STATEMENT OF ADDITIONAL INFORMATION
HERITAGE EQUITY FUNDS
o AGGRESSIVE GROWTH FUND o INCOME-GROWTH TRUST
o CAPITAL APPRECIATION TRUST o MID CAP STOCK FUND
o EAGLE INTERNATIONAL EQUITY o SMALL CAP STOCK FUND
PORTFOLIO o TECHNOLOGY FUND
o GROWTH EQUITY FUND o VALUE EQUITY FUND
This Statement of Additional Information ("SAI") dated January 2, 2001,
should be read in conjunction with the Prospectus dated January 2, 2001,
describing the Class A, Class B and Class C shares the Capital Appreciation
Trust, the Income-Growth Trust and the Heritage Series Trust, including its
seven series, the Aggressive Growth Fund, the Eagle International Equity
Portfolio, the Growth Equity Fund, the Mid Cap Stock Fund, the Small Cap Stock
Fund, the Technology Fund and the Value Equity Fund (each a "fund" and,
collectively, the "funds").
This SAI is not a prospectus itself. To receive a copy of the funds'
Prospectus, write to Heritage Asset Management, Inc. ("Heritage") at the address
below or call (800) 421-4184.
HERITAGE ASSET MANAGEMENT, INC.
880 Carillon Parkway, St. Petersburg, Florida 33716
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TABLE OF CONTENTS
Page
I. GENERAL INFORMATION.........................................................1
A. History............................................................1
B. Classification and Structure.......................................1
II. INVESTMENT INFORMATION.....................................................1
A. Investment Policies and Strategies.................................1
B. Industry Classifications..........................................19
III. INVESTMENT LIMITATIONS...................................................20
A. Fundamental Investment Policies...................................20
B. Fundamental Policies Unique to Eagle International................22
C. Fundamental Policies Unique to Income-Growth......................22
D. Non-Fundamental Investment Policies...............................22
E. Non-Fundamental Policies Unique to Capital Appreciation...........23
F. Non-Fundamental Policies Unique to Small Cap......................23
IV. NET ASSET VALUE...........................................................24
V. PERFORMANCE INFORMATION....................................................25
VI. INVESTING IN THE FUNDS....................................................29
A. Systematic Investment Options.....................................29
B. Retirement Plans..................................................30
C. Class A Combined Purchase Privilege (Right of Accumulation).......31
D. Class A Statement of Intention....................................31
VII. REDEEMING SHARES.........................................................32
A. Waiver of the Contingent Deferred Sales Charge....................32
B. Systematic Withdrawal Plan........................................32
C. Telephone Transactions............................................33
D. Redemptions in Kind...............................................33
E. Receiving Payment.................................................33
VIII. EXCHANGE PRIVILEGE......................................................34
IX. CONVERSION OF CLASS B SHARES..............................................35
X. TAXES......................................................................35
XI. SHAREHOLDER INFORMATION...................................................39
XII. FUND INFORMATION.........................................................39
A. Management of the Funds...........................................39
B. Five Percent Shareholders.........................................42
C. Investment Advisers and Administrator; Subadvisers................42
D. Brokerage Practices...............................................47
E. Distribution of Shares............................................49
F. Administration of the Funds.......................................51
G. Potential Liability...............................................52
APPENDIX A - FUND INVESTMENT TABLE...........................................A-1
APPENDIX B - COMMERCIAL PAPER / CORPORATE DEBT RATINGS.......................B-1
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REPORTS OF THE INDEPENDENT CERTIFED PUBLIC ACCOUNTANTS & FINANCIAL
STATEMENTS..........................................................C-1
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I. GENERAL INFORMATION
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A. HISTORY
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The Heritage Capital Appreciation Trust ("Capital Appreciation"), the
Heritage Income-Growth Trust ("Income-Growth") and the Heritage Series Trust
("Series Trust") (collectively, the "Trusts") 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.
B. CLASSIFICATION AND STRUCTURE
----------------------------
Each Trust is registered as an open-end diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). Capital Appreciation and Income-Growth each offers shares through a
single investment portfolio. Series Trust currently offers its shares through
seven separate investment portfolios: the Aggressive Growth Fund ("Aggressive
Growth"), the Eagle International Equity Portfolio ("Eagle International"), the
Growth Equity Fund ("Growth Equity"), the Mid Cap Stock Fund ("Mid Cap") (prior
to January 3, 2000, named the Mid Cap Growth Fund), the Small Cap Stock Fund
("Small Cap"), the Technology Fund ("Technology Fund") and the Value Equity Fund
("Value Equity"). Each fund currently offers three classes of shares, Class A
shares sold subject to a 4.75% maximum front-end sales charge ("Class A
shares"), Class B shares sold subject to a 5% maximum contingent deferred sales
charge ("CDSC"), declining over a six-year period ("Class B shares"), and Class
C shares, sold subject to a 1% CDSC ("Class C shares"). Eagle International also
offers Eagle Class shares, which are not covered in this SAI. To obtain more
information about Eagle Class shares, call (800) 237-3101.
Each fund described in this SAI operates for many purposes as if it
were an independent company. Each fund has its own objective(s), policies,
strategies and portfolio managers, among other characteristics.
The Technology Fund is classified as non-diversified within the meaning
of the 1940 Act, which means that it is not restricted by the 1940 Act in the
proportion of its assets that it may invest in the securities of a single
issuer. The Technology Fund's investments are limited, however, to allow it to
qualify as a "regulated investment company" under current tax law. See "Taxes"
for more information. To the extent that the fund assumes large positions in the
securities of a small number of issuers, its net asset value may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.
II. INVESTMENT INFORMATION
----------------------
A. INVESTMENT POLICIES AND STRATEGIES
----------------------------------
This section provides a detailed description of the securities in which
a fund may invest to achieve its investment objective, the strategies it may
employ and the corresponding risks of such securities and strategies. In
general, each fund invests at least 65% of its total assets in equity
securities, common stocks, income-producing securities or foreign securities.
The remainder of a fund's assets may be invested in the securities specified
below. At APPENDIX A you will find a FUND INVESTMENT TABLE that provides
information regarding the extent to which each fund may invest in a specific
security or instrument. For more information on a fund's principal strategies
and risks, please see the funds' prospectus.
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EQUITY SECURITIES:
COMMON STOCKS. Each fund may invest in common stocks. Common stocks
represent the residual ownership interest in the issuer and are entitled to the
income and increase in the value of the assets and business of the entity after
all of its obligations and preferred stock are satisfied. Common stocks
generally have voting rights. Common stocks fluctuate in price in response to
many factors including historical and prospective earnings of the issuer, the
value of its assets, general economic conditions, interest rates, investor
perceptions and market liquidity.
CONVERTIBLE SECURITIES. Each fund may invest in convertible securities.
Convertible securities include corporate bonds, notes and preferred stock that
can be converted into or exchanged for a prescribed amount of common stock of
the same or a different issue within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or dividends paid on preferred stock until the
convertible stock matures or is redeemed, converted or exchanged. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security. The market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
While convertible securities generally offer lower interest or dividend yields
than nonconvertible debt securities of similar quality, they do enable the
investor to benefit from increases in the market price of the underlying common
stock. Please see the discussion of "Investment Grade/Lower Rated Securities"
for additional information.
PREFERRED STOCK. Each fund may invest in preferred stock. A preferred
stock blends 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 if
the issuer is dissolved. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer.
REAL ESTATE INVESTMENT TRUSTS ("REITs"). Each fund may invest in REITs.
REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate
properties, and their revenue comes principally from rent. Mortgage REITs loan
money to real estate owners, and their revenue comes principally from interest
earned on their mortgage loans. Hybrid REITs combine characteristics of both
equity and mortgage REITs. The value of an equity REIT may be affected by
changes in the value of the underlying property, while a mortgage REIT may be
affected by the quality of the credit extended. The performance of both types of
REITs depends upon conditions in the real estate industry, management skills and
the amount of cash flow. The risks associated with REITs include defaults by
borrowers, self-liquidation, failure to qualify as a pass-through entity under
the Federal tax law, failure to qualify as an exempt entity under the 1940 Act
and the fact that REITs are not diversified.
WARRANTS AND RIGHTS. Each fund may purchase warrants and rights, which
are instruments that permit a fund to acquire, by subscription, the capital
stock of a corporation at a set price, regardless of the market price for such
stock. Warrants may be either perpetual or of limited duration but they usually
do not have voting rights or pay dividends. The market price of warrants is
usually significantly less than the current price of the underlying stock. Thus,
there is a greater risk that warrants might drop in value at a faster rate than
the underlying stock. Aggressive Growth, Eagle International, Growth Equity, Mid
Cap, Small Cap and Value Equity currently do not intend to invest more than 5%
of their respective net assets in warrants. Eagle International also may invest
in warrants or rights it acquired as part of a unit or attached to securities at
the time of purchase without limitation.
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DEBT SECURITIES:
DEBT SECURITIES. Each fund may invest in debt securities. The market
value of debt securities is influenced primarily by changes in the level of
interest rates. Generally, as interest rates rise, the market value of debt
securities decreases. Conversely, as interest rates fall, the market value of
debt securities increases. Factors that could result in a rise in interest
rates, and a decrease in the market value of debt securities, include an
increase in inflation or inflation expectations, an increase in the rate of U.S.
economic growth, an increase in the Federal budget deficit or an increase in the
price of commodities such as oil.
CORPORATE DEBT OBLIGATIONS. Eagle International, Income-Growth and Mid
Cap may invest in corporate debt securities, including corporate bonds,
debentures, notes and other similar corporate debt instruments. The funds invest
primarily in investment grade non-convertible corporate debt. Income-Growth and
Mid Cap may invest no more than 10% and 5%, respectively, of their respective
assets in below investment grade non-convertible corporate debt obligations.
Please see the discussion of "Investment Grade/Lower Rated Securities" for
additional information.
INVESTMENT GRADE/LOWER RATED SECURITIES:
INVESTMENT GRADE SECURITIES. Each fund may invest in securities rated
investment grade. Investment grade securities include securities rated BBB or
above by Standard & Poor's ("S&P"), or Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are deemed to be of comparable quality by a fund's
subadviser. Securities rated in the lowest category of investment grade are
considered to have speculative characteristics and changes in economic
conditions are more likely to lead to a weakened capacity to pay interest and
repay principal than is the case with higher grade bonds. Each fund may retain a
security that has been downgraded below investment grade if, in the opinion of
its subadviser, it is in the fund's best interest.
LOWER RATED / HIGH-YIELD SECURITIES. Aggressive Growth, 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. These securities are commonly referred to as "high yield
securities" and are deemed to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal and may involve major risk
exposure to adverse conditions. These securities are subject to specific risks
that may not be present with investments of higher grade securities.
RISK FACTORS OF LOWER RATED / HIGH-YIELD SECURITIES:
----------------------------------------------------
INTEREST RATE AND ECONOMIC RISK. As with all debt securities,
the market prices of high yield securities tend to decrease when interest rates
rise and increase when interest rates fall. The prices of high yield securities
also will fluctuate greatly during periods of economic uncertainty and changes
and, thus, in a fund's net asset value. During these periods, some highly
leveraged high yield securities issuers may experience a higher incidence of
default due to their inability to meet principal and interest payments,
projected business goals or to obtain additional financing. In addition, a fund
may need to replace or sell a junk bond that it owns at unfavorable prices or
returns. Accordingly, those high yield securities held by a fund may affect its
net asset value and performance adversely during such times.
In a declining interest rate market, if an issuer of a
high-yield security containing a redemption or call provision exercises either
provision, 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. 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
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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.
CREDIT RISK. Credit ratings usually evaluate the safety of
principal and interest payment of debt securities, such as high yield securities
but may not reflect the true risks of an investment in such securities. A
reduction in an issuer's credit rating may cause that issuer's high yield
securities to decrease in market value. A fund's subadviser continually monitors
the investments in its respective investment portfolio and carefully evaluates
whether to dispose of or retain high yield securities whose credit ratings have
changed. A fund' subadviser primarily relies on its own credit analysis,
including a study of existing debt, capital structure, ability to service debt
and pay dividends, sensitivity to economic conditions and other factors in its
determination. See Appendix A for a description of corporate debt ratings.
LIQUIDITY RISK. The market for high yield securities tends to
be less active and primarily dominated by institutional investors compared to
the market for high-quality debt securities. During periods of economic
uncertainty or adverse economic changes, the market may be further restricted.
In these conditions, a fund may have to dispose of its high yield securities at
unfavorable prices or below fair market value. In addition, during such times,
reliable objective information may be limited or unavailable and negative
publicity may affect adversely the public's perception of the junk bond market.
A Trust's Board of Trustees ("Board") or subadviser may have difficulty
assessing the value of high yield securities during these times. Consequently,
any of these factors may reduce the market value of high yield securities held
by a fund.
SHORT-TERM MONEY MARKET INSTRUMENTS:
BANKERS' ACCEPTANCES. Each fund may invest in bankers' acceptances.
Bankers' acceptances generally are negotiable instruments (time drafts) drawn to
finance the export, import, domestic shipment or storage of goods. They are
termed "accepted" when a bank writes on the draft its agreement to pay it at
maturity, using the word "accepted." The bank is, in effect, unconditionally
guaranteeing 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.
Maturities on bankers' acceptances that are eligible for purchase at times
extend to nine months, but more commonly range from 30 to 180 days.
Income-Growth may invest in bankers' acceptances of domestic banks and
savings and loans that have assets of at least $1 billion and capital, surplus
and undivided profits of over $100 million as of the close of their most recent
fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC").
CERTIFICATES OF DEPOSIT ("CDs"). Each fund may invest in CDs issued by
domestic institutions with assets in excess of $1 billion. The FDIC is an agency
of the U.S. Government that insures the deposits of certain banks and savings
and loan associations up to $100,000 per deposit. The interest on such deposits
may not be insured if this limit is exceeded. Current federal regulations also
permit such institutions to issue insured negotiable CDs in amounts of $100,000
or more, without regard to the interest rate ceilings on other deposits. To
remain fully insured, these investments must be limited to $100,000 per insured
bank or savings and loan association.
