HERITAGE CASH TRUST
MUNICIPAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") dated January 2, 1998, as
supplemented on October 26, 1998 should be read with the Prospectus of Heritage
Cash Trust-Money Market and Municipal Money Market Funds, dated January 2, 1998.
This SAI is not a prospectus itself. To receive a copy of the Prospectus, write
to Heritage Asset Management, Inc. at the address below or call (800) 421-4184.
Heritage Asset Management, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
TABLE OF CONTENTS
Page
GENERAL INFORMATION............................................................1
INVESTMENT INFORMATION.........................................................1
Investment Objectives.....................................................1
Investment Policies.......................................................1
Money Market Fund.........................................................3
Municipal Fund............................................................4
INVESTMENT LIMITATIONS.........................................................6
NET ASSET VALUE................................................................9
CALCULATING YIELDS............................................................10
INVESTING IN THE FUNDS........................................................11
INVESTMENT PROGRAMS...........................................................12
Systematic Investment Options............................................12
Retirement Plans.........................................................12
REDEEMING SHARES.................... .......................................13
Systematic Withdrawal Plan...............................................13
Telephone Transactions...................................................14
Redemptions in Kind......................................................14
Receiving Payment........................................................15
EXCHANGE PRIVILEGE............................................................15
CONVERSION OF CLASS B SHARES..................................................16
TAXES.........................................................................16
TRUST INFORMATION.............................................................19
Management of the Trust..................................................19
Five Percent Shareholders................................................22
Investment Adviser and Administrator; Subadviser.........................23
Portfolio Transactions...................................................25
Distribution of Shares...................................................26
Administration of the Funds..............................................27
Potential Liability......................................................28
APPENDIX ....................................................................A-1
REPORTS OF INDEPENDENT ACCOUNTANTS...........................................A-5
FINANCIAL STATEMENTS.........................................................A-7
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GENERAL INFORMATION
Heritage Cash Trust (the "Trust") was established as a Massachusetts
business trust under a Declaration of Trust dated June 21, 1985. The Trust
currently consists of two separate investment portfolios: the Money Market Fund
and the Municipal Money Market Fund (the "Municipal Fund") (each a "Fund" and
collectively the "Funds"). The Money Market Fund offers three classes of shares:
Class A shares that are not subject to any sales load ("A shares"), Class B
shares offered subject to a contingent deferred sales load ("CDSL") on
redemptions made within six years of the holding period ("B shares"), and Class
C shares offered subject to a CDSL on redemptions made in less than 1 year of
the holding period ("C shares"). B shares automatically convert to A shares
after a certain holding period. The Municipal Fund offers A shares only. Each
Fund's shares may be acquired by direct purchase or through exchange of shares
of the corresponding class of other Heritage mutual funds for which Heritage
Asset Management, Inc. (the "Manager") serves as adviser or administrator
("Heritage Mutual Funds").
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES
Each Fund's investment objective and certain investment policies are
described in the Prospectus. The Funds also have adopted the investment policies
and restrictions described below.
INVESTMENT POLICIES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
domestic commercial banks and with registered broker-dealers who are members of
a national securities exchange or market makers in U.S. Government securities. A
Fund's repurchase agreements will require that the underlying security at all
times have a value at least equal to the resale price. If the seller of a
repurchase agreement defaults, the Fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of the sale are less than
the resale price provided in the agreement. In addition, even though the Federal
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in insolvency proceedings, a Fund may incur delays and
costs in selling the underlying security or may suffer a loss if the Fund is
treated as an unsecured creditor and is required to return the underlying
security to the seller.
REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow by entering into
reverse repurchase agreements with the same parties with whom the Fund may enter
into repurchase agreements. Under a reverse repurchase agreement, a Fund sells
securities and agrees to repurchase them at a mutually agreed upon price. At the
time the 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
the Fund may decline below the price of the securities the Fund has sold but is
obliged to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
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enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement effectively may be restricted
pending such decisions. Reverse repurchase agreements create leverage, a
speculative factor, and will be considered borrowings for the purpose of the
Fund's limitation on borrowing.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A. Each Fund may invest in
Section 4(2) commercial paper. Most commercial paper is exempt from registration
requirements imposed by federal securities laws. In addition, some commercial
paper that is not exempt can be purchased and sold without registration in
transactions not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). The Funds' investments in
Section 4(2) commercial paper will be subject to their nonfundamental 10%
limitation on investments in illiquid securities, unless the Section 4(2)
commercial paper can be sold to qualified institutional buyers ("QIBs") under
Rule 144A of the 1933 Act. As permitted by Rule 144A, the Board has adopted
guidelines and delegated the daily function of determining and monitoring the
liquidity of securities so purchased. Because it is not possible to predict with
assurance how the Rule 144A market will develop, the Board will monitor the
Funds' investments in Rule 144A securities, focusing on such factors as
liquidity and availability of information.
SECURITIES LOANS. Each Fund may lend its securities. Securities loans are
made to broker-dealers or other financial institutions pursuant to agreements
requiring that loans be secured continuously by collateral in cash or short-term
debt obligations, marked to market daily, in an amount at least equal at all
times to the value of the securities loaned, plus accrued interest and
dividends. The borrower pays a Fund an amount equal to any dividends or interest
received on the securities loaned. The Funds retain all or a portion of the
interest received on investments of the cash collateral or receive a fee from
the borrower. The Funds may call such loans in order to sell the securities
involved. In the event that a Fund reinvests cash collateral, it is subject to
the risk that both the reinvested collateral and the loaned securities will
decline in value. In addition, in such event, it is possible that the securities
loan may not be collateralized fully.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase and
sell securities on a when-issued and delayed-delivery basis. These transactions
are made to secure what the Manager or, for the Municipal Fund, Alliance Capital
Management L.P. (the "Subadviser"), considers to be advantageous prices or
yields. Settlement dates may be a month or more after entering into these
transactions, and market values of the securities purchased may vary from the
purchase prices. No fees or other expenses, other than normal transaction costs,
are incurred. However, liquid assets of the Funds, such as cash, U.S. Government
securities or other liquid high-grade debt obligations, which will be marked to
market daily, sufficient to make payment for the securities to be purchased,
will be segregated by the Funds' custodian on the Funds' records at the trade
date and maintained until the transaction settles. In when-issued and
delayed-delivery transactions, a Fund relies on the seller to complete the
transaction. The seller's failure to perform may cause a Fund to miss a price or
yield considered to be advantageous.
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MONEY MARKET FUND
ASSET-BACKED SECURITIES. The Money Market Fund may purchase asset-backed
securities, including commercial paper. Asset-backed securities represent direct
or indirect participations in, or are secured by and payable from, pools of
assets such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property, and
receivables from revolving credit (credit card) agreements. These assets are
securitized through the use of trusts and special purpose corporations. Credit
enhancements, such as various forms of cash collateral accounts or letters of
credit, may support payments of principal and interest on asset-backed
securities. Asset-backed securities are subject to the risk of prepayment and
the risk that recovery on repossessed collateral might be unavailable or
inadequate to support payments.
EURODOLLAR AND YANKEE CERTIFICATES. The Money Market Fund may purchase
certificates of deposit, time deposits and banker's acceptances issued by
foreign branches of domestic banks ("domestic Eurodollar certificates") and
foreign banks ("foreign Eurodollar certificates") or by domestic branches of
foreign banks ("Yankee certificates"). As a result of federal and state laws and
regulations, domestic branches of domestic banks generally are, among other
things, required to maintain specified levels of reserves and are subject to
other supervision and regulation designed to promote financial soundness.
Domestic and foreign Eurodollar certificates, such as certificates of
deposit 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 and 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 that apply to
domestic banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and recordkeeping requirements. In addition, less
information may be publicly available about a foreign branch of a domestic bank
or a foreign bank than a domestic bank.
Yankee certificates 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 and by federal and state regulation as well as governmental action in
the country in which the foreign bank has its head office. The deposits of
state-licensed domestic branches of foreign banks may not necessarily be insured
by the Federal Deposit Insurance Corporation ("FDIC").
In view of the foregoing factors associated with the purchase of domestic
and foreign Eurodollar and Yankee certificates, the Money Market Fund will
evaluate carefully such investments on a case-by-case basis.
