STATEMENT OF ADDITIONAL INFORMATION
HERITAGE
CAPITAL APPRECIATION TRUST
EAGLE INTERNATIONAL EQUITY PORTFOLIO
GROWTH EQUITY FUND
INCOME-GROWTH TRUST
MID CAP GROWTH FUND
SMALL CAP STOCK FUND
VALUE EQUITY FUND
This Statement of Additional Information ("SAI") dated January 2, 1998 as
supplemented on October 26, 1998, should be read in conjunction with the
Prospectus dated January 2, 1998 describing the Class A, Class B and Class C
shares of the Capital Appreciation Trust, the Eagle International Equity
Portfolio, the Growth Equity Fund, the Income-Growth Trust, the Mid Cap Growth
Fund, the Small Cap Stock Fund and the Value Equity Fund (each a "Fund" and,
collectively, the "Funds"). The Eagle International Equity Portfolio also offers
an additional class of shares, which is not discussed in this SAI.
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 Objectives..................................................1
Investment Policies....................................................1
Industry Classifications...............................................8
Futures, Forwards and Hedging Transactions.............................8
INVESTMENT LIMITATIONS......................................................16
NET ASSET VALUE.............................................................20
PERFORMANCE INFORMATION.....................................................21
INVESTING IN THE FUNDS......................................................24
Systematic Investment Options.........................................24
Retirement Plans......................................................25
Class A Combined Purchase Privilege (Right of Accumulation)...........25
Class A Statement of Intention........................................26
REDEEMING SHARES............................................................27
Systematic Withdrawal Plan............................................27
Telephone Transactions................................................27
Redemptions in Kind...................................................28
Receiving Payment.....................................................28
EXCHANGE PRIVILEGE..........................................................28
CONVERSION OF CLASS B SHARES................................................29
TAXES ......................................................................29
FUND INFORMATION............................................................32
Management of the Funds...............................................32
Five Percent Shareholders.............................................35
Investment Advisers and Administrator; Subadvisers....................36
Brokerage Practices...................................................39
Distribution of Shares................................................42
Administration of the Funds...........................................43
Potential Liability...................................................44
APPENDIX...................................................................A-1
REPORTS OF THE INDEPENDENT ACCOUNTANTS.....................................A-4
FINANCIAL STATEMENTS......................................................A-10
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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 five
separate investment portfolios: the Eagle International Equity Portfolio ("Eagle
International"), the Growth Equity Fund ("Growth Equity"), 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 load ("A shares"), Class B shares
sold subject to a 5% maximum contingent deferred sales load ("CDSL"), declining
over an eight-year period ("B Shares"), and Class C shares sold subject to a 1%
CDSL ("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 OBJECTIVES
The investment objective of each Fund is stated in the Prospectus.
INVESTMENT POLICIES
The following information is in addition to and supplements each Fund's
investment policies set forth in the Prospectus.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"), EUROPEAN DEPOSITORY RECEIPTS
("EDRS"), GLOBAL DEPOSITORY RECEIPTS ("GDRS") AND INTERNATIONAL DEPOSITORY
RECEIPTS ("IDRS"). Each Fund, except Capital Appreciation, may invest in
sponsored and unsponsored ADRs. Capital Appreciation may invest only in
sponsored ADRs. ADRs, EDRs, GDRs and 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.
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.
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 ("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
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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 below. For purposes of certain investment limitations,
EDRs, GDRs and IDRs are considered to be foreign securities by Income-Growth.
BANKERS' ACCEPTANCES. A Banker's acceptance is a short-term credit
instrument 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 banker's acceptances. Income-Growth Trust may
invest in banker's 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.
CERTIFICATES OF DEPOSIT. Each Fund may invest in bank certificates of
deposit ("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 currently 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 Investors Service, Inc. ("Moody's") or A-1 or A-2 by Standard & Poor's
("S&P"). Eagle International may invest in commercial paper that is limited to
obligations 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.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
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. Convertible securities in which each Fund may invest include corporate
bonds, notes and preferred stock that can be converted into common stock.
Convertible securities combine the fixed-income characteristics of bonds and
preferred stock with the potential for capital appreciation. As with all debt
securities, 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.
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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.
