As filed with the Securities and Exchange Commission on November 26, 2003
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. ___
HERITAGE SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, Florida 33716
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 573-3800
RICHARD K. REISS
880 Carillon Parkway
St. Petersburg, Florida 33716
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective under the Securities Act of 1933. The
public offering of Registrant's Series is ongoing.
It is proposed that this filing will become effective on December 27, 2003
pursuant to Rule 488.
Title of securities being registered: Class A, B and C Shares of beneficial
interest, no par value of the Growth Equity Fund
No filing fee is required because of reliance on Section 24(f) of the Investment
Company Act of 1940, as amended.
HERITAGE SERIES TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Part A - Prospectus and Information Statement of Heritage Series Trust
- Growth Equity Fund
o Part B - Statement of Additional Information
o Part C of Form N-14
o Signature Page
o Exhibits
HERITAGE SERIES TRUST
GROWTH EQUITY FUND
880 Carillon Parkway
St. Petersburg, Florida 33716
800-421-4184
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PROSPECTUS AND INFORMATION STATEMENT
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This Prospectus and Information Statement ("Prospectus") is being furnished
to shareholders of Heritage Technology Fund ("Technology Fund"), a series of
Heritage Series Trust ("Trust"), in connection with a Plan of Reorganization and
Termination ("Plan"). Pursuant to the Plan, Technology Fund shareholders will
receive, in exchange for shares of that Fund, shares of Heritage Growth Equity
Fund ("Growth Equity Fund"), another series of the Trust, that are equal in
total value to their holdings in Technology Fund as of the closing date of the
reorganization contemplated by the Plan ("Reorganization"). The Reorganization
is expected to take place on December __, 2003 ("Closing Date"). When the
Reorganization is complete, Technology Fund will be dissolved.
The Board of Trustees of the Trust has determined to reorganize Technology
Fund because of the reasons discussed in the Prospectus. SHAREHOLDERS OF
TECHNOLOGY FUND ARE NOT BEING ASKED TO VOTE ON THE PLAN OR TO APPROVE THE
REORGANIZATION. Technology Fund ceased selling its shares as of the close of
business on September 25, 2003.
The investment objective of Growth Equity Fund is to seek growth through
long-term capital appreciation. Technology Fund seeks long-term capital
appreciation. Technology Fund and Growth Equity Fund (each a "Fund") are
separate series of the Trust, a Massachusetts business trust registered as an
open-end, diversified management investment company. Heritage Asset Management,
Inc. ("Heritage") serves as the investment manager, and Eagle Asset Management,
Inc. ("Eagle") serves as sub-adviser, to each Fund.
This Prospectus sets forth concisely information about Growth Equity Fund
that investors should know before the Closing Date. Additional information is
contained in the following documents:
o The Statement of Additional Information ("SAI") dated December __,
2003, relating to the Plan and including financial statements, which
has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated herein by this reference (that is, it legally forms a
part of this Prospectus). The SAI is available without charge upon
request by calling Heritage Mutual Funds at 800-421-4184.
o Information about each Fund is contained in the Heritage Equity Funds
Prospectus dated January 2, 2003 ("Heritage Equity Funds Prospectus"),
which accompanies this Prospectus.
o The Heritage Equity Funds' Statement of Additional Information dated
January 2, 2003 ("Heritage Equity Funds SAI"), and the Trust's
Semi-Annual Report to Shareholders dated April 30, 2003 have been
filed with the SEC and are incorporated herein by this reference with
respect to each Fund.
o You can obtain a free copy of the Heritage Equity Funds SAI, Annual
Report or Semi-Annual Report by calling the Heritage Mutual Funds at
the phone number shown above.
Investors are advised to read and retain this Prospectus for future
reference.