COMMERCIAL PAPER. Each fund, except Eagle International, may invest in
commercial paper that is limited to obligations rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by S&P. Eagle International may invest only in commercial
paper that is rated Prime-1 by Moody's or A-1 by S&P. Commercial paper includes
notes, drafts or similar instruments payable on demand or having a maturity at
the time of issuance not exceeding nine months, exclusive of days of grace or
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any renewal thereof. See Appendix B for a description of commercial paper
ratings.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:
REPURCHASE AGREEMENTS. Each fund may invest in repurchase agreements.
In accordance with the guidelines and procedures established by the Board, a
fund may enter into repurchase agreements with member banks of the Federal
Reserve System, securities dealers who are members of a national securities
exchange or market makers in U.S. Government securities. A repurchase agreement
is a transaction in which a fund purchases securities and commits to resell the
securities to the original seller at an agreed upon date. The resale price
reflects a market rate of interest that is unrelated to the coupon rate or
maturity of the purchased securities. Although repurchase agreements carry
certain risks not associated with direct investment in securities, including
possible declines in the market value of the underlying securities and delays
and costs to a fund if the other party becomes bankrupt, a fund intends to enter
into repurchase agreements only with banks and dealers in transactions believed
by its subadviser to present minimal credit risks.
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. A fund 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 fund in each agreement,
and the fund will make payment for such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian, State Street
Bank and Trust Company ("Custodian").
REVERSE REPURCHASE AGREEMENTS. Each fund 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. If 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. During that time, a fund's use
of the proceeds of the reverse repurchase agreement effectively may be
restricted. Reverse repurchase agreements create leverage, a speculative factor,
and are considered borrowings for the purpose of a fund's limitation on
borrowing.
U.S. Government and Zero Coupon Securities:
U.S. GOVERNMENT SECURITIES. Each fund may invest in U.S. Government
securities. U.S. Government securities include Treasury bills, Treasury notes
and Treasury bonds, Federal Home Loan Bank obligations, Federal Intermediate
Credit Bank obligations, U.S. Government agency obligations and repurchase
agreements secured thereby. U.S. Government securities are issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, supported by the
issuer's right to borrow from the U.S. Treasury or supported by the issuer's
credit.
ZERO COUPON SECURITIES. Income-Growth may invest in zero coupon
securities. Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
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when the securities begin paying current interest. Zero coupon securities are
issued and traded at a discount from their face amount or par value, which
discount rate varies depending on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security, and the perceived credit
quality of the issuer. The market prices of zero coupon securities generally are
more volatile than the prices of securities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree than do
other types of debt securities having similar maturities and credit value.
FOREIGN SECURITIES EXPOSURE:
DEPOSITORY RECEIPTS. Aggressive Growth, Eagle International, Growth
Equity, Income-Growth, Small Cap, Technology and Value Equity may invest in
sponsored or unsponsored European Depository Receipts ("EDRs"), Global
Depository Receipts ("GDRs"), International Depository Receipts ("IDRs") or
other similar securities representing interests in or convertible into
securities of foreign issuers (collectively, "Depository Receipts"). Depository
Receipts are not necessarily denominated in the same currency as the underlying
securities into which they may be converted and are subject to foreign
securities risks, as discussed below.
EDRs and IDRs are receipts typically issued by a European bank or trust
company evidencing ownership of the underlying foreign securities. GDRs are
issued globally for trading in non-U.S. securities markets and evidence a
similar ownership arrangement. 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 these unsponsored Depository Receipts. For purposes of certain
investment limitations, EDRs, GDRs and IDRs are considered to be foreign
securities by Income-Growth.
EURO/YANKEE BONDS. Eagle International may invest in dollar-denominated
bonds issued by foreign branches of domestic banks ("Eurobonds") and
dollar-denominated bonds issued by a U.S. branch of a foreign bank and sold in
the United States ("Yankee bonds"). Investment in Eurobonds and Yankee bonds
entails certain risks similar to investment in foreign securities in general.
These risks are discussed below.
EURODOLLAR CERTIFICATES. Income-Growth may purchase CDs issued by
foreign branches of domestic and foreign banks. Domestic and foreign Eurodollar
certificates, such as CDs and time deposits, may be general obligations of the
parent bank in addition to the issuing branch or may be limited by the terms of
a specific obligation or governmental regulation. Such obligations may be
subject to different risks than are those of domestic banks or domestic branches
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 may invest in foreign securities. In most
cases, the best available market for foreign securities will be on exchanges or
in over-the-counter markets located outside the United States. Foreign stock
markets, while growing in volume and sophistication, generally are not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. companies. Their markets and
economies may react differently to specific or global events than the U.S.
market and economy. In addition, foreign brokerage commissions generally are
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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.
Eagle International may invest in emerging markets. Special
considerations (in addition to the considerations regarding foreign investments
generally) may include greater political uncertainties, an economy's dependence
on revenues from particular commodities or on international aid or development
assistance, currency transfer restrictions, a limited number of potential buyers
for such securities and delays and disruptions in securities settlement
procedures.
No fund will invest in foreign securities when there are currency or
trading restrictions in force or when, in the judgment of its subadviser, such
restrictions are likely to be imposed. However, certain currencies may become
blocked (i.e., not freely available for transfer from a foreign country),
resulting in the possible inability of the fund to convert proceeds realized
upon sale of portfolio securities of the affected foreign companies into U.S.
currency.
Because investments in foreign companies usually will involve
currencies of foreign countries and because Aggressive Growth, Capital
Appreciation, Growth Equity, Income-Growth, Technology and Value Equity may
temporarily hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of any of the assets of these funds
as measured in U.S. dollars may be affected favorably or unfavorably by changes
in foreign currency exchange rates and exchange control regulations, and the
fund may incur costs in connection with conversions between various currencies.
Each fund will conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market. Additionally, to protect against uncertainty in the level of future
exchange rates. Capital Appreciation, Growth Equity, Income-Growth, Technology
and Value Equity may enter into contracts to purchase or sell foreign currencies
at a future date (a "forward currency contract" or "forward contract").
AMERICAN DEPOSITORY RECEIPTS ("ADRs"):
Each fund except Capital Appreciation may invest in both sponsored and
unsponsored ADRs. Capital Appreciation may invest only in sponsored ADRs. ADRs
are receipts that represent interests in, or are convertible into, securities of
foreign issuers. These receipts are not necessarily denominated in the same
currency as the underlying securities into which they may be converted.
ADRs may be purchased through "sponsored" or "unsponsored" facilities.
A sponsored facility is established jointly by the issuer of the underlying
security and a depository, whereas a depository may establish an unsponsored
facility without participation by the issuer of the depository security. Holders
of unsponsored depository receipts generally bear all the costs of such
facilities, and the depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through voting rights to the holders of such
receipts of the deposited securities. Generally, ADRs in registered form are
designed for use in the U.S. securities market and ADRs in bearer form are
designed for use outside the United States. For purposes of certain investment
limitations, ADRs are considered to be foreign securities by Capital
Appreciation, Growth Equity and Income-Growth and are subject to many of the
risks inherent in investing in foreign securities, as discussed previously.
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HEDGING INSTRUMENTS - FUTURES, FORWARDS, OPTIONS AND HEDGING
TRANSACTIONS:
GENERAL DESCRIPTION. Each fund, except Small Cap, may use certain
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 as
discussed below.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is the purchase or sale of a Hedging Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in a fund's investment portfolio. Thus, in a short hedge,
a fund takes a position in a Hedging Instrument whose price is expected to move
in the opposite direction of the price of the investment being hedged. A long
hedge is the purchase or sale of a Hedging Instrument intended partially or
fully to offset potential increases in the acquisition cost of one or more
investments that the fund intends to acquire. Thus, in a long hedge, a fund
takes a position in a Hedging Instrument whose price is expected to move in the
same direction as the price of the prospective investment being hedged.
Hedging Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Hedging Instruments on indices may be used to hedge broad
market sectors.
The use of Hedging Instruments is subject to applicable regulations of
the SEC, the exchanges upon which they are traded and the Commodity Futures
Trading Commission ("CFTC"). In addition, a fund's ability to use Hedging
Instruments may be limited by tax considerations. See "Taxes."
In addition to the products and strategies described below, the funds
expect to discover additional opportunities in connection with options, futures
contracts, forward currency contracts and other hedging techniques. These new
opportunities may become available as each fund's subadviser develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, forward currency contracts
or other techniques are developed. A fund's subadviser may utilize these
opportunities to the extent that it is consistent with a fund's investment
objective(s) and permitted by the fund's investment limitations and applicable
regulatory authorities. Although a fund may be permitted to use a variety of
Hedging Instruments, each fund presently intends to purchase and sell and use
for hedging or investment purposes those Hedging Instruments as specified and
discussed in the sections that follow.
Special Risks of Hedging Strategies. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon a
fund's subadviser's ability to predict movements of the overall securities,
currency and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. While each fund's
subadviser is 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.
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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, futures contracts
or forward contracts or (2) cash and other liquid assets with a value,
marked-to-market daily, 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 an account with
the fund's Custodian, in the prescribed amount.
Assets used as cover or otherwise held in an account 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
Each fund, except Aggressive Growth, Capital Appreciation and Small
Cap, may use for hedging or investment purposes, certain options, including
options on securities, equity and debt indices and currencies. However,
Income-Growth may only purchase and sell call options on securities, and write
covered call options on securities as discussed below. Technology may purchase
and sell only options on securities and indices for hedging purposes. Certain
special characteristics of and risks with these strategies are discussed below.
<PAGE>
Characteristics and Risks of Options Trading. A call option
gives the purchaser the right to buy, and obligates the writer to sell, the
underlying investment at the agreed-upon price during the option period. A put
option gives the purchaser the right to sell, and obligates the writer to buy,
the underlying investment at the agreed-upon price during the option period.
Purchasers of options pay an amount, known as a premium, to the option writer in
exchange for the right under the option contract.
The purchase of call options can serve as a long hedge, and
the purchase of put options can serve as a short hedge. Writing put or call
options can enable the fund to enhance income or yield by reason of the premiums
paid by the purchasers of such options. However, if the market price of the
security underlying a put option declines to less than the exercise price of the
option, minus the premium received, the fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
or currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an over-the-counter ("OTC") option, the securities or other
assets used as cover would be considered illiquid to the extent described under
"Illiquid and Restricted Securities."
Writing put options can serve as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency depreciates to a price lower than the exercise price of the put option,
it can be expected that the put option will be exercised and the fund will be
obligated to purchase the security or currency at more than its market value. If
the put option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid and
Restricted Securities."
The value of an option position will reflect, among other
things, the current market value of the underlying investment, the time
remaining until expiration, the relationship of the exercise price to the market
price of the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options that expire
unexercised have no value.
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 or currencies 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, 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 depends upon a fund's subadviser's ability to forecast
the direction of price fluctuations in the underlying instrument.
<PAGE>
(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. 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.
Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a fund greater flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded. Since 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, there can be no assurance that a fund will in fact be able to close out
an OTC option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, the Fund might be unable to close out an OTC
option position at any time prior to its expiration.
With respect to options written by a fund, the inability to
enter into a closing transaction may result in material losses to it. For
example, because a fund may maintain a covered position with respect to any call
option it writes on a security, it may not sell the underlying security during
the period it is obligated under such option. This requirement may impair the
fund's ability to sell a portfolio security or make an investment at a time when
such a sale or investment might be advantageous.
(4) Activities in the options market may result in a higher
portfolio turnover rate and additional brokerage costs; however, a fund also may
save on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation of market movements.
(5) The risks of investment in options on indices may be
greater than options on securities or currencies. Because index options are
settled in cash, when a fund writes a call on an index it cannot provide in
advance for its 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 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,
<PAGE>
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.
As noted above, 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 plus anticipated appreciation in the market price
of the underlying security up to the exercise price of the option, will be
greater than the total appreciation in the price of the security. For
Income-Growth, the aggregate value of the securities underlying call options
(based on the lower of the option price or market) may not exceed 50% of its net
assets. For Value Equity, its investment in covered call options may not exceed
10% of the fund's total assets.
The strategy also may be used to provide limited protection
against a decrease in the market price of the security in an amount equal to the
premium received for writing the call option, less any transaction costs. Thus,
if the market price of the underlying security held by a fund declines, the
amount of such decline will be offset wholly or in part by the amount of the
premium received by the fund. If, however, there is an increase in the market
price of the underlying security and the option is exercised, the fund will be
obligated to sell the security at less than its market value. A fund would lose
the ability to participate in the value of such securities above the exercise
price of the call option. A fund also gives up the ability to sell the portfolio
securities used to cover the call option while the call option is outstanding.
FUTURES AND OPTIONS ON FUTURES
Growth Equity and Value Equity may purchase and sell futures on
securities, indices or currencies and options on futures for hedging or
investment purposes. Eagle International may purchase and sell only currency and
stock index futures for hedging or investment purposes. Mid Cap and Technology
do not anticipate using futures or options on futures at this time.
GUIDELINES, CHARACTERISTICS AND RISKS OF FUTURES AND OPTIONS ON FUTURES
TRADING. The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge. Futures contracts and options on
futures contracts can also be purchased and sold to attempt to enhance income or
yield.
<PAGE>
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 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 are adjusted daily to reflect unrealized gains and
losses on open contracts. If the price of an open futures or written option
position declines so that a fund has market exposure on such contract, the
broker will require the fund to deposit variation margin. If the value of an
open futures or written option position increases so that a fund no longer has
market exposure on such contract, the broker will pay any excess variation
margin to the fund.
Most of the exchanges on which futures contracts and options
on futures are traded limit the amount of fluctuation permitted in futures and
options prices during a single trading day. The daily price limit establishes
the maximum amount that the price of a futures contract or option may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily price limit has been reached in a particular
type of contract, no trades may be made on that day at a price beyond that
limit. The daily price limit governs only price movement during a particular
trading day and therefore does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. Futures contract and options
prices occasionally have moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures or options positions and subjecting some traders to substantial losses.
