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HERITAGE CASH TRUST
(Pictures of people working and playing)
From Our Family to Yours: The Intelligent Creation of Wealth.
Money Market Fund
Municipal Money Market Fund
Prospectus January 4, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
(HERITAGE CASH TRUST LOGO)
---------------
CASH TRUST (TM)
880 CARILLON PARKWAY
ST. PETERSBURG, FLORIDA 33716
(800) 421-4184
(HERITAGE LOGO and ADDRESS)
- ----------------------------
Address Change Requested
HERITAGE FAMILY OF FUNDS (TM)
From Our Family to Yours:
The Intelligent Creation of Wealth.
HERITAGE MONEY MARKET FUNDS
Cash Trust Money Market
Cash Trust Municipal Money Market
HERITAGE BOND FUNDS
High Yield
Intermediate Government
HERITAGE STOCK FUNDS
Aggressive Growth
Capital Appreciation
Eagle International
Growth Equity
Income-Growth
Mid Cap
Small Cap
Value Equity
300M 12/98 (Recycle Logo) Printed on recycled paper
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
HERITAGE CASH TRUST
Money Market Fund......................................... 1
Municipal Money Market Fund............................... 4
MANAGEMENT OF THE FUNDS
Who Manages Your Fund..................................... 7
Distribution of Fund Shares............................... 7
Year 2000................................................. 7
YOUR INVESTMENT
Before You Invest......................................... 8
How to Invest............................................. 8
Choosing a Class of Shares................................ 10
How to Sell Your Investment............................... 10
How to Exchange Your Shares............................... 12
Account and Transaction Policies.......................... 12
Dividends and Taxes....................................... 13
FINANCIAL HIGHLIGHTS
Financial Highlights...................................... 15
FOR MORE INFORMATION
Back Cover
</TABLE>
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MONEY MARKET FUND
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INVESTMENT OBJECTIVE. The Money Market Fund seeks to achieve maximum
current income consistent with stability of principal.
HOW THE MONEY MARKET FUND PURSUES ITS OBJECTIVE. The Money Market Fund
seeks to achieve its objective by investing in a variety of high-quality money
market instruments with remaining maturities of 397 days or less. Money market
instruments are short-term debt instruments issued by the U.S. government,
domestic and foreign corporations and financial institutions and other entities.
They include, for example, commercial paper, bank obligations, repurchase
agreements, other corporate debt obligations and government debt obligations.
The average dollar-weighted portfolio maturity of the fund's investment
portfolio is 90 days or less.
The fund manages its portfolio subject to strict standards set by its Board
of Trustees following special rules for money market funds under federal law,
which are designed so that the fund may maintain a stable $1.00 share price.
These include requirements for maintaining high credit quality in the fund's
investment portfolio, a short average portfolio maturity to reduce the effects
of changes in interest rates on the value of the fund's securities and
diversifying the fund's investments among issuers to reduce the effects of a
default by any one issuer on the value of the fund's shares.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE MONEY MARKET FUND. All
investments carry risks to some degree. Because the fund invests in money market
instruments and manages its portfolio to maintain a stable share price, its
major risks are those that could affect the overall yield of the fund. These
risks include strong equity markets or a weak economy, which would cause
short-term interest rates to decline. Such a decline would lower the fund's
yield and the return on your investment. The rate of the fund's income will vary
from day to day, generally reflecting changes in overall short-term interest
rates.
The fund cannot be certain that it will achieve its investment objective.
Furthermore, fund shares are not bank deposits and are not guaranteed, endorsed
or insured by any financial institution, government entity or the FDIC. Although
the fund seeks to preserve the value of your investment at $1.00 per share, it
is possible that you could lose money by investing in the fund.
WHO IS THE MONEY MARKET FUND DESIGNED FOR. The fund may be appropriate for
investors who want to earn income at current money market rates while preserving
the value of their investment because the fund is managed to keep its share
price stable at $1.00. Income on short-term securities tends to be lower than
the yield on longer-term fixed income funds. The fund also offers easy access to
your money through check writing and wire redemption privileges. The fund does
not invest for the purpose of seeking capital appreciation or gain.
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HOW THE MONEY MARKET FUND HAS PERFORMED. The bar chart and table below
illustrate annual fund and market benchmark returns for the periods ended
December 31, 1997. This information is intended to give you some indication of
the risk of investing in the fund by demonstrating how its returns have varied
over time. The bar chart shows the Money Market Fund's Class A share performance
from one year to another. The table shows what the return for each class of
shares would equal if you average out actual performance over various lengths of
time. Because this information is based on past performance, it's not a
guarantee of future results.
bar chart
During the 10-year period above, the Class A shares' highest quarterly
return was 2.26% for the quarter ended June 30, 1989 and the lowest quarterly
return was 0.59% for the quarter ended June 30, 1993. For the period from
January 1, 1998 through September 30, 1998, Class A shares' total return (not
annualized) was 3.64%.
AVERAGE ANNUAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 1997)*
<TABLE>
<CAPTION>
PERIOD CLASS A SHARES CLASS C SHARES*
<S> <C> <C> <C>
1 Year 4.82% 4.82%
5 Years 4.11% n/a
10 Years 5.17% n/a
Life of Class 5.39% 4.66%
</TABLE>
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* No average annual return is shown above for Class B shares because they were
not offered before January 2, 1998. Class C shares were first offered on
April 3, 1995.
To obtain the fund's current 7-day yield information, please call Heritage
at (800) 421-4184.
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WHAT ARE THE COSTS OF INVESTING IN THE MONEY MARKET FUND. The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the Money Market Fund. The fund's expenses are based on actual expenses incurred
for the fiscal year ended August 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- --------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a % of
offering price) None None None
Maximum Deferred Sales Charge (as a % of original purchase
price or redemption proceeds, whichever is lower)+ None 5%* 1%**
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
</TABLE>
+ Contingent deferred sales charges apply only to shares acquired through
exchange from another Heritage mutual fund.
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.46% 0.46% 0.46%
Distribution and Service (12b-1) Fees 0.15% 0.15% 0.15%
Other Expenses 0.14% 0.14% 0.14%
---- ---- ----
Total Annual Fund Operating Expenses 0.75% 0.75% 0.75%
==== ==== ====
</TABLE>
EXPENSE EXAMPLE. This Example is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
A shares $ 77 $ 240 $ 417 $ 930
B shares
Assuming redemption at end of period $ 77 $ 240 $ 417 $ 930
Assuming no redemption $ 77 $ 240 $ 417 $ 930
C shares $ 77 $ 240 $ 417 $ 930
</TABLE>
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MUNICIPAL MONEY MARKET FUND
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INVESTMENT OBJECTIVE. The Municipal Money Market Fund seeks to achieve
maximum current income exempt from federal income tax consistent with stability
of principal.
HOW THE MUNICIPAL MONEY MARKET FUND PURSUES ITS OBJECTIVE. The Municipal
Money Market Fund seeks to achieve its objective by investing at least 80% of
its assets in a variety of high-quality municipal securities with remaining
maturities of 397 days or less. Tax-exempt municipal securities are municipal
securities, the interest on which is exempt from federal income tax but may or
may not be an item of tax preference for purposes of the federal alternative
minimum tax (AMT). They include, for example, municipal notes, short-term
municipal bonds and variable rate obligations. The interest on tax-exempt
municipal securities may be subject to state and/or local income taxes.
The remaining portion of the fund's investment portfolio may be invested in
short-term taxable investments, which include U.S. government obligations, bank
obligations, commercial paper and repurchase agreements. The average
dollar-weighted portfolio maturity of the fund's investment portfolio is 90 days
or less.
The fund manages its portfolio subject to strict standards set by its Board
of Trustees following special rules for money market funds under federal law,
which are designed so that the fund may maintain a stable $1.00 share price.
These include requirements for maintaining high credit quality in the fund's
investment portfolio, a short average portfolio maturity to reduce the effects
of changes in interest rates on the value of the fund's securities and
diversifying the fund's investments among issuers to reduce the effects of a
default by any one issuer on the value of the fund's shares.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE MUNICIPAL MONEY MARKET
FUND. All investments carry risks to some degree. Because the fund invests in
money market instruments and manages its portfolio to maintain a stable share
price, its major risks are those that could affect the overall yield of the
fund. Among these are those that would cause short-term interest rates to
decline, such as strong equity markets or a weak economy. Such a decline would
lower the fund's yield and the return on your investment. The rate of the fund's
income will vary from day to day, generally reflecting changes in overall
short-term interest rates.