GNMA CERTIFICATES. The Money Market Fund may invest in securities issued
by the Government National Mortgage Association ("GNMA"), a wholly owned U.S.
Government corporation that guarantees the timely payment of principal and
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interest. The market value and interest yield of these instruments can vary due
to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of federally insured
mortgage loans. The scheduled monthly interest and principal payments relating
to mortgages in the pool will be "passed through" to investors. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, the
Money Market Fund will receive monthly scheduled payments of principal and
interest and may receive unscheduled principal payments representing prepayments
on the underlying mortgages. Although GNMA securities may offer yields higher
than those available from other types of U.S. Government securities, GNMA
securities may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because prepayment proceeds will be
invested at prevailing interest rates, which may be lower than the GNMA
securities on which the prepayments were made.
INDUSTRY CLASSIFICATIONS. For purposes of determining industry
classifications, the Money Market Fund relies upon classifications established
by the Manager that are based upon classifications contained in the Directory of
Companies Filing Annual Reports with the Securities and Exchange Commission
("SEC") and in the Standard & Poor's Corporation Industry Classifications.
MUNICIPAL FUND
ALTERNATIVE MINIMUM TAX. The Municipal Fund may invest without limit in
tax-exempt municipal securities the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax ("AMT"). Such
bonds ("AMT-Subject Bonds") have provided, and may continue to provide, somewhat
higher yields than other comparable municipal securities. AMT-Subject Bonds
generally are limited obligations of the issuer, supported only by payments from
private business entities that use the facilities financed by the bonds (and the
pledge, if any, of the real and personal property so financed as security for
such payment) and not by the full faith and credit or taxing power of the state
or any governmental subdivision. It is not possible to provide specific details
on each of these obligations in which the Municipal Fund's assets may be
invested.
MUNICIPAL SECURITIES. The Municipal Fund invests primarily in municipal
securities. Yields on municipal securities are dependent on a variety of
factors, including the general condition of the money market and of the
municipal bond and municipal note markets, the size of a particular offering,
the maturity of the obligation and the rating of the issue. Municipal securities
with longer maturities tend to produce higher yields and generally are subject
to greater price movements than obligations with shorter maturities. An increase
in interest rates generally will reduce the market value of portfolio
investments, and a decline in interest rates generally will increase the value
of portfolio investments. The achievement of the Municipal Fund's objectives is
dependent in part on the continuing ability of the issuers of municipal
securities in which the Municipal Fund invests to meet their obligations for the
payment of principal and interest when due. Municipal securities have not been
subject to registration with the SEC, although there have been proposals that
would require registration in the future. The Municipal Fund generally will hold
securities to maturity rather than follow a practice of trading. However, the
Municipal Fund may seek to improve portfolio income by selling certain portfolio
securities prior to maturity in order to take advantage of yield disparities
that occur in securities markets. Obligations of issuers of municipal securities
are subject to the provisions of bankruptcy, insolvency and other laws affecting
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the rights and remedies of creditors, such as the Federal Bankruptcy Code. In
addition, the obligations of such issuers may become subject to laws enacted in
the future by Congress or state legislatures or referenda extending the time for
payment of principal and/or interest or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. There also is the possibility that, as a result of litigation or other
conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.
STANDBY COMMITMENTS. The Municipal Fund may purchase municipal securities
together with the right to resell them to the seller at an agreed-upon price or
yield within specified periods prior to their maturity dates. Such a right to
resell commonly is known as a "standby commitment," and the aggregate price for
securities with a standby commitment may be higher than the price that otherwise
would be paid. The primary purpose of this practice is to permit the Municipal
Fund to be as fully invested as practicable in municipal securities while
preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. In this regard, the Municipal Fund acquires standby commitments
solely to facilitate portfolio liquidity and does not exercise its rights
thereunder for trading purposes. Because the value of a standby commitment is
dependent on the ability of the standby commitment writer to meet its obligation
to repurchase, the Municipal Fund will enter into standby commitment
transactions only with municipal securities dealers that are determined by the
Subadviser to present minimal credit risks. The acquisition of a standby
commitment does not affect the valuation or maturity of the underlying municipal
securities that continue to be valued in accordance with the amortized cost
method. Standby commitments are valued by the Municipal Fund at zero in
determining net asset value. If the Municipal Fund pays directly or indirectly
for a standby commitment, its cost is reflected as unrealized depreciation for
the period during which the commitment is held. Standby commitments do not
affect the average weighted maturity of the Municipal Fund's investment
portfolio of securities.
TAXABLE SECURITIES. Although the Municipal Fund is, and expects to be,
invested primarily in municipal securities, it may elect to invest up to 20% of
its total assets in taxable money market securities when such action is deemed
to be in the best interests of shareholders. Such taxable money market
securities are limited to remaining maturities of 397 days or less at the time
of investment, and the Municipal Fund's municipal and taxable securities are
maintained at a dollar-weighted average of 90 days or less. Taxable money market
securities purchased by the Municipal Fund are limited to: marketable
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities; repurchase agreements involving such securities; certificates
of deposit, banker's acceptances and interest-bearing savings deposits of banks
having total assets of more than $1 billion and that are members of the FDIC;
and commercial paper of prime quality rated A-1 or higher by Standard & Poor's
("S&P") or Prime-1 by Moody's Investors Service, Inc. ("Moody's") or, if not
rated, deemed by the Board of Trustees or, pursuant to authority delegated by
the Board, by the Subadviser to be of equal quality.
VARIABLE RATE OBLIGATIONS. The interest rate payable on certain "variable
rate" municipal securities in which the Municipal Fund may invest is not fixed
and may fluctuate based upon changes in market rates. The interest rate payable
on a variable rate municipal security is adjusted either at pre-designated
periodic intervals or whenever there is a change in the market rate to which the
security's interest rate is tied. Other features may include the right of the
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Municipal Fund to demand prepayment of the principal amount of the obligation
prior to its stated maturity and the right of the issuer to prepay the principal
amount prior to maturity. The main benefit of a variable rate municipal security
is that the interest rate adjustment minimizes changes in the market value of
the obligation. As a result, the purchase of variable rate municipal securities
can enhance the ability of the Municipal Fund to maintain a stable net asset
value per share and to sell an obligation prior to maturity at a price
approximating the full principal amount.
The payment of principal and interest by issuers of certain municipal
securities may be guaranteed by letters of credit or other credit facilities
offered by banks or other financial institutions. Such guarantees will be
considered in determining whether a municipal security meets the Municipal
Fund's investment quality requirements. Variable rate obligations purchased by
the Municipal Fund may include participation interests in variable rate
industrial development bonds that are backed by irrevocable letters of credit or
guarantees of banks that meet the criteria for banks described above in "Taxable
Securities."
Purchase of a participation interest gives the Municipal Fund an undivided
interest in certain such bonds. The Municipal Fund can exercise the right, on
not more than 30 days' notice, to sell such an instrument back to the bank from
which it purchased the instrument and draw on the letter of credit for all or
any part of the principal amount of its participation interest in the
instrument, plus accrued interest, but will do so only (1) as required to
provide liquidity, (2) to maintain a high quality investment portfolio, or (3)
upon a default under the terms of the demand instrument. Banks retain portions
of the interest paid on such variable rate industrial development bonds as their
fees for servicing such instruments and the issuance of related letters of
credit and repurchase commitments. The Municipal Fund will not purchase
participation interests in variable rate industrial development bonds unless it
receives an opinion of counsel or a ruling of the Internal Revenue Service that
interest earned from the bonds in which it holds participation interests is
exempt from Federal income tax. The Subadviser will monitor the pricing, quality
and liquidity of variable rate demand obligations and participation interests
therein held by the Municipal Fund on the basis of published financial
information, rating agency reports and other research services to which the
Subadviser may subscribe.
INVESTMENT LIMITATIONS
In addition to the limits disclosed in "Investment Policies" above and the
investment limitations described in the Prospectus, the Funds are subject to the
following investment limitations, which are fundamental policies of the Funds
and may not be changed without the vote of a majority of the outstanding voting
securities of the Funds. Under the Investment Company Act of 1940, as amended
(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. The Money Market Fund may not invest more than 5% of its
total assets in First Tier Securities (as defined in the Prospectus) of any one
issuer other than the U.S. Government, its agencies and instrumentalities;
however, the Money Market Fund may invest more than 5% of its total assets in
First Tier Securities of a single issuer for a period of up to three business
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days after the purchase thereof provided that the Money Market Fund may not make
more than one investment in accordance with the foregoing provision at any time.
