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STATEMENT OF ADDITIONAL INFORMATION
HERITAGE SERIES TRUST
SMALL CAP STOCK FUND & VALUE EQUITY FUND
This Statement of Additional Information ("SAI") dated March 1,
1996, as supplemented on March 22, 1996, should be read with the
Prospectuses of the Small Cap Stock Fund and Value Equity Fund (each a
"Fund" and collectively, the "Funds") of Heritage Series Trust dated March
1, 1996. This SAI is not a prospectus itself. To receive a copy of
either Fund's 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
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GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Objectives . . . . . . . . . . . . . . . . . . . . 1
Investment Policies . . . . . . . . . . . . . . . . . . . . . 1
Industry Classifications . . . . . . . . . . . . . . . . . . . 8
Hedging Strategies . . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . 18
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 22
INVESTING IN THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . 24
Alternative Purchase Plans . . . . . . . . . . . . . . . . . . 24
Class A Purchases at Net Asset Value . . . . . . . . . . . . . 25
Class A Combined Purchase Privilege
(Right of Accumulation) . . . . . . . . . . . . . . . 25
Class A Statement of Intention . . . . . . . . . . . . . . . . 26
REDEEMING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . . 27
Telephone Transactions . . . . . . . . . . . . . . . . . . . . 28
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . . 28
Receiving Payment . . . . . . . . . . . . . . . . . . . . . . 29
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . 29
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
FUND INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Management of the Funds . . . . . . . . . . . . . . . . . . . 35
Five Percent Shareholders . . . . . . . . . . . . . . . . . . 37
Investment Adviser and Administrator; Subadvisers . . . . . . 37
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . 41
Distribution of Shares . . . . . . . . . . . . . . . . . . . . 43
Administration of the Funds . . . . . . . . . . . . . . . . . 45
Potential Liability . . . . . . . . . . . . . . . . . . . . . 46
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
REPORT OF THE INDEPENDENT ACCOUNTANTS
Small Cap Stock Fund . . . . . . . . . . . . . . . . . . . . A-5
Value Equity Fund . . . . . . . . . . . . . . . . . . . . . A-6
FINANCIAL STATEMENTS
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Small Cap Stock Fund . . . . . . . . . . . . . . . . . . . . A-7
Value Equity Fund . . . . . . . . . . . . . . . . . . . . . A-18
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GENERAL INFORMATION
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Heritage Series Trust (the "Trust") was established as a
Massachusetts business trust under a Declaration of Trust dated
October 28, 1992. It is registered as an open-end diversified management
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Trust consists of four portfolios: the Small Cap
Stock Fund ("Small Cap"), the Value Equity Fund ("Value Equity"), the
Growth Equity Fund and the Eagle International Equity Portfolio. This
Statement of Additional Information ("SAI") relates solely to Small Cap
and Value Equity. Each Fund offers two classes of shares, Class A shares
sold subject to a front-end sales load ("A shares") and Class C shares
sold subject to a contingent deferred sales load ("CDSL") ("C shares").
INVESTMENT INFORMATION
----------------------
Investment Objectives
---------------------
The investment objective of each Fund is stated in its
Prospectus.
Investment Policies
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The following information is in addition to and supplements each
Fund's investment policies set forth in its Prospectus.
American Depository Receipts. Each Fund may invest in sponsored
and unsponsored American Depository Receipts ("ADRs"). ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of
the underlying securities of foreign issuers. Generally, ADRs, in
registered form, are denominated in the same currency as the securities
into which they may be converted. ADRs are subject to many of the risks
inherent in investing in foreign securities, including confiscatory
taxation or nationalization, and less comprehensive disclosure
requirements for the underlying security. In addition, the issuers of the
securities underlying unsponsored ADRs are not obligated to disclose
material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the ADRs.
Bankers' Acceptances. Each Fund may invest in bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds
to pay for specific merchandise. The draft is then "accepted" by a bank
that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset, or it may be sold in the secondary market at
the going rate of interest for a specified maturity. Although maturities
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for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
Certificates of Deposit. Each Fund may invest in bank
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 currently must be limited to $100,000 per
insured bank or savings and loan association. Investments in CDs are made
only with domestic institutions with assets in excess of $1 billion.
Commercial Paper. Each Fund may invest in commercial paper that
is limited to obligations rated Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or A-1 or A-2 by Standard & Poor's Ratings
Services ("S&P"). Commercial paper includes notes, drafts or similar
instruments payable on demand or having a maturity at the time of issuance
not exceeding nine months, exclusive of days of grace or any renewal
thereof. See the Appendix for a description of commercial paper ratings.
Convertible Securities. Each Fund may invest in convertible
securities that are rated as investment grade (rated "BBB" or above by S&P
or "Baa" or above by Moody's) or, if unrated, are deemed to be of
comparable quality by the Fund's investment subadviser. Investment grade
securities rated "BBB" or "Baa" are considered to have some speculative
characteristics. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed-income security. The subadvisers will
decide to invest in convertible securities based upon a fundamental
analysis of the long-term attractiveness of the issuer and the underlying
common stock, the evaluation of the relative attractiveness of the current
price of the underlying common stock, and the judgment of the value of the
convertible security relative to the common stock at current prices.
Convertible securities in which each Fund may invest include corporate
bonds, notes and preferred stock that can be converted into (exchanged
for) common stock. Convertible securities combine the fixed-income
characteristics of bonds and preferred stock with the potential for
capital appreciation. As with all debt securities, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. While convertible
securities generally offer lower interest or dividend yields than
nonconvertible debt securities of similar quality, they do enable the
investor to benefit from increases in the market price of the underlying
common stock.
Debt Securities. Each Fund may invest in debt securities. The
market value of debt securities is influenced primarily by changes in the
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level of interest rates. Generally, as interest rates rise, the market
value of debt securities decreases. Conversely, as interest rates fall,
the market value of debt securities increases. Factors that could result
in a rise in interest rates, and a decrease in the market value of debt
securities, include an increase in inflation or inflation expectations, an
increase in the rate of U.S. economic growth, an increase in the federal
budget deficit or an increase in the price of commodities such as oil.
Foreign Securities. Value Equity may invest up to 15% of its net
assets in foreign securities. It is anticipated that in most cases the
best available market for foreign securities will be on exchanges or in
over-the-counter markets located outside the United States. Foreign stock
markets, while growing in volume and sophistication, generally are not as
developed as those in the United States, and securities of some foreign
issuers (particularly those located in developing countries) may be less
liquid and more volatile than securities of comparable U.S. companies. In
addition, foreign brokerage commissions generally are higher than
commissions on securities traded in the United States. In general, there
is less overall governmental supervision and regulation of securities
exchanges, brokers and listed companies than in the United States.
It is Value Equity's policy not to invest in foreign securities
when there are currency or trading restrictions in force or when, in the
judgment of its subadviser, Eagle Asset Management, Inc. ("Eagle"), such
restrictions are likely to be imposed. However, certain currencies may
become blocked (i.e., not freely available for transfer from a foreign
country), resulting in the possible inability of Value Equity to convert
proceeds realized upon sale of portfolio securities of the affected
foreign companies into U.S. currency.
Because investments in foreign companies usually will involve
currencies of foreign countries, and because Value Equity may temporarily
hold funds in bank deposits in foreign currencies during the completion of
investment programs, the value of Value Equity's assets as measured in
U.S. dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and
Value Equity may incur costs in connection with conversions between
various currencies. Value Equity will conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. In addition, in order
to protect against uncertainty in the level of future exchange rates,
Value Equity may enter into contracts to purchase or sell foreign
currencies at a future date (i.e., a "forward currency contract" or
"forward contract"). See the "Special Risks of Hedging Strategies"
section below under "Hedging Strategies."
Illiquid Securities. As stated in its Prospectus, Value Equity
will not purchase or otherwise acquire any illiquid security if, as a
result, more than 10% of its net assets (taken at current value) would be
invested in securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Similarly, Small Cap will not purchase or otherwise acquire any illiquid
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security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions on resale. Small Cap presently has no intention of investing
more than 5% of its assets in illiquid securities. This policy includes
repurchase agreements maturing in more than seven days.
Over-the-counter ("OTC") options and their underlying collateral
are currently considered to be illiquid investments. Value Equity may
sell OTC options and, in connection therewith, segregate assets or cover
its obligations with respect to OTC options written by Value Equity. The
assets used as cover for OTC options written by Value Equity will be
considered illiquid unless OTC options are sold to qualified dealers who
agree that Value Equity may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure
would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Loans of Portfolio Securities. Value Equity may loan portfolio
securities to qualified broker-dealers. Such loans may be terminated by
Value Equity at any time and the market risk applicable to any security
loaned remains its risk. Although voting rights, or rights to consent,
with respect to the loaned securities pass to the borrower, Value Equity
retains the right to call the loans at any time on reasonable notice, and
it will do so in order that the securities may be voted by it if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. Value Equity also may call such
loans in order to sell the securities involved. The borrower must add to
the collateral whenever the market value of the securities rises above the
level of such collateral. Value Equity could incur a loss if the borrower
should fail financially at a time when the value of the loaned securities
is greater than the collateral. The primary objective of securities
lending is to supplement Value Equity's income through investment of the
cash collateral in short-term interest bearing obligations.
Preferred Stock. Each Fund may invest in preferred stock. A
preferred stock is a blend of the characteristics of a bond and common
stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a
bond and its participation in the issuer's growth is limited. Preferred
stock has preference over common stock in the receipt of dividends and in
any residual assets after payment to creditors should the issuer be
dissolved. Although the dividend is set at a fixed annual rate, it can be
changed or omitted by the issuer at any time.
Repurchase Agreements. Each Fund may invest in repurchase
agreements. A repurchase agreement is a transaction in which a Fund
purchases securities and simultaneously commits to resell the securities
to the original seller (a member bank of the Federal Reserve System or a
securities dealer who is a member of a national securities exchange or is
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a market maker in U.S. Government securities) at an agreed upon date and
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. Although repurchase agreements
carry certain risks not associated with direct investments in securities,
including possible decline in the market value of the underlying
securities and delays and costs to a Fund if the other party to the
repurchase agreement becomes bankrupt, the Funds intend to enter into
repurchase agreements only with banks and dealers in transactions believed
by Heritage Asset Management, Inc. ("Manager") to present minimal credit
risks in accordance with guidelines established by the Trust's Board of
Trustees (the "Board of Trustees" or the "Board").
Reverse Repurchase Agreements. Each Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may
enter into repurchase agreements. Under a reverse repurchase agreement, a
Fund sells securities and agrees to repurchase them at a mutually agreed
to price. At the time a Fund enters into a reverse repurchase agreement,
it will establish and maintain a segregated account with an approved
custodian containing liquid high-grade securities, marked-to-market daily,
having a value not less than the repurchase price (including accrued
interest). Reverse repurchase agreements involve the risk that the market
value of securities retained in lieu of sale by a Fund may decline below
the price of the securities the Fund has sold but is obliged to
repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer
or its trustee or receiver may receive an extension of time to determine
whether to enforce a Fund's obligation to repurchase the securities and a
Fund's use of the proceeds of the reverse repurchase agreement effectively
may be restricted pending such decisions. Reverse repurchase agreements
create leverage, a speculative factor, and are considered borrowings for
the purpose of a Fund's limitation on borrowing.
Risk Factors of High-Yield Securities. Small Cap may invest up
to 5% of its assets, measured at the time of purchase, in securities rated
below investment grade, i.e., rated below BBB or Baa by S&P and Moody's,
respectively, or unrated securities determined to be below investment
grade by the subadviser, commonly referred to as "junk bonds." These
high-yield securities are subject to certain risks that may not be present
with investments of higher grade securities. The following supplements
the disclosure in Small Cap's Prospectus.
Effect of Interest Rate and Economic Changes. The prices
of high-yield securities tend to be less sensitive to interest rate
changes than higher rated investments, but may be more sensitive to
adverse economic changes or individual corporate developments. Periods of
economic uncertainty and changes generally result in increased volatility
in market prices and yields of high-yield securities and, thus, in a
Fund's net asset value. A strong economic downturn or a substantial
period of rising interest rates could affect severely the market for high-
yield securities. In these circumstances, highly leveraged companies
might have difficulty in making principal and interest payments, meeting
projected business goals, and obtaining additional financing. Thus, there
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could be a higher incidence of default. This would affect the value of
such securities and, thus, Small Cap's net asset value. Further, if the
issuer of a security owned by Small Cap defaults, it might incur
additional expenses to seek recovery.
Generally, when interest rates rise, the value of fixed-rate debt
obligations, including high-yield securities, tends to decrease; when
interest rates fall, the value of fixed-rate debt obligations tends to
increase. If an issuer of a high-yield security containing a redemption
or call provision exercises either provision in a declining interest rate
market, Small Cap would have to replace the security, which could result
in a decreased return for shareholders. Conversely, if Small Cap
experiences unexpected net redemptions in a rising interest rate market,
it might be forced to sell certain securities, regardless of investment
merit. This could result in decreasing the assets to which Small Cap's
expenses could be allocated and in a reduced rate of return for it. While
it is impossible to protect entirely against this risk, diversification of
Small Cap's investment portfolio and its subadviser's careful analysis of
prospective investment portfolio securities should minimize the impact of
a decrease in value of a particular security or group of securities in
Small Cap's investment portfolio.
The High-Yield Securities Market. The market for below
investment grade bonds expanded rapidly in the 1980s, and its growth
paralleled a long economic expansion. During that period, the yields on
below investment grade bonds rose dramatically. Such higher yields did
not reflect the value of the income stream that holders of such bonds
expected, but rather the risk that holders of such bonds could lose a
substantial portion of their value as a result of the issuers' financial
restructuring or default. In fact, from 1989 to 1991 during a period of
economic recession, the percentage of lower quality bonds that defaulted
rose significantly, although the default rate decreased in subsequent
years. There can be no assurance that such declines in the below
investment grade market will not reoccur. The market for below investment
grade bonds generally is thinner and less active than that for higher
quality bonds, which may limit Small Cap's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, also may decrease the values and liquidity of lower
rated securities, especially in a thinly traded market.
Credit Ratings. The credit ratings issued by credit
rating services may not reflect fully the true risks of an investment.
For example, credit ratings typically evaluate the safety of principal and
interest payments, not market value risk, of high-yield securities. Also,
credit rating agencies may fail to change timely a credit rating to
reflect changes in economic or company conditions that affect a security's
market value. Although Small Cap's subadviser considers ratings of
recognized rating services such as Moody's and S&P, the subadviser
primarily relies on its own credit analyses, which include a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
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history and the current trend of earnings. Small Cap's subadviser
continually monitors the investments in its respective investment
portfolios and carefully evaluates whether to dispose of or retain high-
yield securities whose credit ratings have changed. See the Appendix for
a description of Moody's and S&P's corporate debt ratings.
Liquidity and Valuation. Lower rated bonds typically are
traded among a smaller number of broker-dealers than in a broad secondary
market. Purchasers of high-yield securities tend to be institutions,
rather than individuals, which is a factor that further limits the
secondary market. To the extent that no established retail secondary
market exists, many high-yield securities may not be as liquid as higher
grade bonds. A less active and thinner market for high-yield securities
than that available for higher quality securities may limit Small Cap's
ability to sell such securities at that fair market value in response to
changes in the economy or the financial markets. The ability of Small Cap
to value or sell high-yield securities also will be affected adversely to
the extent that such securities are thinly traded or illiquid. During
such periods, there may be less reliable objective information available
and thus the responsibility of the Board to value high-yield securities
becomes more difficult, with judgment playing a greater role. Further,
adverse publicity about the economy or a particular issuer may affect
adversely the public's perception of the value, and thus liquidity of a
high-yield security, whether or not such perceptions are based on a
fundamental analysis. See "Net Asset Value."
Standard and Poor's Depository Receipts ("SPDRs"). Value Equity
may invest in SPDRs. SPDRs represent an interest in a fixed portfolio of
common stocks designed to track the price and dividend yield performance
of the Standard & Poor's 500 Composite Stock Price Index. The interests
are sponsored by PDR Services Corporation, a wholly-owned subsidiary of
the American Stock Exchange, and are issued as shares of a unit investment
trust registered under the 1940 Act. Accordingly, Value Equity's
investment in SPDRs is limited by its fundamental investment restriction
regarding investing in other investment companies and by Section 12(d)(1)
of the 1940 Act. Under these limitations, Value Equity may not invest in
SPDRs if such investment would cause it: (1) to own more than 3% of the
outstanding voting stock of other investment company SPDRs; (2) to have
more than 5% of the value of its total assets invested in other investment
companies' SPDRs; or (3) to have more than 10% of its total assets
invested in other investment companies, including SPDRs.
U.S. Government Securities. Each Fund may invest in U.S.
Government securities, including a variety of securities that are issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements secured thereby. These securities include
securities issued and guaranteed by the U.S. Government, such as Treasury
bills, Treasury notes, and Treasury bonds; obligations supported by the
right of the issuer to borrow from the U.S. Treasury, such as those of the
Federal Home Loan Banks; and obligations supported only by the credit of
the issuer, such as those of the Federal Intermediate Credit Banks.
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Warrants. Each Fund may purchase warrants, which are instruments
that permit a Fund to acquire, by subscription, the capital stock of a
corporation at a set price, regardless of the market price for such stock.
Warrants may be either perpetual or of limited duration. There is a
greater risk that warrants might drop in value at a faster rate than the
underlying stock. Each Fund's investment in warrants will be limited to
5% of its net assets. Included within that amount, no more than 2% of
either Fund's net assets may be invested in warrants not traded on the New
York or American Stock Exchanges.
