HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") dated January 3, 2000,
should be read with the Prospectus of Heritage Cash Trust-Money Market and
Municipal Money Market Funds, dated January 3, 2000. 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..........................................................13
INVESTING IN THE FUNDS......................................................14
INVESTMENT PROGRAMS.........................................................17
Systematic Investment Options.........................................17
Retirement Plans......................................................17
REDEEMING SHARES............................................................18
Systematic Withdrawal Plan............................................18
Telephone Transactions................................................19
Redemptions in Kind...................................................19
Receiving Payment.....................................................19
Application of CDSC...................................................20
EXCHANGE PRIVILEGE..........................................................21
CONVERSION OF CLASS B SHARES................................................21
TAXES.......................................................................22
SHAREHOLDER INFORMATION.....................................................24
TRUST INFORMATION...........................................................24
Management of the Trust...............................................24
Five Percent Shareholders.............................................27
Investment Adviser and Administrator; Subadviser......................28
Portfolio Transactions................................................30
Distribution of Shares................................................31
Administration of the Funds...........................................32
Potential Liability...................................................33
APPENDIX...................................................................A-1
FINANCIAL STATEMENTS & REPORTS OF INDEPENDENT ACCOUNTANTS..................A-5
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GENERAL INFORMATION
Heritage Cash Trust (the "Trust") was established as a Massachusetts
business trust under a Declaration of Trust dated June 21, 1985. The Trust 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. Maturities on bankers'
acceptances that are eligible for purchase at times extend to nine months, but
more commonly range from 30 to 180 days.
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.
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The Money Market Fund may invest in commercial paper, including U.S.
dollar-denominated commercial paper of foreign issuers provided the paper is
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 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.
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.
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
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"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.
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.
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
Treasury bills, Treasury notes and Treasury bonds, Federal Home Loan Banks'
obligations, Federal Intermediate Credit Banks' obligations, U.S. Government
agency obligations and repurchase agreements secured thereby. U.S. Government
securities may be issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, supported by the issuer's right to borrow from the U.S.
Treasury or supported by the issuer's credit.
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
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securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of the funds, such as cash, U.S. Government securities or other liquid
high-grade debt obligations, which will be marked to market daily, sufficient to
make payment for the securities to be purchased, will be segregated by the
funds' custodian on the funds' records at the trade date and maintained until
the transaction settles. In when-issued and delayed-delivery transactions, a
fund relies on the seller to complete the transaction. The seller's failure to
perform may cause a fund to miss a price or yield considered to be advantageous.
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
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requirements. In addition, less information may be publicly available about a
foreign branch of a domestic bank or a foreign bank than a domestic bank.
Yankee certificates may be general obligations of the parent bank in
addition to the issuing branch or may be limited by the terms of a specific
obligation and by federal and state regulation as well as governmental action in
the country in which the foreign bank has its head office. The deposits of
state-licensed domestic branches of foreign banks may not necessarily be insured
by the 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.
INVESTMENT COMPANIES. The fund may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. Investments in the securities of other
investment companies may involve duplication of advisory fees and certain other
expenses. By investing in another investment company, a fund becomes a
shareholder of that investment company. As a result, a fund's shareholders
indirectly bear the fund's proportionate share of the fees and expenses paid by
the shareholders of the other investment company, in addition to the fees and
expenses fund shareholders directly bear in connection with the fund's own
operations.
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.
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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.
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
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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
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
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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."
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
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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.
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
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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.
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,
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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.
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
The 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 as of the close of
regular trading on the New York Stock Exchange (the "Exchange") immediately
after the daily declaration of dividends, each day the Exchange is open for
business. The Exchange normally is open for business Monday through Friday
except the following holidays: New Year's Day, Martin Luther King's Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
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The funds are open for business on days on which the Exchange is open
(each a "Business Day"). 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.
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
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.
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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.