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WE ARE NOT ASKING YOU FOR A PROXY OR WRITTEN CONSENT, AND YOU ARE REQUESTED NOT
TO SEND TO US A PROXY OR WRITTEN CONSENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is _______, 2003.
ii
TABLE OF CONTENTS
Page
----
Synopsis.....................................................................1
The Reorganization.........................................................1
Investment Objectives And Policies.........................................1
Certain Differences Between The Funds......................................2
Fees And Expenses..........................................................3
Purchases..................................................................5
Redemptions................................................................6
Exchange Privileges........................................................6
Dividends And Other Distributions..........................................7
Federal Income Tax Consequences............................................7
Comparison Of Principal Risk Factors.........................................7
The Reorganization...........................................................8
Reorganization Plan........................................................8
Reasons For The Reorganization............................................10
Description Of The Securities To Be Issued................................10
Federal Income Tax Considerations.........................................11
Capitalization............................................................12
Additional Information About Growth Equity Fund.............................12
Financial Highlights......................................................12
Investment Objective And Policies.........................................12
Investment Manager, Sub-Adviser And Portfolio Manager.....................13
Management's Discussion Of Fund Performance...............................13
Growth Equity Fund Shares.................................................13
Taxes, Dividends, And Other Distributions.................................13
Additional Information About Technology Fund................................13
Financial Highlights......................................................13
Investment Objective And Policies.........................................13
Investment Manager, Sub-Adviser And Portfolio Manager.....................13
Management's Discussion Of Fund Performance...............................13
Technology Fund Shares....................................................14
Taxes, Dividends, And Other Distributions.................................14
Information Regarding Five Percent Share Ownership And Interests Of
Affiliated Persons........................................................14
Five Percent Holders......................................................14
Shares Held By Officers And Directors.....................................14
Interests Of Affiliated Persons...........................................14
Miscellaneous...............................................................14
Available Information.....................................................14
iii
Legal Matters.............................................................15
Experts...................................................................15
Appendix A...................................................................1
Form Of Plan Of Reorganization And Termination.........................1
Appendix B-1.................................................................1
Financial Highlights...................................................1
Appendix B-2.................................................................2
Financial Highlights...................................................2
Appendix C-1.................................................................1
Management's Discussion Of Fund Performance............................1
Growth Equity Fund Portfolio Commentary................................1
Appendix C-2.................................................................6
Management's Discussion Of Fund Performance............................6
Growth Equity Fund Portfolio Commentary................................6
APPENDIX C-3................................................................10
Management's Discussion Of Fund Performance...........................10
Technology Fund Portfolio Commentary..................................10
iv
HERITAGE SERIES TRUST
GROWTH EQUITY FUND
880 Carillon Parkway
St. Petersburg, Florida 33716
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PROSPECTUS AND INFORMATION STATEMENT
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SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Information Statement ("Prospectus") and the
Plan of Reorganization and Termination ("Plan") and is qualified by reference to
the more complete information contained herein as well as the information
relating to Heritage Growth Equity Fund ("Growth Equity Fund") contained in the
current prospectus of Heritage Equity Funds ("Heritage Equity Funds
Prospectus"), which accompanies this Prospectus. Shareholders should read this
entire Prospectus carefully.
The form of the Plan is attached to this Prospectus as Appendix A. The
transactions contemplated by the Plan (collectively, the "Reorganization") are
described herein.
THE REORGANIZATION
At its August 30, 2003 meeting, and via written consent dated November __,
2003, the Board of Trustees ("Board") of Heritage Series Trust ("Trust")
(including a majority of those Trustees who are not "interested persons," as
that term is defined in Section 2(a)(19) of the Investment Company Act of 1940,
as amended ("1940 Act") ("Independent Trustees")) unanimously approved the
Reorganization and the Plan, pursuant to which Heritage Technology Fund
("Technology Fund") will transfer all of its assets to Growth Equity Fund, which
will assume all of Technology Fund's liabilities, and Class A, Class B and Class
C shareholders in Technology Fund will receive shares of the correspondingly
designated Class of Growth Equity Fund in exchange for their shares of
Technology Fund. EACH TECHNOLOGY FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF
FULL AND FRACTIONAL CLASS A, CLASS B OR CLASS C SHARES OF GROWTH EQUITY FUND
EQUAL IN VALUE TO THAT SHAREHOLDER'S SHARES OF THE CORRESPONDINGLY CLASS OF
TECHNOLOGY FUND AS OF THE CLOSING DATE OF THE REORGANIZATION, WHICH IS EXPECTED
TO BE DECEMBER __, 2003 ("CLOSING DATE").