Industry Classifications
------------------------
For purposes of determining industry classifications, each 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.
Hedging Strategies
------------------
General Description. Eagle may use a variety of financial
instruments ("Hedging Instruments"), including futures contracts
(sometimes referred to as "futures"), options, options on futures and
forward currency contracts, to attempt to hedge Value Equity's investment
portfolio. Forward currency contracts also may be used to shift Value
Equity's exposure from one foreign currency to another.
Hedging strategies can be broadly categorized as "short hedges"
and "long hedges." A short hedge is the purchase or sale of a Hedging
Instrument intended partially or fully to offset potential declines in the
value of one or more investments held in Value Equity's investment
portfolio. Thus, in a short hedge, Value Equity takes a position in a
Hedging Instrument whose price is expected to move in the opposite
direction of the price of the investment being hedged. A long hedge is
the purchase or sale of a Hedging Instrument intended partially or fully
to offset potential increases in the acquisition cost of one or more
investments that the Fund intends to acquire. Thus, in a long hedge,
Value Equity takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged.
Hedging Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions
that Value Equity owns or intends to acquire. Hedging Instruments on
indices may be used to hedge broad market sectors.
The use of Hedging Instruments is subject to applicable
regulations of the SEC, the exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
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authorities. In addition, Value Equity's ability to use Hedging
Instruments will be limited by tax considerations. See "Taxes."
In addition to the products and strategies described below, Eagle
expects to discover additional opportunities in connection with options,
futures contracts, forward currency contracts and other hedging
techniques. These new opportunities may become available as Eagle
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts, forward
currency contracts or other techniques are developed. Eagle may utilize
these opportunities to the extent that it is consistent with Value
Equity's investment objectives and permitted by Value Equity's investment
limitations and applicable regulatory authorities.
Special Risks of Hedging Strategies. The use of Hedging
Instruments involves special considerations and risks, as described below.
Risks pertaining to particular Hedging Instruments are described in the
sections that follow.
(1) Successful use of most Hedging Instruments
depends upon Eagle's ability to predict movements of the overall
securities, currency and interest rate markets, which requires
different skills than predicting changes in the prices of
individual securities. While Eagle is experienced in the use of
Hedging Instruments, there can be no assurance that any
particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no
correlation, between price movements of a Hedging Instrument and
price movements of the investments being hedged. For example, if
the value of a Hedging Instrument used in a short hedge increased
by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures
on the markets in which Hedging Instruments are traded. The
effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce
risk of loss by wholly or partially offsetting the negative
effect of unfavorable price movements in the investments being
hedged. However, hedging strategies also can reduce opportunity
for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if Value
Equity entered into a short hedge because Eagle projected a
decline in the price of a security in Value Equity's investment
portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the
price of the Hedging Instrument declined by more than the
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increase in the price of the security, Value Equity could suffer
a loss. In either such case, Value Equity would have been in a
better position had it not hedged at all.
(4) As described below, Value Equity might be
required to maintain assets as "cover," maintain segregated
accounts or make margin payments when it takes positions in
Hedging Instruments involving obligations to third parties. If
Value Equity were unable to close out its positions in such
Hedging Instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position
expired or matured. These requirements might impair Value
Equity's ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do
so, or require that Value Equity sell a portfolio security at a
disadvantageous time. Value Equity's ability to close out a
position in a Hedging Instrument prior to expiration or maturity
depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of the
other party to the transaction ("counterparty") to enter into a
transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time
and price that is favorable to Value Equity.
Cover for Hedging Strategies. Some Hedging Instruments expose
Value Equity to an obligation to another party. Value Equity will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies, forward currency
contracts, options or futures contracts or (2) cash and short-term debt
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Value
Equity will comply with SEC guidelines regarding cover for instruments and
will, if the guidelines so require, set aside cash, U.S. Government
securities or other liquid, high-grade debt securities in a segregated
account with State Street Bank and Trust Company, the Funds' custodian
("Custodian"), in the prescribed amount.
Assets used as cover or otherwise set aside cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they
are replaced with other appropriate assets. As a result, the commitment
of a large portion of Value Equity's assets to cover in segregated
accounts could impede Value Equity's ability to meet redemption requests
or other current obligations.
Options, Futures and Options on Futures Trading. Value Equity
may engage in certain options (including options on securities, indices
and currencies, futures and options on futures strategies) in order to
hedge its investments. Certain special characteristics of and risks with
these strategies are discussed below.
Characteristics and Risks of Options Trading. Value
Equity effectively may terminate its right or obligation under an option
- 10 -
<PAGE>
by entering into a closing transaction. If Value Equity wished to
terminate its obligation to purchase or sell securities under a put or
call option it has written, it may purchase a put or call option of the
same series (i.e., an option identical in its terms to the option
previously written); this is known as a closing purchase transaction.
Conversely, in order to terminate its right to purchase or sell under a
call or put option it has purchased, Value Equity may write an option of
the same series as the option held. This is known as a closing sale
transaction. Closing transactions essentially permit Value Equity to
realize profits or limit losses on its options positions prior to the
exercise or expiration of the option. Whether a profit or loss is
realized from a closing transaction depends on the price movement of the
underlying security, index, currency or futures contract and the market
value of the option.
In considering the use of options to hedge, particular note
should be taken of the following:
(1) The value of an option position will reflect, among
other things, the current market price of the underlying
security, index, currency or futures contract, the time remaining
until expiration, the relationship of the exercise price to the
market price, the historical price volatility of the underlying
instrument and general market conditions. For this reason, the
successful use of options as a hedging strategy depends upon
Eagle's ability to forecast the direction of price fluctuations
in the underlying instrument.
(2) At any given time, the exercise price of an option
may be below, equal to or above the current market value of the
underlying instrument. Purchased options that expire unexercised
have no value. Unless an option purchased by Value Equity is
exercised or unless a closing transaction is effected with
respect to that position, a loss will be realized in the amount
of the premium paid.
(3) A position in an exchange-listed option may be
closed out only on an exchange that provides a secondary market
for identical options. Most exchange-listed options relate to
futures contracts, stocks and currencies. The ability to
establish and close out positions on the exchanges is subject to
the maintenance of a liquid secondary market. Closing
transactions may be effected with respect to options traded in
the OTC markets (currently the primary markets of options on debt
securities) only by negotiating directly with the other party to
the option contract, or in a secondary market for the option if
such market exists. Although Value Equity intends to purchase or
write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any specific time.
In such event, it may not be possible to effect closing
transactions with respect to certain options, with the result
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<PAGE>
that Value Equity would have to exercise those options that it
has purchased in order to realize any profit. With respect to
options written by Value Equity, the inability to enter into a
closing transaction may result in material losses to it. For
example, because Value Equity will maintain a covered position
with respect to any call option it writes on a security, it may
not sell the underlying security during the period it is
obligated under such option. This requirement may impair Value
Equity's ability to sell a portfolio security or make an
investment at a time when such a sale or investment might be
advantageous.
(4) Activities in the options market may result in a
higher portfolio turnover rate and additional brokerage costs;
however, Value Equity also may save on commissions by using
options as a hedge rather than buying or selling individual
securities in anticipation of market movements.
(5) The risks of investment in options on indices may be
greater than options on securities or currencies. Because index
options are settled in cash, when Value Equity writes a call on
an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying
securities. Value Equity can offset some of the risk of writing
a call index option by holding a diversified portfolio of
securities similar to those on which the underlying index is
based. However, Value Equity cannot, as a practical matter,
acquire and hold an investment portfolio containing exactly the
same securities as underlie the index and, as a result, bear a
risk that the value of the securities held will vary from the
value of the index.
Even if Value Equity could assemble an investment portfolio that
exactly reproduced the composition of the underlying index, it still would
not be fully covered from a risk standpoint because of the "timing risk"
inherent in writing index options. When an index option is exercised, the
amount of cash that the holder is entitled to receive is determined by the
difference between the exercise price and the closing index level on the
date when the option is exercised. As with other kinds of options, Value
Equity as the call writer will not learn that it has been assigned until
the next business day at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as common stock, because there the
writer's obligation is to deliver the underlying security, not to pay its
value as of a fixed time in the past. So long as the writer already owns
the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since
the exercise date is borne by the exercising holder. In contrast, even if
the writer of an index call holds securities that exactly match the
composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those securities against payment of
the exercise price. Instead, it will be required to pay cash in an amount
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<PAGE>
based on the closing index value on the exercise date. By the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its investment portfolio. This
"timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If Value Equity has purchased an index option and exercises it
before the closing index value for that day is available, it runs the risk
that the level of the underlying index subsequently may change. If such a
change causes the exercised option to fall out-of-the-money, Value Equity
will be required to pay the difference between the closing index value and
the exercise price of the option (times the applicable multiplier) to the
assigned writer.
Guidelines, Characteristics and Risks of Futures and
Options on Futures Trading. Value Equity is required to maintain margin
deposits with brokerage firms through which it buys and sells futures
contracts or writes options on future contracts. Initial margin deposits
vary from contract to contract and are subject to change. Margin balances
will be adjusted daily to reflect unrealized gains and losses on open
contracts. If the price of an open futures or written option position
declines so that Value Equity has market exposure on such contract, the
broker will require Value Equity to deposit variation margin. If the
value of an open futures or written option position increases so that
Value Equity no longer has market exposure on such contract, the broker
will pay any excess variation margin to Value Equity.
Most of the exchanges on which futures contracts and options on
futures are traded limit the amount of fluctuation permitted in futures
and options prices during a single trading day. The daily price limit
establishes the maximum amount that the price of a futures contract or
option may vary either up or down from the previous day's settlement price
at the end of a trading session. Once the daily price limit has been
reached in a particular type of contract, no trades may be made on that
day at a price beyond that limit. The daily price limit governs only
price movement during a particular trading day and therefore does not
limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract and options prices occasionally
have moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures or
options positions and subjecting some traders to substantial losses.
Another risk in employing futures contracts and options as a
hedge is the prospect that prices will correlate imperfectly with the
behavior of cash prices for the following reasons. First, rather than
meeting additional margin deposit requirements, investors may close
contracts through offsetting transactions. Second, the liquidity of the
futures and options markets depends on participants entering into
offsetting transactions rather than making or taking delivery. To the
extent that participants decide to make or take delivery, liquidity in the
futures and options markets could be reduced, thus producing distortion.
Third, from the point of view of speculators, the deposit requirements in
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<PAGE>
the futures and options markets are less onerous than margin requirements
in the securities market. Therefore, increased participation by
speculators in the futures and options markets may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate, currency exchange rate or security price trends by
Eagle may still not result in a successful transaction.
In addition to the risks that apply to all options transactions,
there are several special risks relating to options on futures contracts.
The ability to establish and close out positions in such options will be
subject to the existence of a liquid secondary market. Compared to the
purchase or sale of futures contracts, the purchase of call options on
futures contracts involves less potential risk to Value Equity because the
maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to
Value Equity when the purchase or sale of a futures contract would not,
such as when there is no movement in the price of the underlying
investment.
To the extent that Value Equity enters into futures contracts and
commodity options (including options on futures contracts and options on
foreign currencies traded on a CFTC-regulated exchange) other than for
bona fide hedging purposes (as defined by the CFTC), the aggregate initial
margin and premiums required to establish those positions (excluding the
amount by which options are "in-the-money") will not exceed 5% of the
liquidation value of Value Equity's investment portfolio, after taking
into account unrealized profits and unrealized losses on any contracts
Value Equity has entered into.
Foreign Currency Hedging Strategies -- Risk Factors. Value
Equity may use options and futures on foreign currencies, as described
above, and foreign currency forward contracts, as described below, to
hedge against movements in the values of the foreign currencies in which
Value Equity's securities are denominated. Such currency hedges can
protect against price movements in a security that Value Equity owns or
intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
Value Equity might seek to hedge against changes in the value of
a particular currency when no Hedging Instruments on that currency are
available or such Hedging Instruments are more expensive than certain
other Hedging Instruments. In such cases, Value Equity may hedge against
price movements in that currency by entering into transactions using
Hedging Instruments on another currency or basket of currencies, the
values of which Eagle believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that
movements in the price of the Hedging Instrument will not correlate
perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
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<PAGE>
The value of Hedging Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of
such Hedging Instruments, Value Equity could be disadvantaged by having to
deal in the odd-lot market (generally consisting of transactions of less
than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Quotation information generally is representative of very large
transactions in the interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The interbank market in
foreign currencies is a global, round-the-clock market. To the extent the
U.S. futures markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements might take
place in the underlying markets that cannot be reflected in the markets
for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, Value Equity might be required to accept or make delivery
of the underlying foreign currency in accordance with any U.S. or foreign
regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Combined Transactions. Value Equity may enter into multiple
futures transactions, instead of a single transaction, as part of a single
or combined strategy when, in the opinion of Eagle, it is in the best
interests of Value Equity to do so. A combined transaction usually will
contain elements of risk that are present in each of its component
transactions. Although combined transactions normally are entered into
based on Eagle's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal,
it is possible that the combination instead will increase such risks or
hinder achievement of the portfolio management objective.
Forward Currency Contracts. Value Equity may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed
amount of U.S. dollars or another foreign currency, in an amount not to
exceed 5% of Value Equity's assets. Such transactions may serve as long
hedges -- for example, Value Equity may purchase a forward currency
contract to lock in the U.S. dollar price of a security denominated in a
foreign currency that it intends to acquire. Forward currency contract
transactions also may serve as short hedges -- for example, Value Equity
may sell a forward currency contract to lock in the U.S. dollar equivalent
of the proceeds from the anticipated sale of a security or from a dividend
or interest payment on a security denominated in a foreign currency. In
addition, Value Equity may purchase forward currency contracts to enhance
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<PAGE>
income when Eagle anticipates that the foreign currency will appreciate in
value, but securities denominated in that currency do not present
attractive investment opportunities.
As noted above, Value Equity may seek to hedge against changes in
the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Eagle
believes will have a positive correlation to the values of the currency
being hedged. Use of a different foreign currency magnifies the risk that
movements in the price of forward currency contracts will not correlate or
will correlate unfavorably with the foreign currency being hedged.
In addition, Value Equity may use forward currency contracts to
shift exposure to foreign currency fluctuations from one country to
another. For example, if Value Equity owned securities denominated in a
foreign currency and Eagle believed that currency would decline relative
to another currency, it might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made
in the second foreign currency.
The cost to Value Equity of engaging in forward currency
contracts varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing. Because
forward currency contracts usually are entered into on a principal basis,
no fees or commissions are involved. When Value Equity enters into a
forward currency contract, it relies on the counterparty to make or take
delivery of the underlying currency at the maturity of the contract.
Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, sellers or purchasers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures, by purchasing or selling,
respectively, an instrument identical to the instrument sold or bought.
Secondary markets generally do not exist for forward currency contracts,
with the result that closing transactions generally can be made for
forward currency contracts only by negotiating directly with the
counterparty. Thus, there can be no assurance that Value Equity will in
fact be able to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of the
counterparty, Value Equity might be unable to close out a forward currency
contract at any time prior to maturity. In either event, Value Equity
would continue to be subject to market risk with respect to the position,
and would continue to be required to maintain a position in the securities
or currencies that are the subject of the hedge or to maintain cash or
securities.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because
the value of such securities, measured in the foreign currency, will
change after the foreign currency contract has been established. Thus,
Value Equity might need to purchase or sell foreign currencies in the spot
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<PAGE>
(cash) market to the extent such foreign currencies are not covered by
forward contracts. The projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Value Equity may use the following instruments:
Equity and Debt Security Index Futures Contracts. An index
futures contract is a bilateral agreement pursuant to which one party
agrees to accept, and the other party agrees to make, delivery of an
amount of cash equal to a specified dollar amount times the difference
between the index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical
delivery of the securities comprising the index is made; generally
contracts are closed out prior to the expiration date of the contract.
Value Equity may also purchase and sell options on such futures contracts.
Security and Currency Futures Contracts. A security or currency
futures contract is a bilateral agreement pursuant to which one party
agrees to accept, and the other party agrees to make, delivery of the
specific type of security or currency called for in the contract at a
specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of
securities or currency, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Value
Equity may also purchase and sell options on such futures contracts.
Forward Currency Contracts. A forward currency contract involves
an obligation to purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from the contract date
agreed upon by the parties, at a price set at the time the contract is
entered into.
INVESTMENT LIMITATIONS
----------------------
In addition to the limits disclosed in "Investment Policies," the
Funds are subject to the following investment limitations, which are
fundamental policies and may not be changed without the vote of a majority
of the outstanding voting securities of the applicable Fund. Under the
1940 Act, a "vote of a majority of the outstanding voting securities" of a
Fund means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares present at
a shareholders meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
Diversification. The Funds may not invest, with respect to 75%
of each Fund's total assets, more than 5% of that Fund's assets (valued at
market value) in securities of any one issuer other than the U.S.
Government or its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer.
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<PAGE>
Industry Concentration. The Funds may not purchase securities
if, as a result of such purchase, more than 25% of the value of each
Fund's total assets would be invested in any one industry.