The Board may suspend the right of redemption or postpone payment for more
than seven days at times (1) during which the Exchange is closed other than for
the customary weekend and holiday closings, (2) during which trading on the
Exchange is restricted as determined by the SEC, (3) during which an emergency
exists as a result of which disposal by the funds of securities owned by them is
not reasonably practicable or it is not reasonably practicable for the funds
fairly to determine the value of their net assets or (4) for such other periods
as the SEC may by order permit for the protection of the holders of Class A
shares, Class B shares and Class C shares.
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, 1999, the Money Market Fund's
current and effective yields for each share class were 4.52% and 4.62%,
respectively.
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
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the Municipal Fund's yield (or effective yield, as the case may be) that is
tax-exempt by 1 minus a stated income tax rate and adding the product to that
portion, if any, of the Municipal Fund's yield that is not tax-exempt, according
to the following formula:
TAX = EQUIVALENT YIELD = [E DIVIDED BY 1 - P] + t
where E = the portion of yield that is tax-exempt, p = stated income tax rate,
and t = the portion of yield that is taxable.
For the seven-day period ended August 31, 1999, 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 2.60%, 2.64% and 4.30%,
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 on Business Days. The procedures of purchasing shares
of a fund are explained in the Prospectus under "How to Invest."
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
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cashiering deadline (which varies according to branch location of the customer's
account) will be credited to the brokerage account on the day of receipt.
Deposits made after the daily cashiering deadline of the Distributor's office in
which the deposit is made will be credited to the brokerage account on the next
business day following the day of deposit.
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 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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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.
------------------------------------------------------
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 A, 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 A shares, Class B shares and Class C
shares currently is waived if the shares are sold:
o to make certain distributions from retirement plans,
o because of shareholder death or disability (including shareholders who
own shares in joint tenancy with a spouse),
o to make payments through certain sales from a Systematic Withdrawal
Plan of up to 12% annually of the account balance at the beginning of
the plan, or
o to close out shareholder accounts that do not comply with the minimum
balance requirements.
REINSTATEMENT PRIVILEGE. If you sell shares of a Heritage mutual fund, you
may reinvest some or all of the sales proceeds up to 90 days later in the same
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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. 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 either 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
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 in employer-provided retirement plans or who
have adjusted gross income below certain levels. Nevertheless, the Code permits
other individuals to make nondeductible IRA contributions up to $2,000 per year
(or $4,000, if such contributions also are made for a nonworking spouse and a
joint return is filed). In addition, individuals whose earnings (together with
their spouse's earnings) do not exceed a certain level may establish an
"education IRA" and/or a "Roth IRA"; although contributions to these types of
IRAs are nondeductible, withdrawals from them will not be taxable under certain
circumstances. A Heritage IRA also may be used for certain "rollovers" from
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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 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.
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. The Systematic Withdrawal Plan currently is not
available for shares held in an IRA, Section 403(b) annuity plan, defined
contribution plan, simplified employee pension plan or other retirement plan,
unless the shareholder establishes to 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.
Redemptions will be made at net asset value determined as of the close of
regular trading on the Exchange on a day of each month selected by the
shareholder or a day of the last month of each period chosen by the shareholder,
whichever is applicable. 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"). If the Exchange is not open for business on that day, the
shares will be redeemed at net asset value determined as of the close of regular
trading on the Exchange on the preceding Business Day, minus any applicable CDSC
for Class B shares and Class C shares. If a shareholder elects to participate in
the Systematic Withdrawal Plan, dividends on all shares in the account must be
reinvested automatically in fund shares. A shareholder may terminate the
Systematic Withdrawal Plan at any time without charge or penalty by giving
written notice to 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. These payments are taxable to the extent that the total amount of the
payments exceeds the tax basis of the shares sold. If the periodic withdrawals
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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 deems 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.
RECEIVING PAYMENT
If a request for redemption is received by a fund before the closing or
regular trading on the Exchange (usually 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 as of 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
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request for redemption is received in good order (as described below) before the
close of regular trading on the Exchange, shares will be redeemed at the net
asset value per share determined on that day, minus any applicable CDSC for
Class B shares and Class C shares. Requests for redemption received after the
close of regular trading on the Exchange will be executed on the next trading
day. Payment for shares redeemed normally will be made by 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.
