As filed with the Securities and Exchange Commission on October 30, 1998
1933 Act File No. 2-98634
1940 Act File No. 811-4338
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 17 [ X ]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 18
----
(Check appropriate box or boxes.)
HERITAGE CAPITAL APPRECIATION TRUST
(Exact name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, FL 33716
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (813) 573-3800
STEPHEN G. HILL, PRESIDENT
880 Carillon Parkway
St. Petersburg, FL 33716
(Name and Address of Agent for Service)
Copy to:
CLIFFORD J. ALEXANDER, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering January 1, 1999
-------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ x ] on January 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
HERITAGE CAPITAL APPRECIATION TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Combined Prospectus for Class A, Class B and Class C shares of
Heritage Aggressive Growth Fund, Capital Appreciation Trust, Eagle
International Equity Portfolio, Growth Equity Fund, Income-Growth
Trust, Mid Cap Growth Fund, Small Cap Stock Fund and Value Equity Fund
Statement of Additional Information for Class A, Class B and Class C
shares of Heritage Aggressive Growth Fund, Capital Appreciation Trust,
Eagle International Equity Portfolio, Growth Equity Fund,
Income-Growth Trust, Mid Cap Growth Fund, Small Cap Stock Fund and
Value Equity Fund
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
HERITAGE
EQUITY
FUNDS
[Picture of people working and playing]
FROM OUR FAMILY TO YOURS: THE INTELLIGENT CREATION OF WEALTH.
AGGRESSIVE GROWTH FUND
CAPITAL APPRECIATION TRUST
EAGLE INTERNATIONAL EQUITY PORTFOLIO
GROWTH EQUITY FUND
INCOME-GROWTH TRUST
MID CAP GROWTH FUND
SMALL CAP STOCK FUND
VALUE EQUITY FUND
PROSPECTUS
January 1, 1999
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
HERITAGE
ASSET MANAGEMENT, INC.
Registered Investment Advisor--SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
<PAGE>
TABLE OF CONTENTS
================================================================================
HERITAGE EQUITY FUNDS
===============================================================
Page 1 .......................Aggressive Growth Fund
3 .......................Capital Appreciation Trust
5 .......................Eagle International Equity Portfolio
8 .......................Growth Equity Fund
11 ......................Income-Growth Trust
14 ......................Mid Cap Growth Fund
16 ......................Small Cap Stock Fund
19 ......................Value Equity Fund
MANAGEMENT OF THE FUNDS
===============================================================
22 ......................Who Manages Your Fund
22 ......................Year 2000
YOUR INVESTMENT
===============================================================
23 ......................Before You Invest
23 ......................Choosing a Class of Shares
25 ......................Sales Charge Reductions and Waivers
26 ......................How to Invest
28 ......................How to Sell Your Investment
29 ......................How to Exchange Your Shares
30 ......................Account and Transaction Policies
31 ......................Dividends, Capital Gains and Taxes
FINANCIAL HIGHLIGHTS
===============================================================
33 ......................Financial Highlights for Your Fund
FOR MORE INFORMATION
===============================================================
Back Cover
<PAGE>
AGGRESSIVE GROWTH FUND
================================================================================
INVESTMENT OBJECTIVE: The Aggressive Growth Fund seeks long-term capital
appreciation.
HOW THE AGGRESSIVE GROWTH FUND PURSUES ITS OBJECTIVE: The Aggressive Growth Fund
seeks to achieve its objective by investing primarily in the common stocks of
companies that may have significant growth potential (growth companies). The
fund's portfolio manager uses a "bottom-up" method of analysis based on
fundamental research to determine which common stocks to purchase for the fund.
The portfolio manager attempts to purchase stock that have the potential for
above-average earnings or sales growth. Such stocks can typically have high
price to earnings ratios. The portfolio manager generally does not emphasize
investment in any particular investment sector or industry. The fund invests a
majority of its assets in common stocks of small- and medium-capitalization
companies, although the fund may invest a portion of its assets in common stocks
of larger companies that it believes have significant growth potential. As a
temporary defensive measure because of market, economic or other conditions, the
fund may invest up to 100% of its assets in high-quality, short-term debt
instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE AGGRESSIVE GROWTH FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions, and/or economic conditions. If this occurs,
the fund's net asset value also may decrease.
While growth companies in which the fund invests offer greater opportunities for
capital appreciation than that of the market averages, investment in growth
companies entails significant risks that you should consider before investing.
The prices of growth company securities may rise and fall dramatically based, in
part, on investors' perceptions of the company rather than on fundamental
analysis of the stocks. In certain cases, the portfolio manager may identify a
company as a growth company based on a belief that actual or anticipated
products or services will produce future earnings. If the company fails to
realize these products or services, the price of its stocks may decline sharply
and become less liquid.
While small- and medium-capitalization companies generally may have potential
for rapid growth, these investments often involve greater risks than investments
in larger, more established companies because small- and medium-sized companies
may lack the management experience, financial resources, product diversification
and competitive strengths of larger companies.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
to manage the fund's portfolio. Bert L. Boksen has been responsible for the
day-to-day management since the fund's inception. Mr. Boksen has been a Senior
Vice President of Eagle since 1995. Prior to that, he was employed for 16 years
by Raymond James & Associates, Inc. in its institutional research and sales
department. While employed by Raymond James & Associates, Inc., Mr. Boksen
served as co-head of Research, Chief Investment Officer, and Chairman of the
Raymond James & Associates, Inc. Focus List Committee.
WHAT ARE THE COSTS OF INVESTING IN THE AGGRESSIVE GROWTH FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Aggressive Growth Fund. The fund's expenses are based on estimated expenses
incurred for the fiscal year ended October 31, 1998.
1
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
Management Fees* 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0. % 0. % 0. %
---- ---- ----
Total Annual Fund Operating Expenses % . % . %
==== ==== ====
Fee Waiver and/or Expense Reimbursement* % % %
Net Expenses % % %
==== ==== ====
- --------------------------------------------------------------------------------
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A
annual operating expenses exceed 1.65% and Class B and Class C annual
operating expenses exceed 2.40% of the fund's average daily net assets for
the fund's 1999 fiscal year.
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3
A shares $__ $__
B shares
Assuming redemption at end of period $__ $__
Assuming no redemption $__ $__
C shares $__ $__
- --------------------------------------------------------------------------------
2
<PAGE>
CAPITAL APPRECIATION TRUST
================================================================================
INVESTMENT OBJECTIVE: The Capital Appreciation Trust seeks long-term capital
appreciation.
HOW THE CAPITAL APPRECIATION TRUST PURSUES ITS OBJECTIVE: The Capital
Appreciation Trust seeks to achieve its objective by investing primarily in
common stocks selected for their potential to achieve capital appreciation over
the long term. The fund's portfolio management team uses a "bottom-up" method of
analysis based on fundamental research to determine which stocks to purchase for
the fund. The portfolio management team purchases stock of companies that have
the potential for attractive long-term growth in earnings, cash flow and total
worth of the company. In addition, the portfolio management team prefers to
purchase such stocks that appear to be undervalued in relation to the company's
long-term growth fundamentals. As a temporary defensive measure because of
market, economic or other conditions, the fund may invest up to 100% of its
assets in high-quality, short-term debt instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE CAPITAL APPRECIATION TRUST: Perhaps
the biggest risk of investing in this fund is that its returns will fluctuate
and you could lose money. This fund invests primarily in common stocks whose
value might decrease in response to the activities of the company that issued
the stock, general market conditions and/or economic conditions. If this occurs,
the fund's net asset value also may decrease.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Liberty Investment
Management, a Division of Goldman Sachs Asset Management Inc., to manage the
fund's portfolio. The fund is managed by six senior portfolio managers led by
Herbert E. Ehlers, who has been responsible for the day-to-day management since
the fund's inception. Since January 1997, Mr. Ehlers has been a Managing
Director of Goldman Sachs. From 1994 to 1997, Mr. Ehlers served as the Chairman,
Chief Executive Officer and Chief Investment Officer of Liberty Investment
Management.
HOW THE CAPITAL APPRECIATION TRUST HAS PERFORMED: The chart and table below
illustrate annual fund and market benchmark returns for the periods ended
December 31, 1997. This information is intended to give you some indication of
the risk of investing in the fund by demonstrating how its returns have varied
over time. The bar chart shows the Capital Appreciation Trust's Class A share
performance from one year to another. The table shows what the return for each
class of shares would equal if you average out actual performance over various
lengths of time. Because this information is based on past performance, it is
not a guarantee of future results.
[GRAPH]
For the ten-year period through December 31, 1997, the Class A shares' highest
quarterly return was ____% for the quarter ended _____ and the lowest quarterly
return was ____% for the quarter ended ____. For the period from January 1, 1998
through September 30, 1998, Class A shares' total return (not annualized) was
3
<PAGE>
___%. These returns do not reflect sales charges. If the sales charges were
reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES S&P 500**
- ------ -------------- -------------- -------------- ---------
1 Year ___% __% __% __%
5 Years ___% __% __% __%
10 Years ___% __% __% __%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* The Capital Appreciation Trust's returns are after deduction of sales
charges and expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad look
at how stock prices have performed. Its returns do not include the effect
of any sales charges. That means the actual returns would be lower if they
included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE CAPITAL APPRECIATION TRUST: The tables
below describe the fees and expenses that you may pay if you buy and hold shares
of the Capital Appreciation Trust. The fund's expenses are based on actual
expenses incurred for the fiscal year ended August 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
4
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.41% 1.00% 1.00%
Other Expenses 0.25% 0.26% 0.25%
----- ----- -----
Total Annual Fund Operating Expenses 1.41% 2.01% 2.00%
===== ===== =====
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- --------------------------------------------------------------------------------
4A
<PAGE>
EAGLE INTERNATIONAL EQUITY PORTFOLIO
================================================================================
INVESTMENT OBJECTIVE: The Eagle International Equity Portfolio seeks capital
appreciation principally through investment in a portfolio of international
equity securities. Income is an incidental consideration.
HOW THE EAGLE INTERNATIONAL EQUITY PORTFOLIO PURSUES ITS OBJECTIVE: The Eagle
International Equity Portfolio seeks to achieve its objective by investing
primarily in equity securities of foreign issuers and depository receipts
representing the securities of foreign issuers. The fund may invest in
securities traded on any securities markets in the world. In allocating the
fund's assets among various securities markets of the world, the portfolio
manager considers such factors as the condition and growth potential of the
economies and securities markets, currency and taxation considerations and
financial, social, national and political factors. The portfolio manager also
considers market regulations and liquidity of the market.
The fund normally invests at least 50% of its investment portfolio in securities
traded in developed foreign securities markets, such as those included in the
Morgan Stanley Capital International Europe, Australasia, Far East Index (EAFE
Index). Countries represented in the EAFE Index include Japan, France, the
United Kingdom, Germany, Hong Kong and Malaysia. The fund also invests in
emerging markets (which may include investments in countries such as India,
Mexico and Poland). Emerging markets are those countries whose markets are not
yet highly developed. The fund can invest in foreign currency and purchase and
sell foreign currency forward contracts and futures contracts to improve its
returns or protect its assets.
The fund may invest in any type or size of company. It may invest in companies
whose earnings are believed to be in a relatively strong growth trend or in
companies in which significant further growth is not anticipated but whose
market value per share is thought to be undervalued. The fund also can invest a
portion of its assets in investment-grade fixed-income securities when equity
securities appear to be overvalued or investing in fixed income securities
affords the fund the opportunity for capital growth, as in periods of declining
interest rates. As a temporary defensive measure because of market, economic or
other conditions, the fund may invest up to 100% of its assets in high-quality,
short-term debt instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE EAGLE INTERNATIONAL EQUITY
PORTFOLIO: Perhaps the biggest risk of investing in this fund is that its
returns will fluctuate and you could lose money. This fund invests primarily in
common stocks whose value might decrease in response to the activities of the
company that issued the stock, general market conditions and/or economic
conditions. If this occurs, the fund's net asset value also may decrease.
The fund also may invest without limit in foreign securities either indirectly
(e.g., through depository receipts) or directly in foreign markets. Investments
in foreign securities involve greater risks that investing in domestic
securities. As a result, the fund's returns and net asset value may be affected
to a large degree by fluctuations in currency exchange rates or political or
economic conditions and regulatory requirements in a particular country. Foreign
equity and currency markets - as well as foreign economies and political systems
- - may be less stable than U.S. markets, and changes in the exchange rates of
foreign currencies can affect the value of the fund's foreign assets. Foreign
laws and accounting standards typically are not as strict as they are in the
U.S., and there may be less public information available about foreign
companies. Because the fund may invest in emerging markets, there are risks of
greater political uncertainties, an economy's dependence on revenues from
particular commodities or on international aid or development assistance,
currency transfer restrictions, a limited number of potential buyers for such
securities and delays and disruptions in securities settlement procedures.
5
<PAGE>
The fund may use derivatives such as futures contracts, foreign currency forward
contracts and options on futures to adjust the risk/return characteristics of
its investment portfolio. These practices, however, may present risks different
from or in addition to the risks associated with investments in foreign
currencies. There can be no assurance that any strategy used will succeed. If
the fund's subadviser incorrectly forecasts stock market values or currency
exchange rates in utilizing a strategy for the fund, the fund could lose money.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Martin Currie, Inc. to
manage the fund's portfolio. Investment decisions for the fund are made by a
committee of Martin Currie organized for that purpose and no single person is
primarily responsible for making recommendations to the committee.
HOW THE EAGLE INTERNATIONAL EQUITY PORTFOLIO HAS PERFORMED: The chart and table
below illustrate annual fund and market benchmark returns for the periods ended
December 31, 1997. This information is intended to give you some indication of
the risk of investing in the fund by demonstrating how its returns have varied
over time. The bar chart shows the Eagle International Equity Portfolio's Class
A share performance from one year to another. The table shows what the return of
each class of shares would equal if you average out actual performance over
various lengths of time. Because this information is based on past performance,
it's not a guarantee of future results.
[GRAPHIC]
From its inception on December 27, 1995 through December 31, 1997, the Class A's
highest quarterly return was ___% for the quarter ended ____ and the lowest
quarterly return was ___% for the quarter ended _____. For the period from
January 1, 1998 through September 30, 1998, Class A shares' total return (not
annualized) was ___%. These returns do not reflect sales charges. If the sales
charges were reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES EAFE INDEX**
- ------ -------------- -------------- -------------- ------------
1 Year __% __% __% __%
Life of Fund __% __% __% __%
- -------------------------------------------------------------------------------------------------------
</TABLE>
* The Eagle International Equity Portfolio's returns are after deduction of
sales charges and expenses.
** The EAFE Index is an unmanaged index representative of the market
structure of 47 developed and emerging markets. Its returns do not include
the effect of any sales charges. That means the actual returns would be
lower if they included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE EAGLE INTERNATIONAL EQUITY PORTFOLIO: The
tables below describe the fees and expenses that you may pay if you buy and hold
shares of the Eagle International Equity Portfolio. The fund's expenses are
based on actual expenses incurred for the fiscal year ended October 31, 1998.
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
------- ------- -------
Management fee* 1.00% 1.00% 1.00%
12b-1 fees 0.25% 1.00% 1.00%
Other expenses 0. % 0. % 0. %
---- ---- -----
Total Fund operating expenses . % . % . %
==== ==== =====
Fee Waiver and/or Expense Reimbursement* % % %
Net Expenses . % . % . %
==== ==== =====
- --------------------------------------------------------------------------------
* Eagle Asset Management, Inc., the investment adviser to the Eagle
International Equity Portfolio, has agreed to waive its fees and, if
necessary, reimburse the fund to the extent that Class A annual operating
expenses exceed 1.97% of the fund's average daily net assets and to the
extent that the Class B and Class C annual operating expenses each exceed
2.72% of that classes' average daily net assets for the fund's 1999 fiscal
year.
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Eagle International Equity Portfolio with the cost of investing
in other mutual funds. The Example assumes that you invest $10,000 in the fund
for the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
<S> <C> <C> <C> <C> <C> <C>
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- -----------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
GROWTH EQUITY FUND
================================================================================
INVESTMENT OBJECTIVE: The Growth Equity Fund seeks growth through long-term
capital appreciation.
HOW THE GROWTH EQUITY FUND PURSUES ITS OBJECTIVE: The Growth Equity Fund seeks
to achieve its objective by investing in common stocks that have sufficient
growth potential to offer above average long-term capital appreciation. The
fund's portfolio manager uses a "bottom-up" method of analysis based on
fundamental research to determine which common stocks to purchase for the fund.
The portfolio manager focuses on companies that are likely to have long-term
returns greater than the average for companies included in the S&P 500 Index.
Each stock should have at the time of purchase (1) earnings-per-share growth
greater than the average of the S&P 500 Index, (2) high profit margin, or (3)
consistency and predictability of earnings. The portfolio manager selects common
stock of a company for the fund based in part on the sustainability of the
company's competitive advantage in the marketplace as well as the strength of a
company's management team. If the stock price appreciates to a level that the
portfolio manager believes is not sustainable, the portfolio manager generally
will sell the stock to realize the existing profits and avoid a potential price
correction. As a temporary defensive measure because of market, economic or
other conditions, the fund may invest up to 100% of its assets in high-quality,
short-term debt instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE GROWTH EQUITY FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions and/or economic conditions. If this occurs, the
fund's net asset value also may decrease.
In addition, growth companies are expected to increase their earnings at a
certain rate. When these expectations are not met, investors can punish the
stocks inordinately even if earnings showed an absolute increase. Growth company
stocks also typically lack the dividend yield that can cushion stock prices in
market downturns.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
to manage the fund's portfolio. Kenneth W. Corba has been responsible for the
day-to-day management since the fund's inception. Mr. Corba has served as an
Executive Vice President and Chief Investment Officer of Eagle since 1995. From
1984 to 1995, Mr. Corba has also held various portfolio management positions
with Stein Roe & Farnham, Inc.
HOW THE GROWTH EQUITY FUND HAS PERFORMED: The chart and table below illustrate
annual fund and market benchmark returns for the periods ended December 31,
1997. This information is intended to give you some indication of the risk of
investing in the fund by demonstrating how its returns have varied over time.
The bar chart shows the Growth Equity Fund's Class A share performance from one
year to another. The table shows what the return for each class of shares would
equal if you average out actual performance over various lengths of time.
Because this information is based on past performance, it's not a guarantee of
future results.
8
<PAGE>
[GRAPH]
From its inception on November 16, 1995 through December 31, 1997, the Class A
shares' highest quarterly return was ____% for the quarter ended _____ and the
lowest quarterly return was ____% for the quarter ended ____. For the period
from January 1, 1998 through September 30, 1998, Class A shares' total return
(not annualized) was ___%. These returns do not reflect sales charges. If the
sales charges were reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES S&P 500**
------ -------------- -------------- -------------- ---------
1 Year 37.61% __% __% __%
Life of Fund 30.19% __% __% __%
- ------------------------------------------------------------------------------------------------
</TABLE>
* The Growth Equity Fund's returns are after deduction of sales charges and
expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad
look at how stock prices have performed. Its returns do not include the
effect of any sales charges. That means the actual returns would be lower
if they included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE GROWTH EQUITY FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Growth Equity Fund. The fund's expenses are based on actual expenses
incurred for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during
the fifth year, 1% during the sixth year and 0% thereafter. Class B shares
will convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
Management Fees 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0. % 0. % 0. %
----- ----- -----
Total Annual Fund Operating Expenses* . % . % . %
===== ===== =====
- --------------------------------------------------------------------------------
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A
annual operating expenses exceed 1.45% and Class B and Class C annual
operating expenses exceed 2.20% of the fund's average daily net assets for
the fund's 1999 fiscal year.
9A
<PAGE>
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Growth Equity Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- --------------------------------------------------------------------------------
10
<PAGE>
INCOME-GROWTH TRUST
================================================================================
INVESTMENT OBJECTIVE: The Income-Growth Trust seeks long-term total return by
seeking, with approximately equal emphasis, current income and capital
appreciation.
HOW THE INCOME-GROWTH TRUST PURSUES ITS OBJECTIVE: The Income-Growth Trust seeks
to achieve its objective by investing primarily in income-producing securities
that offer a high and steadily growing income stream. Income-producing
securities typically include common stocks, convertible bonds, preferred stocks
and real estate investment trusts (REITs). The securities in which the fund may
invest may be rated below investment grade by Moody's or by Standard & Poor's
or, if unrated, deemed to be of comparable quality. The fund's portfolio manager
uses a "bottom-up" method of analysis based on fundamental research to select
securities for the fund's portfolio. The portfolio manager purchases securities
that generally have the following income, growth or stability characteristics:
(1) yields or dividend growth at or above the S&P 500 Index, or a demonstrated
commitment to paying and increasing dividends; (2) growth rate greater than
inflation, (3) issued from a company that is dominant in an expanding industry;
and (4) free cash flow and shareholder-oriented management, or stock price below
estimated intrinsic value. The portfolio manager generally invests in medium- to
large-capitalization companies that are diversified across different industries
and sectors. As a temporary defensive measure because of market, economic or
other conditions, the fund may invest up to 100% of its assets in high-quality,
short-term debt instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE INCOME-GROWTH TRUST: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions and/or economic conditions. If this occurs, the
fund's net asset value also may decrease.
The fund also may invest a portion of its assets in securities rated below
investment grade or "junk bonds." Junk bonds may be sensitive to economic
changes, political changes, or adverse developments specific to a company. These
securities generally involve greater risk of default or price changes than other
types of fixed-income securities and the fund's performance may vary
significantly as a result. Therefore, an investment in the fund is subject to a
higher risk of loss of principal than an investment in a fund that does not
invest in lower-rated securities.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
to manage the fund's portfolio. Louis Kirschbaum and David M. Blount share
responsibility for the day-to-day management of the fund's investment portfolio.
Mr. Kirschbaum has been a Senior Vice President and a portfolio manager of Eagle
since 1986. Mr. Blount has been a Vice President of Eagle since 1993. Mr. Blount
is a Chartered Financial Analyst and Certified Public Accountant.
HOW THE INCOME-GROWTH TRUST HAS PERFORMED: The chart and table below illustrate
annual fund and market benchmark returns for the periods ended December 31,
1997. This information is intended to give you some indication of the risk of
investing in the fund by demonstrating how its returns have varied over time.
The bar chart shows the Income-Growth Trust's Class A share performance from one
year to another. The table shows what the return for each class of shares would
equal if you average out actual performance over various lengths of time.
Because this information is based on past performance, it's not a guarantee of
future results.
11
<PAGE>
[GRAPHIC]
For the ten-year period through December 31, 1997, the Class A shares' highest
quarterly return was ____% for the quarter ended _____ and the lowest quarterly
return was ____% for the quarter ended ____. For the period from January 1, 1998
through September 30, 1998, Class A shares' total return (not annualized) was
___%. These returns do not reflect sales charges. If the sales charges were
reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES S&P 500**
------ -------------- -------------- -------------- ---------
1 Year 26.94% __% __% __%
5 Years 16.95% __% __% __%
10 Years 14.81% __% __% __%
- -------------------------------------------------------------------------------------------------
</TABLE>
* The Income-Growth Trust's returns are after deduction of sales charges and
expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad
look at how stock prices have performed. Its returns do not include the
effect of any sales charges. That means the actual returns would be lower
if they included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE INCOME-GROWTH TRUST: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Income-Growth Trust. The fund's expenses are based on actual expenses
incurred for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during
the fifth year, 1% during the sixth year and 0% thereafter. Class B shares
will convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.29% 0.29% 0.29%
----- ----- -----
Total Annual Fund Operating Expenses 1.29% 2.04% 2.04%
===== ===== =====
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Income-Growth Trust with the cost of investing in other mutual
12
<PAGE>
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $___ $___ $___ $___
B shares
Assuming redemption at end of period $___ $___ $___ $___
Assuming no redemption $___ $___ $___ $___
C shares $___ $___ $___ $___
- --------------------------------------------------------------------------------
13
<PAGE>
MID CAP GROWTH FUND
================================================================================
INVESTMENT OBJECTIVE: The Mid Cap Growth Fund seeks long-term capital
appreciation.
HOW THE MID CAP GROWTH PURSUES ITS OBJECTIVE: The Mid Cap Growth Fund seeks to
achieve its objective by investing primarily in common stocks of
medium-capitalization companies, each of which has a total market capitalization
of between $500 million and $5 billion (mid cap companies). The fund's portfolio
manager uses a "bottom-up" method of analysis based on fundamental research to
determine which common stocks to purchase for the fund. The fund's portfolio
manager seeks to purchase mid cap companies that have above-average earnings,
cash flow and growth at a discount from their market value. The portfolio
manager focuses on common stocks of mid cap companies that have sustainable
advantages in its industry or sector. As a temporary defensive measure because
of market, economic or other conditions, the fund may invest up to 100% of its
assets in high-quality, short-term debt instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE MID CAP GROWTH FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions and/or economic conditions. If this occurs, the
fund's net asset value also may decrease.
Investing in mid cap companies generally involves greater risks than investing
in larger, more established companies but less risks than investing in
small-capitalization companies. Mid cap companies often have narrower markets
and more limited managerial and financial resources than larger, more
established companies. As a result, their performance can be more volatile and
they face greater risk of business failure, which could increase the volatility
of the fund's portfolio. Generally, the smaller the company size, the greater
these risks.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
to manage the fund's portfolio. Todd McCallister, Ph.D., CFA, has been
responsible for the day-to-day management since the fund's inception. Mr.
McCallister is a Senior Vice President of Eagle. Prior to joining Eagle in 1997,
Mr. McCallister served as a portfolio manager for IAI Mutual Funds from 1992 to
1997.
WHAT ARE THE COSTS OF INVESTING IN THE MID CAP GROWTH FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Mid Cap Growth Fund. The fund's expenses are based on actual expenses
incurred for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during
the fifth year, 1% during the sixth year and 0% thereafter. Class B shares
will convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
14
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expense deducted from fund assets):
CLASS A CLASS B CLASS C
Management Fees* 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses . % . % . %
------ ----- -----
Total Annual Fund Operating Expenses . % . % . %
====== ===== =====
Fee Waiver and/or Expense Reimbursement* . % . % . %
Net Waiver . % . % . %
====== ===== =====
- --------------------------------------------------------------------------------
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A
annual operating expenses exceed 1.60% and Class B and Class C annual
operating expenses exceed 2.35% of the fund's average daily net assets for
the fund's 1999 fiscal year.
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Mid Cap Growth Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- --------------------------------------------------------------------------------
15
<PAGE>
SMALL CAP STOCK FUND
================================================================================
INVESTMENT OBJECTIVE: The Small Cap Stock Fund seeks long-term capital
appreciation.
HOW THE SMALL CAP STOCK FUND PURSUES ITS OBJECTIVE: The Small Cap Stock Fund
seeks to achieve its objective by investing at least 80% of its total assets in
equity securities of small-capitalization companies, each of which has a total
market capitalization of less than $1 billion (small cap companies). The fund
will invest in securities of companies that appear to be undervalued in relation
to their long-term earning power or the asset value of their issuers and that
appear to have significant future growth potential. As a temporary defensive
measure because of market, economic or other conditions, the fund may invest up
to 100% of its assets in high-quality, short-term debt instruments. The fund has
two subadvisers, Eagle Asset Management, Inc. and Awad & Associates, Inc. Each
subadviser manages a portion of the fund's assets and has a different management
style.
In making its investment decisions, Eagle generally focuses on investing in the
securities of companies that Eagle believes have accelerating earnings growth
rates, reasonable valuations (typically with a price-to-earnings ratio of no
more than 75% of the earnings growth rate), strong management that participates
in the ownership of the company, reasonable debt levels and a high or expanding
return on equity. Eagle utilizes a "bottom-up" approach to identifying the
companies in which it invests. Eagle also will perform fundamental financial
research and frequently will rely on contact with company management to help
identify investment opportunities.