The fund cannot be certain that it will achieve its investment objective.
Furthermore, fund shares are not bank deposits and are not guaranteed, endorsed
or insured by any financial institution, government entity or the FDIC. Although
the fund seeks to preserve the value of your investment at $1.00 per share, it
is possible that you could lose money by investing in the fund.
WHO IS THE MUNICIPAL MONEY MARKET FUND DESIGNED FOR. The fund may be
appropriate for investors who want to earn tax-exempt income at current money
market rates while preserving the value of their investment because the fund is
managed to keep its share price stable at $1.00. Income on short-term securities
tends to be lower than the yield on longer-term fixed income funds. The fund
also offers easy access to your money through check writing and wire redemption
privileges. The fund does not invest for the purpose of seeking capital
appreciation or gain.
HOW THE MUNICIPAL MONEY MARKET FUND HAS PERFORMED. The bar chart and table
below illustrate annual fund and market benchmark returns for the periods ended
December 31, 1997. This information is intended to give you some indication of
the risk of investing in the fund by demonstrating how its returns have varied
over time. The bar chart shows the Municipal Money Market Fund's performance
from one year to
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another. The table shows what the return for fund shares would equal if you
average out actual performance over various lengths of time. Because this
information is based on past performance, it's not a guarantee of future
results.
(bar chart with the following plot points)
<TABLE>
<S> <C> <C> <C> <C>
1.86% 2.23% 3.17% 2.83% 3.04%
- ---- ---- ---- ---- ----
1993 1994 1995 1996 1997
</TABLE>
From its inception on June 17, 1992 through December 31, 1997, the fund's
highest quarterly return was 0.85% for the quarter ended June 30, 1995 and the
lowest quarterly return was 0.43% for the quarter ended March 31, 1994. For the
period from January 1, 1998 through September 30, 1998, Class A shares' total
return (not annualized) was 2.17%.
AVERAGE ANNUAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 1997)
<TABLE>
<CAPTION>
PERIOD CLASS A
------ -------
<S> <C>
1 Year 3.04%
5 Years 2.62%
Life of Fund 2.64%
</TABLE>
To obtain the fund's current 7-day yield information, please call Heritage
at (800) 421-4184.
WHAT ARE THE COSTS OF INVESTING IN THE MUNICIPAL MONEY MARKET FUND. The
tables below describe the fees and expenses that you may pay if you buy and hold
shares of the Municipal Money Market Fund. The fund's expenses are based on
actual expenses incurred for the fiscal year ended August 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
<TABLE>
<CAPTION>
CLASS A
-------
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a % of
offering price) None
Maximum Deferred Sales Charge (as a % of original purchase
price or redemption proceeds, whichever is lower) None
Wire Redemption Fee (per transaction) $5.00
</TABLE>
5
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ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
CLASS A
-------
<S> <C>
Management Fees 0.49%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.10%
----
Total Annual Fund Operating Expenses 0.74%
====
</TABLE>
EXPENSE EXAMPLE. This Example is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
A shares $ 76 $ 237 $ 411 $ 918
</TABLE>
6
<PAGE> 9
MANAGEMENT OF THE FUNDS
WHO MANAGES YOUR FUND
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Heritage Asset Management, Inc., 880 Carillon Parkway, St. Petersburg,
Florida 33716, is the funds' investment adviser and administrator. Heritage is a
wholly owned subsidiary of Raymond James Financial, Inc., which, together with
its subsidiaries, provides a wide range of financial services to retail and
institutional clients. Heritage manages, supervises and conducts the business
and administrative affairs of the funds and the other Heritage mutual funds with
net assets totaling approximately $3.9 billion as of September 30, 1998.
Heritage charged each fund an aggregate annual investment advisory and
administration fee during the fiscal year ended August 31, 1998 as follows:
<TABLE>
<S> <C>
- - Money Market Fund 0.46%
- - Municipal Money Market Fund 0.49%
</TABLE>
Heritage pays the funds' distributor a service fee out of the fees it receives
for investment advisory and administration services to the funds.
Alliance Capital Management L.P. (Alliance), 1345 Avenue of Americas, New
York, NY 10105, serves as the subadviser to the Municipal Money Market Fund.
Alliance is a limited partnership whose general partner, Alliance Capital
Management Corporation, is an indirect wholly owned subsidiary of The Equitable
Life Assurance Society of the United States. Alliance had $241 billion of assets
under its management as of September 30, 1998.
DISTRIBUTION OF FUND SHARES
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Raymond James & Associates, Inc. (RJA) currently serves as the distributor
of the funds. Subject to regulatory approvals, the Heritage Cash Trust Board of
Trustees has approved a proposed distribution agreement with Heritage Fund
Distributors, Inc. (HFDI).
YEAR 2000
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The funds could be affected adversely if the computer systems used by
Heritage, the funds' other service providers, or companies in which the funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Heritage has taken steps that it
believes are reasonably designed to address the potential failure of computer
systems used by them and the funds' service providers to address the Year 2000
issue. However, due to the funds' reliance on various service providers to
perform essential functions, a fund could have difficulty calculating its net
asset value, processing orders for share sales and delivering account statements
and other information to shareholders. There can be no assurance that these
steps will be sufficient to avoid any adverse impact.
7
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YOUR INVESTMENT
BEFORE YOU INVEST
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Before you invest in a fund, please
- Read this prospectus carefully.
- Then, decide which fund best suits your needs and your goals.
- If you choose to invest in the Money Market Fund, decide which class
of shares is best for you.
- Finally, decide how much you wish to invest and how you want to open
an account.
HOW TO INVEST
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MINIMUM INITIAL INVESTMENT. The minimum initial investment for each fund
is:
<TABLE>
<CAPTION>
MINIMUM INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
<S> <C> <C>
Regular Account $1,000 No minimum
Systematic Investment Program $ 50 $50 on a monthly basis
Retirement Account $1,000 No minimum
</TABLE>
Heritage may waive these minimum requirements at its discretion.
Investments in shares of the Money Market Fund through IRAs may be reduced or
waived under certain circumstances. Contact Heritage or your financial advisor
for further information.
OPENING AN ACCOUNT. You may open an account in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may invest in a fund by contacting
your financial advisor. Your financial advisor can help you open a new account
and help you review your financial needs and formulate long-term investment
goals and objectives.
Your financial advisor may have established a sweep program with the funds
for investors who maintain a brokerage account with a participating dealer. Free
credit cash balances arising from sales of securities for cash, redemptions of
debt securities, dividend and interest payments and funds received from
brokerage investors may be invested automatically in Class A shares on a daily
basis. For additional information regarding this program, contact your financial
advisor.
BY MAIL. You may invest in a fund directly by completing and signing the
account application found in this prospectus. Indicate the fund, the class of
shares and the amount you wish to invest. Make your check payable to the
specific fund and class of shares you are purchasing. Mail the application and
your payment to:
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
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<PAGE> 11
BY DOLLAR COST AVERAGING PLANS. We offer the following plans to allow you
to make regular, automatic investments into a fund. You determine the amount and
frequency of your investments. You can terminate your plans at any time.
Availability of these plans may be limited by your financial advisor.
- AUTOMATIC INVESTING -- You may instruct us to transfer funds from a
specific bank checking account to your Heritage account. This transfer
will be effected either by electronic transfer or paper draft.
Complete the appropriate sections of the account application or the
Heritage Bank Draft Investing form to activate this service.
- DIRECT DEPOSIT -- You may instruct your employer to direct all or part
of your paycheck to your Heritage account. You also may direct to your
account other types of payments you receive such as from an insurance
company or another mutual fund family. Contact your financial advisor
or Heritage for the direct deposit enrollment form. Please note the
routing instructions are different than the Federal Reserve wire
instructions discussed below.
- GOVERNMENT DIRECT DEPOSIT -- Beginning in 1999, any newly established
investment programs by employees of the Federal government must be
paid through direct deposit. You can have your Social Security,
military pension, paycheck or other Federal government payment sent to
your Heritage account. Your completed Government Direct Deposit form
requires Heritage's review and approval for processing. Contact your
financial advisor or Heritage for an enrollment form.