A redemption request will be considered to be received in "good order" if:
o the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
o any written request is signed by a shareholder and by all co-owners of the
account with exactly the same name or names used in establishing the
account;
o any written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed for
transfer exactly as the name or names appear on the certificates or an
accompanying stock power has been attached; and
o the signatures on any written redemption request of $50,000 or more and on
any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company or by any member firm of
the New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guarantees also will be accepted from savings banks
and certain other financial institutions that are deemed acceptable by
Heritage, as transfer agent, under its current signature guarantee
program.
The Trust has the right to suspend redemption or postpone payment at times
when the Exchange is closed (other than customary weekend or holiday closings)
or during periods of emergency or other periods as permitted by the Securities
and Exchange Commission. In the case of any such suspension, you may either
withdraw your request for redemption or receive payment based upon the net asset
value next determined, less any applicable CDSC, after the suspension is lifted.
If a redemption check remains outstanding after six months, the Manager reserves
the right to redeposit those funds into your account.
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
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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
Money Market Fund obtained through an exchange from another Heritage mutual fund
are subject to any applicable CDSC due at redemption.
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."
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 a fund automatically will convert to Class A shares of
that fund, based on the relative net asset values per share of the two classes
(normally $1.00 for each Class), eight years after the end of the calendar month
in which the shareholder's order to purchase the Class B share was accepted. For
the purpose of calculating the holding period required for conversion of Class B
shares, the date of purchase order acceptance shall mean (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
21
<PAGE>
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
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. In
addition, a fund could be required to pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
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
22
<PAGE>
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
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.
23
<PAGE>
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.
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 *(57) 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.
24
<PAGE>
Position
with the Principal Occupation
Name Trust During Past Five Years
---- ----- ----------------------
Richard K. Riess *(50) 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 of Eagle, 1988 to
1993.
Donald W. Burton *(55) Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
Tampa, FL 33606
C. Andrew Graham (59) 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.
David M. Phillips (61) 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 (66) Trustee Litigation Consultant/ Expert
1975 Evening Star Drive Witness and private investor
Park City, Utah 84060 since 1988.
James L. Pappas (56) 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.
25
<PAGE>
Position
with the Principal Occupation
Name Trust During Past Five Years
---- ----- ----------------------
Stephen G. Hill (40) 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 (53) 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 (42) Treasurer Treasurer of the Manager since
880 Carillon Parkway 1989; Treasurer of Heritage
St. Petersburg, FL 33716 Mutual Funds since 1989.
Clifford J. Alexander (56) Secretary Partner, Kirkpatrick & Lockhart
1800 Massachusetts Ave. LLP (law firm).
Washington, DC 20036
Robert J. Zutz (46) Assistant Partner, Kirkpatrick & Lockhart
1800 Massachusetts Ave. Secretary LLP (law firm).
Washington, DC 20036
- ------------------
* These Trustees are "interested persons" as defined in section 2(a)(19) of the
1940 Act.
The Trustees and officers of the Trust, as a group, own less than 1% of
the funds' shares outstanding. The Trust's Declaration of Trust provides that
the Trustees will not be liable for errors of judgment or mistakes of fact or
law. However, they are not protected against any liability to which they would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office.
The Trust currently pays Trustees who are not employees of the Manager or
its affiliates $1,334 annually and $500 per meeting of the Board. 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, 1999.
26
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or Retirement Total Compensation From
Name of Person, Aggregate Benefits Accrued as Estimated Annual the Trust and the
Position Compensation Part of the Benefits Upon Heritage Family of Funds*
-------- From the Trust Trust's Expenses Retirement Paid to Trustees
-------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Donald W. Burton, Trustee $3,333.22 $0 $0 $21,666
C. Andrew Graham, Trustee $3,333.22 $0 $0 $21,666
Thomas A. James, Trustee $0 $0 $0 $0
James L. Pappas, Trustee $3,333.22 $0 $0 $21,666
David M. Phillips, Trustee $2,858.87 $0 $0 $18,582
Richard K. Riess, Trustee $0 $0 $0 $0
Eric Stattin, Trustee $3,333.28 $0 $0 $21,666
</TABLE>
- ------------------
* The Heritage Mutual Funds consist of six separate registered investment
companies, including the Trust.