Awad employs an investment management approach that seeks to provide investment
returns in excess of inflation while attempting to minimize volatility relative
to the overall small cap market. Awad seeks to achieve these goals through
fundamental research consisting of internal research. The companies in which
Awad invests generally will have, in the opinion of Awad, steady earnings and
cash flow growth, good and/or improving balance sheets, strong positions in
their market niches and the ability to perform well in a stagnant economy. The
companies purchased generally will have low price/earnings ratios relative to
the stock market in general.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE SMALL CAP STOCK FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions and/or economic conditions. If this occurs, the
fund's net asset value also may decrease.
Investing in small cap companies generally involves greater risks than investing
in medium- or large- capitalization companies. Small cap companies often have
narrower markets and more limited managerial and financial resources than
larger, more established companies. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase
the volatility of the fund's portfolio. Generally, the smaller the company size,
the greater these risks.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
and Awad & Associates, Inc., each to manage a portion of the fund's assets.
James D. Awad has been responsible for the day-to-day management of Awad's
portion of the fund's assets since the fund's inception. Mr. Awad has been
Chairman of Awad since 1992. Mr. Awad is assisted by Dennison T. Vern, who
joined Awad & Associates in 1992 and became President in January 1995. Bert L.
Boksen has been responsible for the day-to-day management of Eagle's portion of
the fund's assets since August 1995. Mr. Boksen is a Senior Vice President of
Eagle and has been employed for 16 years by Raymond James & Associates, Inc. in
its institutional research and sales department. While employed by Raymond James
16
<PAGE>
& Associates, Inc., Mr. Boksen served as co-head of Research, Chief Investment
Officer and Chairman of the Raymond James & Associates, Inc. Focus List
Committee.
HOW THE SMALL CAP STOCK FUND HAS PERFORMED: The chart and table below illustrate
annual fund and market benchmark returns for the periods ended December 31,
1997. This information is intended to give you some indication of the risk of
investing in the fund by demonstrating how its returns have varied over time.
The bar chart shows the Small Cap Stock Fund's Class A share performance from
one year to another. The table shows what the return for each class of shares
would equal if you average out actual performance over various lengths of time.
Because this information is based on past performance, it's not a guarantee of
future results.
[GRAPHIC]
From its inception on May 7, 1993 through December 31, 1997, the Class A shares'
highest quarterly return was ____% for the quarter ended _____ and the lowest
quarterly return was ____% for the quarter ended ____. For the period from
January 1, 1998 through September 30, 1998, Class A shares' total return (not
annualized) was ___%. These returns do not reflect sales charges. If the sales
charges were reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES S&P 500**
------ -------------- -------------- -------------- ---------
1 Year 29.26% __% __% __%
Life of Fund 22.32% __% __% __%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* The Small Cap Stock Fund's returns are after deduction of sales charges
and expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad
look at how stock prices have performed. Its returns do not include the
effect of any sales charges. That means the actual returns would be lower
if they included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE SMALL CAP STOCK FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Small Cap Stock Fund. The fund's expenses are based on actual expenses
incurred for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during
the fifth year, 1% during the sixth year and 0% thereafter. Class B shares
will convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
17
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
------- ------- -------
Management Fee 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0. % 0. % 0. %
---- ----- -----
Total Annual Fund Operating Expenses . % . % . %
==== ===== =====
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Small Cap Stock Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $____ $____ $____ $____
B shares
Assuming redemption at end of period $____ $____ $____ $____
Assuming no redemption $____ $____ $____ $____
C shares $____ $____ $____ $____
- --------------------------------------------------------------------------------
18
<PAGE>
VALUE EQUITY FUND
================================================================================
INVESTMENT OBJECTIVES: The Value Equity Fund's primary investment objective is
long-term capital appreciation. Current income is its secondary objective.
HOW THE VALUE EQUITY FUND PURSUES ITS OBJECTIVES: The Value Equity Fund seeks to
achieve its objectives by investing without limit in common stocks that, when
purchased, meet certain quantitative standards that indicate above average
financial soundness and high intrinsic value relative to price. The fund invests
in companies that meet certain investment criteria relating to price, dividend
yield, going concern value and debt levels. Specifically, each company or its
stock must have at least one of the following criteria: (1) low price in
relation to the company's earnings or book value; (2) high dividend yield; (3)
high value of the company as a going concern; or (4) low debt. The long-term
debt of the company must be below, or approximately equivalent to, its tangible
net worth. In selecting stocks, the portfolio manager screens a universe of over
2500 companies. From this universe, it anticipates that only a few hundred
companies will meet one or more of its investment criteria. Each of these
companies is analyzed individually in terms of its past and present competitive
position within its respective industry. Selections will be made based on the
portfolio manager's projections of the companies' growth in earnings and
dividends, earnings momentum, and under-valuation based on a dividend discount
model. Target prices and value ranges are developed from this analysis, and
portfolio selection will be made from among the top-rated securities. As a
temporary defensive measure because of market, economic or other conditions, the
fund may invest up to 100% of its assets in high-quality, short-term debt
instruments.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE VALUE EQUITY FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests primarily in common stocks whose value
might decrease in response to the activities of the company that issued the
stock, general market conditions and/or economic conditions. If this occurs, the
fund's net asset value also may decrease.
Value stocks are subject to the risk that their intrinsic value may never be
realized by the market or that their prices may go down. While the fund's
investments in value stocks may limit its downside risk over time, the fund may
produce more modest gains than riskier stock funds as a trade-off for this
potentially lower risk.
WHO IS THE PORTFOLIO MANAGER: Heritage has selected Eagle Asset Management, Inc.
to manage the fund's portfolio. Michael J. Chren, CFA, has been responsible for
the day-to-day management since October 1997. Mr. Chren has been a Senior Vice
President and Portfolio Manager with Eagle since 1996 and a Senior Research
Analyst with Eagle from 1994 to 1996. Mr. Chren holds an MBA from Carnegie
Mellon University.
HOW HAS THE VALUE EQUITY FUND PERFORMED: The chart and table below illustrate
annual fund and market benchmark returns for the periods ended December 31,
1997. This information is intended to give you some indication of the risk of
investing in the fund by demonstrating how its returns have varied over time.
The bar chart shows the Value Equity Fund's Class A share performance from one
year to another. The table shows what the return for each class of shares would
equal if you average out actual performance over various lengths of time.
Because this information is based on past performance, it's not a guarantee of
future results.
19
<PAGE>
[GRAPHIC]
From its inception on December 30, 1994 through December 31, 1997, the Class A
shares' highest quarterly return was ____% for the quarter ended _____ and the
lowest quarterly return was ____% for the quarter ended ____. For the period
from January 1, 1998 through September 30, 1998, Class A shares' total return
(not annualized) was ___%. These returns do not reflect sales charges. If the
sales charges were reflected, the returns would be lower than those shown.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1997)*
<S> <C> <C> <C> <C>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES S&P 500**
------ -------------- -------------- -------------- ---------
1 Year 25.53% __% __% __%
Life of Fund 24.74% __% __% __%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Value Equity Fund's returns are after deduction of sales charges and
expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad
look at how stock prices have performed. Its returns do not include the
effect of any sales charges. That means the actual returns would be
lower if they included the effect of sales charges.
WHAT ARE THE COSTS OF INVESTING IN THE VALUE EQUITY FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Value Equity Fund. The fund's expenses are based on actual expenses incurred
for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during
the fifth year, 1% during the sixth year and 0% thereafter. Class B shares
will convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets):
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees* 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0. % 0. % 0. %
----- ----- -----
Total Annual Fund Operating Expenses . % . % . %
===== ===== =====
Fee Waiver and/or Expense Reimbursement* . % . % . %
Net Expenses . % . % . %
===== ===== =====
- --------------------------------------------------------------------------------
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A
annual operating expenses exceed 1.45% and Class B and Class C annual
operating expenses exceed 2.20% of the fund's average daily net assets for
the fund's 1999 fiscal year.
20
<PAGE>
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Value Equity Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- --------------------------------------------------------------------------------
21
<PAGE>
MANAGEMENT OF THE FUNDS
WHO MANAGES YOUR FUND
================================================================================
Heritage Asset Management, Inc. serves as investment adviser and
administrator for each fund, except for the Eagle International Equity
Portfolio. Heritage manages, supervises and conducts the business and
administrative affairs of these funds and the other Heritage mutual funds with
net assets totaling approximately $___ billion as of ___________, 1998. Heritage
charged each fund the following aggregate annual investment advisory and
administration fee during that fund's last fiscal year:
o Aggressive Growth Fund 0.__%
o Capital Appreciation Trust 0.75%
o Growth Equity Fund 0.75%
o Income-Growth Trust 0.75%
o Mid Cap Growth Fund 0.__%
o Small Cap Stock Fund 0.__%
o Value Equity Fund 0.__%
Heritage may allocate and reallocate the assets of a fund among one or
more investment subadvisers, subject to review by the Board of Trustees. In the
future, Heritage may propose the addition of one or more additional subadvisers,
subject to approval by the Board of Trustees and, if required by the Investment
Company Act of 1940, fund shareholders.
Eagle Asset Management, Inc. is the investment adviser for the Eagle
International Equity Portfolio. Eagle has been managing private accounts since
1976 for a diverse group of clients, including individuals, corporations,
municipalities and trusts. Eagle managed approximately $___ billion for these
clients as of September 30, 1998. Eagle's aggregate annual investment advisory
and administration fee charged to the International Equity Portfolio is 1.00%.
Heritage and Eagle each are located at 880 Carillon Parkway, St.
Petersburg, Florida 33716, and each is a wholly owned subsidiary of Raymond
James Financial, Inc. RJF, together with its subsidiaries, provides a wide range
of financial services to retail and institutional clients.
YEAR 2000
================================================================================
The funds could be affected adversely if the computer systems used by
Heritage, Eagle, the funds' other service providers, or companies in which the
funds invest do not properly process and calculate information that relates to
dates beginning on January 1, 2000 and beyond. Heritage and Eagle have taken
steps that they believe are reasonably designed to address the potential failure
of computer systems used by them and the funds' service providers to address the
Year 2000 issue. However, due to the funds' reliance on various service
providers to perform essential functions, a fund could have difficulty
calculating its net asset value, processing orders for share sales and
delivering account statements and other information to shareholders. There can
be no assurance that these steps will be sufficient to avoid any adverse impact.
22
<PAGE>
YOUR INVESTMENT
BEFORE YOU INVEST
================================================================================
Before you invest in a fund, please
o Read this prospectus carefully.
o Then, decide which fund or funds best suits your needs and your goals.
o Next, decide which class of shares is best for you.
o Finally, decide how much you wish to invest and how you want to open an
account.
CHOOSING A CLASS OF SHARES
================================================================================
You can choose from three classes of fund shares, Class A shares, Class B
shares and Class C shares. Each class has a different combination of sales
charges and ongoing fees allowing you to choose the one that best meets your
needs. You should make this decision carefully based on:
o the amount you wish to invest,
o the different sales charges that apply to each share class,
o whether you qualify for any reduction or waiver of sales charges,
o the length of time you plan to keep the investment, and
o the class expenses.
CLASS A SHARES. You may purchase Class A shares at the "offering price"
- - a price equal to their net asset value, plus a maximum sales charge of 4.75%
imposed at the time of purchase. Class A shares are subject to ongoing Rule
12b-1 fees of up to 0.25% of their average daily net assets. These fees are
lower than the ongoing Rule 12b-1 fees for Class B shares and Class C shares.
If you choose to invest in Class A shares, you will pay a sales charge
at the time of each purchase. The table below shows the charges both as a
percentage of offering price and as a percentage of the amount you invest. If
you invest more, the sales charge will be lower. You may qualify for a reduced
sales charge or the sales charge may be waived as described below.
- --------------------------------------------------------------------------------
AS A % OF AS A % OF YOUR DEALER CONCESSION
YOUR INVESTMENT OFFERING PRICE INVESTMENT AS % OF OFFERING
PRICE(1)
Less than $25,000...........4.75% 4.99% 4.25%
$25,000-$49,999.............4.25% 4.44% 3.75%
$50,000-$99,999.............3.75% 3.90% 3.25%
$l00,000-$249,999...........3.25% 3.36% 2.75%
$250,000-$499,999...........2.50% 2.56% 2.00%
$500,000-$999,999...........1.50% 1.52% 1.25%
$1,000,000 and over.........0.00% 0.00% 0.00%(2)
- --------------------------------------------------------------------------------
(1) During certain periods, the fund's distributor may pay 100% of the sales
charge to participating dealers. Otherwise, it will pay the dealer
concession shown above.
(2) For purchases of $1 million or more, Heritage may pay from its own
resources up to 1.00% of the purchase amount on the first $3 million and
0.80% on assets thereafter. This amount will be paid to the distributor
pro rata over an 18-month period.
23
<PAGE>
CLASS B SHARES. You may purchase Class B shares at net asset value with
no initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares within 6 years of
purchase, you will pay a "contingent deferred" sales charge ("CDSC") at the time
of sale of up to 5.00%. Class B shares are subject to ongoing Rule 12b-1 fees of
up to 1.00% of their average daily net assets. This Rule 12b-1 fee is higher
than the ongoing Rule 12b-1 fees for Class A shares but the same as for the
Class C shares. Class B shares are offered for sale only for purchases of less
than $250,000.
If you choose to invest in Class B shares, you will pay a sales charge
if you sell those shares within 6 years of purchase. The CDSC imposed on sales
of Class B shares will be calculated by multiplying the original purchase cost
or the current market value of the shares being sold, whichever is less, by the
percentage shown on the following chart. The longer you hold the shares, the
lower the rate of the CDSC. The CDSC may be waived as described below. Any
period of time you held Class B shares of the Heritage Cash Trust-Money Market
Fund will not be counted when determining your CDSC.
--------------------------------------------------------------------
REDEMPTION DURING CDSC ON SHARES BEING SOLD
----------------- -------------------------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6 years 0%
--------------------------------------------------------------------
CONVERSION OF CLASS B SHARES. If you buy Class B shares and hold them
for 8 years, we automatically will convert them to Class A shares without
charge. Any period of time you held Class B shares of the Heritage Cash Trust -
Money Market Fund will be excluded from the 8-year period. At this time, we also
will convert any Class B shares that you purchased with reinvested dividends and
other distributions. We do this to lower your investment costs.
When we do the conversion, you will receive Class A shares in an amount
equal to the value of your Class B shares. However, because Class A and Class B
shares have different prices, you may receive more or less Class A shares after
the conversion. The dollar value will be the same, so you have not lost any
money as a result of the conversion.
CLASS C SHARES. You may purchase Class C shares at net asset value with
no initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares less than 1 year after
purchase, you will pay a CDSC at the time of sale of 1.00%. Class C shares are
subject to ongoing Rule 12b-1 fees of up to 1.00% of their average daily net
assets. This Rule 12b-1 fee is higher than the ongoing Rule 12b-1 fees for Class
A shares and is the same as for the Class B shares. Class C shares do not
convert to any other class of shares. Any period of time you held Class C shares
of the Heritage Cash-Trust Money Market Fund will not be counted toward the
1-year period.
If you choose to invest in Class C shares, you will pay a sales charge
if you sell your shares less than 1 year after purchase. The CDSC imposed on
sales of Class C shares will be calculated based on the original purchase cost
or the current market value of the shares being sold, whichever is less. The
CDSC may be waived as described below.
24
<PAGE>
UNDERSTANDING RULE 12B-1 FEES. Each fund has adopted a plan under Rule
12b-1 that allows it to pay distribution and sales fees for the sale of its
shares and for services provided to shareholders. Because these fees are paid
out of the fund's assets on an ongoing basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges. For Capital Appreciation Trust Class A shares purchased prior to
April 3, 1995, the fund pays a Rule 12b-1 fee of up to 0.50% of its Class A
average daily net assets.
SALES CHARGE REDUCTIONS AND WAIVERS
================================================================================
We offer a number of ways to reduce or eliminate the initial sales charge
on Class A shares or the CDSC on Class B and Class C shares. If you think you
are eligible, contact Heritage or your financial advisor for further
information.
REDUCING YOUR CLASS A SALES CHARGE. We offer three programs designed to
reduce your Class A sales charge. You may choose one of these programs to
combine multiple purchases of Class A shares of Heritage mutual funds to take
advantage of the reduced sales charges listed in the schedule above. Please
complete the appropriate section of your account application, contact your
financial advisor or Heritage if you would like to take advantage of these
programs.
o RIGHTS OF ACCUMULATION - Lets you combine purchases in related accounts
for purposes of calculating sales charges. Under this program, a
related account includes any other direct or beneficial accounts you
own, your spouse's accounts, or accounts held by your minor children.
o COMBINED PURCHASE PRIVILEGE - Lets you add the value of your previous
Class A investments for purposes of calculating the sales charge if the
total amount you have invested is at least $25,000.
o STATEMENT OF INTENTION - Lets you purchase Class A shares of any
Heritage mutual fund over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. You must invest at
least $25,000 to obtain the benefit of this privilege.
HERITAGE TRANSFER PROGRAM. If you have sold shares of a mutual fund
other than a Heritage mutual fund within the last 90 days, we may waive the
Class A sales charge on your investment. You may qualify for this waiver if:
o You purchase Class A shares of a Heritage mutual fund between February
1, 1999 and March 31, 1999,
o You provide a copy of your account statement showing the sale of your
other mutual fund shares, and
o You or your financial advisor submit, at the time your purchase, a
request that your purchase be processed without a sales charge.
25
<PAGE>
WAIVER OF CLASS A SHARES SALES CHARGE. Class A shares may be sold at
net asset value without any sales charge to: (1) Heritage, Eagle, and each
fund's subadvisers; (2) current and retired officers and Trustees of a fund; (3)
directors, officers and full-time employees of Heritage, Eagle, any subadviser
of a Heritage mutual fund, their distributor and their affiliates; (4)
registered financial advisors and employees of broker-dealers that are parties
to dealer agreements with the funds' distributor (or financial institutions that
have arrangements with such broker-dealers); and (5) directors, officers and
full-time employees of banks that are party to agency agreements with the
distributor, and all such persons' immediate relatives and their beneficial
accounts. In addition, members of the American Psychiatric Association may
purchase Class A shares at a sales charge equal to two-thirds of the percentages
in the above table. The dealer concession also will be adjusted in a like
manner. Class A shares also may be purchased without sales charges by investors
who participate in certain broker-dealer wrap fee investment programs.
CDSC WAIVERS. The CDSC for Class B shares and Class C shares currently
is waived if the shares are sold:
o to make certain distributions from retirement plans,
o because of shareholder death or disability (including shareholders who
own shares in joint tenancy with a spouse),
o to make payments through certain sales from a Systematic Withdrawal
Plan of up to 12% annually of the account balance at the beginning of
the plan, or
o to close out shareholder accounts that do not comply with the minimum
balance requirements.
REINSTATEMENT PRIVILEGE. If you sell shares of a Heritage mutual fund,
you may reinvest some or all of the sales proceeds up to 90 days later in the
same share class of any Heritage mutual fund without incurring additional sales
charges. If you paid a CDSC, the reinvested shares will have no holding period
requirement. You must notify your fund if you decide to exercise this privilege.
HOW TO INVEST
================================================================================
MINIMUM INITIAL INVESTMENT. Once you have chosen a share class, the
next step is to determine the amount you wish to invest. The minimum initial
investment for each fund is:
----------------------------------------------------------------------
Minimum Initial Subsequent
Type of Account Investment Investment
--------------- --------------- ----------
Regular Account $1,000 No minimum
Systematic Investment $50 $50 on a monthly
Program basis
Retirement Account $1,000 No minimum
----------------------------------------------------------------------
Heritage may waive these minimum requirements at its discretion.
Investments in IRAs may be reduced or waived under certain circumstances.
Contact Heritage or your financial advisor for further information.
OPENING AN ACCOUNT. You may open an account in the following ways:
26
<PAGE>
THROUGH YOUR FINANCIAL ADVISOR. You may invest in a fund by contacting
your financial advisor. Your financial advisor can help you open a new account
and help you review your financial needs and formulate long-term investment
goals and objectives.
BY MAIL. You may invest in a fund directly by completing and signing
the account application found in this prospectus. Indicate the fund, the class
of shares and the amount you wish to invest. If you do not specify a share
class, we will automatically choose Class A shares, which include a front-end
sales charge. Make your check payable to the specific fund and class of shares
you are purchasing. Mail the application and your payment to:
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
BY DOLLAR COST AVERAGING PLANS. We offer the following plans to allow
you to make regular, automatic investments into a fund. You determine the amount
and frequency of your investments. You can terminate your plan at any time.
Availability of these plans may be limited by your financial advisor.
o AUTOMATIC INVESTING - You may instruct us to transfer funds from a
specific bank checking account to your Heritage account. This transfer
will be effected either by electronic transfer or paper draft. Complete
the appropriate sections of the account application or the Heritage
Bank Draft Investing form to activate this service.
o DIRECT DEPOSIT - You may instruct your employer to direct all or part
of your paycheck to your Heritage account. You also may direct to your
account other types of payments you receive such as from an insurance
company or another mutual fund family. Contact your financial advisor
or Heritage for the direct deposit enrollment form. Please note the
routing instructions are different than the Federal Reserve wire
instructions discussed below.
o GOVERNMENT DIRECT DEPOSIT - Beginning in 1999, any newly established
investment programs by employees of the Federal government must be paid
through direct deposit. You can have your Social Security, military
pension, paycheck or other Federal government payment sent to your
Heritage account. Your completed Government Direct Deposit form
requires Heritage's review and approval for processing. Contact your
financial advisor or Heritage for an enrollment form.
o AUTOMATIC EXCHANGE - You may make automatic regular exchanges between
two or more Heritage mutual funds. These exchanges are subject to the
exchange requirements discussed below.
If you discontinue any of these plans before your account reaches the required
minimum investment, you must buy more shares to keep your account open.
THROUGH A RETIREMENT PLAN. Heritage mutual funds offer a range of
retirement plans, including self-directed, traditional and Roth IRA plans, Keogh
Plans, SEPs and SIMPLEs. A special application and custodial agreement is
required. Contact your financial advisor or Heritage for more information.
BY WIRE. You may invest in a fund by Federal Reserve wire sent from
your bank. Mail your completed and signed account application to Heritage.
Contact Heritage at (800) 421-4184 or your financial advisor to obtain your
account number before sending the wire. Your bank may charge a wire fee. Send
your investment and the following information by Federal Reserve or bank wire
to:
27
<PAGE>
State Street Bank and Trust Company
ABA #011-000-028
Account # 3196-769-8
Name of the Fund
The class of shares to be purchased
(Your account number assigned by Heritage)
(Your name)
HOW TO SELL YOUR INVESTMENT
================================================================================
You can sell - or redeem - shares of your fund for cash at any time,
subject to certain restrictions.
APPLICATION OF CDSC. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that carry no CDSC. If there are not enough of these to meet your request, we
will sell those shares that have the lowest CDSC. There is no CDSC on shares
acquired through reinvestment of dividends or other distributions. However, any
period of time you held Class B or Class C shares of Heritage Cash Trust-Money
Market Fund will not be counted for purposes of calculating the CDSC.
HOW TO SELL YOUR SHARES. You may contact your financial advisor or
Heritage with instructions to sell your investment in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may sell your shares through your
financial advisor who can prepare the necessary documentation. Your financial
advisor will transmit your request to sell shares of your fund and may charge
you a fee for this service.
BY TELEPHONE. You may sell shares from your account by telephone by
calling your fund at (800) 421-4184 prior to the close of regular trading on the
New York Stock Exchange - typically 4:00 p.m. eastern time. If you do not wish
to have telephone redemption privileges, you must complete the appropriate
section of the account application.
BY MAIL. You may sell shares of your fund by sending a letter of
instruction. Specify the fund name, your share class, your account number, the
names in which the account is registered and the dollar value or number of
shares you wish to sell. Include all signatures and any additional documents
that may be required. Mail the request to Heritage Asset Management, Inc., P.O.
Box 33022, St. Petersburg, FL 33733.
Some circumstances require a written letter requesting sale of shares,
along with a signature guarantee. These include:
o Sales from any account that has had an address change in the past 30
days
o Sales of greater than $50,000
o Sales in which payment is to be sent to an address other than the
address of record
o Sales in which payment is to be made to payees other than the exact
registration of the account or
o Exchanges or transfers into other Heritage accounts that have different
titles
28
<PAGE>
We will only accept official signature guarantees from participants in
our signature guarantee program, which includes most banks and security dealers.
A notary public can not guarantee your signature.
BY SYSTEMATIC WITHDRAWAL PLAN. This plan may be used for periodic
withdrawals from your account. To establish, complete the appropriate section of
the account application or the Heritage systematic withdrawal form (available
from your financial advisor or Heritage). And send that form to Heritage.
Availability of this plan may be limited by your financial advisor. You should
consider the following factors when establishing a plan:
o Make sure you have a sufficient amount of shares in your account.
o Determine how much you wish to withdraw. You must withdraw a minimum of
$50 for each transaction.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you also are selling shares of the
same fund is not advantageous to you, because of sales charges).
o Determine the schedule: monthly, quarterly, semiannual or annual basis.
o Determine which day of the month you would like the withdrawal to
occur. Available dates are the 1st, 5th, 10th or 20th day of the month.
If such a date falls on the weekend, the withdrawal will take place on
the next business day.
o Heritage reserves the right to cancel systematic withdrawals if
insufficient shares are available for two or more consecutive months.
RECEIVING PAYMENT. When you sell shares, payment of the proceeds
generally will be made the next business day after your order is received. If
you sell shares that were recently purchased by check or pre-authorized
automatic purchase, payment will be delayed until we verify that those funds
have cleared, which may take up to two weeks. You may receive payment of your
sales proceeds the following ways:
o BY CHECK - We will mail a check to the address of record or bank
account specified on your account application. Checks made payable to
other than the registered owners or sent to an address other than the
address of record require written instruction accompanied by a
signature guarantee, as described above.
o BY WIRE - You may request that we send your proceeds by Federal Reserve
wire to a bank account you specify. You must provide wiring
instructions to Heritage in writing. We normally will send these
proceeds the next day. A $5.00 wire fee will be charged to your
account.
o TO YOUR BROKERAGE ACCOUNT - If you place your redemption request with
your financial advisor, payment can be directed to your brokerage
account. Payment for these trades occurs three business days after you
place your sale request.
HOW TO EXCHANGE YOUR SHARES
================================================================================
If you own shares of a fund for at least 30 days, you can exchange
those shares for shares of the same class of any other Heritage mutual fund
provided you satisfy the minimum investment requirements. You may exchange your
shares by calling your financial advisor or Heritage if you exchange to liked
29
<PAGE>
titled Heritage accounts. Written instructions with a signature guarantee, as
described above, are required if the accounts are not identically registered.
You may make exchanges without paying any additional sales charges.
However, if you exchange shares of the Heritage Cash Trust-Money Market Fund
acquired by purchase (rather than exchange) for shares of another Heritage
mutual fund, you must pay the applicable sales charge.
Class B and Class C shares will continue to age from the original date
and will retain the same CDSC rate as they had before the exchange. However, if
you hold Class B shares or Class C shares in the Heritage Cash Trust - Money
Market Fund, the time you hold those shares in that fund will not be counted for
purposes of calculating the CDSC.
ACCOUNT AND TRANSACTION POLICIES
================================================================================
PRICE OF SHARES. The funds' regular business days are the same as those
of the New York Stock Exchange, normally Monday through Friday. The net asset
value per share (NAV) for each class of a fund is determined each business day
at the close of regular trading on the New York Stock Exchange (typically 4:00
p.m. eastern time). The share price is calculated by dividing a class's net
assets by the number of its outstanding shares. Because the value of a fund's
investment portfolio changes every business day, the NAV usually changes as
well.