- AUTOMATIC EXCHANGE -- You may make automatic regular exchanges between
two or more Heritage mutual funds. These exchanges are subject to the
exchange requirements discussed below.
The intent of these plans is to encourage you to increase your Heritage balance
to the fund's minimum investment. If you discontinue any of these plans, or make
regular withdrawals from your account without maintaining the minimum balance,
we may require you to buy more shares to keep your account open.
THROUGH A RETIREMENT PLAN. Heritage mutual funds offer a range of
retirement plans, including self-directed, traditional and Roth IRA plans, Keogh
plans, SEPs and SIMPLEs. A special application and custodial agreement is
required. Contact your financial advisor or Heritage for more information.
BY WIRE. You may invest in a fund by Federal Reserve wire sent from your
bank. Mail your completed and signed account application to Heritage. Contact
Heritage at (800) 421-4184 or your financial advisor to obtain your account
number before sending the wire. Your bank may charge a wire fee. Send your
investment and the following information by Federal Reserve or bank wire to:
State Street Bank and Trust Company
ABA # 011-000-028
Account # 3196-769-8
Name of the Fund
The class of shares to be purchased
(Your account number assigned by Heritage)
(Your name)
9
<PAGE> 12
CHOOSING A CLASS OF SHARES
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If you are investing in the Money Market Fund, you can choose from three
classes of fund shares: Class A shares, Class B shares and Class C shares. The
primary purpose for investing in Class B or Class C shares is to take advantage
of the Money Market Fund exchange privilege into shares of another Heritage
mutual fund.
CLASS A SHARES. You may purchase Class A shares at net asset value with no
initial sales charge when you purchase shares of the fund.
CLASS B SHARES. You may purchase Class B shares at net asset value with no
initial sales charge. If you acquire Class B shares through exchange from
another Heritage mutual fund, your sale of those shares may be subject to a
"contingent deferred" sales charge (CDSC) of up to a maximum 5.00%. This CDSC
may be waived under certain circumstances.
CLASS C SHARES. You may purchase Class C shares at net asset value with no
initial sales charge. If you acquire Class C shares through exchange from
another Heritage mutual fund, your sale of those shares may be subject to a CDSC
of 1.00%. This CDSC may be waived under certain circumstances.
UNDERSTANDING RULE 12B-1 FEES. Each fund has adopted a plan under Rule
12b-1 that allows it to pay distribution and sales fees for the sale of its
shares and for services provided to shareholders. Each class of shares is
subject to ongoing Rule 12b-1 fees of up to 0.15% of its average daily net
assets. Because these fees are paid out of the fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
HOW TO SELL YOUR INVESTMENT
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You can sell -- or redeem -- shares of your fund for cash at any time,
subject to certain restrictions.
HOW TO SELL YOUR SHARES. You may contact your financial advisor or
Heritage with instructions to sell your investment in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may sell your shares through your
financial advisor who can prepare the necessary documentation. Your financial
advisor will transmit your request to sell shares of your fund and may charge
you a fee for this service.
Your financial advisor may have established a sweep program with the funds
for investors who maintain a brokerage account with a participating dealer.
Brokerage cash debits arising from purchases of securities for cash or other
brokerage activity will automatically see Class A shares on a daily basis.
BY TELEPHONE. You may sell shares from your account by calling Heritage at
(800) 421-4184 prior to the close of regular trading on the New York Stock
Exchange -- typically 4:00 p.m. eastern time. If you do not wish to have
telephone redemption privileges, you should complete the appropriate section of
the account application.
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<PAGE> 13
BY MAIL. You may sell shares of your fund by sending a letter of
instruction. Specify the fund name, your share class, your account number, the
names in which the account is registered and the dollar value or number of
shares you wish to sell. Include all signatures and any additional documents
that may be required. Mail the request to Heritage Asset Management, Inc., P.O.
Box 33022, St. Petersburg, FL 33733.
Some circumstances require a written letter requesting sale of shares,
along with a signature guarantee. These include:
- Sales from any account that has had an address change in the past 30
days
- Sales of greater than $50,000
- Sales in which payment is to be sent to an address other than the
address of record
- Sales in which payment is to be made to payees other than the exact
registration of the account or
- Exchanges or transfers into other Heritage accounts that have
different titles
We will only accept official signature guarantees from participants in our
signature guarantee program, which includes most banks and securities dealers. A
notary public cannot guarantee your signature.
BY SYSTEMATIC WITHDRAWAL PLAN. This plan may be used for periodic
withdrawals from your account. To establish, complete the appropriate section of
the account application or the Heritage systematic withdrawal form (available
from your financial advisor or Heritage) and send that form to Heritage.
Availability of this plan may be limited by your financial advisor. You should
consider the following factors when establishing a plan:
- Make sure you have a sufficient amount of shares in your account.
- Determine how much you wish to withdraw. You must withdraw a minimum
of $50 for each transaction.
- Determine the schedule: monthly, quarterly, semiannual or annual
basis.
- Determine which day of the month you would like the withdrawal to
occur. Available dates are the 1st, 5th, 10th or 20th day of the
month. If such a date falls on the weekend, the withdrawal will take
place on the next business day.
- Heritage reserves the right to cancel systematic withdrawals if
insufficient shares are available for two or more consecutive months.
BY WRITING A CHECK. You may write checks against your Class A fund account
if you request and complete a signature card. With these checks, you may sell
your shares by writing a check for at least $100. You must maintain a minimum
account balance of $1,000. You may not write a check to close your account.
There is no charge for checkwriting transactions, except as follows:
- $15.00 charge for all attempted check redemptions in which the amount
of the check exceeds the available assets in your fund account, and
- $15.00 charge for placing a stop payment order on a check.
We may waive these charges at our discretion.
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<PAGE> 14
RECEIVING PAYMENT. When you sell shares, payment of the proceeds generally
will be made the next business day after your order is received. If you sell
shares that were recently purchased by check or pre-authorized automatic
purchase, payment will be delayed until we verify that those funds have cleared,
which may take up to two weeks. You may receive payment of your sales proceeds
the following ways:
- BY CHECK -- We will mail a check to the address of record or bank
account specified on your account application. Checks made payable to
other than the registered owners or sent to an address other than the
address of record require written instruction accompanied by a
signature guarantee, as described above.
- BY WIRE -- You may request that we send your proceeds by Federal
Reserve wire to a bank account you specify. You must provide wiring
instructions to Heritage in writing. We normally will send these
proceeds the next day. A $5.00 wire fee will be charged to your
account.
HOW TO EXCHANGE YOUR SHARES
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If you own shares of a fund for at least 30 days, you can exchange those
shares for shares of the same class of any other Heritage mutual fund provided
you satisfy the minimum investment requirements. You may exchange your shares by
calling your financial advisor or Heritage if you exchange to like titled
Heritage accounts. Written instructions with a signature guarantee, as described
above, are required if the accounts are not identically registered.
You may make exchanges without paying any additional sales charges.
However, if you exchange shares of either fund acquired by purchase (rather than
exchange) for shares of another Heritage mutual fund, you must pay the
applicable sales charge.
ACCOUNT AND TRANSACTION POLICIES
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PRICE OF SHARES. The funds' regular business days are the same as those of
the New York Stock Exchange, normally Monday through Friday. The net asset value
per share (NAV) for each class of a fund is determined each business day at the
close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
eastern time). The share price is calculated by dividing a class' net assets by
the number of its outstanding shares.
In calculating NAV, the funds typically price their securities by using
pricing services or market quotations. However, in cases where these are
unavailable or when the portfolio manager believes that subsequent events have
rendered them unreliable, a fund may use fair-value estimates instead.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, we will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, we are not responsible for any losses that may
occur to any account due to an unauthorized telephone call. Also for your
protection, telephone redemptions are not permitted on accounts whose name or
addresses have changed within the past 30 days. Proceeds from telephone
redemptions can only be mailed to the address of record.
TIMING OF ORDERS. All orders to purchase or sell shares are executed at
the next NAV calculated after the order has been accepted. Orders are accepted
until the close of regular trading on the New York Stock
12
<PAGE> 15
Exchange every business day - normally 4:00 p.m. eastern time - and are executed
the same day at that day's NAV. Otherwise, all orders will be executed at the
NAV determined as of the close of regular trading on the next trading day.
If you participate in a sweep program, your fund purchases usually will be
made on the next business day following the day that credit balances are
generated in your brokerage account with your financial advisor. However, credit
balances arising from funds placed in your brokerage account by personal check
are subject to your financial advisor's cash availability policy.
