustment, if any, is added to or subtracted from the monthly
basic management fee, and is payable after the close of each month on the basis
of the latest 12 months' results. The incentive adjustment is accrued as
incurred for the purpose of calculating the redemption price and offering price
per share. The incentive adjustment for the Fund is calculated each month as
follows:
(1) The sum of the net asset value of a share of the Fund at the end of
the last 12-month period, plus the value per share during such period of all
cash distributions made and capital gain taxes paid or payable on undistributed
realized long-term capital gains (treated as reinvested in shares of the Fund on
the record date of such distribution or the date on which provision for such
taxes is made, as the case may be) is compared to the net asset value per share
of the Fund at the beginning of the period and the difference is expressed as a
percentage (the "Fund's percentage change").
(2) The Fund's percentage change is compared to the percentage change
in the Index, which change is determined by adding to the level of the Index at
the end of the period, in accordance with SEC guidelines, the value of cash
distributions on securities which comprise the Index, treated as reinvested in
the Index based on a monthly value supplied by Standard & Poor's and comparing
such adjusted level with the level of the Index at the beginning of the period.
(3) If the Fund's percentage change during such period shows a relative
performance more than 5 percentage points better or worse than that of the
Index, the excess over 5 percentage points is the "excess performance
differential," and the incentive adjustment is an amount equal to 5% of this
"excess performance differential" multiplied by the net asset value of the Fund
averaged daily over the 12-month period and divided by 12. The incentive
adjustment for any month, however, may not exceed 1/12 of 1/2 of 1% of the
average net asset value for any 12-month period (equivalent on an annual basis
to an adjustment of 1/2 of 1%). A percentage change in a share of the Fund which
is no greater than 5 percentage points better or worse than the percentage
change in the Index results in no incentive adjustment.
During the fiscal year ended September 30, 1993, the Fund paid or
accrued to Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), which served
as the Fund's investment adviser prior to January 30, 1995, $1,639,008, which
represented 0.89% of the Fund's average daily net assets.
During the fiscal year ended September 30, 1994, the Fund paid or
accrued to Hartwell Keystone $1,452,834, which represented 0.97% of the Fund's
average daily net assets.
During the period from October 1, 1994 through January 30, 1995, the
Fund paid or accrued to Hartwell Keystone $223,747, and during the period from
January 31, 1995 through September 30, 1995 the Fund paid or accrued to Keystone
$419,530, which in the aggregate represented 0.84% of the Fund's average daily
net assets.
As a continuing condition of registration of shares in a state,
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of certain percentages of the Fund's
average daily net assets. Keystone is not required, however, to make such
reimbursements 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. This condition may be modified or eliminated in the future.
The Advisory Agreement continues in effect from year to year only if
approved at least annually by the Fund's Board of Directors or by a vote of a
majority of the Fund's outstanding shares, and such renewal has been approved by
the vote of a majority of the Independent Directors cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Directors or by a vote of a majority of the Fund's outstanding shares. The
Advisory Agreement will terminate automatically upon its "assignment" as that
term is defined in the 1940 Act.
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SUBADVISER
- --------------------------------------------------------------------------------
Pursuant to the terms of the Advisory Agreement with the Fund, Keystone
has delegated certain of its investment advisory functions, except for certain
administrative and management services, to Hartwell and has entered into a
SubInvestment Advisory Agreement (the "Subadvisory Agreement") with Hartwell
under which Hartwell furnishes to the Fund and Keystone from time to time, as
needed, investment research, advice, information and recommendations concerning
securities to be acquired, held or sold by the Fund.
Hartwell, located at 515 Madison Avenue, New York, New York 10022, was
organized in 1994 and is a majority-owned subsidiary of JMH Management
Corporation.
For its services for each calendar month, Hartwell receives promptly
from Keystone after calculation of the monthly fee due Keystone under the
Advisory Agreement, 40% of Keystone's basic monthly management fee as described
above on all assets and 60% of Keystone's incentive adjustment as described
above on all assets, provided that Hartwell's total fee will always equal at
least 25% of the combined total fee paid by the Fund. The Fund has no
responsibility to pay Hartwell's fee.
The Subadvisory Agreement automatically renews for successive one-year
periods unless either party to the agreement has given the other party at least
sixty days' written notice of its intention to terminate the agreement at the
end of the contract period then in effect; provided, however, that the
continuation of the Subadvisory Agreement for more than two years shall be
subject to the receipt of annual approvals of the Fund's Board of Directors or
shareholders in accordance with the 1940 Act and the rules thereunder. The
Subadvisory Agreement may be terminated at any time, without penalty, by the
Fund's Board of Directors or a majority of the Fund's outstanding shares, on 60
days' written notice to Hartwell. The Subadvisory Agreement will automatically
terminate upon its "assignment" (as defined in the 1940 Act) by either party.