In calculating NAV, the funds typically price their securities by using
pricing services or market quotations. However, in cases where these are
unavailable or when the portfolio manager believes that subsequent events have
rendered them unreliable, a fund may use fair-value estimates instead.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, we will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, we are not responsible for any losses that may
occur to any account due to an unauthorized telephone call. Also for your
protection, telephone redemptions are not permitted on accounts whose name or
addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
TIMING OF ORDERS. All orders to purchase or sell shares are executed at
the next NAV calculated after the order has been accepted. Orders are accepted
until the close of regular trading on the New York Stock Exchange every business
day normally 4:00 p.m. eastern time - and are executed the same day at that
day's NAV. Otherwise, all orders will be executed at the NAV determined as of
the close of regular trading on the next trading day.
RESTRICTIONS ON ORDERS. The funds and their distributor reserve the
right to reject any purchase order and to suspend the offering of fund shares
for a period of time. There are certain times when you may not be able to sell
shares of a fund or when we may delay paying you the proceeds. This may happen
during unusual market conditions or emergencies or when a fund can not determine
the value of its assets or sell its holdings.
30
<PAGE>
REDEMPTION IN KIND. We reserve the right to give you securities instead
of cash when you sell shares of your fund. If the amount of the sale is at least
either $250,000 or 1% of a fund's assets, we may give you securities from the
fund's portfolio instead of cash.
ACCOUNTS WITH BELOW-MINIMUM BALANCES. If your account balance falls
below $500 as a result of selling shares (and not because of performance or
sales charges), each fund reserves the right to request that you buy more shares
or close your account. If your account balance is still below the minimum 60
days after notification, each fund reserves the right to close your account and
send the proceeds to your address of record.
DIVIDENDS, CAPITAL GAINS AND TAXES
================================================================================
DISTRIBUTIONS AND TAXES. Each fund distributes to its shareholders
dividends from its net investment income annually, except Income-Growth Trust
which distributes dividends to its shareholders quarterly. Net investment income
generally consists of interest income and dividends declared and paid on
investments, less expenses. The dividends you receive from a fund will be taxed
as ordinary income.
Each fund also distributes net capital gains to its shareholders
normally once a year. Capital gains are generated by a fund when it sells assets
in its portfolio for profit. Capital gains are taxed differently depending on
how long the fund held the asset. Distributions of gains recognized on the sale
of assets held for one year or less are taxed as ordinary income; distributions
of gains recognized on the sale of assets held longer than that are taxed at
lower capital gains rates.
Fund distributions of dividends and net capital gains are automatically
reinvested in the same fund at NAV (without sales charge) unless you opt to take
your distributions in cash, in the form of a check or direct them for purchase
of shares in another Heritage mutual fund. However, if you have a retirement
plan or a Systematic Withdrawal Plan, your distributions will be automatically
reinvested.
In general, selling shares, exchanging shares and receiving
distributions (whether reinvested or taken in cash) are all taxable events.
These transactions typically create the following tax liabilities for taxable
accounts:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Type of Transaction Tax Status
------------------- ----------
<S> <C>
Income dividends Ordinary income rate
Short-term capital gain distributions Ordinary income rate
Long-term capital gain distributions Capital gains rate
Sales or exchanges of shares owned for more
than one year Capital gains or losses
Gains are treated as ordinary
Sales or exchanges of shares owned for income; losses are subject to special
one year or less rules
-------------------------------------------------------------------------------------------
</TABLE>
Dividend distributions will vary by class and are anticipated to be
generally higher for Class A shares.
31
<PAGE>
TAX REPORTING. Each year, we will send non-retirement account holders a
Form 1099 that tells you the amount of distributions you received for the prior
calendar year, and the tax status of those distributions, and a list of
reportable sale transactions. Generally, fund distributions are taxable to you
in the year you receive them. However, any dividends that are declared in
October, November or December but paid in January are taxable as if received on
December of the year they are declared.
WITHHOLDING TAXES. If a fund does not have your correct social security
or other taxpayer identification number, federal law requires us to withhold 31%
of your distributions and sale proceeds. If you are subject to backup
withholding, we also will withhold and pay to the IRS 31% of your distributions.
Any tax withheld may be applied against the tax liability on your tax return.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
32
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The financial highlights table is intended to help you understand the
performance of the Class A shares, Class B shares and Class C shares of the
Capital Appreciation Trust for the periods indicated. Certain information
reflects financial results for a single Class A share, Class B share or Class C
share. The total returns in the table represent the rate that an investor would
have earned on an investment in the fund (assuming reinvestment of all dividends
and distributions). The information in this table for the periods presented has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the fund's financial statements, are included in the
statement of additional information, which is available upon request.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION TRUST
CLASS A CLASS B
------------------------------------------------------------- --------------------
FOR THE YEAR ENDED
FOR THE YEARS ENDED AUGUST 31, AUGUST 31,
------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997** 1996 1995* 1994 1998++
---- ------ ---- ----- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $18.60 $15.58 $15.53 $15.30 $15.62 $19.36
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. (.07) (.06) .00(a)(f) .08(a) .02(a) (.06)
Net realized and unrealized gain (loss) on
investments................................. 3.94 4.85 1.81 1.37 1.05 0.61
---- ---- ----- ------- ------- -------
Total from Investment Operations.............. 3.87 4.79 1.81 1.45 1.07 0.55
---- ---- ----- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income.......... (.04) (.06) (.03) -
Distributions from net realized gains on
investment.................................. (2.13) (1.77) (1.72) (1.16) (1.36) -
------ ------ ------ -------- -------- ----
Total Distributions........................... (2.13) (1.77) (1.76) (1.22) (1.39) -
------ ------ ------ -------- -------- ----
NET ASSET VALUE, END OF YEAR..................... $20.34 $18.60 $15.58 $15.53 $15.30 $19.91
====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(E).............................. 21.45 33.61 12.79 10.85 7.07 2.84(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net
assets...................................... 1.41 1.48 1.54(a) 1.62(a) 1.55(a) 2.01(c)
Net investment income (loss) to average daily
net assets.................................. (.34) (.30) (.02) 0.49 .15 .86(c)
Portfolio turnover rate....................... 25 42 54 66 65 25
Net assets, end of year (millions) ($)........ 104 81 70 73 74 5
- -----------------
</TABLE>
* Liberty Investment Management was retained as an additional investment
subadviser to the fund on February 27, 1995.
** Liberty Investment Management became a Division of Goldman Sachs Asset
Management Inc. on January 2, 1997.
+ For the period April 3, 1995 (first offering of Class C shares) to August
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares) to
August 31, 1998.
(a) Excludes management fees waived by Heritage in the amount of less than
$0.04, $0.04, $0.04, per Class A share for the three years ended August
31, 1996, respectively. The operating expense ratios including such items
would have been 1.79%, 1.87%, 1.81% (annualized) for Class A shares,
respectively. Excludes management fees waived by Heritage in the amount of
less than $0.04 and $0.04 per Class C share for the two years ended August
31, 1996, respectively. The operating expense ratio including such items
would have been 2.30% and 2.42% (annualized) for Class C shares,
respectively.
(b) Includes management fees previously waived by Heritage and recovered
during the year of less than $0.01 per share.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
(f) Amounts calculated prior to reclassification of $23,981. The effect of
such reclassification would have no effect on net investment income for
Class A shares and would have resulted in an increase in net investment
income of $0.10 for Class C shares.
33
<PAGE>
<TABLE>
<CAPTION>
CAPITAL APPRECIATION TRUST
CLASS C
------------------------------------------------------
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997** 1996 1995*+
---- ------ ---- -----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $18.34 $15.46 $15.50 $14.18
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. (.09) (.13) (.03)(a)(f) (.01)(a)
Net realized and unrealized gain (loss) on
investments................................. (3.78) 4.78 1.75 1.33
---- ---- ----- -----
Total from Investment Operations.............. (3.69) 4.65 1.72 1.32
---- ---- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income.......... - - (0.04) -
Distributions from net realized gains on
investment.................................. (2.13) (1.77) (1.72) -
---- ----- ------ -----
Total Distributions........................... (2.13) (1.77) (1.76) -
---- ----- ---- -----
NET ASSET VALUE, END OF YEAR..................... $19.90 18.34 $15.46 $15.50
====== ====== ====== ======
TOTAL RETURN (%)(e).............................. (20.72) 32.91 12.16 9.31(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net
assets...................................... 2.00(a) 2.04 2.05(a) 2.17)(a)(c)
Net investment income (loss) to average daily
net assets.................................. (.90) (.88) (.57) (.33)(c)
Portfolio turnover rate....................... 25 42 54 66
Net assets, end of year (millions) ($)........ 12 3 1 .4
- -----------------
</TABLE>
* Liberty Investment Management was retained as an additional investment
subadviser to the fund on February 27, 1995.
** Liberty Investment Management became a Division of Goldman Sachs Asset
Management Inc. on January 2, 1997.
+ For the period April 3, 1995 (first offering of Class C shares) to August
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares) to
August 31, 1998.
(a) Excludes management fees waived by Heritage in the amount of less than
$0.04, $0.04, $0.04, per Class A share for the three years ended August
31, 1996, respectively. The operating expense ratios including such items
would have been 1.79%, 1.87%, 1.81% (annualized) for Class A shares,
respectively. Excludes management fees waived by Heritage in the amount of
less than $0.04 and $0.04 per Class C share for the two years ended August
31, 1996, respectively. The operating expense ratio including such items
would have been 2.30% and 2.42% (annualized) for Class C shares,
respectively.
(b) Includes management fees previously waived by Heritage and recovered
during the year of less than $0.01 per share. (c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
(f) Amounts calculated prior to reclassification of $23,981. The effect of
such reclassification would have no effect on net investment income for
Class A shares and would have resulted in an increase in net investment
income of $0.10 for Class C shares.
33A
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Eagle
International Equity Portfolio for the periods indicated. Certain information
reflects financial results for a single Class A share, Class B share or Class C
share. The total returns in the table represent the rate that an investor would
have earned on an investment in the fund (assuming reinvestment of all dividends
and distributions). The information in this table for the periods presented has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the fund's financial statements, are included in the
statement of additional information, which is available upon request.
<TABLE>
<CAPTION>
EAGLE INTERNATIONAL EQUITY PORTFOLIO
CLASS A CLASS B
--------------------------------------------- ------------------
FOR THE YEAR
FOR THE YEARS ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------------------------- ------------------
<S> <C> <C> <C> <C>
1998 1997 1996^* 1998+
---- ---- ------ ---
NET ASSET VALUE, BEGINNING OF THE YEAR $22.25 $21.11
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. .05 .010(a)
Net realized and unrealized gain on investments 2.28 1.04
---- ----
Total from Investment Operations............... 2.33 1.14
---- ----
LESS DISTRIBUTIONS:
Dividends from net investments income.......... (.44)
Distributions from net realized gains on
investments... .......................... (.17)
-----
Total distributions............................ (.61)
-----
NET ASSET VALUE, END OF YEAR...................... $23.97 $22.25
====== ======
TOTAL RETURN (%) (D)(E) 10.71 5.40
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily assets
(c)............................................... 1.97 1.97(a)
Net investment income (loss) to average .22 0.44
daily net assets (c)..........................
Portfolio turnover rate (d).................... 50 59
Net assets, end of year ($ millions)........... 6 3
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
^ For the period December 27, 1995 (first offering of Class A and Class C
shares) to October 31, 1996.
+ For the period January 2, 1998 (first offering of Class B shares) to
October 31, 1998.
(a) Excludes management fees waived by Eagle in the amount of $.16 per Class A
share for the period ended October 31, 1996. The operating expenses ratio
including such items would have been 2.69% (annualized) for Class A shares
for the period ended October 31, 1996. Excludes management fees waived by
Eagle in the amount of $.16 per Class C share for the period ended October
31, 1996. The operating expense ratio including such items would have been
3.44% (annualized) for Class C shares for the period ended October 31,
1996.
(b) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
34
<PAGE>
<TABLE>
<CAPTION>
EAGLE INTERNATIONAL EQUITY PORTFOLIO
CLASS C
-----------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------------------
<S> <C> <C> <C>
1998 1997 1996^*
---- ---- ------
NET ASSET VALUE, BEGINNING OF THE YEAR $22.12 $21.11
----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. (.13) (.07)(a)
Net realized and unrealized gain on investments 2.25 1.08
---- ----
Total from Investment Operations............... 2.12 1.01
---- ----
LESS DISTRIBUTIONS:
Dividends from net investments income.......... (.34) -
Distributions from net realized gains on
investments... ................................ (.17) -
Total distributions............................... (.51)
-----
NET ASSET VALUE, END OF YEAR...................... $23.73 $22.12
====== ======
TOTAL RETURN (%)(d)(e) 9.79 4.78
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily assets
(c)............................................... 2.72 2.72(a)
Net investment income (loss) to average
daily net assets (c)............................. (.47) (.32)
Portfolio turnover rate (d)....................... 50 59
Net assets, end of year ($ millions).............. 4 1
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
^ For the period December 27, 1995 (first offering of Class A and Class C
shares) to October 31, 1996.
+ For the period January 2, 1998 (first offering of Class B shares) to
October 31, 1998.
(a) Excludes management fees waived by Eagle in the amount of $.16 per Class A
share for the period ended October 31, 1996. The operating expenses ratio
including such items would have been 2.69% (annualized) for Class A shares
for the period ended October 31, 1996. Excludes management fees waived by
Eagle in the amount of $.16 per Class C share for the period ended October
31, 1996. The operating expense ratio including such items would have been
3.44% (annualized) for Class C shares for the period ended October 31,
1996.
(b) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
34A
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Growth Equity
Fund for the periods indicated. Certain information reflects financial results
for a single Class A share, Class B share or Class C share. The total returns in
the table represent the rate that an investor would have earned on an investment
in the fund (assuming reinvestment of all dividends and distributions). The
information in this table for the periods presented has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, are included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
CLASS A CLASS B
--------------------------------------------- ------------------
FOR THE YEAR
FOR THE YEARS ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------------------------- --------------------
1998 1997 1996^^* 1998+
---- ---- ------- ----
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF THE YEAR $17.74 $14.29
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. (.07) (.03)(b)
Net realized and unrealized gain on investments 6.10 3.48
---- -------
Total from Investment Operations............... 6.03 3.45
---- -------
LESS DISTRIBUTIONS:
Dividends from net investments income.......... -
Distributions from net realized gains on -
investments....................................
Total distributions............................
NET ASSET VALUE, END OF YEAR...................... $23.77 $17.74
====== ======
TOTAL RETURN (%) (d)(e) 33.99 24.14
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily 1.61 1.65(b)
assets (c)........................................
Net investment income (loss) to average (0.35) (.19)
daily net assets (c)..........................
Portfolio turnover rate (d).................... 50 23
Net assets, end of year ($ millions)........... 24 12
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
^^ For the period November 16, 1995 (commencement operations) to October 31,
1996.
+ For the period January 2, 1998 (first offering of Class B shares) to
October 31, 1998.
(a) Excludes management fees waived and expenses reimbursed by Heritage of
$.11 per share Class A and Class C shares for the period ended October 31,
1996. The operating expenses ratios including such items would have been
2.39% and 3.14% (annualized) for the period ended October 31, 1996,
respectively.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
35
<PAGE>
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
CLASS C
---------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
---------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996^^*
---- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR $17.61 $14.29
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. (.24) (.15)(b)
Net realized and unrealized gain on investments 6.05 3.47
---- -------
Total from Investment Operations............... 5.81 3.32
---- -------
LESS DISTRIBUTIONS:
Dividends from net investments income..........
Distributions from net realized gains on
investments....................................
Total distributions............................
NET ASSET VALUE, END OF YEAR...................... $23.42 $17.61
====== ======
TOTAL RETURN (%) (d)(e) 32.99 23.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily 2.36 2.40(b)
assets (c).....................................
Net investment income (loss) to average (1.14) (.96)
daily net assets (c)..........................
Portfolio turnover rate (d).................... 50 23
Net assets, end of year ($ millions)........... 18 5
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
^^ For the period November 16, 1995 (commencement operations) to October 31,
1996.
+ For the period January 2, 1998 (first offering of Class B shares) to
October 31, 1998.
(a) Excludes management fees waived and expenses reimbursed by Heritage of
$.11 per share Class A and Class C shares for the period ended October 31,
1996. The operating expenses ratios including such items would have been
2.39% and 3.14% (annualized) for the period ended October 31, 1996,
respectively.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
35A
<PAGE>
Financial Highlights
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Income-Growth
Trust for the periods indicated. Certain information reflects financial results
for a single Class A share, Class B share or Class C share. The total returns in
the table represent the rate that an investor would have earned on an investment
in the fund (assuming reinvestment of all dividends and distributions). The
information in this table for the periods presented has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, are included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
INCOME-GROWTH TRUST
Class A Class B
-------------------------------------------------------------- ----------------
For the Year
For the Years Ended September 30, Ended Sept. 30,
-------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997* 1996 1995 1994 1998++
---- ----- ---- ---- ---- ----
Net asset value, beginning of the year........... $14.67 $12.56 $11.33 $12.28
------ ------ ------ ------
Income from Investment Operations:
Net investment income......................... .40 .36 .27 .30
Net realized and unrealized gain (loss) on
investments................................. 3.45 2.35 1.79 (.09)
---- ------- ------- --------
Total from Investment Operations.............. 3.85 2.71 2.06 .21
---- ------- ------- -------
Less Distributions:
Dividends from net investment income.......... (.38) (.35) (.34) (.24)
Distributions from net realized gain on (1.49) (.25) (.49) (.92)
------ ------- ------- -------
investments.................................
Total Distributions........................... (1.87) (.60) (.83) (1.16)
------ ------- ------- --------
Net asset value, end of year..................... $16.65 $14.67 $12.56 $11.33
====== ====== ====== ======
Total Return (%)(c).............................. 29.45 22.26 19.57 1.80
Ratios (%)/Supplemental Data:
Operating expenses net, to average daily net 1.34 1.51 1.64 1.64
assets......................................
Net investment income to average daily net 2.65 2.66 4.63 2.62
assets......................................
Portfolio turnover rate....................... 75 75 42 99
Net assets, end of year ($ millions)..........
65 43 34 33
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year
since use of the undistributed income method does not correspond with
results of operations.
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period January 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Annualized.
(b) Not annualized.
(c) Does not reflect the imposition of a sales charge.
36
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Income-Growth
Trust for the periods indicated. Certain information reflects financial results
for a single Class A share, Class B share or Class C share. The total returns in
the table represent the rate that an investor would have earned on an investment
in the fund (assuming reinvestment of all dividends and distributions). The
information in this table for the periods presented has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, are included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
INCOME-GROWTH TRUST
CLASS C
------------------------------------------------------
FOR THE YEARS ENDED SEPT. 30,
------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997* 1996 1995+
---- ----- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... 14.57 $12.51 $11.21
----- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................... .28 .26 .18
Net realized and unrealized gain (loss) on 3.43 2.34 1.28
---- ------- -------
investments.................................
Total from Investment Operations.............. 3.71 2.60 1.46
---- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income.......... (.30) (.29) (.16)
Distributions from net realized gain on (1.49) (.25) -
------ ------- -------
investments.................................
Total Distributions........................... (1.79) (.54) (0.16)
------ ------- --------
NET ASSET VALUE, END OF YEAR..................... $16.49 $14.57 $12.51
====== ====== =======
TOTAL RETURN (%)(C).............................. 28.49 21.37 13.18(b)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net 2.07 2.13 2.40(a)
assets......................................
Net investment income to average daily net 1.87 2.05 4.61(a)
assets......................................
Portfolio turnover rate....................... 42(b)
75 75
Net assets, end of year ($ millions)..........
21 6 .2
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year
since use of the undistributed income method does not correspond with
results of operations.
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period January 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Annualized.
(b) Not annualized.
(c) Does not reflect the imposition of a sales charge.
36A
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Small Cap Stock
Fund outstanding for the periods indicated. Certain information reflects
financial results for a single Class A share, Class B share or Class C share.
The total returns in the table represent the rate that an investor would have
earned on an investment in the fund (assuming reinvestment of all dividends and
distributions). The information in this table for the periods presented has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose report,
along with the fund's financial statements, are included in the statement of
additional information, which is available upon request.
<TABLE>
<CAPTION>
SMALL CAP STOCK FUND
CLASS A CLASS B
------------------------------------------------------ ------------
FOR THE
YEAR ENDED
FOR THE YEARS ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996* 1995^ 1994 1998++
---- ---- ----- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $24.08 $18.86 $16.20 $15.57
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. (.02) (.05) .02 (.01) (a)
Net realized and unrealized gain on investments 8.21 6.12 3.62 .64
---- ------- ------- -------
Total from Investment Operations............. 8.19 6.07 3.64 .63
---- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investments income........ -- (.01) (.01) -
Distributions from net realized gains on (1.88) (.84) (.97) -
----- -------- -------- --------
Investments......................................
Total distributions.......................... (1.88) (.85) (.98) -
----- -------- -------- --------
NET ASSET VALUE, END OF YEAR..................... $30.39 $24.08 $18.86 $16.20
====== ====== ====== ======
TOTAL RETURN (%)(e).............................. 36.68 33.18 23.97 4.05
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily 1.25 1.41 1.88 1.91(a)
assets.......................................
Net investment income to average daily net (.09) (.21) .15 (.07)
assets.......................................
Portfolio turnover rate...................... 54 80 89 95
Net assets, end of year ($ millions)......... 222 96 57 42
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
+ For the period April 3, 1995 (first offering of Class C shares) to October
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares to
October 31, 1998.
^ Eagle Asset Management, Inc. became an additional subadviser to the fund
on August 7, 1995.
(a) Excludes management fees waived by Heritage in fiscal 1993 of less than
$.01 per share. The operating expense ratio including such items would be
2.09% (annualized). The year 1994 includes previously waived management
fees paid to Heritage of less than $.01 per share.
(b) Excludes management fees waived and expenses reimbursed in the amount of
$.07 and $.13 per Class A Shares, respectively. The operating expense
ratios including such items would have been 1.99% and 3.49% for Class A
Shares, respectively. Excludes management fees waived and expense
reimbursed by Heritage in the amount of $.07 and $.13 per Class C Shares,
respectively. The operating expense ratio including such items would have
been 2.74% and 4.24% (annualized) for Class C Shares.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
37
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP STOCK FUND
CLASS C
---------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
---------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1996* 1995+
---- ---- ----- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $23.84 $18.79 $15.67
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. (.23) (.22) (.02)
Net realized and unrealized gain on investments 8.10 6.11 3.14
---- ------- ------
Total from Investment Operations............. 7.87 5.89 3.12
---- ------- ------
LESS DISTRIBUTIONS:
Dividends from net investments income........ - - -
Distributions from net realized gains on (1.88) (.84) -
------ --------- -------
investments......................................
Total distributions.......................... (1.88) (.84) -
------ --------- -------
NET ASSET VALUE, END OF YEAR..................... $29.38 $23.84 $18.79
====== ====== ======
TOTAL RETURN (%)(e).............................. 35.63 32.22 19.91(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily 2.00 2.13 2.36(c)
assets.......................................
Net investment income to average daily net (.85) (.94) (.46)(c)
assets.......................................
Portfolio turnover rate...................... 54 80 89
Net assets, end of year ($ millions)......... 90 25 4
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
+ For the period April 3, 1995 (first offering of Class C shares) to October
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares to
October 31, 1998.
^ Eagle Asset Management, Inc. became an additional subadviser to the fund
on August 7, 1995.
(a) Excludes management fees waived by Heritage in fiscal 1993 of less than
$.01 per share. The operating expense ratio including such items would be
2.09% (annualized). The year 1994 includes previously waived management
fees paid to Heritage of less than $.01 per share.
(b) Excludes management fees waived and expenses reimbursed in the amount of
$.07 and $.13 per Class A Shares, respectively. The operating expense
ratios including such items would have been 1.99% and 3.49% for Class A
Shares, respectively. Excludes management fees waived and expense
reimbursed by Heritage in the amount of $.07 and $.13 per Class C Shares,
respectively. The operating expense ratio including such items would have
been 2.74% and 4.24% (annualized) for Class C Shares.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
37A
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance
of the Class A shares, Class B shares and Class C shares of the Value Equity
Fund outstanding for the periods indicated. Certain information reflects
financial results for a single Class A share, Class B share or Class C share.
The total returns in the table represent the rate that an investor would have
earned on an investment in the fund (assuming reinvestment of all dividends and
distributions). The information in this table for the periods presented has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose report,
along with the fund's financial statements, are included in the statement of
additional information, which is available upon request.
<TABLE>
<CAPTION>
VALUE EQUITY FUND
CLASS A CLASS B
------------------------------------------- ---------------
FOR THE
YEAR ENDED
FOR THE YEARS ENDED OCTOBER 31, OCTOBER 31,
-------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995+++ 1998++
---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $20.27 $18.00 $14.29
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. .22 .17(b) .08(b)
Net realized and unrealized gain on investments 5.23 2.76 3.63
---- ------- -------
Total from Investment Operations............. 5.45 2.93 3.71
---- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investments income........ (.15) (.11) -
Distributions from net realized gains on
investments................................. (1.30) (.55) -
------ -------- --------
Total distributions.......................... (1.45) (.66) -
------ -------- --------
NET ASSET VALUE, END OF YEAR..................... $24.27 $20.27 $18.00
====== ====== ======
TOTAL RETURN (%)(e).............................. 28.69 16.59 25.96(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily assets 1.61 1.65(b) 1.65(b)c)
Net investment income to average daily net
assets....................................... .96 .89 1.05(c)
Portfolio turnover rate...................... 155 129 82
Net assets, end of year ($ millions)......... 19 15 12
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
+ For the period April 3, 1995 (first offering of Class C shares) to October
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares to
October 31, 1998.
+++ For the period December 30, 1994 (commencement operations) to October 31,
1995.
^ Eagle Asset Management, Inc. became an additional subadviser to the fund
on August 7, 1995.
(a) Excludes management fees waived by Heritage in fiscal 1993 of less than
$.01 per share. The operating expense ratio including such items would be
2.09% (annualized). The year 1994 includes previously waived management
fees paid to Heritage of less than $.01 per share.
(b) Excludes management fees waived and expenses reimbursed in the amount of
$.07 and $.13 per Class A Shares, respectively. The operating expense
ratios including such items would have been 1.99% and 3.49% for Class A
Shares, respectively. Excludes management fees waived and expense
reimbursed by Heritage in the amount of $.07 and $.13 per Class C Shares,
respectively. The operating expense ratio including such items would have
been 2.74% and 4.24% (annualized) for Class C Shares.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
38
<PAGE>
<TABLE>
<CAPTION>
VALUE EQUITY FUND
CLASS C
----------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1996 1995+
---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE YEAR........... $20.06 $17.92 $15.27
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. .05 .02(b) .01(b)
Net realized and unrealized gain on investments 5.20 2.74 2.64
---- ------ ------
Total from Investment Operations............. 5.25 2.76 2.65
---- ------ ------
LESS DISTRIBUTIONS:
Dividends from net investments income........ (.03) (.07) -
Distributions from net realized gains on
investments................................. (1.30) (.55) -
------ ------- -------
Total distributions.......................... (1.33) (.62) -
------ ------- -----
NET ASSET VALUE, END OF YEAR..................... $23.98 $20.06 $17.92
====== ====== ======
TOTAL RETURN (%)(e).............................. 27.79 15.65 17.35(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily assets 2.36 2.40(b) 2.40 (b)(c)
Net investment income to average daily net
assets....................................... .21 .13 .28 (c)
Portfolio turnover rate...................... 155 129 82
Net assets, end of year ($ millions)......... 13 10 4
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately represents per share data for the period
since use of the undistributed income method does not correspond with
results of operation.
+ For the period April 3, 1995 (first offering of Class C shares) to October
31, 1995.
++ For the period January 2, 1998 (first offering of Class B shares to
October 31, 1998.
+++ For the period December 30, 1994 (commencement operations) to October 31,
1995.
^ Eagle Asset Management, Inc. became an additional subadviser to the fund
on August 7, 1995.
(a) Excludes management fees waived by Heritage in fiscal 1993 of less than
$.01 per share. The operating expense ratio including such items would be
2.09% (annualized). The year 1994 includes previously waived management
fees paid to Heritage of less than $.01 per share.