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
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. It is anticipated that, 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.
It is each Fund's policy not to 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 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
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currency exchange transactions on a spot (I.E., cash) basis at the spot rate
prevailing in the foreign currency exchange market. In addition, in order to
protect against uncertainty in the level of future exchange rates, as described
below in the discussion of 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 (I.E., a
"forward currency contract" or "forward contract").
FORWARD COMMITMENTS. As described in the Prospectus, 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. Each 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 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, 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.
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 each Fund's loans will be "marked to market"
daily so that the collateral at all times exceeds 100% of the value of the loan.
Each 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, each 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. Each 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. Each
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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 each Fund's income through
investment of the cash collateral in short-term interest bearing obligations.
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.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements. 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 bank.
REVERSE REPURCHASE AGREEMENTS. Growth Equity, Small Cap Fund 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.
RISK FACTORS OF HIGH-YIELD SECURITIES. Eagle International, Income-Growth,
Mid Cap and Small Cap may invest in 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, as
described in the Prospectus. These types of securities are commonly referred to
as "junk bonds." These securities are subject to certain risks that may not be
present with investments of higher grade securities. The following supplements
the disclosure in the Prospectus.
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
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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
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 portfolios 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
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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."
STANDARD AND POOR'S DEPOSITORY RECEIPTS ("SPDRS"). Growth Equity, Mid Cap
and Value Equity may invest in 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.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities, including 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.
WARRANTS. Each Fund may purchase rights and warrants, 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.
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 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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. As described in the
Prospectus, 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).
ZERO COUPON SECURITIES. Income-Growth may invest in zero coupon
securities, which 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
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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.
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
Corporation Industry Classifications.
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, 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
will 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.
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(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
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 ("Custodian"), in the prescribed
amount.
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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 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
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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
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.
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
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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
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
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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.
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.
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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.
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.
Foreign 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
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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
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 currency forward 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
foreign 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, 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
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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 foreign
currency contract has been established. Thus, a Fund might need to purchase or
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.
INVESTMENT LIMITATIONS
FUNDAMENTAL INVESTMENT POLICIES
In addition to the limits disclosed in "Investment Policies" 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
or its agencies and instrumentalities, or purchase more than 10% of the voting
securities of the voting securities of any one issuer.
INDUSTRY CONCENTRATION. The Funds may not purchase securities if, as a
result of such purchase, more than 25% of the value of each Fund's total assets
would be invested in any one industry; however, this restriction does not apply
to U.S. Government securities.
BORROWING MONEY. The Funds may not borrow money except as a temporary
measure for extraordinary or emergency purposes. Such borrowing is limited
as follows:
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.
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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.
Eagle International, Growth Equity, Mid Cap Fund, 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 funds
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 funds 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).
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. The Funds may not issue senior securities,
except as permitted by the investment objective, policies, and investment
limitations of the Fund, except that (1) Eagle International, Growth Equity, Mid
Cap and Value Equity may engage in transactions involving options, futures,
forward currency contracts, or other financial instruments, and (2)
Income-Growth may purchase and sell call options and forward contracts.
UNDERWRITING. Subject to the following exceptions, no Fund may underwrite
the securities of other issuers: (1) Eagle International, Growth Equity and
Small Cap Fund 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 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, the Funds may not 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)
Value Equity may purchase and sell options, futures contracts, forward currency
contracts and other financial instruments, (3) Eagle International may purchase
and sell forward contracts, futures contracts, options and foreign currency, (4)
Eagle International and Income-Growth may purchase securities that are secured
by interests in real estate, (5) Income-Growth may write and purchase call
options, sell forward contracts and engage in transactions in forward
commitments, and (6) Capital Appreciation and Income-Growth may not invest in
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oil, gas, or other mineral programs except that they may purchase securities
issued by companies that invest in or sponsor such interests.
LOANS. The Funds may not make loans, except that all Funds 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:
MARGINS. 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
will not sell securities short "against the box."
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 THE TRUST. The Trust 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 TO PORTFOLIO SECURITIES. The Fund 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. The Fund may not purchase securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions.
RESTRICTED SECURITIES. The Fund may not invest more than 5% of the Fund's
total assets (taken at cost) in securities that are not readily marketable
without registration under the 1933 Act (restricted securities).