For the reasons set forth below under "Reasons for the Reorganization," the
Board, including the Independent Trustees, determined that the Reorganization is
in the best interests of the Funds and that the interests of the Funds'
shareholders will not be diluted as a result of the Reorganization.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of Technology Fund are substantially
similar to those of Growth Equity Fund. Technology Fund seeks long-term capital
appreciation. Growth Equity Fund seeks growth through long-term capital
appreciation.
Technology Fund and Growth Equity Fund each invests in a portfolio of
equity securities. The portfolio manager of each Fund uses a "bottom-up" method
of analysis based on fundamental research to determine which common stocks to
purchase. The portfolio manager of Technology Fund searches for companies whose
stocks appear to be trading below their true value. The portfolio manager of
Growth Equity Fund takes a growth approach to selecting stocks, seeking to buy
stock of companies with strong earnings growth and the potential for higher
earnings.
Technology Fund invests at least 80% of its net assets primarily in equity
securities of companies that rely extensively on technology in their processes,
products or services, that or may be expected to benefit from technological
advances and improvements in industry, manufacturing, and commerce (technology
companies). These companies may be found in virtually any industry. The Fund may
invest in companies of any capitalization size.
Growth Equity Fund invests, under normal market conditions, at least 80% of
its net assets in equity securities. The equity securities in which Growth
Equity Fund invests are primarily common stocks that have sufficient growth
potential to offer above average long-term capital appreciation.
The Funds' fundamental investment restrictions are the same with respect
to: (1) borrowing money; (2) issuing senior securities; (3) concentrating
investments in a single industry; (4) purchasing and selling real estate; and
(5) writing, purchasing, and entering into options, futures contracts, and
forward currency contracts. Growth Equity is restricted on investments in oil,
gas, or other mineral programs; whereas, Technology Fund does have a comparable
investment restriction. For temporary defensive purposes, each Fund may invest
up to 100% of its assets in high-quality, short-term debt instruments or may
take positions that are consistent with its principal investment strategies.
CERTAIN DIFFERENCES BETWEEN THE FUNDS
While the Funds are similar in many respects, a number of differences
between them exist as well, including the following.
First, Growth Equity Fund is a "diversified" fund within the meaning of
Section 5(b)(1) of the 1940 Act, while Technology Fund is non-diversified. As a
result, with respect to 75% of its total assets, the Growth Equity Fund may not
invest more than 5% of its assets in securities of any one issuer other than the
U.S. Government or its agencies or instrumentalities or purchase more than 10%
of the voting securities of any one issuer. Technology Fund, as non-diversified,
is not limited by the 1940 Act in the proportion of assets that it may invest in
a single issuer. Technology Fund nevertheless still must satisfy certain
diversification requirements for tax purposes.
Second, while each Fund invests primarily in common stocks, there are some
differences in the types of common stocks in which they invest. For example,
Growth Equity Fund invests mainly in companies that have sustainable competitive
advantages in their industries and recognized brand names, while Technology Fund
may invest in companies of any capitalization size. Growth Equity Fund also
invests among many companies, sectors, and industries, and while Technology Fund
invests in many companies and industries, it focuses on the technology sector.
Growth Equity Fund currently invests about __% of its assets in the technology
sector. See "Principal Risk Factors" below for a discussion of the risks of
investing in such securities.
Third, Technology Fund's policy on underwriting securities issued by other
persons is more restrictive than Growth Equity Fund's policy. Growth Equity Fund
may not underwrite the securities of other issuers except to the extent the Fund
may be deemed an underwriter under the federal securities laws. Technology Fund
may not underwrite the securities of other issuers except to the extent the Fund
may be deemed an underwriter under federal securities laws and except to the
extent that it may invest not more than 15% of its net assets in securities that
are not readily marketable without registration under the Securities Act of
1933, as amended. Neither Fund engages in underwriting activities; accordingly,
this difference in policy is not material.
2
In addition, Technology Fund's policy on making loans to other persons is
more restrictive than Growth Equity Fund's policy. Growth Equity Fund may not
make loans except to the extent that: (1) investments in publicly distributed
debt instruments or deposits with banks and other financial institutions may be
considered loans; (2) the Fund may invest in repurchase agreements; and (3) the
Fund may make loans as described in its statement of additional information.