Another risk in employing futures contracts and options as a
hedge is the prospect that prices will correlate imperfectly with the behavior
of cash prices for the following reasons. First, rather than meeting additional
margin deposit requirements, investors may close contracts through offsetting
transactions. Second, the liquidity of the futures and options markets depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent that participants decide to make or take
delivery, liquidity in the futures and options markets could be reduced, thus
producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures and options markets are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures and options markets may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or security price trends by a subadviser
may still not result in a successful transaction.
In addition to the risks that apply to all options
transactions, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions in such options is
subject to the existence of a liquid secondary market. Compared to the purchase
or sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to a fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the purchase of a call or put option on a
futures contract would result in a loss to a fund when the purchase or sale of a
futures contract would not, such as when there is no movement in the price of
the underlying investment.
<PAGE>
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. Growth Equity and Value Equity may
use options and futures on foreign currencies and Eagle International may only
use futures on foreign currencies. Technology may use options on foreign
currencies.
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.
<PAGE>
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. Each fund, except Small Cap, may engage in
forward currency contracts as discussed below. Growth Equity, Technology 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 exceeding 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.
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.
Forward currency transactions may serve as long hedges - for example, a
fund may purchase a forward currency contract to lock in the U.S. dollar price
of a security denominated in a foreign currency that it intends to acquire.
Forward currency contract transactions also may serve as short hedges - for
example, a fund may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security or from a
dividend or interest payment on a security denominated in a foreign currency.
Income-Growth and Eagle International may enter into a forward contract
to sell the foreign currency for a fixed U.S. dollar amount approximating the
value of some or all of their respective portfolio securities denominated in
such foreign currency. Eagle International may enter into such a forward
<PAGE>
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, Capital Appreciation, Eagle International, Growth Equity,
Income-Growth and Value Equity may use forward currency contracts when its
subadviser wishes to "lock in" the U.S. dollar price of a security when Eagle
International is purchasing or selling a security denominated in a foreign
currency or anticipates receiving a dividend or interest payment denominated in
a foreign currency.
Income-Growth and Technology 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 either fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies.
Capital Appreciation, Eagle International, Growth Equity,
Income-Growth, Technology 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, Eagle International, Growth Equity, Income-Growth,
Technology and Value Equity may use forward currency contracts to shift exposure
to foreign currency fluctuations from one country to another. For example, if a
fund owned securities denominated in a foreign currency and its subadviser
believed that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency. Transactions
that use two foreign currencies are sometimes referred to as "cross hedging."
Use of a different foreign currency magnifies a fund's exposure to foreign
currency exchange rate fluctuations.
The cost to a fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
usually are entered into on a principal basis, no fees or commissions are
involved. When a fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, sellers or purchasers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by purchasing or selling, respectively, an
instrument identical to the instrument sold or bought, respectively. Secondary
markets generally do not exist for forward currency contracts, however, with the
result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, a fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a fund might need to purchase or
<PAGE>
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 purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, a fund may purchase a put option and write a call option
on the same underlying instrument, in order to construct a combined position
whose risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at one
strike price and buying a call option at a lower price, in order to reduce the
risk of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
A fund's options and futures activities may affect its turnover rate
and brokerage commission payments. The exercise of calls or puts written by a
fund, and the sale or purchase of futures contracts, may cause it to sell or
purchase related investments, thus increasing its turnover rate. Once a fund has
received an exercise notice on an option it has written, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price. The
exercise of puts purchased by a fund may also cause the sale of related
investments, also increasing turnover; although such exercise is within the
fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. A fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
FORWARD COMMITMENTS:
Eagle International and Income-Growth may make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments"). However, Income-Growth currently has no intention of
engaging in such transactions at this time. A fund may engage in forward
commitments if it either (1) holds and maintains until the settlement date in a
segregated account, cash or high-grade debt obligations in an amount sufficient
to meet the purchase price or (2) enters into an offsetting contract for the
forward sale of securities of equal value that it owns. Forward commitments may
be considered securities in themselves. They involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date, which
risk is in addition to the risk of decline in value of a fund's other assets.
When such purchases are made through dealers, a fund relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to the
fund of an advantageous yield or price. Although a fund generally will enter
into forward commitments with the intention of acquiring securities for its
investment portfolios, each fund may dispose of a commitment prior to settlement
and may realize short-term profits or losses upon such disposition.
ILLIQUID AND RESTRICTED SECURITIES:
Capital Appreciation, Eagle International, Growth Equity, Income-Growth
and Value Equity will not purchase or otherwise acquire any illiquid security,
including repurchase agreements maturing in more than seven days, if, as a
result, more than 10% of its net assets (taken at current value) would be
invested in securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Similarly,
Aggressive Growth, Mid Cap, Technology 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
<PAGE>
contractual restrictions on resale. Small Cap presently has no intention of
investing more than 5% of its assets in illiquid securities.
OTC options and their underlying collateral are currently considered to
be illiquid investments. Growth Equity, Income-Growth, Mid Cap, Technology 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 written by a fund will be considered
illiquid unless OTC options are sold to qualified dealers who agree that the
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.
Rule 144A under the Securities Act of 1933, as amended ("1933 Act"),
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities that have developed as a result
of Rule 144A provide both readily ascertainable values for certain restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. An insufficient number of qualified institutional buyers
interested in purchasing Rule 144A-eligible securities held by a fund, however,
could affect adversely the marketability of such portfolio securities and a fund
may be unable to dispose of such securities promptly or at reasonable prices.
OTHER INVESTMENT COMPANIES AND INDEX SECURITIES:
INVESTMENT COMPANIES. Each fund may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. Investments in the securities of other
investment companies may involve duplication of advisory fees and certain other
expenses. By investing in another investment company, a fund becomes a
shareholder of that investment company. As a result, a fund's shareholders
indirectly bear the fund's proportionate share of the fees and expenses paid by
the shareholders of the other investment company, in addition to the fees and
expenses fund shareholders directly bear in connection with the fund's own
operations. Eagle International may invest up to 10% of its assets in securities
of closed-end investment companies that invest in foreign markets. See "Foreign
Securities Exposure" for a discussion of the risks of investing in foreign
securities.
INDEX SECURITIES. Index Securities are considered investments in other
investment companies. Each fund, except Eagle International, may invest in
Standard and Poor's Depositary Receipts, Standard and Poor's MidCap 400
Depositary Receipts, 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.
OTHER INVESTMENT PRACTICES:
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Eagle International may
enter into agreements with banks or broker-dealers for the purchase or sale of
securities at an agreed-upon price on a specified future date. Such agreements
might be entered into, for example, when Eagle International anticipates a
decline in interest rates and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later. When Eagle
International purchases securities on a when-issued or delayed delivery basis,
<PAGE>
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).
LOANS OF PORTFOLIO SECURITIES. Mid Cap, Value Equity, Growth Equity and
Income-Growth may loan portfolio securities to qualified broker-dealers. Eagle
International may loan portfolio securities to broker-dealers or other financial
institutions. The collateral for a fund's loans will be "marked to market" daily
so that the collateral at all times exceeds 100% of the value of the loan. A
fund may terminate such loans at any time and the market risk applicable to any
security loaned remains its risk. Although voting rights, or rights to consent,
with respect to the loaned securities pass to the borrower, a fund retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by it if the holders of such securities
are asked to vote upon or consent to matters materially affecting the
investment. A fund also may call such loans in order to sell the securities
involved. The borrower must add to the collateral whenever the market value of
the securities rises above the level of such collateral. A fund could incur a
loss if the borrower should fail financially at a time when the value of the
loaned securities is greater than the collateral. The primary objective of
securities lending is to supplement a fund's income through investment of the
cash collateral in short-term interest bearing obligations.
TEMPORARY DEFENSIVE PURPOSES. For temporary defensive purposes during
anticipated periods of general market decline, each fund, other than Eagle
International, may invest up to 100% of its net assets in money market
instruments, including securities issued by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured thereby, as well as bank CDs
and banker's acceptances issued by banks having net assets of at least $1
billion as of the end of their most recent fiscal year, high-grade commercial
paper, and other long- and short-term debt instruments that are rated A or
higher by S&P or Moody's. For a description of S&P or Moody's commercial paper
and corporate debt ratings, see the Appendix.
In addition, for temporary defensive purposes, Eagle International may
invest all or a major portion of its assets in (1) foreign debt securities, (2)
debt and equity securities or U.S. issuers and (3) obligations issued or
guaranteed by the United States or a foreign government or their respective
agencies, authorities or instrumentalities.
B. INDUSTRY CLASSIFICATIONS
For purposes of determining industry classifications, each fund except
Eagle International relies upon classifications contained in the DIRECTORY OF
COMPANIES FILING ANNUAL REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION,
except with respect to investments in companies that produce or manufacture
semiconductors. Investments in those companies will be classified as one of the
following four industry groups: logic semiconductors (semiconductors that
perform a processing or controlling function); analog semiconductors
(semiconductors that manipulate unprocessed data, such as movement, temperature
and sound); memory semiconductors (semiconductors that hold programs and data);
and communications semiconductors (semiconductors used primarily in the
transmission, amplification and switching of voice, data and video signals).
<PAGE>
Eagle International relies on classifications determined by the Financial Times
Stock Exchange International.
III. INVESTMENT LIMITATIONS
A. FUNDAMENTAL INVESTMENT POLICIES
In addition to the limits disclosed above and the investment
limitations described in the Prospectus, the funds are subject to the following
investment limitations that are fundamental policies and may not be changed
without the vote of a majority of the outstanding voting securities of the
applicable fund. Under the 1940 Act, a "vote of a majority of the outstanding
voting securities" of a fund means the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the fund or (2) 67% or more of the
shares present at a shareholders meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy.
DIVERSIFICATION. With respect to 100% of the total assets of Capital
Appreciation and Income-Growth and with respect to 75% of the total assets of
the other funds (excluding Technology), 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 any one issuer.
INDUSTRY CONCENTRATION. No fund may purchase securities if, as a result
of such purchase, more than 25% of the value of such fund's total assets would
be invested in any one industry; however, this restriction does not apply to
U.S. Government securities.
BORROWING MONEY. No fund may borrow money except as a temporary measure
for extraordinary or emergency purposes. Such borrowing is limited as follows:
(1) Income-Growth may not borrow money except from banks. Borrowing in
the aggregate may not exceed 15%, and borrowing for purposes other than meeting
redemptions may not exceed 5% of the value of the fund's total assets at the
time the borrowing is made. The fund may not make additional investments when
borrowings exceed 5% of the fund's total assets.
(2) Capital Appreciation may not borrow money except from banks and
only if at the time of such borrowings the total loans to the fund do not exceed
5% of the fund's total assets.
(3) Aggressive Growth, Eagle International, Growth Equity, Mid Cap,
Small Cap, Technology and Value Equity may enter into reverse repurchase
agreements in an amount up to 33 1/3% of the value of its total assets in order
to meet redemption requests without immediately selling portfolio securities.
This latter practice is not for investment leverage but solely to facilitate
management of the investment portfolio by enabling the funds to meet redemption
requests when the liquidation of portfolio instruments would be inconvenient or
disadvantageous. However, a fund may not purchase additional portfolio
investments once borrowed obligations exceed 5% of total assets. When effecting
reverse repurchase agreements, fund assets in an amount sufficient to make
payment for the obligations to be purchased will be segregated by the Custodian
and on the funds' records upon execution of the trade and maintained until the
transaction has been settled. During the period any reverse repurchase
agreements are outstanding, to the extent necessary to assure completion of the
reverse repurchase agreements, a fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the expiration
date of the reverse repurchase agreements. Interest paid on borrowed obligations
<PAGE>
will not be available for investment. The funds will liquidate any such
borrowings as soon as possible and may not purchase any portfolio instruments
while any borrowings are outstanding (except as described above).
(4) Eagle International will not borrow money in excess of 10% of the
value (taken at the lower of cost or current value) of Eagle International's
total assets (not including the amount borrowed) at the time the borrowing is
made, and then only from banks as a temporary measure, such as to facilitate the
meeting of higher redemption requests than anticipated (not for leverage) which
might otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. As a matter of nonfundamental investment
policy, Eagle International may not make any additional investments if,
immediately after such investments, outstanding borrowings of money would exceed
5% of the currency value of Eagle International's total assets.
ISSUING SENIOR SECURITIES. No fund may issue senior securities, except
as permitted by the investment objective, policies, and investment limitations
of the fund, except that (1) Aggressive Growth may engage in transactions
involving forward currency contracts or other financial instruments (2) Eagle
International, Growth Equity, Mid Cap, Technology and Value Equity may engage in
transactions involving options, futures, forward currency contracts, or other
financial instruments, as applicable and (3) 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)
Aggressive Growth, Eagle International, Growth Equity, Small Cap and Technology
may underwrite securities to the extent that, in connection with the disposition
of portfolio securities, that fund may be deemed to be an underwriter under
federal securities laws and (2) Capital Appreciation and Income-Growth may
invest not more than 5% and Aggressive Growth, Mid Cap, Small Cap and Technology
may invest not more than 15% of their respective net assets (taken at cost
immediately after making such investment) in securities that are not readily
marketable without registration under the 1933 Act.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. With the following
exceptions, no fund may invest in commodities, commodity contracts or real
estate (including real estate limited partnerships, in the case of all the funds
except Income-Growth and Eagle International): (1) the funds may purchase
securities issued by companies that invest in or sponsor such interests, (2)
Aggressive Growth may purchase and sell forward currency contracts and other
financial instruments, (3) Growth Equity, Technology and Value Equity may
purchase and sell options, futures contracts, forward currency contracts and
other financial instruments, (4) Eagle International may purchase and sell
forward contracts, futures contracts, options and foreign currency, (5) Eagle
International and Income-Growth may purchase securities that are secured by
interests in real estate, (6) Income-Growth may write and purchase call options,
purchase and sell forward contracts and engage in transactions in forward
commitments and (7) Capital Appreciation, Eagle International, Growth Equity,
Income-Growth, Small Cap and Value Equity may not invest in oil, gas, or other
mineral programs except that they may purchase securities issued by companies
that invest in or sponsor such interests.