For the fiscal years ended September 30, 1993, 1994, and for the period
from October 31, 1994 through January 30, 1995, Hartwell Management Company,
Inc., Hartwell's predecessor which served as the Fund's subadviser prior to
January 30, 1995, received $841,511, $500,516 and $89,914 from Hartwell Keystone
for its services under its SubInvestment Advisory Agreement.
For the Period from January 31, 1995 through September 30, 1995,
Hartwell, the Fund's subadviser since January 31, 1995, received $296,954 from
Keystone for its services under its SubInvestment Advisory Agreement.
The Fund is subject to certain annual state expense limitations, 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.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan fees, are not included in the calculation of the state expense
limitation. This limitation may be modified or eliminated in the future.
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DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Directors and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Director of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments, Inc. ("Keystone Investments");
President, Chief Executive Officer and Trustee or Director of all 30
Funds in the Keystone Investments Family of Funds; Director and
Chairman of the Board, Chief Executive Officer and Vice Chairman of
Keystone Investment Management Company ("Keystone"); Chairman of the
Board and Director of Keystone Institutional Company, Inc. ("Keystone
Institutional") (formerly named Keystone Investment Management
Corporation), and Keystone Fixed Income Advisors ("KFIA"); Director,
Chairman of the Board, Chief Executive Officer and President of
Keystone Management, Inc. ("Keystone Management"), Keystone Software
Inc. ("Keystone Software"), Keystone Asset Corporation, Keystone
Capital Corporation, and Keystone Trust Company; Director of Keystone
Investment Distributors Company ("the Principal Underwriter"), Keystone
Investor Resource Center, Inc. ("KIRC"), and Fiduciary Investment
Company, Inc. ("FICO"); Director of Boston Children's Services
Association; Trustee of Anatolia College, Middlesex School, and
Middlebury College; Member, Board of Governors, New England Medical
Center; former Trustee of Neworld Bank; former Director and President
of Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); and former
Director and Vice President of Robert Van Partners, Inc.
FREDERICK AMLING: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Professor, Finance Department, George
Washington University; President, Amling & Company (investment advice);
Member, Board of Advisers, Credito Emilano (banking); and former
Economics and Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation
(investment advice) and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*GEORGE S. BISSELL: Chairman of the Board and Director of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; Director and Chairman of the
Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the Fund.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman of the Board, Director and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments and Keystone.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation,
Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central
Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc. and J & M Cumming Paper Co.
RICHARD J. SHIMA: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Trust Company of Connecticut,
Hartford Hospital, Old State House Association and Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all other
Keystone Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former Presi- dent, Nassau County Bar
Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation and Keystone Trust Company; Treasurer of FICO; Treasurer of
Keystone Institutional; Treasurer and Director of Keystone Management,
and Keystone Software; Vice President and Treasurer of KFIA; Director
of KIRC; former Treasurer of Robert Van Partners, Inc.; and former
Treasurer and Director of Hartwell Keystone.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer
of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone;
Senior Vice President, General Counsel, Secretary and Director of the
Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional;
Senior Vice President, General Counsel and Director of FICO and KIRC;
Vice President and Secretary of KFIA; Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset
Corporation, Keystone Capital Corporation and Keystone Trust Company;
and former Senior Vice President and Secretary of Hartwell Keystone,
and Robert Van Partners, Inc.
* This Director may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, President, Chief Executive Officer and Director of
Keystone Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended September 30, 1995, no Director affiliated
with Keystone or any officer received any direct remuneration from the Fund.
During the same period, the unaffiliated Directors received approximately $9,164
in retainers and fees from the Fund. Annual retainers and meeting fees paid by
all funds in the Keystone Investments Family of Funds (which includes 30 mutual
funds) for the fiscal year ended September 30, 1995, totalled approximately
$463,916. As of October 31, 1995, the Fund's Directors and officers beneficially
owned less than 1% of the Fund's then outstanding Class A shares, Class B and
Class C shares.
Except where otherwise indicated, the address of all of the Fund's
Directors and officers and the address of the Fund is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with Keystone Investment Distributors Company, a
wholly-owned subsidiary of Keystone.