Borrowing Money. The Funds may not borrow money except as a
temporary measure for extraordinary or emergency purposes. The Funds may
enter into reverse repurchase agreements in an amount up to 33 % of the
value of their total assets in order to meet redemption requests without
immediately selling portfolio securities. This latter practice is not for
investment leverage but solely to facilitate management of the investment
portfolio by enabling the Funds to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous. However, a Fund may not purchase additional portfolio
investments once borrowed funds exceed 5% of total assets. When effecting
reverse repurchase agreements, Fund assets in an amount sufficient to make
payment for the obligations to be purchased will be segregated by the
Custodian and on the Funds' records upon execution of the trade and
maintained until the transaction has been settled. During the period any
reverse repurchase agreements are outstanding, to the extent necessary to
assure completion of the reverse repurchase agreements, a Fund will
restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements. Interest paid on borrowed funds will not be available for
investment. The Funds will liquidate any such borrowings as soon as
possible and may not purchase any portfolio instruments while any
borrowings are outstanding (except as described above).
Issuing Senior Securities. The Funds may not issue senior
securities, except as permitted by the investment objective and policies
and investment limitations of that Fund or for Value Equity with respect
to transactions involving options, futures, forward currency contracts or
other financial instruments.
Underwriting. The Funds may not underwrite the securities of
other issuers, except that Value Equity may underwrite to the extent that
in connection with the disposition of portfolio securities, Value Equity
may be deemed to be an underwriter under federal securities laws, and that
Small Cap may invest in securities that are not readily marketable without
registration under the Securities Act of 1933, as amended (the "1933
Act"), if immediately after the making of such investment not more than
15% of the value of Small Cap's net assets (taken at cost) would be so
invested.
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 (including real estate limited partnerships),
except that they may purchase securities issued by companies that invest
in or sponsor such interests and except that Value Equity may purchase and
sell options, futures contracts, forward currency contracts and other
financial instruments.
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<PAGE>
Loans. The Funds may not make loans, except: (1) to the extent
that the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans; (2) that a Fund may enter
into repurchase agreements as permitted under that Fund's investment
policies; and (3) that Value Equity may make loans of portfolio securities
as described in this SAI.
Each Fund has adopted the following additional restrictions
which, together with certain limits described in its Prospectus, may be
changed by the Board of Trustees without shareholder approval in
compliance with applicable law, regulation or regulatory policy.
Investing in Illiquid Securities. Small Cap may not invest more
than 15% and Value Equity may not invest more than 10% of their total
assets in repurchase agreements maturing in more than seven days or in
other illiquid securities, including securities that are illiquid by
virtue of the absence of a readily available market or legal or
contractual restrictions as to resale.
Selling Short and Buying on Margin. The Funds may not sell any
securities short or purchase any securities on margin but may obtain such
short-term credits as may be necessary for clearance of purchases and
sales of securities, and, in addition, Value Equity may make short sales
"against the box" and make margin deposits in connection with its use of
options, futures contracts, forward currency contracts and other financial
instruments.
Investing in Investment Companies. The Funds may not invest in
securities issued by other investment companies, except as permitted under
the 1940 Act and except in connection with the merger, consolidation or
acquisition of all the securities or assets of such an issuer.
Investing in Issuers Whose Securities Are Owned by Officers of
the Fund. The Funds may not purchase or retain the securities of any
issuer if the officers and Trustees of the Trust or the Manager or either
subadviser, Eagle and Awad & Associates ("Awad") (collectively,
"Subadvisers"), who own individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Option Writing. Small Cap may not write put or call options.
Pledging. The Funds may not pledge any securities except that a
Fund may pledge assets having a value of not more than 10% of its total
assets to secure permitted borrowing from banks and except that Value
Equity may pledge its assets in connection with options, futures, forward
currency contracts, forward commitments, when-issued or delayed delivery
securities or other financial instruments.
Unseasoned Issuers. The Funds may not invest more than 5% of the
value of their total assets in securities of issuers (other than
securities issued by the U.S. Government, its agencies or
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<PAGE>
instrumentalities) that, with their predecessors, have been in continuous
operation for less than three years.
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 or net
assets will not result in a violation of such restriction. If at any time
a Fund's borrowings exceed its limitations due to a decline in net assets,
such borrowings will be promptly reduced to the extent necessary to comply
with the limitation.
NET ASSET VALUE
---------------
The net asset values of the A shares and C shares are determined
daily, Monday through Friday, except for New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, as of the close of regular trading on the New York
Stock Exchange (the "Exchange"). Net asset value for each class is
calculated by dividing the value of the total assets of each Fund
attributable to that class, less all liabilities (including accrued
expenses) attributable to that class, by the number of class shares
outstanding, the result being adjusted to the nearest whole cent. A
security listed or traded on the Exchange, or other domestic or foreign
stock exchanges, is valued at its last sales price on the principal
exchange on which it is traded prior to the time when assets are valued.
If no sale is reported at that time or the security is traded in the OTC
market the most recent bid price is used. When market quotations for
options and futures positions held by Value Equity are readily available,
those positions will be valued based upon such quotations. Market
quotations generally will not be available for options traded in the OTC
market. Securities and other assets for which market quotations are not
readily available, or for which market quotes are not deemed to be
reliable, are valued at fair value as determined in good faith by the
Board of Trustees. Securities and other assets in foreign currency and
foreign currency contracts will be valued daily in U.S. dollars at the
foreign currency exchange rates prevailing at the time a Fund calculates
the daily net asset value of each class. Short-term investments having a
maturity of 60 days or less are valued at cost with accrued interest or
discount earned included in interest receivables.
The Funds are open for business on days on which the Exchange is
open (each a "Business Day"). Trading in securities on European and Far
Eastern securities exchanges and OTC markets normally is completed well
before the Funds' close of business on each Business Day. In addition,
European or Far Eastern securities trading may not take place on all
Business Days. Furthermore, trading takes place in various foreign
capital markets on days that are not Business Days and on which the Funds'
net asset value is not calculated. Calculation of net asset value of A
shares and C shares does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities
used in such calculation. The Funds calculate net asset value per share
- 20 -
<PAGE>
and, therefore, effect sales and redemptions, as of the close of trading
on the Exchange each Business Day. If events materially affecting the
value of such securities or other assets occur between the time when their
prices are determined (including their value in U.S. dollars by reference
to foreign currency exchange rates) and the time when the Funds' net asset
value is calculated, such securities and other assets will be valued at
fair value by methods as determined in good faith by or under the
direction of the Board of Trustees.
The Board of Trustees may suspend the right of redemption or
postpone payment for more than seven days at times (1) during which the
Exchange is closed other than for the customary weekend and holiday
closings, (2) during which trading on the Exchange is restricted as
determined by the SEC, (3) during which an emergency exists as a result of
which disposal by the Funds of securities owned by them is not reasonably
practicable or it is not reasonably practical for the Funds fairly to
determine the value of their net assets, or (4) for such other periods as
the SEC may by order permit for the protection of the holders of A shares
and C shares.
PERFORMANCE INFORMATION
-----------------------
The performance data for each class of shares of each Fund quoted
in advertising and other promotional materials represents past performance
and is not intended to indicate future performance. The investment return
and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average
annual total return quotes for each class used in each Fund's advertising
and promotional materials are calculated according to the following
formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at
the end of that period
In calculating the ending redeemable value for A shares, each
Fund's maximum sales load is deducted from the initial $1,000 payment and
all dividends and other distributions by a Fund are assumed to have been
reinvested at net asset value on the reinvestment dates during the period.
Based on this formula, total return, or "T" in the formula above, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending
redeemable value. The average annualized total return for A shares of
Small Cap using this formula for the period May 7, 1993 (commencement of
operations) to October 31, 1995, and for the fiscal year ended October 31,
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<PAGE>
1995, were 12.45% and 18.08%, respectively. The average annualized total
return for C shares of Small Cap using this formula for the period
April 3, 1995 (commencement of C shares) to October 31, 1995 was 19.91%.
The average annualized total return for A shares and C shares for Value
Equity for the respective periods of December 30, 1994 (commencement of
operations) to October 31, 1995 and April 3, 1995 (commencement of C
shares) to October 31, 1995, were 24.36% and 17.35%, respectively.
In connection with communicating its total return to current or
prospective shareholders, each Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services
or to other unmanaged indexes that may assume reinvestment of dividends
but generally do not reflect deductions for administrative and management
costs. In addition, each Fund may from time to time include in
advertising and promotional materials total return figures that are not
calculated according to the formula set forth above for each class of
shares. For example, in comparing a Fund's aggregate total return with
data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc., or with such market indices as the Dow Jones
Industrial Average, and the Standard & Poor's 500 Composite Stock Price
Index, each Fund calculates its cumulative total return for each class for
the specified periods of time by assuming an investment of $10,000 in that
class of shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the
beginning value. The Funds do not, for this purpose, deduct from the
initial value invested any amount representing front-end sales loads
charged on A shares or CDSLs charged on C shares.
Small Cap A shares cumulative returns using this formula for the
period May 7, 1993 (commencement of operations) to October 31, 1994, and
for the fiscal year ended October 31, 1995, were 14.67% and 23.97%,
respectively. The cumulative return for Small Cap C shares for the period
April 3, 1995 (commencement of C shares) to October 31, 1995 was 24.36%.
The cumulative return for Value Equity A shares for the period December
30, 1994 (commencement of operations) to October 31, 1995 was 25.96%. The
cumulative return for Value Equity C shares for the period April 3, 1995
(commencement of C shares) to October 31, 1995 was 17.35%. By not
annualizing the performance and excluding the effect of the front-end
sales load on A shares and the CDSL on C shares, the total return
calculated in this manner simply will reflect the increase in net asset
value per share over a period of time, adjusted for dividends and other
distributions. Calculating total return without taking into account the
sales load or CDSL results in a higher rate of return than calculating
total return net of the front-end sales load.
- 22 -
<PAGE>
INVESTING IN THE FUNDS
----------------------
A shares and C shares are sold at their next determined net asset
value on Business Days. The procedures for purchasing shares of a Fund
are explained in each Fund's Prospectus under "How to Buy Shares."
Alternative Purchase Plans
--------------------------
A shares are sold at their next determined net asset value plus a
front-end sales load on days the Exchange is open for business. C shares
are sold at their next determined net asset value on days the Exchange is
open for business, subject to a 1% CDSL if the investor redeems such
shares within one year. The Manager, as the Funds' transfer agent, will
establish an account with each Fund and will transfer funds to the
Custodian. Normally, orders will be accepted upon receipt of funds and
will be executed at the net asset value determined as of the close of
regular trading on the Exchange on that day plus any applicable sales
load. See "Alternative Purchase Plans" in the Prospectus. The Funds
reserve the right to reject any order for Fund shares. The Funds'
distributor, Raymond James & Associates, Inc. ("RJA" or the "Distributor")
has agreed that it will hold a Fund harmless in the event of loss as a
result of cancellation of trades in Fund shares by the Distributor, its
affiliates or its customers.
Class A Purchases at Net Asset Value
------------------------------------
Cities, counties, states or instrumentalities and their
departments, authorities or agencies are able to purchase A shares at net
asset value as long as certain conditions are met: the governmental
entity is prohibited by applicable investment laws, codes or regulations
from paying a sales load in connection with the purchase of shares of a
registered investment company; the governmental entity has determined that
such A shares are a legally permissible investment; and any relevant
minimum purchase amounts are met.
In the instance of discretionary fiduciary assets or trusts, or
Class A purchases by a governmental entity through a registered broker-
dealer with which the Distributor has a dealer agreement, the Manager may
make a payment out of its own resources to the Distributor, who may
reallow the payment to the selling broker-dealer. However, the
Distributor and the selling broker-dealer may be required to reimburse the
Manager for these payments if investors redeem A shares within specified
periods.
Class A Combined Purchase Privilege (Right of Accumulation)
-----------------------------------------------------------
Certain investors may qualify for the Class A sales load
reductions indicated in the sales load schedule in each Fund's Prospectus
- 23 -
<PAGE>
by combining purchases of A shares into a single "purchase," if the
resulting purchase totals at least $25,000. The term "purchase" refers to
a single purchase by an individual, or to concurrent purchases that, in
the aggregate, are at least equal to the prescribed amounts, by an
individual, his spouse and their children under the age of 21 years
purchasing A shares for his or their own account; a single purchase by a
trustee or other fiduciary purchasing A shares for a single trust, estate
or single fiduciary account although more than one beneficiary is
involved; or a single purchase for the employee benefit plans of a single
employer. The term "purchase" also includes purchases by a "company," as
the term is defined in the 1940 Act, but does not include purchases by any
such company that has not been in existence for at least six months or
that has no purpose other than the purchase of A shares or shares of other
registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit card
holders of a company, policy holders of an insurance company, customers of
either a bank or broker-dealer, or clients of an investment adviser.
The applicable A shares initial sales load will be based on the
total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all A shares of a Fund held by the
investor and (b) all A shares of any other mutual fund advised or
administered by the Manager ("Heritage Mutual Fund") held by the
investor and purchased at a time when A shares of such other fund
were distributed subject to a sales load (including Heritage Cash
Trust shares acquired by exchange); and
(iii) the net asset value of all A shares described in
paragraph (ii) owned by another shareholder eligible to combine
his purchase with that of the investor into a single "purchase."
A shares of Heritage Income Trust-Intermediate Government Fund
("Intermediate Government") (formerly Heritage Income Trust-Limited
Maturity Portfolio) purchased from February 1, 1992 through July 31, 1992,
without payment of a sales load will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
subject to a sales load, unless those shares were acquired through an
exchange of other shares that were subject to a sales load.
Class A Statement of Intention
------------------------------
Investors also may obtain the reduced sales loads shown in each
Fund's Prospectus by means of a written Statement of Intention, which
expresses the investor's intention to invest not less than $25,000 within
a period of 13 months in A shares of a Fund or any other Heritage Mutual
Fund. Each purchase of A shares under a Statement of Intention will be
- 24 -
<PAGE>
made at the public offering price or prices applicable at the time of such
purchase to a single transaction of the dollar amount indicated in the
Statement. At the investor's option, a Statement of Intention may include
purchases of A shares of a Fund or any other Heritage Mutual Fund made not
more than 90 days prior to the date that the investor signs a Statement of
Intention. However, the 13-month period during which the Statement is in
effect will begin on the date of the earliest purchase to be included.
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Statement of Intention is 5% of such amount. A shares
purchased with the first 5% of such amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales load applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed A shares will be
redeemed involuntarily to pay the additional sales load, if necessary.
When the full amount indicated has been purchased, the escrow will be
released. To the extent an investor purchases more than the dollar amount
indicated on the Statement of Intention and qualifies for a further
reduced sales load, the sales load will be adjusted for the entire amount
purchased at the end of the 13-month period. The difference in sales load
will be used to purchase additional A shares subject to the rate of sales
load applicable to the actual amount of the aggregate purchases. An
investor may amend his/her Statement of Intention to increase the
indicated dollar amount and begin a new 13-month period. In that case,
all investments subsequent to the amendment will be made at the sales load
in effect for the higher amount. The escrow procedures discussed above
will apply.
REDEEMING SHARES
----------------
The methods of redemption are described in the section of each
Fund's Prospectus entitled "How to Redeem Shares."
Systematic Withdrawal Plan
--------------------------
Shareholders may elect to make systematic withdrawals from a Fund
account of a minimum of $50 on a periodic basis as set forth in each
Fund's Prospectus under "How to Redeem Shares--Systematic Withdrawal
Plan." The amounts paid each period are obtained by redeeming sufficient
shares from an account to provide the withdrawal amount specified. The
Systematic Withdrawal Plan currently is not available for shares held in
an individual retirement account, Section 403(b) annuity plan, defined
contribution plan, simplified employee pension plan, or other retirement
plans, unless the shareholder establishes to 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.
- 25 -
<PAGE>
Redemptions will be made at net asset value determined as of the
close of regular trading on the Exchange on the 10th day of each month or
the 10th day of the last month of each period, whichever is applicable.
Systematic withdrawals of C shares, if made within one year of the date of
purchase, will be charged a CDSL of 1%. If the Exchange is not open for
business on that day, the shares will be redeemed at net asset value
determined as of the close of regular trading on the Exchange on the
preceding Business Day, minus any applicable CDSL for C shares. The check
for the withdrawal payment usually will be mailed on the next Business Day
following redemption. If a shareholder elects to participate in the
Systematic Withdrawal Plan, dividends and other distributions on all
shares in the account must be reinvested automatically in Fund shares. A
shareholder may terminate the Systematic Withdrawal Plan at any time
without charge or penalty by giving written notice to the Manager or the
Distributor. The Funds, and the transfer agent and Distributor also
reserve the right to modify or terminate the Systematic Withdrawal Plan at
any time.
Withdrawal payments are treated as a sale of shares rather than
as a dividend or a capital gain distribution. These payments are taxable
to the extent that the total amount of the payments exceeds the tax basis
of the shares sold. If the periodic withdrawals exceed reinvested
dividends and other distributions, the amount of the original investment
may be correspondingly reduced.
Ordinarily, a shareholder should not purchase additional A shares
of a Fund if maintaining a Systematic Withdrawal Plan of A shares because
the shareholder may incur tax liabilities in connection with such
purchases and withdrawals. A Fund will not knowingly accept purchase
orders from shareholders for additional A shares if they maintain a
Systematic Withdrawal Plan unless the purchase is equal to at least one
year's scheduled withdrawals. In addition, a shareholder who maintains
such a Plan may not make periodic investments under each Fund's Automatic
Investment Plan.
