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Heritage
Series
Trust
[PHOTO MONTAGE]
From Our Family to Yours: The Intelligent Creation of Wealth.
Technology Fund
PROSPECTUS
October 11, 1999
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal offense.
[LOGO]
Series Trust(TM)
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
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TABLE OF CONTENTS
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DETAILS OF THE FUND .................................................. 1
Investment Objective ................................................ 1
How the Technology Fund Pursues its Objective ....................... 1
What are the Main Risks of Investing in the Technology Fund ......... 1
Who is the Portfolio Manager ........................................ 2
What are the Costs of Investing in the Technology Fund .............. 2
Expense Example ..................................................... 3
MANAGEMENT OF THE FUND ............................................... 4
Who Manages Your Fund ............................................... 4
Distribution of Fund Shares ......................................... 4
Year 2000 ........................................................... 4
YOUR INVESTMENT ...................................................... 5
Before You Invest ................................................... 5
Choosing a Class of Shares .......................................... 5
Sales Charge Reductions and Waivers ................................. 7
How to Invest ....................................................... 8
How to Sell Your Investment ......................................... 9
How to Exchange Your Shares ......................................... 11
Account and Transaction Policies .................................... 11
Dividends, Capital Gains and Taxes .................................. 12
Prospectus
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DETAILS OF THE FUND
TECHNOLOGY FUND
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INVESTMENT OBJECTIVE. The Technology Fund seeks long-term capital
appreciation.
HOW THE TECHNOLOGY FUND PURSUES ITS OBJECTIVE. The Technology Fund seeks
to achieve its objective by investing primarily in equity securities of
companies that rely extensively on technology in their processes, products or
services, or may be expected to benefit from technological advances and
improvements in industry, manufacturing and commerce. Special emphasis may be
given to companies employing innovative technology to enhance distribution
systems, develop new products and increase management efficiencies. The fund
invests in various technology subsectors, including personal computer hardware
and software, enterprise hardware and software, data networking,
telecommunications, Internet and electronic commerce, semiconductors,
semiconductor equipment, computer/business services, contract manufacturing and
component distribution.
The fund's portfolio manager will use a "bottom-up" method of analysis
based on fundamental research to select companies for the fund's portfolio. In
selecting investments, the fund's portfolio manager will search for companies,
regardless of size, whose stocks appear to be trading below their true value.
The Fund also will invest in companies that are positioned for accelerated
growth or higher earnings. The portfolio manager may sell any security in the
fund's portfolio if the company's fundamentals deteriorate, the competitive
landscape of the company or its industry changes, the company's position size
in the fund's portfolio becomes too large, or new investments are more
attractive.
The fund will invest, under normal market conditions, at least 65% of its
total assets in equity securities of companies that rely extensively on
technology in their processes, products or services, or may be expected to
benefit from technological advances and improvements in industry, manufacturing
and commerce. Equity securities include common and preferred stocks, warrants
or rights exercisable into common or preferred stock, securities convertible
into common or preferred stock, and American Depository Receipts. As a
temporary defensive measure because of market, economic or other conditions,
the fund may invest up to 100% of its assets in high-quality, short-term debt
instruments. To the extent that the fund invokes this strategy, its ability to
achieve its investment objective may be affected adversely.
WHAT ARE THE MAIN COMPONENTS OF THE RISKS OF INVESTING IN THE TECHNOLOGY
FUND. Perhaps the biggest risk of investing in this fund is that its returns
will fluctuate and you could lose money. This fund invests primarily in the
equity securities of companies whose value might decrease in response to the
activities of the company that issued the securities, general market
conditions, and/or economic conditions If this occurs, the fund's net asset
value also may decrease.
INVESTING IN A SINGLE SECTOR. The fund concentrates its investments in the
technology sector. As a result, the fund's investments likely will be sensitive
to sector-wide conditions. Adverse conditions or developments affecting one
technology subsector may spread to other companies within related technology
subsectors. The market prices of companies within these subsectors may move in
tandem, which may cause greater volatility on the fund's net asset value and
performance than on a fund that invests among different and unrelated sectors.
INVESTING IN TECHNOLOGY COMPANIES. Investments in technology companies
present special and significant risks. For example, if technology continues to
advance at an accelerated rate, and the number of companies and product
offerings continues to expand, increasingly aggressive pricing may affect the
profitability of companies in which the fund invests. In addition, because of
the rapid pace of technological development, products and services produced by
companies in which the fund invests may become obsolete or have relatively
short product cycles. As a result the fund's returns may be considerably more
volatile than the returns of other mutual funds that do not invest in similarly
related companies.
Prospectus 1
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INVESTING IN SMALL-CAP COMPANIES. The fund may invest a portion of its
assets in small-capitalization technology companies. Small cap companies often
have narrower markets and more limited managerial and financial resources than
larger, more established companies. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase
the volatility of the fund's portfolio. Generally, the smaller the company
size, the greater these risks.
INTEREST RATE RISK. A rising interest rate environment tends to negatively
affect companies in the technology sector. Those technology companies having
high market valuations may appear less attractive to investors which may cause
sharp decreases in the companies' market prices. Further, those technology
companies seeking to finance their expansion would have increased borrowing
costs which may negatively impact their earnings. In addition, a rise in
interest rates typically will cause the market value of any fixed-income
securities held by the fund to fall. Consequently, in a rising interest rate
environment, the fund's performance may be reduced.
INVESTING IN ILLIQUID SECURITIES. Because technology securities may be
volatile, there is the possbility that the technology securities in which the
fund invests may become illiquid. Illiquid securities may trade at a discount
when compared to more liquid investments. The fund may be unable to sell
illiquid securities in a timely manner or at a fair price due to the lack of
liquidity. In addition, the sale of such securities may require more time and
increased selling expenses. Consequently, the fund's investments in illiquid
securities may have an adverse impact on its net asset value.
NON-DIVERSIFICATION RISK. The fund is non-diversified which means it
invests in a limited number of companies. Consequently, the performance of any
one company may have a substantial impact on the fund's performance. In
addition, the fund's net asset value may fluctuate more than a fund investing
in a larger number of companies.
PORTFOLIO TURNOVER. The fund may engage in short-term transactions under
various market conditions to a greater extent than certain other mutual funds
with similar investment objectives. The portfolio manager expects that the
fund's portfolio turnover will exceed 200%. The fund's turnover rate may vary
greatly from year to year or during periods within a year. A high rate of
portfolio turnover generally leads to greater transaction costs and may result
in additional tax consequences to investors.
WHO IS THE PORTFOLIO MANAGER. Duane Eatherly, CFA, a Senior Research
Analyst of the fund's subadviser Eagle Asset Management, Inc., is responsible
for the day-to-day management of the fund.
WHAT ARE THE COSTS OF INVESTING IN THE TECHNOLOGY FUND. The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the fund. The fund's expenses are based on estimated expenses to be incurred
for the fiscal year ending October 31, 2000.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a % of offering price) ......... 4.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or redemption
proceeds, whichever is lower) ............................................... None/triangle/ 5%* 1%**
Wire Redemption Fee (per transaction) ........................................ $5.00 $5.00 $5.00
</TABLE>
/triangle/ If you buy $1,000,000 or more of Class A shares and sell these
shares within 18 months from the date of purchase, you may pay a
1% contingent deferred sales charge at the time of sale.
* Declining over a six-year period as follows: 5% during the first
year, 4% during the second year, 3% during the third and fourth
years, 2% during the fifth year, 1% during the sixth year and 0%
thereafter. Class B shares will convert to Class A shares eight
years after purchase.
** Declining to 0% at the first year.
Prospectus 2
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ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS):
CLASS A CLASS B CLASS C
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Management Fees* ................................. 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees ............ 0.25% 1.00% 1.00%
Other Expenses ................................... 0.71% 0.71% 0.71%
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Total Annual Fund Operating Expenses ............. 1.96% 2.71% 2.71%
Fee Waiver and/or Expense Reimbursement* ......... 0.31% 0.31% 0.31%
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Net Expenses ..................................... 1.65% 2.40% 2.40%
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* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A annual
operating expenses exceed 1.65% of the class' average daily net assets and
Class B and Class C annual operating expenses exceed 2.40% of that class'
average daily net assets for the fund's 2000 fiscal year. Any reduction in
Heritage's management fees is subject to reimbursement by the fund within
the following two years if overall expenses fall below these percentage
limitations.
EXPENSE EXAMPLE. This Example is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the fund's operating expenses for Year 1 are net of fee waivers and/or expense
reimbursement. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
YEAR 1 YEAR 3
SHARE CLASS ------ ------
A shares ...................................... $635 $1,537
B shares
Assuming redemption at end of period ........ $743 $1,629
Assuming no redemption ...................... $243 $1,329
C shares ...................................... $243 $1,329
Prospectus 3
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MANAGEMENT OF THE FUND
WHO MANAGES YOUR FUND
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INVESTMENT ADVISER. Heritage Asset Management, Inc. serves as the
investment adviser and administrator for the fund. Heritage manages, supervises
and conducts the business and administrative affairs of the fund and the other
Heritage mutual funds with net assets totaling approximately $5.4 billion as of
September 30, 1999. Heritage's contractual aggregate annual investment advisory
and administration fee for the fund is 1.00% of the fund's average daily net
assets on the first $100 million and 0.75% on average daily net assets over
$100 million.
Heritage is located at 880 Carillon Parkway, St. Petersburg, Florida
33716, and is a wholly owned subsidiary of Raymond James Financial, Inc. (RJF),
together with its subsidiaries, provides a wide range of financial services to
retail and institutional clients.
SUBADVISER. Heritage may allocate and reallocate the assets of the fund
among one or more investment subadvisers, subject to review by the Board of
Trustees. In the future, Heritage may apply to the Securities and Exchange
Commission (SEC) to receive approval to enter into new or modified subadvisory
agreements with existing or new subadvisers without approval of fund
shareholders, but with the approval of the fund's Board. Upon issuance of such
relief from the SEC, no shareholder approval would be required, subject to
certain conditions. One of the conditions would be that the fund must send
notice to shareholders containing information about the new subadvisor or a
material change to an existing subadvisory contract.
Heritage has selected Eagle Asset Management, Inc., 880 Carillon Parkway,
St. Petersburg, Florida 33716, to provide investment advice and portfolio
management services to the fund's portfolio. Eagle has been managing private
accounts since 1976 for a diverse group of clients, including individuals,
corporations, municipalities and trusts. Eagle managed approximately $5.6
billion for these clients as of September 30, 1999.
PORTFOLIO MANAGER. Duane Eatherly, a Senior Research Analyst of Eagle, is
responsible for the day-to-day management of the fund's portfolio. From July
1996 to May 1999, Mr. Eatherly served as a Sector Manager (Technology Equities)
at Banc One Investment Advisors. Prior to that, he was a Vice President
(Acquisitions) with Banc One Private Label Credit Services from November 1995
to July 1996, and Senior Associate (Merchant Banking Group) with Banc One
Capital Corporation from June 1993 to January 1996. Mr. Eatherly is a Chartered
Financial Analyst and Certified Financial Planner.
DISTRIBUTION OF FUND SHARES
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Raymond James & Associates, Inc. (RJA) currently serves as the distributor
of the fund. Subject to regulatory approvals, the fund's Board of Trustees has
approved a proposed distribution agreement with Heritage Fund Distributors,
Inc.
YEAR 2000
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The fund could be affected adversely if the computer systems used by
Heritage, Eagle, the fund's other service providers, or companies in which the
fund invests do not properly process and calculate information that relates to
dates beginning on January 1, 2000 and beyond. Heritage and Eagle have taken
steps that they believe are reasonably designed to address the potential
failure of computer systems used by them and the fund's service providers to
address the Year 2000 issue. However, due to the fund's reliance on various
service providers to perform essential functions, the fund could have
difficulty calculating its net asset value, processing orders for share sales
and delivering account statements and other information to shareholders. There
can be no assurance that these steps will be sufficient to avoid any adverse
impact.
Prospectus 4
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YOUR INVESTMENT
BEFORE YOU INVEST
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Before you invest in the fund, please
o Read this prospectus carefully.
o Next, decide which class of shares is best for you.
o Finally, decide how much you wish to invest and how you want to
open an account.
CHOOSING A CLASS OF SHARES
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You can choose from three classes of shares: Class A shares, Class B
shares and Class C shares. Each class has a different combination of sales
charges and ongoing fees allowing you to choose the class that best meets your
needs. You should make this decision carefully based on:
o the amount you wish to invest,
o the different sales charges that apply to each share class,
o whether you qualify for any reduction or waiver of sales charges,
o the length of time you plan to keep the investment, and
o the class expenses.
CLASS A SHARES. You may purchase Class A shares at the "offering price" --
a price equal to their net asset value, plus a maximum sales charge of 4.75%
imposed at the time of purchase. Class A shares are subject to ongoing
distribution and service (Rule 12b-1) fees of up to 0.25% of their average
daily net assets. These fees are lower than the ongoing Rule 12b-1 fees for
Class B shares and Class C shares.
If you choose to invest in Class A shares, you will pay a sales charge at
the time of each purchase. The table below shows the charges both as a
percentage of offering price and as a percentage of the amount you invest. If
you invest more, the sales charge will be lower. You may qualify for a reduced
sales charge or the sales charge may be waived as described below.