The Money Market Fund may not invest more than (1) the greater of 1% of its
total assets or $1 million in securities issued by any single issuer of Second
Tier Securities (as defined in the Prospectus); and (2) 5% of its total assets
in Second Tier Securities. The Money Market Fund also may not purchase more than
10% of any class of securities of any issuer. All debt securities of an issuer
are considered as one class.
The Municipal Fund may not, with respect to 75% of its total assets,
invest more than 5% of its total assets in money market instruments of any one
issuer other than the U.S. Government, its agencies or instrumentalities. The
Municipal Fund may not purchase more than 10% of any class of voting securities
of any issuer except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
ILLIQUID SECURITIES. The Money Market Fund may not commit more than 10% of
its net assets to illiquid obligations, including repurchase agreements with
maturities longer than seven days, certain time deposits, and securities that
are restricted as to disposition under the Federal securities laws. The
Municipal Fund may not commit more than 15% of its net assets to illiquid
obligations, including repurchase agreements with maturities longer than seven
days, certain time deposits, and securities that are restricted as to
disposition under the Federal securities law. However, as a matter of
nonfundamental investment policy, the Municipal Fund will not commit more than
10% of its net assets to such illiquid securities.
CONCENTRATION. The Money Market Fund will not purchase money market
instruments if as a result of such purchase more than 25% of the value of its
total net assets would be invested in any one industry. However, the Money
Market Fund may invest up to 100% of its assets in domestic bank obligations and
obligations of the U.S. Government, its agencies and instrumentalities, provided
that it may not invest more than 25% of its net assets in (1) domestic
Eurodollar certificates, unless the domestic parent would be unconditionally
liable if its foreign branch failed to make payments on such instruments, and
(2) Yankee certificates, unless the branch issuing such instrument is subject to
the same regulation as U.S. banks.
The Municipal Fund will not purchase instruments if as a result of such
purchase more than 25% of the value of its total net assets would be invested in
any one industry, provided that for purposes of this policy (1) there is no
limitation with respect to tax-exempt municipal securities (including industrial
development bonds), securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, certificates of deposit, banker's acceptances
and interest-bearing savings deposits issued by domestic banks, and (2) consumer
finance companies, industrial finance companies, and gas, electric, water and
telephone utility companies are each considered to be separate industries. For
purposes of this restriction, the Municipal Fund will regard the entity that has
the primary responsibility for making payment of principal and interest as the
issuer.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. The Funds may not
invest in commodities, commodity contracts, oil, gas or other mineral programs
or real estate, except that each may purchase money market instruments issued by
companies that invest in or sponsor such interests.
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UNDERWRITING. The Funds may not engage in the underwriting of money market
instruments issued by others except as a Fund may be deemed to be an underwriter
under the 1933 Act in connection with the purchase and sale of portfolio
securities.
LOANS. The Funds may not engage in lending activities. However, this
policy does not apply to securities lending and repurchase agreements. The Money
Market Fund may not make secured loans of its portfolio securities amounting to
more than 25% of its total assets.
ISSUING SENIOR SECURITIES. The Money Market Fund may not issue senior
securities, except as permitted by the investment objective, policies and
investment limitations of the Fund. The Municipal Fund may not issue senior
securities. However, this policy does not apply to investment policies otherwise
permitted by the Municipal Fund, such as making securities loans, borrowing
money and engaging in repurchase agreements and reverse repurchase agreements.
BORROWING MONEY. The Funds may not borrow money except as a temporary
measure for extraordinary or emergency purposes. A Fund may enter into reverse
repurchase agreements and otherwise borrow up to one-third of the value of its
total assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments. This latter practice
is not for investment leverage but solely to facilitate management of the
portfolio by enabling a Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. However, a Fund
may not purchase additional portfolio investments once borrowed funds exceed 5%
of total assets. When effecting reverse repurchase agreements, Fund assets in an
amount sufficient to make payment for the obligations to be purchased will be
segregated by the borrowing Fund's custodian and on the Fund's records upon
execution of the trade and maintained until the transaction has been settled.
During the period any reverse repurchase agreements are outstanding, to the
extent necessary to assure completion of the reverse repurchase agreements, a
Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. Interest paid on borrowed funds will not be available for
investment. Each Fund will liquidate any such borrowings as soon as possible and
may not purchase any portfolio instruments while any borrowings are outstanding.
The Funds have adopted the following additional restrictions that,
together with certain limits described in the Funds' prospectus, are
nonfundamental policies and may be changed by the Board of Trustees without
shareholder approval in compliance with applicable law, regulation or regulatory
policy.
SELLING SHORT AND BUYING ON MARGIN. The Funds may not sell any money
market instruments short or purchase any money market instruments on margin, but
may obtain such short-term credits as may be necessary for clearance of
purchases and sales of money market instruments.
INVESTING IN NEW ISSUERS. Neither Fund may invest more than 5% of its
total assets in securities of issuers that have records of less than three years
of continuous operation.
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DEALING IN PUTS AND CALLS. The Funds may not invest in puts, calls,
straddles, spreads or any combination thereof.
PLEDGING SECURITIES. The Funds may not pledge any securities except to
secure permitted borrowings, and then only in amounts not to exceed 10% of a
Fund's total assets.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value of net assets will not result in a
violation of such restriction.
NET ASSET VALUE
Each Fund determines its net investment income for dividend purposes once
each business day immediately prior to the determination of net asset value.
Each determination of net investment income includes all accrued interest on
portfolio investments of the Fund, less all accrued expenses of the Fund. (A
Fund will not have unrealized gains or losses so long as it values its
instruments by the amortized cost method.) Realized gains and losses are
reflected in a Fund's net asset value and are not included in net investment
income. All of a Fund's net investment income is declared as dividends daily.
Net asset value per share for each class of the Money Market Fund and for
an A share of the Municipal Fund is determined daily at 4:00 p.m. Eastern time
immediately after the daily declaration of dividends, each day the New York
Stock Exchange (the "Exchange") is open for business. Each Fund will seek to
stabilize the net asset value per share of its class(es) at $1.00 by use of the
amortized cost method of valuation, which the Board of Trustees has determined
is the best method for determining the value of portfolio instruments. Under
this method, portfolio instruments are valued at the acquisition cost as
adjusted for amortization of premiums or accumulation of discounts rather than
at current market value. The Board of Trustees periodically assesses the
continued use of this valuation method and, if necessary, will consider valuing
Fund assets at their fair value as determined in good faith by the Board of
Trustees.
A Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with Rule 2a-7 under the 1940 Act ("Rule 2a-7"). Rule
2a-7 requires the Board to establish procedures reasonably designed to stabilize
the net asset value per share as computed for purposes of distribution and
redemption. The Board's procedures include monitoring the relationship between
the amortized cost value per share and a net asset value per share based upon
available indications of market value. The Board of Trustees will decide what,
if any, steps should be taken if there is a difference of more than .5% between
the two methods. The Board of Trustees will take any steps they consider
appropriate (such as redemption in kind or shortening the average portfolio
maturity) to minimize any material dilution or other unfair results arising from
differences between the two methods of determining net asset value.
Rule 2a-7 requires that a Fund limit its investments to instruments that,
in the opinion of the Board of Trustees, present minimal credit risk and are of
high quality as determined by any major rating agency. If the instruments are
not rated, the Board must determine that they are of comparable quality. The
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Rule also requires a Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of maintaining a
stable net asset value. In addition, no instrument with a remaining maturity of
more than 397 days can be purchased by a Fund. For these purposes, each Fund
treats variable rate securities as maturing on the date of their next scheduled
rate adjustment and instruments purchased subject to repurchase agreements as
maturing as of the date that the repurchase is to be made. Should the
disposition of a portfolio security result in a Fund's dollar-weighted average
portfolio maturity of more than 90 days, the Fund will invest its available cash
to reduce the average maturity to 90 days or less as soon as possible.