Technology Fund's policy on lending is identical except for item (3) above.
Neither Fund engages in lending activities; accordingly, this difference in
policy is not material.
Based on its review of each Fund's investment portfolio, Heritage Asset
Management, Inc. ("Heritage") believes that most of Technology Fund's assets are
consistent with Growth Equity Fund's investment policies and strategies and thus
can be transferred to and held by the latter. If, however, Technology Fund has
any assets that may not be held by Growth Equity Fund, those assets will be sold
before the Reorganization. The proceeds of those sales will be held in temporary
investments or reinvested in assets that qualify to be held by Growth Equity
Fund. The possible need for Technology Fund to dispose of assets before the
Reorganization could result in it selling securities at a disadvantageous time
and realizing losses that otherwise would not have been realized. Alternatively,
these sales could result in Technology Fund's realizing gains that otherwise
would not have been realized, the net proceeds of which would be included in a
taxable distribution to its shareholders before the Reorganization.
FEES AND EXPENSES
The tables below describe the fees and expenses you may pay if you buy and
hold shares of each Fund, and what the expected fees and expenses will be after
the Reorganization. THERE WILL NOT BE ANY FEE PAYABLE IN CONNECTION WITH THE
REORGANIZATION.
GROWTH EQUITY FUND TECHNOLOGY FUND PRO FORMA COMBINED
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
Maximum Sales Charge 4.75 None None 4.75 None None 4.75 None None
Imposed on Purchases
(as a % of offering
price)
Maximum Deferred None* 5%** 1%*** None* 5%** 1%*** None* 5%** 1%***
Sales Charges (as a
of original purchase
price or redemption
proceeds, whichever
is lower)
* Sales of Class A shares within 18 months of purchase will be subject to a contingent deferred sales charge
if those shares were originally purchased from another Heritage Mutual Fund in an amount of $1 million or
more and were not subject to a front-end sales charge.
** Declining over a six-year period as follows: 5% during the first year, 4% during the second year, 3%
during the third year and fourth years, 2% during the fifth year, 1% during the sixth year, and 0%
thereafter.
*** Declining to 0% after the first year.
Set forth below is a comparison of each Fund's operating expenses for the
fiscal year ended October 31, 2003. The ratios also are shown on a pro forma
(estimated) combined basis, giving effect to the Reorganization.
3
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PRO FORMA
HERITAGE SERIES TRUST GROWTH EQUITY FUND(1) TECHNOLOGY FUND(2) COMBINED FUND
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Annual operating expenses (% of average net assets)
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Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- ------- ------- ------- -------
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MANAGEMENT
FEES 0.75% 0.75% 0.75% 1.00% 1.00% 1.00% 0.75% 0.75% 0.75%
PLUS: -----------------------------------------------------------------------------------------------------
12b-1 FEES 0.25% 1.00% 1.00% 0.25% 1.00% 1.00% 0.25% 1.00% 1.00%
-----------------------------------------------------------------------------------------------------
OTHER EXPENSES 0.30% 0.30% 0.30% 1.54% 1.54% 1.54% 0.30% 0.30% 0.30%
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EQUALS: TOTAL
OPERATING
EXPENSES 1.30% 2.05% 2.05% 2.79% 3.54% 3.54% 1.30% 2.05% 2.05%
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MINUS: EXPENSE
REIMBURSEMENT N/A N/A N/A 1.14% 1.14% 1.14% 0.03% 0.03% 0.03%
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EQUALS: NET EXPENSES 1.30% 2.05% 2.05% 1.65% 2.40% 2.40% 1.30% 2.05% 2.05%
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Total Annual Operating Expenses for each Fund are based upon current management fees for each Fund and any
current expense reimbursement undertakings. "Other Expenses" are based on each Fund's expenses for the past
fiscal year.