CLASS A SALES CHARGES
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<TABLE>
<CAPTION>
AS A % OF AS A % OF YOUR DEALER CONCESSION
YOUR INVESTMENT OFFERING PRICE INVESTMENT AS % OF OFFERING PRICE(1)
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<S> <C> <C> <C>
Less than $25,000....... 4.75% 4.99% 4.25%
$25,000 - $49,000....... 4.25% 4.44% 3.75%
$50,000 - $99,999....... 3.75% 3.90% 3.25%
$100,000 - $249,999..... 3.25% 3.36% 2.75%
$250,000 - $499,999..... 2.50% 2.56% 2.00%
$500,000 - $999,999..... 1.50% 1.52% 1.25%
$1,000,000 and over..... 0.00% 0.00% 0.00%(2)
</TABLE>
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(1) During certain periods, the fund's distributor may pay 100% of the
sales charge to participating dealers. Otherwise, it will pay the
dealer concession shown above.
(2) For purchases of $1 million or more, Heritage may pay from its own
resources to the Distributor, up to 1.00% of the purchase amount on
the first $3 million and 0.80% on assets thereafter. If you sell these
shares within 18 months from the date of purchase, then you will be
subject to a 1.00% "contingent deferred" sales charge at the time of
sale and Heritage will retain the initial year's Rule 12b-1 fees.
CLASS B SHARES. You may purchase Class B shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares within 6 years of
purchase, you will pay a "contingent deferred" sales charge (CDSC) at the time
of sale of up to 5.00%. Class B shares are subject to ongoing Rule 12b-1 fees
of up to 1.00% of
Prospectus 5
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their average daily net assets. This Rule 12b-1 fee is higher than the ongoing
Rule 12b-1 fees for Class A shares but the same as for the Class C shares.
Class B shares are offered for sale only for purchases of less than $250,000.
If you choose to invest in Class B shares, you will pay a sales charge if
you sell those shares within 6 years of purchase. The CDSC imposed on sales of
Class B shares will be calculated by multiplying the original purchase cost or
the current market value of the shares being sold, whichever is less, by the
percentage shown on the following chart. The longer you hold the shares, the
lower the rate of the CDSC. The CDSC may be waived as described below. Any
period of time you held Class B shares of the Heritage Cash Trust-Money Market
Fund will not be counted when determining your CDSC.
CLASS B DEFERRED CHARGES
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REDEMPTION DURING: CDSC ON SHARES BEING SOLD
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1st year .............. 5%
2nd year .............. 4%
3rd year .............. 3%
4th year .............. 3%
5th year .............. 2%
6th year .............. 1%
After 6 years ......... 0%
CONVERSION OF CLASS B SHARES. If you buy Class B shares and hold them for
8 years, we automatically will convert them to Class A shares without charge.
Any period of time you held Class B shares of the Heritage Cash Trust-Money
Market Fund will be excluded from the 8-year period. At this time, we also will
convert any Class B shares that you purchased with reinvested dividends and
other distributions. We do this to lower your investment costs.
When we do the conversion, you will receive Class A shares in an amount
equal to the value of your Class B shares. However, because Class A and Class B
shares have different prices, you may receive more or less Class A shares after
the conversion. The dollar value will be the same, so you have not lost any
money as a result of the conversion.
CLASS C SHARES. You may purchase Class C shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares less than 1 year after
purchase, you will pay a CDSC at the time of sale of 1.00%. Class C shares are
subject to ongoing Rule 12b-1 fees of up to 1.00% of their average daily net
assets. This Rule 12b-1 fee is higher than the ongoing Rule 12b-1 fees for
Class A shares and is the same as for the Class B shares. Class C shares do not
convert to any other class of shares. Any period of time you held Class C
shares of the Heritage Cash-Trust Money Market Fund will not be counted toward
the 1-year period.
If you choose to invest in Class C shares, you will pay a sales charge if
you sell your shares less than 1 year after purchase. The CDSC imposed on sales
of Class C shares will be calculated based on the original purchase cost or the
current market value of the shares being sold, whichever is less. The CDSC may
be waived as described below.
UNDERSTANDING RULE 12B-1 FEES. The fund has adopted a plan under Rule
12b-1 that allows it to pay distribution and sales fees for the sale of its
shares and for services provided to shareholders. Because these fees are paid
out of the fund's assets on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
Prospectus 6
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SALES CHARGE REDUCTIONS AND WAIVERS
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We offer a number of ways to reduce or eliminate the initial sales charge
on Class A shares or the CDSC on Class B and Class C shares. If you think you
are eligible, contact Heritage or your financial advisor for further
information.
REDUCING YOUR CLASS A SALES CHARGE. We offer three programs designed to
reduce your Class A sales charge. You may choose one of these programs to
combine multiple purchases of Class A shares of Heritage mutual funds to take
advantage of the reduced sales charges listed in the schedule above. Please
complete the appropriate section of your account application, contact your
financial advisor or Heritage if you would like to take advantage of these
programs.
o RIGHTS OF ACCUMULATION -- Lets you combine purchases in related
accounts for purposes of calculating sales charges. Under this program, a
related account includes any other direct or beneficial accounts you own,
your spouse's accounts, or accounts held by your minor children.
o COMBINED PURCHASE PRIVILEGE -- Lets you add the value of your
previous Class A investments for purposes of calculating the sales charge
if the total amount you have invested is at least $25,000.
o STATEMENT OF INTENTION -- Lets you purchase Class A shares of any
Heritage mutual fund over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. You must invest at
least $25,000 to obtain the benefit of this privilege.
WAIVER OF CLASS A SHARES SALES CHARGE. Class A shares may be sold at net
asset value without any sales charge to: (1) Heritage and Eagle; (2) current
and retired officers and Trustees of the fund; (3) directors, officers and
full-time employees of Heritage, Eagle, any subadviser of a Heritage mutual
fund, the fund's distributor and its affiliates; (4) registered financial
advisors and employees of broker-dealers that are parties to dealer agreements
with the fund's distributor (or financial institutions that have arrangements
with such broker-dealers); and (5) directors, officers and full-time employees
of banks that are party to agency agreements with the distributor, and all such
persons' immediate relatives and their beneficial accounts. In addition,
members of the American Psychiatric Association may purchase Class A shares at
a sales charge equal to two-thirds of the percentages in the above table. The
dealer concession also will be adjusted in a like manner. Class A shares also
may be purchased without sales charges by investors who participate in certain
broker-dealer wrap fee investment programs.
Class A shares also may be sold at net asset value without any sales
charges to individual retirement accounts, qualified retirement plans and
taxable accounts that execute transactions through a single omnibus account
that is maintained by a financial institution or service organization that has
entered into an acceptable administrative or similar agreement with the
applicable Heritage mutual fund, Heritage or the fund's distributor.
In addition, Class A shares may be sold at net asset value without any
sales charges to participants of retirement plans which have at least 100
participants or $50 million dollars. Heritage may pay from its own resources to
the Distributor up to 1.00% of the purchase amount on the first $3 million and
0.80% on assets thereafter, by these plans. Any participant in these plans who
redeems Class A shares within 18 months of his or her purchase may be subject
to a CDSC of 1.00% and Heritage will retain the initial year's Rule 12b-1 fees.
CDSC WAIVERS. The CDSC for Class A shares, Class B shares and Class C
shares currently is waived if the shares are sold:
o to make certain distributions from retirement plans,
o because of shareholder death or disability (including shareholders who
own shares in joint tenancy with a spouse),
Prospectus 7
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o to make payments through certain sales from a Systematic Withdrawal Plan
of up to 12% annually of the account balance at the beginning of the
plan, or
o to close out shareholder accounts that do not comply with the minimum
balance requirements.
REINSTATEMENT PRIVILEGE. If you sell shares of a Heritage mutual fund, you
may reinvest some or all of the sales proceeds up to 90 days later in the same
share class of any Heritage mutual fund without incurring additional sales
charges. If you paid a CDSC, the reinvested shares will have no holding period
requirement. You must notify the fund if you decide to exercise this privilege.
HOW TO INVEST
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INITIAL OFFERING OF SHARES. The fund initially will offer its shares for
sale during a period scheduled to end at the close of business on November 17,
1999. During this period, shares of the fund will be offered through RJA to
participating dealers or banks at a price of $14.29 per Class A share
(including the applicable sales charge) with a maximum offering price of $15.00
per share. Class B and Class C shares will be offered at $14.29. During this
period, a financial advisor of RJA, participating dealers, or participating
banks may receive payments for any orders. These persons may benefit from the
temporary use of funds received prior to close of the initial offering period.
After the close, the fund will commence investment operations. The fund may
withdraw, cancel or modify the offering of shares during the initial offering
period without notice or refuse any order in whole or in part, if the fund
determines that it is in its best interests to do so.
MINIMUM INITIAL INVESTMENT. Once you have chosen a share class, the next
step is to determine the amount you wish to invest. The minimum initial
investment for the fund is:
MINIMUM INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
--------------- ---------------- ---------------------
Regular Account ................... $1,000 No minimum
Systematic Investment Program ..... $ 50 $50 on a monthly basis
Retirement Account ................ $1,000 No minimum
Heritage may waive these minimum requirements at its discretion.
Investments in individual retirement accounts may be reduced or waived under
certain circumstances. Contact Heritage or your financial advisor for further
information.
OPENING AN ACCOUNT. You may open an account in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may invest in the fund by contacting
your financial advisor. Your financial advisor can help you open a new account
and help you review your financial needs and formulate long-term investment
goals and objectives.
BY MAIL. You may invest in the fund directly by completing and signing the
account application found in this prospectus. Indicate the class of shares and
the amount you wish to invest. If you do not specify a share class, we will
automatically choose Class A shares, which include a front-end sales charge.
Make your check payable to the fund and specific class of shares you are
purchasing. Mail the application and your payment to:
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
BY DOLLAR COST AVERAGING PLANS. We offer the following plans to allow you
to make regular, automatic investments into the fund. You determine the amount
and frequency of your investments. You can terminate your plan at any time.
Availability of these plans may be limited by your financial advisor.
Prospectus 8
<PAGE>
o AUTOMATIC INVESTING -- You may instruct us to transfer funds from
a specific bank checking account to your Heritage account. This transfer
will be effected either by electronic transfer or paper draft. Complete
the appropriate sections of the account application or the Heritage Bank
Draft Investing form to activate this service.
o DIRECT DEPOSIT -- You may instruct your employer to direct all or part
of your paycheck to your Heritage account. You also may direct to your
account other types of payments you receive such as from an insurance
company or another mutual fund family. Contact your financial advisor or
Heritage for the direct deposit enrollment form. Please note the routing
instructions are different than the Federal Reserve wire instructions
discussed below.
o GOVERNMENT DIRECT DEPOSIT -- Beginning in 1999, any newly established
investment programs by employees of the Federal government must be paid
through direct deposit. You can have your Social Security, military
pension, paycheck or other Federal government payment sent to your
Heritage account. Your completed Government Direct Deposit form requires
Heritage's review and approval for processing. Contact your financial
advisor or Heritage for an enrollment form.
o AUTOMATIC EXCHANGE -- You may make automatic regular exchanges between
two or more Heritage mutual funds. These exchanges are subject to the
exchange requirements discussed below.
If you discontinue any of these plans before your account reaches the required
minimum investment, you must buy more shares to keep your account open.
THROUGH A RETIREMENT PLAN. Heritage mutual funds offer a range of
retirement plans, including self-directed, traditional and Roth IRAs, Keogh
Plans, SEPs and SIMPLEs. A special application and custodial agreement is
required. Contact your financial advisor or Heritage for more information.
BY WIRE. You may invest in the fund by Federal Reserve wire sent from your
bank. Mail your completed and signed account application to Heritage. Contact
Heritage at (800) 421-4184 or your financial advisor to obtain your account
number before sending the wire. Your bank may charge a wire fee. Send your
investment and the following information by Federal Reserve or bank wire to:
State Street Bank and Trust Company
ABA #011-000-028
Account # 3196-769-8
Name of the Fund
The class of shares to be purchased
(Your account number assigned by Heritage)
(Your name)
HOW TO SELL YOUR INVESTMENT
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You can sell -- or redeem -- shares of the fund for cash at any time,
subject to certain restrictions.
APPLICATION OF CDSC. To keep your CDSC as low as possible, each time you
place a request to sell shares we will first sell any shares in your account
that carry no CDSC. If there are not enough of these to meet your request, we
will sell those shares that have the lowest CDSC. There is no CDSC on shares
acquired through reinvestment of dividends or other distributions. However, any
period of time you held Class B or Class C shares of Heritage Cash Trust--Money
Market Fund will not be counted for purposes of calculating the CDSC.
Prospectus 9
<PAGE>
HOW TO SELL YOUR SHARES. You may contact your financial advisor or
Heritage with instructions to sell your investment in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may sell your shares through your
financial advisor who can prepare the necessary documentation. Your financial
advisor will transmit your request to sell shares of the fund and may charge
you a fee for this service.
BY TELEPHONE. You may sell shares from your account by telephone by
calling the fund at (800) 421-4184 prior to the close of regular trading on the
New York Stock Exchange -- typically 4:00 p.m. Eastern time. If you do not wish
to have telephone redemption privileges, you must complete the appropriate
section of the account application.
BY MAIL. You may sell shares of the fund by sending a letter of
instruction. Specify the fund's name, your share class, your account number,
the names in which the account is registered and the dollar value or number of
shares you wish to sell. Include all signatures and any additional documents
that may be required. Mail the request to Heritage Asset Management, Inc., P.O.