LOANS. No funds may make loans, except that each fund except Eagle
International may make loans under the following circumstances: (1) to the
extent that the purchase of a portion of an issue of publicly distributed (and,
in the case of Income-Growth, privately placed) notes, bonds, or other evidences
of indebtedness or deposits with banks and other financial institutions may be
considered loans; (2) where the fund may enter into repurchase agreements as
permitted under that fund's investment policies (3) Mid Cap, Value Equity 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.
<PAGE>
B. FUNDAMENTAL POLICIES UNIQUE TO EAGLE INTERNATIONAL
Eagle International has adopted the following fundamental policies that
can be changed only by shareholder vote:
MARGIN PURCHASES. Eagle International will not purchase securities on
margin, except such short-term credits as may be necessary for the clearance of
purchases and sales of securities. (For this purpose, the deposit or payment by
Eagle International of initial or variation margin in connection with futures
contracts, forward contracts or options is not considered the purchase of a
security on margin.)
SHORT SALES. Eagle International will not make short sales of
securities or maintain a short position, except that Eagle International may
maintain short positions in connection with its use of options, futures
contracts, forward contracts and options on futures contracts, and Eagle
International may sell short "against the box." As a matter of nonfundamental
investment policy, Eagle International will not sell securities short "against
the box."
C. FUNDAMENTAL POLICIES UNIQUE TO INCOME-GROWTH
Income-Growth has adopted the following fundamental policies that can
be changed only by shareholder vote:
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF INCOME-GROWTH. Income-Growth may not purchase or retain the
securities of any issuer if the officers and Trustees of the fund or Heritage or
its subadviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES. Income-Growth
may not enter into repurchase agreements with respect to more than 25% of its
total assets and may not lend portfolio securities amounting to more than 25% of
its total assets.
MARGIN PURCHASES. Income-Growth may not purchase securities on margin
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
RESTRICTED SECURITIES. Income-Growth may not invest more than 5% of the
its total assets (taken at cost) in securities that are not readily marketable
without registration under the 1933 Act (restricted securities).
D. NON-FUNDAMENTAL INVESTMENT POLICIES
Each fund has adopted the following additional restrictions which,
together with certain limits described above, may be changed by the Board
without shareholder approval in compliance with applicable law, regulation or
regulatory policy.
INVESTING IN ILLIQUID SECURITIES. Aggressive Growth, Small Cap and
Technology 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.
<PAGE>
Growth Equity and Eagle International may not invest more than 10%, and
Mid Cap may not invest more than 15% of their net assets in securities that are
subject to restrictions on resale or are not readily marketable without
registration under the 1933 Act and in repurchase agreements maturing in more
than seven days.
SELLING SHORT AND BUYING ON MARGIN. Aggressive Growth, Capital
Appreciation, Growth Equity, Mid Cap, Small Cap, Technology and Value Equity may
not sell any securities short or purchase any securities on margin but may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of securities. In addition, Aggressive Growth, Growth Equity, Mid Cap,
Technology and Value Equity may make margin deposits in connection with its use
of options, futures contracts and forward currency contracts, as applicable. In
addition, Growth Equity and Mid Cap may sell short "against the box."
INVESTING IN INVESTMENT COMPANIES. Aggressive Growth, Income-Growth,
Mid Cap, Small Cap, Technology and Value Equity may not invest in securities
issued by other investment companies except as permitted by the 1940 Act.
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.
E. NON-FUNDAMENTAL POLICIES UNIQUE TO CAPITAL APPRECIATION
Capital Appreciation has adopted the following non-fundamental
policies:
OPTION WRITING. Capital Appreciation may not write put or call options.
PLEDGING. Capital Appreciation may not pledge any securities except
that it may pledge assets having a value of not more than 10% of its total
assets to secure permitted borrowing from banks.
F. NON-FUNDAMENTAL POLICIES UNIQUE TO SMALL CAP
Small Cap has adopted the following non-fundamental policy:
OPTION WRITING. Small Cap may not write put or call options.
<PAGE>
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.
IV. NET ASSET VALUE
The net asset value per share of Class A shares, Class B shares and
Class C shares is separately determined daily as of the close of regular trading
on the New York Stock Exchange (the "Exchange") each day the Exchange is open
for business (each a "Business Day"). The Exchange normally is open for business
Monday through Friday except the following holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas Day. The funds value securities or
assets held in their portfolios as follows:
LISTED SECURITIES. A security listed or traded on the
Exchange, or on The Nasdaq Stock Market, is valued at its last sales price on
the principal exchange on which it is traded prior to the time when assets are
valued. If no sale is reported at that time or the security is traded in the OTC
market, market value is based on the most recent quoted bid price.
OPTIONS AND FUTURES. Options and futures positions are valued
based on market quotations when readily available. Market quotations generally
will not be available for options traded in the OTC market.
FOREIGN ASSETS. 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. Foreign currency exchange rates generally
are determined prior to the close of regular trading on the Exchange.
Occasionally, events affecting the value of foreign securities and such exchange
rates occur between the time at which they are determined and the close of
regular trading on the Exchange, which events will not be reflected in a
computation of the fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Board. 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.
SHORT-TERM SECURITIES. 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.
FAIR VALUE ESTIMATES. 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 their fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Board.
The funds are open each 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, trading
in various foreign markets may not take place on all Business Days or may take
place on days that are not Business Days and on which the funds' net asset
values per share are not calculated. Calculation of net asset value of Class A
shares, Class B shares and Class C shares does not take place contemporaneously
with the determination of the prices of the majority of the portfolio securities
used in such calculation. The funds calculate net asset value per share and,
therefore, effect sales and redemptions, as of the close of regular trading on
the Exchange each Business Day. If events materially affecting the value of such
securities or other assets occur between the time when their prices are
determined (including their value in U.S. dollars by reference to foreign
<PAGE>
currency exchange rates) and the time when the funds' net asset value is
calculated, such securities and other assets may be valued at fair value by
methods as determined in good faith by or under procedures established by the
Board.
The Board may suspend the right of redemption or postpone payment for
more than seven days at times (1) during which the Exchange is closed other than
for the customary weekend and holiday closings, (2) during which trading on the
Exchange is restricted as determined by the SEC, (3) during which an emergency
exists as a result of which disposal by the funds of securities owned by them is
not reasonably practicable or it is not reasonably practicable for the funds
fairly to determine the value of their net assets or (4) for such other periods
as the SEC may by order permit for the protection of the holders of Class A
shares, Class B shares and Class C shares.
V. PERFORMANCE INFORMATION
Total return data of each class from time to time may be included in
advertisements about each fund. Performance information is computed separately
for each class. Because Class B shares and Class C shares bear higher Rule 12b-1
fees, the performance of Class B shares and Class C shares of a fund likely will
be lower than that of Class A shares.
The funds' performance data quoted in advertising and other promotional
materials represents past performance and is not intended to indicate future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Average annual total return quotes for each class used
in each fund's advertising and promotional materials are calculated for the
one-year, five-year and ten-year periods (or life of the fund), according to the
following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of that period
In calculating the ending redeemable value for Class A shares, each
fund's current maximum sales charge of 4.75% is deducted from the initial $1,000
payment and, for Class B shares and Class C shares, the applicable CDSC imposed
on a redemption of Class B shares or Class C shares held for the period is
deducted. All dividends and other distributions by a fund are assumed to have
been reinvested at net asset value on the reinvestment dates during the period.
Based on this formula, the total return, or "T" in the formula above, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value.
In connection with communicating its average annual total return or
cumulative return (simple change of an investment over a stated period) to
current or prospective shareholders, each fund may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes that may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs. Investment
performance also often reflects the risks associated with a fund's investment
objective and policies. These factors should be considered when comparing a
fund's investment results to those of other mutual funds and investment
vehicles.
<PAGE>
From time to time each Fund's performance may be compared with: (1)
data (that may be expressed as rankings or ratings) published by independent
services or publications (including newspapers, newsletters, and financial
periodicals) that monitor the performance of mutual funds, such as Lipper
Analytical Services, Inc., C.D.A. Investment Technologies, Inc., Wiesenberger
Investment Companies Service, Investment Company Data Inc., Morningstar, Inc.,
Micropal Incorporated, and quarterly mutual fund rankings by Money, Fortune,
Forbes, Business Week, Personal Investor, and U.S. News & World Report
magazines, The Wall Street Journal, The New York Times, Kiplinger's Personal
Finance, and Barron's Newspaper, or (2) recognized stock and other indices, such
as the S&P 500 Composite Stock Price Index ("S&P 500 Index"), S&P Mid Cap 400
Index ("S&P 400 Index"), Russell 2000 Stock Index, Russell Midcap Growth Index,
Dow Jones Industrial Average ("DJIA"), Nasdaq Composite Index, Russell 2000
Index, Value Line Index, U.S. Department of Labor Consumer Price Index
("Consumer Price Index"), the Barra Growth Index, the Barra Value Index, and
various other domestic, international, and global indices. The S&P 500 Index is
a broad index of common stock prices, while the DJIA represents a narrower
segment of industrial companies. The S&P 400 Index measures mid-sized companies
that have an average market capitalization of $2.1 billion. Each assumes
reinvestment of distributions and is calculated without regard to tax
consequences or the costs of investing.
In addition, each fund may from time to time include in advertising and
promotional materials total return or cumulative figures that are not calculated
according to the formula set forth above or for other periods for each class of
shares. For example, in comparing a fund's aggregate total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc., Morningstar Mutual Funds or with such market indices as the Dow Jones
Industrial Average and the S&P 500 Index, each fund calculates its cumulative
total return for each class for the specified periods of time by assuming an
investment of $10,000 in that class of shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The funds do not, for these purposes, deduct from the initial value
invested any amount representing front-end sales charges charged on Class A
shares or CDSCs charged on Class B shares and Class C shares. By not annualizing
the performance and excluding the effect of the front-end sales charge on Class
A shares and the CDSC on Class B shares and Class C shares, the total return
calculated in this manner simply will reflect the increase in net asset value
per share over a period of time, adjusted for dividends and other distributions.
Calculating total return without taking into account the sales charge or CDSC
results in a higher rate of return than calculating total return net of the
front-end sales charge.
The average annualized total return and cumulative total return are as
follows for each period of each fund below. The returns are through October 31,
2000, except for Capital Appreciation and Income-Growth, which are through
August 31, 2000 and September 30, 2000, respectively. The average annual return
calculations below reflect the imposition of the maximum sales charge for Class
A shares and the applicable CDSC for Class B shares and Class C shares. The
cumulative return calculations do not include the imposition of any sales
charges. The returns calculated below for each class of shares of Aggressive
Growth, Eagle International, Growth Equity, Mid Cap Stock, Small Cap Stock,
Technology and Value Equity are based on the published NAVs for October 31, 2000
and not on the NAVs reflected in those Funds' Annual Report to Shareholders.
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------- ----------- ------------- ------------ ------------- -------------------------
Fund 1 Year 5 Years 10 Years Inception Initial Offering Date
---- ------ ------- -------- --------- ---------------------
--------------------------------- ----------- ------------- ------------ ------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
o Aggressive Growth August 20, 1998
average annual 37.89% N/A N/A 37.26%
return 44.77% N/A N/A 110.72%
cumulative return
<PAGE>
o Capital Appreciation December 12, 1985
average annual return 23.40% 26.10% 20.43% 16.10%
cumulative return 29.55% 234.77% 573.66% 845.99%
o Eagle International December 27, 1995
average annual return -5.73% N/A N/A 8.60%
cumulative return -1.02% N/A N/A 56.61%
o Growth Equity November 16, 1995
average annual return 24.72% N/A N/A 31.16%
cumulative return 30.94% N/A N/A 303.27%
o Income-Growth December 15, 1986
average annual return -0.24% 10.80% 13.20% 9.60%
cumulative return 4.74% 75.35% 262.84% 271.72%
o Mid Cap Stock November 6, 1997
average annual return 35.84% N/A N/A 16.41%
cumulative return 42.61% N/A N/A 65.26%
o Small Cap Stock May 7, 1993
average annual return 19.67% 12.05% N/A 12.91%
cumulative return 25.64% 85.47% N/A 160.65%
o Technology November 18, 1999
average annual return N/A N/A N/A N/A%
cumulative return N/A N/A N/A 21.90%
o Value Equity December 30, 1994
average annual return 9.72% 9.75% N/A 12.65%
cumulative return 15.19% 67.15% N/A 110.55%
--------------------------------- ----------- ------------- ------------ ------------- -------------------------
<PAGE>
CLASS B SHARES
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
Fund 1 Year 5 Years 10 Years Inception Initial Offering Date
---- ------ ------- -------- --------- ---------------------
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
o Aggressive Growth August 20, 1998
average annual return 39.74% N/A N/A 38.37%
cumulative return 43.74% N/A N/A 107.31%
o Capital Appreciation January 2, 1998
average annual return 24.75% N/A N/A 25.60%
cumulative return 28.75% N/A N/A 86.50%
o Eagle International January 2, 1998
average annual return -5.67% N/A N/A 7.64%
cumulative return -1.74% N/A N/A 26.17%
o Growth Equity January 2, 1998
average annual return 25.97% N/A N/A 32.73%
cumulative return 29.97% N/A N/A 125.84%
o Income-Growth January 2, 1998
average annual return -0.05% N/A N/A 0.68%
cumulative return 3.95% N/A N/A 4.89%
o Mid Cap Stock January 2, 1998
average annual return 37.51% N/A N/A 17.38%
cumulative return 41.51% N/A N/A 60.37%
o Small Cap Stock January 2, 1998
average annual return 20.72% N/A N/A -0.95%
cumulative return 24.72% N/A N/A 0.32%
o Technology November 18, 1999
average annual return N/A N/A N/A N/A
cumulative return N/A N/A N/A 21.06%
o Value Equity January 2, 1998
average annual return 10.34% N/A N/A 0.86%
cumulative return 14.34% N/A N/A 5.46%
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
Fund 1 Year 5 Years 10 Years Inception Initial Offering Date
---- ------ ------- -------- --------- ---------------------
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
o Aggressive Growth August 20, 1998
average annual return 43.69% N/A N/A 39.27%
cumulative return 43.69% N/A N/A 107.24%
o Capital Appreciation April 3, 1995
average annual return 28.76% 26.59% N/A 26.38%
cumulative return 28.76% 225.09% N/A 255.35%
o Eagle International December 27, 1995
average annual return -1.81% N/A N/A 8.85%
cumulative return -1.81% N/A N/A 50.90%
o Growth Equity November 16, 1995
average annual return 29.99% N/A N/A 31.46%
cumulative return 29.99% N/A N/A 288.53%
o Income-Growth April 3, 1995
average annual return 3.95% 11.05% N/A 12.50%
cumulative return 3.95% 68.88% N/A 91.14%
o Mid Cap Stock November 6, 1997
average annual return 41.51% N/A N/A 17.44%
cumulative return 41.51% N/A N/A 61.61%
o Small Cap Stock April 3, 1995
average annual return 24.75% 12.32% N/A 14.63%
cumulative return 24.75% 78.78% N/A 114.37%
o Technology November 18, 1999
average annual return N/A N/A N/A N/A
cumulative return N/A N/A N/A 20.99%
o Value Equity April 3, 1995
average annual return 14.34% 9.99% N/A 12.07%
cumulative return 14.34% 60.96% N/A 88.90%
--------------------------------- ----------- ----------- ------------- ------------- -------------------------
</TABLE>
VI. INVESTING IN THE FUNDS
----------------------
Class A shares, Class B shares and Class C shares are sold at their
next determined net asset value on Business Days. The procedures for purchasing
shares of a fund are explained in the Prospectus under "How to Invest."