FIVE PERCENT SHAREHOLDERS
As of December 16, 1999, 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. (30.85%)* David M Opas Sr. and Zonetta Trustee
Cust. Paul G. Tyler (8.47%) David M. Opas Sr. Living Trust
83 Murillo Lane 9215 S. Keeler Ave.
Hot Springs Village, AR 71909 Oak Lawn, Il 60453-1920
Heidi Y. Teraguchi (7.93%) Raymond James & Assoc., Inc. (6.57%)
1890 W. 44th Street Cust. Thomas P. Thompson
Cleveland, OH 44113 7449 S. Ogden Way
Littleton, CO 80122
Richard L. Kennedy Raymond James & Assoc., Inc. (6.33%)
FAO Ann M. Kennedy (21.74%) Cust. Richard O. Russell
142 Oley Furnace Rd. P.O. Box 1092
Fleetwood, PA 19522 Cashiers, NC 28717
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<PAGE>
Gustavo and Elisa Bustamante (14.34%)
4855 Whistler Dr.
Orlando, FL 32812-6810
* As a shareholder owning voting securities of the Class B shares of the Money
Market Fund in excess of 25%, 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
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.
28
<PAGE>
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 .73% 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 .73% of the average daily net
assets attributable to that class for this fiscal year. For the three fiscal
years ended August 31, 1999, the Manager earned from the Money Market Fund fees
of $8,891,273, $10,209,544 and $12,586,737, respectively. For the three fiscal
years ended August 31, 1999, the Manager earned from the Municipal Fund fees of
$1,831,037, $2,380,492 and $2,834,414, respectively.
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.
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<PAGE>
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, 1997, 1998 and 1999, the
Subadviser earned $331,906, $394,220 and $444,111, 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
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
30
<PAGE>
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, 1999, these fees
amounted to $4,280,724 for the Class A shares of Money Market Fund and $882,305
for Class A shares of the Municipal Fund. For the same period, these fees
amounted to $559 and $3,412 for the Class B shares and 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.
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<PAGE>
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.
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 three fiscal years ended August 31, 1997, 1998 and
1999, the Manager earned $39,804, $42,357 and $52,415, respectively, from the
Money Market Fund for its services as fund accountant. For the three fiscal
years ended August 31, 1997, 1998 and 1999, the Manager earned $40,935, $45,923
and $50,104, respectively. for such services from the Municipal Fund.
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 of the funds that appear in this SAI
32
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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.
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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
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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
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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
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DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
MOODY'S
Municipal Bonds that are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make long-term
risks appear somewhat larger than in Aaa securities.
Municipal Notes. Moody's ratings for state and municipal notes and other
short-term obligations are designated Moody's Investment Grade ("MIG") and for
variable rate demand obligations are designated Variable Moody's Investment
Grade ("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Notes bearing the designation
MIG-1 or VMIG-1 are of the best quality, enjoying strong protection from
established cash flows for their servicing or from established and broad-based
access to the market for refinancing, or both. Notes bearing the designation
MIG-2 or VMIG-2 are judged to be of high quality, with margins of protection
ample although not so large as in the preceding group.
STANDARD & POOR'S
Municipal Bonds rated AAA by S&P are the highest grade obligations. This
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
Municipal Notes. Municipal notes with maturities of three years or less
are usually given note ratings (designated SP-1, -2, or -3) by S&P to
distinguish more clearly the credit quality of notes as compared to bonds. Notes
rated SP-1 have a very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are given
the designation SP-1+.
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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, 1999, filed with the Securities and
Exchange Commission on October 27, 1999, Accession No. 0000950144-99-012147
(Money Market Fund) and Accession No.
0000950144-99-012146 (Municipal Fund).
A-5