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NON-FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted the following additional restrictions which,
together with certain limits described in the Prospectus, may be changed by the
Board of Trustees without shareholder approval in compliance with applicable
law, regulation or regulatory policy.
INVESTING IN ILLIQUID SECURITIES. 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. 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; and, in
addition, Growth Equity, Mid Cap, and Value Equity may make margin deposits in
connection with the Fund's use of options, futures contracts, forward currency
contracts in the case of Value Equity and Growth Equity, and other financial
instruments.
INVESTING IN INVESTMENT COMPANIES. 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, and with respect to Small Cap and Value
Equity, except in connection with the merger, consolidation or acquisition of
all the securities or assets of such an issuer.
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.
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NON-FUNDAMENTAL POLICIES UNIQUE TO CAPITAL APPRECIATION
Capital Appreciation has adopted the following non-fundamental policies:
OPTION WRITING. The Trust may not write put or call options.
PLEDGING. The Trust 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 A shares, B shares and 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.
A security listed or traded on the Exchange, or other domestic or foreign
stock exchanges, 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 the most
recent quoted bid price is used. 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 as determined in good faith by the Board of Trustees.
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 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 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 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.
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Calculation of net asset value of A shares and 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 will be valued at
fair value by methods as determined in good faith by or under the direction of
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
practical 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 A shares and C shares.
PERFORMANCE INFORMATION
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
in each Fund's advertising and promotional materials are calculated 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 A shares, each Fund's
current maximum sales load of 4.75% is deducted from the initial $1,000 payment
and, for B shares and C shares, the applicable CDSL imposed on a redemption of B
shares or 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 total return to current or
prospective shareholders, each Fund also 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. In addition,
each Fund may from time to time include in advertising and promotional materials
total return figures that are not calculated according to the formula set forth
above 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., 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
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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 loads charged on A shares or
CDSLs charged on B shares and C shares. By not annualizing the performance and
excluding the effect of the front-end sales load on A shares and the CDSL on B
shares and 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 load or CDSL results in a higher rate of return
than calculating total return net of the front-end sales load.
The average annualized total return and cumulative return are as follows
for each period of each Fund below. Return information is not available for Mid
Cap because Mid Cap did not commence operations until November 2, 1997. In
addition, return information is not available for B shares because they were not
offered prior to the date of this SAI.
Average
Annualized Total
Fund Shares Period Total Return Return
---- ------ ------ ------------ ------
Capital A shares One-year period ended
Appreciation August 31, 1997 27.27%
Five-year period ended
August 31, 1997 16.45% 124.89%
Ten-year period ended
August 31, 1997 11.35% 207.82%
December 12, 1985
(commencement of 12.68% 325.87%
operations) to August 31,
1997
C shares One-year period ended
August 31, 1997 32.91%
April 3, 1995 (initial
offering of shares) to 22.43% 62.96%
August 31, 1997
Eagle A shares One-year period ended
Inter- October 31, 1997 9.98%
national
December 27, 1995 (initial
offering of A shares) to 5.89% 16.68%
October 31, 1997
C shares One-year period ended
October 31, 1997 9.79%
December 27 1995 (initial
offering of C shares) to 7.87% 15.04%
October 31, 1997
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Average
Annualized Total
Fund Shares Period Total Return Return
---- ------ ------ ------------ ------
Growth A shares One-year period ended
Equity October 31, 1997 27.63%
November 16, 1995
(commencement of 26.48% 66.34%
operations) to October 31,
1997
C shares One-year period ended
October 31, 1997 32.99%
November 16, 1995
(commencement of 28.68% 63.89%
operations) to October 31,
1997
Income- A Shares One-year period ended
Growth September 30, 1997 23.30%
Five-year period ended
September 30, 1997 16.39% 124.32%
Ten-year period ended
September 30, 1997 11.57% 214.18%
December 15, 1986
(commencement of 11.36% 235.51%
operations) to September
30, 1997
C shares One-year period ended
September 30, 1997 28.49%
April 3, 1995 (initial
offering of shares) to 25.55% 76.49%
September 30, 1997
Small Cap A shares One-year period ended
October 31, 1997 30.18%
May 7, 1993 (commencement
of operations) to 21.95% 155.80%
October 31, 1997
C shares One-year period ended
October 31, 1997 35.63%
April 3, 1995 (initial
offering of C shares) to 34.54% 115.03%
October 31, 1997
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<PAGE>
Average
Annualized Total
Fund Shares Period Total Return Return
---- ------ ------ ------------ ------
Value Equity A shares One-year period ended
October 31, 1997 22.57%
December 30, 1994
(commencement of 23.01% 88.99%
operations) to October 31,
1997
C shares One-year period ended
October 31, 1997 27.79%
April 3, 1995 (initial
offering of C shares) to 23.79% 73.45%
October 31, 1997
INVESTING IN THE FUNDS
A shares, B shares and 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.