A. SYSTEMATIC INVESTMENT OPTIONS
The options below allow you to invest continually in one or more funds
at regular intervals.
1. Automatic 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.
<PAGE>
2. 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.
B. RETIREMENT PLANS
----------------
HERITAGE IRA. An individual who earns compensation and who has not
reached age 70 1/2 before the close of the year generally may establish a
Heritage Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of a fund and/or
other Heritage Mutual Funds. The Internal Revenue Code of 1986, as amended (the
"Code"), limits the deductibility of IRA contributions to taxpayers who are not
active participants (and, under certain circumstances, whose spouses are not
active participants) in employer-provided retirement plans or who have adjusted
gross income below a certain level; however, a married investor who is not an
active participant in such a plan and files a joint income tax return with his
or her spouse (and their combined adjusted gross income does not exceed
$150,000) is not affected by the spouse's active participant status.
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 types of IRAs 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 Class A shares of any Heritage Mutual Fund at
a reduced sales charge on a monthly basis during the 13-month period following
such a plan's initial purchase. The sales charge applicable to an initial
purchase of Class A shares will be that normally applicable under the schedule
of sales charges set forth in the prospectus to an investment 13 times larger
than the initial purchase. The sales charge applicable to each succeeding
monthly purchase of Class A shares will be that normally applicable, under the
schedule, to an investment equal to the sum of (1) the total purchase previously
made during the 13-month period and (2) the current month's purchase multiplied
by the number of months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will not be adjusted
retroactively on the basis of later purchases. Multiple participant payroll
deduction retirement plans may purchase Class C shares at any time.
<PAGE>
C. CLASS A COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
Certain investors may qualify for the Class A sales charge reductions
indicated in the sales charge schedule in the prospectus by combining purchases
of Class A shares into a single "purchase," if the resulting purchase totals at
least $25,000. The term "purchase" refers to a single purchase by an individual,
or to concurrent purchases that, in the aggregate, are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account; a single
purchase by a trustee or other fiduciary purchasing Class A shares for a single
trust, estate or single fiduciary account although more than one beneficiary is
involved; or a single purchase for the employee benefit plans of a single
employer. The term "purchase" also includes purchases by a "company," as the
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or that has no
purpose other than the purchase of Class A shares or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit card holders of a company, policy holders of
an insurance company, customers of either a bank or broker-dealer, or clients of
an investment adviser. A "purchase" also may include Class A shares purchased at
the same time through a single selected dealer of any other Heritage Mutual Fund
that distributes its shares subject to a sales charge.
The applicable Class A shares initial sales charge will be based on the
total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A shares of a fund held by the investor and (b)
all Class A shares of any other Heritage Mutual Fund held by the investor and
purchased at a time when Class A shares of such other fund were distributed
subject to a sales charge (including Heritage Cash Trust shares acquired by
exchange); and
(iii) the net asset value of all Class A shares described in
paragraph (ii) owned by another shareholder eligible to combine his purchase
with that of the investor into a single "purchase."
Class A shares of Heritage Income Trust-Intermediate Government Fund
("Intermediate Government") purchased from February 1, 1992 through July 31,
1992, without payment of a sales charge will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
subject to a sales charge, unless those shares were acquired through an exchange
of other shares that were subject to a sales charge.
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.
D. CLASS A STATEMENT OF INTENTION
Investors also may obtain the reduced sales charges shown in the
prospectus by means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $25,000 within a period of 13
months in Class A shares of a fund or any other Heritage Mutual Fund subject to
a sales charge. Each purchase of Class A shares under a Statement of Intention
will be made at the public offering price or prices applicable at the time of
such purchase to a single transaction of the dollar amount indicated in the
Statement of Intention. In addition, if you own Class A shares of any other
Heritage Mutual Fund subject to a sales charge, you may include those shares in
computing the amount necessary to qualify for a sales charge reduction.
<PAGE>
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Statement of Intention is 5% of such amount. Class A shares purchased
with the first 5% of such amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full amount indicated
is not purchased, and such escrowed Class A shares will be redeemed
involuntarily to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrow will be released. The difference
in sales charge will be used to purchase additional Class A shares of a fund
subject to the rate of sales charge applicable to the actual amount of the
aggregate purchases. An investor may amend his/her Statement of Intention to
increase the indicated dollar amount and begin a new 13-month period. In that
case, all investments subsequent to the amendment will be made at the sales
charge in effect for the higher amount. The escrow procedures discussed above
will apply.
VII. REDEEMING SHARES
----------------
The methods of redemption are described in the section of the
Prospectus entitled "How to Sell Your Investment."
A. WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE
----------------------------------------------
The CDSC for Class A shares, Class B shares and Class C shares
currently is waived for: (1) any partial or complete redemption in connection
with a distribution without penalty under Section 72(t) of the Internal Revenue
Code of 1986, as amended (the "Code"), from a qualified retirement plan,
including a Keogh Plan or IRA upon attaining age 70 1/2; (2) any redemption
resulting from a tax-free return of an excess contribution to a qualified
employer retirement plan or an IRA; (3) any partial or complete redemption
following death or disability (as defined in Section 72(m)(7) of the Code) of a
shareholder (including one who owns the shares as joint tenant with his spouse)
from an account in which the deceased or disabled is named, provided the
redemption is requested within one year of the death or initial determination of
disability; (4) certain periodic redemptions under the Systematic Withdrawal
Plan from an account meeting certain minimum balance requirements, in amounts
representing certain maximums established from time to time by the Distributor
(currently a maximum of 12% annually of the account balance at the beginning of
the Systematic Withdrawal Plan); or (5) involuntary redemptions by a Fund of
Class A shares or Class B shares or Class C shares in shareholder accounts that
do not comply with the minimum balance requirements. The Distributor may require
proof of documentation prior to waiver of the CDSC described in sections (1)
through (4) above, including distribution letters, certification by plan
administrators, applicable tax forms or death or physicians' certificates
B. SYSTEMATIC WITHDRAWAL PLAN
--------------------------
Shareholders may elect to make systematic withdrawals from a fund
account of a minimum of $50 on a periodic basis. The amounts paid each period
are obtained by redeeming sufficient shares from an account to provide the
withdrawal amount specified. The Systematic Withdrawal Plan currently is not
available for shares held in an IRA, Section 403(b) annuity plan, defined
contribution plan, simplified employee pension plan or other retirement plan,
unless the shareholder establishes to Heritage's satisfaction that withdrawals
from such an account may be made without imposition of a penalty. Shareholders
may change the amount to be paid without charge not more than once a year by
written notice to the Distributor or Heritage.
Redemptions will be made at net asset value determined as of the close
of regular trading on the Exchange on a day of each month chosen by the
shareholders or a day of the last month of each period chosen by the
shareholders, whichever is applicable. Systematic withdrawals of Class C shares,
if made in less than one year of the date of purchase, will be charged a CDSC of
1%. Systematic withdrawals of Class B shares, if made in less than six years of
<PAGE>
the date of purchase, will be charged the applicable CDSC. If the Exchange is
not open for business on that day, the shares will be redeemed at net asset
value determined as of the close of regular trading on the Exchange on the
preceding Business Day, minus any applicable CDSC for Class B shares and Class C
shares. If a shareholder elects to participate in the Systematic Withdrawal
Plan, dividends and other distributions on all shares in the account must be
reinvested automatically in fund shares. A shareholder may terminate the
Systematic Withdrawal Plan at any time without charge or penalty by giving
written notice to Heritage or the Distributor. The funds, and the transfer agent
and Distributor also reserve the right to modify or terminate the Systematic
Withdrawal Plan at any time.
A withdrawal payment is treated as proceeds from a sale of shares
rather than as a dividend or a capital gain distribution. These payments are
taxable to the extent that the total amount of the payments exceeds the tax
basis of the shares sold. If the periodic withdrawals exceed reinvested
dividends and other distributions, the amount of the original investment may be
correspondingly reduced.
Ordinarily, a shareholder should not purchase additional Class A shares
of a fund if maintaining a Systematic Withdrawal Plan of Class A shares because
the shareholder may incur tax liabilities in connection with such purchases and
withdrawals. A fund will not knowingly accept purchase orders from shareholders
for additional Class A shares if they maintain a Systematic Withdrawal Plan
unless the purchase is equal to at least one year's scheduled withdrawals. In
addition, a shareholder who maintains such a Plan may not make periodic
investments under each fund's Automatic Investment Plan.
C. 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(s)
registered to the account, and personal identification; (2) recording all
telephone transactions; and (3) sending written confirmation of each transaction
to the registered owner. If a fund, Heritage, Eagle, the Distributor and their
Trustees, directors, officers and employees do not follow reasonable procedures,
some or all of them may be liable for any such losses.
D. 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 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 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.
E. RECEIVING PAYMENT
-----------------
If shares of a fund are redeemed by a shareholder through the
Distributor or a participating dealer, the redemption is settled with the
shareholder as an ordinary transaction. If a request for redemption is received
in good order (as described below) before the close of regular trading on the
Exchange, shares will be redeemed at the net asset value per share determined on
<PAGE>
that day, minus any applicable CDSC for Class B shares and Class C shares.
Requests for redemption received after the close of regular trading on the
Exchange will be executed on the next trading day. Payment for shares redeemed
normally will be made by a fund to the Distributor or a participating dealer by
the third business day after the day the redemption request was made, provided
that certificates for shares have been delivered in proper form for transfer to
the fund, or if no certificates have been issued, a written request signed by
the shareholder has been provided to the Distributor or a participating dealer
prior to settlement date.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of record
making the request for redemption. Questions concerning the redemption of fund
shares can be directed to registered representatives of the Distributor, a
participating dealer or to Heritage.
A redemption request will be considered to be received in "good order"
if:
o the number or amount of shares and the class of shares to be redeemed
and shareholder account number have been indicated;
o any written request is signed by a shareholder and by all co-owners of
the account with exactly the same name or names used in establishing
the account;
o any written request is accompanied by certificates representing the
shares that have been issued, if any, and the certificates have been
endorsed for transfer exactly as the name or names appear on the
certificates or an accompanying stock power has been attached; and
o the signatures on any written redemption request of $50,000 or more and
on any certificates for shares (or an accompanying stock power) have
been guaranteed by a national bank, a state bank that is insured by the
Federal Deposit Insurance Corporation, a trust company or by any member
firm of the New York, American, Boston, Chicago, Pacific or
Philadelphia Stock Exchanges. Signature guarantees also will be
accepted from savings banks and certain other financial institutions
that are deemed acceptable by Heritage, as transfer agent, under its
current signature guarantee program.
Each fund has the right to suspend redemption or postpone payment at
times when the Exchange is closed (other than customary weekend or holiday
closings) or during periods of emergency or other periods as permitted by the
Securities and Exchange Commission. In the case of any such suspension, you may
either withdraw your request for redemption or receive payment based upon the
net asset value next determined, less any applicable CDSC, after the suspension
is lifted. If a redemption check remains outstanding after six months, Heritage
reserves the right to redeposit those funds into your account.
VIII. EXCHANGE PRIVILEGE
------------------
An exchange is effected through the redemption of the shares tendered
for exchange and the purchase of shares being acquired at their respective net
asset values as next determined following receipt by the Heritage Mutual Fund
whose shares are being exchanged of (1) proper instructions and all necessary
supporting documents or (2) a telephone request for such exchange in accordance
with the procedures set forth in the Prospectus and below. Telephone or telegram
requests for an exchange received by a fund before the close of regular trading
on the Exchange will be effected at the close of regular trading on that day.
Requests for an exchange received after the close of regular trading will be
effected on the Exchange's next trading day.
<PAGE>
If you or your Financial Advisor are unable to reach Heritage by
telephone, an exchange can be effected by sending a telegram to Heritage. Due to
the volume of calls or other unusual circumstances, telephone exchanges may be
difficult to implement during certain time periods.
Class A shares of Intermediate Government purchased from February 1,
1992 through July 31, 1992, without payment of an initial sales charge may be
exchanged into Class A shares of a fund without payment of any sales charge.
Class A shares of Intermediate Government purchased after July 31, 1992 without
an initial sales charge will be subject to a sales charge when exchanged into
Class A shares of a fund, unless those shares were acquired through an exchange
of other Class A shares that were subject to an initial sales charge.