The Principal Underwriter, located at 200 Berkeley Street, Boston,
Massachusetts, 02116-5034, is a Delaware corporation. The Principal Underwriter,
as agent, currently has the right to obtain subscriptions for and to sell shares
of the Fund to the public. In so doing, the Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers or others, acting as principals, for sales of
shares. No such representative, dealer or broker has any authority to act as
agent for the Fund. The Principal Underwriter has not undertaken to buy or to
find purchasers for any specific number of shares. The Principal Underwriter may
receive payments from the Fund pursuant to the Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Restated Certificate of Incorporation, By-Laws, the
current prospectus and statement of additional information. All orders are
subject to acceptance by the Fund, and the Fund reserves the right, in its sole
discretion, to reject any order received. Under the Underwriting Agreements, the
Fund is not liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreement to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers romotional materials and selling
aids, including but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will in all respects duly
conform with all state and federal laws applicable to the sale of the shares and
will indemnify and hold harmless the Fund, and each person who has been, is or
may be a Director or officer of the Fund, against expenses reasonably incurred
by any of them in connection with any claim or in connection with any action,
suit or proceeding to which any of them may be a party that arises out of or is
alleged to arise out of any misrepresentation or omission to state a material
fact on the part of the Principal Underwriter or any other person for whose acts
the Principal Underwriter is responsible or is alleged to be responsible, unless
such misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreements will remain in effect as long as their
terms and continuance are approved by a majority of the Fund's Independent
Directors at least annually at a meeting called for that purpose and if their
continuance is approved annually by vote of a majority of Directors or by vote
of a majority of the outstanding shares.
The Underwriting Agreements may be terminated, without penalty, on 60
days' written notice by the Fund's Board of Directors or by a vote of a majority
of outstanding shares. The Underwriting Agreements will terminate automatically
upon their "assignment" as that term is defined in the 1940 Act.
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BROKERAGE
- --------------------------------------------------------------------------------
It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Management
weighs such considerations in determining the overall reasonableness of
brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports Concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund or its advisers is considered to be
in addition to, and not in lieu, of services required to be performed by the
adviser under its Advisory Agreement with the Fund or the subadviser under its
SubAdvisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of the advisers who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients. Under the Advisory Agreement and the SubAdvisory Agreement, the
advisers are permitted to pay higher brokerage commissions for brokerage and
research services in accordance with Section 28(e) of the Securities Exchange
Act of 1934. In the event the advisers do follow such a practice, they will do
so on a basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or reflect a dealer's mark down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither the advisers nor the Fund intend to place securities
transactions with any particular broker-dealer or group thereof. The Fund's
Board of Directors, however, has determined that the Fund may follow a policy of
considering sales of shares as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the requirements of best execution,
including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Directors from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by the
advisers from those of the other funds and investment accounts managed by the
advisers. It may frequently develop that the same investment decision is made
for more than one fund. Simultaneous transactions are inevitable when the same
security is suitable for the investment objective of more than one account. When
two or more funds or accounts are engaged in the purchase or sale of the same
security, the transactions are allocated as to amount in accordance with a
formula which is equitable to each fund or account. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions will
produce better executions for the Fund.
In no instance are portfolio securities purchased from or sold to the
advisers, the Principal Underwriter or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
For the fiscal years ended September 30, 1993, 1994 and 1995 the Fund
paid $268,848, $257,916 and $75,720, respectively, in brokerage commissions.
- --------------------------------------------------------------------------------
CAPITAL STOCK
- --------------------------------------------------------------------------------
The Fund is authorized to issue 90,000,000 shares of common stock, par
value $1.00 per share, consisting of the following classes of shares:
Class A 30,000,000
Class B 30,000,000
Class C 30,000,000
Each share represents an equal proportionate interest in the Fund with
each other share of that class. Upon liquidation, shares are entitled to a pro
rata share in the net assets of the Fund based on the relative net asset value
of each class of shares. Each share of the Fund is entitled to one vote. Classes
of shares of the Fund have equal voting rights except that each class of shares
has exclusive voting rights with respect to its Distribution Plan.
Fund shares are fully paid and non-assessable when issued and have no
preemptive, conversion or exchange rights. Shareholders are entitled to redeem
their shares as set forth under "How to Redeem Shares" in the prospectus. The
shares are transferable without restriction. The Fund does not issue
certificates for fractional shares.
Fund shares have non-cumulative voting rights, which means that the
holders of more than 50% of shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. In such an event, the
holders of the remaining shares so voting are not able to elect any Directors.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added and the maximum sales
charge and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
The cumulative total returns of Class A shares of the Fund for the five
and ten year periods ended September 30, 1995 were 135.92% and 429.08%,
respectively. The compounded average annual rates of return for Class A shares
of the Fund for the one, five and ten year periods ended September 30, 1995 were
29.31%, 18.73% and 18.13%, respectively.