Telephone Transactions
----------------------
Shareholders may redeem shares by placing a telephone request to
a Fund. A Fund, its Manager, the Distributor and their Trustees,
directors, officers and employees are not liable for any loss arising out
of telephone instructions they reasonably believe are authentic. In
acting upon telephone instructions, these parties use procedures that are
reasonably designed to ensure that such instructions are genuine, such as
(1) obtaining some or all of the following information: account number,
name(s) and social security number registered to the account, and personal
identification; (2) recording all telephone transactions; and (3) sending
written confirmation of each transaction to the registered owner. This
policy places the entire risk of loss for unauthorized, fraudulent
transactions on the shareholders, except that if a Fund, its Manager, the
Distributor and their Trustees, directors, officers and employees do not
- 26 -
<PAGE>
follow reasonable procedures, some or all of them may be liable for any
such losses.
Redemptions in Kind
-------------------
A Fund is obligated to redeem shares for any shareholder for cash
during any 90-day period up to $250,000 or 1% of that Fund's net asset
value, whichever is less. Any redemption beyond this amount also will be
in cash unless the Board of Trustees determine that further cash payments
will have a material adverse effect on remaining shareholders. In such a
case, a Fund will pay all or a portion of the remainder of the redemption
in portfolio instruments, valued in the same way as each Fund determines
net asset value. The portfolio instruments will be selected in a manner
that the Board of Trustees deem fair and equitable. A redemption in kind
is not as liquid as a cash redemption. If a redemption is made in kind, a
shareholder receiving portfolio instruments could receive less than the
redemption value thereof and could incur certain transaction costs.
Receiving Payment
-----------------
If a request for redemption is received by a Fund in good order
(as described in each Prospectus) before the close of regular trading on
the Exchange, the shares will be redeemed at the net asset value per share
determined at such close, minus any applicable CDSL for C shares.
Requests for redemption received by a Fund after the close of regular
trading on the Exchange will be executed at the net asset value determined
as of the close of such trading on the next trading day, minus any
applicable CDSL for C shares.
If shares of a Fund are redeemed by a shareholder through the
Distributor or a participating dealer, the redemption is settled with the
shareholder as an ordinary transaction. If a request for redemption is
received before the close of regular trading on the Exchange, shares will
be redeemed at the net asset value per share determined on that day, minus
any applicable CDSL for C shares. Requests for redemption received after
the close of regular trading on the Exchange will be executed on the next
trading day. Payment for shares redeemed normally will be made by a Fund
to the Distributor or a participating dealer by the third business day
after the day the redemption request was made, provided that certificates
for shares have been delivered in proper form for transfer to the Fund, or
if no certificates have been issued, a written request signed by the
shareholder has been provided to the Distributor or a participating dealer
prior to settlement date.
Other supporting legal documents may be required from
corporations or other organizations, fiduciaries or persons other than the
shareholder of record making the request for redemption. Questions
concerning the redemption of Fund shares can be directed to registered
representatives of the Distributor or a participating dealer, or to the
Manager.
- 27 -
<PAGE>
EXCHANGE PRIVILEGE
------------------
Shareholders who have held Fund shares for at least 30 days may
exchange some or all of their A shares or C shares for corresponding
classes of shares of any other Heritage Mutual Fund. 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 each Fund's Prospectus and
below.
A shares of Intermediate Government (formerly Heritage Income
Trust-Limited Maturity Portfolio) purchased from February 1, 1992 through
July 31, 1992, without payment of an initial sales load may be exchanged
into A shares of a Fund without payment of any sales load. A shares of
Intermediate Government purchased after July 31, 1992 without an initial
sales load will be subject to a sales load when exchanged into A shares of
a Fund, unless those shares were acquired through an exchange of other A
shares that were subject to an initial sales load.
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" above.
Telephone exchanges can be effected by calling the Manager at
(800) 421-4184 or by calling a registered representative of the
Distributor, a participating dealer or participating bank
("Representative"). In the event that a shareholder or his Representative
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 the close of regular trading on the
Exchange will be effected at the close of regular trading on that day.
Requests for an exchange received after the close of regular trading will
be effected on the Exchange's next trading day. Due to the volume of
calls or other unusual circumstances, telephone exchanges may be difficult
to implement during certain time periods.
TAXES
-----
General. Each Fund is treated as a separate corporation for
Federal income tax purposes. In order to qualify or continue to qualify
for the favorable tax treatment afforded to a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), each
Fund must distribute annually to its shareholders at least 90% of its
- 28 -
<PAGE>
investment company taxable income (generally consisting of net investment
income, net short-term capital gain and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. With respect to each Fund, these requirements
include the following: (1) the Fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from
options, futures or forward currency contracts) derived with respect to
its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any
of the following, that were held for less than three months -- options or
futures (other than those on foreign currencies), or foreign currencies
(or options, futures or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or
options and futures with respect thereto) ("Short-Short Limitation"); (3)
at the close of each quarter of the Fund's taxable year, at least 50% of
the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities,
with those other securities limited, in respect of any one issuer, to an
amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (4) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. Government securities or the securities of
other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ending on October 31 of
that year, plus certain other amounts.
A redemption of Fund shares will result in a taxable gain or loss
to the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares (which normally includes any sales load paid on A shares). An
exchange of shares of either Fund for shares of any other Heritage Mutual
Fund (including the other Fund) generally will have similar tax
consequences. However, special rules apply when a shareholder disposes of
shares of a Fund through a redemption or exchange within 90 days after
purchase thereof and subsequently reacquires shares of that Fund or
acquires shares of another Heritage Mutual Fund without paying a sales
load due to the 30-day reinstatement or exchange privilege. In these
cases, any gain on the disposition of the original Fund shares will be
increased, or loss decreased, by the amount of the sales load paid when
those shares were acquired, and that amount will increase the adjusted
basis of the shares subsequently acquired. In addition, if Fund shares
are purchased (whether pursuant to the reinstatement privilege or
otherwise) within 30 days before or after redeeming other shares of that
Fund (regardless of class) at a loss, all or a portion of that loss will
- 29 -
<PAGE>
not be deductible and will increase the basis of the newly purchased
shares.
If shares of a Fund are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of short-
term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
are purchased shortly before the record date for a dividend or other
distribution, the shareholder will pay full price for the shares and
receive some portion of the price back as a taxable distribution.
Income from Foreign Securities. Dividends and interest received
by each Fund may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce the yield on
its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of in-
vestments by foreign investors. If more than 50% of the value of each
Fund's total assets at the close of any taxable year consists of
securities of foreign corporations, it will be eligible to, and may, file
an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign and U.S. possessions income taxes paid by it.
Pursuant to any such election, each Fund would treat those taxes as
dividends paid to its shareholders and each shareholder would be required
to (1) include in gross income, and treat as paid by the shareholder, the
shareholder's proportionate share of those taxes, (2) treat the
shareholder's share of those taxes and of any dividend paid by each Fund
that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the
taxes deemed paid by the shareholder in computing the shareholder's
taxable income or, alternatively, use the foregoing information in calcu-
lating the foreign tax credit against the shareholder's Federal income
tax. Each Fund will report to its shareholders shortly after each taxable
year their respective shares of each Fund's income from sources within,
and taxes paid to, foreign countries and U.S. possessions if it makes this
election.
Value Equity may invest in the stock of "passive foreign invest-
ment companies" ("PFICs"). A PFIC is a foreign corporation that, in
general, meets either of the following tests: (1) at least 75% of its
gross income is passive or (2) an average of at least 50% of its assets
produce, or are held for the production of, passive income. Under certain
circumstances, Value Equity will be subject to Federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of
any gain on disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if Value Equity distributes the PFIC income as a
taxable dividend to its shareholders. The balance of the PFIC income will
be included in Value Equity's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders.
- 30 -
<PAGE>
If Value Equity invests in a PFIC and elects to treat the PFIC as
a "qualified electing fund," then in lieu of the foregoing tax and
interest obligation, Value Equity will be required to include in income
each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term
capital gain over net short-term capital loss) -- which probably would
have to be distributed to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax -- even if those earnings and gain were not
received by Value Equity. In most instances it will be very difficult, if
not impossible, to make this election because of certain requirements
thereof.
Pursuant to proposed regulations, open-end RICs, such as Value
Equity, would be entitled to elect to "mark-to-market" their stock in
certain PFICs. "Marking-to-market," in this context, means recognizing as
gain for each taxable year the excess, as of the end of that year, of the
fair market value of each such PFIC's stock over the adjusted basis in
that stock (including mark-to-market gain for each prior year for which an
election was in effect).
Gains or losses (1) from the disposition of foreign currencies,
(2) from the disposition of debt securities denominated in foreign
currency that are attributable to fluctuations in the value of the foreign
currency between the date of acquisition of each security and the date of
disposition, and (3) that are attributable to fluctuations in exchange
rates that occur between the time Value Equity accrues dividends, interest
or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time Value Equity actually collects the
receivables or pays the liabilities, generally will be treated as ordinary
income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of
Value Equity's investment company taxable income to be distributed to its
shareholders.
Hedging Strategies. The use of hedging strategies, such as
selling (writing) and purchasing options and futures contracts and
entering into forward currency contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition
of the gains and losses Value Equity realizes in connection therewith.
Gains from the disposition of foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by Value Equity
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures
contracts (other than those on foreign currencies) will be subject to the
Short-Short Limitation if they are held for less than three months.
Income from the disposition of foreign currencies, and futures and forward
contracts thereon, that are not directly related to Value Equity's
principal business of investing in securities (or options and futures with
respect to securities) also will be subject to the Short-Short Limitation
if they are held for less than three months.
- 31 -
<PAGE>
If Value Equity satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be offset by
any decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether Value Equity satisfies the Short-Short Limitation. Thus, only the
net gain (if any) from the designated hedge will be included in gross
income for purposes of that limitation. Value Equity will consider
whether it should seek to qualify for this treatment for its hedging
transactions. To the extent Value Equity does not so qualify, it may be
forced to defer the closing out of certain options, futures and forward
currency contracts beyond the time when it otherwise would be advantageous
to do so, in order for Value Equity to continue to qualify as a RIC.
Certain options and futures in which Value Equity may invest will
be "section 1256 contracts." Section 1256 contracts held by Value Equity
at the end of each taxable year, other than section 1256 contracts that
are part of a "mixed straddle" with respect to which it has made an
election not to have the following rules apply, must be "marked-to-market"
(that is, treated as sold for their fair market value) for Federal income
tax purposes, with the result that unrealized gains or losses will be
treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and 60% of any net realized gain or
loss from any actual sales of section 1256 contracts, will be treated as
long-term capital gain or loss, and the balance will be treated as short-
term capital gain or loss. Section 1256 contracts also may be marked-to-
market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the
taxation of options and futures contracts in which Value Equity may
invest. Section 1092 defines a "straddle" as offsetting positions with
respect to personal property; for these purposes, options and futures
contracts are personal property. Section 1092 generally provides that any
loss from the disposition of a position in a straddle may be deducted only
to the extent the loss exceeds the unrealized gain on the offsetting
position(s) of the straddle. Section 1092 also provides certain "wash
sale" rules, which apply to transactions where a position is sold at a
loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If Value Equity makes
certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions would be determined
under rules that vary according to the elections made. Because only a few
of the regulations implementing the straddle rules have been promulgated,
the tax consequences to Value Equity of straddle transactions are not
entirely clear.
- 32 -
<PAGE>
FUND INFORMATION
----------------
Management of the Funds
-----------------------
Trustees and Officers. Trustees and officers are listed below
with their addresses, principal occupations and present positions,
including any affiliation with Raymond James Financial, Inc. ("RJF"), RJA,
the Manager, Eagle and Awad.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
<S> <C> <C>
Thomas A. James* Trustee Chairman of the Board since 1986 and Chief
880 Carillon Parkway Executive Officer since 1969 of RJF;
St. Petersburg, FL Chairman of the Board of RJA since 1986;
33716 Chairman of the Board of Eagle since 1984
and Chief Executive Officer of Eagle since
July 1994.
Richard K. Riess* Trustee President of Eagle, January 1995 to present,
880 Carillon Parkway Chief Operating Officer, July 1988 to
St. Petersburg, FL present, Executive Vice President, July
33716 1988-December 1993; President of Heritage
Mutual Funds, June 1985-November 1991.
Donald W. Burton Trustee President of South Atlantic Capital
614 W. Bay Street Corporation (venture capital) since October
Suite 200 1981.
Tampa, FL 33606
C. Andrew Graham Trustee Vice President of Financial Designs Ltd.
Financial Designs, Ltd. since 1992; Executive Vice President of the
1775 Sherman Street Madison Group, Inc., October 1991-1992;
Suite 1900 Principal of First Denver Financial
Denver, CO 80203 Corporation (investment banking) since 1987.
David M. Phillips Trustee Chairman and Chief Executive Officer of CCC
World Trade Center Information Services, Inc. since 1994 and of
Chicago InfoVest Corporation (information services
444 Merchandise Mart to the insurance and auto industries and
Chicago, IL 60654 consumer households) since October 1982.
- 33 -
<PAGE>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
Eric Stattin Trustee Litigation Consultant/Expert Witness and
2587 Fairway Village private investor since February 1988.
Drive
Park City, UT 84060
James L. Pappas Trustee Dean of College of Business Administration
University of South since August 1987 and Lykes Professor of
Florida Banking and Finance since August 1986 at
College of Business University of South Florida.
Administration
Tampa, FL 33620
Stephen G. Hill President Chief Executive Officer and President of the
880 Carillon Parkway Manager since April 1989 and Director since
St. Petersburg, FL December 31, 1994.
33716
Donald H. Glassman Treasurer Treasurer of the Manager since May 1989;
880 Carillon Parkway Treasurer of Heritage Mutual Funds since May
St. Petersburg, FL 1989.
33716
Clifford J. Alexander Secretary Partner, Kirkpatrick & Lockhart LLP.
1800 Massachusetts
Ave., N.W.
Washington, DC 20036
Patricia Schneider Assistant Compliance Administrator of the Manager.
880 Carillon Parkway Secretary
St. Petersburg, FL
33716
Robert J. Zutz Assistant Partner, Kirkpatrick & Lockhart LLP.
1800 Massachusetts Secretary
Ave., N.W.
Washington, DC 20036
</TABLE>
* These Trustees are "interested persons" as
defined in section 2(a)(19) of the 1940 Act.
The Trustees and officers of the Trust, as a group, own less than
1% of each Fund's 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
- 34 -
<PAGE>
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 "interested
persons" of the Trust $1,333.33 annually and $333.33 per meeting of the
Board of Trustees. Trustees also are reimbursed for any expenses incurred
in attending meetings. Because the Manager performs substantially all of
the services necessary for the operation of each Fund, each Fund requires
no employees. No officer, director or employee of the Manager receives
any compensation from either Fund for acting as a director or officer.
The following table shows the compensation earned by each Trustee for the
fiscal year ended October 31, 1995.
<TABLE>
<CAPTION>
Compensation Table
Total Compensation
From the Trust and
Pension or the Heritage
Aggregate Retirement Benefits Estimated Family of Funds
Name of Person, Compensation From the Accrued as Part of Annual Benefits Paid
Position Trust the Trust's Expenses Upon Retirement to Trustees
--------------- --------------------- -------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Donald W. Burton, $2,333 $0 $0 $14,000
Trustee
C. Andrew Graham, $2,667 $0 $0 $16,000
Trustee
David M. Phillips, $2,333 $0 $0 $14,000
Trustee
Eric Stattin, $2,667 $0 $0 $16,000
Trustee
James L. Pappas, $2,667 $0 $0 $16,000
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
</TABLE>
- 35 -
<PAGE>
Five Percent Shareholders
-------------------------
As of January 31, 1996, SEMA & Co., 100 Wall Street, New York,
New York, 10005, owned 6.26% of the A shares of Small Cap and Julius Baer
& Co. AG, 2 Boulevard du Theatre, Ch 1211, Geneva 4 Switzerland, owned
8.64% of the C shares of Small Cap.
Investment Adviser and Administrator; Subadvisers
-------------------------------------------------
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 cus-
tomers 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 March 29, 1993 and supplemented on March 31,
1993 to include Value Equity, between the Trust on behalf of Small Cap and
Value Equity, respectively, and the Manager, and subject to the control
and direction of the Board of Trustees, the Manager is responsible for
reviewing and establishing investment policies for each Fund and
administering the Funds' noninvestment affairs. Under separate
Subadvisory Agreements, Eagle and Awad each provide investment advice and
portfolio management services, subject to direction by the Manager and the
Board of Trustees, to Small Cap for a fee payable by the Manager. Under a
Subadvisory Agreement, Eagle provides investment advice and portfolio
management services, subject to the direction of the Manager and the Board
of Trustees, to Value Equity for a fee payable by the Manager
(collectively, the "Subadvisory Agreements").
The Manager also is obligated to furnish each Fund with office
space, administrative, and certain other services as well as executive and
other personnel necessary for the operation of a Fund. The Manager and
its affiliates also pay all the compensation of Trustees of the Trust who
are employees of the Manager and its affiliates. Each Fund pays all its
other expenses that are not assumed by the Manager. Each Fund also is
liable for such nonrecurring expenses as may arise, including litigation
to which a Fund may be a party. Each Fund also may have an obligation to
indemnify its Trustees and officers with respect to any such litigation.