It is the Funds' usual practice to hold portfolio securities to maturity
and realize the instruments' stated full value, unless the Manager or, in the
case of the Municipal Fund, the Subadviser, determines that sale or other
disposition is appropriate in light of a Fund's investment objective. Under the
amortized cost method of valuation, neither the amount of daily income nor the
net asset value is affected by any unrealized appreciation or depreciation of
the portfolio.
In periods of declining interest rates the indicated daily yield on shares
of a Fund, computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value as computed above, may tend to be higher than a
similar computation made by using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the daily yield on shares of
a Fund computed the same way may tend to be lower than a similar computation
made by using a method of calculation based upon market prices and estimates.
CALCULATING YIELDS
Each class of a Fund computes its current and effective yield quotations
and A shares of the Municipal Fund calculate their tax-equivalent yield using
standardized methods required by the SEC. Each class of a Fund from time to time
advertises (1) its current yield based on a recently ended seven-day period,
computed by determining the net change, exclusive of capital changes and income
other than investment income, in the value of a hypothetical pre-existing
account having a balance of one share of such class at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base return by (365/7), with the resulting yield figure carried
to at least the nearest hundredth of one percent, and (2) its effective yield
based on the same seven-day period by compounding the base period and by adding
1, raising the sum to a power equal to (365/7), and subtracting 1 from the
result, according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ]-1
For the seven-day period ended August 31, 1997, the A shares of the Money
Market Fund's current and effective yields were 4.84% and 4.96%, respectively.
For the same period, the C shares of the Money Market Fund's current and
effective yields were 4.84% and 4.96%, respectively. No B shares were
outstanding during this period.
10
<PAGE>
The Municipal Fund from time to time advertises its Class A tax-equivalent
yield and tax-equivalent effective yield, also based on a recently ended
seven-day period. These quotations are calculated by dividing that portion of
the Municipal Fund's yield (or effective yield, as the case may be) that is
tax-exempt by 1 minus a stated income tax rate and adding the product to that
portion, if any, of the Municipal Fund's yield that is not tax-exempt, according
to the following formula:
TAX = EQUIVALENT YIELD = (E OVER 1 MINUS p)+ t
where E = the portion of yield that is tax-exempt, p = stated income tax rate,
and t = the portion of yield that is taxable.
For the seven-day period ended August 31, 1997, the A shares of the
Municipal Fund's current, effective and tax-equivalent (assuming the maximum
Federal income tax rate of 39.6%) yields were 2.69%, 2.72% and 4.50%,
respectively.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each class of a Fund fluctuates, it cannot
be compared with yields on savings accounts or other investment alternatives
that provide an agreed-to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each fund's investment
policies, including the types of investments made, the average maturity of the
portfolio securities and whether there are any special account charges that may
reduce the yield.
A Fund's class performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represents past performance
and is not intended to predict or indicate future results. The return on an
investment in a class will fluctuate. In Performance Advertisements, a class may
compare its taxable and tax-equivalent yields with data published by Lipper
Analytical Services, Inc. for money market funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC/Donoghue's Money Market Fund Report
("Donoghue"), Wiesenberger Investment Companies Service ("Wiesenberger"), or
Investment Company Data Inc. ("ICD"). A Fund also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Donoghue, Wiesenberger or ICD.
Performance Advertisements also may refer to discussions of the Fund and
comparative mutual fund data and ratings reported in independent periodicals,
including The Wall Street Journal, Money Magazine, Forbes, Business Week,
Financial World, Barron's, Fortune and The New York Times.
INVESTING IN THE FUNDS
A shares, B shares and C shares are sold at their next determined net
asset value after an order is received, without a front-end sales load. The
procedures for purchasing each class of shares of each Fund is explained in the
Prospectus under "Purchase Procedures." For customers of Raymond James &
Associates, Inc. ("RJA" or the "Distributor") or its affiliates, credit balances
11
<PAGE>
will be invested automatically. Credit balances arising from deposits made prior
to the daily cashiering deadline (which varies according to branch location of
the customer's account) will be credited to the brokerage account on the day of
receipt. Deposits made after the daily cashiering deadline of the Distributor's
office in which the deposit is made will be credited to the brokerage account on
the next business day following the day of deposit.
INVESTMENT PROGRAMS
The options below allow you to invest continually in either Fund at
regular intervals.
SYSTEMATIC INVESTMENT OPTIONS
1. Systematic Investing -- You may authorize the Manager to process a
monthly draft from your personal checking account for investment into either
Fund. The draft is returned by your bank the same way a canceled check is
returned.
2. Payroll Direct Deposit -- If your employer participates in a direct
deposit program (also known as ACH Deposits) you may have all or a portion of
your payroll directed to the 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
either 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, you may elect to have a preset amount redeemed from that fund and
exchanged into the corresponding class of shares of either Fund. You will
receive a statement from the other Heritage Mutual Fund confirming the
redemption.
You may change or terminate any of the above options at any time.
RETIREMENT PLANS
Shares of the Money Market Fund may be purchased as an investment for
Heritage IRA plans. In addition, shares of that Fund may be purchased as an
investment for self-directed IRAs, defined contribution plans, Simplified
Employee Pension Plans ("SEPs") and other retirement plan accounts. It will not
be advantageous to hold shares of the Municipal Fund in an IRA or other
retirement plans.
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage
Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of the Money
Market Fund and/or other Heritage Mutual Funds. The Internal Revenue Code of
1986, as amended (the "Code"), limits the deductibility of IRA contributions to
12
<PAGE>
taxpayers who are not active participants (and whose spouses are not active
participants) in employer-provided retirement plans or who have adjusted gross
income below certain levels. Nevertheless, the Code permits other individuals to
make nondeductible IRA contributions up to $2,000 per year (or $4,000, if such
contributions also are made for a nonworking spouse and a joint return is
filed). In addition, individuals whose earnings (together with their spouse's
earnings) do not exceed a certain level may establish an "education IRA" and/or
a "Roth IRA"; although contributions to these new types of IRAs (established by
the Taxpayer Relief Act of 1997 ("Tax Act")) are nondeductible, withdrawals from
them will not be taxable under certain circumstances. A Heritage IRA also may be
used for certain "rollovers" from qualified benefit plans and from Section
403(b) annuity plans. For more detailed information on the Heritage IRA, please
contact the Manager.
Shares of the Money Market Fund 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.
REDEEMING SHARES
The methods of redemption are described in the section of the
Prospectus entitled "How to Redeem Shares."
SYSTEMATIC WITHDRAWAL PLAN
Shareholders may elect to make systematic withdrawals from a Fund account
of a minimum of $50 on a periodic basis. The amounts paid each period are
obtained by redeeming sufficient shares from an account to provide the
withdrawal amount specified. Since the amounts of the withdrawals are selected
by the shareholder, they are not related to the dividends paid by the Fund.
Accordingly, periodic withdrawals may exceed dividends and may result in a
depletion of the shareholder's original investment in the Fund. The Systematic
Withdrawal Plan may be amended or terminated at any time by the shareholder or
the Fund on notice and, in any event, will be terminated when all shares owned
by the shareholder and available for the Systematic Withdrawal Plan have been
redeemed. For the shareholder's protection any change of payee must be in
writing. A shareholder's Systematic Withdrawal Plan also will be terminated if
the Fund is notified of his or her death. Accounts using the Systematic
Withdrawal Plan are subject to the minimum balance requirements. See "Minimum
Investment Required/Accounts with Low Balances" in the Prospectus. The
Systematic Withdrawal Plan currently is not available for shares held in an IRA,
Section 403(b) annuity plan, defined contribution plan, Keogh Plan, SEP, SIMPLE
or other retirement plans, unless the shareholder establishes to the Manager'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 the
Manager.
Systematic withdrawals of B shares may be charged a CDSL based on the
amount of time such B shares were held in a Heritage Mutual Fund, excluding the
time such shares were held in the Money Market Fund ("B Share Holding Period").
Systematic withdrawals of C shares may be charged a CDSL of 1% if such shares
were held for less than one year ("C Share Holding Period"). Redemptions will be
made at net asset value determined as of 4:00 p.m. Eastern time on a day of the
month selected by the shareholder or a day of the last month of each period
13
<PAGE>
selected by the shareholder, whichever is applicable, if the Exchange is open
for business on that day. If the Exchange is not open for business on that day,
the shares will be redeemed at net asset value determined as of 4:00 p.m.