The cumulative total returns for Class B shares of the Fund for the
period since commencement of operations (August 2, 1993) until September 30,
1995 ("Life of the Fund") was 15.27%. The compounded average annual rates of
return for Class B shares of the Fund for the one year period ended September
30, 1995 and the Life of the Fund were 31.61% and 6.79%, respectively.
The cumulative total returns for Class C shares of the Fund for the
period since commencement of operations (August 2, 1993) until September 30,
1995 ("Life of the Fund") was 18.62%. The compounded average annual rates of
return for Class C shares of the Fund for the one year period ended September
30, 1995 and the Life of the Fund were 35.89% and 8.21%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian ("Custodian") of all securities and cash
of the Fund. The Custodian performs no investment management functions for the
Fund but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
As of October 31, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL 32246-6484, owned
20.71% of the Fund's Class A outstanding shares.
As of October 31, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL 32246-6484, owned
15.41% of the Fund's Class B outstanding shares.
As of October 31, 1995: Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL 32246-6484, owned
23.64% of the Fund's Class C outstanding shares; Lavedna Ellingson, Douglas
Ellingson JT WROS, 8510 McClintock, Tempe, AZ 85284-2527, owned 9.10% of the
Fund's Class B outstanding shares; Donaldson Lufkin Jenrette Securities
Corporation Inc., P.O. Box 2052, Jersey City, NJ 07303-9998, owned 6.26% of the
Fund's Class B outstanding Shares; and Painewebber FBO, Jobn T. Frankfurth, 70
Celestial Way #208, West Palm Beach, FL 33408 owned 5.50% of the Fund's Class C
outstanding shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the Rules and Regulations
promulgated by the Commission.
The Fund is one of 15 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
The Keystone America Fund Family consists of the following Funds having the
various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND -- Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN -- Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE GLOBAL OPPORTUNITIES FUND -- Seeks long-term capital growth from
foreign and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND -- Seeks income and capital preservation
from U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. -- Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND -- Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE INTERMEDIATE TERM BOND FUND -- Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND -- Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND -- A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II -- A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND -- Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
KEYSTONE TAX FREE INCOME FUND -- Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND -- Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS -- Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND -- Seeks long-term capital growth by
investing primarily in equity securities.
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others, S&P
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. S&P rankings,
however, do not reflect all of the factors, tangible or intangible, that bear on
stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A Above Average B Lower
S&P believes its rankings are not a forecast of future market price performance,
but are basically an appraisal of past performance of earnings and dividends,
and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics
of a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten-year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which is rated "aaa" is considered to be a
top-quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within the
universe of preferred stocks.
2. aa: An issue which is rated "aa" is considered a high-
grade preferred stock. This rating indicates that there is a
reasonable assurance that earnings and asset protection will remain
relatively well-maintained in the foreseeable future.
3. a: An issue which is rated "a" is considered to be an
uppermedium grade preferred stock. While risks are judged to be
somewhat greater then in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
4. baa: An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
5. ba: An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered well
assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
6. b: An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of dividend
payments and maintenance of other terms of the issue over any long
period of time may be small.
7. caa: An issue which is rated "caa" is likely to be in
arrears on dividend payments. This rating designation does not
purport to indicate the future status of payments.
8. ca: An issue which is rated "ca" is speculative in a high
degree and is likely to be in arrears on dividends with little
likelihood of eventual payments.