Box 33022, St. Petersburg, FL 33733.
Some circumstances require a written letter requesting sale of shares,
along with a signature guarantee. These include:
o Sales from any account that has had an address change in the past 30
days
o Sales of greater than $50,000
o Sales in which payment is to be sent to an address other than the
address of record
o Sales in which payment is to be made to payees other than the exact
registration of the account or
o Exchanges or transfers into other Heritage accounts that have different
titles
We will only accept official signature guarantees from participants in our
signature guarantee program, which includes most banks and security dealers. A
notary public can not guarantee your signature.
BY SYSTEMATIC WITHDRAWAL PLAN. This plan may be used for periodic
withdrawals from your account. To establish, complete the appropriate section
of the account application or the Heritage systematic withdrawal form
(available from your financial advisor or Heritage) and send that form to
Heritage. Availability of this plan may be limited by your financial advisor.
You should consider the following factors when establishing a plan:
o Make sure you have a sufficient amount of shares in your account.
o Determine how much you wish to withdraw. You must withdraw a minimum of
$50 for each transaction.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you also are selling shares of the
same fund is not advantageous to you, because of sales charges).
o Determine the schedule: monthly, quarterly, semiannual or annual basis.
o Determine which day of the month you would like the withdrawal to occur.
Available dates are the 1st, 5th, 10th or 20th day of the month. If such
a date falls on the weekend, the withdrawal will take place on the next
business day.
o Heritage reserves the right to cancel systematic withdrawals if
insufficient shares are available for two or more consecutive months.
Prospectus 10
<PAGE>
RECEIVING PAYMENT. When you sell shares, payment of the proceeds generally
will be made the next business day after your order is received. If you sell
shares that were recently purchased by check or pre-authorized automatic
purchase, payment will be delayed until we verify that those funds have
cleared, which may take up to two weeks. You may receive payment of your sales
proceeds the following ways:
o BY CHECK -- We will mail a check to the address of record or bank
account specified on your account application. Checks made payable to
other than the registered owners or sent to an address other than the
address of record require written instruction accompanied by a signature
guarantee, as described above.
o BY WIRE -- You may request that we send your proceeds by Federal Reserve
wire to a bank account you specify. You must provide wiring instructions
to Heritage in writing. We normally will send these proceeds the next
day. A $5.00 wire fee will be charged to your account.
o TO YOUR BROKERAGE ACCOUNT -- If you place your redemption request with
your financial advisor, payment can be directed to your brokerage
account. Payment for these trades occurs three business days after you
place your sale request.
HOW TO EXCHANGE YOUR SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you own shares of the fund for at least 30 days, you can exchange those
shares for shares of the same class of any other Heritage mutual fund provided
you satisfy the minimum investment requirements. You may exchange your shares
by calling your financial advisor or Heritage if you exchange to like titled
Heritage accounts. Written instructions with a signature guarantee, as
described above, are required if the accounts are not identically registered.
You may make exchanges without paying any additional sales charges.
However, if you exchange shares of the Heritage Cash Trust-Money Market Fund
acquired by purchase (rather than exchange) for shares of another Heritage
mutual fund, you must pay the applicable sales charge.
Class B and Class C shares will continue to age from the original date and
will retain the same CDSC rate as they had before the exchange. However, if you
hold Class B shares or Class C shares in the Heritage Cash Trust--Money Market
Fund, the time you hold those shares in that fund will not be counted for
purposes of calculating the CDSC.
ACCOUNT AND TRANSACTION POLICIES
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- --------------------------------------------------------------------------------
PRICE OF SHARES. The fund's regular business days are the same as those of
the New York Stock Exchange, normally Monday through Friday. The net asset
value per share (NAV) for each class of the fund is determined each business
day at the close of regular trading on the New York Stock Exchange (typically
4:00 p.m., Eastern time). The share price is calculated by dividing a class's
net assets by the number of its outstanding shares. Because the value of the
fund's investment portfolio changes every business day, the NAV usually changes
as well.
In calculating NAV, the fund typically prices its securities by using
pricing services or market quotations. However, in cases where these are
unavailable or when the portfolio manager believes that subsequent events have
rendered them unreliable, the fund may use fair-value estimates instead. In
addition, the fund may invest in securities that are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does not
price its shares. As a result, the NAV of the fund's shares may change on days
when shareholders will not be able to purchase or redeem the fund's shares.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, we will take measures
to verify the identity of the caller, such as
Prospectus 11
<PAGE>
asking for name, account number, Social Security or other taxpayer ID number
and other relevant information. If appropriate measures are taken, we are not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone redemptions are not
permitted on accounts whose name or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
TIMING OF ORDERS. All orders to purchase or sell shares are executed at
the next NAV calculated after the order has been received in good order. Orders
are accepted until the close of regular trading on the New York Stock Exchange
every business day -- normally 4:00 p.m., Eastern time -- and are executed the
same day at that day's NAV. Otherwise, all orders will be executed at the NAV
determined as of the close of regular trading on the next trading day.
RESTRICTIONS ON ORDERS. The fund and its distributor reserve the right to
reject any purchase order and to suspend the offering of fund shares for a
period of time. There are certain times when you may not be able to sell shares
of the fund or when we may delay paying you the proceeds. This may happen
during unusual market conditions or emergencies or when the fund cannot
determine the value of its assets or sell its holdings.
REDEMPTION IN KIND. We reserve the right to give you securities instead of
cash when you sell shares of the fund. If the amount of the sale is at least
either $250,000 or 1% of the fund's assets, we may give you securities from the
fund's portfolio instead of cash.
ACCOUNTS WITH BELOW-MINIMUM BALANCES. If your account balance falls below
$500 as a result of selling shares (and not because of performance or sales
charges), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close your account and send
the proceeds to your address of record.
DIVIDENDS, CAPITAL GAINS AND TAXES
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DISTRIBUTIONS AND TAXES. The fund distributes to its shareholders
dividends from its net investment income annually. Net investment income
generally consists of interest income and dividends received on investments,
less expenses. The dividends you receive from the fund will be taxed as
ordinary income.
The fund also distributes net capital gains to its shareholders normally
once a year. Capital gains are generated by the fund when it sells assets in
its portfolio for profit. Capital gains are taxed differently depending on how
long the fund held the asset. Distributions of net gains recognized on the sale
of assets held for one year or less are taxed as ordinary income; distributions
of net gains recognized on the sale of assets held longer than that (long-term
capital gains) are taxed at lower capital gains rates.
Fund distributions of dividends and net capital gains are automatically
reinvested in fund shares at NAV (without sales charge) unless you opt to take
your distributions in cash, in the form of a check or direct them for purchase
of shares in another Heritage mutual fund. However, if you have a retirement
plan or a Systematic Withdrawal Plan, your distributions will be automatically
reinvested in fund shares.
Prospectus 12
<PAGE>
In general, selling or exchanging shares and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These
transactions typically create the following tax liabilities for taxable
accounts:
<TABLE>
<CAPTION>
TYPE OF TRANSACTION TAX STATUS
------------------- ----------
<S> <C>
Income dividends ...................................................... Ordinary income rate
Short-term capital gain distributions ................................. Ordinary income rate
Long-term capital gain distributions .................................. Capital gains rate
Sales or exchange of fund shares owned for more than one year ......... Long-term capital gains or losses
(capital gains rate)
Sales or exchange of fund shares owned for one year or less ........... Gains are taxed at the same rate as ordinary
income; losses are subject to special rules
</TABLE>
Dividend distributions will vary by class and are anticipated to be
generally higher for Class A shares.
TAX REPORTING. If you are a non-retirement account holder, then each year,
we will send you a Form 1099 that tells you the amount of fund distributions
you received for the prior calendar year, the tax status of those
distributions, and a list of reportable sale transactions. Generally, fund
distributions are taxable to you in the year you receive them. However, any
distributions that are declared in October, November or December but paid in
January generally are taxable as if received on December 31 of the year they
are declared.
WITHHOLDING TAXES. If you are a non-corporate shareholder and the fund
does not have your correct social security or other taxpayer identification
number, federal law requires us to withhold 31% of the distributions and sale
proceeds payable to you. If you are otherwise subject to backup withholding, we
also are required to withhold and pay to the IRS 31% of your distributions. Any
tax withheld may be applied against the tax liability on your tax return.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
Prospectus 13
<PAGE>
FOR MORE INFORMATION
More information on the fund is available free upon request, including the
following:
Statement of Additional Information (SAI). Provides more details about the fund
and its policies. A current SAI is on file with the Securities and Exchange
Commission and is incorporated herein by reference (is legally considered part
of this prospectus).
To obtain information contact Heritage Mutual Funds:
By mail: 880 Carillon Parkway
St. Petersburg, Florida 33716
By telephone: (800) 421-4184
[PHOTO MONTAGE]
Text-only version of these documents and this prospectus are available, upon
payment of a duplicating fee, by writing the Public Reference Room of the
Securities and Exchange Commission in Washington, D.C. 20549-6009. Information
on the operation of the public reference room may be obtained by calling the
Commission at (800) SEC-0330. Reports and other information about the funds may
be viewed on-screen or downloaded from the SEC's Internet web site at
http://www.sec.gov.
The fund's Investment Company and 1933 Act registration numbers are:
Heritage Series Trust: 811-747033-57986
Technology Fund 811-747033-57986
No dealer, salesman or other person has been authorized to give any information
or to make any representation other than that contained in this Prospectus in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon having been
authorized by the funds or their distributor. This Prospectus does not
constitute an offering in any state in which such offering may not lawfully be
made.
RAYMOND JAMES & ASSOCIATES, INC.,
[LOGO] DISTRIBUTOR
Member New York Stock Exchange/SIPC
P.O. Box 33022, St. Petersburg, FL 33733
727-573-8143 o 800-421-4184
- --------------------------------------------------------------------------------
ADDRESS SERVICE REQUESTED
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HERITAGE SERIES TRUST
TECHNOLOGY FUND
This Statement of Additional Information ("SAI") dated October 11 1999,
should be read in conjunction with the Prospectus of the Heritage Series Trust -
Technology Fund (the "fund") dated October 11, 1999. This SAI is not a
prospectus. To receive a copy of the fund's Prospectus, write to Heritage Asset
Management, Inc. ("Heritage") at the address below or call (800) 421-4184.
HERITAGE ASSET MANAGEMENT, INC.
880 Carillon Parkway, St. Petersburg, Florida 33716
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION............................................................1
INVESTMENT INFORMATION.........................................................1
Non-Diversified Status................................................1
Investment Policies and Strategies....................................1
Industry Classifications.............................................13
INVESTMENT LIMITATIONS........................................................13
NET ASSET VALUE...............................................................14
PERFORMANCE INFORMATION.......................................................15
INVESTING IN THE FUND.........................................................17
Systematic Investment Options........................................17
Retirement Plans.....................................................17
Class A Combined Purchase Privilege (Right of Accumulation)..........18
Class A Statement of Intention.......................................19
REDEEMING SHARES..............................................................19
Systematic Withdrawal Plan...........................................19
Telephone Transactions...............................................20
Redemptions in Kind..................................................19
Receiving Payment....................................................21
EXCHANGE PRIVILEGE............................................................21
CONVERSION OF CLASS B SHARES..................................................22
TAXES.........................................................................22
SHAREHOLDER INFORMATION.......................................................25
FUND INFORMATION..............................................................26
Management of the Fund...............................................26
Investment Adviser and Administrator; Subadviser.....................28
Brokerage Practices..................................................30
Distribution of Shares...............................................31
Administration of the Fund...........................................32
Potential Liability..................................................33
APPENDIX ....................................................................A-1
<PAGE>
GENERAL INFORMATION
- -------------------
The Heritage Series Trust (the "Trust") was established as a
Massachusetts business trust under a Declaration of Trust dated October 28,
1992. The Trust is registered as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust
currently offers its shares through seven separate investment portfolios,
including the fund. The fund offers three classes of shares, Class A shares sold
subject to a 4.75% maximum front-end sales charge ("Class A shares"), Class B
shares sold subject to a 5% maximum contingent deferred sales charge ("CDSC"),
declining over a six-year period ("Class B shares"), and Class C shares sold
subject to a 1% CDSC ("Class C shares"). To obtain more information about the
Trust's other investment portfolios, call (800) 421-4281.
INVESTMENT INFORMATION
- ----------------------
NON-DIVERSIFIED STATUS
----------------------
The fund is classified as non-diversified within the meaning of the
1940 Act, which means that it is not restricted by the 1940 Act in the
proportion of its assets that it may invest in the securities of a single
issuer. The fund's investments are limited, however, in order to allow the fund
to qualify as a "regulated investment company" under current tax law. See
"Taxes" for more information. To the extent that the fund assumes large
positions in the securities of a small number of issuers, the fund's net asset
value may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers, and the fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
INVESTMENT POLICIES AND STRATEGIES
----------------------------------
The fund invests at least 65% of its total assets in the equity
securities of companies that develop, manufacture or deliver technology-related
products or services. Up to 35% of the fund's total assets may be invested in
U.S. government securities, other investment-grade fixed income securities and
cash equivalents. The information that follows in this section describes these
and other types of securities and instruments the fund may invest in to achieve
its investment objective.