Eastern time on the preceding business day, minus any applicable CDSL for B
shares and C shares. The check for the withdrawal payment usually will be mailed
on the next business day following redemption. If a shareholder elects to
participate in the Systematic Withdrawal Plan, dividends on all shares in the
account must be automatically reinvested in Fund shares. A shareholder may
terminate the Systematic Withdrawal Plan at any time without charge or penalty
by giving written notice to the Manager or the Distributor. Each Fund, the
Manager as transfer agent, and the Distributor also reserve the right to modify
or terminate the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend. If the periodic withdrawals exceed reinvested dividends, the amount of
the original investment may be correspondingly reduced.
A Fund will not knowingly accept purchase orders from shareholders for
additional 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 a
Fund's Automatic Investment Plan.
TELEPHONE TRANSACTIONS
Shareholders may redeem shares by placing a telephone request to either
Fund. The Trust, Manager, Distributor and their Trustees, directors, officers
and employees are not liable for any loss arising out of telephone instructions
they reasonably believe are authentic. In acting upon telephone instructions,
these parties use procedures that are reasonably designed to ensure that such
instructions are genuine, such as (1) obtaining some or all of the following
information: account number, name(s) and social security number registered to
the account, and personal identification; (2) recording all telephone
transactions; and (3) sending written confirmation of each transaction to the
registered owner. If the Trust, Manager, Distributor and their Trustees,
directors, officers and employees do not follow reasonable procedures, some or
all of them may be liable for any such losses.
REDEMPTIONS IN KIND
Each Fund is obligated to redeem shares for any shareholder for cash
during any 90-day period up to $250,000 or 1% of the Fund's net asset value,
whichever is less. Any redemption beyond this amount also will be in cash unless
the Board of Trustees determine that further cash payments will have a material
adverse effect on remaining shareholders. In such a case, a Fund will pay all or
a portion of the remainder of the redemption in portfolio instruments, valued in
the same way as the Fund determines net asset value. The portfolio instruments
will be selected in a manner that the Board of Trustees deem fair and equitable.
A redemption in kind is not as liquid as a cash redemption. If a redemption is
made in kind, a shareholder receiving portfolio instruments and selling them
before their maturity could receive less than the redemption value thereof and
could incur certain transaction costs.
14
<PAGE>
RECEIVING PAYMENT
If a request for redemption is received by a Fund before 4:00 p.m. Eastern
time on a day on which the Exchange is open for business, the shares will be
redeemed at the net asset value per share determined at 4:00 p.m. Eastern time,
minus any applicable CDSL for B shares and C shares. Requests for redemption
received by the Fund after 4:00 p.m. Eastern time will be executed at the net
asset value determined as of 4:00 p.m. Eastern time on the next trading day on
the Exchange, minus any applicable CDSL for B shares and C shares.
If shares of a Fund are redeemed by a shareholder through the Distributor,
a participating dealer or participating bank ("Financial Advisor"), the
redemption is settled with the shareholder as an ordinary transaction. If a
request for redemption is received before the close of regular trading on the
Exchange, shares will be redeemed at the net asset value per share determined on
that day, minus any applicable CDSL for B shares and C shares. Requests for
redemption received after the close of regular trading will be executed on the
next trading day. Payment for shares redeemed normally will be made by the Fund
to the Distributor or a Financial Advisor by the third 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 Financial Advisor 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 the Distributor, a Financial Advisor or to the
Manager.
EXCHANGE PRIVILEGE
Shareholders who have held Money Market Fund shares for at least 30 days
may exchange some or all of their A shares, B shares or C shares for shares of
the corresponding classes of any other Heritage Mutual Fund. Exchanges of A
shares that have not been subject to a front-end sales load will be subject to a
sales load upon exchange. No CDSL is imposed when B shares and C shares are
exchanged for the corresponding class of shares of other Heritage Mutual Funds.
All exchanges will be based on the respective net asset values of the Heritage
Mutual Funds involved. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being acquired at their
respective net asset values as next determined following receipt by the Heritage
Mutual Fund whose shares are being exchanged of (1) proper instructions and all
necessary supporting documents as described in such fund's prospectus, or (2) a
telephone request for such exchange in accordance with the procedures set forth
in the prospectus and below.
Shares acquired pursuant to a telephone request for exchange will be held
under the same account registration as the shares redeemed through such
exchange. For a discussion of limitation of liability of certain entities, see
"Telephone Transactions."
Telephone exchanges can be effected by calling the Manager at 800-421-4184
or by calling a Financial Advisor. In the event that a shareholder or his
Financial Advisor is unable to reach the Manager by telephone, a telephone
15
<PAGE>
exchange can be effected by sending a telegram to Heritage Asset Management,
Inc., attention: Shareholder Services. Telephone or telegram requests for an
exchange received by a Fund before 4:00 p.m. Eastern time will be effected at
4:00 p.m. Eastern time on that day. Requests for an exchange received after the
close of regular trading will be effected on the Exchange's next trading day.
Due to the volume of calls or other unusual circumstances, telephone exchanges
may be difficult to implement during certain time periods.
CONVERSION OF CLASS B SHARES
B shares of each Fund automatically will convert to A shares, based on the
relative net asset values per share of the two classes (normally $1.00 for each
Class), as of the close of business on the last business day of the month in
which the eighth anniversary of the initial issuance of such B shares occurs.
For the purpose of calculating the holding period required for conversion of B
shares, the date of initial issuance shall mean (1) the date on which such B
shares were issued or (2) for B shares obtained through an exchange, or a series
of exchanges, the date on which the original B shares were issued. For purposes
of conversion to A shares, B shares purchased through the reinvestment of
dividends and other distributions paid in respect of B shares will be held in a
separate sub-account. Each time any B shares in the shareholder's regular
account (other than those in the sub-account) convert to A shares, a pro rata
portion of the B shares in the sub-account will also convert to A shares. The
portion will be determined by the ratio that the shareholder's B shares
converting to A shares bears to the shareholder's total B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on A shares and B shares will not result in "preferential
dividends" under the Code and the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available, the B shares
would not be converted and would continue to be subject to the higher ongoing
expenses of the B shares beyond eight years form the date of purchase. The
Manager has no reason to believe that this condition for the availability of the
conversion feature will not be met.
TAXES
Each Fund is treated, as a separate corporation for Federal income tax
purposes. In order to continue to qualify for the favorable tax treatment as a
regulated investment company ("RIC") under the Code, a Fund must distribute
annually to its shareholders at least 90% of its investment company taxable
income (generally, taxable net investment income and net short-term capital
gain, if any) plus, in the case of the Municipal Fund, its net interest income
excludable from gross income under section 103(a) of the Code, 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 other
income derived with respect to its business of investing in securities; (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
16
<PAGE>
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.
Dividends paid by the Municipal Fund will qualify as "exempt-interest
dividends" and thus will be excludable from gross income by its shareholders, if
that Fund satisfies the additional requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); the Municipal Fund intends to continue to satisfy this
requirement. The aggregate amount designated for any year by the Municipal Fund
as exempt-interest dividends may not exceed its excludable interest for the year
less certain amounts disallowed as deductions.
Tax-exempt interest attributable to certain private activity bonds
("PABs") (including, in the case of the Municipal fund, a proportionate part of
the exempt-interest dividends paid by it) is subject to the AMT. Exempt-interest
dividends received by a corporate shareholder also may be indirectly subject to
the AMT without regard to whether the Municipal Fund's tax-exempt interest was
attributable to such bonds.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisers before purchasing shares of the
Municipal Fund because, for users of certain of these facilities, the interest
on those bonds is not exempt from Federal income tax. For these purposes, the
term "substantial user" is defined generally to include a "non-exempt person"
who regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Municipal Fund) plus 50% of their
benefits exceeds certain base amounts. Exempt-interest dividends from the
Municipal Fund still are tax-exempt to the extent described above; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If the Municipal Fund invests in any instruments that generate taxable
income, under the circumstances described in the Prospectus, the portion of any
dividend attributable to the interest earned thereon will be taxable to that
Fund's shareholders as ordinary income to the extent of its earnings and
profits, and only the remaining portion will qualify as an exempt-interest
dividend. Moreover, if the Municipal Fund realizes capital gain as a result of
market transactions, any distribution of that gain will be taxable to its
shareholders. There also may be collateral Federal income tax consequences
regarding the receipt of tax-exempt dividends by shareholders such as S
corporations, financial institutions, and property and casualty insurance
companies. A shareholder falling into any of these categories should consult its
tax adviser concerning its investment in shares of the Municipal Fund.