EXAMPLE
To illustrate the effect of Total Operating Expenses, assume that each Fund's annual return is 5% and that
it had Total Operating Expenses described in the table above. For every $10,000 invested in each Fund, the
following amounts of total expenses would have been paid if an investor closed his or her account at the end of
each of the following time periods:
(1) Heritage has contractually agreed to waive its investment advisory fees and, if necessary, reimburse Class
A of the Growth Equity Fund to the extent that Class A annual operating expenses exceed 1.35% of the
Class' average daily net assets and Class B and Class C annual operating expenses exceed 2.10% of that
Class' average daily net assets for the Fund's 2004 fiscal year. The Board may agree to change fee waivers
or reimbursements without the approval of Fund shareholders. Any reductions in Heritage's management fees
are subject to reimbursement by the Fund within the following two fiscal years if overall expenses fall
below these percentage limitations.
(2) Heritage has contractually agreed to waive its investment advisory fees and, if necessary, reimburse Class
A of the Technology 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 2004 fiscal year. The Board may agree to change fee waivers or
reimbursements without the approval of Fund shareholders. Any reductions in Heritage's management fees are
subject to reimbursement by the Fund within the following two fiscal years if overall expenses fall below
these percentage limitations.
4
HERITAGE SERIES TRUST 1 YEAR 3 YEARS 5 YEARS 10 YEARS
TECHNOLOGY FUND
A shares $635 $1,196 $1,783 $3,367
B shares
Assuming redemption at end of period $643 $1,280 $1,839 $3,567
Assuming no redemption $243 $ 980 $1,739 $3,567
C shares $243 $ 980 $1,739 $3,735
GROWTH EQUITY FUND
A shares $601 $ 868 $1,154 $1,968
B shares
Assuming redemption at end of period $608 $ 943 $1,203 $2,187
Assuming no redemption $208 $ 643 $1,103 $2,187
C shares $208 $ 643 $1,103 $2,379
PRO FORMA COMBINED
A shares $601 $ 868 $1,154 $1,958
B shares
Assuming redemption at end of period $608 $ 943 $1,203 $2,187
Assuming no redemption $208 $ 643 $1,103 $2,187
C shares $208 $ 643 $1,103 $2,379
The purpose of these tables is to assist an investor in understanding the
various types of costs and expenses that an investor in the combined Fund will
bear, whether directly or indirectly. The assumption in this example of a 5%
annual return is required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds. THE INFORMATION IN THE
PREVIOUS TABLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN; ACTUAL EXPENSES OR RETURNS MAY BE GREATER OR LESS
THAN THOSE SHOWN.
PURCHASES
Procedures to purchase shares in the two Funds are identical. Shareholders
of each Fund purchased through your financial advisor, through Heritage directly
by mail, telephone or wire or through an exchange of shares with another
Heritage Mutual Fund. Shares are purchased at the next price calculated on a day
the New York Stock Exchange ("NYSE") is open, after a purchase order is received
and accepted. Prices for shares of each Fund are usually calculated as of 4 p.m.
Eastern time. For shareholders purchasing shares of a Fund for a regular
account, a minimum investment of $1,000 is required (initial minimum investments
of $50 and $500 a required for periodic investment programs and retirement
accounts, respectively). There is no minimun investment for subsequent purchases
except for a periodic investment program account, which requires an investment
of at least $50 on a monthly basis. Heritage, in its discretion, may waive the
minimum investment requirements.
5
Shares of each Fund may also be purchased indirectly through certain
stockbrokers, banks, and other financial institutions having an arrangement with
the Fund, some of which may charge a fee and have different procedures and
policies to purchase fund shares.
See "Choosing A Class of Shares," "Sales Charge Reductions and Waivers,"
"How to Invest," "How to Exchange Your Shares" and "Account and Transaction
Policies"in the Heritage Equity Funds Prospectus for additional information on
how shares of each Fund may be purchased.
REDEMPTIONS
Rights and procedures to redeem shares in the two Funds are identical. You
may sell some or all of your Fund shares at any time through your financial
advisor, through Heritage by telephone, mail or systematic withdrawal plan. You
also may sell your shares by exchanging them for shares of another Heritage
Mutual Fund. Sale of your shares may be subject to a contingent deferres sales
charge. For more information on the CDSCs, see "Choosing a Class of Shares,"
"Sales Charge Reductions and Waivers" and "How to Sell Your Investment" in the
Heritage Equity Funds Prospectus.