DEBT SECURITIES:
Under normal circumstances, the fund may invest up to 35% of its total
assets in debt securities. The market value of debt securities is influenced
primarily by changes in the level of interest rates. Generally, as interest
rates rise, the market value of debt securities decreases. Conversely, as
interest rates fall, the market value of debt securities increases. Factors that
could result in a rise in interest rates, and a decrease in the market value of
debt securities, include an increase in inflation or inflation expectations, an
increase in the rate of U.S. economic growth, an increase in the Federal budget
deficit or an increase in the price of commodities such as oil.
EQUITY SECURITIES:
The fund invests at least 65% of its total assets in equity securities.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). The fund may invest in sponsored
and unsponsored ADRs. ADRs are receipts that represent interests in or are
convertible into, securities of foreign issuers. These receipts are not
necessarily denominated in the same currency as the underlying securities into
which they may be converted. ADRs may be purchased through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
<PAGE>
issuer of the underlying security and a depository, whereas a depository may
establish an unsponsored facility without participation by the issuer of the
depository security. Holders of unsponsored depository receipts generally bear
all the costs of such facilities and the depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts of the deposited securities. Generally,
ADRs in registered form are designed for use in the U.S. securities market and
ADRs in bearer form are designed for use outside the U.S.
COMMON STOCKS. The fund may invest in common stocks. Common stocks
represent the residual ownership interest in the issuer and are entitled to the
income and increase in the value of the assets and business of the entity after
all of its obligations and preferred stock are satisfied. Common stocks
generally have voting rights. Common stocks fluctuate in price in response to
many factors including historical and prospective earnings of the issuer, the
value of its assets, general economic conditions, interest rates, investor
perceptions and market liquidity.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities,
including up to 10% of its assets in convertible securities rated below
investment grade. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount
of common stock of the same or a different issue within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or dividends paid on preferred stock
until the convertible stock matures or is redeemed, converted or exchanged.
Convertible securities combine the fixed-income characteristics of bonds and
capital appreciation potential of preferred stock. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than the issuer's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. While
convertible securities generally offer lower interest or dividend yields than
nonconvertible debt securities of similar quality, they do enable the investor
to benefit from increases in the market price of the underlying common stock.
Please see the discussion of "Investment Grade/Lower Rated Securities" below for
additional information.
PREFERRED STOCK. The fund may invest in preferred stock. A preferred
stock blends the characteristics of a bond and common stock. It can offer the
higher yield of a bond and has priority over common stock in equity ownership,
but does not have the seniority of a bond and its participation in the issuer's
growth may be limited. Preferred stock has preference over common stock in the
receipt of dividends and in any residual assets after payment to creditors
should the issuer be dissolved. Although the dividend is set at a fixed annual
rate, in some circumstances it can be changed or omitted by the issuer.
REAL ESTATE INVESTMENT TRUSTS ("REITs"). The fund may invest in REITs.
REITs include equity REITs, which own real estate properties, and mortgage
REITs, which make construction, development and long-term mortgage loans. The
value of an equity REIT may be affected by changes in the value of the
underlying property, while a mortgage REIT may be affected by the quality of the
credit extended. The performance of both types of REITs depends upon conditions
in the real estate industry, management skills and the amount of cash flow. The
risks associated with REITs include defaults by borrowers, self-liquidation,
failure to qualify as a pass-through entity under the Federal tax law, failure
to qualify as an exempt entity under the 1940 Act and the fact that REITs are
not diversified.
WARRANTS AND RIGHTS. The fund may purchase warrants and rights, which
are instruments that permit the fund to acquire, by subscription, the capital
-2-
<PAGE>
stock of a corporation at a set price, regardless of the market price for such
stock. The fund does not intend to invest more than 5% of its respective net
assets in warrants. 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.
FOREIGN SECURITIES EXPOSURE:
DEPOSITORY RECEIPTS. The fund may invest up to 15% of its total assets
in sponsored or unsponsored European Depository Receipts ("EDRs"), Global
Depository Receipts ("GDRs") and International Depository Receipts ("IDRs")
EDRs, GDRs, IDRs or other similar securities representing interests in or
convertible into securities of foreign issuers (collectively "Depository
Receipts"). Depository Receipts are receipts that represent interests in or are
convertible into, securities of foreign issuers. These receipts are not
necessarily denominated in the same currency as the underlying securities into
which they may be converted.
EDRs and IDRs are receipts typically issued by a European bank or trust
company evidencing ownership of the underlying foreign securities. GDRs are
issued globally for trading in non-U.S. securities markets and evidence a
similar ownership arrangement. Depository Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. As with ADRs, the issuers of the securities underlying
unsponsored Depository Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depository Receipts. Depository Receipts
also involve the risks of other investments in foreign securities, as discussed
below.
FOREIGN SECURITIES. The fund may invest up to 15% of its total assets
in foreign securities (including Depository Receipts). Investments in foreign
securities involve greater risks than investing in domestic securities. The
fund's investments in foreign securities may be adversely affected through
economic, political or regulatory developments in a foreign security's home
country. 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. Investments in foreign securities
also involve the risk of possible adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation, limitation on or
delays in the removal of funds or other assets of the fund, political or
financial instability or diplomatic and other developments that could affect
such investments. Further, the economies of some countries may differ favorably
or unfavorably from the economy of the United States.
The fund will not 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 the fund to convert proceeds realized upon sale of portfolio
securities of the affected foreign companies into U.S. currency.
Because investments in foreign companies usually will involve
currencies of foreign countries and because the fund may temporarily hold funds
in bank deposits in foreign currencies during the completion of investment
-3-
<PAGE>
programs, the value of any of the assets of these funds as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the fund may incur costs in
connection with conversions between various currencies. The fund will conduct
its foreign currency exchange transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market. Additionally, to
protect against uncertainty in the level of future exchange rates, the fund may
enter into contracts to purchase or sell foreign currencies at a future date
(i.e., a "forward currency contract" or "forward contract").
HEDGING INSTRUMENTS - OPTIONS, FORWARDS AND HEDGING TRANSACTIONS:
GENERAL DESCRIPTION. The fund may purchase and sell options on
securities, indices of securities and currencies and forward currency contracts
("Hedging Instruments") to attempt to hedge its investment portfolio. The fund
also may use forward currency contracts to shift exposure from one foreign
currency to another and write call options for income.
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 the fund's investment portfolio. Thus, in a short
hedge, the fund takes a position in a Hedging Instrument whose price is expected
to move in the opposite direction of the price of the investment being hedged. A
long hedge is the purchase or sale of a Hedging Instrument intended partially or
fully to offset potential increases in the acquisition cost of one or more
investments that the fund intends to acquire. Thus, in a long hedge, the fund
takes a position in a Hedging Instrument whose price is expected to move in the
same direction as the price of the prospective investment being hedged.
Hedging Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the fund
owns or intends to acquire. Hedging Instruments on indices may be used to hedge
broad market sectors.
The use of Hedging Instruments is subject to applicable regulations of
the U.S. Securities and Exchange Commission ("SEC"), the exchanges upon which
they are traded. In addition, the fund's ability to use Hedging Instruments may
be limited by tax considerations. See "Taxes."
In addition to the products and strategies described below, the fund
expect to discover additional opportunities in connection with options and
forward currency contracts. These new opportunities may become available as the
fund's subadviser develops new techniques, as regulatory authorities broaden the
range of permitted transactions and as new options or forward currency contracts
or other techniques are developed. The fund's subadviser may utilize these
opportunities to the extent that it is consistent with the fund's investment
objectives and permitted by the fund'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 the fund's
subadviser's ability to predict movements of the overall securities, currency
and interest rate markets, which requires different skills than predicting
-4-
<PAGE>
changes in the prices of individual securities. While the fund's subadviser are
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.
To compensate for imperfect correlation, the fund may purchase or sell
Hedging Instruments in a greater dollar amount than the hedged securities or
currency if the volatility of the hedged securities or currency is historically
greater than the volatility of the Hedging Instruments. Conversely, the fund may
purchase or sell fewer contracts if the volatility of the price of the hedged
securities or currency is historically less than that of the Hedging
Instruments.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies also can
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the fund entered into a
short hedge because its subadviser projected a decline in the price of a
security in the fund's investment portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Hedging Instrument. Moreover, if the
price of the Hedging Instrument declined by more than the increase in the price
of the security, the fund could suffer a loss. In either such case, the fund
would have been in a better position had it not hedged at all.
(4) As described below, the fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties. If the
fund were unable to close out its positions in such Hedging Instruments, it
might be required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might impair
the fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the fund sell a
portfolio security at a disadvantageous time. The fund's ability to close out a
position in a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("counterparty")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the fund.
COVER FOR HEDGING STRATEGIES. Some Hedging Instruments expose the fund
to an obligation to another party. The fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, forward currency contracts or options contracts or (2)
cash and other liquid assets with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. The
fund will comply with SEC guidelines regarding cover for instruments and will,
if the guidelines so require, set aside cash or other liquid assets in a
segregated account with the fund's custodian, State Street Bank & Trust Company
("Custodian") in the prescribed amount.
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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 the fund's assets to cover in segregated accounts could impede its
ability to meet redemption requests or other current obligations.
FOREIGN CURRENCY HEDGING STRATEGIES -- RISK FACTORS. The fund may use
options on foreign currencies. Currency hedges can protect against price
movements in a security that the fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The fund might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are available
or such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, a fund may hedge against price movements in that
currency by entering into transactions using Hedging Instruments on another
currency or basket of currencies, the values of which the subadviser believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Hedging Instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, the fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. futures markets are closed while
the markets for the underlying currencies remain open, significant price and
rate movements might take place in the underlying markets that cannot be
reflected in the markets for the Hedging Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation of the fund to purchase or sell specified currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers.
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The fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. The fund also may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date either with
respect to specific transactions or with respect to portfolio positions in order
to minimize its risk from adverse changes in the relationship between the U.S.
dollar and foreign currencies.
Forward currency transactions may serve as long hedges - for example,
the fund may purchase a forward currency contract to lock in the U.S. dollar
price of a security denominated in a foreign currency that it intends to
acquire. Forward currency contract transactions also may serve as short hedges -
for example, the fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security or
from a dividend or interest payment on a security denominated in a foreign
currency.
As noted above, the fund may seek to hedge against changes in the value
of a particular currency by using forward contracts on another foreign currency
or a basket of currencies, the value of which the fund's subadviser believes
will have a positive correlation to the values of the currency being hedged. Use
of a different foreign currency magnifies the risk that movements in the price
of the forward contract will not correlate or will correlate unfavorably with
the foreign currency being hedged.
In addition, the fund may use forward currency contracts to shift
exposure to foreign currency fluctuations from one country to another. For
example, if the fund owned securities denominated in a foreign currency and its
subadviser believed that currency would decline relative to another currency, it
might enter into a forward contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as "cross
hedging." Use of a different foreign currency magnifies the fund's exposure to
foreign currency exchange rate fluctuations.
The cost to the fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
usually are entered into on a principal basis, no fees or commissions are
involved. When the fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
Sellers or purchasers of forward currency contracts can enter into
offsetting closing transactions, by purchasing or selling, respectively, an
instrument identical to the instrument sold or bought. Secondary markets
generally do not exist for forward currency contracts, however, with the result
that closing transactions generally can be made for forward currency contracts
only by negotiating directly with the counterparty. Thus, there can be no
assurance that the fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
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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.
OPTIONS TRADING. The fund may purchase, or may use for hedging
purposes, options on securities, equity indices and debt indices. Certain
special characteristics of and risks with these options are discussed below.
CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The fund
effectively may terminate its right or obligation under an option by entering
into a closing transaction. If the fund wished to terminate its obligation to
purchase or sell securities 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, the fund may write a call or put
option of the same series; this is known as a closing sale transaction. Closing
transactions essentially permit the fund to realize profits or limit losses on
its options positions prior to the exercise or expiration of the option. Whether
a profit or loss is realized from a closing transaction depends on the price
movement of the underlying security, index or currency 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 or currency,
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 the fund's subadviser'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 the fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out
only on an exchange that provides a secondary market for identical options. 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 over-the-counter ("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 the fund intends
to purchase or write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular option at any specific time. In such event, it may not
be possible to effect closing transactions with respect to certain options, with
the result that the fund would have to exercise those options that it has
purchased in order to realize any profit. With respect to options written by the
fund, the inability to enter into a closing transaction may result in material
losses to it. For example, because the fund may maintain a covered position with
respect to any call option it writes on a security, it may not sell the
underlying security during the period it is obligated under such option. This
requirement may impair the fund's ability to sell a portfolio security or make
an investment at a time when such a sale or investment might be advantageous.
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(4) Activities in the options market may result in a higher
portfolio turnover rate and additional brokerage costs; however, the fund also
may save on commissions by using options as a hedge rather than buying or
selling individual securities in anticipation of market movements.
(5) The risks of investment in options on indices may be greater
than options on securities. Because index options are settled in cash, when the
fund writes a call on an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
fund can offset some of the risk of writing a call index option by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the fund cannot, as a practical matter, acquire and
hold an investment portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the fund could assemble an investment portfolio that
exactly reproduced the composition of the underlying index, it still would not
be fully covered from a risk standpoint because of the "timing risk" inherent in
writing index options. When an index option is exercised, the amount of cash
that the holder is entitled to receive is determined by the difference between
the exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the fund 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 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 the fund has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that the
level of the underlying index subsequently may change. If such a change causes
the exercised option to fall out-of-the-money, the fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer.