The exemption of certain interest income for Federal income tax purposes
does not necessarily result in exemption thereof under the income or other tax
laws of any state or local taxing authority. A shareholder may be exempt from
17
<PAGE>
state and local taxes on distributions of interest income derived from
obligations of the state and/or municipalities of the state in which he or she
is a resident, but generally will be taxed on income derived from obligations of
other jurisdictions.
Each Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary (taxable) 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.
Shareholders (except for qualified retirement plans and accounts and other
tax-exempt investors in the Money Market Fund) will be subject to Federal income
tax on taxable dividends whether received as cash or in additional Fund shares.
No portion of any dividend paid by either Fund is eligible for the
dividends-received deduction available to corporations. Because each Fund
invests primarily for income and normally holds portfolio instruments to
maturity, neither Fund is expected to realize long-term capital gains.
Shareholders should consult their own tax advisers regarding the status of their
investment in either Fund under state and local tax laws.
18
<PAGE>
TRUST INFORMATION
- -----------------
MANAGEMENT OF THE TRUST
-----------------------
TRUSTEES AND OFFICERS. Trustees and officers are listed below with their
addresses, principal occupations and present positions, including any
affiliation with Raymond James Financial, Inc. ("RJF"), RJA or the Manager.
POSITION
WITH THE PRINCIPAL OCCUPATION
NAME TRUST DURING PAST FIVE YEARS
---- ----- ----------------------
Thomas A. James *(55) Trustee Chairman of the Board since
880 Carillon Parkway 1986 and Chief Executive
St. Petersburg, FL 33716 Officer since 1969 of RJF;
Chairman of the Board of RJA
since 1986; Chairman of the
Board of Eagle Asset
Management, Inc. ("Eagle")
since 1984 and Chief Executive
Officer of Eagle, 1994 to 1996.
Richard K. Riess *(48) Trustee Chief Executive Officer of
880 Carillon Parkway Eagle since 1996, President,
St. Petersburg, FL 33716 1995 to present, Chief
Operating Officer, 1988 to
1996, Executive Vice President,
1988 to 1993.
Donald W. Burton *(53) Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
Tampa, FL 33606
C. Andrew Graham (57) Trustee Vice President of Financial
Financial Designs, Ltd. Designs Ltd. since 1992;
1775 Sherman Street Executive Vice President of the
Suite 1900 Madison Group, Inc., 1991 to
Denver, CO 80203 1992; Principal of First Denver
Financial Corporation
(investment banking) since
1987.
19
<PAGE>
POSITION
WITH THE PRINCIPAL OCCUPATION
NAME TRUST DURING PAST FIVE YEARS
---- ----- ----------------------
David M. Phillips (58) Trustee Chairman and Chief Executive
World Trade Center Chicago Officer of CCC Information
444 Merchandise Mart Services, Inc. since 1994 and
Chicago, IL 60654 of InfoVest Corporation
(information services to the
insurance and auto industries
and consumer households) since
1982.
Eric Stattin (64) Trustee Litigation Consultant/ Expert
1975 Evening Star Drive Witness and private investor
Park City, Utah 84060 since 1988.
James L. Pappas (54) Trustee Lykes Professor of Banking and
University of South Florida Finance since 1986 at
College of Business University of South Florida;
Administration Dean of College of Business
Tampa, FL 33620 Administration 1987 to 1996.
Stephen G. Hill (38) President Chief Executive Officer and
880 Carillon Parkway President of the Manager since
St. Petersburg, FL 33716 1989 and Director since 1994;
Director of Eagle since 1995.
H. Peter Wallace (51) Vice Senior Vice President and
880 Carillon Parkway President Director of Fixed
St. Petersburg, FL 33716 Income Investments of the
Manager since 1993; Vice
President of Mortgage Products
of Donaldson, Lufkin &
Jenrette, 1990 to 1992.
Donald H. Glassman (40) Treasurer Treasurer of the Manager since
880 Carillon Parkway 1989; Treasurer of Heritage
St. Petersburg, FL 33716 Mutual Funds since 1989.
Clifford J. Alexander (53) Secretary Partner, Kirkpatrick & Lockhart
1800 Massachusetts Ave. LLP (law firm).
Washington, DC 20036
Patricia Schneider (56) Assistant Compliance Administrator of the
880 Carillon Parkway Secretary Manager.
St. Petersburg, FL 33716
20
<PAGE>
POSITION
WITH THE PRINCIPAL OCCUPATION
NAME TRUST DURING PAST FIVE YEARS
---- ----- ----------------------
Robert J. Zutz (44) Assistant Partner, Kirkpatrick & Lockhart
1800 Massachusetts Ave. Secretary LLP (law firm).
Washington, DC 20036
- ------------------
* These Trustees are "interested persons" as defined in section 2(a)(19) of the
1940 Act.
The Trustees and officers of the Trust, as a group, own less than 1% of
the Funds' shares outstanding. The 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 Trust currently pays Trustees who are not employees of the Manager or
its affiliates $1,334 annually and $500 per meeting of the Board of Trustees.
Trustees also are reimbursed for any expenses incurred in attending meetings.
Because the Manager performs substantially all of the services necessary for the
operation of the Trust, the Trust requires no employees. No officer, director or
employee of the Manager receives any compensation from the Trust for acting as a
director or officer. The following table shows the compensation earned by each
Trustee for the fiscal year ended August 31, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM THE TRUST
BENEFITS ANNUAL AND THE HERITAGE
AGGREGATE ACCRUED AS PART BENEFITS FAMILY OF FUNDS*
NAME OF PERSON, COMPENSATION OF THE TRUST'S UPON PAID
POSITION FROM THE TRUST EXPENSES RETIREMENT TO TRUSTEES
-------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Donald W. Burton, $2,908 $0 $0 $16,000
Trustee
C. Andrew Graham, $2,908 $0 $0 $16,000
Trustee
David M. Phillips, $2,182 $0 $0 $12,000
Trustee
Eric Stattin, $2,908 $0 $0 $16,000
Trustee
James L. Pappas, $2,544 $0 $0 $14,000
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
- ------------------
</TABLE>
* The Heritage Mutual Funds consist of six separate registered investment
companies, including the Trust.
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<PAGE>
FIVE PERCENT SHAREHOLDERS
As of December 16, 1997, the following shareholders owned of record, or
were known by the Trust to own beneficially, five percent or more of the
outstanding Class C shares of the Money Market Fund:
NAME AND ADDRESS PERCENTAGE OWNED
Raymond James & Assoc. Inc. 7.40
and Blanche Jewell
and Dianne Clarkson
JT WROS for Elite
12651 Seminole Blvd. Lot 3-A
Largo, FL. 33770-2208
Raymond James & Assoc. Inc. 5.94
and Craig B. Miller
and Janet Ann Miller
JT WROS for Elite
1060 Dunhill, Dr. SE
Marietta, CA. 30067-5471
William J. Mauter 9.37
and Marguerite E. Mauter
JT WROS
560 Retreat Drive Apt. 103
Maples, FL. 34110-8080
Fredrica D. Blue 5.60
395 Albion St
Denver, CO. 80220-4912
Robert Guilford Trustee 8.42
For Guilford Family Trust
VA DTD 12/3/96
2607 S. Holly Place
Denver, CO. 80222-6255
Peggy L. Rice 20.62
5992 S. Annapurna Drive
Evergreen, CO 80439-5315
22
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NAME AND ADDRESS PERCENTAGE OWNED
Norris V. Daniel 11.02
and Getty J. Daniel
JT WROS
4015 Leeward Ln
Sudoy Daisy, TN 37379-8240
Raymond James & Assoc. Inc. 11.45
FBO Grace C. Smith
For Elite
9220 Sunnyshore Ln
Chattanooga, TN 37416-1343
There were no shareholders who owned of record, or were known by the Trust to
own beneficially, five percent or more of the outstanding shares of any other
class of the Trust.