(b) Excludes management fees waived and expenses reimbursed in the amount of
$.07 and $.13 per Class A Shares, respectively. The operating expense
ratios including such items would have been 1.99% and 3.49% for Class A
Shares, respectively. Excludes management fees waived and expense
reimbursed by Heritage in the amount of $.07 and $.13 per Class C Shares,
respectively. The operating expense ratio including such items would have
been 2.74% and 4.24% (annualized) for Class C Shares.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales charge.
38A
<PAGE>
FOR MORE INFORMATION
================================================================================
More information on these funds is available free upon request, including the
following:
ANNUAL/SEMIANNUAL REPORTS. Describes each fund's performance, lists portfolio
holdings and contains a letter from the fund's manager discussing recent market
conditions, economic trends and fund strategies.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Provides more details about each fund
and its policies. A current SAI is on file with the Securities and Exchange
Commission and is incorporated herein by reference (is legally considered part
of this prospectus).
To obtain information contact Heritage Mutual Funds:
By mail: 880 Carillon Parkway
St. Petersburg, Florida 33716
By telephone: (800) 421-4184
By E-mail: [email protected]
For prospectus and SAI requests only.
No fund orders will be accepted by e-mail.
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (800-SEC-0330) and may be viewed
on-screen or downloaded from the SEC's Internet web site at http://www.sec.gov.
The funds' investment company and 1993 Act registration numbers are:
Heritage Capital Appreciation Trust 811-4338 2-98634
Heritage Income-Growth Trust 811-4767 33-7559
Heritage Series Trust: 811-7470 33-57986
Aggressive Growth Fund 811-7470 33-57986
Eagle International Equity Portfolio 811-7470 33-57986
Growth Equity Fund 811-7470 33-57986
Mid Cap Growth Fund 811-7470 33-57986
Small Cap Stock Fund 811-7470 33-57986
Value Equity Fund 811-7470 33-57986
HERITAGE
ASSET MANAGEMENT, INC.
Registered Investment Advisor--SEC
No dealer, salesman or other person has been authorized to give any information
or to make any representation other than that contained in this Prospectus in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the funds or their distributor. This Prospectus does not
constitute an offering in any state in which such offering may not lawfully be
made.
39
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HERITAGE EQUITY FUNDS
. AGGRESSIVE GROWTH FUND . INCOME-GROWTH TRUST
. CAPITAL APPRECIATION TRUST . MID CAP GROWTH FUND
. EAGLE INTERNATIONAL EQUITY . SMALL CAP STOCK FUND
PORTFOLIO . VALUE EQUITY FUND
. GROWTH EQUITY FUND
This Statement of Additional Information ("SAI") dated January 1, 1999,
should be read in conjunction with the Prospectus dated January 1, 1999
describing the Class A, Class B and Class C shares of the Heritage Series Trust,
which includes the Aggressive Growth Fund,. the Eagle International Equity
Portfolio, the Growth Equity Fund, the Mid Cap Growth Fund, the Small Cap Stock
Fund and the Value Equity Fund, the Capital Appreciation Trust and the
Income-Growth Trust (each a "fund" and, collectively, the "funds").
This SAI is not a prospectus itself. To receive a copy of the funds'
Prospectus, write to Heritage Asset Management, Inc. ("Heritage") at the address
below or call (800) 421-4184.
HERITAGE ASSET MANAGEMENT, INC.
880 Carillon Parkway, St. Petersburg, Florida 33716
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION..........................................................1
INVESTMENT INFORMATION.......................................................1
Investment Policies and Strategies.....................................1
Industry Classifications..............................................18
INVESTMENT LIMITATIONS......................................................18
NET ASSET VALUE.............................................................22
PERFORMANCE INFORMATION.....................................................23
INVESTING IN THE FUNDS......................................................28
Systematic Investment Options.........................................28
Retirement Plans......................................................28
Class A Combined Purchase Privilege (Right of Accumulation)...........29
Class A Statement of Intention........................................30
REDEEMING SHARES............................................................30
Systematic Withdrawal Plan............................................30
Telephone Transactions................................................31
Redemptions in Kind...................................................31
Receiving Payment.....................................................31
EXCHANGE PRIVILEGE..........................................................32
CONVERSION OF CLASS B SHARES................................................33
TAXES ......................................................................33
FUND INFORMATION............................................................37
Management of the Funds...............................................37
Five Percent Shareholders.............................................40
Investment Advisers and Administrator; Subadvisers....................40
Brokerage Practices...................................................44
Distribution of Shares................................................46
Administration of the Funds...........................................48
Potential Liability...................................................49
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
REPORTS OF THE INDEPENDENT ACCOUNTANTS & FINANCIAL STATEMENTS..............C-1
<PAGE>
GENERAL INFORMATION
The Heritage Capital Appreciation Trust ("Capital Appreciation"), the
Heritage Income-Growth Trust ("Income-Growth"), and the Heritage Series Trust
("Series Trust") each was established as a Massachusetts business trust under a
Declaration of Trust dated June 21, 1985, July 25, 1986, and October 28, 1992,
respectively. All are registered as open-end diversified management investment
companies under the Investment Company Act of 1940, as amended (the "1940 Act").
Capital Appreciation and Income-Growth each offer shares through a single
investment portfolio. Series Trust currently offers its shares through six
separate investment portfolios: the Aggressive Growth Fund ("Aggressive
Growth"), the Eagle International Equity Portfolio ("Eagle International"), the
Growth Equity Fund ("Growth Equity"), the Mid Cap Growth Fund ("Mid Cap"), the
Small Cap Stock Fund ("Small Cap") and the Value Equity Fund ("Value Equity").
Each fund offers three classes of shares, Class A shares sold subject to a 4.75%
maximum front-end sales charge ("Class A shares"), Class B shares sold subject
to a 5% maximum contingent deferred sales charge ("CDSC"), declining over a
six-year period ("Class B shares"), and Class C shares sold subject to a 1% CDSC
("Class C shares"). Eagle International also offers Eagle Class shares, which
are not covered in this SAI. To obtain more information about Eagle Class
shares, call (800) 237-3101.
INVESTMENT INFORMATION
INVESTMENT POLICIES AND STRATEGIES
Each fund may invest in various securities and instruments to achieve its
investment objective. The FUND INVESTMENT TABLE at APPENDIX A provides
information regarding the extent to which a fund may invest in a specific
instrument. Below is a detailed description of such instruments.
EQUITY SECURITIES:
PREFERRED STOCK. Each fund may invest in preferred stock. A preferred stock
is a blend of the characteristics of a bond and common stock. It can offer the
higher yield of a bond and has priority over common stock in equity ownership,
but does not have the seniority of a bond and its participation in the issuer's
growth may be limited. Preferred stock has preference over common stock in the
receipt of dividends and in any residual assets after payment to creditors
should the issuer be dissolved. Although the dividend is set at a fixed annual
rate, in some circumstances it can be changed or omitted by the issuer.
REAL ESTATE INVESTMENT TRUSTS ("REITs"). Each fund may invest in REITs.
REITs include equity REITs, which own real estate properties, and mortgage
REITs, which make construction, development and long-term mortgage loans. The
value of an equity REIT may be affected by changes in the value of the
underlying property, while a mortgage REIT may be affected by the quality of the
credit extended. The performance of both types of REITs depends upon conditions
in the real estate industry, management skills and the amount of cash flow. The
risks associated with REITs include defaults by borrowers, self-liquidation,
failure to qualify as a pass-through entity under the Federal tax law, failure
to qualify as an exempt entity under the 1940 Act, and the fact that REITs are
not diversified.
WARRANTS AND RIGHTS. Each fund may purchase warrants and rights, which are
instruments that permit a fund to acquire, by subscription, the capital stock of
a corporation at a set price, regardless of the market price for such stock.
Aggressive Growth, Eagle International, Growth Equity, Mid Cap, Small Cap and
Value Equity currently do not intend to invest more than 5% of their respective
net assets in warrants. Warrants may be either perpetual or of limited duration.
There is a greater risk that warrants might drop in value at a faster rate than
<PAGE>
the underlying stock. Eagle International also may invest in warrants or rights
acquired by Eagle International as part of a unit or attached to securities at
the time of purchase without limitation.
CONVERTIBLE SECURITIES. Each fund may invest in convertible securities.
Convertible securities include corporate bonds, notes and preferred stock that
can be converted into or exchanged for a prescribed amount of common stock of
the same or a different issue within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or dividends paid on preferred stock until the
convertible stock matures or is redeemed, converted or exchanged. Convertible
securities combine the fixed-income characteristics of bonds and capital
appreciation potential of preferred stock. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than the issuer's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security. The market value of
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. While convertible securities
generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from
increases in the market price of the underlying common stock. Please see the
discussion of Investment Grade and Lower Rated / High Yield Securities for
additional information.
AMERICAN DEPOSITORY RECEIPTS ("ADRs"):
Each fund, except Capital Appreciation, may invest in sponsored and
unsponsored ADRs. Capital Appreciation may invest only in sponsored ADRs. ADRs
are receipts that represent interests in or are convertible into, securities of
foreign issuers. These receipts are not necessarily denominated in the same
currency as the underlying securities into which they may be converted.
ADRs may be purchased through "sponsored" or "unsponsored" facilities. A
sponsored facility is established jointly by the issuer of the underlying
security and a depository, whereas a depository may establish an unsponsored
facility without participation by the issuer of the depository security. Holders
of unsponsored depository receipts generally bear all the costs of such
facilities and the depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through voting rights to the holders of such
receipts of the deposited securities. Generally, ADRs in registered form are
designed for use in the U.S. securities market and ADRs in bearer form are
designed for use outside the United States. For purposes of certain investment
limitations, ADRs are considered to be foreign securities by Capital
Appreciation, Growth Equity, and Income-Growth and are subject to many of the
risks inherent in investing in foreign securities, as discussed previously.
DEBT SECURITIES:
DEBT SECURITIES. Each fund except Capital Appreciation may invest in debt
securities. The market value of debt securities is influenced primarily by
changes in the level of interest rates. Generally, as interest rates rise, the
market value of debt securities decreases. Conversely, as interest rates fall,
the market value of debt securities increases. Factors that could result in a
rise in interest rates, and a decrease in the market value of debt securities,
include an increase in inflation or inflation expectations, an increase in the
rate of U.S. economic growth, an increase in the Federal budget deficit or an
increase in the price of commodities such as oil.
CORPORATE DEBT OBLIGATIONS. Eagle International, Income-Growth and Mid Cap
may invest in corporate debt securities, including corporate bonds, debentures,
notes and other similar corporate debt instruments. The funds' invest primarily
in investment grade non-convertible corporate debt. Income-Growth and Mid Cap
2
<PAGE>
may invest no more than 10% and 5% of their respective assets in below
investment grade non-convertible corporate debt obligations. Please see the
discussion of Investment Grade and Lower Rated / High Yield Securities for
additional information.
INVESTMENT GRADE/LOWER RATED SECURITIES:
INVESTMENT GRADE SECURITIES. Each fund may invest in securities rated
investment grade. Investment grade securities include securities rated BBB or
above by Standard & Poor's ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are deemed to be of comparable quality by a fund's
subadviser. Securities rated in the lowest category of investment grade are
considered to have speculative characteristics and changes in economic
conditions are more likely to lead to a weakened capacity to pay interest and
repay principal than is the case with higher grade bonds. Each fund may retain a
security that has been downgraded below investment grade if, in the opinion of
its subadviser, it is in the fund's best interest.
LOWER RATED / HIGH-YIELD SECURITIES. Securities rated below investment
grade, i.e., rated below BBB or Baa by S&P and Moody's, respectively, or unrated
securities determined to be below investment grade by its subadviser, are
commonly referred to as "junk bonds." These securities are deemed to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
These securities are subject to specific risks that may not be present with
investments of higher grade securities.
RISK FACTORS OF LOWER RATED / HIGH-YIELD SECURITIES:
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The prices of high-yield
securities tend to be less sensitive to interest rate changes than higher rated
investments, but may be more sensitive to adverse economic changes or individual
corporate developments. Periods of economic uncertainty and changes generally
result in increased volatility in market prices and yields of high-yield
securities and, thus, in a fund's net asset value. A strong economic downturn or
a substantial period of rising interest rates could affect severely the market
for high-yield securities. In these circumstances, highly leveraged companies
might have difficulty in making principal and interest payments, meeting
projected business goals, and obtaining additional financing. Thus, there could
be a higher incidence of default. This would affect the value of such securities
and, thus, a fund's net asset value. Further, if the issuer of a security owned
by the fund defaults, it might incur additional expenses to seek recovery.
Generally, when interest rates rise, the value of fixed-rate debt
obligations, including high-yield securities, tends to decrease; when interest
rates fall, the value of fixed-rate debt obligations tends to increase. If an
issuer of a high-yield security containing a redemption or call provision
exercises either provision in a declining interest rate market, a fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if a fund experiences unexpected net redemptions in a
rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which the fund's expenses could be allocated and in a reduced rate of return for
it. While it is impossible to protect entirely against this risk,
diversification of a fund's investment portfolio and its subadviser's careful
analysis of prospective investment portfolio securities should minimize the
impact of a decrease in value of a particular security or group of securities in
the fund's investment portfolio.
THE HIGH-YIELD SECURITIES MARKET. The market for below investment grade
bonds expanded rapidly in the 1980s, and its growth paralleled a long economic
expansion. During that period, the yields on below investment grade bonds rose
dramatically. Such higher yields did not reflect the value of the income stream
that holders of such bonds expected, but rather the risk that holders of such
bonds could lose a substantial portion of their value as a result of the
3
<PAGE>
issuers' financial restructuring or default. In fact, from 1989 to 1991 during a
period of economic recession, the percentage of lower quality bonds that
defaulted rose significantly, although the default rate decreased in subsequent
years. There can be no assurance that such declines in the below investment
grade market will not reoccur. The market for below investment grade bonds
generally is thinner and less active than that for higher quality bonds, which
may limit a fund's ability to sell such securities at fair value in response to
changes in the economy or financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, also may decrease the
values and liquidity of lower rated securities, especially in a thinly traded
market.
CREDIT RATINGS. The credit ratings issued by credit rating services may not
reflect fully the true risks of an investment. For example, credit ratings
typically evaluate the safety of principal and interest payments, not market
value risk, of high-yield securities. Also, credit rating agencies may fail to
change timely a credit rating to reflect changes in economic or company
conditions that affect a security's market value. Although a fund's subadviser
considers ratings of recognized rating services such as Moody's and S&P, the
subadviser primarily relies on its own credit analyses, which include a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. A fund's subadviser continually monitors the
investments in its respective investment portfolio and carefully evaluates
whether to dispose of or retain high-yield securities whose credit ratings have
changed. See the Appendix for a description of Moody's and S&P's corporate debt
ratings.
LIQUIDITY AND VALUATION. Lower rated bonds typically are traded among a
smaller number of broker-dealers than in a broad secondary market. Purchasers of
high-yield securities tend to be institutions, rather than individuals, which is
a factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many high-yield securities may not
be as liquid as higher grade bonds. A less active and thinner market for
high-yield securities than that available for higher quality securities may
limit a fund's ability to sell such securities at that fair market value in
response to changes in the economy or the financial markets. The ability of a
fund to value or sell high-yield securities also will be affected adversely to
the extent that such securities are thinly traded or illiquid. During such
periods, there may be less reliable objective information available and thus the
responsibility of the Board to value high-yield securities becomes more
difficult, with judgment playing a greater role. Further, adverse publicity
about the economy or a particular issuer may affect adversely the public's
perception of the value, and thus liquidity of a high-yield security, whether or
not such perceptions are based on a fundamental analysis. See "Net Asset Value."
SHORT-TERM MONEY MARKET INSTRUMENTS:
BANKERS' ACCEPTANCES. Bankers' acceptances are short-term credit
instruments used to finance commercial transactions. Generally, an acceptance is
a time draft drawn on a bank by an exporter or an importer to obtain a stated
amount of funds to pay for specific merchandise. The draft is then "accepted" by
a bank that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset, or it may be sold in the secondary market at the
going rate of interest for a specified maturity. Although maturities for
acceptances can be as long as 270 days, most acceptances have maturities of six
months or less.
Each fund may invest in bankers' acceptances. Income-Growth may invest in
bankers' acceptances of domestic banks and savings and loans that have assets of
at least $1 billion and capital, surplus, and undivided profits of over $100
million as of the close of their most recent fiscal year, or instruments that
are insured by the Bank Insurance Fund or the Savings Institution Insurance Fund
of the Federal Deposit Insurance Corporation.
4
<PAGE>
CERTIFICATES OF DEPOSIT ("CDS"). Each fund may invest in CDs issued by
domestic institutions with assets in excess of $1 billion. The Federal Deposit
Insurance Corporation is an agency of the U.S. Government that insures the
deposits of certain banks and savings and loan associations up to $100,000 per
deposit. The interest on such deposits may not be insured if this limit is
exceeded. Current federal regulations also permit such institutions to issue
insured negotiable CDs in amounts of $100,000 or more, without regard to the
interest rate ceilings on other deposits. To remain fully insured, these
investments must be limited to $100,000 per insured bank or savings and loan
association.
COMMERCIAL PAPER. Each fund, except Eagle International, may invest in
commercial paper that is limited to obligations rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by S&P. Eagle International may invest in commercial paper
that is rated Prime-1 by Moody's or A-1 by S&P. Commercial paper includes notes,
drafts or similar instruments payable on demand or having a maturity at the time
of issuance not exceeding nine months, exclusive of days of grace or any renewal
thereof. See the Appendix for a description of commercial paper ratings.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:
REPURCHASE AGREEMENTS. Each fund may invest in repurchase agreements.
Repurchase agreements are transactions in which a fund purchases securities and
commits to resell the securities to the original seller (a member bank of the
Federal Reserve System or securities dealers who are members of a national
securities exchange or are market makers in U.S. Government securities) at an
agreed upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. Although repurchase
agreements carry certain risks not associated with direct investment in
securities, including possible declines in the market value of the underlying
securities and delays and costs to a fund if the other party becomes bankrupt, a
fund intends to enter into repurchase agreements only with banks and dealers in
transactions believed by its subadviser to present minimal credit risks in
accordance with guidelines established by the Board of Trustees.
The period of these repurchase agreements usually will be short, from
overnight to one week, and at no time will the funds invest in repurchase
agreements of more than one year. The securities that are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The funds always will receive as
collateral securities whose market value, including accrued interest, will be at
least equal to 100% of the dollar amount invested by the funds in each
agreement, and the funds will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of the
fund's custodian ("Custodian") bank.
REVERSE REPURCHASE AGREEMENTS. Growth Equity, Small Cap and Value Equity
may borrow by entering into reverse repurchase agreements with the same parties
with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, a fund sells securities and agrees to repurchase them at a mutually
agreed to price. At the time a fund enters into a reverse repurchase agreement,
it will establish and maintain a segregated account with an approved custodian
containing liquid high-grade securities, marked-to-market daily, having a value
not less than the repurchase price (including accrued interest). Reverse
repurchase agreements involve the risk that the market value of securities
retained in lieu of sale by a fund may decline below the price of the securities
the fund has sold but is obliged to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce a fund's obligation to repurchase the
securities and a fund's use of the proceeds of the reverse repurchase agreement
effectively may be restricted pending such decisions. Reverse repurchase
agreements create leverage, a speculative factor, and are considered borrowings
for the purpose of a fund's limitation on borrowing.
5
<PAGE>
U.S. GOVERNMENT AND ZERO COUPON SECURITIES:
U.S. GOVERNMENT SECURITIES. Each fund may invest in U.S. Government
securities. U.S. Government securities include a variety of securities that are
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements secured thereby. These securities include securities
issued and guaranteed by the full faith and credit of the U.S. Government, such
as Treasury bills, Treasury notes, and Treasury bonds; obligations supported by
the right of the issuer to borrow from the U.S. Treasury, such as those of the
Federal Home Loan Banks; and obligations supported only by the credit of the
issuer, such as those of the Federal Intermediate Credit Banks.
ZERO COUPON SECURITIES. Income-Growth may invest in zero coupon securities.
Zero coupon securities are debt obligations that do not entitle the holder to
any periodic payment of interest prior to maturity or a specified date when the
securities begin paying current interest. Zero coupon securities are issued and
traded at a discount from their face amount or par value, which discount rate
varies depending on the time remaining until cash payments begin, prevailing
interest rates, liquidity of the security, and the perceived credit quality of
the issuer. The market prices of zero coupon securities generally are more
volatile than the prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do other
types of debt securities having similar maturities and credit value.
FOREIGN SECURITIES EXPOSURE:
DEPOSITORY RECEIPTS. European Depository Receipts ("EDRs"), Global
Depository Receipts ("GDRs") and International Depository Receipts ("IDRs") are
receipts that represent interests in or are convertible into, securities of
foreign issuers. These receipts are not necessarily denominated in the same
currency as the underlying securities into which they may be converted.
Aggressive Growth, Eagle International, Growth Equity, Income-Growth, Small
Cap and Value Equity may invest in sponsored or unsponsored EDRs, GDRs, IDRs or
other similar securities representing interests in or convertible into
securities of foreign issuers (collectively "Depository Receipts"). EDRs and
IDRs are receipts typically issued by a European bank or trust company
evidencing ownership of the underlying foreign securities. GDRs are issued
globally for trading in non-U.S. securities markets and evidence a similar
ownership arrangement. Depository Receipts may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
As with ADRs, the issuers of the securities underlying unsponsored Depository
Receipts are not obligated to disclose material information in the United States
and, therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the market value
of the Depository Receipts. Depository Receipts also involve the risks of other
investments in foreign securities, as discussed previously. For purposes of
certain investment limitations, EDRs, GDRs, and IDRs are considered to be
foreign securities by Income-Growth.
EURO/YANKEE BONDS. Eagle International may invest in dollar-denominated
bonds issued by foreign branches of domestic banks ("Eurobonds") and
dollar-denominated bonds issued by a U.S. branch of a foreign bank and sold in
the United States ("Yankee bonds"). Investment in Eurobonds and Yankee bonds
entails certain risks similar to investment in foreign securities in general.
These risks are discussed below.
EURODOLLAR CERTIFICATES. Income-Growth may purchase CDs issued by foreign
branches of domestic and foreign banks. Domestic and foreign Eurodollar
certificates, such as CDs and time deposits, may be general obligations of the
parent bank in addition to the issuing branch or may be limited by the terms of
a specific obligation or governmental regulation. Such obligations may be
subject to different risks than are those of domestic banks or domestic branches
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of foreign banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may affect adversely
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding and other taxes on interest income. Foreign branches of
foreign banks are not necessarily subject to the same or similar regulatory
requirements, loan limitations, and accounting, auditing and recordkeeping
requirements as are domestic banks or domestic branches of foreign banks. In
addition, less information may be publicly available about a foreign branch of a
domestic bank or a foreign bank than a domestic bank.
FOREIGN SECURITIES. Each fund, except Small Cap, may invest in foreign
securities. In most cases, the best available market for foreign securities will
be on exchanges or in over-the-counter markets located outside the United
States. Foreign stock markets, while growing in volume and sophistication,
generally are not as developed as those in the United States, and securities of
some foreign issuers (particularly those located in developing countries) may be
less liquid and more volatile than securities of comparable U.S. companies. In
addition, foreign brokerage commissions generally are higher than commissions on
securities traded in the United States. In general, there is less overall
governmental supervision and regulation of securities exchanges, brokers and
listed companies than in the United States. Investments in foreign securities
also involve the risk of possible adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation, limitation on or
delays in the removal of funds or other assets of a fund, political or financial
instability or diplomatic and other developments that could affect such
investments. Further, the economies of some countries may differ favorably or
unfavorably from the economy of the United States.
In addition, Eagle International may invest in emerging markets. Special
considerations (in addition to the considerations regarding foreign investments
generally) may include greater political uncertainties, an economy's dependence
on revenues from particular commodities or on international aid or development
assistance, currency transfer restrictions, a limited number of potential buyers
for such securities and delays and disruptions in securities settlement
procedures.
No fund will invest in foreign securities when there are currency or
trading restrictions in force or when, in the judgment of its subadviser, such
restrictions are likely to be imposed. However, certain currencies may become
blocked (i.e., not freely available for transfer from a foreign country),
resulting in the possible inability of the fund to convert proceeds realized
upon sale of portfolio securities of the affected foreign companies into U.S.
currency.
Because investments in foreign companies usually will involve currencies of
foreign countries and because Aggressive Growth, Capital Appreciation, Growth
Equity, Income-Growth, and Value Equity may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs, the
value of any of the assets of these funds as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the fund may incur costs in connection
with conversions between various currencies. Each fund will conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. Additionally, to protect
against uncertainty in the level of future exchange rates, certain funds, as
discussed below in the section on futures, forwards, and hedging transactions,
Capital Appreciation, Income-Growth, Growth Equity and Value Equity may enter
into contracts to purchase or sell foreign currencies at a future date (a
"forward currency contract" or "forward contract").
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HEDGING INSTRUMENTS: - FUTURES, FORWARDS AND HEDGING TRANSACTIONS:
GENERAL DESCRIPTION. A fund may use a variety of financial instruments
("Hedging Instruments"), including futures contracts (sometimes referred to as
"futures"), options, options on futures and forward currency contracts, to
attempt to hedge the fund's investment portfolio. Capital Appreciation, Eagle
International, Growth Equity, Income-Growth and Value Equity also may use
forward currency contracts to shift exposure from one foreign currency to
another.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is the purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's investment portfolio. Thus, in a short hedge, a
fund takes a position in a Hedging Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged. A long hedge
is the purchase or sale of a Hedging Instrument intended partially or fully to
offset potential increases in the acquisition cost of one or more investments
that the fund intends to acquire. Thus, in a long hedge, a fund takes a position
in a Hedging Instrument whose price is expected to move in the same direction as
the price of the prospective investment being hedged.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a fund owns or
intends to acquire. Hedging Instruments on indices may be used to hedge broad
market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the exchanges upon which they are traded, and the Commodity Futures Trading
Commission ("CFTC"). In addition, a fund's ability to use Hedging Instruments
may be limited by tax considerations. See "Taxes."
In addition to the products and strategies described below, the funds
expect to discover additional opportunities in connection with options, futures
contracts, forward currency contracts and other hedging techniques. These new
opportunities may become available as each fund's subadviser develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, forward currency contracts
or other techniques are developed. A fund's subadviser may utilize these
opportunities to the extent that it is consistent with a fund's investment
objectives and permitted by the fund's investment limitations and applicable
regulatory authorities.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon a fund's
subadviser's ability to predict movements of the overall securities, currency
and interest rate markets, which requires different skills than predicting
changes in the prices of individual securities. While each fund's subadvisers
are experienced in the use of Hedging Instruments, there can be no assurance
that any particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging Instrument used
in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Hedging
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Instruments are traded. The effectiveness of hedges using Hedging Instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the securities being hedged.
To compensate for imperfect correlation, a fund may purchase or sell
Hedging Instruments in a greater dollar amount than the hedged securities or
currency if the volatility of the hedged securities or currency is historically
greater than the volatility of the Hedging Instruments. Conversely, a fund may
purchase or sell fewer contracts if the volatility of the price of the hedged
securities or currency is historically less than that of the Hedging
Instruments.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies also can
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because its subadviser projected a decline in the price of a security in
the fund's investment portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the fund could suffer a loss. In either such case, the fund would have
been in a better position had it not hedged at all.
(4) As described below, each fund might be required to maintain
assets as "cover," maintain segregated accounts or make margin payments when it
takes positions in Hedging Instruments involving obligations to third parties.
If a fund were unable to close out its positions in such Hedging Instruments, it
might be required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might impair
a fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the fund sell a
portfolio security at a disadvantageous time. A fund's ability to close out a
position in a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("counterparty")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the fund.
COVER FOR HEDGING STRATEGIES. Some Hedging Instruments expose a fund
to an obligation to another party. A fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, forward currency contracts, options or futures contracts
or (2) cash and other liquid assets with a value sufficient at all times to
cover its potential obligations to the extent not covered as provided in (1)
above. Each fund will comply with SEC guidelines regarding cover for instruments
and will, if the guidelines so require, set aside cash or other liquid assets in
a segregated account with the funds' custodian, in the prescribed amount.