Each Heritage Mutual Fund reserves the right to reject any order to
acquire its shares through exchange or otherwise to restrict or terminate the
exchange privilege at any time. In addition, each Heritage Mutual Fund may
terminate this exchange privilege upon 60 days' notice.
IX. CONVERSION OF CLASS B SHARES
----------------------------
Class B shares of a fund automatically will convert to Class A shares
of that fund, 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 the Class B shares was accepted. For the purpose
of calculating the holding period required for conversion of Class B shares, the
date of purchase order acceptance shall mean (i) the date on which the Class B
shares were issued or (ii) for Class B shares obtained through an exchange, or a
series of exchanges, the date on which the original Class B shares were issued.
For purposes of conversion to Class A shares, Class B shares purchased through
the reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A shares and Class B shares will not result in
"preferential dividends" under the Code and the conversion of shares does not
constitute a taxable event. If the conversion feature ceased to be available,
the Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class B shares beyond eight years from the
date of purchase. Heritage and Eagle have no reason to believe that this
condition for the availability of the conversion feature will not be met.
X. TAXES
-----
GENERAL. Each fund is treated as a separate corporation for Federal tax
purposes and intends to continue to qualify for favorable tax treatment as a
regulated investment company under the Code ("RIC"). To do so, a fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally consisting of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions,
determined without regard to the dividends-paid deduction) ("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
<PAGE>
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.
By qualifying for treatment as a RIC, a fund (but not its shareholders)
will be relieved of Federal income tax on the part of its investment company
taxable income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that it distributes to its shareholders. If a
fund failed to qualify for treatment as a RIC for any taxable year, it would be
taxed on the full amount of its taxable income for that year without being able
to deduct the distributions it makes to its shareholders and the shareholders
would treat all those distributions, including distributions of net capital
gain, as dividends (that is, ordinary income) to the extent of the fund's
earnings and profits. In addition, the fund could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before requalifying for RIC treatment.
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.
DISPOSITION OF FUND SHARES; DISTRIBUTIONS. A redemption of fund shares
will result in a taxable gain or loss to the redeeming shareholder, depending on
whether the redemption proceeds are more or less than the shareholder's adjusted
basis for the redeemed shares (which normally includes any sales charge paid on
Class A shares). An exchange of shares of any fund for shares of another
Heritage Mutual Fund (including another fund) generally will have similar tax
consequences. However, special rules apply when a shareholder disposes of Class
A shares of a fund through a redemption or exchange within 90 days after
purchase thereof and subsequently reacquires Class A shares of that fund or of
another Heritage Mutual Fund without paying a sales charge due to the 90-day
reinstatement or exchange privileges. In these cases, any gain on the
disposition of the original Class A shares will be increased, or loss decreased,
by the amount of the sales charge paid when those shares were acquired, and that
amount will increase the 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 in the newly purchased shares.
If shares of a fund are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Dividends from a fund's investment company taxable income are taxable
to its shareholders as ordinary income, to the extent of its earnings and
profits, whether received in cash or in additional fund shares. Distributions of
a fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gains, whether received in cash or in
additional fund shares and regardless of the length of time the shares have been
held. A portion of the dividends (but not the capital gain distributions) each
fund pays (an insubstantial portion in the case of Eagle International), not
exceeding the aggregate dividends it receives from U.S. corporations, will be
eligible for the dividends-received deduction allowed to corporations; however,
<PAGE>
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
INCOME FROM FOREIGN SECURITIES. Dividends and interest received by each
fund, and gains realized thereby, may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions ("foreign taxes") that
would reduce the yield and/or total return on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate 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. It is anticipated that only Eagle International will be eligible for
such election. Pursuant to such election, the fund would treat those taxes as
dividends paid to its shareholders and each shareholder would be required to (1)
include in gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of those
taxes and of any dividend paid by the fund that represents income from foreign
or U.S. possessions sources as the shareholder's own income from those sources,
and (3) either deduct the taxes deemed paid by the shareholder in computing the
shareholder's taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against the shareholder's Federal income tax.
Each fund that makes this election will report to its shareholders shortly after
each taxable year their respective shares of the fund's income from sources
within foreign countries and U.S. possessions and foreign taxes it paid.
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 may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a fund will be subject to Federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its PRO RATA share of the QEF's annual ordinary earnings and net capital gain -
which the fund most likely would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax - even if the fund did not
receive those earnings and gain from 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 the fund included in income
for prior taxable years under the election (and under regulations proposed in
1992 that provided a similar election with respect to the stock of certain
<PAGE>
PFICs). A fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.
Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of a
foreign-currency-denominated debt security that are attributable to fluctuations
in the value of the foreign currency between the dates of acquisition and
disposition of the security and (3) that are attributable to exchange rate
fluctuations between the time a fund accrues dividends, interest or other
receivables, or 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, increase or
decrease the amount of a fund's investment company taxable income available to
be distributed to its shareholders as ordinary income, rather than affecting the
amount of its net capital gain.
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 a fund derives
with respect to its business of investing in securities or foreign currencies,
will be treated as qualifying income under the Income Requirement.
Certain futures, foreign currency contracts and listed nonequity
options (such as those on a securities index) in which a fund may invest will be
subject to section 1256 of the Code ("Section 1256 Contracts"). Section 1256
Contracts a fund holds at the end of each taxable year, other than Section 1256
Contracts that are part of a "mixed straddle" with respect to which it has made
an election not to have the following rules apply, must be "marked-to-market"
(that is, treated as sold for their fair market value) for Federal income tax
purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of Section 1256 Contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 1256 Contracts also may be marked-to-market for purposes of the Excise
Tax. These rules may operate to increase the amount that a fund must distribute
to satisfy the Distribution Requirement (i.e., with respect to the portion
treated as short-term capital gain), which will be taxable to its shareholders
as ordinary income, and to increase the net capital gain a fund recognizes,
without in either case increasing the cash available to the fund.
Code section 1092 (dealing with straddles) also may affect the taxation
of certain Hedging Instruments in which a fund may invest. That section defines
a "straddle" as offsetting positions with respect to actively traded personal
property; for these purposes, options, futures and forward currency contracts
are positions in personal property. Under that section, any loss from the
disposition of a position in a straddle generally may be deducted only to the
extent the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle. In addition, these rules may postpone the recognition of loss that
otherwise would be recognized under the mark-to-market rules discussed above.
The regulations under 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 currency
contract or short sale) with respect to any stock, debt instrument (other than
<PAGE>
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis - and enters into a "constructive sale" of the position, the
fund will be treated as having made an actual sale thereof, with the result that
it will recognize gain at that time. A constructive sale generally consists of a
short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by a fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction by
a fund during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the fund holds the appreciated financial position unhedged for 60 days after
that closing (i.e., at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
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.
XI. SHAREHOLDER INFORMATION
-----------------------
Each share of a fund gives the shareholder one vote in matters
submitted to shareholders for a vote. Class A shares, Class B shares and Class C
shares of each fund have equal voting rights, except that, in matters affecting
only a particular class or series, only shares of that class or series are
entitled to vote. As Massachusetts business trusts, Capital Appreciation,
Income-Growth and Heritage Series Trust are not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in a Trust's or a fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of a Trust's outstanding shares.
<PAGE>
XII. FUND INFORMATION
----------------
A. MANAGEMENT OF THE FUNDS
-----------------------
BOARD OF TRUSTEES. The business affairs of each fund are managed by or
under the direction of the Board. The Trustees are responsible for managing the
funds' business affairs and for exercising all the funds' powers except those
reserved to the shareholders. A Trustee may be removed by the other Trustees or
by a two-thirds vote of the outstanding Trust shares.
BACKGROUND OF THE TRUSTEES AND OFFICERS. Each fund's Trustees and
Officers are listed below with their addresses, principal occupations and
present positions, including any affiliation with Raymond James Financial, Inc.
("RJF"), Raymond James & Associates, Inc. ("RJA"), Heritage and Eagle.
Position with Principal Occupation
Name each Trust During Past Five Years
---- ---------- ----------------------
Thomas A. James* (58) Trustee Chairman of the Board since
880 Carillon Parkway 1986 and Chief Executive
St. Petersburg, FL Officer since 1969 of RJF;
Chairman of the Board of
RJA 33716 since 1986;
Chairman of the Board of
Eagle since 1984 and Chief
Executive Officer of Eagle,
1994 to 1996.
Richard K. Riess (51) President and Executive Vice President
880 Carillon Parkway Trustee and Managing Director for
St. Petersburg, FL 33716 Asset Management of RJF
since 1998, Chief Executive
Officer of Eagle since
1996, President of Eagle,
1995 to 2000, Chief
Operating Officer of Eagle,
1988 to 1995.
Donald W. Burton* (56) Trustee President of South Atlantic
614 W. Bay Street, Suite 200 Capital Corporation
Tampa, FL 33606 (venture capital) since
1981.
C. Andrew Graham (60) Trustee Vice President of Financial
Financial Designs, Ltd. Designs Ltd. since 1992.
1700 Lincoln Street
Denver, CO 80203
David M. Phillips (62) Trustee Chairman and Chief
World Trade Center Chicago Executive Officer of CCC
444 Merchandise Mart Information Services, Inc.
Chicago, IL 60654 since 1994 and of InfoVest
Corporation (information
services to the insurance
and auto industries and
consumer households) since
1982.
Eric Stattin (67) Trustee Litigation Consultant/
Expert Witness and private
investor 1975 Evening Star
Drive since 1988. Park
City, UT 84060
James L. Pappas (57) Trustee Lykes Professor of Banking
16303 Villarreal de Avila and Finance since 1986 at
Tampa, FL 33613 University of South
Florida; Dean of College of
Business Administration
1987 to 1996.
<PAGE>
Position with Principal Occupation
Name each Trust During Past Five Years
---- ---------- ----------------------
K.C. Clark (42) Executive Vice Executive Vice President
880 Carillon Parkway President and and Chief Operating Officer
St. Petersburg, FL 33716 Principal of Heritage Mutual Funds
Executive since 2000; Senior Vice
Officer President - Operations and
Administration of Heritage
Mutual Funds, 1998 to 2000;
Vice President - Operations
and Administration of
Heritage Mutual Funds, 1993
to 1998.
Donald H. Glassman (43) Treasurer Treasurer of Heritage
880 Carillon Parkway since 1989; Treasurer of
St. Petersburg, FL 33716 Heritage Mutual Funds since
1989.
Clifford J. Alexander (57) Secretary Partner, Kirkpatrick &
1800 Massachusetts Ave., N.W. Lockhart LLP (law firm).
Washington, D.C. 20036
Robert J. Zutz (47) Assistant Partner, Kirkpatrick &
1800 Massachusetts Ave., N.W. Secretary Lockhart LLP (law firm).
Washington, D.C. 20036
---------------
* These Trustees are "interested persons" as defined in section 2(a)(19) of the
1940 Act.
The Trustees and officers of the Trust, as a group, own less than 1% of
each class of each fund's shares outstanding. Each Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any liability to which
they would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
The Series Trust currently pays Trustees who are not employees of
Heritage or its affiliates $9,692 annually and $1,615 per meeting of the Board.
Income-Growth and Capital Appreciation each pay such Trustees $1,385 annually
and $231 per meeting of the Board. Each Trustee also is reimbursed for any
expenses incurred in attending meetings. Because Heritage or Eagle, as
applicable, performs substantially all of the services necessary for the
operation of each fund, each fund requires no employees. No officer, director or
employee of Heritage or Eagle receives any compensation from either fund for
acting as a director or officer. The following table shows the compensation
earned by each Trustee for the calendar year ended December 31, 2000.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total Compensation
Aggregate Aggregate From the Trust and the
Compensation From Compensation From Aggregate Heritage Family of
Name of Person, Capital Appreciation Income-Growth Compensation From the Funds Paid
Position Trust Trust Series Trust to Trustees(1)
--------- ----- ----- ------------ --------------
<S> <C> <C> <C> <C>
Donald W. Burton, $10,500 $1,500 $1,500 $19,500
Trustee
<PAGE>
C. Andrew Graham, $11,667 $1,667 $1,667 $21,666
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
James L. Pappas, $11,667 $1,667 $1,667 $21,666
Trustee
David M. Phillips, $10,500 $1,500 $1,500 $19,500
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Eric Stattin, $11,667 $1,667 $1,667 $21,666
Trustee
---------------
</TABLE>
(1) The Heritage Mutual Funds consist of five separate registered investment
companies, including Capital Appreciation, Income-Growth Trust and Series
Trust, and 13 portfolios of those companies.
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.
B. 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 shares of the
following funds as of December 22, 2000:
Eagle International - Class A Shares:
-------------------------------------
Johnson Family Ltd. Partnership 7.4%
5406 Lakemont Boulevard, SE
Bellevue, WA 98006
Eagle International - Class B Shares:
-------------------------------------
Lawrence T. Brannon TTEE TRSTE 9.2% Raymond James & Assoc., Inc. 6.2%
For U A DID 12-18-95 Cust. A. Robert Dare
Lawrence T. Brannon MD PSP TR IRA R/O
3213 Embry Hills Drive 855 Winn Lake Road
Atlanta, GA 30341 Lapeer, MI 48446
Value Equity - Class B Shares
Raymond James & Assoc., Inc. 7.9% Raymond James & Assoc., Inc. 7.6%
For Elite Acct. 51903562 Cust. Charles I. Dunlap
Fad Ann M. Kennedy IRA
PASS 846 McCallie Avenue
142 Oley Furnace Road Chattanooga, TN 37403
Fleetwood, PA 19552
<PAGE>
C. 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 RJF. RJF is a
holding company that, through its subsidiaries, is engaged primarily in
providing customers with a wide variety of financial services in connection with
securities, limited partnerships, options, investment banking and related
fields.
With respect to each fund except Eagle International, Heritage is
responsible for overseeing the fund's investment and noninvestment affairs,
subject to the control and direction of the fund's Board. The Series Trust, on
behalf of Aggressive Growth, Growth Equity, Mid Cap, Small Cap, Technology and
Value Equity entered into an Investment Advisory and Administration Agreement
with Heritage dated March 29, 1993 and last supplemented on October 12, 1999.