RESTRICTIONS ON ORDERS. The funds and their distributor reserve the right
to reject any purchase order and to suspend the offering of fund shares for a
period of time. There are certain times when you may not be able to sell shares
of a fund or when we may delay paying you the proceeds. This may happen during
unusual market conditions or emergencies or when a fund cannot determine the
value of its assets or sell its holdings.
REDEMPTION IN KIND. We reserve the right to give you securities instead of
cash when you sell shares of your fund. If the amount of the sale is at least
$250,000 or 1% of a fund's assets, we may give you securities from the fund's
portfolio instead of cash.
ACCOUNTS WITH BELOW-MINIMUM BALANCES. If your account balance falls below
$1,000, each fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, each fund reserves the right to close your account and send
the proceeds to your address of record.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES. Each fund declares dividends daily and pays them
monthly. Net investment income generally consists of interest income and
dividends declared and paid on investments, less expenses. The Money Market Fund
expects that these distributions will consist of ordinary income. Dividend
distributions by the Money Market Fund will vary by class and are anticipated to
be generally higher for Class A shares. The Municipal Money Market Fund may make
distributions, called "exempt-interest dividends," that are exempt from federal
income tax. Exempt-interest dividends will not necessarily be exempt from state
and local income taxes. The Municipal Money Market Fund also may make taxable
distributions.
Fund dividends are automatically reinvested in the fund unless you opt to
take your distributions in cash, in the form of a check or direct them for
purchase of shares in another Heritage mutual fund. However, if you have a
retirement plan or a Systematic Withdrawal Plan, your distributions will be
automatically reinvested.
In general, receiving distributions (whether reinvested or taken in cash)
are taxable events. These transactions typically create the following tax
liabilities for taxable accounts:
<TABLE>
<CAPTION>
TYPE OF TRANSACTION TAX STATUS
<S> <C>
Income dividends Ordinary income rate
Short-term capital gain distributions Ordinary income rate
</TABLE>
The sale or exchange of shares of a fund will not result in any gain or loss for
the shareholder to the extent the fund maintains a stable share price of $1.00.
13
<PAGE> 16
TAX REPORTING. During each year, we will send non-retirement account
holders a Form 1099 that tells you the amount of distributions you received for
the prior calendar year, and the tax status of those distributions. Generally,
fund distributions are taxable to you in the year you receive them. However, any
dividends that are declared in October, November or December but paid in January
are taxable as if received on December of the year they are declared.
WITHHOLDING TAXES. If a fund does not have your correct social security or
other taxpayer identification number, federal law requires us to withhold 31% of
your distributions and sale proceeds. If you are subject to backup withholding,
we will withhold and pay to the IRS 31% of your distributions. Any tax withheld
may be applied against the tax liability on your tax return.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
performance of the Class A shares, Class B shares and Class C shares of the
Money Market Fund for the periods indicated. Certain information reflects
financial results for a single Class A share, Class B share or Class C share.
The total returns in the table represent the rate that an investor would have
earned on an investment in the fund (assuming reinvestment of all dividends and
distributions). The information in this table for the periods presented has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose report,
along with the fund's financial statements, is included in the statement of
additional information, which is available upon request.
MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------------ ------------------ --------------------------------
FOR THE YEAR ENDED
FOR THE YEARS ENDED AUGUST 31, AUGUST 31, FOR THE YEARS ENDED AUGUST 31,
------------------------------------------ ------------------ --------------------------------
1998 1997 1996 1995 1994 1998++ 1998 1997 1996+
---- ---- ---- ---- ---- ------ ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of the year............... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment
income(a)(b)............ .049 .047 .048 .050 .029 .027 .049 .047 .023
Less Distributions:
Distributions from net
investment income and
net realized gains(a)... (.049) (.047) (.048) (.050) (.029) (.027) (.049) (.047) (.023)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
year...................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return(%)............. 4.99 4.85 4.89 5.00 2.87 2.70(d) 4.99 4.85 2.34(d)
Ratios to average daily net
assets (%)/Supplemental
Data:
Operating expenses,
net(b).................. .75 .76 .78 .79 .79 .75(c) .75 .77 .75(c)
Net investment
income(b)............... 4.88 4.74 4.78 5.00 2.87 4.86(c) 4.87 4.72 4.62(c)
Net assets, end of year ($
millions)............... 2,492 2,016 1,641 1,294 982 .21 3 .51 --
</TABLE>
- ---------------
+ For the period February 29, 1996 (first offering of Class C Shares) to
August 31, 1996.
++ For the period January 2, 1998 (first offering of Class B Shares) to August
31, 1998.
(a) Includes net realized gains and losses which were less than $.001 per share
for each of the periods.
(b) Excludes management fees waived by the Manager in the amount of less than
$.001 and $.001 per share, for the two years ended August 31, 1995 and 1994,
respectively. The operating expense ratios including such items would have
been .81% and .81%, respectively. No management fees were waived or
recovered for the year ended August 31, 1996. The year ended August 31, 1997
includes recovery of previously waived management fees paid to the manager
of less than $.01 per share. The operating expense ratios for fiscal 1997,
excluding such items would have been .75% for Class A and C Shares. No
management fees were waived or recovered for the year ended August 31, 1998.
(c) Annualized.
(d) Not annualized.
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
performance of the Municipal Money Market Fund for the periods indicated.
Certain information reflects financial results for a single share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The information in this table for the periods presented has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose report,
along with the fund's financial statements, is included in the statement of
additional information, which is available upon request.
MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income (a)........................... .030 .030 .030 .030 .019
Less Distributions:
Dividends from net investment income................ (.030) (.030) (.030) (.030) (.019)
------ ------ ------ ------ ------
Net asset value, end of year.......................... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Total Return (%)...................................... 3.02 3.00 2.98 3.04 1.90
Ratios to average daily net assets (%)/Supplemental
data:
Operating expenses net (a).......................... .74 .75 .77 .77 .77
Net investment income............................... 2.98 2.96 2.94 3.05 1.89
Net assets, end of period ($ millions).............. 565 419 326 283 212
</TABLE>
- ---------------
(a) Excludes management fees waived by the Manager in the amount of less than
$.001 and $.001, per share, for the two years ended August 31, 1995 and
1994, respectively. The operating expense ratios including such items would
have been .79% and .77%, respectively. No management fees were waived or
recovered for the year ended August 31, 1996. The year ended August 31, 1997
includes recovery of previously waived management fees paid to the Manager
of $.01 per share. The operating expense ratios excluding such items would
have been .74%. No management fees were waived or recovered for the year
ended August 31, 1998.
16
<PAGE> 19
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
More information on these funds is available free upon request, including
the following:
ANNUAL/SEMIANNUAL REPORTS. Describes each fund's performance, lists
portfolio holdings and contains a letter from the fund's manager discussing
recent market conditions, economic trends and fund strategies.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Provides more details about
each fund and its policies. A current SAI is on file with the Securities and
Exchange Commission and is incorporated herein by reference (is legally
considered part of this prospectus).
To obtain information contact Heritage Mutual Funds:
<TABLE>
<S> <C>
By mail: 880 Carillon Boulevard
St. Petersburg, Florida 33716
By telephone: (800) 421-4184
</TABLE>
Text-only versions of these documents and this prospectus are available,
upon payment of a duplicating fee, by writing to the Public Reference Room of
the Securities and Exchange Commission in Washington, D.C. 20549-6009 or by
calling the Commission at 800-SEC-0330. Reports and other information about the
funds may be viewed on-screen or downloaded from the SEC's Internet web site at
http://www.sec.gov.
The funds' Investment Company and 1933 Act registration numbers are:
<TABLE>
<S> <C> <C>
Heritage Cash Trust 811-4337 2-98635
Money Market Fund 811-4337 2-98635
Municipal Money Market Fund 811-4337 2-98635
</TABLE>
HERITAGE
ASSET MANAGEMENT, INC.
REGISTERED INVESTMENT ADVISOR -- SEC
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than that contained in this
Prospectus in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the funds or their distributor. This Prospectus
does not constitute an offering in any state in which such offering may not
lawfully be made.