CALL OPTIONS. The fund may write call options on securities to
increase income in the form of premiums received from the purchasers of the
options. Because it can be expected that a call option will be exercised if the
market value of the underlying security increases to a level greater than the
exercise price, the fund will write covered call options on securities generally
when its subadviser believes that the premium received by the fund, anticipated
appreciation in the market price of the underlying security up to the exercise
price of the option, will be greater than the total appreciation in the price of
the security.
The strategy also may be used to provide limited protection
against a decrease in the market price of the security in an amount equal to the
premium received for writing the call option, less any transaction costs. Thus,
if the market price of the underlying security held by the fund declines, the
amount of such decline will be offset wholly or in part by the amount of the
premium received by the fund. If, however, there is an increase in the market
price of the underlying security and the option is exercised, the fund will be
obligated to sell the security at less than its market value. The fund would
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lose the ability to participate in the value of such securities above the
exercise price of the call option. The fund also gives up the ability to sell
the portfolio securities used to cover the call option while the call option is
outstanding.
ILLIQUID SECURITIES:
The fund will not purchase or otherwise acquire any illiquid security
if, as a result, more than 15% of its net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale. The
fund's ability to dispose of illiquid securities in a timely manner and for a
fair price may be limited. Further, illiquid securities may trade at a discount
from comparable, more liquid investments.
OTC options and their underlying collateral are currently considered to
be illiquid investments. The fund may sell OTC options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC options
written by the fund. The assets used as cover for OTC options will be considered
illiquid unless OTC options are sold to qualified dealers who agree that a fund
may repurchase any OTC option it writes at a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
INDEX SECURITIES AND OTHER INVESTMENT COMPANIES:
INDEX SECURITIES. The fund may invest up to 10% of its total assets in
Standard and Poor's Depositary Receipts ("SPDRs"), Standard and Poor's MidCap
400 Depositary Receipts ("Mid Cap SPDRs") and other similar index securities
("Index Securities"). Index Securities represent interests in a fixed portfolio
of common stocks designed to track the price and dividend yield performance of a
broad-based securities index, such as the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500 Index"), but are traded on an exchange like shares of
common stock. The value of Index Securities fluctuates in relation to changes in
the value of the underlying portfolio of securities. However, the market price
of Index Securities may not be equivalent to the pro rata value of the index it
tracks. Index Securities are subject to the risks of an investment in a broadly
based portfolio of common stocks. Index Securities are considered investments in
other investment companies.
INVESTMENT COMPANIES. The fund may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. Investments in the securities of other
investment companies may involve duplication of advisory fees and certain other
expenses. By investing in another investment company, the fund becomes a
shareholder of that investment company. As a result, the fund's shareholders
indirectly bear the fund's proportionate share of the fees and expenses paid by
the shareholders of the other investment company, in addition to the fees and
expenses fund shareholders directly bear in connection with the fund's own
operations.
INVESTMENT GRADE/LOWER RATED SECURITIES:
INVESTMENT GRADE SECURITIES. The fund may invest in investment grade
debt and convertible securities. Investment grade securities include securities
rated BBB or above by Standard & Poor's ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are deemed to be of comparable quality
by the fund's subadviser. Securities rated in the lowest category of investment
grade are considered to have speculative characteristics and changes in economic
conditions are more likely to lead to a weakened capacity to pay interest and
repay principal than is the case with higher grade bonds. The fund may retain a
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security that has been downgraded below investment grade if, in the opinion of
its subadviser, it is in the fund's best interest.
LOWER RATED / HIGH-YIELD SECURITIES. The fund may invest up to 10% of
its net assets in securities rated below investment grade, i.e., rated below BBB
or Baa by S&P and Moody's, respectively, or unrated securities determined to be
below investment grade by its subadviser. These securities are commonly referred
to as "junk bonds" and are deemed to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal and may involve
major risk exposure to adverse conditions. These securities are subject to
specific risks that may not be present with investments of higher grade
securities. These securities may have increased sensitivity to adverse economic
changes and individual corporate developments, increased volatility in market
prices and yields and decreased liquidity among dealers.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:
REPURCHASE AGREEMENTS. The fund may invest up to 35% of its total
assets in repurchase agreements. A repurchase agreement is a transaction in
which the fund purchases securities and 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 a market makers
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 investment in securities, including possible declines in
the market value of the underlying securities and delays and costs to the fund
if the other party becomes bankrupt, the fund intends to enter into repurchase
agreements only with banks and dealers in transactions believed by its
subadviser to present minimal credit risks in accordance with guidelines
established by the Board of Trustees ("Board").
The period of these repurchase agreements usually will be short, from
overnight to one week, and at no time will the fund invest in repurchase
agreements of more than one year. The securities that are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The fund always will receive as
collateral securities whose market value, including accrued interest, will be at
least equal to 100% of the dollar amount invested by the fund in each agreement,
and the fund will make payment for such securities only upon physical delivery
or evidence of book entry transfer to the account of the fund's Custodian.
REVERSE REPURCHASE AGREEMENTS. The fund may borrow up to 33 1/3% of its
total assets by entering into reverse repurchase agreements with the same
parties with whom it may enter into repurchase agreements. Under a reverse
repurchase agreement, the fund sells securities and agrees to repurchase them at
a mutually agreed to price. At the time the fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid high-grade securities, marked-to-market
daily, having a value not less than the repurchase price (including accrued
interest). Reverse repurchase agreements involve the risk that the market value
of securities retained in lieu of sale by the fund may decline below the price
of the securities the fund has sold but is obliged to repurchase. If the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the fund's obligation to
repurchase the securities and the fund's use of the proceeds of the reverse
repurchase agreement effectively may be restricted pending such decisions.
Reverse repurchase agreements create leverage, a speculative factor, and are
considered borrowings for the purpose of the fund's limitation on borrowing.
However, the fund intends to enter into reverse repurchase agreements only as a
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temporary measure for extraordinary or emergency purposes and in order to meet
redemption requests without immediately selling portfolio securities. See
"Fundamental Investment Policies" for additional information.
SHORT-TERM MONEY MARKET INSTRUMENTS:
Under normal circumstances, the fund may invest up to 35% of its total
assets in short-term money market instruments.
BANKERS' ACCEPTANCES. The fund may invest in bankers' acceptances.
Bankers' acceptances are short-term credit instruments used to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
asset, or it may be sold in the secondary market at the going rate of interest
for a specified maturity. Although maturities for acceptances can be as long as
270 days, most acceptances have maturities of six months or less.
CERTIFICATES OF DEPOSIT ("CDs"). The fund may invest in CDs issued by
domestic institutions with assets in excess of $1 billion. The Federal Deposit
Insurance Corporation is an agency of the U.S. Government that insures the
deposits of certain banks and savings and loan associations up to $100,000 per
deposit. The interest on such deposits may not be insured if this limit is
exceeded. Current federal regulations also permit such institutions to issue
insured negotiable CDs in amounts of $100,000 or more, without regard to the
interest rate ceilings on other deposits. To remain fully insured, these
investments must be limited to $100,000 per insured bank or savings and loan
association.
COMMERCIAL PAPER. The fund may invest in commercial paper that is
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P.
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.
TEMPORARY DEFENSIVE PURPOSES:
For temporary defensive purposes during anticipated periods of general
market decline, the fund may invest up to 100% of its net assets in money market
instruments, including securities issued by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured thereby, as well as bank
certificates of deposit and banker's acceptances issued by banks having net
assets of at least $1 billion as of the end of their most recent fiscal year,
high-grade commercial paper, and other long- and short-term debt instruments
that are rated A or higher by S&P or Moody's. For a description of S&P or
Moody's commercial paper and corporate debt ratings, see the Appendix.
U.S. GOVERNMENT SECURITIES:
The fund may invest in U.S. Government securities. U.S. Government
securities include a variety of securities that are issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
secured thereby. These include securities issued and guaranteed by the full
faith and credit of the U.S. Government, such as Treasury bills, Treasury notes
and Treasury bonds; obligations supported by the right of the issuer to borrow
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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.
INDUSTRY CLASSIFICATIONS
------------------------
For purposes of determining industry classifications, the fund relies
upon classifications established by Heritage that are based upon classifications
contained in the Directory of Companies Filing Annual Reports with the SEC and
in the S&P's Corporation Industry Classifications.
INVESTMENT LIMITATIONS
- ----------------------
FUNDAMENTAL INVESTMENT POLICIES
-------------------------------
In addition to the limits disclosed above and the investment
limitations described in the Prospectus, the fund is subject to the following
investment limitations that are fundamental policies and may not be changed
without the vote of a majority of the outstanding voting securities of the fund.
Under the 1940 Act, a "vote of a majority of the outstanding voting securities"
of the 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.
BORROWING MONEY. The fund may not borrow money except as a temporary
measure for extraordinary or emergency purposes, and except that the fund may
enter into reverse repurchase agreements in an amount up to 33 1/3% of the value
of its total assets in order to meet redemption requests without immediately
selling portfolio securities. This latter practice is not for investment
leverage but solely to facilitate management of the investment portfolio by
enabling the fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. However, the fund may not
purchase additional portfolio investments once borrowed obligations exceed 5% of
total assets. When effecting reverse repurchase agreements, fund assets in an
amount sufficient to make payment for the obligations to be purchased will be
segregated by the Custodian and on the fund's records upon execution of the
trade and maintained until the transaction has been settled. During the period
any reverse repurchase agreements are outstanding, to the extent necessary to
assure completion of the reverse repurchase agreements, the 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 fund 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).
CONCENTRATION. The fund may not invest more than 25% of the value of
its total assets taken at market value in the securities of issuers in any
single industry. There shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
ISSUING SENIOR SECURITIES. The fund may not issue senior securities,
except as permitted by its investment objective, policies, and investment
limitations, except that the fund may engage in transactions involving options,
futures contracts, forward currency contracts or other financial instruments.
UNDERWRITING. Subject to the following exception, the fund may not
underwrite the securities of other issuers: (1) the fund may underwrite
securities to the extent that, in connection with the disposition of portfolio
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securities, it may be deemed to be an underwriter under federal securities laws
and (2) may invest not more than 15% of its net assets (taken at cost
immediately after making such investment) in securities that are not readily
marketable without registration under the 1933 Act.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. With the following
exceptions, the fund may not invest in commodities, commodity contracts or real
estate (including real estate limited partnerships): the fund may purchase (1)
securities issued by companies that invest in or sponsor such interests, and (2)
purchase and sell options, futures contracts, forward currency contracts and
other financial instruments.
LOANS. The fund may not make loans, except under the following
circumstances: (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 and (2)
where the fund may enter into repurchase agreements as permitted under its
investment policies.
NON-FUNDAMENTAL INVESTMENT POLICIES
-----------------------------------
The fund has adopted the following additional restrictions that,
together with certain limits described in the Prospectus, may be changed by the
Board without shareholder approval in compliance with applicable law, regulation
or regulatory policy.
INVESTING IN ILLIQUID SECURITIES. The fund may not invest more than 15%
of its net assets in repurchase agreements maturing in more than seven days or
in other illiquid securities, including securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions as to resale.
SELLING SHORT AND BUYING ON MARGIN. The fund may not sell any
securities short or purchase any securities on margin but may obtain such
short-term credits as may be necessary for clearance of purchases and sales of
securities; in addition, the fund may make margin deposits in connection with
its use of forward currency contracts, futures contracts, options and other
financial instruments.
INVESTING IN INVESTMENT COMPANIES. The fund may not invest in
securities issued by other investment companies except as permitted by the 1940
Act, except in connection with the merger, consolidation or acquisition of all
the securities or assets of such an issuer.
NET ASSET VALUE
- ---------------
The net asset value per share of Class A shares, Class B shares and
Class C shares is determined separately daily as of the close of regular trading
on the New York Stock Exchange (the "Exchange") each day the Exchange is open
for business. The Exchange normally is open for business Monday through Friday
except the following holidays: New Year's Day, Martin Luther King's Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
The fund values its securities and other assets based on their market
value determined as follows. A security listed or traded on the Exchange, or on
The Nasdaq Stock Market, is valued at its last sales price on the principal
exchange on which it is traded prior to the time when assets are valued. If no
sale is reported at that time or the security is traded in the OTC market,
market value is based on the most recent quoted bid price. When market
quotations for options positions held by the fund 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
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<PAGE>
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 using such
methods as the Board believes would reflect fair value. 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
the 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 receivable.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the fund's Custodian. Foreign currency exchange rates generally are determined
prior to the close of regular trading on the Exchange. Occasionally, events
affecting the value of foreign securities and such exchange rates occur between
the time at which they are determined and the close of regular trading on the
Exchange, which events will not be reflected in a computation of the fund's net
asset value. If events materially affecting the value of such securities or
assets or currency exchange rates occurred during such time period, the
securities or assets would be valued at their fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Board. The foreign currency exchange transactions of the
fund conducted on a spot basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market.
The fund is 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
fund's 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 net asset value per share is not calculated.