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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 whose spouses are not active participants) 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.
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 A shares of any Heritage Mutual Fund at a reduced sales
load on a monthly basis during the 13-month period following such a plan's
initial purchase. The sales load applicable to an initial purchase of A shares
will be that normally applicable under the schedule of sales loads set forth in
the Prospectus to an investment 13 times larger than the initial purchase. The
sales load applicable to each succeeding monthly purchase of 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 loads previously paid
during such period will not be adjusted retroactively on the basis of later
purchases. Multiple participant payroll deduction retirement plans may purchase
C shares at any time.
CLASS A COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
Certain investors may qualify for the Class A sales load reductions
indicated in the sales load schedule in the Prospectus by combining purchases of
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 A shares for his or their own account; a single
purchase by a trustee or other fiduciary purchasing 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 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 A shares purchased at the
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same time through a single selected dealer of any other Heritage Mutual Fund
that distributes its shares subject to a sales load.
The applicable A shares initial sales load 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 A shares of a Fund held by the investor and (b) all A shares of
any other Heritage Mutual Fund held by the investor and purchased at a time when
A shares of such other fund were distributed subject to a sales load (including
Heritage Cash Trust shares acquired by exchange); and
(iii) the net asset value of all A shares described in paragraph
(ii) owned by another shareholder eligible to combine his purchase with that of
the investor into a single "purchase."
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 load will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
subject to a sales load, unless those shares were acquired through an exchange
of other shares that were subject to a sales load.
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 loads 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 A
shares of a Fund or any other Heritage Mutual Fund. Each purchase of 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 load, you may include those
shares in computing the amount necessary to qualify for a sales load 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. 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 load applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed A shares will be redeemed involuntarily to pay the additional
sales load, 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 load, the sales load will be adjusted for the entire
amount purchased at the end of the 13-month period. The difference in sales load
will be used to purchase additional A shares of a Fund subject to the rate of
sales load 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 load in effect for the
higher amount. The escrow procedures discussed above will apply.
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<PAGE>
REDEEMING SHARES
The methods of redemption are described in the section of the Prospectus
entitled "How to Redeem Shares."
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 individual retirement account, 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 C shares, if
made in less than one year of the date of purchase, will be charged a CDSL of
1%. 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 CDSL for B shares
and 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 A shares of a
Fund if maintaining a Systematic Withdrawal Plan of 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 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
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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 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 CDSL for B shares
and 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.
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 as described in such fund's Prospectus, 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.
A shares of Intermediate Government purchased from February 1, 1992
through July 31, 1992, without payment of an initial sales load may be exchanged
into A shares of a Fund without payment of any sales load. A shares of
Intermediate Government purchased after July 31, 1992 without an initial sales
load will be subject to a sales load when exchanged into A shares of a Fund,
unless those shares were acquired through an exchange of other A shares that
were subject to an initial sales load.