<PAGE>
HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") dated January 4, 1999,
should be read with the Prospectus of Heritage Cash Trust-Money Market and
Municipal Money Market Funds, dated January 4, 1999. 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 Policies, Strategies and Risks..............................1
INVESTMENT LIMITATIONS.......................................................8
NET ASSET VALUE.............................................................11
CALCULATING YIELDS..........................................................12
INVESTING IN THE FUNDS......................................................13
INVESTMENT PROGRAMS.........................................................16
Systematic Investment Options.........................................16
Retirement Plans......................................................16
REDEEMING SHARES............................................................17
Systematic Withdrawal Plan............................................17
Telephone Transactions................................................18
Redemptions in Kind...................................................18
Application of CDSC...................................................18
Receiving Payment.....................................................19
EXCHANGE PRIVILEGE..........................................................19
CONVERSION OF CLASS B SHARES................................................20
TAXES.......................................................................20
SHAREHOLDER INFORMATION.....................................................22
TRUST INFORMATION...........................................................23
Management of the Trust...............................................23
Five Percent Shareholders.............................................26
Investment Adviser and Administrator; Subadviser......................26
Portfolio Transactions................................................28
Distribution of Shares................................................29
Administration of the Funds...........................................30
Potential Liability...................................................31
APPENDIX ..................................................................A-1
REPORTS OF INDEPENDENT ACCOUNTANTS & FINANCIAL STATEMENTS..................A-5
<PAGE>
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 is
registered as an open-end diversified management investment company under the
Investment Company Act of 1940 ("1940 Act"). 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 charge ("Class A shares"), Class B shares offered
subject to a contingent deferred sales charge ("CDSC") on redemptions made
within six years of the holding period ("Class B shares"), and Class C shares
offered subject to a CDSC on redemptions made in less than 1 year of the holding
period ("Class C shares"). Class B shares automatically convert to Class A
shares after a certain holding period. The Municipal Fund offers Class 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 POLICIES, STRATEGIES AND RISKS
-----------------------------------------
MONEY MARKET FUND AND MUNICIPAL FUND
------------------------------------
The following discussion of the securities and money market instruments
relates to both funds.
BANKERS' ACCEPTANCES. Bankers' acceptances are short-term credit
instruments used to finance commercial transactions. Generally, an acceptance is
a time draft drawn on a bank by an exporter or an importer to obtain a stated
amount of funds to pay for specific merchandise. The draft is then "accepted" by
a bank that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset, or it may be sold in the secondary market at the
going rate of interest for a specified maturity. Although maturities for
acceptances can be as long as 270 days, most acceptances have maturities of six
months or less.
The Money Market Fund may purchase bankers' acceptances of domestic
banks and savings and loans that have assets of at least $1 billion and capital,
surplus and undivided profits of over $100 million as of the close of their most
recent fiscal year. The Municipal Fund may purchase high quality bankers'
acceptances.
COMMERCIAL PAPER.
----------------
GENERAL. Commercial paper includes notes, drafts or similar
instruments payable on demand or having a maturity at the time of issuance not
exceeding nine months, exclusive of days of grace or any renewal thereof.
The Money Market Fund may invest in commercial paper, including U.S.
dollar-denominated commercial paper of foreign issuers provided the paper is
<PAGE>
rated in the highest rating category (First Tier Securities) by at least two
nationally recognized statistical rating organizations (or by one if only one
rating is assigned) and in unrated securities determined by the Trust's Board of
Trustees ("Board") or, pursuant to authority delegated by the Board, by the
Manager, to be of comparable quality. The fund also may invest up to 5% of its
assets in securities receiving the second highest rating (Second Tier
Securities) or in unrated securities determined to be of comparable quality. The
Municipal Fund may invest in prime commercial paper. See the Appendix for a
description of commercial paper ratings.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A. Section 4(2) commercial
paper is commercial paper that 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"). Investments in Section 4(2)
commercial paper will be subject to the funds' 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.
CERTIFICATES OF DEPOSIT ("CDs"). The Federal Deposit Insurance
Corporation ("FDIC") is an agency of the U.S. Government that insures the
deposits of certain banks and savings and loan associations up to $100,000 per
deposit. The interest on such deposits may not be insured if this limit is
exceeded. Current federal regulations also permit such institutions to issue
insured negotiable CDs in amounts of $100,000 or more, without regard to the
interest rate ceilings on other deposits. To remain fully insured, these
investments must be limited to $100,000 per insured bank or savings and loan
association.
The Money Market Fund may invest in CDs (along with demand deposits,
time deposits and savings shares) under the same conditions as relate to
banker's acceptances. The Municipal Fund may invest in high quality CDs.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in
which a fund purchases securities and simultaneously commits to resell the
securities to the original seller at an agreed upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. A 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 and
who, in the opinion of the Manager or Alliance Capital Management L.P. (the
"Subadviser"), present minimal credit risks in accordance with guidelines
established by the Board of Trustees. 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, a 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.
2
<PAGE>
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are
transactions with the same parties with whom it may enter into repurchase
agreements in which a fund borrows by selling securities and agreeing to
repurchase them at a mutually agreed upon price. When 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. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver
may receive an extension of time to determine whether to 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 funds' limitations on
borrowing.
RISKS OF FOREIGN BANK INVESTMENTS. Investments in foreign bank
instruments, including instruments of foreign branches of domestic banks,
present certain additional risks. These risks include the impact of future
political and economic developments, the possible entanglement of exchange
controls and/or the adoption of other governmental restrictions that might
affect adversely the payment of principal and interest on such instruments.
Further, there may be less publicly available information about a foreign bank
than about a domestic bank.
SECURITIES LOANS. 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 fund retains all or a portion of the interest received on
investments of the cash collateral or receive a fee from the borrower. The fund
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.
U.S. GOVERNMENT SECURITIES. U.S. Government securities include a
variety of securities that are issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured thereby. These
securities include securities issued and guaranteed by the full faith and credit
of the U.S. Government, such as Treasury bills, Treasury notes, and Treasury
bonds; obligations supported by the right of the issuer to borrow from the U.S.
Treasury, such as those of the Federal Home Loan Banks and obligations supported
only by the credit of the issuer, such as those of the Federal Intermediate
Credit Banks.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. These transactions
are made to secure what the Manager or, for the Municipal Fund, 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
3
<PAGE>
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.
The funds may purchase short-term U.S. Government obligations on a
when-issued or delayed-delivery basis but only for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies,
and not for investment leverage. The Money Market Fund may purchase obligations
on this basis without limit. The Municipal Fund may commit up to 15% of its net
assets to the purchase of when-issued securities.
MONEY MARKET FUND
-----------------
The following discussion applies only to investments by the Money Market
Fund.
ASSET-BACKED SECURITIES. 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. Domestic and foreign Eurodollar
certificates are CDs, time deposits and bankers' acceptances issued by foreign
branches of domestic banks and foreign banks, respectively. Yankee certificates
are CDs, time deposits and bankers' acceptances issued by domestic branches of
foreign banks. 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 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
4
<PAGE>
state-licensed domestic branches of foreign banks may not necessarily be insured
by the FDIC.
In view of the foregoing factors associated with the purchase of
domestic and foreign Eurodollar and Yankee certificates, the fund will evaluate
carefully such investments on a case-by-case basis. The fund, however, may only
purchase domestic Eurodollar certificates if the issuing bank has assets of at
least $1 billion and capital, surplus and undivided profits of over $100 million
as of its most recent fiscal year, and foreign Eurodollar certificates or Yankee
certificates if the issuing bank has assets that are the equivalent of at least
$2 billion as of the close of its most recent fiscal year.
GNMA CERTIFICATES. GNMA certificates are securities issued by the
Government National Mortgage Association ("GNMA"), a wholly owned U.S.
Government corporation that guarantees the timely payment of principal and
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 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.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are
short-term debt obligations whose interest rates are adjusted at periodic
intervals or whenever there is a change in the market rate to which the
security's interest is tied. The fund may invest in these notes under the same
conditions as relate to commercial paper.
INDUSTRY CLASSIFICATIONS. For purposes of determining industry
classifications, the 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
--------------
The following discussion applies only to investments by the Municipal
Fund.
ALTERNATIVE MINIMUM TAX. AMT-Subject Bonds are 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 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.
5
<PAGE>
The fund may invest without limit in AMT-Subject Bonds. It is not possible to
provide specific details on each of these obligations in which the fund's assets
may be invested.