INVESTMENT ADVISER AND ADMINISTRATOR; SUBADVISER
The Funds' investment adviser and administrator, Heritage Asset
Management, Inc., was organized as a Florida corporation in 1985. All the
capital stock of the Manager 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.
Under an Investment Advisory and Administration Agreement ("Advisory
Agreement") dated November 13, 1985, as amended April 22, 1992, between the
Trust, on behalf of the Money Market Fund and the Municipal Fund, the Manager
provides each Fund with investment advice and portfolio management services as
well as administers the Fund's noninvestment affairs.
The Manager also is obligated to furnish the Funds with office space,
administrative, and certain other services as well as executive and other
personnel necessary for the operation of the Funds. The Manager and its
affiliates also pay all the compensation of those Trustees of the Trust who are
employees of the Manager and its affiliates. The Funds pay all of their other
expenses that are not assumed by the Manager. The Funds also are liable for such
nonrecurring expenses as may arise, including litigation to which the Funds may
be a party. The Funds also may have an obligation to indemnify Trustees of the
Trust and its officers with respect to any such litigation.
The Advisory Agreement was approved by the Board of Trustees (including
all of the Trustees who are not "interested persons" of the Manager, as defined
under the 1940 Act) and by the shareholders of each Fund in compliance with the
1940 Act. The Agreement will continue in force for a period of two years unless
its continuance is approved at least annually 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 the Manager or the applicable Fund, and by (2)
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the majority vote of either the full Board of Trustees or the vote of a majority
of the outstanding shares of each Fund. The Agreement automatically terminates
on assignment, and is terminable on not more than 60 days' written notice by a
Fund to the Manager. In addition, the Advisory Agreement may be terminated on
not less than 60 days' written notice by the Manager to a Fund. In the event the
Manager ceases to be the manager of a Fund or the Distributor ceases to be
principal distributor of Fund shares, the right of a Fund to use the identifying
name of "Heritage" may be withdrawn.
The Manager 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 the Manager by the Advisory Agreement or for any loss that may be
sustained in the purchase, holding or sale of any security.
All of the officers of the Trust except for Messrs. Alexander and Zutz
are officers or directors of the Manager. These relationships are described
under "Management of the Funds."
ADVISORY AND ADMINISTRATION FEE. The annual investment advisory and
administration fee paid monthly by each Fund to the Manager is based on each
Fund's average daily net assets as listed in the prospectus.
The Manager has voluntarily agreed to waive management fees to the extent
that the Money Market Fund Class A, Class B and Class C expenses exceed .74% of
the average daily net assets attributable to that class for this fiscal year.
The Manager also has agreed to waive its fees for A shares of the Municipal Fund
to the extent that expenses exceed .75% of the average daily net assets
attributable to that class for this fiscal year. For the three fiscal years
ended August 31, 1995, 1996 and 1997, the Manager earned from the Money Market
Fund $5,436,551 (before waiving $244,972 of its fees), $7,253,924 and
$8,891,273, respectively. The Municipal Fund paid the Manager for the fiscal
years ended August 31, 1995, 1996 and 1997, fees of $1,226,671 (before waiving
$40,432 of its fees), $1,538,074 and $1,831,037, respectively. The Manager
recouped in the fiscal year ended August 31, 1997 all of the fees waived by the
Money Market Fund and the Municipal Fund in the fiscal year ended August 31,
1995.
CLASS SPECIFIC EXPENSES. The Money Market Fund may determine to allocate
certain of its expenses (in addition to distribution fees) to the specific
classes of the Money Market Fund's shares to which those expenses are
attributable.
INVESTMENT SUBADVISER. Alliance Capital Management L.P. has been
retained, under an investment subadvisory agreement (the "Subadvisory
Agreement") dated April 22, 1992 with the Manager, as the Municipal Fund's
investment subadviser.
The Subadvisory Agreement will continue in force if its continuance is
approved at least annually 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 the Trust or the Subadviser, and by (2) the majority vote of either the full
Board of Trustees or the vote of a majority of the outstanding shares of the
Municipal Fund. The Subadvisory Agreement automatically terminates on
assignment, and is terminable (1) on not more than 60 days' written notice by
the Trust to the Manager and Subadviser, (2) on not less than 60 days' written
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notice by the Manager to the Subadviser, and (3) on not less than 90 days'
notice by the Subadviser to the Manager.
The Subadviser shall not be liable to the Trust, the Manager or any
shareholder for anything done or omitted by them, except acts or omissions
involving willful misfeasance, bad faith, negligence or reckless disregard of
the duties imposed upon the Subadviser by the Subadvisory Agreement.
For the three fiscal years ended August 31, 1995, 1996 and 1997, the
Subadviser earned $267,993, $305,541 and $331,906, respectively, in investment
subadvisory fees from the Manager.
PORTFOLIO TRANSACTIONS
Most purchases and sales of portfolio investments will be with the issuer
or with major dealers in money market instruments acting as principal. Thus, the
Funds do not expect to pay significant brokerage commissions. In underwritten
offerings, the price paid by the Fund includes a disclosed, fixed commission or
discount retained by the underwriter. There generally is no stated commission in
the case of securities purchased from or sold to dealers, but the prices of such
securities usually include an undisclosed dealer's mark-up or mark-down. The
Manager or Subadviser will place all orders for the purchase and sale of
portfolio securities for the Funds and will buy and sell securities for the
Funds through a substantial number of brokers and dealers. In doing so, the
Manager or the Subadviser will use its best efforts to obtain for the Funds the
most favorable price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions as described below. Best
execution, however, does not mean that a Fund necessarily will be paying the
lowest price or spread available. Rather the Manager or Subadviser also will
take into account such factors as size of the transaction, the nature of the
market for the security, the amount of commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions.
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 Manager or Subadviser may give
consideration to research, statistical and other services furnished by brokers
or dealers. In addition, the Manager or Subadviser may place orders with brokers
who provide supplemental investment and market research and securities and
economic analysis and may pay these brokers a higher brokerage commission or
spread than may be charged by other brokers, provided that the Manager or
Subadviser determines in good faith that such commission or spread is reasonable
in relation to the value of brokerage and research services provided. Such
research and analysis may be useful to the Manager or Subadviser in connection
with services to clients other than the Funds.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Board of Trustees may
determine, the Manager or Subadviser may consider sales of shares of the Funds
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(and, if permitted by law, of other Heritage Mutual Funds) as a factor in the
selection of broker-dealers to execute portfolio transactions for the Fund.
DISTRIBUTION OF SHARES
The Distributor and Financial Advisor with whom the Distributor has
entered into dealer agreements offer shares of the Funds as agents on a best
efforts basis and are not obligated to sell any specific amount of shares.
Pursuant to its Distribution Agreements with the Funds, the Distributor bears
the cost of making information about the Funds 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 Funds pay the cost of registering and qualifying their
shares under state and federal securities laws and typesetting of their
prospectuses and printing and distributing prospectuses to existing
shareholders.
As compensation for the services provided and expenses borne by the
Distributor pursuant to a Distribution Agreement, each class of each Fund will
pay the Distributor a distribution fee in accordance with the Distribution Plan
described below. The distribution fee is accrued daily and paid monthly, and
currently is equal on an annual basis to 0.15% of average daily net assets of
each class of each Fund. For the fiscal year ended August 31, 1997, these fees
amounted to $2,785,331 for the A shares of Money Market Fund and $545,717 for A
shares of the Municipal Fund. For the fiscal year ended August 31, 1997, these
fees amounted to $1,599 for C shares of the Money Market Fund. No B shares were
outstanding during this period. All of these fees were used by the Funds for
payments to underwriters.
In reporting amounts expended for the Money Market Fund under the
Distribution Plan to the Board of Trustees, the Distributor will allocate
expenses attributable to the sale of A shares, B shares and C shares to the
applicable class based on the ratio of sales of shares of that class to the
sales of all Money Market Fund shares. The fees paid by one class of shares will
not be used to subsidize the sale of any other class of shares.