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CONVERSION OF CLASS B SHARES
B shares of the Funds automatically will convert to 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 B shares, the date of initial issuance shall mean (i) the date on
which such B shares were issued or (ii) for B shares obtained through an
exchange, or a series of exchanges, the date on which the original B shares were
issued. For purposes of conversion to A shares, B shares purchased through the
reinvestment of dividends and other distributions paid in respect of B shares
will be held in a separate sub-account. Each time any B shares in the
shareholder's regular account (other than those in the sub-account) convert to A
shares, a pro rata portion of the B shares in the sub-account will also convert
to A shares. The portion will be determined by the ratio that the shareholder's
B shares converting to A shares bears to the shareholder's total 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 A shares and 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 B shares
would not be converted and would continue to be subject to the higher ongoing
expenses of the 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. In order to qualify or to continue to qualify for the favorable
tax treatment as a regulated investment company ("RIC") under the Code, each
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
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
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
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normally includes any sales load paid on 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 A shares of a Fund through a redemption or exchange
within 90 days after purchase thereof and subsequently reacquires A shares of
that Fund or acquires A shares of another Heritage Mutual Fund without paying a
sales load due to the 90-day reinstatement or exchange privilege. In these
cases, any gain on the disposition of the original A shares will be increased,
or loss decreased, by the amount of the sales load 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.
INCOME FROM FOREIGN SECURITIES. Dividends and interest received by each
Fund (other than Small Cap) may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions ("foreign taxes") that would
reduce the yield 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 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 if it makes this election.
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
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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 (the
excess of net long-term capital gain over net short-term capital loss) -- 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
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 would provide 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. The 60% portion of that capital gain that is
treated as long-term capital gain will qualify for the reduced maximum tax rates
on net capital gain of 20% (10% for taxpayers in the 15% marginal tax bracket)
on capital assets held for more than 18 months. Section 1256 contracts also may
be marked-to-market for purposes of the Excise Tax.
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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 the Fund or a
related person with respect to the same or substantially similar property. In
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
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* (55) 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.
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Position With Principal Occupation
Name Each Trust During Past Five Years
---- ---------- ----------------------
Richard K. Riess* (48) 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* (53) Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
Tampa, FL 33606
C. Andrew Graham (57) 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 (58) 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 (64) Trustee Litigation Consultant/
1975 Evening Star Drive Expert Witness and private
Park City, UT 84060 investor since 1988.
James L. Pappas (54) 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 (38) 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.
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Position With Principal Occupation
Name Each Trust During Past Five Years
---- ---------- ----------------------
Donald H. Glassman (40) Treasurer Treasurer of Heritage since
880 Carillon Parkway 1989; Treasurer of Heritage
St. Petersburg, FL Mutual Funds since 1989.
33716
Clifford J. Alexander (53) Secretary Partner, Kirkpatrick &
1800 Massachusetts Lockhart LLP (law firm).
Ave., NW
Washington, DC 20036
Patricia Schneider (56) Assistant Compliance Administrator of
880 Carillon Parkway Secretary Heritage.
St. Petersburg, FL
33716
Robert J. Zutz (44) 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 the
Manager or its affiliates $3,333 annually and $1,250 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. Trustees also are
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.
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COMPENSATION TABLE
Total
Compensation
From the Trust
Aggregate Aggregate and the Heritage
Compensation Compensation Aggregate Family of Funds
From Capital From Compensation Paid
Name of Person, Appreciation Income-growth From the to
Position Trust(1) Trust(2) Series Trust(3) Trustees(4)
-------- -------- -------- --------------- -----------
Donald W. $1,454 $1,454 $5,820 $16,000
Burton, Trustee
C. Andrew $1,454 $1,454 $5,820 $16,000
Graham, Trustee
David M. $1,091 $1,091 $4,364 $12,000
Phillips,
Trustee
Eric Stattin, $1,454 $1,454 $5,820 $16,000
Trustee
James L. $1,272 $1,272 $5,092 $14,000
Pappas,
Trustee
Richard K. $0 $0 $0 $0
Riess,
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
- -------------------------
(1) For the fiscal year ended August 31, 1997.
(2) For the fiscal year ended September 30, 1997.
(3) For the fiscal year ended October 31, 1997.
(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 C shares
of the Capital Appreciation Trust as of November 30, 1997.
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Name and Address Percent Owned
---------------- -------------
William J. Gamble 7.825%
2101 Cantu Court
Sarasota, FL 34232-6240
Raymond James & Assoc. Inc. 6.494%
Cust. Jerry Harris
P.O. Box 12749
St. Petersburg, FL 33733-2749
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 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 September 29, 1997. 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
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 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").
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<PAGE>
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.