The Advisory Agreement and the Subadvisory Agreements each were
approved by the Board of Trustees (including all of the Trustees who are
not "interested persons" of the Manager or Subadvisers, as defined under
the 1940 Act) and by the shareholders of the Trust in compliance with the
1940 Act. Each 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
- 36 -
<PAGE>
of those Trustees who are not "interested persons" of the Manager, the
Subadvisers or the Trust, and by (2) the majority vote of either the full
Board of Trustees or the vote of a majority of the outstanding shares of a
Fund. The Advisory and Subadvisory Agreements each automatically
terminates on assignment, and each is terminable on not more than 60 days'
written notice by the Trust to either party. In addition, the Advisory
Agreement may be terminated on not less than 60 days' written notice by
the Manager to a Fund and the Subadvisory Agreements may be terminated on
not less than 60 days' written notice by the Manager or 90 days' written
notice by the Subadvisers. Under the terms of the Advisory Agreement, the
Manager automatically becomes responsible for the obligations of the
Subadvisers upon termination of the Subadvisory Agreements. In the event
the Manager ceases to be the Manager of a Fund or the Distributor ceases
to be principal distributor of shares of a Fund, the right of a Fund to
use the identifying name of "Heritage" may be withdrawn.
The Manager and the Subadvisers shall not be liable to either
Fund or any shareholder for anything done or omitted by them, except acts
or omissions involving willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties imposed upon them by their agreements
with a Fund or for any losses that may be sustained in the purchase,
holding or sale of any security.
All of the officers of each Fund except for Messrs. Alexander and
Zutz are officers or directors of the Manager. These relationships are
described under "Management of the Funds."
Advisory and Administration Fee. The annual investment advisory
fee paid monthly by each Fund to the Manager is based on the applicable
Fund's average daily net assets as listed in each Fund's Prospectus.
For Small Cap, the Manager has voluntarily agreed to waive its
management fees to the extent that annual operating expenses attributable
to A shares exceed 1.80% of the average daily net assets or to the extent
that annual operating expenses attributable to C shares exceed 2.55% of
average daily net assets attributable to that class during this fiscal
year. To the extent that the Manager waives its fees for one class, it
will waive its fees for the other class on a proportionate basis. The
Manager has entered into an agreement with the Subadvisers to provide
investment advice and portfolio management services to the Fund for a fee
paid by the Manager to each Subadviser equal to 50% of the fees payable to
the Manager by the Fund, without regard to any reduction in fees actually
paid to the Manager as a result of expense limitations. For the period
from May 7, 1993 (commencement of operations) to October 31, 1993 and the
two years ended October 31, 1995, management fees amounted to $156,975,
$416,788 and $465,132, respectively. For the period from May 7, 1993
(commencement of operations) to October 31, 1993, the Manager waived its
fees in the amount of $14,764. This amount was recovered in the fiscal
year ended October 31, 1994. The Research Department of Raymond James &
Associates, Inc. ("Research"), a former subadviser of Small Cap who
resigned as its subadviser on November 20, 1995, received from the Manager
- 37 -
<PAGE>
for the period from May 7, 1993 (commencement of operations) to October
31, 1993, the fiscal year ended October 31, 1994, and November 1, 1995 to
November 20, 1995 (when Research resigned as subadviser), subadvisory fees
of $38,815, $99,764 and $74,583, respectively. Eagle began as subadviser
to Small Cap on August 7, 1995 and received subadvisory fees from the
Manager for the period August 7, 1995 to October 31, 1995 in the amount of
$30,725. For the period May 7, 1993 (commencement of operations) to
October 31, 1993 and the two fiscal years ended October 31, 1994 and 1995,
the Manager paid Awad subadvisory fees of $38,972, $101,249 and $127,866,
respectively.
For Value Equity, the annual investment advisory fee paid monthly
by Value Equity to the Manager is set forth in its Prospectus. The
Manager voluntarily has agreed to waive management fees to the extent that
annual operating expenses attributable to A shares exceed 1.65% of average
daily net assets or to the extent that annual operating expenses
attributable to C shares exceed 2.40% of average daily net assets
attributable to that class during this fiscal year. To the extent that
the Manager waives its fees for one class, it will waive its fees for the
other class on a proportionate basis. The Manager has entered into an
agreement with Eagle to provide investment advice and portfolio management
services to Value Equity for a fee paid by the Manager to Eagle equal to
50% of the fees paid to the Manager, without regard to any reduction in
fees actually paid to the Manager as a result of expense limitations. For
the period December 30, 1994 (commencement of operations) to October 31,
1995, management fees amounted to $47,250. For the same period, the
Manager waived its fees in the amount of $47,250 and reimbursed expenses
in the amount of $68,724. For the period December 30, 1994 (commencement
of operations) to October 31, 1995, the Manager paid subadvisory fees of
$23,625.
Class-Specific Expenses. Each Fund may determine to allocate
certain of its expenses (in addition to distribution fees) to the specific
classes of a Fund's shares to which those expenses are attributable.
State Expense Limitations. Certain states have established
expense limitations for investment companies whose shares are registered
for sale in that state. If a Fund's operating expenses (including the
investment advisory fee, but not including distribution fees, brokerage
commissions, interest, taxes and extraordinary expenses) exceed state
expense limits, the Manager will reimburse a Fund for its expenses over
the limitation. If a Fund's monthly projected operating expenses exceed
applicable state expense limitations, the investment advisory fee paid
will be reduced on a monthly basis by the amount of the excess, unless
waivers of the expense limitations are obtained by such Fund. If
applicable state expense limitations are exceeded, the amount to be
reimbursed by the Manager will be limited to the amount of the investment
advisory fee and that Fund may have to cease offering Fund shares for sale
in certain states until the expense ratio declines. Any fees waived by
the Manager can be recovered by it from a Fund when such recovery would
not cause that Fund to exceed its expense limits. The most restrictive
current state expense limit is 2.5% of a Fund's first $30 million in
- 38 -
<PAGE>
assets, 2.0% of the next $70 million in assets and 1.5% of all excess
assets.
Brokerage Practices
-------------------
While each Fund generally purchases securities for long-term
capital gains, each Fund may engage in short-term transactions under
various market conditions to a greater extent than certain other mutual
funds with similar investment objectives. Thus, the turnover rate may
vary greatly from year to year or during periods within a year. A Fund's
portfolio turnover rate is computed by dividing the lesser of purchases or
sales of securities for the period by the average value of portfolio
securities for that period. Small Cap's portfolio turnover rates for the
two years ended October 31, 1995, were 95% and 89%, respectively. Value
Equity's annualized portfolio turnover rate for the period December 30,
1994 (commencement of operations) to October 31, 1995, was 82%
(annualized). It is not anticipated that Value Equity's portfolio
turnover rate will deviate greatly from this rate during its next fiscal
year.
The Subadvisers are responsible for the execution of each Fund's
portfolio transactions and must seek the most favorable price and
execution for such transactions. Best execution, however, does not mean
that a Fund necessarily will be paying the lowest commission or spread
available. Rather, each Fund also will take into account such factors as
size of the order, difficulty of execution, efficiency of the executing
broker's facilities, and any risk assumed by the executing broker.
It is a common practice in the investment advisory business for
advisers of investment companies and other institutional investors to
receive research, statistical and quotation services from broker-dealers
who execute portfolio transactions for the clients of such advisers.
Consistent with the policy of most favorable price and execution, the
Subadvisers may give consideration to research, statistical and other
services furnished by brokers or dealers. In addition, the Subadvisers
may place orders with brokers who provide supplemental investment and
market research and securities and economic analysis and may pay to these
brokers a higher brokerage commission or spread than may be charged by
other brokers, provided that the Subadvisers determine in good faith that
such commission is reasonable in relation to the value of brokerage and
research services provided. Such research and analysis may be useful to
the Subadvisers in connection with services to clients other than the
Funds.
Value Equity generally uses the Distributor, its affiliates or
certain affiliates of Eagle as a broker for agency transactions in listed
and OTC securities at commission rates and under circumstances consistent
with the policy of best execution. Commissions paid to the Distributor,
its affiliates or certain affiliates of Eagle will not exceed "usual and
customary brokerage commissions." Rule l7e-1 under the 1940 Act defines
"usual and customary" commissions to include amounts that are "reasonable
- 39 -
<PAGE>
and fair compared to the commission, fee or other remuneration received
or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time."
Although it currently does not intend to do so, Small Cap may use
the Distributor as broker for agency transactions in listed and OTC
securities at commission rates and under circumstances consistent with the
policy of best execution. Provided, however, that if Small Cap does use
the Distributor as a broker, commissions paid to the Distributor will not
exceed "usual and customary brokerage commissions" as defined above.
The Subadvisers also may select other brokers to execute
portfolio transactions. In the OTC market, each Fund generally deals with
primary market makers unless a more favorable execution can otherwise be
obtained.
RJA may act as broker on behalf of each Fund in the purchase and
sale of portfolio securities. (Prior to fiscal 1995, Small Cap did not
use RJA as broker in effecting trading.) Aggregate brokerage commissions
paid by Small Cap for the period May 7, 1993 (commencement of operations)
to October 31, 1993, and the two years ended October 31, 1995 amounted to
$128,813, $145,750 and $196,353, respectively. For the same periods, RJA
was paid $0, $0 and $13,416. Transactions in which Small Cap used RJA as
broker involved 0%, 0% and 7%, respectively, of the aggregate dollar
amount of transactions involving the payment of commissions, and 0%, 0%
and 6.8%, respectively, of the aggregate commission paid by Small Cap
during the period. Aggregate brokerage commissions paid by Value Equity
for the period December 30, 1994 (commencement of operations) to October
31, 1995 amounted to $43,552. For the same period, RJA was paid $8,596.
Transactions in which Value Equity used RJA as broker involved 12.08% of
the aggregate dollar amount of transactions involving the payment of
commissions, and 19.74% of the aggregate commission paid by Value Equity
during the period.
Each Fund may not buy securities from, or sell securities to, the
Distributor as principal. However, the Board of Trustees has adopted
procedures in conformity with Rule 10f-3 under the 1940 Act whereby each
Fund may purchase securities that are offered in underwritings in which
the Distributor is a participant. The Board of Trustees will consider the
possibilities of seeking to recapture for the benefit of expenses to each
Fund of certain portfolio transactions, such as underwriting commissions
and tender offer solicitation fees, by conducting such portfolio
transactions through affiliated entities, including the Distributor, but
only to the extent such recapture would be permissible under applicable
regulations, including the rules of the National Association of Securities
Dealers, Inc. and other self-regulatory organizations.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934,
as amended, each Fund expressly consented to the Distributor executing
transactions on an exchange on its behalf.
- 40 -
<PAGE>
Distribution of Shares
----------------------
The Distributor and Representatives with whom the Distributor has
entered into dealer agreements offer shares of each Fund as agents on a
best efforts basis and are not obligated to sell any specific amount of
shares. In this connection, the Distributor makes distribution and
servicing payments to participating dealers in connection with the sale of
shares of a Fund. Pursuant to the Distribution Agreements with the Trust
on behalf of each Fund with respect to A shares and C shares, the
Distributor bears the cost of making information about each Fund available
through advertising, sales literature and other means, the cost of
printing and mailing prospectuses to persons other than shareholders, and
salaries and other expenses relating to selling efforts. The Distributor
also pays service fees to dealers for providing personal services to Class
A and C shareholders and for maintaining shareholder accounts. Each Fund
pays the cost of registering and qualifying its shares under state and
federal securities laws and typesetting of its prospectuses and printing
and distributing prospectuses to existing shareholders.
Each Fund has adopted a Class A Distribution Plan (the "Class A
Plan") which, among other things, permits it to pay the Distributor the
monthly distribution and service fee out of its net assets to finance
activity that is intended to result in the sale and retention of A shares.
The Class A Plan was approved by the Manager, as the sole shareholder of
each Fund, and the Board of Trustees, including a majority of the Trustees
who are not interested persons of a Fund (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Plan or the Distribution Agreement (the "Independent Trustees") after
determining that there is a reasonable likelihood that each Fund and its
Class A shareholders will benefit from the Class A Plan.
Each Fund also has adopted a Class C Distribution Plan (the
"Class C Plan") which, among other things, permits it to pay the
Distributor the monthly distribution and service fee out of its net assets
to finance activity that is intended to result in the sale and retention
of C shares. The Distributor, on C shares, may retain the first 12 months
distribution fee for reimbursement of amounts paid to the broker-dealer at
the time of purchase. The Class C Plan was approved by the Board of
Trustees, including a majority of the Independent Trustees, after
determining that there is a reasonable likelihood that the Fund and its
Class C shareholders will benefit from the Class C Plan.
The Class A Plan and the Class C Plan each may be terminated by
vote of a majority of the Independent Trustees, or by vote of a majority
of the outstanding voting securities of a class of a Fund. The Board of
Trustees reviews quarterly a written report of Plan costs and the purposes
for which such costs have been incurred. A Plan may be amended by vote of
the Board, including a majority of the Independent Trustees, cast in
person at a meeting called for such purpose. Any change in a Plan that
would increase materially the distribution cost to a class requires
shareholder approval of that class.
- 41 -
<PAGE>
As compensation for the services provided and expenses borne by
the Distributor pursuant to the Distribution Agreement with respect to A
shares, each Fund pays the Distributor the sales load described in its
Prospectus and may pay a 12b-1 fee in an amount up to .35% of each Fund's
average daily net assets in accordance with the Class A Plan described
below. The distribution fee is accrued daily and paid monthly, and
currently is equal on an annual basis to .25% of average daily net assets
for each Fund. The Distributor may use this fee as a service fee to
compensate participating dealers for services performed incidental to the
maintenance of shareholder accounts. For the period May 7, 1993
(commencement of operations) to October 31, 1993, and the two years ended
October 31, 1994 and 1995, the Distributor received Class A 12b-1 fees for
Small Cap in the amount of $39,249, $100,506 and $115,551, respectively.
For the period December 30, 1994 (commencement of operations) to October
31, 1995, the Distributor received Class A 12b-1 fees for Value Equity in
the amount of $13,040.
As compensation for the services provided and expenses borne by
the Distributor pursuant to the Distribution Agreement with respect to C
shares, each Fund pays the Distributor a distribution fee in accordance
with the Class C Plan described below. The distribution fee is accrued
daily and paid monthly, and currently is equal on an annual basis to .75%
of average daily net assets. The service fee is accrued daily and paid
monthly, and currently is equal on an annual basis to .25% of average
daily net assets. For the period April 3, 1995 (commencement of C shares)
to October 31, 1995, the Distributor received these fees for Small Cap and
Value Equity in the amount of $9,098 and $10,848, respectively.
The Distribution Agreements may be terminated at any time on 60
days' written notice without payment of any penalty by either party. Each
Fund may effect such termination by vote of a majority of the outstanding
voting securities of a Fund or by vote of a majority of the Independent
Trustees. For so long as either the Class A 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 Agreements and each of the above-referenced
Plans will continue in effect for successive one-year periods, provided
that each such continuance is specifically approved (1) by the vote of a
majority of the Independent Trustees and (2) by the vote of a majority of
the entire Board of Trustees cast in person at a meeting called for that
purpose.
For the period of May 7, 1993 (commencement of operations) to
October 31, 1993, and for the two years ended October 31, 1995, the
Distributor received $1,302,004, $474,274 and $259,774, respectively, as
compensation for the sale of A shares of Small Cap, of which it retained
$155,196, $55,451 and $17,176, respectively. For the period December 30,
1994 (commencement of operation) to October 31, 1995, the Distributor
received $155,444 as compensation for the sale of A shares of Value
Equity, of which it retained $9,256.
- 42 -
<PAGE>
Administration of the Funds
---------------------------
Administrative, Fund Accounting and Transfer Agent Services. The
Manager, subject to the control of the Board of Trustees, will manage,
supervise and conduct the administrative and business affairs of each
Fund; furnish office space and equipment; oversee the activities of the
Subadvisers and the Custodian; and pay all salaries, fees and expenses of
officers and Trustees of each Fund who are affiliated with the Manager.
The Manager also will provide certain shareholder servicing activities for
customers of each Fund. The Manager also is the fund accountant and
transfer and dividend disbursing agent for each Fund. Each Fund pays the
Manager its cost plus 10% for its services as fund accountant and transfer
and dividend disbursing agent. For the period of May 7, 1993
(commencement of operations) to October 31, 1993, and the two years ended
October 31, 1994 and 1995, the Manager earned approximately $15,763,
$44,240 and $62,042, respectively, from Small Cap for its services as
transfer agent. For the period of December 30, 1994 (commencement of
operations) to October 31, 1995, the Manager earned approximately $10,346
from Value Equity for its services as transfer agent. For the period
November 1, 1994 (commencement of engagement as fund accountant) to
October 31, 1995, the Manager earned approximately $29,311 from Small Cap
for its services as fund accountant. For the period December 30, 1994
(commencement of operations) to October 31, 1995, the Manager earned
approximately $20,509 from Value Equity for its services as fund
accountant.
Custodian. State Street Bank and Trust Company, P.0. Box 1912,
Boston, Massachusetts 02105, serves as custodian of each Fund's assets.
The Custodian also provides portfolio accounting and certain other
services for the Funds.
Legal Counsel. Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., 2nd Floor, Washington, D.C. 20036, serves as counsel to the
Funds. Schifino & Fleischer, P.A., 1 Tampa City Center, Suite 2700,
Tampa, Florida 33602, serves as counsel to the Distributor and the
Manager.