Assets used as cover or otherwise set aside cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of a fund's assets to cover in segregated accounts could impede its
ability to meet redemption requests or other current obligations.
OPTIONS, FUTURES AND OPTIONS ON FUTURES TRADING
Growth Equity, Income-Growth and Value Equity may engage in certain
options (including options on securities, equity and debt indices and
currencies, futures and options on futures strategies) in order to hedge their
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respective investments. Eagle International may only purchase and sell stock
index and currency futures contracts. Certain special characteristics of and
risks with these strategies are discussed below.
CHARACTERISTICS AND RISKS OF OPTIONS TRADING. A fund effectively may
terminate its right or obligation under an option by entering into a closing
transaction. If the fund wished to terminate its obligation to purchase or sell
securities under a put or call option it has written, it may purchase a put or
call option of the same series (i.e., an option identical in its terms to the
option previously written); this is known as a closing purchase transaction.
Conversely, in order to terminate its right to purchase or sell under a call or
put option it has purchased, a fund may write a call or put option of the same
series. This is known as a closing sale transaction. Closing transactions
essentially permit the fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. Whether a profit or
loss is realized from a closing transaction depends on the price movement of the
underlying security, index, currency or futures contract and the market value of
the option.
In considering the use of options to hedge, particular note
should be taken of the following:
(1) The value of an option position will reflect, among other
things, the current market price of the underlying security, index, currency or
futures contract, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying instrument and general market conditions. For this reason, the
successful use of options as a hedging strategy depends upon a fund's
subadviser's ability to forecast the direction of price fluctuations in the
underlying instrument.
(2) At any given time, the exercise price of an option may be below,
equal to or above the current market value of the underlying instrument.
Purchased options that expire unexercised have no value. Unless an option
purchased by a fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out only
on an exchange that provides a secondary market for identical options. Most
exchange-listed options relate to futures contracts, stocks and currencies. The
ability to establish and close out positions on the exchanges is subject to the
maintenance of a liquid secondary market. Closing transactions may be effected
with respect to options traded in the OTC markets (currently the primary markets
of options on debt securities) only by negotiating directly with the other party
to the option contract, or in a secondary market for the option if such market
exists. Although a fund intends to purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any specific
time. In such event, it may not be possible to effect closing transactions with
respect to certain options, with the result that the fund would have to exercise
those options that it has purchased in order to realize any profit. With respect
to options written by a fund, the inability to enter into a closing transaction
may result in material losses to it. For example, because a fund may maintain a
covered position with respect to any call option it writes on a security, it may
not sell the underlying security during the period it is obligated under such
option. This requirement may impair the fund's ability to sell a portfolio
security or make an investment at a time when such a sale or investment might be
advantageous.
(4) Activities in the options market may result in a higher
portfolio turnover rate and additional brokerage costs; however, a fund also may
save on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation of market movements.
(5) The risks of investment in options on indices may be greater
than options on securities or currencies. Because index options are settled in
cash, when a fund writes a call on an index it cannot provide in advance for its
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potential settlement obligations by acquiring and holding the underlying
securities. A fund can offset some of the risk of writing a call index option by
holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the fund cannot, as a practical matter,
acquire and hold an investment portfolio containing exactly the same securities
as underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if a fund could assemble an investment portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, a fund as the call writer will not
learn that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date. By the time it learns that it has been assigned, the index
may have declined, with a corresponding decline in the value of its investment
portfolio. This "timing risk" is an inherent limitation on the ability of index
call writers to cover their risk exposure by holding securities positions.
If a fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index subsequently may change. If such a change causes the
exercised option to fall out-of-the-money, the fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
COVERED CALL OPTIONS. Income-Growth and Value Equity may write
covered call options on securities to increase income in the form of premiums
received from the purchasers of the options. Because it can be expected that a
call option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, a fund will write covered
call options on securities generally when its subadviser believes that the
premium received by the fund, anticipated appreciation in the market price of
the underlying security up to the exercise price of the option, will be greater
than the total appreciation in the price of the security. For Income-Growth, the
aggregate value of the securities underlying call options (based on the lower of
the option price or market) may not exceed 50% of its net assets. For Value
Equity, its investment in covered call options may not exceed 10% of the fund's
total assets.
The strategy also may be used to provide limited protection against
a decrease in the market price of the security in an amount equal to the premium
received for writing the call option, less any transaction costs. Thus, if the
market price of the underlying security held by a fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by the fund. If, however, there is an increase in the market price of
the underlying security and the option is exercised, the fund will be obligated
to sell the security at less than its market value. A fund would lose the
ability to participate in the value of such securities above the exercise price
of the call option. A fund also gives up the ability to sell the portfolio
securities used to cover the call option while the call option is outstanding.
GUIDELINES, CHARACTERISTICS AND RISKS OF FUTURES AND OPTIONS ON FUTURES
TRADING. Although futures contracts by their terms call for actual delivery or
acceptance of currencies or financial instruments, in most cases the contracts
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are closed out before the settlement date without the making or taking of
delivery. Closing out a futures contract sale is effected by purchasing a
futures contract for the same aggregate amount of the specific type of financial
instrument or currency and the same delivery date. If the price of the initial
sale of the futures contract exceeds the price of the offsetting purchase, the
seller is paid the difference and realizes a gain. Conversely, if the price of
the offsetting purchase exceeds the price of the initial sale, the seller
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the purchaser entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a gain,
and if the purchase price exceeds the offsetting sale price, he realizes a loss.
A fund is required to maintain margin deposits with brokerage firms
through which it buys and sells futures contracts or writes options on future
contracts. Initial margin deposits vary from contract to contract and are
subject to change. Margin balances will be adjusted daily to reflect unrealized
gains and losses on open contracts. If the price of an open futures or written
option position declines so that a fund has market exposure on such contract,
the broker will require the fund to deposit variation margin. If the value of an
open futures or written option position increases so that a fund no longer has
market exposure on such contract, the broker will pay any excess variation
margin to the fund.
Most of the exchanges on which futures contracts and options on
futures are traded limit the amount of fluctuation permitted in futures and
options prices during a single trading day. The daily price limit establishes
the maximum amount that the price of a futures contract or option may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily price limit has been reached in a particular
type of contract, no trades may be made on that day at a price beyond that
limit. The daily price limit governs only price movement during a particular
trading day and therefore does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. Futures contract and options
prices occasionally have moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures or options positions and subjecting some traders to substantial losses.
Another risk in employing futures contracts and options as a hedge
is the prospect that prices will correlate imperfectly with the behavior of cash
prices for the following reasons. First, rather than meeting additional margin
deposit requirements, investors may close contracts through offsetting
transactions. Second, the liquidity of the futures and options markets depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent that participants decide to make or take
delivery, liquidity in the futures and options markets could be reduced, thus
producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures and options markets are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures and options markets may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or security price trends by a subadviser
may still not result in a successful transaction.
In addition to the risks that apply to all options transactions,
there are several special risks relating to options on futures contracts. The
ability to establish and close out positions in such options is subject to the
existence of a liquid secondary market. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures contract
would result in a loss to a fund when the purchase or sale of a futures contract
would not, such as when there is no movement in the price of the underlying
investment.
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STOCK INDEX FUTURES. A stock index assigns relative values to the common
stocks comprising the index. A stock index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the underlying stocks in the index is made.
The risk of imperfect correlation between movements in the price of a stock
index futures contract and movements in the price of the securities that are the
subject of the hedge increases as the composition of a fund's portfolio diverges
from the securities included in the applicable index. The price of the stock
index futures may move more than or less than the price of the securities being
hedged. If the price of the futures contract moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, a fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the stock index futures contracts, a fund may buy or
sell stock index futures contracts in a greater dollar amount than the dollar
amount of securities being hedged if the historical volatility of the prices of
such securities is more than the historical volatility of the stock index. It is
also possible that, where a fund has sold futures contracts to hedge its
securities against decline in the market, the market may advance and the value
of securities held by the fund may decline. If this occurred, the fund would
lose money on the futures contract and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the value of a diversified portfolio of
securities will tend to move in the same direction as the market indices upon
which the futures contracts are based.
Where stock index futures contracts are purchased to hedge against a
possible increase in the price of securities before a fund is able to invest in
securities in an orderly fashion, it is possible that the market may decline
instead. If a fund then concludes not to invest in securities at that time
because of concern as to possible further market decline for other reasons, it
will realize a loss on the futures contract that is not offset by a reduction in
the price of the securities it had anticipated purchasing.
LIMITATION ON THE USE OF OPTIONS AND FUTURES. To the extent that a fund
enters into futures contracts and commodity options (including options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange) other than for BONA FIDE hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums required to establish those positions
(excluding the amount by which options are "in-the-money" at the time of
purchase) will not exceed 5% of the liquidation value of the fund's investment
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the fund has entered into. This limitation does not limit the
percentage of the fund's assets at risk to 5%.
FOREIGN CURRENCY HEDGING STRATEGIES -- RISK FACTORS. Value Equity may use
options and futures on foreign currencies and Growth Equity and Eagle
International may only use futures on foreign currencies, as described above.
Capital Appreciation, Eagle International, Growth Equity, Income-Growth, and
Value Equity may use foreign currency forward contracts as described below.
Currency hedges can protect against price movements in a security
that a fund owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other
causes.
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A fund might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, a fund may hedge against price movements in that
currency by entering into transactions using Hedging Instruments on another
currency or basket of currencies, the values of which its subadviser believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Hedging Instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. futures markets are closed while
the markets for the underlying currencies remain open, significant price and
rate movements might take place in the underlying markets that cannot be
reflected in the markets for the Hedging Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation of a fund to purchase or sell specified currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers.
Growth Equity and Value Equity may enter into forward currency contracts to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency, in an amount not to exceed 5% of their respective
assets. Capital Appreciation may enter into contracts to purchase or sell
foreign currencies at a future date that is not more than 30 days from the date
of the contract. Eagle International generally will not enter into a forward
contract with a term of greater than one year.
Forward currency transactions may serve as long hedges - for example, a
fund may purchase a forward currency contract to lock in the U.S. dollar price
of a security denominated in a foreign currency that it intends to acquire.
Forward currency contract transactions also may serve as short hedges - for
example, a fund may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security or from a
dividend or interest payment on a security denominated in a foreign currency.
Income-Growth and Eagle International may enter into a forward contract to
sell the foreign currency for a fixed U.S. dollar amount approximating the value
of some or all of their respective portfolio securities denominated in such
foreign currency. Eagle may enter into such a forward contract when its
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subadviser believes that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar.
In addition, Eagle International may use forward currency contracts when
its subadviser wishes to "lock in" the U.S. dollar price of a security when
Eagle International is purchasing or selling a security denominated in a foreign
currency or anticipates receiving a dividend or interest payment denominated in
a foreign currency.
Income-Growth may enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with respect to
specific transactions or with respect to portfolio positions in order to
minimize the risk to Income-Growth from adverse changes in the relationship
between the U.S. dollar and foreign currencies.
As noted above, Capital Appreciation, Growth Equity, Income-Growth, and
Value Equity may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which the fund's subadviser believes will have a
positive correlation to the values of the currency being hedged. Use of a
different foreign currency magnifies the risk that movements in the price of the
forward contract will not correlate or will correlate unfavorably with the
foreign currency being hedged.
In addition, Growth Equity, Income-Growth, and Value Equity may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a fund owned securities denominated in a
foreign currency and its subadviser believed that currency would decline
relative to another currency, it might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency. Transactions that use two foreign currencies are
sometimes referred to as "cross hedging." Use of a different foreign currency
magnifies a fund's exposure to foreign currency exchange rate fluctuations.
The cost to a fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts usually
are entered into on a principal basis, no fees or commissions are involved. When
a fund enters into a forward currency contract, it relies on the counterparty to
make or take delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, sellers or purchasers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by purchasing or selling, respectively, an
instrument identical to the instrument sold or bought. Secondary markets
generally do not exist for forward currency contracts, however, with the result
that closing transactions generally can be made for forward currency contracts
only by negotiating directly with the counterparty. Thus, there can be no
assurance that a fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, a fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a fund might need to purchase or
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sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
COMBINED TRANSACTIONS. A fund may enter into multiple futures transactions,
instead of a single transaction, as part of a single or combined strategy when,
in the opinion of its subadviser, it is in the best interests of a fund to do
so. A combined transaction usually will contain elements of risk that are
present in each of its component transactions. Although combined transactions
normally are entered into based on its subadviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination instead will
increase such risks or hinder achievement of the portfolio management objective.
FORWARD COMMITMENTS:
FORWARD COMMITMENTS. Eagle International and Income-Growth may make
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time ("forward commitments"). However, Income-Growth
currently has no intention of engaging in such transactions at this time. A fund
may engage in forward commitments if it either (1) holds, and maintains until
the settlement date in a segregated account, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price or (2) enters into an
offsetting contract for the forward sale of securities of equal value that it
owns. Forward commitments may be considered securities in themselves. They
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of a fund's other assets. When such purchases are made through dealers,
a fund relies on the dealer to consummate the sale. The dealer's failure to do
so may result in the loss to the fund of an advantageous yield or price.
Although a fund generally will enter into forward commitments with the intention
of acquiring securities for its investment portfolios, each fund may dispose of
a commitment prior to settlement and may realize short-term profits or losses
upon such disposition.
ILLIQUID AND RESTRICTED SECURITIES:
Illiquid and Restricted Securities. Capital Appreciation, Eagle
International, Growth Equity, Income-Growth and Value Equity will not purchase
or otherwise acquire any illiquid security, including repurchase agreements
maturing in more than seven days, if, as a result, more than 10% of its net
assets (taken at current value) would be invested in securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Similarly, Aggressive Growth, Mid Cap and
Small Cap will not purchase or otherwise acquire any illiquid security if, as a
result, more than 15% of its net assets (taken at current value) would be
invested in securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Small Cap
presently has no intention of investing more than 5% of its assets in illiquid
securities.
Over-the-counter ("OTC") options and their underlying collateral are
currently considered to be illiquid investments. Growth Equity, Income-Growth,
Mid Cap and Value Equity may sell OTC options and, in connection therewith,
segregate assets or cover its obligations with respect to OTC options written by
these funds. The assets used as cover for OTC options will be considered
illiquid unless OTC options are sold to qualified dealers who agree that a fund
may repurchase any OTC option it writes at a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
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Rule 144A under the Securities Act of 1933, as amended ("1933 Act"),
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities that have developed as a result
of Rule 144A provide both readily ascertainable values for certain restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. An insufficient number of qualified institutional buyers
interested in purchasing Rule 144A-eligible securities held by a fund, however,
could affect adversely the marketability of such portfolio securities and a fund
may be unable to dispose of such securities promptly or at reasonable prices.
INDEX SECURITIES AND OTHER INVESTMENT COMPANIES:
INDEX SECURITIES. Aggressive Growth, Growth Equity, Mid Cap and Value
Equity may invest in Standard and Poor's Depositary Receipts ("SPDRs"), Standard
and Poor's MidCap 400 Depositary Receipts ("Mid Cap SPDRs") and other similar
index securities ("Index Securities"). Index Securities represent interests in a
fixed portfolio of common stocks designed to track the price and dividend yield
performance of a broad-based securities index, such as the Standard & Poor's 500
Composite Stock Price Index ("S&P 500 Index"), but are traded on an exchange
like shares of common stock. The value of Index Securities fluctuates in
relation to changes in the value of the underlying portfolio of securities.
However, the market price of Index Securities may not be equivalent to the pro
rata value of the index it tracks. Index Securities are subject to the risks of
an investment in a broadly based portfolio of common stocks. Index Securities
are considered investments in other investment companies.
INVESTMENT COMPANIES. Each fund may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. Investments in the securities of other
investment companies may involve duplication of advisory fees and certain other
expenses. By investing in another investment company, a fund becomes a
shareholder of that investment company. As a result, a fund's shareholders
indirectly bear the fund's proportionate share of the fees and expenses paid by
the shareholders of the other investment company, in addition to the fees and
expenses fund shareholders directly bear in connection with the fund's own
operations. Eagle International may invest up to 10% of its assets in securities
of closed-end investment companies that invest in foreign markets. See "Foreign
Securities Exposure" for a discussion of the risks of investing in foreign
securities.
OTHER INVESTMENT PRACTICES:
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Eagle International may
enter into agreements with banks or broker-dealers for the purchase or sale of
securities at an agreed-upon price on a specified future date. Such agreements
might be entered into, for example, when Eagle International anticipates a
decline in interest rates and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later. When Eagle
International purchases securities on a when-issued or delayed delivery basis,
it is required either (1) to create a segregated account with Eagle
International's custodian and to maintain in that account cash, U.S. Government
securities or other high grade debt obligations in an amount equal on a daily
basis to the amount of Eagle International's when-issued or delayed delivery
commitments or (2) to enter into an offsetting forward sale of securities it
owns equal in value to those purchased. Eagle International will only make
commitments to purchase securities on a when-issued or delayed-delivery basis
with the intention of actually acquiring the securities. However, Eagle
International may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy. When the time comes to pay
for when-issued or delayed-delivery securities, Eagle International will meet
its obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the when-issued
or delayed delivery securities themselves (which may have a value greater or
less than Eagle International's payment obligation).
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LOANS OF PORTFOLIO SECURITIES. Mid Cap, Value Equity, Growth Equity and
Income-Growth may loan portfolio securities to qualified broker-dealers. Eagle
International may loan portfolio securities to broker-dealers or other financial
institutions. The collateral for a fund's loans will be "marked to market" daily
so that the collateral at all times exceeds 100% of the value of the loan. A
fund may terminate such loans at any time and the market risk applicable to any
security loaned remains its risk. Although voting rights, or rights to consent,
with respect to the loaned securities pass to the borrower, a fund retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by it if the holders of such securities
are asked to vote upon or consent to matters materially affecting the
investment. A fund also may call such loans in order to sell the securities
involved. The borrower must add to the collateral whenever the market value of
the securities rises above the level of such collateral. A fund could incur a
loss if the borrower should fail financially at a time when the value of the
loaned securities is greater than the collateral. The primary objective of
securities lending is to supplement a fund's income through investment of the
cash collateral in short-term interest bearing obligations.
TEMPORARY DEFENSIVE PURPOSES. For temporary defensive purposes during
anticipated periods of general market decline, each fund, other than Eagle
International, may invest up to 100% of its net assets in money market
instruments, including securities issued by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured thereby, as well as bank
certificates of deposit and banker's acceptances issued by banks having net
assets of at least $1 billion as of the end of their most recent fiscal year,
high-grade commercial paper, and other long- and short-term debt instruments
that are rated A or higher by S&P or Moody's. For a description of S&P or
Moody's commercial paper and corporate debt ratings, see the Appendix.
In addition, for temporary defensive purposes, Eagle International may
invest all or a major portion of its assets in (1) foreign debt securities, (2)
debt and equity securities or U.S. issuers and (3) obligations issued or
guaranteed by the United States or a foreign government or their respective
agencies, authorities or instrumentalities.
INDUSTRY CLASSIFICATIONS
For purposes of determining industry classifications, each fund relies upon
classifications established by each fund's adviser that are based upon
classifications contained in the Directory of Companies Filing Annual Reports
with the Securities and Exchange Commission ("SEC") and in the Standard & Poor's
Industry Classifications.
INVESTMENT LIMITATIONS
FUNDAMENTAL INVESTMENT POLICIES
In addition to the limits disclosed above and the investment limitations
described in the Prospectus, the funds are subject to the following investment
limitations that are fundamental policies and may not be changed without the
vote of a majority of the outstanding voting securities of the applicable fund.
Under the 1940 Act, a "vote of a majority of the outstanding voting securities"
of a fund means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the fund or (2) 67% or more of the shares present at a
shareholders meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.
DIVERSIFICATION. With respect to 100% of the total assets of Capital
Appreciation and Income-Growth and with respect to 75% of the total assets of
the other funds, no fund may invest more than 5% of that fund's assets (valued
at market value) in securities of any one issuer other than the U.S. Government
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or its agencies and instrumentalities, or purchase more than 10% of the voting
securities of the voting securities of any one issuer.
INDUSTRY CONCENTRATION. No fund may purchase securities if, as a result of
such purchase, more than 25% of the value of such fund's total assets would be
invested in any one industry; however, this restriction does not apply to U.S.
Government securities.
BORROWING MONEY. No fund may borrow money except as a temporary measure for
extraordinary or emergency purposes. Such borrowing is limited as follows:
(1) Income-Growth may not borrow money except from banks. Borrowing in the
aggregate may not exceed 15%, and borrowing for purposes other than meeting
redemptions may not exceed 5% of the value of the fund's total assets at the
time the borrowing is made. The fund may not make additional investments when
borrowings exceed 5% of the fund's total assets.
(2) Capital Appreciation may not borrow money except from banks and only if
at the time of such borrowings the total loans to the fund do not exceed 5% of
the fund's total assets.
(3) Aggressive Growth, Eagle International, Growth Equity, Mid Cap, Small
Cap and Value Equity may enter into reverse repurchase agreements in an amount
up to 33 1/3% of the value of its total assets in order to meet redemption
requests without immediately selling portfolio securities. This latter practice
is not for investment leverage but solely to facilitate management of the
investment portfolio by enabling the funds to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or disadvantageous.
However, a fund may not purchase additional portfolio investments once borrowed
obligations exceed 5% of total assets. When effecting reverse repurchase
agreements, fund assets in an amount sufficient to make payment for the
obligations to be purchased will be segregated by the Custodian and on the
funds' records upon execution of the trade and maintained until the transaction
has been settled. During the period any reverse repurchase agreements are
outstanding, to the extent necessary to assure completion of the reverse
repurchase agreements, a fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the expiration
date of the reverse repurchase agreements. Interest paid on borrowed obligations
will not be available for investment. The funds will liquidate any such
borrowings as soon as possible and may not purchase any portfolio instruments
while any borrowings are outstanding (except as described above).
(4) Eagle International will not borrow money in excess of 10% of the value
(taken at the lower of cost or current value) of Eagle International's total
assets (not including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure, such as to facilitate the
meeting of higher redemption requests than anticipated (not for leverage) which
might otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. As a matter of nonfundamental investment
policy, Eagle International may not make any additional investments if,
immediately after such investments, outstanding borrowings of money would exceed
5% of the currency value of Eagle International's total assets.
ISSUING SENIOR SECURITIES. No fund may issue senior securities, except as
permitted by the investment objective, policies, and investment limitations of
the fund, except that (1) Aggressive Growth may engage in transactions involving
forward currency contracts or other financial instruments (2) Eagle
International, Growth Equity, Mid Cap and Value Equity may engage in
transactions involving options, futures, forward currency contracts, or other
financial instruments, and (3) Income-Growth may purchase and sell call options
and forward contracts.
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UNDERWRITING. Subject to the following exceptions, no fund may underwrite
the securities of other issuers: (1) Aggressive Growth, Eagle International,
Growth Equity and Small Cap may underwrite securities to the extent that, in
connection with the disposition of portfolio securities, that fund may be deemed
to be an underwriter under federal securities laws, and (2) Capital Appreciation
and Income-Growth may invest not more than 5% and Aggressive Growth, Mid Cap,
and Small Cap may invest not more than 15% of their respective net assets (taken
at cost immediately after making such investment) in securities that are not
readily marketable without registration under the 1933 Act.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. With the following
exceptions, no fund may invest in commodities, commodity contracts or real
estate (including real estate limited partnerships, in the case of all the funds
except Income-Growth and Capital Appreciation): (1) the funds may purchase
securities issued by companies that invest in or sponsor such interests, (2)
Aggressive Growth may purchase and sell forward currency contracts and other
financial instruments, (3) Value Equity may purchase and sell options, futures
contracts, forward currency contracts and other financial instruments, (4) Eagle
International may purchase and sell forward contracts, futures contracts,
options and foreign currency, (5) Eagle International and Income-Growth may
purchase securities that are secured by interests in real estate, (6)
Income-Growth may write and purchase call options, sell forward contracts and
engage in transactions in forward commitments, and (7) Capital Appreciation and
Income-Growth may not invest in oil, gas, or other mineral programs except that
they may purchase securities issued by companies that invest in or sponsor such
interests.
LOANS. No funds may make loans, except that each fund except Eagle
International may make loans under the following circumstances: (1) to the
extent that the purchase of a portion of an issue of publicly distributed (and,
in the case of Income-Growth, privately placed) notes, bonds, or other evidences
of indebtedness or deposits with banks and other financial institutions may be
considered loans; (2) where the fund may enter into repurchase agreements as
permitted under that fund's investment policies; (3) Mid Cap, Value Equity,
Income-Growth, and Growth Equity may make loans of portfolio securities as
described in this SAI. Eagle International may make loans by purchase of debt
obligations or by entering into repurchase agreements or through lending of
Eagle International's portfolio securities.
FUNDAMENTAL POLICIES UNIQUE TO EAGLE INTERNATIONAL
Eagle International has adopted the following fundamental policies that can
be changed only by shareholder vote:
MARGIN PURCHASES. Eagle International will not purchase securities on
margin, except such short-term credits as may be necessary for the clearance of
purchases and sales of securities. (For this purpose, the deposit or payment by
Eagle International of initial or variation margin in connection with futures
contracts, forward contracts or options is not considered the purchase of a
security on margin.)
SHORT SALES. Eagle International will not make short sales of securities or
maintain a short position, except that Eagle International may maintain short
positions in connection with its use of options, futures contracts, forward
contracts and options on futures contracts, and Eagle International may sell
short "against the box." As a matter of nonfundamental investment policy, Eagle
International will not sell securities short "against the box."
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FUNDAMENTAL POLICIES UNIQUE TO INCOME-GROWTH
Income-Growth has adopted the following fundamental policies that can be
changed only by shareholder vote:
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
INCOME-GROWTH. Income-Growth may not purchase or retain the securities of any
issuer if the officers and Trustees of the fund or Heritage or its subadviser
owning individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES. Income-Growth may
not enter into repurchase agreements with respect to more than 25% of its total
assets and may not lend portfolio securities amounting to more than 25% of its
total assets.
MARGIN PURCHASES. Income-Growth may not purchase securities on margin
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
RESTRICTED SECURITIES. Income-Growth may not invest more than 5% of the its
total assets (taken at cost) in securities that are not readily marketable
without registration under the 1933 Act (restricted securities).
NON-FUNDAMENTAL INVESTMENT POLICIES
Each fund has adopted the following additional restrictions which, together
with certain limits described above, may be changed by the Board of Trustees
without shareholder approval in compliance with applicable law, regulation or
regulatory policy.
INVESTING IN ILLIQUID SECURITIES. Aggressive Growth, Small Cap may not
invest more than 15% and Capital Appreciation, Income-Growth and Value Equity
may not invest more than 10% of their net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale and including, in the
case of Income-Growth, privately placed securities.
Growth Equity and Eagle International may not invest more than 10%, and Mid
Cap may not invest more than 15% of their net assets in securities that are
subject to restrictions on resale or are not readily marketable without
registration under the 1933 Act and in repurchase agreements maturing in more
than seven days.
SELLING SHORT AND BUYING ON MARGIN. Aggressive Growth, Capital
Appreciation, Growth Equity, Mid Cap, Small Cap, and Value Equity may not sell
any securities short or purchase any securities on margin but may obtain such
short-term credits as may be necessary for clearance of purchases and sales of
securities. In addition, Aggressive Growth, Growth Equity, Mid Cap, and Value
Equity may make margin deposits in connection with its use of options, futures
contracts, forward currency contracts, as applicable.
INVESTING IN INVESTMENT COMPANIES. Aggressive Growth, Income-Growth, Mid
Cap, Small Cap and Value Equity may not invest in securities issued by other
investment companies except as permitted by the 1940 Act.