CAPITAL APPRECIATION. For Capital Appreciation, Heritage has voluntarily
agreed to waive management fees to the extent that total annual operating
expenses attributable to A shares exceed 1.45% of the average daily net assets
or to the extent that total annual operating expenses attributable to C shares
exceed 2.20% of average daily net assets. For the three fiscal years ended
August 31, 1995, 1996 and 1997, Heritage earned $711,510, $736,180 and $585,991
(of which $177,878, $184,045 and $0 was waived), respectively.
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
limitations. Eagle currently does not have any of Capital Appreciation's assets
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under management, and, therefore, does not receive a fee from Heritage. For the
three fiscal years ended August 31, 1997, Heritage paid $221,041, $184,045 and
$195,330, 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 the period May 1, 1995
(commencement of operations) to October 31, 1995 and for the two fiscal years
ended October 31, 1997, management fees amounted to $32,303, $189,777 and
$351,913, respectively. For the same periods, Eagle waived its fees in the
amounts of $32,303, $134,735 and $91,433, respectively, and was reimbursed
expenses in the amount of $48,001 for the period ended October 31, 1995.
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 period May 1, 1995
(commencement of operations) to October 31, 1995 and the two fiscal years ended
October 31, 1997, Eagle paid Martin Currie subadvisory fees of $16,152, $94,888
and $175,957, 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 fiscal year ended October 31, 1997, management fees amounted to $77,137
and $240,084. 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
limitations. For the period November 16, 1995 (commencement of operations) to
October 31, 1996 and the fiscal year ended October 31, 1997, Heritage paid Eagle
subadvisory fees of $38,568 and $110,273.
INCOME-GROWTH. For Income-Growth, Heritage has voluntarily agreed to waive
management fees to the extent that total annual operating expenses attributable
to A shares exceed 1.60% of the average daily net assets or to the extent that
total annual operating expenses attributable to C shares exceed 2.35% of average
daily net assets. For the fiscal years ended September 30, 1995, 1996 and 1997,
Heritage earned approximately $242,000, $294,000 and $483,882, respectively.
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, 1995, 1996 and 1997,
Heritage paid Eagle approximately $121,000, $147,000 and $241,941 respectively.
MID CAP. For Mid Cap, Heritage has voluntarily agreed to waive its
management fees to the extent that annual operating expenses attributable to A
shares exceed 1.60 % of the average daily net assets or to the extent that
annual operating expenses attributable to 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%
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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.
Because Mid Cap did not commence operations until this fiscal year, Heritage
Eagle has not received any fees relating to Mid Cap.
SMALL CAP. For Small Cap, Heritage has voluntarily agreed to waive its
management fees to the extent that annual operating expenses attributable to A
shares exceed 1.60% of the average daily net assets or to the extent that annual
operating expenses attributable to B shares and 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, 1997, management fees amounted to $465,132,
$827,233 and $1,609,998, 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 period August 7, 1995 to October 31, 1995
and the two fiscal years ended October 31, 1997 in the amount of $30,725,
$203,492 and $427,907, respectively. For the three fiscal years ended October
31, 1997, Heritage paid Awad subadvisory fees of $127,866, $210,124 and
$377,092, 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 A shares exceed 1.60% of average daily net
assets or to the extent that annual operating expenses attributable to B shares
and C shares exceed 2.35% of average daily net assets attributable to that class
during this fiscal year. For the period December 30, 1994 (commencement of
operations) to October 31, 1995 and the two fiscal years ended October 31, 1997,
management fees amounted to $47,250, $168,020 and $263,164, respectively. For
the first two periods, Heritage waived its fees in the amount of $47,250 and
$76,062, respectively, and reimbursed expenses in the amount of $68,724 for the
period ended October 31, 1995.
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 period December 30, 1994 (commencement of
operations) to October 31, 1995 and the fiscal years ended October 31, 1997,
Heritage paid Eagle subadvisory fees of $23,625, $45,947 and $111,334,
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
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computed by dividing the lesser of purchases or sales of securities for the
period by the average value of portfolio securities for that period. Capital
Appreciation's portfolio turnover rate was 54% and 42% for the two years ended
August 31, 1997. Eagle International's portfolio turnover rates for the two
years ended October 31, 1997 were 59% and 50%. Growth Equity's portfolio
turnover rate for the period November 16, 1995 (commencement of operations) to
October 31, 1997 and the fiscal year ended October 31, 1997 were 23% (not
annualized) and 50%. Income-Growth's portfolio turnover rates for the two years
ended September 1997, were 75% and 75%. Mid Cap's turnover rate is expected to
be 100%. Small Cap's portfolio turnover rates for the two years ended October
31, 1997 were 80% and 54%. Value Equity's portfolio turnover rate for two years
ended October 31, 1997, were 129% and 155%.