Independent Accountants. Price Waterhouse LLP, 1177 Avenue of
the Americas, New York, New York 10036, are the independent public
accountants for the Funds. The Financial Statements and Financial
Highlights of the Funds that appear in this SAI have been audited by
Coopers & Lybrand L.L.P., the Funds' former accountants, 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 a Fund. To
protect its shareholders, each Fund has filed legal documents with
- 43 -
<PAGE>
Massachusetts that expressly disclaim the liability of its shareholders
for acts or obligations of a Fund. These documents require notice of this
disclaimer to be given in each agreement, obligation or instrument each
Fund or its Trustees enter into or sign. In the unlikely event a
shareholder is held personally liable for a Fund's obligations, that Fund
is required to use its property to protect or compensate the shareholder.
On request, a Fund will defend any claim made and pay any judgment against
a shareholder for any act or obligation of a Fund. Therefore, financial
loss resulting from liability as a shareholder will occur only if a Fund
itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
- 44 -
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
The rating services' descriptions of commercial paper ratings in which the
Fund may invest are:
Description of Moody's Short-Term Debt Ratings
----------------------------------------------
Prime-l. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal
cash generation; well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Description of S&P's Commercial Paper Ratings
---------------------------------------------
A-1. This designation indicates that the degree of safety regarding
timely payment is very strong. Those issues determined to possess
extremely strong characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment of issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
CORPORATE DEBT RATINGS
The rating services' descriptions of corporate debt ratings in which the
Fund may invest are:
Description of Moody's Corporate Debt Ratings
---------------------------------------------
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
A-1
<PAGE>
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present that make the long-term risks appear
somewhat larger than the Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
<PAGE>
Description of S&P's Corporate Debt Ratings
-------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB," "B," "CCC," "CC," and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "BBB-" rating.
B - Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
A-3
<PAGE>
CC - The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no interest is
being paid.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-) - The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major categories.
NR - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
A-4
<PAGE>
<PAGE> 1
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Series Trust-Small Cap Stock Fund:
We have audited the accompanying statement of assets and liabilities of
Heritage Series Trust-Small Cap Stock Fund, including the investment portfolio,
as of October 31, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage Series Trust-Small Cap Stock Fund, as of October 31, 1995, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
December 22, 1995
COOPERS & LYBRAND
<PAGE> 2
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
REPURCHASE AGREEMENT--8.6%(A)
- ----------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated October 31, 1995 @ 5.82%, to
be repurchased at $5,310,858 on November 1, 1995, (collateralized by $4,945,000 United States
Treasury Notes, 7.25%, due August 15, 2004 with a market value $5,449,041, including
interest)(cost $5,310,000)........................................................................ $ 5,310,000
-----------
COMMON STOCKS--89.9%(A)
- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
----------------
<C> <S> <C>
AIR TRANSPORT--0.9%
----------------
50,000 Amtran, Inc.*..................................................................... 550,000
-----------
BANKING--5.2%
-------------
2,500 Commerce Bancorp, Inc............................................................. 57,813
32,500 First Financial Caribbean Corporation............................................. 578,906
20,000 FNB Rochester Corporation*........................................................ 157,500
17,000 Home Financial Corporation........................................................ 259,250
25,000 Imperial Thrift & Loan Association*............................................... 287,500
10,000 ISB Financial Corporation......................................................... 160,000
5,000 Pennfed Financial Services, Inc.*................................................. 72,500
2,500 Progressive Bank, Inc............................................................. 68,125
5,000 Queens County Bancorp, Inc........................................................ 200,000
17,250 RCSB Financial, Inc............................................................... 383,812
20,298 Summit Bancorporation............................................................. 575,956
12,500 UJB Financial Corporation......................................................... 398,437
-----------
3,199,799
-----------
BROADCASTING--0.7%
-----------------
32,500 Spelling Entertainment Group, Inc.*............................................... 422,500
-----------
BUILDING--0.7%
-------------
20,000 Lennar Corporation................................................................ 457,500
-----------
CHEMICALS--0.1%
--------------
10,000 Planet Polymer Technology, Inc.*.................................................. 31,250
-----------
CONGLOMERATES/DIVERSIFIED--0.1%
----------------------------
1,754 Belding Heminway Company, Inc.*................................................... 6,577
10,000 Noel Group, Inc................................................................... 55,000
-----------
61,577
-----------
DATA PROCESSING--13.2%
---------------------
27,376 BancTec, Inc.*.................................................................... 513,300
15,000 Byron Preiss Multimedia Company, Inc.*............................................ 112,500
45,000 Comdisco, Inc..................................................................... 1,372,500
10,000 Cornerstone Imaging, Inc.*........................................................ 225,000
141,705 Greentree Software, Inc.*......................................................... 137,284
52,000 Inter-Tel, Inc.*.................................................................. 773,500
79,500 National Data Corporation......................................................... 2,106,750
40,000 Norand Corporation*............................................................... 680,000
35,750 Printronix, Inc.*................................................................. 679,250
35,000 Shared Medical Systems Corporation................................................ 1,351,875
15,000 Tech Data Corporation*............................................................ 181,875
-----------
8,133,834
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 3
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------------- -----------
<C> <S> <C>
ELECTRONICS/ELECTRICAL--1.1%
------------------------
200,000 Ampex Corporation*................................................................ $ 625,000
10,000 Cincinnati Microwave, Inc.*....................................................... 57,500
-----------
682,500
-----------
FILMED ENTERTAINMENT--3.2%
------------------------
35,000 Applied Bioscience International Inc.*............................................ 223,125
25,000 IMCO Recycling, Inc............................................................... 537,500
40,000 Republic Waste Industries*........................................................ 860,000
25,000 TETRA Technologies, Inc.*......................................................... 331,250
-----------
1,951,875
-----------
FINANCE--1.2%
------------
61,000 AmeriCredit Corporation*.......................................................... 747,250
-----------
FOOD--2.1%
----------
25,000 D F & R Restaurants, Inc.*........................................................ 762,500
25,000 Morningstar Group, Inc.*.......................................................... 193,750
10,000 Smithfield Foods, Inc.*........................................................... 252,500
5,694 Sylvan, Inc.*..................................................................... 60,499
-----------
1,269,249
-----------
HEALTH CARE CENTERS--6.1%
-----------------------
66,000 Advocat, Inc.*.................................................................... 709,500
27,500 Assisted Living Concepts, Inc.*................................................... 395,312
44,300 Bergen Brunswig Corporation, Class "A"............................................ 919,225
30,000 Community Psychiatric Centers..................................................... 326,250
45,000 Horizon Mental Health Management, Inc.*........................................... 697,500
7,500 Multicare Companies, Inc.*........................................................ 140,625
35,000 Sterling Healthcare Group......................................................... 481,250
10,000 Sterling House Corporation*....................................................... 123,750
-----------
3,793,412
-----------
HOME FURNISHINGS--0.5%
---------------------
20,000 Falcon Products, Inc.............................................................. 280,000
-----------
INSURANCE--0.7%
--------------
10,000 Delphi Financial Group, Inc.*..................................................... 201,250
11,000 John Alden Financial Corporation.................................................. 228,250
-----------
429,500
-----------
INVESTMENT--0.5%
---------------
30,000 Southwest Securities Group, Inc................................................... 292,500
-----------
LEATHER/SHOES--1.1%
------------------
170,000 Genesco, Inc.*.................................................................... 680,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------------- -----------
<C> <S> <C>
LEISURE/AMUSEMENT--4.8%
-----------------------
43,000 Anthony Industries, Inc........................................................... $ 800,875
27,000 Bally Gaming International, Inc.*................................................. 283,500
40,000 Callaway Golf Company............................................................. 655,000
25,000 Matthews Studio Equipment Group*.................................................. 43,750
30,000 Scientific Games Holdings Corporation*............................................ 982,500
52,500 Sports Club Company, Inc.*........................................................ 223,125
-----------
2,988,750
-----------
MACHINERY--0.7%
---------------
30,000 Computational Systems, Inc.*...................................................... 446,250
-----------
MANUFACTURING/DISTRIBUTIONS--7.5%
-------------------------------
25,000 Harsco Corporation................................................................ 1,318,750
22,000 Luxottica Group S.P.A., ADR....................................................... 1,072,500
34,800 Peak Technologies Group, Inc.*.................................................... 878,700
10,000 Sweetwater, Inc.*................................................................. 37,500
25,000 Thermo Instrument Systems, Inc.*.................................................. 759,375
16,800 Thermo Process Systems, Inc.*..................................................... 182,700
25,000 ThermoSpectra Corporation(c)*..................................................... 406,250
-----------
4,655,775
-----------
MEDICAL EQUIPMENT/SUPPLY--9.6%
-----------------------------
125,000 Angeion Corporation*.............................................................. 953,125
37,742 Circon Corporated*................................................................ 858,631
63,333 Cooper Companies, Inc.*........................................................... 372,083
10,000 Cordis Corporation*............................................................... 1,105,000
15,000 Empi, Inc.*....................................................................... 333,750
20,000 Jones Medical, Inc................................................................ 390,000
40,000 Thermedics, Inc.*................................................................. 735,000
20,000 Thermo Cardiosystems, Inc.*....................................................... 970,000
68,000 Unilab Corporation*............................................................... 212,500
-----------
5,930,089
-----------
METAL--0.9%
-----------
32,500 Material Sciences Corporation*.................................................... 540,313
-----------
MINING/DIVERSIFIED--1.0%
----------------------
15,000 Minerals Technologies, Inc........................................................ 598,125
-----------
OFFICE EQUIPMENT--0.4%
--------------------
12,000 American Business Products, Inc................................................... 262,500
-----------
OIL & GAS--2.1%
--------------
45,000 Camco International, Inc.......................................................... 1,029,375
10,000 Global Industries Ltd.*........................................................... 262,500
-----------
1,291,875
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------------- -----------
<C> <S> <C>
POLLUTION CONTROL--3.7%
---------------------
38,475 Handex Corporation*............................................................... 240,469
63,000 Insituform Technologies, Class "A"................................................ 787,500
22,500 Thermo Remediation, Inc........................................................... 320,625
40,000 U.S. Filter Corporation*.......................................................... 930,000
-----------
2,278,594
-----------
PUBLISHING--3.9%
---------------
40,000 CCH Inc., Class "A"............................................................... $ 930,000
10,000 CCH Inc., Class "B"............................................................... 230,000
20,000 Claire's Stores, Inc.............................................................. 392,500
12,000 International Imaging Materials, Inc.*............................................ 303,000
6,000 John Wiley & Sons, Inc. Class "A"................................................. 178,500
9,000 Waverly, Inc...................................................................... 357,750
-----------
2,391,750
-----------
REAL ESTATE INVESTMENT TRUSTS (REIT)--5.4%
--------------------------------------
19,000 Alexander Haagen Properties, Inc.................................................. 209,000
25,000 Apartment Investors & Management Company.......................................... 503,125
77,000 LTC Properties, Inc............................................................... 1,116,500
22,000 Malan Realty Investors, Inc....................................................... 308,000
10,000 Mid-America Apartment Communities, Inc............................................ 230,000
6,000 Mid-America Realty Investments.................................................... 47,250
13,000 Mid-Atlantic Realty Trust......................................................... 107,250
25,000 Storage Equities, Inc............................................................. 459,375
20,000 Walden Residential Properties, Inc................................................ 367,500
-----------
3,348,000
-----------
RETAIL--4.9%
-----------
40,000 Cole National Corporation, Class "A"*............................................. 490,000
15,000 Damark International, Inc.*....................................................... 90,000
40,000 Eckerd Corporation*............................................................... 1,585,000
13,000 Fingerhut Companies, Inc.......................................................... 177,125
42,500 Forschner Group, Inc.*............................................................ 494,063
25,000 The Sirena Apparel Group, Inc.*................................................... 181,250
-----------
3,017,438
-----------
SERVICES--5.4%
------------
40,000 Interim Services, Inc.*........................................................... 1,190,000
200,000 National Education Corporation*................................................... 1,625,000
19,000 Protection One, Inc.*............................................................. 149,625
11,500 Stewart Enterprises, Inc.......................................................... 388,125
-----------
3,352,750
-----------
TELECOMMUNICATIONS--2.4%
-----------------------
60,000 A+ Network, Inc.*................................................................. 840,000
25,000 Metrocall, Inc.*.................................................................. 625,000
-----------
1,465,000
-----------
Total common stocks (cost $46,649,408)............................................................... 55,549,955
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS--2.4%(A)
- ---------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ---------------- ---------- -----------
<C> <S> <C> <C>
HEALTH CARE CENTERS--1.3%
-----------------------
$750,000 Assisted Living Concepts, Inc., 7.00%..................................... 08/15/05 $ 822,503
-----------
LEISURE/AMUSEMENT--0.3%
-----------------------
200,000 All American Communications Inc., 6.50%................................... 10/01/03 193,182
-----------
MEDICAL EQUIPMENT/SUPPLY--0.8%
-----------------------------
500,000 Cabot Medical Corporation, 7.50%.......................................... 03/01/99 490,000
-----------
Total convertible bonds (cost $1,415,000)................................................................ 1,505,685
-----------
TOTAL INVESTMENT PORTFOLIO (cost $53,374,408)(b), 100.9%(a).............................................. 62,365,639
OTHER ASSETS AND LIABILITIES, (0.9%)(a).................................................................. (539,586)
-----------
NET ASSETS, 100.0%....................................................................................... $61,826,053
==========
</TABLE>
- ------------------
* Not an income producing security.
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
$53,447,719. Market value includes net unrealized appreciation of
$8,917,920, which consists of aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost of
$10,845,037 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value of $1,927,117.
(c) Restricted security -- security that has not been registered with the
Securities and Exchange Commission under the Securities Act of
1933 -- purchased on October 11, 1994 at $10.00 per share. This security
represented 0.7% of the net assets of the Fund.
ADR--American Depository Receipt
The accompanying notes are an integral part of the financial statements.
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $48,064,408) (Note 1)...................... $57,055,639
Repurchase agreement (identified cost $5,310,000) (Note 1)............................... 5,310,000
Cash..................................................................................... 170
Receivables:
Investments sold....................................................................... 1,699,527
Fund shares sold....................................................................... 376,339
Dividends and interest................................................................. 44,790
Deferred organization expenses (Note 1).................................................. 25,000
Deferred state registration expenses (Note 1)............................................ 13,281
Prepaid insurance........................................................................ 1,866
-----------
Total assets..................................................................... 64,526,612
Liabilities
Payables (Note 4):
Investments purchased.................................................................. $2,506,063
Fund shares redeemed................................................................... 41,541
Accrued management fee................................................................. 48,899
Accrued distribution fee............................................................... 15,835
Other accrued expenses................................................................. 88,221
----------
Total liabilities................................................................ 2,700,559
-----------
Net assets, at market value.............................................................. $61,826,053
==========
Net Assets
Net assets consist of:
Undistributed net investment income.................................................... $ 30,996
Net unrealized appreciation on investments............................................. 8,991,231
Accumulated net realized gain.......................................................... 2,768,507
Paid-in capital........................................................................ 50,035,319
-----------
Net assets, at market value.............................................................. $61,826,053
==========
Class A Shares
Net asset value and redemption price per share ($57,430,000 divided by 3,044,503 shares
of beneficial interest outstanding, no par value) (Notes 1 and 2)...................... $18.86
==========
Maximum offering price per share (100/95.25 of $18.86)................................... $19.80
==========
Class C Shares
Net asset value and offering price per share ($4,396,053 divided by 233,921 shares of
beneficial interest outstanding, no par value) (Notes 1 and 2)......................... $18.79
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Income:
Dividends............................................................................. $ 547,047
Interest.............................................................................. 406,626
------------
Total income.................................................................... 953,673
Expenses (Notes 1 and 4):
Management fee........................................................................ $ 465,132
Distribution fee...................................................................... 124,649
Shareholder servicing fees............................................................ 62,042
Professional fees..................................................................... 60,346
Custodian/Fund accounting fees........................................................ 53,835
Amortization of state registration expenses........................................... 50,309
Reports to shareholders............................................................... 39,799
Trustees' fees and expenses........................................................... 12,405
Amortization of organization expenses................................................. 10,000
Insurance............................................................................. 4,720
Federal registration fees............................................................. 4,488
Other................................................................................. 1,334
----------
Total expenses.................................................................. 889,059
------------
Net investment income................................................................... 64,614
------------
Realized and Unrealized Gain on Investments
Net realized gain from investment transactions.......................................... 2,899,946
Net increase in unrealized appreciation of investments during the year.................. 6,857,583
------------
Net gain on investments......................................................... 9,757,529
------------
Net increase in net assets resulting from operations.................................... $ 9,822,143
===========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- ----------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income (loss)............................................... $ 64,614 $ (27,981)
Net realized gain from investment transactions............................. 2,899,946 2,526,517
Net increase (decrease) in unrealized appreciation of investments during
the year................................................................. 6,857,583 (1,054,728)
---------------- ----------------
Net increase in net assets resulting from operations....................... 9,822,143 1,443,808
Distributions to shareholders from:
Net investment income Class A ($.01 per share)............................. (33,618) --
Net realized gains Class A ($.97 per share)................................ (2,501,284) --
Increase (decrease) in net assets from Fund share transactions (Note 2)...... 13,014,458 (307,114)
---------------- ----------------
Increase in net assets....................................................... 20,301,699 1,136,694
Net assets, beginning of year................................................ 41,524,354 40,387,660
---------------- ----------------
Net assets, end of year (including undistributed net investment income of
$30,996 as of October 31, 1995)............................................ $ 61,826,053 $ 41,524,354
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
FOR THE YEARS ENDED CLASS C
OCTOBER 31 SHARES
---------------------------- -------
1995 1994 1993+ 1995++
------ ------ ------ -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD.................................. $16.20 $15.57 $14.29 $15.67
------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)(a)......................................... .02 (.01) (.01) (.02 )
Net realized and unrealized gain on investments......................... 3.62 .64 1.29 3.14
------ ------ ------ -------
Total from investment operations.......................................... 3.64 .63 1.28 3.12
------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income.................................... (.01) -- -- --
Distributions from net realized gains................................... (.97) -- -- --
------ ------ ------ -------
Total Distributions..................................................... (.98) -- -- --
------ ------ ------ -------
NET ASSET VALUE, END OF THE PERIOD........................................ $18.86 $16.20 $15.57 $18.79
====== ====== ====== =======
TOTAL RETURN (%)(C)....................................................... 23.97 4.05 8.96 19.91
RATIOS (%)/SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average daily net assets(a)........ 1.88 1.91 2.00(b) 2.36 (b)
Ratio of net investment income (loss) to average daily net assets....... .15 (0.07) (0.15)(b) (.46 )(b)
Portfolio turnover rate................................................. 89 95 97(b) 89
Net assets, end of period ($ millions).................................. 57 42 40 4
</TABLE>
- ---------------
+ For the period May 7, 1993 (commencement of operations) to October 31, 1993.