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 Goldman Sachs Asset
Management ("Goldman"), subject to the direction and control of Capital
Appreciation's Board, 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 Asset Management, Inc. ("Awad") each
provide investment advice and portfolio management services, subject to
direction by Heritage and the Series Trust's Board, 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, to Aggressive Growth, Growth Equity, Income-Growth, Mid Cap and
Value Equity for a fee payable by Heritage. None of Value Equity's assets
currently are allocated to Eagle. Under a Subadvisory Agreement, Osprey Partners
Investment Management, LLC ("Osprey") provides investment adviser and portfolio
management services, subject to the direction by Heritage and the Series Trust's
Board, to 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,
to Eagle International for a fee payable by Eagle (collectively, the
"Subadvisory Agreements").
Heritage and Eagle, as applicable, also are obligated to furnish each
fund with office space, administrative, and certain other services as well as
executive and other personnel necessary for the operation of a fund. Heritage
and Eagle, as applicable, and their affiliates also pay all the compensation of
Trustees of the Trust who are employees of Heritage or Eagle and their
affiliates. Each fund pays all its other expenses that are not assumed by
Heritage or Eagle, as applicable. Each fund also is liable for such nonrecurring
expenses as may arise, including litigation to which a fund may be a party. Each
fund also may have an obligation to indemnify its Trustees and officers with
respect to any such litigation.
The Advisory Agreements and the Subadvisory Agreements each were
approved by the Board (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
<PAGE>
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 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.
AGGRESSIVE GROWTH. For Aggressive Growth, Heritage contractually has
agreed to waive through the fund's 2000 fiscal year management fees to the
extent that annual operating expenses attributable to Class A shares exceed
1.60% of the average daily net assets or to the extent that annual operating
expenses attributable to Class B shares and Class C shares exceed 2.35% of
average daily net assets attributable to that class during this fiscal year. For
the period since the Fund's inception to October 31, 1998 and the two fiscal
years ended October 31, 2000, Heritage earned $25,861, $382,703 and $872,006,
respectively. For those same periods, Heritage waived its fees in the amounts of
$25,861, $55,188 and recovered $81,049, respectively.
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to the fund for a fee paid by Heritage
to Eagle with respect to the amount of fund assets under management equal to 50%
of the fees payable to Heritage by the fund, without regard to any reduction in
fees actually paid to Heritage as a result of expense limitations. For the two
fiscal years ended October 31, 2000, Heritage paid Eagle subadvisory fees of
$191,381and $395,479, respectively.
CAPITAL APPRECIATION. For Capital Appreciation, Heritage contractually
has agreed to waive through the fund's 2000 fiscal year management fees to the
extent that total annual operating expenses attributable to Class A shares
exceed 1.40% of the average daily net assets or to the extent that total annual
operating expenses attributable to Class C shares exceed 2.15% of average daily
net assets. For the three fiscal years ended August 31, 2000, Heritage earned
$825,313, $1,378,107 and $2,316,092, respectively.
Heritage has entered into agreements with Eagle and Goldman to provide
investment advice and portfolio management services to Capital Appreciation for
an annual fee to be paid by Heritage to Goldman of .25% of Capital
Appreciation's average daily net assets and for an annual fee paid by Heritage
<PAGE>
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
under management, and, therefore, does not receive a fee from Heritage. For the
three fiscal years ended August 31, 2000, Heritage paid to Goldman subadvisory
fees of $275,104, $459,368 and $772,031, respectively.
EAGLE INTERNATIONAL. For Eagle International, Eagle contractually has
agreed to waive through the fund's 2000 fiscal year management fees to the
extent that Class A annual operating expenses, exclusive of foreign taxes paid,
exceed 1.97% or to the extent that Class B and Class C annual operating expenses
exceed 2.72% of average daily net assets attributable to that class during this
fiscal year. For three fiscal years ended October 31, 2000, Eagle earned
$453,725 $477,822 and $506,058, respectively. For the same periods, Eagle waived
its fees in the amounts of $52,276, $24,049 and $0, respectively.
Eagle has entered into an agreement with Martin Currie to provide
investment advisory advice and portfolio management services to Eagle
International for a fee based on Eagle International's average daily net assets
paid by Eagle to Martin Currie equal to .50% on the first $100 million of assets
and .40% thereafter, without regard to any reduction in fees actually paid to
Eagle as a result of expense limitations. For the three fiscal years ended
October 31, 2000, Eagle paid Martin Currie subadvisory fees of $226,862 $238,911
and $253,029, respectively.
GROWTH EQUITY. For Growth Equity, Heritage contractually has agreed to
waive through the fund's 2000 fiscal year management fees to the extent that
Class A annual operating expenses exceed 1.40% or to the extent that Class C
annual operating expenses exceed 2.15% of average daily net assets attributable
to that class during this fiscal year. For the three fiscal years ended October
31, 2000, Heritage earned $471,447, $932,644 and $1,993,560, respectively.
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 three fiscal years ended October 31, 2000, Heritage paid Eagle
subadvisory fees of $235,729, $466,322 and $966,780, respectively.
INCOME-GROWTH. For Income-Growth, Heritage contractually has agreed to
waive through the fund's 2000 fiscal year management fees to the extent that
total annual operating expenses attributable to Class A shares exceed 1.35% of
the average daily net assets or to the extent that total annual operating
expenses attributable to Class C shares exceed 2.10% of average daily net
assets. For the three fiscal years ended September 30, 2000, Heritage earned
$760,605, $783,838 and $588,810, 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, 2000, Heritage paid
Eagle subadvisory fees of $380,302, $391,919 and $294,405, respectively.
MID CAP. For Mid Cap, Heritage contractually has agreed to waive
through the fund's 2000 fiscal year management fees to the extent that annual
operating expenses attributable to Class A shares exceed 1.55 % of the average
daily net assets or to the extent that annual operating expenses attributable to
Class C shares exceed 2.30% of average daily net assets attributable to that
class during this fiscal year. For the period since the fund's inception through
October 31, 1998 and the two fiscal years ended October 31, 2000, Heritage
earned $178,741, $210,881 and $240,166, respectively. For those same periods,
Heritage waived its fees in the amounts of $60,948, $27,644 and $24,899,
respectively.
<PAGE>
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to Mid Cap for a fee paid by Heritage
to Eagle equal to 50% of the fees payable to Heritage by the fund, without
regard to any reduction in fees actually paid to Heritage as a result of
voluntary fee waivers by Heritage. For the period since the fund's inception to
October 31, 1998 and the two fiscal years ended October 31, 2000, Heritage paid
Eagle $89,371, $105,440 and $120,083, respectively.
SMALL CAP. For Small Cap, Heritage contractually has agreed to waive
through the fund's 2000 fiscal year management fees to the extent that annual
operating expenses attributable to Class A shares exceed 1.30% of the average
daily net assets or to the extent that annual operating expenses attributable to
Class B shares and Class C shares exceed 2.05% of average daily net assets
attributable to that class during this fiscal year. For the three fiscal years
ended October 31, 2000, Heritage earned $2,609,951, $1,960,400 and $1,503,024,
respectively.
Heritage has entered into an agreement with Eagle and Awad to provide
investment advice and portfolio management services to Small Cap for a fee paid
by Heritage to each subadviser with respect to the amount of Small Cap assets
under management equal to 50% of the fees payable to Heritage by Small Cap,
without regard to any reduction in fees actually paid to Heritage as a result of
expense limitations. The Research Department of Raymond James & Associates, Inc.
("Research"), a former subadviser of Small Cap who resigned as its subadviser on
November 20, 1995, received from Heritage for the November 1, 1995 to November
20, 1995 (when Research resigned as subadviser), subadvisory fees of $74,583.
Eagle began as subadviser to Small Cap on August 7, 1995 and received
subadvisory fees from Heritage for the three fiscal years ended October 31, 2000
in the amount of $691,150, $541,662 and $392,941, respectively. For the three
fiscal years ended October 31, 2000, Heritage paid Awad subadvisory fees of
$613,825, $438,538 and $358,571, respectively.
TECHNOLOGY. For Technology, Heritage contractually has agreed to waive
through the fund's 2000 fiscal year management fees to the extent that annual
operating expenses attributable to Class A shares exceed 1.65% of average daily
net assets or to the extent that annual operating expenses attributable to Class
B shares and Class C shares exceed 2.40% of average daily net assets
attributable to that class during this fiscal year. For the period since the
fund's inception through October 31, 2000, Heritage earned $1,026,011 and waived
$0 of its fees.
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to the fund for a fee paid by Heritage
to Eagle with respect to the amount of fund assets under management equal to 50%
of the fees payable to Heritage by the fund, without regard to any reduction in
fees actually paid to Heritage as a result of expense limitations. For the
period since the fund's inception through October 31, 2000, Heritage paid Eagle
subadvisory fees of $513,006.
VALUE EQUITY. For Value Equity, Heritage contractually has agreed to
waive through the fund's 2000 fiscal year management fees to the extent that
annual operating expenses attributable to Class A shares exceed 1.45% of average
daily net assets or to the extent that annual operating expenses attributable to
Class B shares and Class C shares exceed 2.20% of average daily net assets
attributable to that class during this fiscal year. For the three fiscal years
ended October 31, 2000, Heritage earned $272,954, $227,557 and $193,447,
respectively. For the same periods, Heritage waived its fees in the amounts of
$48,072, $76,169 and $69,913, respectively.
Heritage has entered into separate agreements with Eagle and Osprey to
provide investment advice and portfolio management services to Value Equity for
a fee paid by Heritage. Heritage paid fees to Eagle and Osprey, for the 1999
fiscal year, equal to 0.375% and 0.32% of average daily net assets,
respectively, without regard to any reduction in fees actually paid to Heritage
as a result of expense limitations. For the three fiscal years ended October 31,
<PAGE>
1998, Heritage paid Eagle subadvisory fees of $111,334, $136,477 and $0,
respectively. For the period November 1, 1998 through May 17, 1999, Heritage
paid Eagle subadvisory fees of $66,946. Commencing on May 18, 1999, all of the
fund's assets were allocated to Osprey. No assets currently are allocated to
Eagle. From May 18, 1999 to October 31, 1999, Heritage paid Osprey subadvisory
fees of $39,964. For the fiscal year ended October 31, 2000, Heritage paid
Osprey subadvisory fees of $82,537.
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.
D. BROKERAGE PRACTICES
-------------------
Each fund may engage in short-term transactions under various market
conditions to a greater extent than certain other mutual funds with similar
investment objectives. Thus, the turnover rate may vary greatly from year to
year or during periods within a year. A fund's portfolio turnover rate is
computed by dividing the lesser of purchases or sales of securities for the
period by the average value of portfolio securities for that period. A 100%
turnover rate would occur if all the securities in a Fund's portfolio, with the
exception of securities whose maturities at the time of acquisition were one
year or less, were sold and either repurchased or replaced within one year. A
high rate of portfolio turnover (100% or more) generally leads to transaction
costs and may result in a greater number of taxable transactions. Aggressive
Growth's portfolio turnover rates for two fiscal years ending October 31, 1999
and 2000 were 195% and 252%, respectively. Capital Appreciation's portfolio
turnover rates for the two fiscal years ended August 31, 1999 and 2000 were 44%
and 48%, respectively. Eagle International's portfolio turnover rates for the
two fiscal years ended October 31, 1999 and 2000 were 78% and 67%, respectively.
Growth Equity's portfolio turnover rates for the two fiscal years ended October
31, 1999 and 2000 were 160% and 392%, respectively. Income-Growth's portfolio
turnover rates for the two fiscal years ended September 30, 1999 and 2000 were
46% and 58%, respectively. Mid Cap's portfolio turnover rates for the two fiscal
years ended October 31, 1999 and 2000 were 192% and 265%, respectively. Small
Cap's portfolio turnover rates for the two fiscal years ended October 31, 1999
and 2000 were 42% and 85%, respectively. Technology's portfolio turnover rate
for the period November 18, 1999 to October 31, 2000 was 441%. Value Equity's
portfolio turnover rates for two fiscal years ended October 31, 1999 and 2000
were 137% and 95%, respectively.
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, and to potential access to initial public offerings ("IPOs") that
may be made available by such broker-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.
<PAGE>
The Trustees may direct Heritage or the subadvisers to allocate a
certain amount of commission business from certain funds to certain
broker-dealers as consideration for the annual provision of certain data
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationships among the funds, Heritage
and the subadvisers).
Aggressive Growth, Capital Appreciation, Eagle International, Growth
Equity, Income-Growth, Mid Cap, Technology 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 Aggressive Growth for the
period ended October 31, 1998 and the two fiscal years ended October 31, 2000
amounted to $26,396, $118,326, and $329,767, respectively. For the same periods,
aggregate brokerage commissions paid by Aggressive Growth to the Distributor, an
affiliated broker-dealer, were $6,696, $16,500 and $33,320, respectively. The
commission to the Distributor for the most recent fiscal year represented 10.10%
of the total aggregate commissions paid on brokerage transactions representing
3.87% of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Capital Appreciation for the
three fiscal years ended August 31, 2000 amounted to $68,582, $206,766 and
$375,005, respectively. For the same periods, aggregate brokerage commissions
paid by Capital Appreciation to the Distributor, an affiliated broker-dealer,
were $216, $2,580 and $0, respectively. The commission to the Distributor for
the most recent fiscal year represented 0% of the total aggregate commissions
paid on brokerage transactions representing 0% of the total aggregate brokerage
transactions.
Aggregate brokerage commissions paid by Eagle International for the
three years ended October 31, 2000 amounted to $134,334, $191,194 and $137,739,
respectively.
Aggregate brokerage commissions paid by Growth Equity for the three
fiscal years ended October 31, 2000 amounted to $81,410, $303,840 and
$1,284,162, respectively. For the same periods, aggregate brokerage commissions
paid by Growth Equity to the Distributor, an affiliated broker-dealer, were $0,
$0 and $1,440, respectively.