Calculation of net asset value of Class A shares, Class B shares and Class C
shares does not take place contemporaneously with the determination of the
prices of the majority of the portfolio securities used in such calculation. The
fund calculates net asset value per share and, therefore, effect sales and
redemptions, as of the close of regular trading on the Exchange each Business
Day. If events materially affecting the value of such securities or other assets
occur between the time when their prices are determined (including their value
in U.S. dollars by reference to foreign currency exchange rates) and the time
when the fund's net asset value is calculated, such securities and other assets
may be valued at fair value by methods as determined in good faith by or under
procedures established by the Board.
The Board may suspend the right of redemption or postpone payment for
more than seven days at times (1) during which the Exchange is closed other than
for the customary weekend and holiday closings, (2) during which trading on the
Exchange is restricted as determined by the SEC, (3) during which an emergency
exists as a result of which disposal by the fund of securities owned by them is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of their net assets or (4) for such other periods
as the SEC may by order permit for the protection of the holders of Class A
shares, Class B shares and Class C shares.
PERFORMANCE INFORMATION
- -----------------------
Total return data of each class from time to time may be included in
advertisements about each fund. Performance information may be computed
separately for each class. Because Class B shares and Class C shares bear higher
Rule 12b-1 fees, the performance of Class B shares and Class C shares of the
fund likely will be lower than that of Class A shares.
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<PAGE>
The fund's performance data quoted in advertising and other promotional
materials represents past performance and is not intended to indicate future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Average annual total return quotes for each class used
in the fund's advertising and promotional materials are calculated for the
one-year, five-year and ten-year periods (or life of the fund), according to the
following formula:
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 Class A shares, the
fund's current maximum sales charge of 4.75% is deducted from the initial $1,000
payment and, for Class B shares and Class C shares, the applicable CDSC imposed
on a redemption of Class B shares or Class C shares held for the period is
deducted. All dividends and other distributions by the fund are assumed to have
been reinvested at net asset value on the reinvestment dates during the period.
Based on this formula, the total return, or "T" in the formula above, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value.
In connection with communicating its average annual total return or
cumulative return to current or prospective shareholders, the fund may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes that may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs. Investment performance also may not reflects the risks
associated with the fund's investment objective and policies. These factors
should be considered when comparing the fund's investment results to those of
other mutual funds and investment vehicles.
In addition, the fund may from time to time include in advertising and
promotional materials total return or cumulative figures that are not calculated
according to the formula set forth above or for other periods for each class of
shares. For example, in comparing the fund's aggregate total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc., Morningstar Mutual Funds or with such market indices as the Dow Jones
Industrial Average and the S&P 500 Index, the 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 fund does not, for these purposes, deduct from the initial value
invested any amount representing front-end sales charges charged on Class A
shares or CDSCs charged on Class B shares and Class C shares. By not annualizing
the performance and excluding the effect of the front-end sales charge on Class
A shares and the CDSC on Class B shares and Class C shares, the total return
calculated in this manner simply will reflect the increase in net asset value
per share over a period of time, adjusted for dividends and other distributions.
Calculating total return without taking into account the sales charge or CDSC
results in a higher rate of return than calculating total return net of the
front-end sales charge.
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<PAGE>
INVESTING IN THE FUND
- ---------------------
Class A shares, Class B shares and Class C shares are sold at their
next determined net asset value on Business Days. The procedures for purchasing
shares of the fund are explained in the Prospectus under "How to Invest."
SYSTEMATIC INVESTMENT OPTIONS
-----------------------------
The options below allow you to invest continually in the fund at
regular intervals.
1. Automatic Investing -- You may authorize Heritage to process a
monthly draft from your personal checking account for investment into the fund.
The draft is returned by your bank the same way a canceled check is returned.
2. Payroll Direct Deposit -- If your employer participates in a direct
deposit program (also known as ACH Deposits), you may have all or a portion of
your payroll directed to the fund. This will generate a purchase transaction
each time you are paid by your employer. Your employer will report to you the
amount sent from each paycheck.
3. Government Direct Deposit -- If you receive a qualifying periodic
payment from the U.S. Government or other agency that participates in Direct
Deposit, you may have all or a part of each check directed to purchase shares of
the fund. The U.S. Government or agency will report to you all payments made.
4. Automatic Exchange -- If you own shares of another Heritage mutual
fund advised or administered by Heritage ("Heritage Mutual Fund"), you may elect
to have a preset amount redeemed from that fund and exchanged into the
corresponding class of shares of the fund. You will receive a statement from the
other Heritage Mutual Fund confirming the redemption.
You may change or terminate any of the above options at any time.
RETIREMENT PLANS
----------------
HERITAGE IRA. Individuals who earn compensation and who have not
reached age 70 1/2 before the close of the year generally may establish a
Heritage Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of the fund
and/or other Heritage Mutual Funds. The Internal Revenue Code of 1986, as
amended (the "Code"), limits the deductibility of IRA contributions to taxpayers
who are not active participants (and, under certain circumstances, whose spouses
are not active participants) in employer-provided retirement plans or who have
adjusted gross income below certain levels. Nevertheless, the Code permits other
individuals to make nondeductible IRA contributions up to $2,000 per year (or
$4,000, if such contributions also are made for a nonworking spouse and a joint
return is filed). In addition, individuals whose earnings (together with their
spouse's earnings) do not exceed a certain level may establish an "education
IRA" and/or a "Roth IRA"; although contributions to these new types of IRAs are
nondeductible, withdrawals from them will not be taxable under certain
circumstances. A Heritage IRA also may be used for certain "rollovers" from
qualified benefit plans and from Section 403(b) annuity plans. For more detailed
information on the Heritage IRA, please contact Heritage.
Fund shares also may be used as the investment medium for qualified
plans (defined benefit or defined contribution plans established by
corporations, partnerships or sole proprietorships). Contributions to qualified
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plans may be made (within certain limits) on behalf of the employees, including
owner-employees, of the sponsoring entity.
OTHER RETIREMENT PLANS. Multiple participant payroll deduction
retirement plans also may purchase Class A shares of any Heritage Mutual Fund at
a reduced sales charge on a monthly basis during the 13-month period following
such a plan's initial purchase. The sales charge applicable to an initial
purchase of Class A shares will be that normally applicable under the schedule
of sales charges set forth in the prospectus to an investment 13 times larger
than the initial purchase. The sales charge applicable to each succeeding
monthly purchase of Class A shares will be that normally applicable, under the
schedule, to an investment equal to the sum of (1) the total purchase previously
made during the 13-month period and (2) the current month's purchase multiplied
by the number of months (including the current month) remaining in the 13-month
period. Sales charges previously paid during such period will not be adjusted
retroactively on the basis of later purchases. Multiple participant payroll
deduction retirement plans may purchase Class C shares at any time.
CLASS A COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
-----------------------------------------------------------
Certain investors may qualify for the Class A sales charge reductions
indicated in the sales charge schedule in the prospectus by combining purchases
of Class A shares into a single "purchase," if the resulting purchase totals at
least $25,000. The term "purchase" refers to a single purchase by an individual,
or to concurrent purchases that, in the aggregate, are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account; a single
purchase by a trustee or other fiduciary purchasing Class A shares for a single
trust, estate or single fiduciary account although more than one beneficiary is
involved; or a single purchase for the employee benefit plans of a single
employer. The term "purchase" also includes purchases by a "company," as the
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or that has no
purpose other than the purchase of Class A shares or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit card holders of a company, policy holders of
an insurance company, customers of either a bank or broker-dealer, or clients of
an investment adviser. A "purchase" also may include Class A shares purchased at
the same time through a single selected dealer of any other Heritage Mutual Fund
that distributes its shares subject to a sales charge.
The applicable Class A shares initial sales charge will be based on the
total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A shares of the fund held by the investor and (b)
all Class A shares of any other Heritage Mutual Fund held by the investor and
purchased at a time when Class A shares of such other fund were distributed
subject to a sales charge (including Heritage Cash Trust shares acquired by
exchange); and
(iii) the net asset value of all Class A shares described in
paragraph (ii) owned by another shareholder eligible to combine his purchase
with that of the investor into a single "purchase."
Class A shares of Heritage Income Trust-Intermediate Government Fund
("Intermediate Government") purchased from February 1, 1992 through July 31,
1992, without payment of a sales charge will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
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<PAGE>
subject to a sales charge, unless those shares were acquired through an exchange
of other shares that were subject to a sales charge.
To qualify for the Combined Purchase Privilege on a purchase through a
selected dealer, the investor or selected dealer must provide the distributor,
Raymond James & Associates, Inc. ("Distributor"), with sufficient information to
verify that each purchase qualifies for the privilege or discount.
CLASS A STATEMENT OF INTENTION
------------------------------
Investors also may obtain the reduced sales charges shown in the
prospectus by means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $25,000 within a period of 13
months in Class A shares of the fund or any other Heritage Mutual Fund subject
to a sales charge. Each purchase of Class A shares under a Statement of
Intention will be made at the public offering price or prices applicable at the
time of such purchase to a single transaction of the dollar amount indicated in
the Statement. In addition, if you own Class A shares of any other Heritage
Mutual Fund subject to a sales charge, you may include those shares in computing
the amount necessary to qualify for a sales charge reduction.
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Statement of Intention is 5% of such amount. Class A shares purchased
with the first 5% of such amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full amount indicated
is not purchased, and such escrowed Class A shares will be redeemed
involuntarily to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrow will be released. To the extent
an investor purchases more than the dollar amount indicated on the Statement of
Intention and qualifies for a further reduced sales charge, the sales charge
will be adjusted for the entire amount purchased at the end of the 13-month
period. The difference in sales charge will be used to purchase additional Class
A shares of the fund subject to the rate of sales charge applicable to the
actual amount of the aggregate purchases. An investor may amend his/her
Statement of Intention to increase the indicated dollar amount and begin a new
13-month period. In that case, all investments subsequent to the amendment will
be made at the sales charge in effect for the higher amount. The escrow
procedures discussed above will apply.
REDEEMING SHARES
- ----------------
The methods of redemption are described in the section of the Prospectus
entitled "How to Sell Your Investment."
SYSTEMATIC WITHDRAWAL PLAN
--------------------------
Shareholders may elect to make systematic withdrawals from the fund
account of a minimum of $50 on a periodic basis. The amounts paid each period
are obtained by redeeming sufficient shares from an account to provide the
withdrawal amount specified. The Systematic Withdrawal Plan currently is not
available for shares held in an IRA, Section 403(b) annuity plan, defined
contribution plan, simplified employee pension plan or other retirement plan,
unless the shareholder establishes to Heritage's satisfaction that withdrawals
from such an account may be made without imposition of a penalty. Shareholders
may change the amount to be paid without charge not more than once a year by
written notice to the Distributor or Heritage.
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<PAGE>
Redemptions will be made at net asset value determined as of the close
of regular trading on the Exchange on a day of each month chosen by the
shareholders or a day of the last month of each period chosen by the
shareholders, whichever is applicable. Systematic withdrawals of Class C shares,
if made in less than one year of the date of purchase, will be charged a CDSC of
1%. Systematic withdrawals of Class B shares, if made in less than six years of
the date of purchase, will be charged the applicable CDSC. If the Exchange is
not open for business on that day, the shares will be redeemed at net asset
value determined as of the close of regular trading on the Exchange on the
preceding Business Day, minus any applicable CDSC for Class B shares and Class C
shares. If a shareholder elects to participate in the Systematic Withdrawal
Plan, dividends and other distributions on all shares in the account must be
reinvested automatically in fund shares. A shareholder may terminate the
Systematic Withdrawal Plan at any time without charge or penalty by giving
written notice to Heritage or the Distributor. The fund, and the transfer agent
and Distributor also reserve the right to modify or terminate the Systematic
Withdrawal Plan at any time.
A withdrawal payment is treated as proceeds from a sale of shares
rather than as a dividend or a capital gain distribution. These payments are
taxable to the extent that the total amount of the payments exceeds the tax
basis of the shares sold. If the periodic withdrawals exceed reinvested
dividends and other distributions, the amount of the original investment may be
correspondingly reduced.
Ordinarily, a shareholder should not purchase additional Class A shares
of the fund if maintaining a Systematic Withdrawal Plan of Class A shares
because the shareholder may incur tax liabilities in connection with such
purchases and withdrawals. The fund will not knowingly accept purchase orders
from shareholders for additional Class A shares if they maintain a Systematic
Withdrawal Plan unless the purchase is equal to at least one year's scheduled
withdrawals. In addition, a shareholder who maintains such a Plan may not make
periodic investments under the fund's Automatic Investment Plan.
TELEPHONE TRANSACTIONS
----------------------
Shareholders may redeem shares by placing a telephone request to the
fund. The fund, Heritage, the Distributor and their Trustees, directors,
officers and employees are not liable for any loss arising out of telephone
instructions they reasonably believe are authentic. In acting upon telephone
instructions, these parties use procedures that are reasonably designed to
ensure that such instructions are genuine, such as (1) obtaining some or all of
the following information: account number, name(s) and social security number(s)
registered to the account, and personal identification; (2) recording all
telephone transactions; and (3) sending written confirmation of each transaction
to the registered owner. If the fund, Heritage, the Distributor and their
Trustees, directors, officers and employees do not follow reasonable procedures,
some or all of them may be liable for any such losses.