Generally, redemption proceeds will be mailed on the next business day
following the receipt of a proper redemption request (under unusual
circumstances, the Funds may take longer, as permitted by law). If shares were
purchased with a check or automated clearing house deposits, each Fund may delay
paying for any redemption until it is reasonably satisfied that those funds have
cleared, which may take up to two weeks after the purchase date. Redemption
requests made by telephone are limited to not more than $50,000. If a
shareholder's account balance falls below $500 because he or she sold shares,
each Fund has the right to close the account after giving the shareholder at
least 30 days' written notice to reestablish the minimum balance.
Shareholders purchasing shares indirectly through certain stockbrokers,
banks, or other financial institutions, may sell those shares only through those
organizations, some of which may charge a fee and have different procedures and
policies to sell fund shares.
Shares are sold at the next price calculated on a day the NYSE is open,
after the sales order is received and accepted. Prices for shares of each Fund
are usually calculated as of 4 p.m. Eastern time.
See "How to Sell Your Investment," "How to Exchange Your Shares" and
"Account and Transaction Policies" in the Heritage Equity Funds Prospectus for
additional information on how to redeem shares held in each Fund.
EXCHANGE PRIVILEGES
You may exchange shares of each Fund for the same class of shares in
another Heritage Mutual Fund provided that you satisfy the minimim investment
requirements. You may exchanges shares through your financial advisor or
Heritage by telephone or in writing. Certain exchanges may be subject to
additional sales charges.
See "How to Exchange Your Shares" and "Account and Transaction Policies"
in the Heritage Equity Funds Prospectus for additional information on how to
exchange Fund shares.
6
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund annually distributes to its shareholders dividends from its net
investment income. Net investment income generally consists of interest income
and dividends received on investments, less expenses. The dividends received
from a Fund will be taxed as ordinary income.
Each Fund also distributes net capital gains to its shareholders normally
once a year. A Fund generates capital gains when it sells assets in its
portfolio for profit. Capital gains distributions are taxed differently
depending on how long the Fund held the asset (not on how long you hold your
shares). Distributions of net capital gains recognized on the sale of assets
held for one year or less (net short-term capital gains) are taxed as ordinary
income; distributions of net capital gains recognized on the sale of assets held
longer than that (net long-term capital gains) are taxed at lower capital gains
rates.
Fund distributions of dividends and net capital gains are automatically
reinvested in additional shares of the distributing Fund at net asset value
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. This
election does not affect the tax treatment of the distributions, which is as
described above. However, distributions to shareholders in a retirement plan or
Systemic Withdrawal Plan will be automatically reinvested in shares of the
distributing Fund.
Following the Reorganization, Growth Equity Fund will continue to honor
the current distribution election of each shareholder of Technology Fund, except
where a shareholder already has an existing account with the Growth Equity Fund.
A shareholder can change any distribution election by notifying Heritage.
FEDERAL INCOME TAX CONSEQUENCES
The Trust will receive an opinion of Kirkpatrick & Lockhart LLP, its
counsel, to the effect that, based on certain representations and assumptions
and subject to certain conditions, Technology Fund's transfer of its assets to
Growth Equity Fund in exchange solely for the latter's shares and its assumption
of Technology Fund's liabilities will qualify as a tax-free "reorganization" as
defined in section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
("Code"). Accordingly, neither Fund nor its shareholders will recognize any gain
or loss as a direct result of the Reorganization. See "The Reorganization -
Federal Income Tax Considerations," for more information regarding the federal
income tax consequences of the Reorganization. However, sales of any of
Technology Fund's assets (described under "Certain Differences Between the
Funds" above) could result in the realization of net gains that would have to be
distributed, and thus taxed, to its shareholders.
COMPARISON OF PRINCIPAL RISK FACTORS
STOCK MARKET RISK. Most of the performance of both Funds depends on what
happens in the stock markets. The value of each Fund's holdings may decline in
price because of changes in prices of those holdings due to factors affecting
only those holdings or to a broad stock market decline. These fluctuations could
be a sustained trend or a drastic movement. The stock markets generally move in
cycles, with periods of rising prices followed by periods of declining prices.
The value of a shareholder's investment may reflect these fluctuations.