Aggregate brokerage commissions paid by Income-Growth for the three
fiscal years ended September 30, 2000 amounted to $195,587, $130,655 and
$130,561, respectively. For the same periods, aggregate brokerage commissions
paid by Income-Growth to the Distributor, an affiliated broker-dealer, were
$9,280, $8,058 and $6,807, respectively. The commission to the Distributor for
<PAGE>
the most recent fiscal year represented 5.21% of the total aggregate commissions
paid on brokerage transactions representing 2.0% of the total aggregate
brokerage transactions.
Aggregate brokerage commissions paid by Mid Cap for the period since
inception to October 31, 1998 and the two fiscal years ended October 31, 2000
amounted to $81,410, $127,029 and $119,898, respectively. For the same periods,
aggregate brokerage commissions paid by Mid Cap to the Distributor, an
affiliated broker-dealer, were $0, $540 and $3,180, respectively. The commission
to the Distributor for the most recent fiscal year represented 2.65% of the
total aggregate commissions paid on brokerage transactions representing .9% of
the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Small Cap for the three years
ended October 31, 2000 amounted to $560,894, $347,665 and $406,607,
respectively. For the same periods, Small Cap paid the Distributor, an
affiliated broker-dealer, commissions of $102,192, $48,580 and $34,317
respectively. The commission to the Distributor for the most recent fiscal year
represented 8.44% of the total aggregate commissions paid on brokerage
transactions representing 2.8% of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Technology for the period ended
October 31, 2000 amounted to $506,342. For the same period, aggregate brokerage
commissions paid by Technology to the Distributor, an affiliated broker-dealer,
were $1,290. The commission to the Distributor for the most recent fiscal period
represented .26% of the total aggregate commissions paid on brokerage
transactions representing .1% of the total aggregate brokerage transactions.
Aggregate brokerage commissions paid by Value Equity for the three
fiscal years ended October 31, 2000 amounted to $153,869, $130,194 and $73,625
respectively. For the same periods, aggregate brokerage commissions paid by
Value Equity to the Distributor were $4,212, $300 and $0, respectively. The
commission to the Distributor for the prior fiscal year represented 0.23% of the
total aggregate commissions paid on brokerage transactions representing 0.05% of
the total aggregate brokerage transactions.
Each fund may not buy securities from, or sell securities to, the
Distributor as principal. However, the Board 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 will consider the ability to recapture fund expenses on
certain portfolio transactions, such as underwriting commissions and tender
offer solicitation fees, by conducting such portfolio transactions through
affiliated entities, including the Distributor, but only to the extent such
recapture would be permissible under applicable regulations, including the rules
of the National Association of Securities Dealers, Inc. and other
self-regulatory organizations.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, each fund has expressly consented to the Distributor executing
transactions on an exchange on its behalf.
Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 there under,
Heritage, Eagle, the Adviser, each subadviser and the Distributor have adopted
Codes of Ethics ("Codes"). These Codes permit portfolio managers and other
access persons of the applicable Funds to invest in securities that may be owned
by the Fund, subject to certain restrictions.
E. DISTRIBUTION OF SHARES
----------------------
DISTRIBUTION. Shares of each fund are offered continuously through the
funds' principal underwriter, Raymond James & Associates, Inc. (the
"Distributor"), and through other participating dealers or banks that have
<PAGE>
dealer agreements with the Distributor. The Distributor receives commissions
consisting of that portion of the sales load remaining after the dealer
concession is paid to participating dealers or banks. Such dealers may be deemed
to be underwriters pursuant to the 1933 Act. The Distributor and Financial
Advisors or banks with whom the Distributor has entered into dealer agreements
offer shares of each fund as agents on a best efforts basis and are not
obligated to sell any specific amount of shares. In this connection, the
Distributor makes distribution and servicing payments to participating dealers.
DISTRIBUTION AGREEMENT. Each fund had adopted a Distribution Agreement
pursuant to which 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,
Class B and Class 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.
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.
RULE 12b-1 DISTRIBUTION PLAN. Each fund has adopted a Distribution Plan
under Rule 12b-1 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 Class A shares, Class B
shares and Class C shares. The funds used all Class A and Class C 12b-1 fees to
pay the Distributor. The Distributor, on Class C shares, may retain the first 12
months distribution fee for reimbursement of amounts paid to the broker-dealer
at the time of purchase.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class A shares and in
connection with personal services rendered to Class A shareholders and the
maintenance of Class A shareholder accounts, each fund may pay the Distributor
distribution and service fees of up to 0.35% of that fund's average daily net
assets attributable to Class A shares of that fund. Currently, each fund pays
the Distributor a fee of up to 0.25% of its average daily net assets
attributable to Class A shares. For Capital Appreciation Class A shares
purchased prior to April 3, 1995, the fund pays the Distributor a fee of up to
0.50% of that fund's average daily net assets attributable to those Class A
shares. These fees are computed daily and paid monthly.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class B shares and Class C
shares and in connection with personal services rendered to Class B and Class C
shareholders and the maintenance of Class B and Class C shareholder accounts,
each fund pays the Distributor a service fee of 0.25% and a distribution fee of
0.75% of that fund's average daily net assets attributable to Class B shares and
Class C shares. These fees are computed daily and paid monthly.
The following table illustrates the amount of class specific 12b-1 fees
paid by the funds to the Distributor for the fiscal year end August 31, 2000 for
Capital Appreciation, September 30, 2000 for Income-Growth and October 31, 2000
for the other funds. All 12b-1 fees were paid to the Distributor.
<PAGE>
------------------------ --------------- --------------- ----------------
Fund Class A Class B Class C
---- ------- ------- -------
------------------------ --------------- --------------- ----------------
Aggressive Growth $108,231 $159,752 $ 295,268
Capital Appreciation $738,068 $325,881 $ 580,044
Eagle International $22,342 $ 7,072 $ 88,632
Growth Equity $282,213 $331,910 $1,197,319
Income-Growth $131,347 $56,574 $ 203,119
Mid Cap $47,505 $ 29,937 $100,263
Small Cap $293,578 $105,971 $557,083
Technology $137,043 $199,667 $327,021
Value Equity $33,504 $9,420 $114,492
------------------------ --------------- --------------- ----------------
Each Plan was approved by the Board, 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
reviews quarterly a written report of Plan costs and the purposes for which such
costs have been incurred. A Plan may be amended by vote of the Board, including
a majority of the Independent Trustees, cast in person at a meeting called for
such purpose. Any change in a Plan that would increase materially the
distribution cost to a class requires shareholder approval of that class.
The 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 cast in person at a meeting called
for that purpose. If a Plan is terminated, the obligation of a fund to make
payments to the Distributor pursuant to the Plan will cease and the fund will
not be required to make any payment past the date the Plan terminates.
F. ADMINISTRATION OF THE FUNDS
---------------------------
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. Heritage
or Eagle, as applicable, subject to the control of the Board, will manage,
supervise and conduct the administrative and business affairs of each fund;
furnish office space and equipment; oversee the activities of the subadvisers
and the Custodian; and pay all salaries, fees and expenses of officers and
Trustees of each fund who are affiliated with Heritage or Eagle, as applicable.
In addition, Heritage provides certain shareholder servicing activities for
customers of the funds. State Street Bank & Trust is the fund accountant for the
Eagle International Equity Portfolio. Each fund pays directly for fund
accounting and transfer agent services.
Under a separate Administration Agreement between Eagle and Heritage,
Heritage provides certain noninvestment services to Eagle International for a
fee payable by Eagle equal to .10% on the first $100 million of average daily
net assets, and .05% thereafter.
<PAGE>
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 period August 20, 1998 to October 31, 1998 and the two fiscal
years ended October 31, 2000, Heritage earned $8,200, $40,829 and $52,270,
respectively, from Aggressive Growth for its services as fund accountant. For
the three fiscal years ended August 31, 2000, Heritage earned $42,486, $49,326
and $54,001, respectively, from Capital Appreciation for its services as fund
accountant. For the three fiscal years ended October 31, 2000, Heritage earned
approximately $39,661, $49,494 and $54,999, respectively, from Growth Equity for
its services as fund accountant. For the three fiscal years ended September 30,
2000, Heritage earned $49,324, $51,947 and $51,128, respectively, from
Income-Growth for its services as fund accountant. For the period November 6,
1997 to October 31, 1998 and the two fiscal years ended October 31, 2000,
Heritage earned approximately $32,403, $38,911 and $45,091 from Mid Cap for its
services as fund accountant. For the three fiscal years ended October 31, 2000,
Heritage earned approximately $47,885, $49,801 and $55,370, respectively, from
Small Cap for its services as fund accountant. For the period November 18, 1999
to October 31, 2000, Heritage earned $48,712 from Technology for its services as
fund accountant. For the three fiscal years ended October 31, 2000, Heritage
earned approximately $35,631, $39,620 and $43,894, 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 CERTIFIED PUBLIC ACCOUNTANTS. PricewaterhouseCoopers LLP,
400 North Ashley Street, Suite 2800, Tampa, Florida 33602, are the certified
independent public accountants for the funds. The Financial Statements of the
funds that appear in this SAI have been audited by PricewaterhouseCoopers LLP,
and are included herein in reliance upon the report of said firm of accountants,
which is given upon their authority as experts in accounting and auditing.
G. 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.
<PAGE>
APPENDIX A
----------
FUND INVESTMENT TABLE
---------------------
All percentage limitations are based on the fund's total assets, unless
otherwise specified.
N Net Assets
10 minimum percent of assets (italic type)
10 no more than specified percent of assets (Roman type)
-- not permitted
o no policy limitation on usage
|_| permitted, but typically has not been used
** Excluding those short-term money market instruments not separately listed.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Eagle Small
Aggressive Capital Int'l. Growth Income- Mid Cap Cap Value
Growth Appreciation Equity Equity Growth Stock Stock Technology Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
o Equity Securities 65 65 65 65 1/ o 65 65 65 65
o Convertible Securities
->Investment Grade o o o 35 o o 35 o 35
->Below Investment 5 -- 5 -- 35 2/ 5 5 -- --
Grade
o Corporate Debt -- -- 35 3/ -- o 4/ 35 -- -- --
o Short-Term Money 35 35 35 -- o 35 35 35 --
Market Instruments**
o Illiquid SecuritiesN 15 10 10 10 10 15 15 5/ 15 10
o Repurchase 35 35 35 35 25 35 35 35 35
Agreements
o Reverse Repurchase 33 1/3 5 33 1/3 33 1/3 5 33 1/3 33 1/3 33 1/3 33 1/3
Agreements
o U.S. Government 35 35 35 35 o 35 35 35 35
Securities
o Zero Coupon -- -- -- -- |_| -- -- -- --
Securities
----------------------------------
1/ Growth Equity may invest up to 35% of its assets in rights and warrants.
2/ Income-Growth will not invest 35% or more of its assets in below
investment grade convertible and nonconvertible securities.
3/ Investment grade non-convertible foreign debt.
4/ Income-Growth may invest not more than 10% of its assets in
non-convertible corporate debt obligations that are rated below investment grade
by Moody's or S&P.
5/ Small Cap currently has no intention of investing more than 5% in these
securities at this time.
A-1
<PAGE>
-----------------------------------------------------------------------------------------------------------------------------------
Eagle Small
Aggressive Capital Int'l. Growth Income- Mid Cap Cap Value
Growth Appreciation Equity Equity Growth Stock Stock Technology Equity
-----------------------------------------------------------------------------------------------------------------------------------
o Foreign Securities 10 10 6/ 65 25 N,7/ 20 8/ 15 N/ 15 N/ 15 15 N/
Exposure
o ADRs o 10 6/ o 25 N,7/ 20 o 35 o 35
o Hedging Instruments
->Futures -- -- o 35 -- |_| -- o 35
Contracts
->Options -- o 9/ o 35 o 10/ |_| -- o 35 11/
Contracts
->Forward
Contracts (including o o o 35 o |_| -- o 35
foreign currency
transactions)
o Forward Commitments -- -- o -- 25 12/ -- -- -- --
o Index Securities 10 5 10 10 10 5 10 10 10
and Other Investment
Companies
o When-issued and -- -- o -- -- -- -- -- --
Delayed Delivery
Transactions
o Loans of Portfolio -- -- |_| |_| 25 12/ |_| -- -- |_|
Securities
o Temporary 100 100 100 100 100 100 100 100 100
Defensive Measures
</TABLE>
-------------------------------------
6/ Capital Appreciation's investments in foreign securities and ADRs may not
exceed 10%.
7/ Growth Equity may not invest more than 25% of its net assets in foreign
securities and ADRs.
8/ Income-Growth may invest up to 20% in foreign securities, including ADRs
and other similar securities.
9/ Capital Appreciation may not write put or call options.
10/ Income-Growth may write covered calls. The aggregate value of the
securities underlying call options (based on the lower of the option price or
market) may not exceed 50% of the fund's net assets.
11/ Value Equity may write covered call options; however, the fund may not
invest more than 10% of its total assets in covered call options.
12/ Income-Growth currently has no intention of engaging in this transaction
at this time.
A-2
<PAGE>
APPENDIX B
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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.
<PAGE>
Baa - Bonds that are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the company ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the company ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
-------------------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB," "B," "CCC," "CC," and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
<PAGE>
BB - Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B - Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no interest is being
paid.
D - Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<PAGE>
REPORTS OF THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
-----------------------------------------------------------
FINANCIAL STATEMENTS
--------------------
The Report of the Independent Certified Public Accountants 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, 2000, filed with the Securities and Exchange Commission on October
27, 2000, Accession No. 0001016843-00-000813; Income-Growth Trust's Annual
Report to Shareholders for the fiscal year ended September 30, 2000, filed with
the Securities and Exchange Commission on November 27, 2000, Accession No.
0000950168-00-002511; Series Trust's Annual Report to Shareholders for the
fiscal year ended October 31, 2000 filed with the Securities and Exchange
Commission on December 29, 2000, Accession No. 0001016843-00-000906.