REDEMPTIONS IN KIND
-------------------
The fund is obligated to redeem shares for any shareholder for cash
during any 90-day period up to $250,000 or 1% of the fund's net asset value,
whichever is less. Any redemption beyond this amount also will be in cash unless
the Board determine that further cash payments will have a material adverse
effect on remaining shareholders. In such a case, the fund will pay all or a
portion of the remainder of the redemption in portfolio instruments, valued in
the same way as the fund determines net asset value. The portfolio instruments
will be selected in a manner that the Board deem fair and equitable. A
redemption in kind is not as liquid as a cash redemption. If a redemption is
made in kind, a shareholder receiving portfolio instruments could receive less
than the redemption value thereof and could incur certain transaction costs.
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<PAGE>
RECEIVING PAYMENT
-----------------
If shares of the fund are redeemed by a shareholder through the
Distributor or a participating dealer, the redemption is settled with the
shareholder as an ordinary transaction. If a request for redemption is received
in good order (as described below) before the close of regular trading on the
Exchange, shares will be redeemed at the net asset value per share determined on
that day, minus any applicable CDSC for Class B shares and Class C shares.
Requests for redemption received after the close of regular trading on the
Exchange will be executed on the next trading day. Payment for shares redeemed
normally will be made by the fund to the Distributor or a participating dealer
by the third business day after the day the redemption request was made,
provided that certificates for shares have been delivered in proper form for
transfer to the fund, or if no certificates have been issued, a written request
signed by the shareholder has been provided to the Distributor or a
participating dealer prior to settlement date.
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of record
making the request for redemption. Questions concerning the redemption of fund
shares can be directed to registered representatives of the Distributor, a
participating dealer or to Heritage.
A redemption request will be considered to be received in "good order" if:
o the number or amount of shares and the class of shares to be redeemed
and shareholder account number have been indicated;
o any written request is signed by a shareholder and by all co-owners of
the account with exactly the same name or names used in establishing
the account;
o any written request is accompanied by certificates representing the
shares that have been issued, if any, and the certificates have been
endorsed for transfer exactly as the name or names appear on the
certificates or an accompanying stock power has been attached; and
o the signatures on any written redemption request of $50,000 or more
and on any certificates for shares (or an accompanying stock power)
have been guaranteed by a national bank, a state bank that is insured
by the Federal Deposit Insurance Corporation, a trust company or by
any member firm of the New York, American, Boston, Chicago, Pacific or
Philadelphia Stock Exchanges. Signature guarantees also will be
accepted from savings banks and certain other financial institutions
that are deemed acceptable by Heritage, as transfer agent, under its
current signature guarantee program.
The fund has the right to suspend redemption or postpone payment at
times when the Exchange is closed (other than customary weekend or holiday
closings) or during periods of emergency or other periods as permitted by the
SEC. In the case of any such suspension, you may either withdraw your request
for redemption or receive payment based upon the net asset value next
determined, less any applicable CDSC, after the suspension is lifted. If a
redemption check remains outstanding after six months, Heritage reserves the
right to redeposit those funds into your account.
EXCHANGE PRIVILEGE
- ------------------
An exchange is effected through the redemption of the shares tendered
for exchange and the purchase of shares being acquired at their respective net
asset values as next determined following receipt by the Heritage Mutual Fund
whose shares are being exchanged of (1) proper instructions and all necessary
supporting documents or (2) a telephone request for such exchange in accordance
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with the procedures set forth in the Prospectus and below. Telephone or telegram
requests for an exchange received by the 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.
If you or your Financial Advisor are unable to reach Heritage by
telephone, an exchange can be effected by sending a telegram to Heritage. Due to
the volume of calls or other unusual circumstances, telephone exchanges may be
difficult to implement during certain time periods.
Each Heritage Mutual Fund reserves the right to reject any order to
acquire its shares through exchange or otherwise to restrict or terminate the
exchange privilege at any time. In addition, each Heritage Mutual Fund may
terminate this exchange privilege upon 60 days' notice.
CONVERSION OF CLASS B SHARES
- ----------------------------
Class B shares automatically will convert to Class A shares, based on
the relative net asset values per share of the two classes, eight years after
the end of the month in which the shareholder's order to purchase was accepted.
For the purpose of calculating the holding period required for conversion of
Class B shares, the date of initial issuance shall mean (i) the date on which
the Class B shares were issued or (ii) for Class B shares obtained through an
exchange, or a series of exchanges, the date on which the original Class B
shares were issued. For purposes of conversion to Class A shares, Class B shares
purchased through the reinvestment of dividends and other distributions paid in
respect of Class B shares will be held in a separate sub-account. Each time any
Class B shares in the shareholder's regular account (other than those in the
sub-account) convert to Class A shares, a pro rata portion of the Class B shares
in the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A shares and Class B shares will not result in
"preferential dividends" under the Code and the conversion of shares does not
constitute a taxable event. If the conversion feature ceased to be available,
the Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class B shares beyond eight years from the
date of purchase. Heritage has no reason to believe that this condition for the
availability of the conversion feature will not be met.
TAXES
- -----
GENERAL. The fund is treated as a separate corporation for Federal
income tax purposes and intends to qualify for favorable tax treatment as a
regulated investment company ("RIC") under the Code. To do so, the fund must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally consisting of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
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) at the
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close of each quarter of the fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (3) at the
close of each quarter of the fund's taxable year, not more than 25% of the value
of its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
By qualifying for treatment as a RIC, the fund (but not its
shareholders) will be relieved of Federal income tax on the part of its
investment company taxable income and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
its shareholders. If the fund failed to qualify as a RIC for any taxable year,
it would be taxed on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and the
shareholders would treat all those distributions, including distributions of net
capital gain, as dividends (that is, ordinary income) to the extent of the
fund's earnings and profits. In addition, the fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying for RIC treatment.
The fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and its capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
DISPOSITION OF FUND SHARES; DISTRIBUTIONS. A redemption of fund shares
will result in a taxable gain or loss to the redeeming shareholder, depending on
whether the redemption proceeds are more or less than the shareholder's adjusted
basis for the redeemed shares (which normally includes any sales charge paid on
Class A shares). An exchange of fund shares for shares of another Heritage
Mutual Fund generally will have similar tax consequences. However, special rules
apply when a shareholder disposes of Class A shares through a redemption or
exchange within 90 days after purchase thereof and subsequently acquires Class A
shares of the fund or of another Heritage Mutual Fund without paying a sales
charge due to the 90-day reinstatement or exchange privileges. In these cases,
any gain on the disposition of the original Class A shares will be increased, or
loss decreased, by the amount of the sales charge paid when those shares were
acquired, and that amount will increase the 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 fund shares (regardless of class) at a loss, all or a
portion of that loss will not be deductible and will increase the basis of the
newly purchased shares.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Dividends from the fund's investment company taxable income are taxable
to its shareholders as ordinary income, to the extent of its earnings and
profits, whether received in cash or in additional fund shares. Distributions of
the fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gains, whether received in cash or in
additional fund shares and regardless of the length of time the shares have been
held. The portion of the dividends (but not the capital gain distributions) the
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fund pays that does not exceed the aggregate dividends it receives from U.S.
corporations will be eligible for the dividends-received deduction allowed to
corporations; however, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the Federal alternative minimum tax.
INCOME FROM FOREIGN SECURITIES. Dividends and interest received by the
fund, and gains realized thereby, may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions ("foreign taxes") that
would reduce the yield and/or total return on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
The fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the fund will be subject to Federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If the fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its PRO RATA share of the QEF's annual ordinary earnings and net capital gain --
which the fund most likely would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if the fund did not
receive those earnings and gain from the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
The fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock the fund included in income
for prior taxable years thereunder. The fund's adjusted basis in each PFIC's
stock with respect to which it makes this election will be adjusted to reflect
the amounts of income included and deductions taken under the election.
Gains or losses (1) from the disposition of foreign currencies
including foreign currency contracts, (2) on the disposition of each
foreign-currency denominated debt security that are attributable to fluctuations
in the value of the foreign currency between the dates of acquisition and
disposition of the security and (3) that are attributable exchange rate
fluctuation between the time the fund accrues dividends, interest or other
receivables, or expenses or other liabilities, denominated in a foreign currency
and the time the fund actually collects the receivables or pays the liabilities,
generally will be treated as ordinary income or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, increase or
decrease the amount of the fund's investment company taxable income available to
be distributed to its shareholders as ordinary income, rather than affecting the
amount of its net capital gain.
HEDGING STRATEGIES. The use of hedging strategies, such as selling
(writing) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
-24-
<PAGE>
purposes the amount, character and timing of recognition of the gains and losses
the fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts derived by the
fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Certain foreign currency contracts in which the fund may invest will be
"section 1256 contracts." Section 1256 contracts the fund holds at the end of
each taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which it has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation
of certain Hedging Instruments in which the fund may invest. That section
defines a "straddle" as offsetting positions with respect to actively traded
personal property; for these purposes, options and forward currency contracts
are personal property. Under that section, any loss from the disposition of a
position in a straddle generally may be deducted only to the extent the loss
exceeds the unrealized gain on the offsetting position(s) of the straddle. In
addition, these rules may postpone the recognition of loss that otherwise would
be recognized under the mark-to-market rules discussed above. The regulations
under section 1092 also provide 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 the fund makes certain elections, the amount, character and timing
of the recognition of gains and losses from the affected straddle positions
would be determined under rules that vary according to the elections made.
Because only a few of the regulations implementing the straddle rules have been
promulgated, the tax consequences to the fund of straddle transactions are not
entirely clear.
If the fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract or forward contract entered into
by the fund or a related person with respect to the same or substantially
similar property. In addition, if the appreciated financial position is itself a
short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to any transaction during any taxable year
that otherwise would be treated as a constructive sale if the transaction is
closed within 30 days after the end of that year and the fund holds the
appreciated financial position unhedged for 60 days after that closing (I.E., at
no time during that 60-day period is the fund's risk of loss regarding that
position reduced by reason of certain specified transactions with respect to
substantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale, or granting an
option to buy substantially identical stock or securities).
Investors are advised to consult their own tax advisers regarding the
status of an investment in the fund under state and local tax laws.
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<PAGE>
SHAREHOLDER INFORMATION
- -----------------------
Each share of the fund gives the shareholder one vote in matters
submitted to shareholders for a vote. Class A shares, Class B shares and Class C
shares of the fund have equal voting rights, except that, in matters affecting
only a particular class or series, only shares of that class or series are
entitled to vote. As a Massachusetts business trust, the Trust is not required
to hold annual shareholder meetings. Shareholder approval will be sought only
for certain changes in a Trust's or the fund's operation and for the election of
Trustees under certain circumstances. Trustees may be removed by the Trustees or
by shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of a Trust's outstanding shares.
FUND INFORMATION
- ----------------
MANAGEMENT OF THE FUND
----------------------
BOARD OF TRUSTEES. The business affairs of the fund is managed by or
under the direction of the Board. The Trustees are responsible for managing the
fund's business affairs and for exercising all the fund's powers except those
reserved to the shareholders. A Trustee may be removed by the other Trustees or
by a two-thirds vote of the outstanding Trust shares.
BACKGROUND OF THE TRUSTEES AND OFFICERS. The fund's Trustees and
Officers are listed below with their addresses, principal occupations and
present positions, including any affiliation with Raymond James Financial, Inc.
("RJF"), Raymond James & Associates, Inc. ("RJA"), Heritage and Eagle.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name each Trust During Past Five Years
---- ---------- ----------------------
<S> <C> <C>
Thomas A. James* (56) Trustee Chairman of the Board since 1986 and Chief Executive Officer since
880 Carillon Parkway 1969 of RJF; Chairman of the Board of RJA since 1986; Chairman of the
St. Petersburg, FL 33716 Board of Eagle since 1984 and Chief Executive Officer of Eagle, 1994
to 1996.
Richard K. Riess* (49) Trustee Executive Vice President and Managing Director for Asset Management of
880 Carillon Parkway RJF since 1998, Chief Executive Officer of Eagle since 1996, President
St. Petersburg, FL 33716 of Eagle, 1995 to present, Chief Operating Officer of Eagle, 1988 to
1995, Executive Vice President of Eagle, 1988 to 1993.
Donald W. Burton (54) Trustee President of South Atlantic Capital Corporation (venture capital)
614 W. Bay Street, Suite 200 since 1981.
Tampa, FL 33606
C. Andrew Graham (58) Trustee Vice President of Financial Designs Ltd. since 1992; Executive Vice
Financial Designs, Ltd. President of the Madison Group, Inc., 1991 to 1992; Principal of
1775 Sherman Street, Suite 1900 First Denver Financial Corporation (investment banking) since 1987.
Denver, CO 80203
-26-
<PAGE>
Position with Principal Occupation
Name each Trust During Past Five Years
---- ---------- ----------------------
David M. Phillips (59) Trustee Chairman and Chief Executive Officer of CCC Information Services, Inc.
World Trade Center Chicago since 1994 and of InfoVest Corporation (information services to the
444 Merchandise Mart insurance and auto industries and consumer households) since 1982.
Chicago, IL 60654
Eric Stattin (65) Trustee Litigation Consultant/Expert Witness and private investor since 1988.
1975 Evening Star Drive
Park City, UT 84060
James L. Pappas (55) Trustee Lykes Professor of Banking and Finance since 1986 at University of
University of South Florida South Florida; Dean of College of Business Administration 1987 to
Tampa, FL 33620 1996.
Stephen G. Hill (39) President Chief Executive Officer and President of Heritage since 1989 and
880 Carillon Parkway Director since 1994; Director of Eagle since 1995.
St. Petersburg, FL 33716
Donald H. Glassman (41) Treasurer Treasurer of Heritage since 1989; Treasurer of Heritage Mutual
880 Carillon Parkway Funds since 1989.
St. Petersburg, FL 33716
Clifford J. Alexander (56) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm).