9. C: This is the lowest rated class of preferred or
preference stock. Issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
<PAGE>
SCHEDULE OF INVESTMENTS--September 30, 1995
Market
Shares Value
==========================================================
COMMON STOCKS (94.7%)(a)
CELLULAR/WIRELESS (6.3%)
Arch Communications Group 160,000 $ 4,200,000
Pronet, Inc. 120,000 3,495,000
---------------------------------------------------------
7,695,000
---------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.6%)
Stratacom, Inc. 57,500 3,176,875
---------------------------------------------------------
COMMUNICATIONS/SOFTWARE (16.7%)
Computron Software, Inc. 65,000 1,121,250
Global Village Communications 75,000 1,031,250
Netcom-On-Line Communications 125,000 5,500,000
PictureTel Corp. 100,000 4,525,000
Transwitch Corp. 100,000 1,262,500
VideoServer, Inc. 100,000 3,525,000
VTel Corp. 130,000 3,233,750
---------------------------------------------------------
20,198,750
---------------------------------------------------------
HEALTHCARE/INFORMATION SYSTEMS (5.5%)
Cycare Systems, Inc. 155,000 5,153,750
Phamis, Inc. 56,000 1,533,000
---------------------------------------------------------
6,686,750
---------------------------------------------------------
HEALTHCARE SERVICES (13.6%)
Gulf South Medical Supply, Inc. 150,000 3,693,750
Med-Partners, Inc. 60,000 1,890,000
Phycor, Inc. 135,000 4,623,750
Steris Corp. 150,000 6,318,750
---------------------------------------------------------
16,526,250
---------------------------------------------------------
MISCELLANEOUS (6.2%)
Premenos Technology Corp. 110,000 3,575,000
Uniphase Corp. 110,000 3,877,500
---------------------------------------------------------
7,452,500
---------------------------------------------------------
OIL/OIL SERVICES (2.6%)
Input/Output, Inc. 43,000 $ 1,650,125
Petroleum Geo-Services, ADR 60,000 1,470,000
---------------------------------------------------------
3,120,125
---------------------------------------------------------
RESTAURANTS (8.7%)
Apple South, Inc. 150,000 3,412,500
Daka International, Inc. 115,000 3,766,250
DF & R Restaurants, Inc. 100,000 3,375,000
---------------------------------------------------------
10,553,750
---------------------------------------------------------
SEMI-CONDUCTORS (3.0%)
Exar Corp. 100,000 3,575,000
---------------------------------------------------------
SOFTWARE/BUSINESS (10.3%)
Alternative Resource Group 55,000 1,760,000
McAfee Associates, Inc. 120,000 6,180,000
PeopleSoft, Inc. 50,000 4,543,750
---------------------------------------------------------
12,483,750
---------------------------------------------------------
SOFTWARE/MANUFACTURING (6.0%)
Cognex Corp. 90,000 4,342,500
Wonderware Corp. 75,000 2,915,625
---------------------------------------------------------
7,258,125
---------------------------------------------------------
SPECIALTY RETAIL (13.2%)
Hollywood Entertainment, Inc. 185,000 3,965,938
Moovies, Inc. 40,000 785,000
Movie Gallery, Inc. 125,000 5,343,750
Sunglass Hut International,
Inc. 90,000 4,500,000
Trend Lines, Inc. 107,500 1,424,375
---------------------------------------------------------
16,019,063
---------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $79,751,539) 114,745,938
=========================================================
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
SCHEDULE OF INVESTMENTS--September 30, 1995
Maturity Market
Value Value
==========================================================
REPURCHASE AGREEMENT (2.9%)
State Street Bank & Trust Co., 5.25%, purchased 09/29/95, (Collateralized by
$2,790,000 U.S. Treasury Bond, 8.875%, due 02/15/19), maturing
10/02/95 (Cost $3,490,000) $3,491,527 $ 3,490,000
----------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $3,490,000) 3,490,000
==========================================================
TOTAL INVESTMENTS
(Cost -- $83,241,540) (b) 118,235,938
OTHER ASSETS AND LIABILITIES --
NET (2.4%) 2,925,249
----------------------------------------------------------
NET ASSETS (100%) $121,161,187
==========================================================
NOTES TO SCHEDULE OF INVESTMENTS
(a) All common stocks with the exception of Apple South, Inc. are non-
income-producing securities.
(b) The cost of investments for federal income tax purposes amounted to
$83,241,540. Gross unrealized appreciation and depreciation on investments,
based on identified tax cost, at September 30, 1995, are as follows:
Gross unrealized
appreciation $36,399,559
Gross unrealized
depreciation (1,405,161)
----------
Net unrealized appreciation $34,994,398
==========
Legend of Portfolio Abbreviations:
ADR--American Depository Receipts.