MUNICIPAL SECURITIES. Municipal securities include municipal notes,
such as tax anticipation and revenue bonds which generally have maturities of
one year or less and short-term municipal bonds. Municipal notes are usually
issued in anticipation of various seasonal revenues, bond anticipation notes and
tax-exempt commercial paper. Short-term municipal bonds such as general
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for payment of principal and interest, and revenue bonds, which
generally are paid from the revenues of a particular facility or a specific
excise or other source.
The yields on municipal securities are dependent on a variety of
factors, including the general condition of the money, 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 fund normally invests at least 80% of its net assets in
municipal securities, and all municipal securities purchased by the fund will be
rated within the two highest quality ratings of Moody's Investors Service, Inc.
("Moody's") and Standard and Poor's ("S&P"), or if unrated, judged by the Board
or, pursuant to authority delegated by the Board, by the Subadviser to be of
comparable quality, and meet credit standards applied by the Subadviser. See the
Appendix for a description of securities ratings.
The achievement of the fund's objectives is dependent in part on the
continuing ability of the issuers of municipal securities in which the 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 fund generally will hold securities to maturity rather than follow a
practice of trading. However, the 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 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. The income generated by the fund's investments in municipal
securities may not be tax exempt in its entirety in certain jurisdictions.
STANDBY COMMITMENTS. Standby commitments are municipal securities
combined with the right to resell them to the seller at an agreed-upon price or
yield within specified periods prior to their maturity dates. The right to
resell 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 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 fund acquires standby
6
<PAGE>
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 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 fund at zero in determining net
asset value. If the 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 fund's investment portfolio of securities. The fund does not
expect to invest more than 5% of its net assets in standby commitments.
TAXABLE SECURITIES. The fund 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 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 fund are limited to: marketable obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities; repurchase
agreements involving such securities; CDs, 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 S&P or Prime-1 by Moody's or, if not rated, deemed by the
Board or, pursuant to authority delegated by the Board, by the Subadviser to be
of equal quality.
VARIABLE RATE OBLIGATIONS. These obligations are municipal
securities that offer a variable and fluctuating interest rate 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 purchaser 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 purchaser 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.
Variable rate securities may include participation interests in industrial
development bonds backed by letters of credit of FDIC member banks having total
assets of more than $1 billion. The letters of credit of any single bank will
not apply to variable rate obligations constituting more than 10% of the fund's
total assets. Because the fund invests in securities backed by banks, changes in
the credit quality of these banks could cause losses to the fund and affect its
share price.
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 fund's
investment quality requirements. Variable rate obligations purchased by the 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."
7
<PAGE>
Purchase of a participation interest gives the fund an undivided
interest in certain such bonds. The 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 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 fund on the
basis of published financial information, rating agency reports and other
research services to which the Subadviser may subscribe.
INVESTMENT LIMITATIONS
- ----------------------
FUNDAMENTAL POLICIES
--------------------
In addition to the limits disclosed in "Investment Policies, Strategies
and Risks" 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 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.
MONEY MARKET FUND AND MUNICIPAL FUND
------------------------------------
The following discussion relates to the fundamental policies of both
funds.
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.
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.
8
<PAGE>
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.
MONEY MARKET FUND
-----------------
The following discussion relates to the fundamental policies of the Money
Market Fund.
DIVERSIFICATION. The fund may not invest more than 5% of its total
assets in First Tier Securities of any one issuer other than the U.S.
Government, its agencies and instrumentalities; however, the 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 days after the purchase thereof provided that
the fund may not make more than one investment in accordance with the foregoing
provision at any time. The 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 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.
ILLIQUID SECURITIES. The 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.
CONCENTRATION. The 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 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.
ISSUING SENIOR SECURITIES. The fund may not issue senior securities,
except as permitted by the investment objective, policies and investment
limitations of the fund.
9
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MUNICIPAL FUND
--------------
The following discussion relates to the fundamental policies of the
Municipal Fund.
DIVERSIFICATION. The 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 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 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 fund will not commit more than
10% of its net assets to such illiquid securities.
CONCENTRATION. The 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 fund will regard the
entity that has the primary responsibility for making payment of principal and
interest as the issuer.
ISSUING SENIOR SECURITIES. The fund may not issue senior securities.
However, this policy does not apply to investment policies otherwise permitted
by the fund, such as making securities loans, borrowing money and engaging in
repurchase agreements and reverse repurchase agreements.
NONFUNDAMENTAL POLICIES
-----------------------
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 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.
DEALING IN PUTS AND CALLS. The funds may not invest in puts, calls,
straddles, spreads or any combination thereof.
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<PAGE>
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 its 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
a Class 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. The Exchange normally is
open for business Monday through Friday except the following holidays: New
Year's Day, Martin Luther King's Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. Each
fund 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 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 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.
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 will decide what, if any, steps
should be taken if there is a difference of more than .5% between the two
methods. The Board 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, 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 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
11
<PAGE>
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
- ------------------
From time to time the funds may advertise "yield" and "effective yield."
The Money Market Fund's yield is computed separately for Class A shares, Class B
shares and Class C shares. Yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of a fund refers to
the investment income in the fund over a seven-day period that is then
"annualized." The "effective yield" is calculated similarly but, when
annualized, the investment income earned is assumed to be reinvested. Also, the
Municipal Fund may advertise its "tax-equivalent yield." The "tax equivalent
yield" represents the taxable yield a shareholder would have to earn before
Federal income tax to equal the fund's tax-free yield.
Each class of a fund computes its current and effective yield quotations
and Class A shares of the Municipal Fund calculate their tax-equivalent yield
using standardized methods required by the SEC. A fund's current yield is 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.
A fund's effective yield, which will be slightly higher, is 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:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) 365/7(SUPERSCRIPT)]-1
For the seven-day period ended August 31, 1998, the Class A shares of the
Money Market Fund's current and effective yields were 4.87% and 4.99%,
respectively. For the same period, the Class B shares of the Money Market Fund's
current and effective yields were 4.87% and 4.99%, respectively, and the Class C
shares were 4.87% and 4.99%.
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<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:
( E )
TAX = EQUIVALENT YIELD = (-----) + t
( 1-p )
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, 1998, the Class A shares of the
Municipal Fund's current, effective and tax-equivalent (assuming the maximum
Federal income tax rate of 39.6%) yields were 2.66%, 2.70% and 4.40%,
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 sales
communications ("Promotional Materials") represents past performance and is not
intended to predict or indicate future results. The return on an investment in a
class will fluctuate. In Promotional Materials, 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. Promotional Materials
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
- ----------------------
Class A shares, Class B shares and Class C shares are sold at their next
determined net asset value after an order is received, without a front-end sales
charge. For customers of Raymond James & Associates, Inc. ("RJA" or the
"Distributor") or its affiliates, credit balances 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.
13
<PAGE>
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.
CHOOSING A CLASS OF SHARES. If you are investing in the Money Market Fund,
you can choose from three classes of fund shares, Class A shares, Class B shares
and Class C shares. The primary purpose for investing in Class B or Class C
shares is to take advantage of the Money Market Fund exchange privilege into
shares of another Heritage mutual fund. If you do not intend to exchange Money
Market Fund shares for Class B or Class C shares of another Heritage mutual
fund, then you should purchase Class A shares. If you do intend to exchange such
shares, you should decide which class to choose carefully based on:
o the amount you wish to invest,
o the different sales charges that apply to each share class,
o whether you qualify for any reduction or waiver of sales charges,
o the length of time you plan to keep the investment, and
o the class expenses.
Class B and Class C shares each offer different sales charges and ongoing fees
allowing you to choose the one that best meets your needs.
CLASS A SHARES. You may purchase Class A shares at net asset value with no
initial sales charge when you purchase shares of the fund or a "contingent
deferred" sales charge when you sell your shares. Class A shares are subject to
ongoing Rule 12b-1 fees of up to 0.15% of their average daily net assets. These
fees are the same for Class B and Class C shares.
If you choose to invest in Class A shares, you will pay a sales charge
only if you exchange your shares for Class A shares of another Heritage mutual
fund. However, if the shares being exchanged were themselves acquired by the
exchange of another Heritage mutual fund, then no initial sales charge would be
imposed. Contact Heritage at (800) 421-4184 or your financial advisor for a
prospectus of the Heritage mutual funds.