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Capital Appreciation may not invest in securities issued by other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization by purchase in the open market of securities of
closed-end investment companies where no underwriter or dealer commission or
profit, other than a customary brokerage commission is involved and only if
immediately thereafter not more than 5% of Capital Appreciation's total assets
(taken at market value) would be invested in such securities.
Growth Equity may not invest in the securities of other investment
companies, except by purchase in the open market where no commission or profit
to a sponsor or dealer results from the purchase other than the customary
broker's commission, or except when the purchase is part of a plan of merger,
consolidation, reorganization or acquisition.
Eagle International may not invest more than 10% of its total assets in
securities of other investment companies. For purposes of this restriction,
foreign banks and foreign insurance companies or their respective agents or
subsidiaries are not considered investment companies. In addition, Eagle
International may invest in the securities of other investment companies in
connection with a merger, consolidation or acquisition of assets or other
reorganization approved by Eagle International's shareholders. Eagle
International may incur duplicate advisory or management fees when investing in
another mutual fund.
NON-FUNDAMENTAL POLICIES UNIQUE TO CAPITAL APPRECIATION
Capital Appreciation has adopted the following non-fundamental policies:
OPTION WRITING. Capital Appreciation may not write put or call options.
PLEDGING. Capital Appreciation may not pledge any securities except that it
may pledge assets having a value of not more than 10% of its total assets to
secure permitted borrowing from banks.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value of net assets will not result in a
violation of such restriction.
NET ASSET VALUE
The net asset value per share of Class A shares, Class B shares and Class C
shares is determined separately daily as of the close of regular trading on the
New York Stock Exchange (the "Exchange") each day the Exchange is open for
business. The Exchange normally is open for business Monday through Friday
except the following holidays: New Year's Day, Martin Luther King's Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
Each fund values its securities and other assets based on their market
value determined as follows. A security listed or traded on the Exchange, or on
The Nasdaq Stock Market, is valued at its last sales price on the principal
exchange on which it is traded prior to the time when assets are valued. If no
sale is reported at that time or the security is traded in the OTC market,
market value is based on the most recent quoted bid price. When market
quotations for options and futures positions held by Value Equity, Growth
Equity, Mid Cap and Eagle International are readily available, those positions
will be valued based upon such quotations. Market quotations generally will not
be available for options traded in the OTC market. Securities and other assets
for which market quotations are not readily available, or for which market
quotes are not deemed to be reliable, are valued at fair value using such
methods as the Board of Trustees believes would reflect fair value. Securities
and other assets in foreign currency and foreign currency contracts will be
valued daily in U.S. dollars at the foreign currency exchange rates prevailing
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at the time a fund calculates the daily net asset value of each class.
Short-term investments having a maturity of 60 days or less are valued at cost
with accrued interest or discount earned included in interest receivable.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the fund's custodian. Foreign currency exchange rates generally are determined
prior to the close of regular trading on the Exchange. Occasionally, events
affecting the value of foreign securities and such exchange rates occur between
the time at which they are determined and the close of regular trading on the
Exchange, which events will not be reflected in a computation of the fund's net
asset value. If events materially affecting the value of such securities or
assets or currency exchange rates occurred during such time period, the
securities or assets would be valued at their fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Board of Trustees. The foreign currency exchange
transactions of a fund conducted on a spot basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market.
The funds are open for business on days on which the Exchange is open (each
a "Business Day"). Trading in securities on European and Far Eastern securities
exchanges and OTC markets normally is completed well before the funds' close of
business on each Business Day. In addition, European or Far Eastern securities
trading may not take place on all Business Days. Furthermore, trading takes
place in various foreign capital markets on days that are not Business Days and
on which the funds' net asset value is not calculated. Calculation of net asset
value of Class A shares, Class B shares and Class C shares does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. The funds calculate net asset
value per share and, therefore, effect sales and redemptions, as of the close of
regular trading on the Exchange each Business Day. If events materially
affecting the value of such securities or other assets occur between the time
when their prices are determined (including their value in U.S. dollars by
reference to foreign currency exchange rates) and the time when the funds' net
asset value is calculated, such securities and other assets may be valued at
fair value by methods as determined in good faith by or under procedures
established by the Board of Trustees.
The Board of Trustees may suspend the right of redemption or postpone
payment for more than seven days at times (1) during which the Exchange is
closed other than for the customary weekend and holiday closings, (2) during
which trading on the Exchange is restricted as determined by the SEC, (3) during
which an emergency exists as a result of which disposal by the funds of
securities owned by them is not reasonably practicable or it is not reasonably
practicable for the funds fairly to determine the value of their net assets, or
(4) for such other periods as the SEC may by order permit for the protection of
the holders of Class A shares, Class B shares and Class C shares.
PERFORMANCE INFORMATION
Total return data of each class from time to time may be included in
advertisements about each fund. Performance information is computed separately
for each class. Because Class B shares and Class C shares bear higher Rule 12b-1
fees, the performance of Class B shares and Class C shares of a fund likely will
be lower than that of Class A shares.
The funds' performance data quoted in advertising and other promotional
materials represents past performance and is not intended to indicate future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Average annual total return quotes for each class used
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in each fund's advertising and promotional materials are calculated for the
one-year, five-year and ten-year periods (or life of the fund), according to the
following formula:
P(1+T)n(SUPERSCRIPT) = ERV
where:P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period at the end of that period
In calculating the ending redeemable value for Class A shares, each fund's
current maximum sales charge of 4.75% is deducted from the initial $1,000
payment and, for Class B shares and Class C shares, the applicable CDSC imposed
on a redemption of Class B shares or Class C shares held for the period is
deducted. All dividends and other distributions by a fund are assumed to have
been reinvested at net asset value on the reinvestment dates during the period.
Based on this formula, the total return, or "T" in the formula above, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value.
In connection with communicating its average annual total return or
cumulative return to current or prospective shareholders, each fund may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes that may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs. Investment performance also often reflects the risks
associated with a fund's investment objective and policies. These factors should
be considered when comparing a fund's investment results to those of other
mutual funds and investment vehicles.
In addition, each fund may from time to time include in advertising and
promotional materials total return or cumulative figures that are not calculated
according to the formula set forth above or for other periods for each class of
shares. For example, in comparing a fund's aggregate total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc., Morningstar Mutual Funds or with such market indices as the Dow Jones
Industrial Average, and the S&P 500 Index, each fund calculates its cumulative
total return for each class for the specified periods of time by assuming an
investment of $10,000 in that class of shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The funds do not, for these purposes, deduct from the initial value
invested any amount representing front-end sales charges charged on Class A
shares or CDSCs charged on Class B shares and Class C shares. By not annualizing
the performance and excluding the effect of the front-end sales charge on Class
A shares and the CDSC on Class B shares and Class C shares, the total return
calculated in this manner simply will reflect the increase in net asset value
per share over a period of time, adjusted for dividends and other distributions.
Calculating total return without taking into account the sales charge or CDSC
results in a higher rate of return than calculating total return net of the
front-end sales charge.
The average annualized total return and cumulative return are as follows
for each period of each fund below.
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<PAGE>
AVERAGE
ANNUALIZED
TOTAL TOTAL
FUND SHARES PERIOD RETURN RETURN
---- ------ ------ ------ ------
Aggressive Class A . ____ __, 1998 (initial % %
Growth offering of Class A shares)
to October 31, 1998
Class B . ____ __, 1998 (initial % %
offering of Class B shares)
to October 31, 1998
Class C . ____ __, 1998 (initial % %
offering of Class C shares)
to October 31, 1998
Capital Class A . One-year period ended % %
Appreciation August 31, 1998
. Five-year period ended % %
August 31, 1998
. Ten-year period ended % %
August 31, 1998
. December 12, 1985 % %
(commencement of
operations) to August 31,
1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to August 31, 1998
Class C . One-year period ended % %
August 31, 1998
April 3, 1995 (initial % %
offering of shares) to
August 31, 1998
Eagle Class A . One-year period ended % %
International October 31, 1998
. December 27, 1995 (initial % %
offering of Class A shares)
to October 31, 1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to October 31, 1998
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<PAGE>
Class C . One-year period ended % %
October 31, 1998
. December 27 1995 (initial % %
offering of Class C shares)
to October 31, 1998
Growth Class A . One-year period ended % %
Equity October 31, 1997
. November 16, 1995 % %
(commencement of
operations) to October 31,
1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to October 31, 1998
Class C . One-year period ended % %
October 31, 1998
. November 16, 1995 % %
(commencement of
operations) to October 31,
1998
Income- Class A . One-year period ended % %
Growth September 30, 1998
. Five-year period ended % %
September 30, 1998
. Ten-year period ended % %
September 30, 1998
. December 15, 1986
(commencement of operations) % %
to September 30, 1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to September 30, 1998
Class C . One-year period ended % %
September 30, 1998
. April 3, 1995 (initial % %
offering of shares) to
September 30, 1998
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Mid Cap Class A . November 6, 1997 % %
(commencement of operation)
to October 31, 1998
Class B . January 2, 1998 (initial % %
offering of Class B shares
to October 31, 1998
Class C . November 6, 1997 % %
(commencement of operation)
to October 31, 1998
Small Cap Class A . One-year period ended % %
October 31, 1998
. Five-year ended October % %
31, 1998
. May 7, 1993 (commencement % %
of operations) to
October 31, 1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to October 31, 1998
Class C . One-year period ended % %
October 31, 1998
. April 3, 1995 (initial % %
offering of Class C shares)
to October 31, 1998
Value Equity Class A . One-year period ended % %
October 31, 1998
. December 30, 1994 % %
(commencement of operations)
to October 31, 1998
Class B . January 2, 1998 (initial % %
offering of Class B shares)
to October 31, 1998
Class C . One-year period ended % %
October 31, 1998
. April 3, 1995 (initial % %
offering of Class C shares)
to October 31, 1998
27
<PAGE>
INVESTING IN THE FUNDS
Class A shares, Class B shares and Class C shares are sold at their next
determined net asset value on Business Days. The procedures for purchasing
shares of a fund are explained in the Prospectus under "Purchase Procedures."
SYSTEMATIC INVESTMENT OPTIONS
The options below allow you to invest continually in one or more funds at
regular intervals.
1. Systematic Investing -- You may authorize Heritage to process a monthly
draft from your personal checking account for investment into a fund. The draft
is returned by your bank the same way a canceled check is returned.
2. Payroll Direct Deposit -- If your employer participates in a direct
deposit program (also known as ACH Deposits) you may have all or a portion of
your payroll directed to a fund. This will generate a purchase transaction each
time you are paid by your employer. Your employer will report to you the amount
sent from each paycheck.
3. Government Direct Deposit -- If you receive a qualifying periodic
payment from the U.S. Government or other agency that participates in Direct
Deposit, you may have all or a part of each check directed to purchase shares of
a fund. The U.S. Government or agency will report to you all payments made.
4. Automatic Exchange -- If you own shares of another Heritage mutual fund
advised or administered by Heritage ("Heritage Mutual Fund"), you may elect to
have a preset amount redeemed from that fund and exchanged into the
corresponding class of shares of a fund. You will receive a statement from the
other Heritage Mutual Fund confirming the redemption.
You may change or terminate any of the above options at any time.
RETIREMENT PLANS
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage
Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of a fund and/or
other Heritage Mutual Funds. The Internal Revenue Code of 1986, as amended (the
"Code"), limits the deductibility of IRA contributions to taxpayers who are not
active participants (and, under certain circumstances, whose spouses are not
active participants, unless their combined adjusted gross income does not exceed
$150,000) in employer-provided retirement plans or who have adjusted gross
income below certain levels. Nevertheless, the Code permits other individuals to
make nondeductible IRA contributions up to $2,000 per year (or $4,000, if such
contributions also are made for a nonworking spouse and a joint return is
filed). In addition, individuals whose earnings (together with their spouse's
earnings) do not exceed a certain level may establish an "education IRA" and/or
a "Roth IRA"; although contributions to these new types of IRAs (established by
the Taxpayer Relief Act of 1997) ("Tax Act") are nondeductible, withdrawals from
them will not be taxable under certain circumstances. A Heritage IRA also may be
used for certain "rollovers" from qualified benefit plans and from Section
403(b) annuity plans. For more detailed information on the Heritage IRA, please
contact Heritage.
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<PAGE>
Fund shares also may be used as the investment medium for qualified plans
(defined benefit or defined contribution plans established by corporations,
partnerships or sole proprietorships). Contributions to qualified plans may be
made (within certain limits) on behalf of the employees, including
owner-employees, of the sponsoring entity.
OTHER RETIREMENT PLANS. Multiple participant payroll deduction retirement
plans also may purchase Class A shares of any Heritage Mutual Fund at a reduced
sales charge on a monthly basis during the 13-month period following such a
plan's initial purchase. The sales charge applicable to an initial purchase of
Class A shares will be that normally applicable under the schedule of sales
charges set forth in the prospectus to an investment 13 times larger than the
initial purchase. The sales charge applicable to each succeeding monthly
purchase of Class A shares will be that normally applicable, under the schedule,
to an investment equal to the sum of (1) the total purchase previously made
during the 13-month period and (2) the current month's purchase multiplied by
the number of months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will not be adjusted
retroactively on the basis of later purchases. Multiple participant payroll
deduction retirement plans may purchase Class C shares at any time.
CLASS A COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
Certain investors may qualify for the Class A sales charge reductions
indicated in the sales charge schedule in the prospectus by combining purchases
of Class A shares into a single "purchase," if the resulting purchase totals at
least $25,000. The term "purchase" refers to a single purchase by an individual,
or to concurrent purchases that, in the aggregate, are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account; a single
purchase by a trustee or other fiduciary purchasing Class A shares for a single
trust, estate or single fiduciary account although more than one beneficiary is
involved; or a single purchase for the employee benefit plans of a single
employer. The term "purchase" also includes purchases by a "company," as the
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or that has no
purpose other than the purchase of Class A shares or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit card holders of a company, policy holders of
an insurance company, customers of either a bank or broker-dealer, or clients of
an investment adviser. A "purchase" also may include Class A shares purchased at
the same time through a single selected dealer of any other Heritage Mutual Fund
that distributes its shares subject to a sales charge.
The applicable Class A shares initial sales charge will be based on the
total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous
day) of (a) all Class A shares of a fund held by the investor and (b) all Class
A shares of any other Heritage Mutual Fund held by the investor and purchased at
a time when Class A shares of such other fund were distributed subject to a
sales charge (including Heritage Cash Trust shares acquired by exchange); and
(iii) the net asset value of all Class A shares described in
paragraph (ii) owned by another shareholder eligible to combine his purchase
with that of the investor into a single "purchase."
Class A shares of Heritage Income Trust-Intermediate Government Fund
("Intermediate Government") purchased from February 1, 1992 through July 31,
1992, without payment of a sales charge will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
subject to a sales charge, unless those shares were acquired through an exchange
of other shares that were subject to a sales charge.
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<PAGE>
To qualify for the Combined Purchase Privilege on a purchase through a
selected dealer, the investor or selected dealer must provide the Distributor
with sufficient information to verify that each purchase qualifies for the
privilege or discount.
CLASS A STATEMENT OF INTENTION
Investors also may obtain the reduced sales charges shown in the prospectus
by means of a written Statement of Intention, which expresses the investor's
intention to invest not less than $25,000 within a period of 13 months in Class
A shares of a fund or any other Heritage Mutual Fund subject to a sales charge.
Each purchase of Class A shares under a Statement of Intention will be made at
the public offering price or prices applicable at the time of such purchase to a
single transaction of the dollar amount indicated in the Statement. In addition,
if you own Class A shares of any other Heritage Mutual Fund subject to a sales
charge, you may include those shares in computing the amount necessary to
qualify for a sales charge reduction.
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Statement of Intention is 5% of such amount. Class A shares purchased with the
first 5% of such amount will be held in escrow (while remaining registered in
the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased, and such escrowed Class A shares will be redeemed involuntarily to
pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the escrow will be released. To the extent an investor
purchases more than the dollar amount indicated on the Statement of Intention
and qualifies for a further reduced sales charge, the sales charge will be
adjusted for the entire amount purchased at the end of the 13-month period. The
difference in sales charge will be used to purchase additional Class A shares of
a fund subject to the rate of sales charge applicable to the actual amount of
the aggregate purchases. An investor may amend his/her Statement of Intention to
increase the indicated dollar amount and begin a new 13-month period. In that
case, all investments subsequent to the amendment will be made at the sales
charge in effect for the higher amount. The escrow procedures discussed above
will apply.
REDEEMING SHARES
The methods of redemption are described in the section of the Prospectus
entitled "Sell Your Investment."
SYSTEMATIC WITHDRAWAL PLAN
Shareholders may elect to make systematic withdrawals from a fund account
of a minimum of $50 on a periodic basis. The amounts paid each period are
obtained by redeeming sufficient shares from an account to provide the
withdrawal amount specified. The Systematic Withdrawal Plan currently is not
available for shares held in an IRA, Section 403(b) annuity plan, defined
contribution plan, simplified employee pension plan, or other retirement plans,
unless the shareholder establishes to Heritage's satisfaction that withdrawals
from such an account may be made without imposition of a penalty. Shareholders
may change the amount to be paid without charge not more than once a year by
written notice to the Distributor or Heritage.
Redemptions will be made at net asset value determined as of the close of
regular trading on the Exchange on a day of each month chosen by the
shareholders or a day of the last month of each period chosen by the
shareholders, whichever is applicable. Systematic withdrawals of Class C shares,
30
<PAGE>
if made in less than one year of the date of purchase, will be charged a CDSC of
1%. Systematic withdrawals of Class B shares, if made in less than six years of
the date of purchase, will be charged the applicable CDSC. If the Exchange is
not open for business on that day, the shares will be redeemed at net asset
value determined as of the close of regular trading on the Exchange on the
preceding Business Day, minus any applicable CDSC for Class B shares and Class C
shares. If a shareholder elects to participate in the Systematic Withdrawal
Plan, dividends and other distributions on all shares in the account must be
reinvested automatically in fund shares. A shareholder may terminate the
Systematic Withdrawal Plan at any time without charge or penalty by giving
written notice to Heritage or the Distributor. The funds, and the transfer agent
and Distributor also reserve the right to modify or terminate the Systematic
Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or a capital gain distribution. These payments are taxable to the
extent that the total amount of the payments exceeds the tax basis of the shares
sold. If the periodic withdrawals exceed reinvested dividends and other
distributions, the amount of the original investment may be correspondingly
reduced.
Ordinarily, a shareholder should not purchase additional Class A shares of
a fund if maintaining a Systematic Withdrawal Plan of Class A shares because the
shareholder may incur tax liabilities in connection with such purchases and
withdrawals. A fund will not knowingly accept purchase orders from shareholders
for additional Class A shares if they maintain a Systematic Withdrawal Plan
unless the purchase is equal to at least one year's scheduled withdrawals. In
addition, a shareholder who maintains such a Plan may not make periodic
investments under each fund's Automatic Investment Plan.
TELEPHONE TRANSACTIONS
Shareholders may redeem shares by placing a telephone request to a fund. A
fund, Heritage, Eagle, the Distributor and their Trustees, directors, officers
and employees are not liable for any loss arising out of telephone instructions
they reasonably believe are authentic. In acting upon telephone instructions,
these parties use procedures that are reasonably designed to ensure that such
instructions are genuine, such as (1) obtaining some or all of the following
information: account number, name(s) and social security number registered to
the account, and personal identification; (2) recording all telephone
transactions; and (3) sending written confirmation of each transaction to the
registered owner. If a fund, Heritage, Eagle, the Distributor and their
Trustees, directors, officers and employees do not follow reasonable procedures,
some or all of them may be liable for any such losses.
REDEMPTIONS IN KIND
A fund is obligated to redeem shares for any shareholder for cash during
any 90-day period up to $250,000 or 1% of that fund's net asset value, whichever
is less. Any redemption beyond this amount also will be in cash unless the Board
of Trustees determine that further cash payments will have a material adverse
effect on remaining shareholders. In such a case, a fund will pay all or a
portion of the remainder of the redemption in portfolio instruments, valued in
the same way as each fund determines net asset value. The portfolio instruments
will be selected in a manner that the Board of Trustees deem fair and equitable.
A redemption in kind is not as liquid as a cash redemption. If a redemption is
made in kind, a shareholder receiving portfolio instruments could receive less
than the redemption value thereof and could incur certain transaction costs.
RECEIVING PAYMENT
If shares of a fund are redeemed by a shareholder through the Distributor
or a participating dealer, the redemption is settled with the shareholder as an
ordinary transaction. If a request for redemption is received in good order (as
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<PAGE>
described below) before the close of regular trading on the Exchange, shares
will be redeemed at the net asset value per share determined on that day, minus
any applicable CDSC for Class B shares and Class C shares. Requests for
redemption received after the close of regular trading on the Exchange will be
executed on the next trading day. Payment for shares redeemed normally will be
made by a fund to the Distributor or a participating dealer by the third
business day after the day the redemption request was made, provided that
certificates for shares have been delivered in proper form for transfer to the
fund, or if no certificates have been issued, a written request signed by the
shareholder has been provided to the Distributor or a participating dealer prior
to settlement date.
Other supporting legal documents may be required from corporations or other
organizations, fiduciaries or persons other than the shareholder of record
making the request for redemption. Questions concerning the redemption of fund
shares can be directed to registered representatives of the Distributor or a
participating dealer, or to Heritage.
A redemption request will be considered to be received in "good order" if:
. the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
. any written request is signed by a shareholder and by all co-owners of the
account with exactly the same name or names used in establishing the
account;
. any written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed for
transfer exactly as the name or names appear on the certificates or an
accompanying stock power has been attached; and
. the signatures on any written redemption request of $50,000 or more and on
any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company, or by any member firm of
the New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guarantees also will be accepted from savings banks
and certain other financial institutions that are deemed acceptable by
Heritage, as transfer agent, under its current signature guarantee program.
Each fund has the right to suspend redemption or postpone payment at times
when the Exchange is closed (other than customary weekend or holiday closings)
or during periods of emergency or other periods as permitted by the Securities
and Exchange Commission. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined, less any applicable CDSC, after the suspension is lifted.
If a redemption check remains outstanding after six months, Heritage reserves
the right to redeposit those funds into your account.
EXCHANGE PRIVILEGE
An exchange is effected through the redemption of the shares tendered for
exchange and the purchase of shares being acquired at their respective net asset
values as next determined following receipt by the Heritage Mutual Fund whose
shares are being exchanged of (1) proper instructions and all necessary
supporting documents or (2) a telephone request for such exchange in accordance
with the procedures set forth in the Prospectus and below. Telephone or telegram
requests for an exchange received by a fund before the close of regular trading
on the Exchange will be effected at the close of regular trading on that day.
Requests for an exchange received after the close of regular trading will be
effected on the Exchange's next trading day.
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<PAGE>
In the event that you or your Financial Advisor are unable to reach
Heritage by telephone, an exchange can be effected by sending a telegram to
Heritage. Due to the volume of calls or other unusual circumstances, telephone
exchanges may be difficult to implement during certain time periods.
Class A shares of Intermediate Government purchased from February 1, 1992
through July 31, 1992, without payment of an initial sales charge may be
exchanged into Class A shares of a fund without payment of any sales charge.
Class A shares of Intermediate Government purchased after July 31, 1992 without
an initial sales charge will be subject to a sales charge when exchanged into
Class A shares of a fund, unless those shares were acquired through an exchange
of other Class A shares that were subject to an initial sales charge.
Each Heritage Mutual Fund reserves the right to reject any order to
acquire its shares through exchange or otherwise to restrict or terminate the
exchange privilege at any time. In addition, each Heritage Mutual Fund may
terminate this exchange privilege upon 60 days' notice.
CONVERSION OF CLASS B SHARES
Class B shares of the funds automatically will convert to Class A shares,
based on the relative net asset values per share of the two classes, eight years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. For the purpose of calculating the holding period required for
conversion of Class B shares, the date of initial issuance shall mean (i) the
date on which the Class B shares were issued or (ii) for Class B shares obtained
through an exchange, or a series of exchanges, the date on which the original
Class B shares were issued. For purposes of conversion to Class A shares, Class
B shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account. Each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares in the sub-account will also convert to Class A shares. The portion will
be determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A shares and Class B shares will not result in
"preferential dividends" under the Code and the conversion of shares does not
constitute a taxable event. If the conversion feature ceased to be available,
the Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class B shares beyond eight years from the
date of purchase. Heritage and Eagle have no reason to believe that this
condition for the availability of the conversion feature will not be met.
TAXES
GENERAL. Each fund is treated as a separate corporation for Federal income
tax purposes and intends to qualify or continue to qualify for favorable tax
treatment as a regulated investment company ("RIC") under the Code. To do so, a
fund must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally consisting of net investment income, net
short-term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. With respect to each fund, these requirements include the
following: (1) the fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
currency contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) at the close of each
quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the fund's taxable year, not more than 25% of the value of its total
33
<PAGE>
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
By qualifying for treatment as a RIC, a fund (but not its shareholders)
will be relieved of Federal income tax on the part of its investment company
taxable income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that it distributes to its shareholders. If a
fund failed to qualify as a RIC for any taxable year, it would be taxed on the
full amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and the shareholders would treat all
those distributions, including distributions of net capital gain, as dividends
(that is, ordinary income) to the extent of the fund's earnings and profits.
Each fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and its capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
A redemption of fund shares will result in a taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales charge paid on Class A shares). An exchange of
shares of any fund for shares of another Heritage Mutual Fund (including another
fund) generally will have similar tax consequences. However, special rules apply
when a shareholder disposes of Class A shares of a fund through a redemption or
exchange within 90 days after purchase thereof and subsequently reacquires Class
A shares of that fund or acquires Class A shares of another Heritage Mutual Fund
without paying a sales charge due to the 90-day reinstatement or exchange
privilege. In these cases, any gain on the disposition of the original Class A
shares will be increased, or loss decreased, by the amount of the sales charge
paid when those shares were acquired, and that amount will increase the adjusted
basis of the shares subsequently acquired. In addition, if shares of a fund are
purchased (whether pursuant to the reinstatement privilege or otherwise) within
30 days before or after redeeming other shares of that fund (regardless of
class) at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
If shares of a fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Dividends from each fund's investment company taxable income are taxable
to its shareholders as ordinary income, to the extent of that fund's earnings
and profits, whether received in cash or in additional fund shares.
Distributions of each fund's net capital gain, when designated as such, are
taxable to its shareholders as long-term capital gains, whether received in cash
or in additional fund shares and regardless of the length of time the shares
have been held. The portion of the dividends (but not the capital gain
distributions) paid by each fund (an insubstantial portion in the case of the
Eagle International Equity Portfolio) that does not exceed the aggregate
dividends received by the fund from U.S. corporations will be eligible for the
dividends-received deduction allowed to corporations; however, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
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INCOME FROM FOREIGN SECURITIES. Dividends and interest received by each
fund (other than Small Cap), and gains realized thereby, may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions ("foreign taxes") that would reduce the yield and/or total return on
its securities. Tax conventions between certain countries and the United States
may reduce or eliminate these foreign taxes, however, and many foreign countries
do not impose taxes on capital gains in respect of investments by foreign
investors. If more than 50% of the value of a fund's total assets at the close
of any taxable year consists of securities of foreign corporations, it will be
eligible to, and may, file an election with the Internal Revenue Service that
would enable its shareholders, in effect, to receive the benefit of the foreign
tax credit with respect to any foreign taxes paid by it. Pursuant to any such
election, each fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by the shareholder, the shareholder's proportionate
share of those taxes, (2) treat the shareholder's share of those taxes and of
any dividend paid by the fund that represents income from foreign or U.S.
possessions sources as the shareholder's own income from those sources, and (3)
either deduct the taxes deemed paid by the shareholder in computing the
shareholder's taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against the shareholder's Federal income tax.
Each fund that makes this election will report to its shareholders shortly after
each taxable year their respective shares of the fund's income from sources
within foreign countries and U.S. possessions and foreign taxes paid by it.
Pursuant to the Tax Act, individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and have no foreign source non-passive income will be able to claim a
foreign tax credit without having to file the detailed Form 1116 that otherwise
is required.