The Trust has adopted a separate Distribution Plan on behalf of each class
of each Fund ("Class A Plan," "Class B Plan" and "Class C Plan," each a "Plan")
that, among other things, permits each Fund to pay the Distributor the monthly
distribution fee out of its net assets. The Class A and Class C Plans were
approved by the initial shareholder of each Fund. In addition, the Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust (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"), approved each Plan after determining that there is
a reasonable likelihood that the Plan will benefit the Fund and its shareholders
by enabling the Fund to increase its assets and thereby realize economies of
scale and its diversification goals.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
Funds. The Board of Trustees review quarterly a written report of Plan costs and
the purposes for which such costs have been incurred. A Plan may be amended by
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vote of the Board of Trustees, including a majority of the votes of the
Independent Trustees cast in person at a meeting called for such purpose. Any
change in a Plan that would materially increase the distribution cost to a class
of a Fund requires shareholder approval of that class.
The Distribution Agreement may be terminated at any time on 60 days'
written notice without payment of any penalty by either party. The Trust may
effect such termination by vote of a majority of the outstanding voting
securities of the Trust or by vote of a majority of the Independent Trustees.
For so long as either the Class A Plan, Class B Plan or the Class C Plan is in
effect, selection and nomination of the Independent Trustees shall be committed
to the discretion of such disinterested persons.
The Distribution Agreement and each of the above-referenced Plans will
continue in effect for successive one-year periods, provided that each such
continuance is specifically approved (1) by the vote of a majority of the
Independent Trustees and (2) by the vote of a majority of the entire Board of
Trustees cast in person at a meeting called for that purpose.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. The Manager,
subject to the control of the Board of Trustees, will manage, supervise and
conduct the administrative and business affairs of the Funds; furnish office
space and equipment; oversee the activities of the Subadviser and Custodian; and
pay all salaries, fees and expenses of those officers and Trustees of the Trust
who are affiliated with the Manager. The Manager also will provide certain
shareholder servicing activities for customers of the Funds.
The Manager also is the Fund accountant and transfer and dividend
disbursing agent for each Fund. Each Fund pays the Manager the Manager's cost
plus ten percent for its services as fund accountant and transfer and dividend
disbursing agent. For the two fiscal years ended August 31, 1995 and 1996, the
Manager earned $35,932, and $40,168, respectively, from each Fund for its
services as fund accountant. For the fiscal year ended August 31, 1997, the
Manager earned $39,804 and $40,935 for such services from the Money Market Fund
and the Municipal Fund, respectively.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as custodian of the Funds' assets and provides
portfolio accounting and certain other services.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP of 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, serves as counsel to the Trust.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 400 North Ashley
Street, Suite 2800, Tampa, Florida 33602, are the independent public accountants
for the Trust. The Financial Statements and Financial Highlights of the Funds
for the fiscal year ended August 31, 1997 that appear in this SAI have been
audited by Price Waterhouse 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. The Financial Highlights for the fiscal
years ended prior thereto were audited by other independent accountants.
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POTENTIAL LIABILITY
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation or instrument the Trust or its Board of Trustees enters
into or signs. In the unlikely event a shareholder is held personally liable for
the Trust's obligations, the Trust is required to use its property to protect or
compensate the shareholder. On request, the Trust will defend any claim made and
pay any judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
COMMERCIAL PAPER
MOODY'S. Moody's Investors Service, Inc. evaluates the salient features
that affect a commercial paper issuer's financial and competitive position. Its
appraisal includes, but is not limited to, the review of such factors as:
quality of management, industry strengths and risks, vulnerability to business
cycles, competitive position, liquidity measurements, debt structure, operating
trends and access to capital markets. Differing degrees of weight are applied to
these factors as deemed appropriate for individual situations.
Commercial paper issuers rated "Prime-1" are judged to be of the best
quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured. Current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protection elements may change over
the intermediate or long term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations. Issuers in the
commercial paper market rated "Prime-2" are of high quality. Protection for
short-term note holders is issued with liquidity and value of current assets as
well as cash generation in sound relationship to current indebtedness. They are
rated lower than the best commercial paper issuers because margins of protection
may not be as large or because fluctuations of protective elements over the near
or intermediate term may be of greater amplitude. Temporary increases in
relative short and overall debt load may occur. Alternate means of financing
remain assured.
STANDARD & POOR'S. Standard & Poor's describes its highest ("A") rating
for commercial paper as follows, with the numbers 1, 2, and 3 being used to
denote relative strength within the "A" classification. Liquidity ratios are
adequate to meet cash requirements. Long-term senior debt rating should be "A"
or better; in some instances "BBB" credits may be allowed if other factors
outweigh the "BBB." The issuer should have access to at least two additional
channels of borrowing. Basic earnings and cash flow should have an upward trend,
with allowances made for unusual circumstances. Typically, the issuer's industry
should be well established and the issuer should have a strong position within
its industry. The reliability and quality of management should be unquestioned.
A-1
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CORPORATE DEBT
MOODY'S. Moody's Investors Service, Inc. describes its investment grade
highest ratings for corporate bonds as follows: 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 edge." 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. 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 risk appear somewhat larger than
in Aaa securities.
STANDARD & POOR'S. Standard & Poor's describes its investment grade
ratings for corporate bonds as follows: Ratings of AAA are the highest assigned
by Standard & Poor's to debt obligations and indicate an extremely strong
capacity to pay principal and interest. Bonds rated AA also qualify as high
quality obligations. Capacity to pay principal and interest is very strong, and
in the majority of instances they differ from AAA issues only in small degree.
DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Notes generally are used to provide for short-term capital needs
and usually have maturities of one year or less. They include the following:
Project Notes, which carry a U.S. Government guarantee, are issued by
public bodies ("local issuing agencies") created under the laws of a state,
territory or U.S. possession. They have maturities that range up to one year
from the date of issuance. Project Notes are backed by an agreement between the
local issuing agency and the Federal Department of Housing and Urban
Development. These Notes provide financing for a wide range of financial
assistance programs for housing, redevelopment, and related needs (such as
low-income housing programs and renewal programs).
Tax Anticipation Notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of, and are payable
from, seasonal tax revenues, such as income, sales, use and business taxes.
Revenue Anticipation Notes are issued in expectation of receipt of other
types of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
Bond Anticipation Notes are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the Notes.
Construction Loan Notes are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
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through the Federal Housing Administration under the Federal National Mortgage
Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper is a short-term obligation with a stated
maturity of 365 days or less. It is issued by agencies of state and local
governments to finance seasonal working capital needs or as short-term financing
in anticipation of longer-term financing.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
General Obligation Bonds are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds generally are secured by the net revenues derived from a
particular facility, group of facilities, or, in some cases, the proceeds of a
special excise or other specific revenue source. Revenue Bonds are issued to
finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these Bonds provide additional
security in the form of a debt service reserve fund to be used to make principal
and interest payments. Housing authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. Some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund.
Industrial Development Bonds are considered municipal bonds if the
interest paid thereon is exempt from Federal income tax and are issued by or on
behalf of public authorities to raise money to finance various privately
operated facilities for business and manufacturing, housing, sports, and
pollution control. These Bonds are also used to finance public facilities such
as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such Bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property as security for such payment.
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DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
MOODY'S
Municipal Bonds that are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." 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. Bonds
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 long-term
risks appear somewhat larger than in Aaa securities.
Municipal Notes. Moody's ratings for state and municipal notes and other
short-term obligations are designated Moody's Investment Grade ("MIG") and for
variable rate demand obligations are designated Variable Moody's Investment
Grade ("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Notes bearing the designation
MIG-1 or VMIG-1 are of the best quality, enjoying strong protection from
established cash flows for their servicing or from established and broad-based
access to the market for refinancing, or both. Notes bearing the designation
MIG-2 or VMIG-2 are judged to be of high quality, with margins of protection
ample although not so large as in the preceding group.
STANDARD & POOR'S
Municipal Bonds rated AAA by S&P are the highest grade obligations. This
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
Municipal Notes. Municipal notes with maturities of three years or less
are usually given note ratings (designated SP-1, -2, or -3) by S&P to
distinguish more clearly the credit quality of notes as compared to bonds. Notes
rated SP-1 have a very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are given
the designation SP-1+.
A-4