CLASS B SHARES. You may purchase Class B shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell shares within 6 years of purchase,
you may be required to pay a "contingent deferred" sales charge (CDSC) at the
time of sale of up to 5.00%. You would not have to pay a CDSC when you sell your
shares if you initially purchased Class B shares of the Money Market Fund and
never exchanged those shares for Class B shares of another Heritage mutual fund.
Class B shares are subject to ongoing Rule 12b-1 fees of up to 0.15% of their
average daily net assets. This Rule 12b-1 fee is the same for Class A and Class
C shares.
If you choose to invest in Class B shares, you may pay a sales charge if
you sell those shares within 6 years of purchase. The 6-year period is
calculated based on the period of time Class B shares were held in another
Heritage mutual fund; any time those shares were held in the Money Market Fund
will not be counted for purposes of calculating the CDSC. The CDSC imposed on
sales of Class B shares will be calculated by multiplying the original purchase
cost or the current market value of the shares being sold, whichever is less, by
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<PAGE>
the percentage shown on the following chart. The longer you hold the shares, the
lower the rate of the CDSC. The CDSC may be waived as described below.
----------------------------------------------------------
CLASS B DEFERRED CHARGES
----------------------------------------------------------
Redemption During CDSC on shares being sold
----------------- -------------------------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6 years 0%
----------------------------------------------------------
CLASS C SHARES. You may purchase Class C shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares less than 1 year after
purchase, you may pay a CDSC at the time of sale of 1.00%. You would not have to
pay a CDSC when you sell your shares if you initially purchased Class C shares
of the Money Market Fund and never exchanged those shares for Class C shares of
another Heritage mutual fund.
Class C shares are subject to ongoing Rule 12b-1 fees of up to 0.15% of
their average daily net assets. This Rule 12b-1 fee is the same for Class A and
Class B shares. Class C shares do not convert to any other class of shares.
If you choose to invest in Class C shares, you may pay a sales charge if
you sell your shares less than 1 year after purchase. The 1-year period is
calculated based on the period of time Class C shares were held in another
Heritage mutual fund; any time you held Class C shares of the Money Market Fund
will not be counted for purposes of calculating the CDSC. The CDSC imposed on
sales of Class C shares will be calculated based on the original purchase cost
or the current market value of the shares being sold, whichever is less. The
CDSC may be waived as described below.
SALES CHARGE REDUCTIONS AND WAIVERS
-----------------------------------
We offer ways to reduce or eliminate the CDSC on Class B and Class C
shares. If you think you are eligible, contact Heritage or your financial
advisor for further information.
CDSC WAIVERS. The CDSC for Class B shares and Class C shares currently is
waived if the shares are sold:
o to make certain distributions from retirement plans,
o because of shareholder death or disability (including shareholders
who own shares in joint tenancy with a spouse),
o to make payments through certain sales from a Systematic Withdrawal
Plan, or
o to close out shareholder accounts that do not comply with the
minimum balance requirements.
REINSTATEMENT PRIVILEGE. If you sell shares of a Heritage mutual fund, you
may reinvest some or all of the sales proceeds up to 90 days later in the same
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<PAGE>
share class of any Heritage mutual fund without incurring additional sales
charges. If you paid a CDSC, the reinvested shares will have no holding period
requirement. You must notify your fund if you decide to exercise this privilege.
INVESTMENT PROGRAMS
- -------------------
The options below allow you to invest continually in either fund at
regular intervals.
SYSTEMATIC INVESTMENT OPTIONS
-----------------------------
1. Automatic 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 Individual Retirement Account ("IRA") plans and Roth 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"), Savings Incentive Match Plans for Employees ("SIMPLEs") 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 have not reached age
70 1/2 before the close of the year generally may establish a Heritage 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 taxpayers who are not active participants (and whose
spouses are not active participants, unless their combined adjusted gross income
does not exceed $150,000) in employer-provided retirement plans or who have
adjusted gross income below certain levels. Nevertheless, the Code permits other
16
<PAGE>
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 ) 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
- ----------------
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 Class B shares may be charged a CDSC based on
the amount of time such Class 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 Class C shares may be charged a CDSC
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 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 CDSC for Class B shares and Class 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
17
<PAGE>
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(s) registered to
the account, and personal identification; (2) recording all telephone
transactions; and (3) sending written confirmation of each transaction to the
registered owner. If 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 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 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.
APPLICATION OF CDSC
-------------------
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that carry no CDSC. If
there are not enough of these to meet your request, we will sell those shares
that have the lowest CDSC. There is no CDSC on shares acquired through
reinvestment of dividends and other distributions. However, any period of time
you held Class B or Class C shares of the Money Market Fund will not be counted
for purposes of calculating the CDSC. Class B shares and Class C shares of the
18
<PAGE>
Money Market Fund obtained through an exchange from another Heritage mutual fund
are subject to any applicable CDSC due at redemption.
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 CDSC for Class B shares and Class 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 CDSC for Class B shares and Class 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 CDSC for Class B shares and Class 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 Class A shares, Class B shares or Class C
shares for shares of the corresponding classes of any other Heritage Mutual
Fund. Exchanges of Class A shares that have not been subject to a front-end
sales charge will be subject to a sales charge upon exchange. No CDSC is imposed
when Class B shares and Class 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."
19
<PAGE>
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
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
- ----------------------------
Class B shares of each fund automatically will convert to Class 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 Class
B shares occurs. For the purpose of calculating the holding period required for
conversion of Class B shares, the date of initial issuance shall mean (1) the
date on which such Class B shares were issued or (2) for Class B shares obtained
through an exchange, or a series of exchanges, the date on which the original
Class B shares were issued. For purposes of conversion to Class A shares, Class
B shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account. Each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares in the sub-account will also convert to Class A shares. The portion will
be determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A shares and Class B shares will not result in
"preferential dividends" under the Code and the conversion of shares does not
constitute a taxable event. If the conversion feature ceased to be available,
the Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class B shares beyond eight years from the
date of purchase. 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 and intends to continue to qualify for favorable tax treatment as a
regulated investment company ("RIC") under the Code. To do so, a fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally, 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 securities limited, in respect of any one issuer, to an amount that
20
<PAGE>
does not exceed 5% of the value of the fund's total assets; and (3) at the close
of each quarter of the fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer. By qualifying for
treatment as a RIC, a fund (but not its shareholders) will be relieved of
federal income tax on the part of its investment company taxable income that it
distributes to its shareholders. If either fund failed to qualify as a RIC for
any taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions, including
distributions that otherwise would qualify as "exempt-interest dividends"
described in the following paragraph, as dividends (that is, ordinary income) to
the extent of the fund's earnings and profits.
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 those 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
21
<PAGE>
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
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.
SHAREHOLDER INFORMATION
- -----------------------
Each share of a fund gives the shareholder one vote in matters submitted
to shareholders for a vote, except that, in matters affecting only one fund,
only shares of that fund are entitled to vote. Each class of shares of the Money
Market Fund has equal voting rights, except that, in matters affecting only a
particular class, only shares of that class are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or a fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of the Trust's outstanding shares.
22
<PAGE>
TRUST INFORMATION
- -----------------
MANAGEMENT OF THE TRUST
-----------------------
BOARD OF TRUSTEES. The business affairs of each fund are managed by or
under the direction of the Trust's Board. The Trustees are responsible for
managing the funds' business affairs and for exercising all the funds' powers
except those reserved to the shareholders. A Trustee may be removed by the other
Trustees or a two-thirds vote of the outstanding Trust's shares.
BACKGROUND OF 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"), Raymond
James & Associates, Inc. ("RJA") or the Manager.
Position
with the Principal Occupation
Name Trust During Past Five Years
---- -------- ----------------------
Thomas A. James *(56) Trustee Chairman of the Board since
880 Carillon Parkway 1986 and Chief Executive
St. Petersburg, FL 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 *(49) Trustee Executive Vice President and
880 Carillon Parkway Managing Director for Asset
St. Petersburg, FL 33716 Management of RJF since 1998,
Chief Executive Officer of
Eagle since 1996, President,
of Eagle 1995 to present, Chief
Operating Officer of Eagle,
1988 to 1995, Executive Vice
President, 1988 to 1993.
Donald W. Burton *(54) Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
Tampa, FL 33606
C. Andrew Graham (58) Trustee Vice President of Financial
Financial Designs, Ltd. Designs Ltd. since 1992;
1775 Sherman Street Executive Vice President of the
Suite 1900 Madison Group, Inc., 1991 to
Denver, CO 80203 1992; Principal of First
Denver Financial Corporation
(investment banking) since
1987.