++ For the period April 3, 1995 (commencement of Class C Shares) to October 31,
1995.
(a) Excludes management fees waived by the Manager in fiscal 1993 of less than
$.01 per share. The operating expense ratio including such items would be
2.09% (annualized). The year 1994 includes previously waived management fees
paid to the Manager of less than $.01 per share.
(b) Annualized.
(c) Does not include sales load. Not annualized for fiscal 1993 for Class A
Shares and fiscal 1995 for Class C Shares.
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage Series Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company and presently offers shares in four
series, the Small Cap Stock Fund (the "Fund"), the Value Equity Fund,
the Growth Equity Fund and the Eagle International Equity Portfolio. The
Fund currently issues Class A and Class C Shares. Class A Shares are
sold subject to a maximum sales charge of 4.75% of the amount invested
payable at the time of purchase. Class C Shares, which were offered to
shareholders beginning April 3, 1995, are sold subject to a contingent
sales charge of 1% of the lower of net asset value or purchase price
payable upon any redemptions within one year after purchase. The
financial statements for the Value Equity Fund and Eagle International
Equity Portfolio are presented separately. The policies described below
are followed consistently by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles.
Security Valuation: The Fund values investment securities at market
value based on the last quoted sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, the last bid price is used and in the absence of a market
quote, securities are valued using such methods as the Board of Trustees
believes would reflect fair market value. Short term investments having
a maturity of 60 days or less are valued at cost which, when combined
with accrued interest included in interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund's policy is to comply with the
requirements of the Internal Revenue Code of 1986, as amended, which are
applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders.
Accordingly, no provision has been made for federal income and excise
taxes.
Distribution of Net Realized Gains. Net realized gains from investment
transactions during any particular year in excess of available capital
loss carryforwards, which, if not distributed, would be taxable to the
Fund, will be distributed to shareholders in the following fiscal year.
The Fund uses the identified cost method for determining realized gain
or loss on investments for both financial and federal income tax
reporting purposes. Of the $2,526,517 net realized gains for the year
ended October 31, 1994, the Fund has designated $403,325 as net
long-term capital gains on a tax basis paid in 1995.
Expenses: The Fund is charged for those expenses which are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are allocated proportionately among the
Portfolios. Expenses of the Fund are allocated to each class of shares
based upon their relative percentage of current net assets. All expenses
that are directly attributable to a specific class of shares, such as
distribution fees, are allocated to that class.
State Registration Expenses: State registration fees are amortized based
either on the time period covered by the registration or as related
shares are sold, whichever is appropriate for each state.
Organization Expenses: Expenses incurred in connection with the
formation of the Fund were deferred and are being amortized on a
straight-line basis over 60 months from the date of commencement of
operations.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make reclasses among
certain capital accounts without impacting the net asset value of the
Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis.
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At October 31, 1995, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A Shares of the Fund during the years ended
October 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1994
-------------------------- ---------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold......................................... 984,286 $ 17,529,467 2,257,306 $ 36,019,552
Shares issued on reinvestment of distributions...... 160,682 2,431,113 -- --
Shares redeemed..................................... (664,339) (11,260,584) (2,287,410) (36,326,666)
--------- ------------ ---------- ------------
Net increase (decrease)............................. 480,629 $ 8,699,996 (30,104) $ (307,114)
=========== ===========
Shares outstanding:
Beginning of year................................. 2,563,874 2,593,978
--------- ----------
End of year....................................... 3,044,503 2,563,874
======== =========
</TABLE>
Transactions in Class C Shares of the Fund from April 3, 1995
(commencement of Class C Shares) to October 31, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS C SHARES SHARES AMOUNT
---------------------------------------------------- --------- ------------
<S> <C> <C> <C> <C>
Shares sold......................................... 234,197 $ 4,319,728
Shares redeemed..................................... (276) (5,266)
--------- ------------
Net increase........................................ 233,921 $ 4,314,462
===========
Shares outstanding:
Beginning of period............................... --
---------
End of period..................................... 233,921
========
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For year ended October 31, 1995,
purchases and sales of investment securities (excluding repurchase
agreements and short term obligations) aggregated $49,450,409 and
$38,183,445, respectively.
Note 4: MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND
TRUSTEES' FEES. Under the Fund's Investment Advisory and Administration
Agreement with Heritage Asset Management, Inc. ( the "Manager"), the
Fund agrees to pay to the Manager a fee equal to an annualized rate of
1.00% of the Fund's average daily net assets, computed daily and payable
monthly. The agreement also provides for a reduction in such fees in any
year to the extent that operating expenses of the Fund exceed applicable
state expense limitations. Currently, the Manager has voluntarily agreed
to waive its fee to the extent that Fund operating expenses exceed 2.00%
for Class A Shares (2.75% for Class C Shares effective April 3, 1995) on
an annual basis of the Fund's average daily net assets. This agreement
is more restrictive than any state expense limitation at the current
level of net assets attributable to each class of Shares. Fees
voluntarily waived are recoverable by the Manager for a period of up to
two years. In the prior year, the Fund's operating expenses fell below
2% of average daily net assets. Accordingly, during fiscal 1994 the Fund
paid the Manager all of the fees waived in 1993 amounting to $14,764
($.01 per share).
The Manager has entered into agreements with Awad & Associates, Inc., a
division of Raymond James & Associates, Inc., and Eagle Asset
Management, Inc. (the "Subadvisers") for the Subadvisers to provide to
the Fund investment advice, portfolio management services including the
placement of brokerage orders, and certain compliance and other services
for a fee payable by the Manager equal to 50% of the fees payable by the
Fund to the Manager without regard to any reduction due to the
imposition of expense limitations.
The Manager is also the Dividend Paying and Shareholder Servicing Agent
for the Fund. The amount payable to the Manager for such expenses as of
October 31, 1995 was $19,600. In addition, the Manager performs Fund
Accounting services and charged $29,311 during the current year of which
$10,400 was payable as of October 31, 1995.
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-SMALL CAP STOCK FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Pursuant to the Class A Distribution plan adopted in accordance with
Rule 12b-1 of the Investment Company Act of 1940, as amended, the Fund
is authorized to pay Raymond James & Associates, Inc. (the
"Distributor") a fee of up to 0.35% of average daily net assets for
services it provides in connection with the promotion and distribution
of Fund shares. However, at the present time the Board of Trustees has
authorized payments of only .25% of average daily net assets for Class A
Shares. Such fee is accrued daily and payable monthly. Under the Class C
Distribution Plan the Fund paid the Distributer a fee equal to 1.00% of
the average daily net assets. The Distributor, on Class C Shares, may
retain the first 12 months distribution fee for reimbursement of amounts
paid to the broker/dealer at the time of purchase. Such fees are accrued
daily and payable monthly. During the period $115,551 and $9,098 were
paid for distribution fees for Class A Shares and Class C Shares,
respectively. The Manager, the Subadvisers, the Distributor and the
Shareholder Servicing Agent are all wholly-owned subsidiaries of Raymond
James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Capital Appreciation Trust, Heritage Income-Growth Trust,
Heritage Income Trust and Heritage U.S. Government Income Fund,
investment companies that are also advised by the Manager (collectively
referred to as the Heritage mutual funds). Each Trustee of the Heritage
mutual funds who is not an interested person of the Manager received an
annual fee of $8,000 and an additional fee of $2,000 for each combined
quarterly meeting of the Heritage mutual funds attended. Trustees' fees
and expenses are paid equally by each of the Heritage mutual funds.
<PAGE> 13
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Series Trust-Value Equity Fund:
We have audited the accompanying statement of assets and liabilities of
Heritage Series Trust-Value Equity Fund, including the investment portfolio, as
of October 31, 1995, and the related statements of operations and changes in net
assets for the period December 30, 1994 (commencement of operations) to October
31, 1995, and the financial highlights for the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage Series Trust-Value Equity Fund as of October 31, 1995, the results of
its operations, and the changes in its net assets for the period December 30,
1994 (commencement of operations) to October 31, 1995, and the financial
highlights for the periods indicated therein, in conformity with generally
accepted accounting principles.
Boston, Massachusetts
December 22, 1995
COOPERS & LYBRAND
<PAGE> 14
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
REPURCHASE AGREEMENT--13.8%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated October 31, 1995 @ 5.82%, to be
repurchased at $2,225,364 on November 1, 1995, (collateralized by $2,075,000 United States Treasury Notes,
7.25% due August 15, 2004 with a market value of $2,286,503, including interest) (cost $2,225,000).......... $ 2,225,000
-----------
COMMON STOCKS--93.2%(A)
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ------------------
<C> <S> <C>
AEROSPACE--1.6%
--------------
3,000 Boeing Company........................................................................... 196,875
1,500 General Motors Corporation, Class "H".................................................... 63,000
-----------
259,875
-----------
AUTO PARTS/EQUIPMENT--2.6%
------------------------
12,000 Breed Technologies, Inc. ................................................................ 223,500
1,000 Dana Corporation......................................................................... 25,625
2,300 Eaton Corporation........................................................................ 117,875
3,000 Federal-Mogul Corporation................................................................ 53,625
-----------
420,625
-----------
AUTO/TRUCK MANUFACTURERS--2.5%
-----------------------------
2,800 Chrysler Corporation..................................................................... 144,550
7,000 Ford Motor Company....................................................................... 201,250
1,400 General Motors Corporation............................................................... 61,250
-----------
407,050
-----------
BANKING--7.9%
-------------
1,500 Banc One Corporation..................................................................... 50,625
3,200 Bank Of New York Company, Inc. .......................................................... 134,400
3,000 BankAmerica Corporation.................................................................. 172,500
3,000 Bankers Trust New York Corporation....................................................... 191,250
4,500 Dime Bancorp, Inc.*...................................................................... 47,813
400 First Interstate Bancorp................................................................. 51,600
2,800 Fleet Financial Group, Inc. ............................................................. 108,500
2,800 Great Western Financial Corporation...................................................... 63,350
1,000 Home Financial Corporation............................................................... 15,250
2,500 Klamath First Bancorp, Inc.*............................................................. 31,875
3,300 Mellon Bank Corporation.................................................................. 165,412
1,000 J.P. Morgan & Company, Inc. ............................................................. 77,125
2,700 PNC Bank Corporation..................................................................... 70,875
2,300 Wachovia Corporation..................................................................... 101,488
-----------
1,282,063
-----------
BEVERAGES--0.6%
--------------
1,900 PepsiCo, Inc. ........................................................................... 100,225
-----------
BUILDING--1.0% -------------
2,000 Black & Decker Corporation............................................................... 67,750
2,400 Foster Wheeler Corporation............................................................... 90,000
-----------
157,750
-----------
CHEMICALS--0.6%
--------------
1,000 ARCO Chemical Company.................................................................... 49,000
1,500 Lubrizol Corporation..................................................................... 43,125
-----------
92,125
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 15
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------------------ -----------
<C> <S> <C>
CONGLOMERATE/DIVERSIFIED--0.3%
---------------------------
2,400 Hanson PLC, ADR.......................................................................... $ 37,200
800 U.S. Industries, Inc.*................................................................... 12,000
-----------
49,200
-----------
COSMETICS/TOILETRIES--1.0%
-----------------------
1,000 Jean Philippe Fragrances, Inc.*.......................................................... 9,250
3,500 Tambrands, Inc. ......................................................................... 156,625
-----------
165,875
-----------
DATA PROCESSING--2.9%
--------------------
2,500 Apple Computer, Inc. .................................................................... 90,781
2,000 Autodesk, Inc. .......................................................................... 68,000
2,000 Automatic Data Processing, Inc. ......................................................... 143,000
1,200 Diamond Multimedia Systems, Inc.*........................................................ 35,400
2,500 MacNeal-Schwendler Corporation........................................................... 38,125
2,000 Seagate Technology, Inc.*................................................................ 89,250
-----------
464,556
-----------
ELECTRONICS/ELECTRICAL--2.4%
------------------------
1,000 First Alert, Inc.*....................................................................... 15,500
700 General Electric Company................................................................. 44,275
1,700 Honeywell, Inc. ......................................................................... 71,400
600 Intel Corporation........................................................................ 41,925
300 Sony Corporation, ADR.................................................................... 13,725
1,100 Tech-Sym Corporation*.................................................................... 32,588
11,500 Westinghouse Electric Corporation........................................................ 162,438
300 Philips Electronics N.V., NY Shares, ADR................................................. 11,587
-----------
393,438
-----------
FINANCE--4.1%
------------
6,300 American Express Company................................................................. 255,937
1,300 Federal National Mortgage Association.................................................... 136,337
4,500 Student Loan Marketing Association....................................................... 264,937
-----------
657,211
-----------
FOOD--2.7%
----------
2,000 Campbell Soup Company.................................................................... 104,750
7,100 Chiquita Brands International............................................................ 115,375
1,600 Dole Food Company........................................................................ 60,200
1,500 Grand Metropolitan, PLC, ADR............................................................. 41,250
1,900 Heinz (H.J.) Company..................................................................... 88,350
950 Quaker Oats Company...................................................................... 32,419
-----------
442,344
-----------
FOOD SERVING--1.1%
-----------------
2,200 McDonald's Corporation................................................................... 90,200
4,500 Wendy's International, Inc. ............................................................. 89,437
-----------
179,637
-----------
GRAPHIC ARTS--0.5%
-----------------
2,800 Deluxe Corporation....................................................................... 75,250
-----------
HEALTH CARE CENTERS--7.2%
-----------------------
3,300 Columbia Healthcare Corporation.......................................................... 162,112
4,500 Foundation Health Corporation*........................................................... 190,688
1,000 Healthsource, Inc.*...................................................................... 53,000
2,000 Horizon/CMS Healthcare Corporation*...................................................... 40,500
300 Physician Corporation Of America*........................................................ 4,612
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 16
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------------------ -----------
<C> <S> <C>
9,500 Tenet Healthcare Corporation*............................................................ $ 169,812
7,500 U.S. Healthcare, Inc. ................................................................... 288,750
4,700 United Healthcare Corporation............................................................ 249,688
-----------
1,159,162
-----------
HOTELS/MOTELS/INNS--0.5%
-----------------------
1,000 HFS, Inc.*............................................................................... 61,250
2,500 Prime Hospitality Corporation*........................................................... 24,687
-----------
85,937
-----------
HOUSEWARES--0.2%
----------------
1,000 Rubbermaid, Inc. ........................................................................ 26,125
-----------
INSURANCE--3.2%
--------------
3,022 Allstate Corporation..................................................................... 111,059
1,600 Hartford Steam Boiler Inspection & Insurance Company..................................... 74,600
7,000 Humana, Inc.*............................................................................ 147,875
1,200 Jefferson-Pilot Corporation.............................................................. 79,200
2,700 Torchmark Corporation.................................................................... 112,050
-----------
524,784
-----------
LEISURE/AMUSEMENT--1.4%
-----------------------
1,600 Polaroid Corporation..................................................................... 68,400
4,000 Royal Caribbean Cruises, Ltd. ........................................................... 92,000
1,100 The Walt Disney Company.................................................................. 63,387
-----------
223,787
-----------
MACHINERY--1.4%
---------------
2,000 Caterpillar, Inc. ....................................................................... 112,250
1,000 Harnischfeger Industries, Inc. .......................................................... 31,500
1,200 Johnson Controls, Inc. .................................................................. 69,900
2,000 Western Power & Equipment Corporation*................................................... 8,000
-----------
221,650
-----------
MANUFACTURING/DISTRIBUTIONS--0.4%
-------------------------------
1,100 Minnesota Mining & Manufacturing Company................................................. 62,563
-----------
MEDICAL EQUIPMENT/SUPPLY--2.6%
-----------------------------
1,700 Bausch & Lomb, Inc. ..................................................................... 58,863
3,000 Baxter International, Inc. .............................................................. 115,875
700 C.R. Bard, Inc. ......................................................................... 19,775
2,300 Johnson & Johnson........................................................................ 187,450
2,200 Sterile Concepts Holdings, Inc. ......................................................... 31,075
-----------
413,038
-----------
OFFICE EQUIPMENT--1.4%
--------------------
1,800 Danka Business Systems, Sponsored ADR.................................................... 60,300
4,000 Pitney-Bowes, Inc. ...................................................................... 174,500
-----------
234,800
-----------
OIL & GAS--9.6%
--------------
1,900 Amoco Corporation........................................................................ 121,363
1,200 Anadarko Petroleum Corporation........................................................... 52,050
6,000 Apache Corporation....................................................................... 153,000
1,500 Atlantic Richfield Company............................................................... 160,125
1,100 Burlington Resources, Inc. .............................................................. 39,600
1,400 Chevron Corporation...................................................................... 65,450
800 Dresser Industries, Inc. ................................................................ 16,600
1,800 Exxon Corporation........................................................................ 137,475
1,000 Halliburton Company...................................................................... 41,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 17
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------------------ -----------
<C> <S> <C>
1,500 Mobil Corporation........................................................................ $ 151,125
5,500 Occidental Petroleum Corporation......................................................... 118,250
1,700 Pennzoil Company......................................................................... 64,175
900 Phillips Petroleum Company............................................................... 29,025
1,000 Royal Dutch Petroleum, NY Shares, ADR.................................................... 122,875
1,300 Schlumberger, Ltd. ...................................................................... 80,925
1,500 Texaco, Inc. ............................................................................ 102,187
1,400 Ultramar Corporation..................................................................... 34,125
2,200 Valero Energy Corporation................................................................ 51,975