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.
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 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 Capital Appreciation for the three
fiscal years ended August 31, 1997 amounted to $125,563, $108,010 and $93,760,
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respectively. Those commissions were paid on brokerage transactions worth
$84,219,558, $80,918,168 and $60,754,010, respectively. Aggregate brokerage
commissions paid by Capital Appreciation to the Distributor, an affiliated
broker-dealer, for the same periods amounted to $3,090, $0 and $168,
respectively, or 2.5%, 0% and less than 1%, respectively of the aggregate
commissions paid. These commissions to the Distributor were paid on aggregate
brokerage transactions of $1,911,784, $0 and $133,398, respectively or 2.3%, 0%
and less than 1%, 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
fiscal year ended October 31, 1997 amounted to $18,075 and $36,721,
respectively. Those commissions were paid on brokerage transactions worth
$33,451,360 for the period ended October 31, 1997. Aggregate brokerage
commissions paid by Growth Equity to the Distributor for the periods November
26, 1995 to October 31, 1996 and the year ended October 31, 1997 were $0 and
$1,560, respectively, or 4.2% of the aggregate commissions paid for the most
recent period. The commissions to the Distributor for the period ended October
31, 1997 were paid on aggregate brokerage transactions of $1,300,764 or 3.9% of
total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Income-Growth for the three fiscal
years ended September 30, 1997 amounted to $53,748, $61,278 and $141,722,
respectively. Those commissions were paid on brokerage transactions worth
$28,057,262, $56,150,173 and $76,915,866, respectively. Aggregate brokerage
commissions paid by Income-Growth to the Distributor amounted to $7,852 or
14.6%, $12,370 or 16.80% and $30,879 or 21.8%, respectively, of the aggregate
commissions paid. These commissions to the Distributor were paid on aggregate
brokerage transactions of $1,830,625 (or 6.5%), $2,535,393 (or 4.52%) and
$3,498,292 (or 4.5%), respectively, of the total aggregate brokerage
transactions.
Aggregate brokerage commissions paid by Small Cap for the three years
ended October 31, 1997 amounted to $196,353, $297,557 and $490,512,
respectively. These commissions were paid on brokerage transactions worth
$149,629,636 for the period ended October 31, 1997. For the three years ended
October 31, 1997, the Distributor was paid by Small Cap commissions of $13,416,
$59,591 and $114,416, respectively, or 7%, 25% and 23%, respectively, of the
total aggregate commissions paid. These commissions to the Distributor were paid
on aggregate brokerage transactions for the most recent period of $40,533,126,
or 27% of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Value Equity for the period
December 30, 1994 (commencement of operations) to October 31, 1995 and the two
fiscal years ended October 31, 1997 amounted to $43,552, $71,566 and $100,688,
respectively. These commissions were paid on brokerage transactions worth
$85,464,424 for the period ended October 31, 1997. For the three years ended
October 31, 1997, the Distributor was paid by Value Equity commissions of
$8,596, $60 and $0, respectively, or 20%, less than 1% and 0%, respectively, of
the total aggregate commissions paid. These commissions to the Distributor were
paid on aggregate brokerage transactions for the most recent period of $0 or 0%
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 possibilities of seeking to
recapture for the benefit of expenses to each Fund of certain portfolio
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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
The Distributor and Representatives 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 A shares, B shares and 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
of A shares, B shares and C shares. The Funds used all Class A and Class C 12b-1
fees to pay the Distributor. The Distributor, on 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.
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.