See Notes to Financial Statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of
year $21.41 $ 28.56 $20.80 $22.91 $14.13 $ 15.96 $11.56 $ 24.37 $14.94 $11.17
- ----------------------------------------------------------------------------------------------------------------------------------
Income from
investment
operations
Net investment
loss (0.38) (0.37) (0.34) (0.26) (0.22) (0.29) (0.21) (0.20) (0.23) (0.26)
Net gain (loss)
on investments 8.14 (4.43) 8.10 0.05 9.13 (1.45) 4.61 (6.03) 9.66 4.03
- ----------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 7.76 (4.80) 7.76 (0.21) 8.91 (1.74) 4.40 (6.23) 9.43 3.77
- ----------------------------------------------------------------------------------------------------------------------------------
Less
distributions
from:
Net realized
gain on
investments (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Total
distributions (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value
end of year $26.28 $ 21.41 $28.56 $20.80 $22.91 $ 14.13 $15.96 $ 11.56 $24.37 $14.94
===================================================================================================================================
Total return (a) 37.20% (17.86%) 37.31% (1.12%) 63.51% (10.95%) 38.06% (16.40%) 63.12% 33.75%
Ratios/supplemental
data
Ratios to
average net
assets:
Total expenses 1.81%(c) 1.80% 1.60% 1.63% 1.70% 2.50% 2.40% 2.40% 1.90%(b) 2.00%
Net investment
loss (1.58%) (1.62%) (1.34%) (1.18%) (1.18%) (1.80%) (1.60%) (1.70%) (1.20%) (1.70%)
Portfolio
turnover rate 164% 156% 155% 152% 137% 96% 136% 110% 224% 123%
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets end
of year
(thousands) $111,791 $120,689 $195,708 $152,714 $72,602 $21,855 $25,131 $23,596 $41,440 $24,883
==================================================================================================================================
</TABLE>
Per share calculation based on average weighted shares outstanding.
(a) Excluding applicable sales charges.
(b) Figure is net of expense reimbursement by Hartwell Keystone in connection
with voluntary expense limitations. Before expense reimbursement the "Ratio
of operating and management expenses to average net assets" would have been
2.00% for the year ended September 30, 1987.
(c) "Ratio of total expenses to average net assets" for the year ended September
30, 1995 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended September 30, 1995, the expense ratio would have
been 1.78%.
See Notes to Financial Statements.
11
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
August 2, 1993
Year Ended (Date of Initial
September 30, Public Offering)
------------------ to
September 30,
1995 1994 1993
=============================================================================
Net asset value
beginning of period $21.22 $ 28.56 $26.69
-----------------------------------------------------------------------------
Income from investment operations
Net investment loss (0.56) (0.49) (0.05)
Net gain (loss) on investments 7.92 (4.50) 1.92
-----------------------------------------------------------------------------
Total from investment operations 7.36 (4.99) 1.87
-----------------------------------------------------------------------------
Less distributions from:
Net realized gain on investments (2.89) (2.35) 0
-----------------------------------------------------------------------------
Total distributions (2.89) (2.35) 0
-----------------------------------------------------------------------------
Net asset value end of period $25.69 $ 21.22 $28.56
=============================================================================
Total return (a) 35.61% (18.58%) 7.01%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.58%(c) 2.49% 3.70%(b)
Net investment loss (2.34%) (2.27%) (3.4%)(b)
Portfolio turnover rate 164% 156% 155%
-----------------------------------------------------------------------------
Net assets end of period
(thousands) $6,970 $3,801 $823
=============================================================================
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 year ended September
30, 1995 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended September 30, 1995, the expense ratio would have
been 2.55%.
See Notes to Financial Statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
August 2, 1993
Year Ended (Date of Initial
September 30, Public Offering)
------------------ to
September 30,
1995 1994 1993
=============================================================================
Net asset value
beginning of period $21.26 $ 28.56 $26.69
-----------------------------------------------------------------------------
Income from investment operations
Net investment loss (0.56) (0.47) (0.08)
Net gain (loss) on investments 7.99 (4.48) 1.95
-----------------------------------------------------------------------------
Total from investment operations 7.43 (4.95) 1.87
-----------------------------------------------------------------------------
Less distributions from:
Net realized gain on investments (2.89) (2.35) 0
-----------------------------------------------------------------------------
Total distributions (2.89) (2.35) 0
-----------------------------------------------------------------------------
Net asset value end of period $25.80 $ 21.26 $28.56
=============================================================================
Total return (a) 35.89% (18.42%) 7.01%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.58%(c) 2.47% 3.09%(b)
Net investment loss (2.37%) (2.25%) (2.80%)(b)
Portfolio turnover rate 164% 156% 155%
-----------------------------------------------------------------------------
Net assets end of period
(thousands) $2,400 $1,679 $297
=============================================================================
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 year ended September
30, 1995 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended September 30, 1995, the expense ratio would have
been 2.55%.
See Notes to Financial Statements.