1,000 YPF Sociedad Anonima, Sponsored ADR...................................................... 17,125
-----------
1,558,950
-----------
PHARMACEUTICAL--10.3%
--------------------
3,000 Abbott Laboratories...................................................................... 119,250
2,600 American Home Products Corporation....................................................... 230,425
4,000 Amgen, Inc.*............................................................................. 192,000
2,000 Beckman Instruments, Inc. ............................................................... 66,250
3,200 Bristol-Myers Squibb Company............................................................. 244,000
3,600 Lilly (Eli) & Company.................................................................... 347,850
1,200 Merck & Company, Inc. ................................................................... 69,000
1,600 Pfizer, Inc. ............................................................................ 91,800
2,000 R.P. Scherer Corporation*................................................................ 89,000
1,700 Schering-Plough Corporation.............................................................. 91,163
2,500 Upjohn Company........................................................................... 126,875
-----------
1,667,613
-----------
POLLUTION CONTROL--0.9%
---------------------
3,000 Browning-Ferris Industries............................................................... 87,375
2,100 WMX Technologies, Inc. .................................................................. 59,063
-----------
146,438
-----------
PUBLISHING--3.0%
---------------
3,500 Dun & Bradstreet Corporation............................................................. 209,125
1,700 Gannett Company.......................................................................... 92,437
2,800 Tribune Company.......................................................................... 176,750
-----------
478,312
-----------
REAL ESTATE INVESTMENT TRUST (REIT)--0.3%
--------------------------------------
1,500 Meditrust, SBI........................................................................... 50,625
-----------
RETAIL--3.8%
-----------
1,000 Ann Taylor Stores, Inc.*................................................................. 11,000
2,500 Barnes & Noble, Inc.*.................................................................... 91,250
3,000 Gap, Inc. ............................................................................... 118,125
1,900 J.C. Penney Company, Inc. ............................................................... 80,037
2,000 May Department Stores Company............................................................ 78,500
2,400 Nordstrom, Inc. ......................................................................... 88,950
1,000 O'Reilly Automotive, Inc.*............................................................... 32,750
1,000 Sears Roebuck And Company................................................................ 34,000
1,700 Toys "R" Us, Inc.*....................................................................... 37,187
2,000 Wal-Mart Stores, Inc. ................................................................... 43,250
-----------
615,049
-----------
SECURITIES--1.5%
--------------
1,000 Edwards (A.G.), Inc. .................................................................... 25,500
1,100 Lehman Brothers Holding, Inc. ........................................................... 23,925
300 Morgan Stanley Group, Inc. .............................................................. 26,100
4,700 Salomon, Inc. ........................................................................... 169,787
-----------
245,312
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 18
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
- ------------------ -----------
<C> <S> <C>
SERVICES--0.5%
------------
2,500 Medaphis Corporation*.................................................................... $ 79,375
-----------
STEEL--0.3%
----------
1,500 Carpenter Technology Corporation......................................................... 56,813
-----------
TELECOMMUNICATIONS--5.4%
-----------------------
800 Alcatel Alsthom CGE, Sponsored ADR....................................................... 13,500
1,000 Ameritech Corporation.................................................................... 54,000
2,700 BellSouth Corporation.................................................................... 206,550
8,000 Comsat Corporation....................................................................... 159,000
1,000 GTE Corporation.......................................................................... 41,250
1,600 Hong Kong Telecommunications, Ltd., Sponsored ADR........................................ 27,800
600 MCI Communications....................................................................... 14,963
2,600 NYNEX Corporation........................................................................ 122,200
800 Pacific Telesis Group.................................................................... 24,300
2,700 SBC Communications, Inc. ................................................................ 150,863
1,300 Telephone & Data Systems, Inc. .......................................................... 52,000
-----------
866,426
-----------
TEXTILES--0.3%
------------
1,500 Liz Claiborne, Inc. ..................................................................... 42,563
400 Shaw Industries, Inc. ................................................................... 5,100
-----------
47,663
-----------
TOBACCO--2.2%
-------------
3,000 American Brands, Inc. ................................................................... 128,625
4,500 RJR Nabisco Holdings Corporation......................................................... 138,375
3,000 UST, Inc. ............................................................................... 90,000
-----------
357,000
-----------
TRANSPORTATION--5.0%
------------------
6,000 Airborne Freight Corporation............................................................. 157,500
2,700 CSX Corporation.......................................................................... 226,125
4,000 Federal Express Corporation*............................................................. 328,500
2,400 Illinois Central Corporation............................................................. 91,800
-----------
803,925
-----------
Total common stocks (cost $14,277,378)....................................................................... 15,072,571
-----------
TOTAL INVESTMENT PORTFOLIO (cost $16,502,378)(b), 107.0%(a).................................................. 17,297,571
OTHER ASSETS AND LIABILITIES, NET, (7.0%)(a)................................................................. (1,126,765)
-----------
NET ASSETS, 100.0%........................................................................................... $16,170,806
==========
</TABLE>
- ------------------
* Not an income-producing security.
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
$16,511,338. Market value includes net unrealized appreciation of
$786,233, which consists of aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
of $1,076,898 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value of
$290,665.
ADR -- American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
<PAGE> 19
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
- -----
Investments, at market value (identified cost $14,277,378) (Note 1)............................ $15,072,571
Repurchase agreement (identified cost $2,225,000) (Note 1)..................................... 2,225,000
Cash........................................................................................... 166
Receivables:
Investments sold............................................................................. 652,797
Fund shares sold............................................................................. 174,658
Dividends and interest....................................................................... 20,601
Deferred organization expenses (Note 1)........................................................ 44,175
Deferred state registration expenses (Note 1).................................................. 15,931
Prepaid insurance.............................................................................. 1,283
-----------
Total assets........................................................................... 18,207,182
Liabilities
- --------
Payables (Note 4):
Investments purchased........................................................................ $1,919,273
Fund shares redeemed......................................................................... 15,388
Due to Manager............................................................................... 27,128
Accrued distribution fee..................................................................... 5,562
Other accrued expenses....................................................................... 69,025
----------
Total liabilities...................................................................... 2,036,376
-----------
Net assets, at market value.................................................................... $16,170,806
==========
Net Assets
- ---------
Net assets consist of:
Undistributed net investment income.......................................................... $ 56,475
Net unrealized appreciation on investments................................................... 795,193
Accumulated net realized gain................................................................ 536,111
Paid-in capital.............................................................................. 14,783,027
-----------
Net assets, at market value.................................................................... $16,170,806
==========
Class A Shares
- -------------
Net asset value and redemption price per share ($11,918,015 divided by 661,961 shares of
beneficial interest outstanding, no par value) (Notes 1 and 2)............................... $18.00
-----
-----
Maximum offering price per share (100/95.25 of $18.00)......................................... $18.90
-----
-----
Class C Shares
- ------------
Net asset value and offering price per share ($4,252,791 divided by 237,324 shares of
beneficial interest outstanding, no par value) (Notes 1 and 2)............................... $17.92
-----
-----
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 20
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 30, 1994
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
- ----------------
Income:
Dividends....................................................................................... $ 133,861
Interest........................................................................................ 34,714
----------
Total income.............................................................................. 168,575
Expenses (Notes 1 and 4):
Management fee.................................................................................. $ 47,250
Custodian/Fund accounting fees.................................................................. 54,127
Amortization of state registration expenses..................................................... 30,714
Professional fees............................................................................... 26,809
Distribution fee................................................................................ 23,888
Reports to shareholders......................................................................... 12,512
Shareholder servicing fee....................................................................... 10,346
Amortization of organization expenses........................................................... 8,835
Trustees' fees and expenses..................................................................... 6,413
Federal registration fee........................................................................ 4,994
Insurance....................................................................................... 2,186
--------
Total expenses before waiver and reimbursement............................................ 228,074
Fees waived by the Manager (Note 4)....................................................... (47,250)
Reimbursement from Manager (Note 4)....................................................... (68,724) 112,100
-------- ----------
Net investment income............................................................................. 56,475
----------
Realized and Unrealized Gain on Investments
- ---------------------------------------
Net realized gain from investment transactions.................................................... 536,111
Net increase in unrealized appreciation of investments during the period.......................... 795,193
----------
Net gain on investments................................................................... 1,331,304
----------
Net increase in net assets resulting from operations.............................................. $1,387,779
=========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 30, 1994
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 1995
-----------------------------
<S> <C>
Increase in net assets:
Operations:
Net investment income......................................................................... $ 56,475
Net realized gain from investment transactions................................................ 536,111
Net increase in unrealized appreciation of investments during the period...................... 795,193
------------
Net increase in net assets resulting from operations.......................................... 1,387,779
Increase in net assets from Fund share transactions (Note 2).................................... 14,482,027
------------
Increase in net assets.......................................................................... 15,869,806
Net assets, beginning of period (original capital as of December 30, 1994)...................... 301,000
------------
Net assets, end of period (including undistributed net investment income of $56,475)............ $ 16,170,806
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 21
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
CLASS A+ CLASS C++
---------- ----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD................................................. $ 14.29 $ 15.27
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................................. .08 .01
Net realized and unrealized gain on investments........................................ 3.63 2.64
---------- ----------
Total from investment operations......................................................... 3.71 2.65
---------- ----------
NET ASSET VALUE, END OF THE PERIOD....................................................... $ 18.00 $ 17.92
=========== ===========
TOTAL RETURN (%)(C)(D)................................................................... 25.96 17.35
RATIOS (%)/AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net to average daily net assets(a)(b)..................... 1.65 2.40
Ratio of net investment income to average daily net assets(b).......................... 1.05 .28
Portfolio turnover rate(b)............................................................. 82 82
Net assets, end of period ($ millions)................................................. 12 4
</TABLE>
- ---------------
+ For the period December 30, 1994 (commencement of operations) to October 31,
1995.
++ For the period April 3, 1995 (commencement of Class C Shares) to October 31,
1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager of
$.13 per share for Class A and Class C Shares, respectively. The operating
expense ratios including such items would be 3.49% and 4.24%, (annualized),
respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
<PAGE> 22
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage Series Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company and presently offers shares in four
series, the Value Equity Fund (the "Fund"), the Small Cap Stock Fund,
the Growth Equity Fund and the Eagle International Equity Portfolio. The
Fund currently issues Class A and Class C Shares. Class A Shares are
sold subject to a maximum sales charge of 4.75% of the amount invested
payable at the time of purchase. Class C Shares, which were offered to
shareholders beginning April 3, 1995, are sold subject to a contingent
deferred sales charge of 1% of the lower of net asset value or purchase
price payable upon any redemptions within one year after purchase. The
financial statements for the Small Cap Fund and Eagle International
Equity Portfolio are presented separately. The policies described below
are followed by the Fund in the preparation of its financial statements
in conformity with generally accepted accounting principles.
Security Valuation: The Fund values investment securities at market
value based on the last quoted sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, the last bid price is used and in the absence of a market
quote, securities are valued using such methods as the Board of Trustees
believes would reflect fair market value. Short term investments having
a maturity of 60 days or less are valued at cost which, when combined
with accrued interest included in interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund's policy is to comply with the
requirements of the Internal Revenue Code of 1986, as amended, which are
applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders.
Accordingly, no provision has been made for federal income and excise
taxes.
Distribution of Net Realized Gains. Net realized gains from investment
transactions during any particular year in excess of available capital
loss carryforwards, which, if not distributed, would be taxable to the
Fund, will be distributed to shareholders in the following fiscal year.
The Fund uses the identified cost method for determining realized gain
or loss on investments for both financial and federal income tax
reporting purposes.
State Registration Expenses: State registration fees are amortized based
either on the time period covered by the registration or as related
shares are sold, whichever is appropriate for each state.
Expenses: The Fund is charged for those expenses which are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are all allocated proportionately among
the Funds. Expenses of the Fund are allocated to each class of shares
based upon their relative percentage of current net assets. All expenses
that are directly attributable to a specific class of shares, such as
distribution fees, are allocated to that class.
Organization Expenses: Expenses incurred in connection with the
formation of the Fund were deferred and are being amortized on a
straight-line basis over 60 months from the date of commencement of
operations.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of the Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis.
<PAGE> 23
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At October 31, 1995, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A and Class C Shares of the Fund during the period
December 30, 1994 to October 31, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
FOR THE PERIOD FOR THE PERIOD
DECEMBER 30, 1994 APRIL 3, 1995
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO CLASS C SHARES) TO
OCTOBER 31, 1995 OCTOBER 31, 1995
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold............................................ 692,734 $11,278,811 238,487 $4,109,350
Shares redeemed........................................ (51,837) (885,977) (1,163) (20,157)
---------- ----------- --------- ----------
Net increase........................................... 640,897 $10,392,834 237,324 $4,089,193
========== =========
Shares outstanding:
Beginning of period (seed shares).................... 21,064 --
---------- ---------
End of period........................................ 661,961 237,324
========= ========
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the period ended October 31,
1995, purchases and sales of investment securities (excluding repurchase
agreements and short term obligations) aggregated $18,855,843 and
$5,114,517, respectively.
Note 4: MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND
TRUSTEES' FEES. Under the Fund's Investment Advisory and Administration
Agreement with Heritage Asset Management, Inc. ( the "Manager"), the
Fund agrees to pay to the Manager a fee equal to an annualized rate of
.75% of the Fund's average daily net assets, computed daily and payable
monthly. The agreement also provides for a reduction in such fees in any
year to the extent that operating expenses of the Fund exceed applicable
state expense limitations. Currently, the Manager has voluntarily agreed
to waive its fee and, if necessary reimburse the Fund to the extent that
Fund operating expenses exceed 1.65% for Class A Shares (2.40% for Class
C Shares effective April 3, 1995) on an annual basis of the Fund's
average daily net assets attributable to each class of shares. This
agreement is more restrictive than any state expense limitation at the
current level of net assets. Under the Agreement, management fees waived
and expenses reimbursed totaled $115,974 ($.13 per share for each class)
during the period ended October 31, 1995. If total Fund expenses fall
below the expense limitation agreed to by the Manager before the end of
the year ending October 31, 1997, the Fund may be required to pay the
Manager a portion or all of the waived management fee.
The Manager is also the Dividend Paying and Shareholder Servicing Agent
for the Portfolio. The amount payable to the Manager for such expenses
as of October 31, 1995 was $4,800. In addition, the Manager performs
Fund Accounting services and charged $20,509 during the current period
of which $8,200 was payable as of October 31, 1995.
The Manager has entered into an agreement with Eagle Asset Management,
Inc. (the "Subadviser") for the Subadviser to provide to the Fund
investment advice, portfolio management services including the placement
of brokerage orders, and certain compliance and other services for a fee
payable by the Manager equal to 50% of the fees payable by the Fund to
the Manager without regard to any reduction due to the imposition of
expense limitations.
Pursuant to a plan adopted in accordance with Rule 12b-1 of the
Investment Company Act of 1940, as amended, the Fund is authorized to
pay Raymond James & Associates, Inc. (the "Distributor") a fee pursuant
to the Class A Distribution Plan of up to 0.35% of average daily net
assets for the services it provides in connection with the promotion and
distribution of Fund shares. However, at the present time the Board of
Trustees has authorized payments of only .25% of average daily net
assets. Under the Class C Distribution Plan the Fund paid the
Distributor a fee equal to 1.00% of the average daily net assets. The
Distributor may retain the first 12 months distribution fee for
reimbursement of amounts paid to the broker/dealer at the time of
purchase. Such fees are accrued daily and payable monthly. During the
period $13,040 and $10,848 were paid for distribution fees for Class A
Shares and Class C Shares, respectively. The Manager, the Subadviser,
the Distributor and the Shareholder Servicing Agent are all wholly-owned
subsidiaries of Raymond James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Capital Appreciation Trust, Heritage Income-Growth Trust,
Heritage Income Trust and Heritage U.S. Government Income Fund,
investment companies which are also advised by the Manager (collectively
referred to as the Heritage funds). Each Trustee of the Heritage funds
who is not an
<PAGE> 24
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST-VALUE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
interested person of the Manager received an annual fee of $8,000 and an
additional fee of $2,000 for each combined quarterly meeting of the
Heritage funds attended. Trustees' fees and expenses are paid equally by
each of the Heritage funds.
<PAGE>