For Capital Appreciation, for the two fiscal years ended August 31, 1997,
the Distributor received Class A 12b-1 fees in the amount of $344,067 and
$335,468. For Eagle International, for the period ended December 27, 1995 (first
offering of A shares) to October 31, 1996 and the fiscal year ended October 31,
1997, the Distributor received Class A 12b-1 fees in the amount of $3,934 and
$12,772. For Growth Equity, for the period November 16, 1995 (commencement of
operations) to October 31, 1996 and the fiscal year ended October 31, 1997, the
Distributor received Class A 12b-1 fees in the amount of $19,287 and $47,584.
For Income-Growth, for the two fiscal years ended September 30, 1997, the
Distributor received Class A 12b-1 fees in the amount of $94,590 and $130,805.
For Small Cap, for the three fiscal years ended October 31, 1997, the
Distributor received Class A 12b-1 fees in the amount of $115,551, $197,076 and
$369,980, respectively. For Value Equity, for the period December 30, 1994
(commencement of operations) to October 31, 1995 and the two fiscal years ended
October 31. 1997, the Distributor received Class A 12b-1 fees for Value Equity
in the amount of $13,040, $36,710 and $46,759, respectively.
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For Capital Appreciation, for the two fiscal years ended August 31, 1997,
the Distributor received Class C 12b-1 fees in the amount of $10,838 and
$19,834. For Eagle International, for the period December 27, 1995 (first
offering of C shares) to October 31, 1996 and the fiscal year ended October 31,
1997, the Distributor received Class C 12b-1 fees in the amount of $5,404 and
$25,783. For Growth Equity, for the period November 16, 1995 (commencement of
operations) to October 31, 1996 and the fiscal year ended October 31, 1997, the
Distributor received Class C 12b-1 fees in the amount of $25,704 and $103,726,
respectively. For Income-Growth, for the two fiscal years ended September 30,
1997, the Distributor received Class C 12b-1 fees in the amount of $13,604 and
$121,957. For the period April 3, 1995 (first offering of C shares) to October
31, 1995 and the two fiscal years ended October 31, 1997, the Distributor
received $9,098, $146,179 and $500,078, respectively in fees for Small Cap and
$10,848, $77,187 and $130,243, respectively in fees for Value Equity.
B shares were not offered for sale prior to the date of this SAI.
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.
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.
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 three fiscal years ended August 31, 1997, Heritage earned $32,742,
$36,261 and $36,310, respectively, from Capital Appreciation for its services as
fund accountant. For the period November 16, 1995 to October 31, 1996 and the
fiscal year ended October 31, 1997, Heritage earned approximately $24,797 and
$29,782 from Growth Equity for its services as fund accountant. For the three
fiscal years ended September 30, 1997, Heritage earned $28,932, $31,011 and
$34,570, respectively, from Income-Growth for its services as fund accountant.
For the period November 1, 1994 (commencement of engagement as fund accountant)
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to October 31, 1995 and the two fiscal years ended October 31, 1997, Heritage
earned approximately $29,311, $38,378 and $38,822, respectively, from Small Cap
for its services as fund accountant. For the period December 30, 1994
(commencement of operations) to October 31, 1995 and the two fiscal years ended
October 31, 1997, Heritage earned approximately $20,509, $30,208 and $29,795,
respectively, from Value Equity for its services as fund accountant.
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 Heritage Capital
Appreciation Trust, Heritage Income-Growth Trust and Heritage Series Trust for
the fiscal years ended August 31, 1997, September 30, 1997 and October 31, 1997,
respectively, that appear in this SAI have been audited by Price Waterhouse LLP,
and are included herein in reliance upon their authority as experts in
accounting and auditing. The Financial Highlights for the fiscal years ended
August 31, 1995, September 30, 1995 and October 31, 1995, respectively, and
years prior thereto were audited by other independent accountants.
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.
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APPENDIX
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.
A-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
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characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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.
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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, 1997, filed with the
Securities and Exchange Commission on October 29, 1997, Accession No.
0000950144-97-011302, the Income-Growth Trust's Annual Report to Shareholders
for the fiscal year ended September 30, 1997, filed with the Securities and
Exchange Commission on November 26, 1997, Accession No. 0000950144-97-012870,
and the Series Trust's Annual Report to Shareholders for the fiscal year ended
October 31, 1997, filed with the Securities and Exchange Commission on December
29, 1997, Accession No. 0000950144-97-013671.
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