23
<PAGE>
Position
with the Principal Occupation
Name Trust During Past Five Years
---- -------- ----------------------
David M. Phillips (60) 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 (65) Trustee Litigation Consultant/Expert
1975 Evening Star Drive Witness and private investor
Park City, Utah 84060 since 1988.
James L. Pappas (55) 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 (39) 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 (52) Vice Senior Vice President and
880 Carillon Parkway President Director of Fixed Income
St. Petersburg, FL 33716 Investments of the Manager
since 1993; Vice President
of Mortgage Products of
Donaldson, Lufkin & Jenrette,
1990 to 1992.
Donald H. Glassman (41) Treasurer Treasurer of the Manager since
880 Carillon Parkway 1989; Treasurer of Heritage
St. Petersburg, FL 33716 Mutual Funds since 1989.
Clifford J. Alexander (55) Secretary Partner, Kirkpatrick &
1800 Massachusetts Ave. Lockhart LLP (law firm).
Washington, DC 20036
Patricia Schneider (58) Assistant Compliance Administrator of
880 Carillon Parkway Secretary the Manager.
St. Petersburg, FL 33716
24
<PAGE>
Position
with the Principal Occupation
Name Trust During Past Five Years
---- -------- ----------------------
Robert J. Zutz (45) Assistant Partner, Kirkpatrick &
1800 Massachusetts Ave. Secretary Lockhart 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. 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 calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Name of Person, Aggregate Pension or Estimated Total Compensation
Position Compensation Retirement Annual From the Trust and
-------- From the Trust Benefits Accrued Benefits Upon the Heritage Family
-------------- as Part of the Retirement of Funds*
Trust's Expenses ---------- Paid to Trustees
---------------- ----------------
<S> <C> <C> <C> <C>
Donald W. Burton, Trustee $3,333.28 $0 $0 $20,833
C. Andrew Graham, Trustee $3,333.28 $0 $0 $20,833
Thomas A. James, Trustee $0 $0 $0 $0
James L. Pappas, Trustee $3,333.28 $0 $0 $20,833
David M. Phillips, $2,833.29 $0 $0 $20,833
Trustee
Richard K. Riess, Trustee $0 $0 $0 $0
Eric Stattin, Trustee $3,333.28 $0 $0 $20,833
</TABLE>
- ------------------
* The Heritage Mutual Funds consist of six separate registered investment
companies, including the Trust.
25
<PAGE>
FIVE PERCENT SHAREHOLDERS
-------------------------
As of December 15, 1998, the following shareholders owned of record, or
were known by the Trust to own beneficially, five percent or more of the
outstanding Class B or Class C shares of the Money Market Fund:
Class B Shares Class C Shares:
Raymond James & Assoc., Inc. (5.05%) National Financial Services Corp.
Cust. Marguerite P. Williamson (5.36%)
5001 Hampton Lake Dr. FAO Richard A Dye, Trstee.
Marietta, GA 30068 Richard A. Dye Trust
120 E. De La Guerra
Santa Barbara, CA 93101
Raymond James & Assoc., Inc. (12.05%) Raymond James & Assoc., Inc. (6.24%)
Cust. Herbert J. Salisbury Cust. Kathy J. Thompson
6380 E. U. V. Ave. 3396 Applecross
Vicksburg, MI 49097 Las Cruces, NM 88005
Daniel J. Allen & Denise Allen (6.16%) Raymond James & Assoc., Inc. (10.99%)
824 SE Degan Dr. Cust. Frank S. Vignieri
Port Saint Lucie, FL 34983 P.O. Box 12749
St. Petersburg, FL 33733
Richard L. Kennedy
FAO Ann M. Kennedy (65.24%)*
142 Oley Furnace Rd.
Fleetwood, PA 19522
* As a shareholder owning more than 25% of the voting securities of the Class B
shares of the Money Market Fund, this person may determine the outcome of any
matter affecting, and voted on by shareholders of, that class.
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
26
<PAGE>
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 (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)
the majority vote of either the full Board 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 shown in the charts below.
MONEY MARKET FUND MUNICIPAL FUND
- --------------------------------------------------------------------------------
Advisory Fee as % Advisory Fee as %
Average Daily Net of Average Daily Average Daily Net of Average Daily
Assets Net Assets Assets Net Assets
- --------------------------------------------------------------------------------
First $500 million .500% First $250 million .500%
Second $500 million .475% Second $250 million .475%
Third $500 million .450% Third $250 million .450%
Fourth $500 million .425% Fourth $250 million .425%
Fifth $500 million .400% Over $1 billion .400%
Over $2.5 billion .375%
- --------------------------------------------------------------------------------
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 Class 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, 1998, the Manager earned from the Money Market Fund
$7,253,924, $8,891,273 and $10,209,544, respectively. The Municipal Fund paid
the Manager for the three fiscal years ended August 31, 1998, fees of
$1,538,074, $1,831,037 and $2,380,492, respectively.
27
<PAGE>
The Manager reserves the right to discontinue any voluntary waiver of its
fees or reimbursement to a fund in the future. The Manager also may recover
advisory fees waived in the two previous years. The Manager and the Distributor
also are authorized to use the fees paid to them by each fund to compensate
third parties who agree to provide administrative or shareholder services to the
funds. The Manager also may compensate the Distributor or participating dealers
or banks for providing certain administrative or shareholder services to each
fund.
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.
Under the Subadvisory Agreement, the Subadviser will receive fees payable by the
Manager equal to .125% of the fund's average daily net assets up to $100
million, .10% of average daily net assets from $100 million to $250 million and
.05% of average daily net assets exceeding $250 million.
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 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 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, 1996, 1997 and 1998, the
Subadviser earned $305,541, $331,906 and $394,220, 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 because money
market instruments generally are traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. In transactions
with underwriters, 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
28
<PAGE>
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 may determine, the
Manager or Subadviser may consider sales of shares of the funds (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 funds.
DISTRIBUTION OF SHARES
----------------------
The Distributor and Financial Advisors 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, 1998, these fees
amounted to $3,358,905 for the Class A shares of Money Market Fund and $732,661
for Class A shares of the Municipal Fund. For the period January 2, 1998 (first
offering of the Class B shares) to August 31, 1998, these fees amounted to $25
for the Class B shares of the Money Market Fund. For the fiscal year ended
29
<PAGE>
August 31, 1998, these fees amounted to $899 for Class C shares of the Money
Market Fund. All of these fees were used by the funds for payments to the
Distributor.
In reporting amounts expended for the Money Market Fund under the
Distribution Plan to the Board, the Distributor will allocate expenses
attributable to the sale of Class A shares, Class B shares and Class 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,
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 reviews quarterly a written report of Plan costs and the
purposes for which such costs have been incurred. A Plan may be amended by vote
of the Board, including a majority of the 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 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, 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 State Street Bank and
Trust Company, the funds' 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.
30
<PAGE>
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 fiscal year ended August 31, 1996, the Manager earned
$40,168 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. For the fiscal
year ended August 31, 1998, the Manager earned $42,357 and $45,923 for such
services from the Money Market Fund and 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
that appear in this SAI have been audited by PricewaterhouseCoopers LLP, and are
included herein in reliance upon the report of said firm of accountants, which
is given upon their authority as experts in accounting and auditing.
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 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.
31
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
COMMERCIAL PAPER
MOODY'S. Moody's 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 charge may occur. Alternate means of financing
remain assured.
STANDARD & POOR'S. S&P 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.
CORPORATE DEBT
--------------
MOODY'S. Moody's 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.
A-1
<PAGE>
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. S&P describes its investment grade ratings for
corporate bonds as follows: Ratings of AAA are the highest assigned by S&P 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
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:
A-2
<PAGE>
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.
A-3
<PAGE>
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
<PAGE>
REPORTS OF THE INDEPENDENT ACCOUNTANTS & FINANCIAL STATEMENTS
The Reports of Independent Accountants and Financial Statements are
incorporated herein by reference from each Fund's Annual Report to Shareholders
for the fiscal year ended August 31, 1998, filed with the Securities and
Exchange Commission on October 30, 1998, Accession No. 0000950144-98-011802
(Money Market Fund) and Accession No.
0000950144-98-011801 (Municipal Fund).
A-5