13
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
=============================================================================
Assets (Note 1):
Investments at market value (identified cost--
$83,241,540) $118,235,938
Cash 668
Receivable for:
Investments sold 2,984,750
Fund shares sold 264,135
Dividends and interest 1,528
Prepaid expenses 6,084
Other assets 1,851
-------------------------------------------------------------------
Total assets 121,494,954
-------------------------------------------------------------------
Liabilities (Note 4):
Payable for:
Fund shares redeemed 164,148
Accrued reimbursable expenses 4,148
Other accrued expenses 165,471
-------------------------------------------------------------------
Total liabilities 333,767
-------------------------------------------------------------------
Net assets $121,161,187
===================================================================
Net assets represented by (Note 1):
Paid-in capital $ 85,066,787
Accumulated net realized gains on investments 1,100,002
Net unrealized appreciation on investments 34,994,398
-------------------------------------------------------------------
Total net assets $121,161,187
===================================================================
Net asset value and redemption price per share (Note 2):
Class A Shares
Net assets of $111,790,735/4,253,505 shares
outstanding $26.28
Offering price per share ($26.28/0.9425) (based
on a sales charge of 5.75% of the offering
price September 30, 1995) $27.88
Class B Shares
Net assets of $6,969,957/271,302 shares
outstanding $25.69
Class C Shares
Net assets of $2,400,495/93,058 shares
outstanding $25.80
===================================================================
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
=============================================================================
Investment income (Note 1):
Dividend $ 900
Interest 244,286
----------------------------------------------------------
Total investment income 245,186
----------------------------------------------------------
Expenses (Notes 2, 4 and 5):
Management fee $1,030,145
Shareholder services 604,182
Accounting, auditing, and
legal 42,889
Custodian fee expense 92,672
Printing 44,885
Distribution Plan expenses 305,698
Registration fees 115,063
Directors' fees and expenses 9,164
Miscellaneous expenses 43,818
----------------------------------------------------------
Total expenses 2,288,516
Less: Expenses paid
indirectly (Note 4) (33,879)
----------------------------------------------------------
Net expenses 2,254,637
----------------------------------------------------------
Net investment loss (2,009,451)
----------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
(Notes 1 and 3): 22,375,130
----------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on investments 17,446,189
----------------------------------------------------------
Net gain (loss) on investments 39,821,319
----------------------------------------------------------
Net increase in net assets
resulting from operations $37,811,868
==========================================================
See Notes to Financial Statements.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1995 1994
===============================================================================================
<S> <C> <C>
Operations:
Net investment loss $ (2,009,451) $ (2,459,625)
Net realized gain (loss) on investments 22,375,130 8,820,946
Net change in unrealized appreciation (depreciation)
on investments 17,446,189 (38,936,468)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 37,811,868 (32,575,147)
-----------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gains on investments (Note 5):
Class A Shares (11,564,652) (15,655,783)
Class B Shares (718,070) (123,550)
Class C Shares (229,717) (52,384)
-----------------------------------------------------------------------------------------------
Total distributions to shareholders (12,512,439) (15,831,717)
-----------------------------------------------------------------------------------------------
Capital share transactions (Note 2): Proceeds from shares sold:
Class A Shares 10,088,352 13,815,022
Class B Shares 27,935,012 5,015,690
Class C Shares 1,609,258 2,613,385
Payments for shares redeemed:
Class A Shares (52,915,813) (55,198,867)
Class B Shares (26,761,159) (1,615,154)
Class C Shares (1,469,796) (1,118,138)
Net asset value of shares issued in reinvestment of distributions:
Class A Shares 10,351,036 14,084,578
Class B Shares 634,603 108,234
Class C Shares 221,110 42,421
-----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (30,307,397) (22,252,829)
-----------------------------------------------------------------------------------------------
Total decrease in net assets (5,007,968) (70,659,693)
Net Assets:
Beginning of year 126,169,155 196,828,848
-----------------------------------------------------------------------------------------------
End of year [including accumulated distributions in excess of
net investment income as follows: 1995--$0 and 1994--
($257,173)] (Note 1) $121,161,187 $126,169,155
===============================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
(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. Through
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. Effective January 31, 1995 Keystone became the Fund's investment
adviser.
J.M. Hartwell Limited Partnership (formerly Hartwell Management Company,
Inc.) ("Hartwell") has acted 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 Management 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 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.)("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 or
accretion of discount) which, when combined with accrued interest, approximates
market.
B. Securities transactions are accounted for on the day after the trade date.
Realized gains and losses are computed on the identified cost basis. Interest
income
16
<PAGE>
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 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 investment income and net capital gains. The
significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are primarily due to 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 are outstanding.