Each fund, except Small Cap, may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (I.E., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
most likely would have to be distributed by the fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not distributed to the fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years. A fund's adjusted basis in each PFIC's stock with respect
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<PAGE>
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock of
certain PFICs).
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
dates of acquisition and disposition of the securities and (3) that are
attributable to fluctuations in exchange rates that occur between the time a
fund accrues dividends, interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the fund
actually collects the receivables or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of a
fund's investment company taxable income to be distributed to its shareholders.
HEDGING STRATEGIES. The use of hedging strategies, such as selling
(writing) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
a fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts derived by a fund
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement.
Certain options and futures in which a fund may invest will be "section
1256 contracts." Section 1256 contracts held by a fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which it has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Section 1092
generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
fund of straddle transactions are not entirely clear.
If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a fund or a
related person with respect to the same or substantially similar property. In
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<PAGE>
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale.
ORIGINAL ISSUE DISCOUNT SECURITIES. Income-Growth may acquire zero coupon
or other securities issued with original issue discount ("OID"). As a holder of
those securities, Income-Growth must include in its income the OID that accrues
on them during the taxable year, even if it receives no corresponding payment on
them during the year. Because Income-Growth annually must distribute
substantially all of its investment company taxable income, including any OID,
to satisfy the Distribution Requirement and avoid imposition of the Excise Tax,
Income-Growth may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from Income-Growth's cash assets or from the
proceeds of sales of portfolio securities, if necessary. Income-Growth may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.
Investors are advised to consult their own tax advisers regarding the
status of an investment in the funds under state and local tax laws.
FUND INFORMATION
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES. The business affairs of each fund are managed by or
under the direction of the Board of Trustees. The Trustees are responsible for
managing the funds' business affairs and for exercising all the funds' powers
except those reserved to the shareholders. A Trustee may be removed by the other
Trustees or by a two-thirds vote of the outstanding Trust shares.
BACKGROUND OF THE TRUSTEES AND OFFICERS. Each fund's Trustees and Officers
are listed below with their addresses, principal occupations and present
positions, including any affiliation with Raymond James Financial, Inc. ("RJF"),
RJA, Heritage and Eagle.
Position with Principal Occupation
Name Each Trust During Past Five Years
---- ----------- ----------------------
Thomas A. James* (56) Trustee Chairman of the Board since
880 Carillon Parkway 1986 and Chief Executive
St. Petersburg, FL Officer since 1969 of RJF;
33716 Chairman of the Board of RJA
since 1986; Chairman of the
Board of Eagle since 1984 and
Chief Executive Officer of
Eagle, 1994 to 1996.
Richard K. Riess* (49) Trustee Chief Executive Officer of
880 Carillon Parkway Eagle since 1996, President,
St. Petersburg, FL 1995 to present, Chief
33716 Operating Officer, 1988 to
1996, Executive Vice President,
1988 to 1993.
Donald W. Burton* (54) Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
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<PAGE>
Position with Principal Occupation
Name Each Trust During Past Five Years
---- ----------- ----------------------
Tampa, FL 33606
C. Andrew Graham (58) Trustee Vice President of Financial
Financial Designs, Ltd. Designs Ltd. since 1992;
1775 Sherman Street Executive Vice President of
Suite 1900 the Madison Group, Inc., 1991
Denver, CO 80203 to 1992; Principal of First
Denver Financial Corporation
(investment banking) since
1987.
David M. Phillips (59) Trustee Chairman and Chief Executive
World Trade Center Officer of CCC Information
Chicago Services, Inc. since 1994 and
444 Merchandise Mart of InfoVest Corporation
Chicago, IL 60654 (information services to the
insurance and auto industries
and consumer households) since
1982.
Eric Stattin (65) Trustee Litigation Consultant/Expert
1975 Evening Star Drive Witness and private investor
Park City, UT 84060 since 1988.
James L. Pappas (55) Trustee Lykes Professor of Banking and
University of South Finance since 1986 at
Florida University of South Florida;
College of Business Dean of College of Business
Administration Administration 1987 to 1996.
Tampa, FL 33620
Stephen G. Hill (39) President Chief Executive Officer and
880 Carillon Parkway President of Heritage since
St. Petersburg, FL 1989 and Director since 1994;
33716 Director of Eagle since 1995.
Donald H. Glassman (41) Treasurer Treasurer of Heritage since
880 Carillon Parkway 1989; Treasurer of Heritage
St. Petersburg, FL Mutual Funds since 1989.
33716
Clifford J. Alexander (54) Secretary Partner, Kirkpatrick & Lockhart
1800 Massachusetts LLP (law firm).
Ave., NW
Washington, DC 20036
Patricia Schneider (57) Assistant Compliance Administrator of
880 Carillon Parkway Secretary Heritage.
St. Petersburg, FL
33716
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Position with Principal Occupation
Name Each Trust During Past Five Years
---- ----------- ----------------------
Robert J. Zutz (45) Assistant Partner, Kirkpatrick &
1800 Massachusetts Secretary Lockhart LLP (law firm).
Ave., NW
Washington, DC 20036
- -----------------------
* These Trustees are "interested persons" as defined in section 2(a)(19)
of the 1940 Act.
The Trustees and officers of the Trust, as a group, own less than 1% of
each class of each fund's shares outstanding. Each Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any liability to which
they would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
The Series Trust currently pays Trustees who are not employees of Heritage
or its affiliates $3,999 annually and $1,500 per meeting of the Board of
Trustees. Income-Growth and Capital Appreciation each pay such Trustees $667
annually and $250 per meeting of the Board of Trustees. Each Trustee also is
reimbursed for any expenses incurred in attending meetings. Because Heritage or
Eagle, as applicable, performs substantially all of the services necessary for
the operation of each fund, each fund requires no employees. No officer,
director or employee of Heritage or Eagle receives any compensation from either
fund for acting as a director or officer. The following table shows the
compensation earned by each Trustee for each Trust's prior fiscal year ended.
<TABLE>
COMPENSATION TABLE
Total
Compensation
Aggregate Aggregate From the Trust
Compensation Compensation Aggregate and the Heritage
From Capital From Compensation Family of Funds
Name of Person, Appreciation Income-Growth From the Paid to
Position Trust(1) Trust(2) Series Trust(3) Trustees(4)
-------- -------- -------- --------------- ----------
<S> <C> <C> <C> <C>
Donald W. Burton, $ $ $ $
Trustee ----- ----- ----- -----
C. Andrew Graham, $ $ $ $
Trustee ----- ----- ----- -----
David M. Phillips, $ $ $ $
Trustee ----- ----- ----- -----
Eric Stattin, $ $ $ $
Trustee ----- ----- ----- -----
James L. Pappas, $ $ $ $
Trustee ----- ----- ----- -----
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<PAGE>
Total
Compensation
Aggregate Aggregate From the Trust
Compensation Compensation Aggregate and the Heritage
From Capital From Compensation Family of Funds
Name of Person, Appreciation Income-Growth From the Paid to
Position Trust(1) Trust(2) Series Trust(3) Trustees(4)
-------- -------- -------- --------------- ----------
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James $0 $0 $0 $0
Trustee
- -------------------------
</TABLE>
(1) For the fiscal year ended August 31, 1998.
(2) For the fiscal year ended September 30, 1998.
(3) For the fiscal year ended October 31, 1998.
(4)The Heritage Mutual Funds consist of six separate registered investment
companies, including Capital Appreciation, Income-Trust and Series Trust.
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of any of any Trust's expenses.
FIVE PERCENT SHAREHOLDERS
Listed below are shareholders who owned of record or were known by the
funds to own beneficially five percent or more of the outstanding Class __
shares of the _________________ as of September 30, 1998.
INVESTMENT ADVISERS AND ADMINISTRATOR; SUBADVISERS
The investment adviser and administrator for each fund except Eagle
International is Heritage Asset Management, Inc. Heritage was organized as a
Florida corporation in 1985. The investment adviser for Eagle International is
Eagle Asset Management, Inc. Eagle was organized as a Florida corporation in
1976. All the capital stock of both Heritage and Eagle is owned by Raymond James
Financial, Inc. ("RJF"). RJF is a holding company that, through its
subsidiaries, is engaged primarily in providing customers with a wide variety of
financial services in connection with securities, limited partnerships, options,
investment banking and related fields.
With respect to each fund except Eagle International, Heritage is
responsible for overseeing the fund's investment and noninvestment affairs,
subject to the control and direction of the fund's Board. The Series Trust, on
behalf of Aggressive Growth, Growth Equity, Mid Cap, Small Cap and Value Equity
entered into an Investment Advisory and Administration Agreement with Heritage
dated March 29, 1993 and last supplemented on July 29, 1998. Capital
Appreciation and Income-Growth entered into Investment Advisory and
Administration Agreements dated November 13, 1985 and October 31, 1986,
respectively and, in the case of Capital Appreciation, amended on November 19,
1996. The Investment Advisory and Administration Agreements require that
Heritage review and establish investment policies for each fund and administer
the funds' noninvestment affairs.
On behalf of Eagle International, the Series Trust also entered into an
Investment Advisory and Administration Agreement (collectively with the Advisory
Agreements discussed above, "Advisory Agreements") dated February 14, 1995 with
Eagle to provide oversight of Eagle International's investment and noninvestment
affairs, subject to the control and direction of the Board.
Under separate Subadvisory Agreements, Eagle and Liberty Investment
Management, a division of Goldman Sachs Asset Management ("Liberty"), subject to
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<PAGE>
the direction and control of Capital Appreciation's Board of Trustees, provide
investment advice and portfolio management services to Capital Appreciation for
a fee payable by Heritage. None of Capital Appreciation's assets currently are
allocated to Eagle. Under separate Subadvisory Agreements, Eagle and Awad &
Associates ("Awad") each provide investment advice and portfolio management
services, subject to direction by Heritage and the Series Trust's Board of
Trustees, to Small Cap for a fee payable by Heritage. Under a Subadvisory
Agreement, Eagle provides investment advice and portfolio management services,
subject to the direction of Heritage and the Board of Trustees, to Aggressive
Growth, Growth Equity, Income-Growth, Mid Cap and Value Equity for a fee payable
by Heritage. Under a Subadvisory Agreement, Martin Currie Inc. ("Martin Currie")
provides investment advice and portfolio management services, subject to the
direction of Eagle and the Board of Trustees, to Eagle International for a fee
payable by Eagle (collectively, the "Subadvisory Agreements").
Heritage and Eagle, as applicable, also are obligated to furnish each fund
with office space, administrative, and certain other services as well as
executive and other personnel necessary for the operation of a fund. Heritage
and Eagle, as applicable, and their affiliates also pay all the compensation of
Trustees of the Trust who are employees of Heritage or Eagle and their
affiliates. Each fund pays all its other expenses that are not assumed by
Heritage or Eagle, as applicable. Each fund also is liable for such nonrecurring
expenses as may arise, including litigation to which a fund may be a party. Each
fund also may have an obligation to indemnify its Trustees and officers with
respect to any such litigation.
The Advisory Agreements and the Subadvisory Agreements each were approved
by the Board of Trustees (including all of the Trustees who are not "interested
persons" of Heritage and Eagle or the subadvisers, as defined under the 1940
Act) and by the shareholders of the applicable funds in compliance with the 1940
Act. Each Agreement provides that it will be in force for an initial two-year
period and it must be approved each year thereafter by (1) a vote, cast in
person at a meeting called for that purpose, of a majority of those Trustees who
are not "interested persons" of Heritage, Eagle, the subadvisers or the Trust,
and by (2) the majority vote of either the full Board of Trustees or the vote of
a majority of the outstanding shares of a fund. The Advisory and Subadvisory
Agreements each automatically terminates on assignment, and each is terminable
on not more than 60 days' written notice by the Trust to either party. In
addition, the Advisory Agreements may be terminated on not less than 60 days'
written notice by Heritage or Eagle, as applicable, to a fund and the
Subadvisory Agreements may be terminated on not less than 60 days' written
notice by Heritage or Eagle, as applicable, or 90 days' written notice by the
subadvisers. Under the terms of the Advisory Agreement, Heritage and Eagle
automatically become responsible for the obligations of the subadvisers upon
termination of the Subadvisory Agreements. In the event Heritage or Eagle, as
applicable, ceases to be the investment adviser of a fund or the Distributor
ceases to be principal distributor of shares of a fund, the right of a fund to
use the identifying name of "Heritage" may be withdrawn.
Heritage, Eagle and the subadvisers shall not be liable to either fund or
any shareholder for anything done or omitted by them, except acts or omissions
involving willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties imposed upon them by their agreements with a fund or for any
losses that may be sustained in the purchase, holding or sale of any security.
All of the officers of each fund except for Messrs. Alexander and Zutz are
officers or directors of Heritage, Eagle or their affiliates. These
relationships are described under "Management of the funds."
ADVISORY AND ADMINISTRATION FEE. The annual investment advisory fee paid
monthly by each fund to Heritage or Eagle, as applicable, is based on the
applicable fund's average daily net assets as listed in the Prospectus.
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<PAGE>
AGGRESSIVE GROWTH. For Aggressive Growth, Heritage has [voluntarily]
agreed to waive its management fees to the extent that annual operating expenses
attributable to Class A shares exceed 1.65% of the average daily net assets or
to the extent that annual operating expenses attributable to Class B shares and
Class C shares exceed 2.40% of average daily net assets attributable to that
class during this fiscal year.
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to the fund for a fee paid by Heritage
to Eagle with respect to the amount of fund assets under management equal to 50%
of the fees payable to Heritage by the fund, without regard to any reduction in
fees actually paid to Heritage as a result of expense limitations.
CAPITAL APPRECIATION. For Capital Appreciation, Heritage has [voluntarily]
agreed to waive management fees to the extent that total annual operating
expenses attributable to Class A shares exceed 1.45% of the average daily net
assets or to the extent that total annual operating expenses attributable to
Class C shares exceed 2.20% of average daily net assets. For the three fiscal
years ended August 31, 1998, Heritage earned $736,180, $585,991 and $______.
Heritage has entered into agreements with Eagle and Liberty to provide
investment advice and portfolio management services to Capital Appreciation for
an annual fee to be paid by Heritage to Liberty of .25% of Capital
Appreciation's average daily net assets and for an annual fee paid by Heritage
to Eagle of 50% of the fees payable to Heritage by Capital Appreciation, without
regard to any reduction in fees actually paid to Heritage as a result of expense
l imitations. Eagle currently does not have any of Capital Appreciation's assets
under management, and, therefore, does not receive a fee from Heritage. For the
three fiscal years ended August 31, 1998, Heritage paid $184,045, $195,330 and
$_____, respectively.
EAGLE INTERNATIONAL. For Eagle International, Eagle has [voluntarily]
agreed to waive management fees to the extent that Class A annual operating
expenses, exclusive of foreign taxes paid, exceed 1.97% or to the extent that
Class B and Class C annual operating expenses exceed 2.72% of average daily net
assets attributable to that class during this fiscal year. For three fiscal
years ended October 31, 1998, management fees amounted to $189,777, $351,913 and
$_____, respectively. For the same periods, Eagle waived its fees in the amounts
of $134,735, $91,433 and $_____, respectively.
Eagle has entered into an agreement with Martin Currie to provide
investment advisory advice and portfolio management services to Eagle
International for a fee based on Eagle International's average daily net assets
paid by Eagle to Martin Currie equal to .50% on the first $100 million of assets
and .40% thereafter, without regard to any reduction in fees actually paid to
Eagle as a result of expense limitations. For the three fiscal years ended
October 31, 1998, Eagle paid Martin Currie subadvisory fees of $94,888, $175,957
and $_____, respectively.
GROWTH EQUITY. For Growth Equity, Heritage has [voluntarily] agreed to
waive management fees to the extent that Class A annual operating expenses
exceed 1.60% or to the extent that Class C annual operating expenses exceed
2.35% of average daily net assets attributable to that class during this fiscal
year. For the period November 16, 1995 (commencement of operations) to October
31, 1996 and the two fiscal years ended October 31, 1998, management fees
amounted to $77,137, $240,084 and $______, respectively. For the first period
Heritage waived $76,210 of its fees.
Heritage has entered into an agreement with Eagle to provide investment
advisory advice and portfolio management services to Growth Equity for a fee
paid by Heritage to Eagle equal to 50% of the fees paid to Heritage, without
regard to any reduction in fees actually paid to Heritage as a result of expense
42
<PAGE>
limitations. For the period November 16, 1995 (commencement of operations) to
October 31, 1996 and the two fiscal years ended October 31, 1998, Heritage paid
Eagle subadvisory fees of $38,568, $110,273 and $______, respectively.
INCOME-GROWTH. For Income-Growth, Heritage has [voluntarily] agreed to
waive management fees to the extent that total annual operating expenses
attributable to Class A shares exceed 1.60% of the average daily net assets or
to the extent that total annual operating expenses attributable to Class C
shares exceed 2.35% of average daily net assets. For the three fiscal years
ended September 30, 1998, Heritage earned approximately $294,000, $483,882 and
$_______.
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to Income-Growth for a fee paid by
Heritage equal to 50% of the fees payable to Heritage by Income-Growth, without
regard to any reduction in fees actually paid to Heritage as a result of expense
limitations. For the three fiscal years ended September 30, 1998, Heritage paid
Eagle approximately $147,000, $241,941 and $______.
MID CAP. For Mid Cap, Heritage has [voluntarily] agreed to waive its
management fees to the extent that annual operating expenses attributable to
Class A shares exceed 1.60 % of the average daily net assets or to the extent
that annual operating expenses attributable to Class C shares exceed 2.35% of
average daily net assets attributable to that class during this fiscal year.
Heritage has entered into an agreement with Eagle to provide investment advice
and portfolio management services to Mid Cap for a fee paid by Heritage to Eagle
equal to 50% of the fees payable to Heritage by the fund, without regard to any
reduction in fees actually paid to Heritage as a result of voluntary fee waivers
by Heritage. For the period ________ (commencement of operations) to October 31,
1998 the management fee amounted to $_______. For the same period, Heritage
waived its fees in the amount of $________.
SMALL CAP. For Small Cap, Heritage has [voluntarily] agreed to waive its
management fees to the extent that annual operating expenses attributable to
Class A shares exceed 1.60% of the average daily net assets or to the extent
that annual operating expenses attributable to Class B shares and Class C shares
exceed 2.35% of average daily net assets attributable to that class during this
fiscal year. For the three years ended October 31, 1998, management fees
amounted to $827,233, $1,609,998 and $_______, respectively.
Heritage has entered into an agreement with Eagle and Awad to provide
investment advice and portfolio management services to Small Cap for a fee paid
by Heritage to each subadviser with respect to the amount of Small Cap assets
under management equal to 50% of the fees payable to Heritage by Small Cap,
without regard to any reduction in fees actually paid to Heritage as a result of
expense limitations. The Research Department of Raymond James & Associates, Inc.
("Research"), a former subadviser of Small Cap who resigned as its subadviser on
November 20, 1995, received from Heritage for the November 1, 1995 to November
20, 1995 (when Research resigned as subadviser), subadvisory fees of $74,583.
Eagle began as subadviser to Small Cap on August 7, 1995 and received
subadvisory fees from Heritage for the three fiscal years ended October 31, 1998
in the amount of $203,492, $427,907 and $________, respectively. For the three
fiscal years ended October 31, 1998, Heritage paid Awad subadvisory fees of
$210,124, $377,092 and $_________, respectively.
VALUE EQUITY. For Value Equity, effective March 1, 1997, Heritage
voluntarily has agreed to waive management fees to the extent that annual
operating expenses attributable to Class A shares exceed 1.60% of average daily
net assets or to the extent that annual operating expenses attributable to Class
B shares and Class C shares exceed 2.35% of average daily net assets
attributable to that class during this fiscal year. For the three fiscal years
ended October 31, 1998, management fees amounted to $168,020, $263,164 and
$________, respectively. For the second period, Heritage waived its fees in the
amount of $76,062.
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<PAGE>
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to Value Equity for a fee paid by
Heritage to Eagle, as applicable, equal to 50% of the fees paid to Heritage,
without regard to any reduction in fees actually paid to Heritage as a result of
expense limitations. For the three fiscal years ended October 31, 1998, Heritage
paid Eagle subadvisory fees of $45,947, $111,334 and $________, respectively.
Dreman Value Advisor, Inc. ("Dreman"), a former subadviser of Value Equity,
received from Heritage for the periods June 1, 1996 (when Dreman began managing
Value Equity's assets) to October 31, 1996 and November 1, 1996 to October 1,
1997 (when Heritage allocated Value Equity's assets to Eagle), subadvisory fees
of $38,063 and $99,243, respectively.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of a
fund's shares to which those expenses are attributable.
BROKERAGE PRACTICES
While each fund generally purchases securities for long-term capital
gains, each fund may engage in short-term transactions under various market
conditions to a greater extent than certain other mutual funds with similar
investment objectives. Thus, the turnover rate may vary greatly from year to
year or during periods within a year. A fund's portfolio turnover rate is
computed by dividing the lesser of purchases or sales of securities for the
period by the average value of portfolio securities for that period. Aggressive
Growth's turnover rate was ________ for the ________ years ended ______ 1998.
Capital Appreciation's portfolio turnover rate was 42% and ____ for the two
years ended August 31, 1998. Eagle International's portfolio turnover rates for
the two years ended October 31, 1998 were 50% and _____. Growth Equity's
portfolio turnover rate for the two years ended October 31, 1998 50% and _____.
Income-Growth's portfolio turnover rates for the two years ended September 1998,
were 75% and ____. Mid Cap's portfolio turnover rate for the period ______ was
____. Small Cap's portfolio turnover rates for the two years ended October 31,
1998 54% and ____. Value Equity's portfolio turnover rate for two years ended
October 31, 1998, were 155% and ----.
The subadvisers are responsible for the execution of each fund's portfolio
transactions and must seek the most favorable price and execution for such
transactions. Best execution, however, does not mean that a fund necessarily
will be paying the lowest commission or spread available. Rather, each fund also
will take into account such factors as size of the order, difficulty of
execution, efficiency of the executing broker's facilities, and any risk assumed
by the executing broker.
It is a common practice in the investment advisory business for advisers
of investment companies and other institutional investors to receive research,
statistical and quotation services from broker-dealers who execute portfolio
transactions for the clients of such advisers. Consistent with the policy of
most favorable price and execution, the subadvisers may give consideration to
research, statistical and other services furnished by brokers or dealers. In
addition, the subadvisers may place orders with brokers who provide supplemental
investment and market research and securities and economic analysis and may pay
to these brokers a higher brokerage commission or spread than may be charged by
other brokers, provided that the subadvisers determine in good faith that such
commission is reasonable in relation to the value of brokerage and research
services provided. Such research and analysis may be useful to the subadvisers
in connection with services to clients other than the funds. Eagle International
also may purchase and sell portfolio securities to and from dealers who provide
it with research services. However, portfolio transactions will not be directed
by Eagle International to dealers on the basis of such research services.
Aggressive Growth, Capital Appreciation, Eagle International, Growth
Equity, Income-Growth, Mid Cap and Value Equity may use the Distributor, its
affiliates or certain affiliates of Heritage and Eagle as a broker for agency
transactions in listed and OTC securities at commission rates and under
44
<PAGE>
circumstances consistent with the policy of best execution. Commissions paid to
the Distributor, its affiliates or certain affiliates of Heritage and Eagle will
not exceed "usual and customary brokerage commissions." Rule l7e-1 under the
1940 Act defines "usual and customary" commissions to include amounts that are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time."
Although it currently does not intend to do so, Small Cap may use the
Distributor as broker for agency transactions in listed and OTC securities at
commission rates and under circumstances consistent with the policy of best
execution. Provided, however, that if Small Cap does use the Distributor as a
broker, commissions paid to the Distributor will not exceed "usual and customary
brokerage commissions" as defined above.
The subadvisers also may select other brokers to execute portfolio
transactions. In the OTC market, each fund generally deals with primary market
makers unless a more favorable execution can otherwise be obtained.
Aggregate brokerage commissions paid by Aggressive Growth for the period
ended ______ amounted to ______.
Aggregate brokerage commissions paid by Capital Appreciation for the three
fiscal years ended August 31, 1998 amounted to $108,010, $93,760 and ______,
respectively. Those commissions were paid on brokerage transactions worth
$$80,918,168, $60,754,010 and _____, respectively. Aggregate brokerage
commissions paid by Capital Appreciation to the Distributor, an affiliated
broker-dealer, for the same periods amounted to $0, $168 and ____, respectively,
or 0%, less than 1% and _____, respectively of the aggregate commissions paid.
These commissions to the Distributor were paid on aggregate brokerage
transactions of $0, $133,398 and _____, respectively or 0%, less than 1% and
____, respectively of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Growth Equity for the period
November 26, 1995 (commencement of operations) to October 31, 1996 and the two
fiscal years ended October 31, 1998 amounted to $18,075, $36,721 _____,
respectively. Those commissions were paid on brokerage transactions worth
$______for the period ended October 31, 1998. Aggregate brokerage commissions
paid by Growth Equity to the Distributor for the periods November 26, 1995 to
October 31, 1996 and the two years ended October 31, 1998 were $0, $1,560 and
_____, respectively, or ____% of the aggregate commissions paid for the most
recent period. The commissions to the Distributor for the year ended October 31,
1998 were paid on aggregate brokerage transactions of $______ or ____% of total
aggregate brokerage transactions.
Aggregate brokerage commissions paid by Income-Growth for the three fiscal
years ended September 30, 1998 amounted to $61,278, $141,722 and _____,
respectively. Those commissions were paid on brokerage transactions worth
$56,150,173, $76,915,866 and _____, respectively. Aggregate brokerage
commissions paid by Income-Growth to the Distributor amounted to $12,370 or
16.80%, $30,879 or 21.8% and $_______ or ____%, respectively, of the aggregate
commissions paid. These commissions to the Distributor were paid on aggregate
brokerage transactions of $2,535,393 (or 4.52%), $3,498,292 (or 4.5%) and
_______ or _____, respectively, of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Mid Cap for the ___________.
Aggregate brokerage commissions paid by Small Cap for the three years
ended October 31, 1998 amounted to $297,557, $490,512 and _______, respectively.
These commissions were paid on brokerage transactions worth $________ for the
period ended October 31, 1998. For the three years ended October 31, 1998, the
45
<PAGE>
Distributor was paid by Small Cap commissions of $59,591, $114,416 and ________,
respectively, or 25%, 23% and ____, respectively, of the total aggregate
commissions paid. These commissions to the Distributor were paid on aggregate
brokerage transactions for the most recent period of $______ or ____% of the
total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Value Equity for the three fiscal
years ended October 31, 1998 amounted to $71,566, $100,688 and _____,
respectively. These commissions were paid on brokerage transactions worth
$_______ for the period ended October 31, 1998. For the three years ended
October 31, 1998, the Distributor was paid by Value Equity commissions of $60,
$0 and ___, respectively, or less than 1%, 0% and ____%, respectively, of the
total aggregate commissions paid. These commissions to the Distributor were paid
on aggregate brokerage transactions for the most recent period of $____ or ____%
of the total aggregate brokerage transactions.
Each fund may not buy securities from, or sell securities to, the
Distributor as principal. However, the Board of Trustees has adopted procedures
in conformity with Rule 10f-3 under the 1940 Act whereby each fund may purchase
securities that are offered in underwritings in which the Distributor is a
participant. The Board of Trustees will consider the ability to recapture fund
expenses on certain portfolio transactions, such as underwriting commissions and
tender offer solicitation fees, by conducting such portfolio transactions
through affiliated entities, including the Distributor, but only to the extent
such recapture would be permissible under applicable regulations, including the
rules of the National Association of Securities Dealers, Inc. and other
self-regulatory organizations.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, each fund has expressly consented to the Distributor executing
transactions on an exchange on its behalf.