1800 Massachusetts Ave., NW
Washington, DC 20036
Patricia Schneider (58) Assistant Compliance Administrator of Heritage.
880 Carillon Parkway Secretary
St. Petersburg, FL 33716
Robert J. Zutz (46) Assistant Partner, Kirkpatrick & Lockhart LLP (law firm).
1800 Massachusetts Ave., NW Secretary
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 class of the fund's shares outstanding. Each Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any liability to which
they would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
The Trust currently pays Trustees who are not employees of Heritage or
its affiliates $4,000 annually and $1,500 per meeting of the Board. Each Trustee
also is reimbursed for any expenses incurred in attending meetings.
-27-
<PAGE>
Because Heritage performs substantially all of the services necessary for the
operation of each fund, the fund requires no employees. No officer, director or
employee of Heritage receives any compensation from the fund for acting as a
director or officer. The following table shows the compensation earned by each
Trustee for the fiscal year ending October 31, 1998.
COMPENSATION TABLE(1)
---------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- ---------------------- -----------------------
Total Compensation
Pension or From the Trust and
Aggregate Retirement Benefits Estimated Annual the Heritage Family
Name of Person, Compensation From Accrued as Part of Benefits Upon of Funds Paid to
Position the Series Trust the Trust's Expenses Retirement Trustees(2)
-------- ---------------- -------------------- ---------- -----------
- ---------------------------- -------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Donald W. Burton, Trustee $9,166.60 $0 $0 $20,833
C. Andrew Graham, Trustee $9,166.60 $0 $0 $20,833
Thomas A. James, $0 $0 $0 $0
Trustee
James L. Pappas, $9,166.60 $0 $0 $20,833
Trustee
David M. Phillips, Trustee $7,916.56 $0 $0 $17,833
Richard K. Riess, $0 $0 $0 $0
Trustee
Eric Stattin, $9,166.60 $0 $0 $20,833
Trustee
- ---------------------------- -------------------- ---------------------- ---------------------- -----------------------
</TABLE>
- -------------------------
(1) For the fiscal year ended October 31, 1999.
(2) The Heritage Mutual Funds consist of seven separate registered investment
companies, including the Series Trust.
INVESTMENT ADVISER AND ADMINISTRATOR; SUBADVISER
------------------------------------------------
The investment adviser and administrator for the fund is Heritage Asset
Management, Inc. Heritage was organized as a Florida corporation in 1985. All
the capital stock of Heritage is owned by RJF. RJF is a holding company that,
through its subsidiaries, is engaged primarily in providing customers with a
wide variety of financial services in connection with securities, limited
partnerships, options, investment banking and related fields.
With respect to the fund, Heritage is responsible for overseeing the
fund's investment and noninvestment affairs, subject to the control and
direction of the fund's Board. The Trust, on behalf of the fund entered into an
Investment Advisory and Administration Agreement with Heritage dated March 29,
-28-
<PAGE>
1993 and last supplemented on October 12, 1999. The Investment Advisory and
Administration Agreements require that Heritage review and establish investment
policies for the fund and administer the fund's noninvestment affairs.
Under a Subadvisory Agreement, Eagle, subject to the direction and
control of Heritage and the Board, provide investment advice and portfolio
management services to the fund for a fee payable by Heritage.
Heritage also is obligated to furnish the fund with office space,
administrative, and certain other services as well as executive and other
personnel necessary for the operation of the fund. Heritage and its affiliates
also pay all the compensation of Trustees of the Trust who are employees of
Heritage or its affiliates. The fund pays all its other expenses that are not
assumed by Heritage. The fund also is liable for such nonrecurring expenses as
may arise, including litigation to which the fund may be a party. The fund also
may have an obligation to indemnify its Trustees and officers with respect to
any such litigation.
The Advisory Agreement and the Subadvisory Agreement each were approved
by the Board (including all of the Trustees who are not "interested persons" of
the Trust, Heritage or Eagle, as defined under the 1940 Act) and by the
shareholders of the fund in compliance with the 1940 Act. Each Agreement
provides that it will be in force for an initial two-year period and it must be
approved each year thereafter by (1) a vote, cast in person at a meeting called
for that purpose, of a majority of those Trustees who are not "interested
persons" of Heritage, Eagle, or the Trust, and by (2) the majority vote of
either the full Board or the vote of a majority of the outstanding shares of the
fund. The Advisory and Subadvisory Agreement 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 Heritage, to the fund and the
Subadvisory Agreement may be terminated on not less than 60 days' written notice
by Heritage, or 90 days' written notice by Eagle. Under the terms of the
Advisory Agreement, Heritage automatically becomes responsible for the
obligations of Eagle upon termination of the Subadvisory Agreement. In the event
Heritage ceases to be the investment adviser of the fund or the Distributor
ceases to be principal distributor of shares of the fund, the right of the fund
to use the identifying name of "Heritage" may be withdrawn.
Heritage and Eagle 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 the fund or for any
losses that may be sustained in the purchase, holding or sale of any security.
All of the officers of the fund except for Messrs. Alexander and Zutz are
officers or directors of Heritage, Eagle or their affiliates. These
relationships are described under "Management of the Fund."
ADVISORY AND ADMINISTRATION FEE. The annual investment advisory fee
paid monthly by the fund to Heritage is based on the fund's average daily net
assets as listed in the Prospectus. Heritage has agreed to waive its management
fees to the extent that annual operating expenses attributable to Class A shares
exceed 1.65% of the average daily net assets or to the extent that annual
operating expenses attributable to Class B shares and Class C shares exceed
2.40% of average daily net assets attributable to that class during this fiscal
year.
Heritage has entered into an agreement with Eagle to provide investment
advice and portfolio management services to the fund for a fee paid by Heritage
to Eagle with respect to the amount of fund assets under management equal to 50%
of the fees payable to Heritage by the fund, without regard to any reduction in
fees actually paid to Heritage as a result of expense limitations.
-29-
<PAGE>
CLASS-SPECIFIC EXPENSES. The fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
fund's shares to which those expenses are attributable.
BROKERAGE PRACTICES
-------------------
While the fund generally purchases securities for long-term capital
gains, the 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. The fund's portfolio turnover rate is
computed by dividing the lesser of purchases or sales of securities for the
period by the average value of portfolio securities for that period. A 100%
turnover rate would occur if all the securities in the fund's portfolio, with
the exception of securities whose maturities at the time of acquisition were one
year or less, were sold and either repurchased or replaced within one year. A
high rate of portfolio turnover (100% or more) generally leads to higher
transaction costs and may result in a greater number of taxable transactions.
The fund's turnover rate is expected to range between 100% and 200%.
Eagle is responsible for the execution of the fund's portfolio
transactions and must seek the most favorable price and execution for such
transactions. Best execution, however, does not mean that the fund necessarily
will be paying the lowest commission or spread available. Rather, Eagle 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, Eagle may give consideration to
research, statistical and other services furnished by brokers or dealers. In
addition, Eagle may place orders with brokers who provide supplemental
investment and market research and securities and economic analysis and may pay
these brokers a higher brokerage commission or spread than may be charged by
other brokers, provided that Eagle determines 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 Eagle in connection with
services to clients other than the fund.
Eagle may use the Distributor, its affiliates or certain affiliates of
Heritage as a broker for agency transactions in listed and OTC securities at
commission rates and under circumstances consistent with the policy of best
execution. Commissions paid to the Distributor, its affiliates or certain
affiliates of Heritage will not exceed "usual and customary brokerage
commissions." Rule l7e-1 under the 1940 Act defines "usual and customary"
commissions to include amounts that are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time."
Eagle also may select other brokers to execute portfolio transactions.
In the OTC market, the fund generally deals with primary market makers unless a
more favorable execution can otherwise be obtained.
The Board has adopted procedures in conformity with Rule 10f-3 under
the 1940 Act whereby the fund may purchase securities that are offered in
underwritings in which the Distributor is a participant. The Board of Trustees
will consider the ability to recapture fund expenses on certain portfolio
transactions, such as underwriting commissions and tender offer solicitation
-30-
<PAGE>
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, the fund has expressly consented to the Distributor executing
transactions on an exchange on its behalf.
DISTRIBUTION OF SHARES
----------------------
Shares of the fund are offered continuously through the fund's
principal underwriter, RJA, and through other participating dealers or banks
that have dealer agreements with the Distributor. The Distributor receives
commissions consisting of that portion of the sales charge remaining after the
dealer concession is paid to participating dealers or banks. Such dealers may be
deemed to be underwriters pursuant to the 1933 Act.
The Distributor and Financial Advisors or banks with whom the
Distributor has entered into dealer agreements offer shares of the 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 the
fund. Pursuant to the Distribution Agreements with respect to Class A shares,
Class B shares and Class C shares, the Distributor bears the cost of making
information about the 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, B and C shareholders and for maintaining shareholder accounts. The fund
pays the cost of registering and qualifying its shares under state and federal
securities laws and typesetting of its prospectuses and printing and
distributing prospectuses to existing shareholders.
The fund has adopted a Distribution Plan, which is a type of
compensation plan, for each class of shares (each a "Plan" and collectively the
"Plans"). These Plans permit the fund to pay the Distributor the monthly
distribution and service fee out of the fund's net assets to finance activity
that is intended to result in the sale and retention of Class A shares, Class B
shares and Class C shares. The 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. Each Plan was approved by the Board,
including a majority of the Trustees who are not interested persons of the fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or the Distribution Agreement (the
"Independent Trustees"). In approving such Plans, the Board determined that
there is a reasonable likelihood that the fund and its shareholders will benefit
from each Plan.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class A shares and in
connection with personal services rendered to Class A shareholders and the
maintenance of Class A shareholder accounts, the fund may pay the Distributor
distribution and service fees of up to 0.35% of that fund's average daily net
assets attributable to Class A shares of that fund. Currently, the fund pays the
Distributor a fee of up to 0.25% of its average daily net assets attributable to
Class A shares. These fees are computed daily and paid monthly.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class B shares and Class C
shares and in connection with personal services rendered to Class B and Class C
shareholders and the maintenance of Class B and Class C shareholder accounts,
the fund pays the Distributor a service fee of 0.25% and a distribution fee of'
-31-
<PAGE>
0.75% of that fund's average daily net assets attributable to Class B shares and
Class C shares. These fees are computed daily and paid monthly.
Each Plan each may be terminated by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of a class of the fund. The Board reviews quarterly a written report
of Plan costs and the purposes for which such costs have been incurred. A Plan
may be amended by vote of the Board, including a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. Any change in a
Plan that would increase materially the distribution cost to a class requires
shareholder approval of that class.
The Distribution Agreements may be terminated at any time on 60 days
written notice without payment of any penalty by either party. The fund may
effect such termination by vote of a majority of the outstanding voting
securities of the fund or by vote of a majority of the Independent Trustees. For
so long as the 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 Plan will continue in effect for
successive one-year periods, provided that each such continuance is specifically
approved (1) by the vote of a majority of the Independent Trustees and (2) by
the vote of a majority of the entire Board cast in person at a meeting called
for that purpose. If a Plan is terminated, the obligation of the fund to make
payments to the Distributor pursuant to the Plan will cease and the fund will
not be required to make any payment past the date the Plan terminates.
ADMINISTRATION OF THE FUND
- --------------------------
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. Heritage,
subject to the control of the Board of Trustees, will manage, supervise and
conduct the administrative and business affairs of the fund; furnish office
space and equipment; oversee the activities of the subadviser and the Custodian;
and pay all salaries, fees and expenses of officers and Trustees of the Trust
who are affiliated with Heritage. In addition, Heritage provides certain
shareholder servicing activities for fund customers.
Heritage also is the transfer and dividend reimbursing agent for the
fund and serves as fund accountant for the fund. The fund pays Heritage its cost
plus 10% for its services as fund accountant and transfer and dividend
disbursing agent.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as custodian of the fund's assets. The Custodian
also provides portfolio accounting and certain other services for the fund.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
NW, 2nd Floor, Washington, D.C. 20036, serves as counsel to the Trust.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 400 North Ashley
Street, Suite 2800, Tampa, Florida 33602, is the independent accountant for the
Trust.
POTENTIAL LIABILITY
- -------------------
Under certain circumstances, shareholders may be held personally liable
as partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the fund. These documents require notice of this disclaimer to be given in each
-32-
<PAGE>
agreement, obligation or instrument the fund or the Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the fund's
obligations, that fund is required to use its property to protect or compensate
the shareholder. On request, the fund will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the fund. Therefore,
financial loss resulting from liability as a shareholder will occur only if the
fund itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
-33-
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
The rating services' descriptions of commercial paper ratings in which the fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER DEBT RATINGS
PRIME-1. Issuers (or supporting institutions) rated PRIME-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2. Issuers (or supporting institutions) rated PRIME-2 (P-2) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
- ---------------------------------------------------------
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess extremely strong
characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment of issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
CORPORATE DEBT RATINGS
The rating services' descriptions of corporate debt ratings in which the fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE DEBT RATINGS
- ---------------------------------------------------------------------
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than the Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
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Baa - Bonds that are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the company ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the company ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
- -------------------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB," "B," "CCC," "CC," and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
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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.
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.
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