Transactions in shares of the Fund were as follows:
Class A Shares
-------------------------------
Year Ended September 30,
1995 1994
==================================================
Shares sold 434,450 620,860
Shares redeemed (2,239,300) (2,410,004)
Shares issued in
reinvestment of
distributions 420,504 573,944
- --------------------------------------------------
Net decrease (1,384,346) (1,215,200)
==================================================
17
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
Class B Shares
-------------------------------
Year Ended September 30,
1995 1994
==================================================
Shares sold 1,156,468 216,318
Shares redeemed (1,090,475) (70,467)
Shares issued in
reinvestment of
distributions 26,206 4,416
- --------------------------------------------------
Net increase 92,199 150,267
==================================================
Class C Shares
-------------------------------
Year Ended September 30,
1995 1994
==================================================
Shares sold 69,278 119,572
Shares redeemed (64,325) (52,718)
Shares issued in
reinvestment of
distributions 9,114 1,731
- --------------------------------------------------
Net increase 14,067 68,585
==================================================
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 payment 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) (i) a commission at
the time of purchase normally equal to 4.00% 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 after June 1, 1995 at rates ranging from a maximum of 5.00% of
amounts redeemed during the first twelve months 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 rule") plus service fees at an
annual rate of 0.25%, respectively, of the average daily net asset
18
<PAGE>
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 KIDC
may continue as compensation for its services which had been earned while the
Distribution Plan was in effect.
During the fiscal year ended September 30, 1995, the Fund paid KIDC $231,932
under its Class A Distribution Plan. The Fund paid KIDC $52,294 for Class B
shares sold prior to June 1, 1995 and $1,470 for Class B shares sold on or after
June 1, 1995. The Fund paid KIDC $20,002 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 Plan were $312,791 for
shares purchased prior to June 1, 1995, and $96,072 for 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 $167,847 for Class
C shares as of September 30, 1995. Presently, the Fund's class-specific expenses
are limited to Distribution Plan expenses incurred by a class of shares.Keystone
America Hartwell Emerging Growth Fund, Inc.
(3.) Securities Transactions
Purchases and sales of investment securities (including proceeds received at
maturity) for the fiscal year ended September 30, 1995, were as follows:
Cost of Proceeds
Purchases from Sales
=====================================================
Portfolio securities $ 193,733,779 $ 242,378,224
Short-term
investments 1,377,950,000 1,378,998,900
-----------------------------------------------------
$1,571,683,779 $1,621,377,124
=====================================================
(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 fiscal year ended September 30, 1995, the Fund paid or accrued
$1,030,145 in management fees representing 0.84% of average daily net assets. Of
this amount $89,914 was paid or accrued to Hartwell Management Company for the
period October 31, 1994 through January 31, 1995, and $296,954 was paid or
accrued to JM Hartwell Limited Partnership for the period January 31, 1995
through September 30, 1995.
During the fiscal year ended September 30, 1995, the Fund paid or accrued
$22,382 to KII as reimbursement for certain accounting services. The Fund paid
or accrued $604,182 to KIRC 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.
The Fund has entered into an expense offset arrangement with its custodian. For
the year September 30, 1995, the Fund paid custody fees in the
19
<PAGE>
amount of $58,793 and received a credit of $33,879 pursuant to the expense
offset arrangement, resulting in a total expense of $92,672. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in an income-producing asset.Keystone America Hartwell Emerging
Growth Fund, Inc.
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.
(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 the next February 1 will be taxable to shareholders in the year
declared.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
Keystone America Hartwell Emerging Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Keystone
America Hartwell Emerging 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 each of the years in the two-year period then ended and the period from
August 2, 1993 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 each of the years in the five-year period ended
September 30, 1990, 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 and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone America Hartwell Emerging Growth Fund, Inc. 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 referred to above in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 27, 1995
21
<PAGE>
Keystone America Hartwell Emerging Growth Fund, Inc.
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)
During the fiscal year ended September 30, 1995, distributions of taxable
long-term capital gains totalling $2.89 per share were paid in shares or cash.
The above figures may differ from those cited elsewhere in this report due to
differences in the calculation of income and capital gains for accounting (book)
purposes and Internal Revenue Service (tax) purposes.
In January 1996, we will send you complete information on the distributions paid
during the calendar year 1995 to help you in completing your federal tax return.
22
<PAGE>
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account information
on your balance, last transaction and recent Fund distribution. You may also
process transactions such as investments, redemptions and exchanges using a
touch-tone telephone as well as receive quotes on price, yield, and total return
of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at any
time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your investment by
automatically reinvesting your Fund's distributions at net asset value with no
sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone offers
a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less transaction,"
EFT allows you to take advantage of a variety of preauthorized account
transactions, including automatic monthly investments and systematic monthly or
quarterly withdrawals. EFT is a quick, safe and accurate way to move money
between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a day,
every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans, including
IRA, SEP-IRA, profit sharing, money purchase, and defined contribution plans.
For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account service.
We will do our best to assist you and your financial adviser in carrying out
your investment plans.