DISTRIBUTION OF SHARES
Shares of each fund are offered continuously through the funds' principal
underwriter, Raymond James & Associates, Inc. (the "Distributor"), and through
other participating dealers or banks that have dealer agreements with the
Distributor. The Distributor receives commissions consisting of that portion of
the sales load remaining after the dealer concession is paid to participating
dealers or banks. Such dealers may be deemed to be underwriters pursuant to the
1933 Act.
The Distributor and Financial Advisors or banks with whom the Distributor
has entered into dealer agreements offer shares of each fund as agents on a best
efforts basis and are not obligated to sell any specific amount of shares. In
this connection, the Distributor makes distribution and servicing payments to
participating dealers in connection with the sale of shares of a fund. Pursuant
to the Distribution Agreements with respect to Class A shares, Class B shares
and Class C shares, the Distributor bears the cost of making information about
each fund available through advertising, sales literature and other means, the
cost of printing and mailing prospectuses to persons other than shareholders,
and salaries and other expenses relating to selling efforts. The Distributor
also pays service fees to dealers for providing personal services to Class A, B
and C shareholders and for maintaining shareholder accounts. Each fund pays the
cost of registering and qualifying its shares under state and federal securities
laws and typesetting of its prospectuses and printing and distributing
prospectuses to existing shareholders.
Each fund has adopted a Distribution Plan for each class of shares (each a
"Plan" and collectively the "Plans"). These Plans permit a fund to pay the
Distributor the monthly distribution and service fee out of the fund's net
assets to finance activity that is intended to result in the sale and retention
46
<PAGE>
of Class A shares, Class B shares and Class C shares. The funds used all Class A
and Class C 12b-1 fees to pay the Distributor. The Distributor, on Class C
shares, may retain the first 12 months distribution fee for reimbursement of
amounts paid to the broker-dealer at the time of purchase. Each Plan was
approved by the Board of Trustees, including a majority of the Trustees who are
not interested persons of a fund (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or the
Distribution Agreement (the "Independent Trustees"). In approving such Plans,
the Board determined that there is a reasonable likelihood that each fund and
its shareholders will benefit from each Plan.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class A shares and in
connection with personal services rendered to Class A shareholders and the
maintenance of Class A shareholder accounts, each fund may pay the Distributor
distribution and service fees of up to 0.35% of that fund's average daily net
assets attributable to Class A shares of that fund. Currently, each fund pays
the Distributor a fee of up to 0.25% of its average daily net assets
attributable to Class A shares. For Capital Appreciation Trust Class A shares
purchased prior to April 3, 1995, the fund pays the Distributor a fee of up to
0.50% of that fund's average daily net assets attributable to those Class A
shares. These fees are computed daily and paid monthly.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class B shares and Class C
shares and in connection with personal services rendered to Class B and Class C
shareholders and the maintenance of Class B and Class C shareholder accounts,
each fund pays the Distributor a service fee of 0.25% and a distribution fee of'
0.75% of that fund's average daily net assets attributable to Class B shares and
Class C shares. These fees are computed daily and paid monthly.
Each Plan each may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of a
class of a fund. The Board of Trustees reviews quarterly a written report of
Plan costs and the purposes for which such costs have been incurred. A Plan may
be amended by vote of the Board, including a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. Any change in a
Plan that would increase materially the distribution cost to a class requires
shareholder approval of that class.
The following table illustrates the amount of class specific 12b-1 fees
paid by the funds to the Distributor for the fiscal year end August 31, 1998 for
Capital Appreciation, September 30, 1998 for Income-Growth and October 31, 1998
for the other funds:
Fund Class A Class B Class C
---- ------- ------- -------
Aggressive Growth
Capital Appreciation
Eagle International
Growth Equity
Income-Growth
47
<PAGE>
Fund Class A Class B Class C
---- ------- ------- -------
Mid Cap
Small Cap
Value Equity
The Distribution Agreements may be terminated at any time on 60 days'
written notice without payment of any penalty by either party. Each fund may
effect such termination by vote of a majority of the outstanding voting
securities of a fund or by vote of a majority of the Independent Trustees. For
so long as either Plan is in effect, selection and nomination of the Independent
Trustees shall be committed to the discretion of such disinterested persons.
The Distribution Agreements and each Plan will continue in effect for
successive one-year periods, provided that each such continuance is specifically
approved (1) by the vote of a majority of the Independent Trustees and (2) by
the vote of a majority of the entire Board of Trustees cast in person at a
meeting called for that purpose. If a Plan is terminated, the obligation of a
fund to make payments to the Distributor pursuant to the Plan will cease and the
fund will not be required to make any payment past the date the Plan terminates.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. Heritage or
Eagle, as applicable, subject to the control of the Board of Trustees, will
manage, supervise and conduct the administrative and business affairs of each
fund; furnish office space and equipment; oversee the activities of the
subadvisers and the Custodian; and pay all salaries, fees and expenses of
officers and Trustees of each fund who are affiliated with Heritage or Eagle, as
applicable. In addition, Heritage provides certain shareholder servicing
activities for customers of the funds. State Street Bank & Trust is the fund
accountant for the Eagle International Equity Portfolio. Each fund pays directly
for fund accounting and transfer agent services.
Under a separate Administration Agreement between Eagle and Heritage,
Heritage provides certain noninvestment services to Eagle International for a
fee payable by Eagle equal to .10% on the first $100 million of average daily
net assets, and .05% thereafter.
Heritage also is the transfer and dividend reimbursing agent for each fund
and serves as fund accountant for each fund except Eagle International. Each
fund pays Heritage its cost plus 10% for its services as fund accountant and
transfer and dividend disbursing agent.
For the ________, Heritage earned _______ from Aggressive Growth for its
services as fund accountant. For the three fiscal years ended August 31, 1998,
Heritage earned $36,261, $36,310 and ______, respectively, from Capital
Appreciation for its services as fund accountant. For the period November 16,
1995 to October 31, 1996 and the two fiscal years ended October 31, 1998,
Heritage earned approximately $24,797, $29,782 and _______, respectively from
Growth Equity for its services as fund accountant. For the three fiscal years
ended September 30, 1998, Heritage earned $31,011, $34,570 and ______,
respectively, from Income-Growth for its services as fund accountant. For the
______ ended ______, Heritage earned approximately ______ from Mid Cap for its
services as fund accountant. For the three fiscal years ended October 31, 1998,
Heritage earned approximately $38,378, $38,822 and ______, respectively, from
Small Cap for its services as fund accountant. For the three fiscal years ended
October 31, 1998, Heritage earned approximately $30,208, $29,795 and ______,
respectively, from Value Equity for its services as fund accountant.
48
<PAGE>
CUSTODIAN. State Street Bank and Trust Company, P.0. Box 1912, Boston,
Massachusetts 02105, serves as custodian of each fund's assets. The Custodian
also provides portfolio accounting and certain other services for the funds.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, NW,
2nd Floor, Washington, D.C. 20036, serves as counsel to the funds.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 400 North Ashley
Street, Suite 2800, Tampa, Florida 33602, is the independent accountant for the
funds. The Financial Statements and Financial Highlights of the funds that
appear in this SAI have been audited by PricewaterhouseCoopers LLP, and are
included herein in reliance upon their authority as experts in accounting and
auditing.
POTENTIAL LIABILITY
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of a fund. To protect its
shareholders, each fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
a fund. These documents require notice of this disclaimer to be given in each
agreement, obligation or instrument each fund or its Trustees enter into or
sign. In the unlikely event a shareholder is held personally liable for a fund's
obligations, that fund is required to use its property to protect or compensate
the shareholder. On request, a fund will defend any claim made and pay any
judgment against a shareholder for any act or obligation of a fund. Therefore,
financial loss resulting from liability as a shareholder will occur only if a
fund itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
49
<PAGE>
APPENDIX A
FUND INVESTMENT TABLE
ALL PERCENTAGE LIMITATIONS ARE BASED ON THE FUND'S TOTAL ASSETS, UNLESS
OTHERWISE SPECIFIED.
N NET ASSETS
10 MINIMUM PERCENT OF ASSETS (ITALIC TYPE)
10 NO MORE THAN SPECIFIED PERCENT OF ASSETS (ROMAN TYPE)
- -- NOT PERMITTED
. NO POLICY LIMITATION ON USAGE
/_/PERMITTED, BUT TYPICALLY HAS NOT BEEN USED
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
EAGLE MID SMALL
AGGRESSIVE CAPITAL INT'L. GROWTH INCOME- CAP CAP VALUE
GROWTH APPRECIATION EQUITY EQUITY GROWTH STOCK STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
. EQUITY SECURITIES 65 65 65 65 . 80 80 65
. CONVERTIBLE
SECURITIES
>INVESTMENT GRADE 65 65 65 35 . 80 80 35
>BELOW INVESTMENT 5 -- 5 -- 35 5 5 --
GRADE
. CORPORATE DEBT -- -- 35(1) -- .(2) 20 -- --
. SHORT-TERM MONEY 35 35 35 -- . 20 20 --
MARKET INSTRUMENTS
. ILLIQUID SECURITIES(N) 15 10 10 10 10 15 15(3) 10
. REPURCHASE 35 35 35 35 25 20 20 35
AGREEMENTS
. REVERSE REPURCHASE 33 1/3 5 33 1/3 33 1/3 5 33 1/3 33 1/3 33 1/3
AGREEMENTS
. U.S. GOVERNMENT 35 35 35 35 . 20 20 35
SECURITIES
. ZERO COUPON -- -- -- -- /_/ -- -- --
SECURITIES
. FOREIGN SECURITIES 10 10 50 25(N) 20(4) 5(N) -- 15(N)
EXPOSURE
. ADRs 10 10 . 25(N) 20 . 20 .
. HEDGING INSTRUMENTS
>FUTURES CONTRACTS -- -- . . -- /_/ -- .
</TABLE>
- ----------------------------
(1) Investment grade non-convertible foreign debt.
(2) The Fund may invest not more than 10% of its assets in nonconvertible
corporate debt obligations that are rated below investment grade by Moody's
or S&P.
(3) Small Cap currently has no intention of investing more than 5% in these
securities at this time.
(4) Income-Growth may invest in Eurodollar certificates without limitation.
A-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
EAGLE MID SMALL
AGGRESSIVE CAPITAL INT'L. GROWTH INCOME- CAP CAP VALUE
GROWTH APPRECIATION EQUITY EQUITY GROWTH STOCK STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
>OPTIONS
CONTRACTS -- .(5) . . .(6) /_/ -- .(7)
>FORWARD
CONTRACTS . . . 5 . /_/ -- 5
FORWARD
COMMITMENTS -- -- . -- 25(8) -- -- --
INDEX
SECURITIES AND
OTHER
INVESTMENT
COMPANIES 10 5 10 10 10 5(N) 10 10
WHEN-ISSUED
AND DELAYED
DELIVERY
TRANSACTIONS -- -- . -- -- -- -- --
LOANS OF
PORTFOLIO
SECURITIES -- -- /_/ /_/ 25 /_/ -- /_/
TEMPORARY
DEFENSIVE
PURPOSES 100 100 100 100 100 100 100 100
</TABLE>
- -----------------------
(5) Capital Appreciation may not write put or call options.
(6) Income-Growth may write covered calls.
(7) Value Equity may write covered call options. Value Equity may not invest
more than 10% of its total assets in covered call options.
(8) Income-Growth currently has no intention of engaging in this transaction at
this time.
A-2
<PAGE>
APPENDIX B
COMMERCIAL PAPER RATINGS
The rating services' descriptions of commercial paper ratings in which the fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER DEBT RATINGS
- ----------------------------------------------------------------------------
PRIME-L. Issuers (or supporting institutions) rated PRIME-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2. Issuers (or supporting institutions) rated PRIME-2 (P-2) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
- ---------------------------------------------------------
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess extremely strong
characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment of issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
CORPORATE DEBT RATINGS
The rating services' descriptions of corporate debt ratings in which the fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE DEBT RATINGS
- ---------------------------------------------------------------------
AAA - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than the Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
B-1
<PAGE>
BAA - Bonds that are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA - Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and 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 generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the company 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 company ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
- -------------------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB," "B," "CCC," "CC," and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
B-2
<PAGE>
BB - Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B - Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no interest is being
paid.
D - Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-3
<PAGE>
REPORTS OF THE INDEPENDENT ACCOUNTANTS & FINANCIAL STATEMENTS
The Report of the Independent Accounts and Financial Statements are
incorporated herein by reference from the Capital Appreciation Trust's Annual
Report to Shareholders for the fiscal year ended August 31, 1998, filed with the
Securities and Exchange Commission on October 30, 1998, Accession No.
0001016843-98-000581.
C-1
<PAGE>
HERITAGE CAPITAL APPRECIATION TRUST
PART C. OTHER INFORMATION
Item 23. EXHIBITS
--------
(a) Declaration of Trust*
(b)(i) Bylaws*
(ii) Amended and Restated Bylaws*
(c) Voting trust agreement -- none
(d)(i)(A) Investment Advisory and Administration Agreement*
(i)(B) Amended and Restated Investment Advisory and Administration
Agreement**
(ii)(A) Subadvisory Agreement between Heritage Asset Management,
Inc. and Eagle Asset Management, Inc.*
(ii)(B) Subadvisory Agreement between Heritage Asset Management,
Inc. and Liberty Investment Management, Inc., d/b/a Liberty
Investment Management*
(e) Distribution Agreement*
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement*
(h)(i) Transfer Agency and Service Agreement*
(ii) Fund Accounting and Pricing Service Agreement*
(i) Opinion and consent of counsel (filed herewith)
(j) Consent of Independent Auditors (filed herewith)
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent*
(m)(i) Class A Plan pursuant to Rule 12b-1*
(ii) Class C Plan pursuant to Rule 12b-1*
(iii) Class B plan pursuant to Rule 12b-1^
(n)(i) Financial Data Schedule Relating to Class A (filed
herewith)
(ii) Financial Data Schedule Relating to Class C (filed
herewith)
(iii) Financial Data Schedule Relating to Class B (filed herewith)
(o)(i) Plan pursuant to Rule 18f-3**
(ii) Amended Plan pursuant to Rule 18f-3***
- --------------------------
* Incorporated by reference from Post-Effective Amendment No. 12 to
the Registration
<PAGE>
Statement of the Trust, SEC File No. 2-98634, filed previously on
December 27, 1995.
** Incorporated by reference from Post-Effective Amendment No. 14 to
the Registration Statement of the Trust, SEC File No. 2-98634, filed
previously on December 27, 1996.
*** To be filed by subsequent amendment.
^ Incorporated by reference from Post-Effective Amendment No. 15 to the
Registration Statement of the Trust, SEC File No. 2-98634, filed
previously on October 31, 1997.
Item 24. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT
------------------------------
None.
Item 25. INDEMNIFICATION
---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in Section (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
Trust to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
C-2
<PAGE>
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the Trust from time to time prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him to the Trust if it
is ultimately determined that he is not entitled to indemnification under this
Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
Paragraph 8 of the Investment Advisory and Administration Agreement
("Advisory Agreement") between the Trust and Heritage provides that Heritage
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters to which this Advisory
Agreement relates except a loss resulting from the willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Advisory
Agreement. Any person, even though also an officer, partner, employee, or agent
of Heritage, who may be or become an officer, director, employee or agent of the
Trust shall be deemed, when rendering services to the Trust or acting in any
business of the Trust, to be rendering such services to or acting solely for the
Trust and not as an officer, partner, employee, or agent or one under the
control or direction of Heritage even though paid by it.
Paragraph 9 of the Subadvisory Agreements ("Subadvisory Agreements")
between Heritage and Eagle Asset Management, Inc. ("Eagle") and Heritage and
Liberty Investment Management, a Division of Goldman Sachs Asset Management Inc.
("Liberty") ("Subadvisers") provides that, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Subadvisers, or
reckless disregard of its obligations and duties thereunder, the Subadvisers
shall not be subject to any liability to the Trust, or to any shareholder of the
Trust, for any act or omission in the course of, or connected with, rendering
services thereunder.
C-3
<PAGE>
Paragraph 7 of the Distribution Agreement ("Distribution Agreement")
between the Trust and Raymond James and Associates, Inc. ("Raymond James")
provides as follows, that the Trust agrees to indemnify, defend and hold
harmless Raymond James, its several officers and directors, and any person who
controls Raymond James within the meaning of Section 15 of the 1933 Act from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Raymond James, its officers
or Trustees, or any such controlling person may incur under the 1933 Act or
under common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement, Prospectus
or Statement of Additional Information or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
provided that in no event shall anything contained in this Distribution
Agreement be construed so as to protect Raymond James against any liability to
the Trust or its shareholders to which Raymond James would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Distribution Agreement.
Item 26. I. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
Heritage is a Florida corporation that offers investment management
services and is a registered investment adviser. Heritage's offices are located
at 880 Carillon Parkway, St. Petersburg, Florida 33716. Information as to the
officers and directors of Heritage is included in its current Form ADV filed
with the Securities and Exchange Commission ("SEC") and is incorporated by
reference herein.
II. BUSINESS AND OTHER CONNECTIONS OF SUBADVISERS
---------------------------------------------
Eagle, a Florida corporation, is a registered investment adviser. All of
its stock is owned by Raymond James Financial, Inc. ("RJF"). Eagle is engaged
primarily in the investment advisory business. Eagle's offices are located at
880 Carillon Parkway, St. Petersburg, Florida 33716. Information as to the
officers and directors of Eagle is included in its current Form ADV filed with
the SEC and is incorporated by reference herein.
Liberty, 2502 Rocky Point Drive, Tampa, Florida 33607, is a division of
Goldman Sachs Asset Management Inc., which is a separate operating division of
Goldman Sachs & Co. ("Goldman Sachs"). Goldman Sachs is registered as an
investment adviser. Information as to the officers and directors of Liberty is
included in the Goldman Sachs current Form ADV filed with the SEC and is
incorporated by reference herein.
Item 27. PRINCIPAL UNDERWRITER
---------------------
(a) Raymond James, 880 Carillon Parkway, St. Petersburg, Florida 33716 is
the principal underwriter for each of the following investment companies:
Heritage Cash Trust, Heritage Capital Appreciation Trust, Heritage Income-Growth
Trust, Heritage Income Trust and Heritage Series Trust.
(b) The directors and officers of the Registrant's principal underwriter
are:
C-4
<PAGE>
POSITIONS & OFFICES POSITION
NAME WITH UNDERWRITER WITH REGISTRANT
- ---- ------------------- ---------------
Thomas A. James Chief Executive Officer, Trustee
Director
Robert F. Shuck Executive Vice None
President, Director
Thomas S. Franke President, Chief Operating None
Officer, Director
Lynn Pippenger Secretary/Treasurer, None
Chief Financial Officer,
Director
Dennis Zank Executive Vice President None
of Operations and
Administration, Director
The business address for each of the above directors and officers is 880
Carillon Parkway, St. Petersburg, Florida 33716.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books and other documents required by Rule 31a-1 under the Investment
Company Act of 1940 are maintained in the physical possession of the Trust's
Custodian through February 28, 1994, except that: Heritage maintains some or all
of the records required by Rule 31a-1(b)(1), (2) and (8); and the Subadviser
will maintain some or all of the records required by Rule 31a-1(b)(2), (5), (6),
(9), (10) and (11). Since March 1, 1994, all required records are maintained by
Heritage.
Item 29. MANAGEMENT SERVICES
-------------------
Not applicable.
Item 30. UNDERTAKINGS
------------
The Trust hereby undertakes to furnish each person to whom a prospectus is
delivered a copy of its latest annual report(s) to shareholders, upon request
and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Post-Effective Amendment No. 17 to its Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of St. Petersburg and the State of Florida, on the 30th day of October,
1998.
HERITAGE CAPITAL APPRECIATION TRUST
/s/ Stephen G. Hill
By: -----------------------------
Stephen G. Hill, President
Attest:
/s/ Donald H. Glassman
- -----------------------------
Donald H. Glassman, Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 17 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen G. Hill President October 30, 1998
- -------------------
Stephen G. Hill
Richard K. Riess* Trustee October 30, 1998
- -----------------
Richard K. Riess
Thomas A. James* Trustee October 30, 1998
- ----------------
Thomas A. James
C. Andrew Graham* Trustee October 30, 1998
- -----------------
C. Andrew Graham
David M. Phillips* Trustee October 30, 1998
- ------------------
David M. Phillips
James L. Pappas* Trustee October 30, 1998
- ----------------
James L. Pappas
<PAGE>
Donald W. Burton* Trustee October 30, 1998
- -----------------
Donald W. Burton
Eric Stattin* Trustee October 30, 1998
- -------------
Eric Stattin
/s/ Donald H. Glassman Treasurer October 30, 1998
- -------------------
Donald H. Glassman
/s/ Donald H. Glassman
*By ---------------------------------------
Donald H. Glassman, Attorney-In-Fact
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
(a) Declaration of Trust*
(b) (i) Bylaws*
(ii) Amended and Restated Bylaws*
(c) Voting trust agreement - none
(d) (i)(A) Investment Advisory and Administration Agreement*
(i)(B) Amended and Restated Investment Advisory and
Administration Agreement**
(ii)(A) Subadvisory Agreement between Heritage
Asset Management, Inc. and Eagle Asset Management, Inc.*
(ii)(B) Subadvisory Agreement between Heritage Asset Management,
Inc. and Liberty Investment Management, Inc., d/b/a
Liberty Investment Management*
(e) Distribution Agreement*
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement*
(h) (i) Transfer Agency and Service Agreement*
(ii) Fund Accounting and Pricing Service Agreement*
(i) Opinion and Consent of Counsel (filed herewith)
(j) Consent of Independent Auditors (filed herewith)
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent*
(m) (i) Class A Plan pursuant to Rule 12b-1*
(ii) Class C Plan pursuant to Rule 12b-1*
(iii) Class B Plan pursuant to Rule 12b-1^
(n) (i) Financial Data Schedule Relating to Class A (filed
herewith)
(ii) Financial Data Schedule Relating to Class C (filed herewith)
(iii) Financial Data Schedule Relating to Class B (filed herewith)
(o) (i) Plan pursuant to Rule 18f-3**
(ii) Amended Plan pursuant to Rule 18f-3***
<PAGE>
- --------------------------
* Incorporated by reference from Post-Effective Amendment No. 12 to
the Registration Statement of the Trust, SEC File No. 2-98634, filed
previously on December 27, 1995.
** Incorporated by reference from Post-Effective Amendment No. 14 to
the Registration Statement of the Trust, SEC File No. 2-98634, filed
previously on December 27, 1996.
*** To be filed by subsequent amendment.
^ Incorporated by reference from Post Effective Amendment No. 15 to the
Registration Statement of the Trust, SEC File No. 2-98634, filed
previously on October 31, 1997.
- 2 -
KIRPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Facsimile (202) 778-9100
www.kl.com
October 30, 1998
Heritage Capital Appreciation Trust
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
You have requested our opinion, as counsel to Heritage Capital
Appreciation Trust (the "Trust"), as to certain matters regarding the issuance
of Shares of the Trust. As used in this letter, the term "Shares" means the
Class A, Class B and Class C shares of beneficial interest of the Trust.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the issuance
of the Shares has been duly authorized by the Trust and that, when sold in
accordance with the terms contemplated by the Post-Effective Amendment No. 17 to
the Trust's Registration Statement on Form N-1A ("PEA"), including receipt by
the Trust of full payment for the Shares and compliance with the 1933 Act and
the 1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that all persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally liable
therefor. It also requires that every note, bond, contract or other undertaking
issued by or on behalf of the Trust or the Trustees relating to the Trust shall
include a recitation limiting the obligation represented thereby to the Trust
and its assets. The Declaration of Trust further provides: (1) for
indemnification from the assets of the Trust for all loss and expense of any
shareholder held personally liable for the obligations of the Trust by virtue of
ownership of shares of the Trust; and (2) for the Trust to assume the defense of
any claim against the shareholder for any act or obligation of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
<PAGE>
Heritage Capital Appreciation Trust
October 30, 1998
Page 2
liability is limited to circumstances in which the Trust or series would be
unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
----------------------------
Robert J. Zutz
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
October 14, 1998, relating to the financial statements and financial highlights
of the Heritage Capital Appreciation Trust, which appear in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants" in
such Statement of Additional Information and to the reference to us under the
heading "Financial Highlights" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
400 North Ashley Street, Suite 2800
Tampa, Florida 33602
October 30, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Heritage Capital Appreciation Trust Class A
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 86,596,593
<INVESTMENTS-AT-VALUE> 121,151,508
<RECEIVABLES> 461,382
<ASSETS-OTHER> 23,300
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121,636,190
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 308,371
<TOTAL-LIABILITIES> 308,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,751,003
<SHARES-COMMON-STOCK> 5,985,183
<SHARES-COMMON-PRIOR> 4,523,026
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,021,901
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,554,915
<NET-ASSETS> 121,327,819
<DIVIDEND-INCOME> 938,451
<INTEREST-INCOME> 244,158
<OTHER-INCOME> 0
<EXPENSES-NET> 1,595,748
<NET-INVESTMENT-INCOME> (413,139)
<REALIZED-GAINS-CURRENT> 9,960,883
<APPREC-INCREASE-CURRENT> 5,542,290
<NET-CHANGE-FROM-OPS> 15,090,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 9,594,905
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,586,217
<NUMBER-OF-SHARES-REDEEMED> 611,894
<SHARES-REINVESTED> 487,834
<NET-CHANGE-IN-ASSETS> 37,262,276
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 8,069,062
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 825,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,442,910
<AVERAGE-NET-ASSETS> 102,412,680
<PER-SHARE-NAV-BEGIN> 18.60
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 3.94
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 2.13
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.34
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Heritage Capital Appreciation Trust Class B
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 86,596,593
<INVESTMENTS-AT-VALUE> 121,151,508
<RECEIVABLES> 461,382
<ASSETS-OTHER> 23,300
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121,636,190
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 308,371
<TOTAL-LIABILITIES> 308,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,751,003
<SHARES-COMMON-STOCK> 5,985,183
<SHARES-COMMON-PRIOR> 4,523,026
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,021,901
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,554,915
<NET-ASSETS> 121,327,819
<DIVIDEND-INCOME> 938,451
<INTEREST-INCOME> 244,158
<OTHER-INCOME> 0
<EXPENSES-NET> 1,595,748
<NET-INVESTMENT-INCOME> (413,139)
<REALIZED-GAINS-CURRENT> 9,960,883
<APPREC-INCREASE-CURRENT> 5,542,290
<NET-CHANGE-FROM-OPS> 15,090,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 9,594,905
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,586,217
<NUMBER-OF-SHARES-REDEEMED> 611,894
<SHARES-REINVESTED> 487,834
<NET-CHANGE-IN-ASSETS> 37,262,276
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 8,069,062
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 825,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36,303
<AVERAGE-NET-ASSETS> 2,719,533
<PER-SHARE-NAV-BEGIN> 19.36
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.91
<EXPENSE-RATIO> 2.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Heritage Capital Appreciation Trust Class C
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 86,596,593
<INVESTMENTS-AT-VALUE> 121,151,508
<RECEIVABLES> 461,382
<ASSETS-OTHER> 23,300
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121,636,190
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 308,371
<TOTAL-LIABILITIES> 308,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,751,003
<SHARES-COMMON-STOCK> 5,985,183
<SHARES-COMMON-PRIOR> 4,523,026
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,021,901
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,554,915
<NET-ASSETS> 121,327,819
<DIVIDEND-INCOME> 938,451
<INTEREST-INCOME> 244,158
<OTHER-INCOME> 0
<EXPENSES-NET> 1,595,748
<NET-INVESTMENT-INCOME> (413,139)
<REALIZED-GAINS-CURRENT> 9,960,883
<APPREC-INCREASE-CURRENT> 5,542,290
<NET-CHANGE-FROM-OPS> 15,090,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 9,594,905
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,586,217
<NUMBER-OF-SHARES-REDEEMED> 611,894
<SHARES-REINVESTED> 487,834
<NET-CHANGE-IN-ASSETS> 37,262,276
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 8,069,062
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 825,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 116,535
<AVERAGE-NET-ASSETS> 5,818,557
<PER-SHARE-NAV-BEGIN> 18.34
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 3.78
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 2.13
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.90
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