PORTFOLIO TURNOVER. Each Fund may engage in short-term transactions under
various market conditions to a greater extent than certain other mutual funds
with similar investment objectives. Each Fund's portfolio turnover could exceed
7
200%. A high rate of portfolio turnover generally leads to greater transaction
costs, may result in additional tax consequences to investors, and may affect
performance.
GROWTH COMPANIES. The growth companies in which Growth Equity Fund invests
are expected to increase their earnings at a certain rate. When these
expectations are not met, investors can punish the stocks inordinately, even if
earnings show an absolute increase. Growth company stocks also typically lack
the dividend yield that can cushion stock prices in market downturns.
NON-DIVERSIFICATION RISK. Technology 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
contrast, Growth Equity Fund is diversified and, with respect to 75% of its
total assets, may not invest more than 5% of its assets in securities of any one
issuer other than the U.S. Government or its agencies or instrumentalities or
purchase more than 10% of the voting securities of any one issuer.
TECHNOLOGY COMPANIES. By focusing on technology companies, Technology Fund
is more subject to their risks. 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.
SMALL CAP COMPANIES. In addition, while Growth Equity Fund focuses on
growth companies, Technology Fund is managed using a value approach and may be
more subject to the risks of investing in small cap companies. Small
capitalization ("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. They face
greater risk of business failure, which could also increase the volatility of
Technology Fund's portfolio.
THE REORGANIZATION
REORGANIZATION PLAN
The terms and conditions under which the Reorganization will be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, the form of which is attached as Appendix A to this
Prospectus.
The Plan contemplates (1) Growth Equity Fund's acquiring all of the assets
of Technology Fund in exchange solely for Class A, Class B, and Class C shares
of Growth Equity Fund and the assumption by Growth Equity Fund of all of
Technology Fund's liabilities as of the close of business on the Closing Date
("Effective Time") and (2) the distribution of such shares to the shareholders
of Technology Fund constructively in exchange for their Technology Fund shares.
The assets of Technology Fund to be acquired by Growth Equity Fund will
include all cash, cash equivalents, securities, receivables (including interest
and dividends receivable), deferred or prepaid expenses shown as assets on its
books and other property of any kind owned it owns as of the Effective Time.
The investment policies and limitations of the two Funds are sufficiently
similar that it will not be necessary for Technology Fund to dispose of any
assets before the Reorganization or for Growth Equity Fund to dispose of any of
8
the assets it receives from Technology Fund in order for Growth Equity Fund to
continue operating within its investment policies and limitations. However,
sales of certain assets held by Technology Fund may be necessary or desirable
based upon Growth Equity Fund's investment strategy and the market as it exists
following the Reorganization. Those sales may result in the recognition of net
gains for tax purposes that will have to be distributed, and thus taxed, to Fund
shareholders.
Growth Equity Fund will assume all liabilities of Technology Fund.
However, Technology Fund will utilize its best efforts to discharge all of its
known liabilities prior to the Closing Date.
The value of Technology Fund's assets to be acquired, and the amount of
its liabilities to be assumed, by Growth Equity Fund and the net asset value of
a share of each Class of Growth Equity Fund will be determined as of the close
of regular trading on the NYSE on the Closing Date and will be determined in
accordance with the valuation procedures described in the Heritage Equity Funds
Prospectus and SAI. Securities and other assets for which market quotations are
not readily available will be valued by a method that the Board believes
accurately reflects fair value. All computations of value will be performed by
Heritage, the Trust's fund accountant, using to the extent possible prices
provided by outside pricing services approved by the Board.
As soon as practicable after the Effective Time, Technology Fund will
distribute pro rata to its shareholders of record as of that time the Class A,
Class B, and Class C shares of Growth Equity Fund it receives in the
Reorganization, so that each shareholder of Technology Fund will receive a
number of full and fractional shares of Growth Equity Fund of the
correspondingly designated Class equal in value to the shareholder's Technology
Fund shares. Technology Fund will be dissolved as soon as practicable
thereafter. Such distribution will be accomplished by opening accounts on the
books of the Trust's transfer agent in the names of Technology Fund shareholders
and by transferring to these accounts the Class A, Class B, or Class C shares of
Growth Equity Fund previously credited to the account of Technology Fund on
those books. Each shareholders account shall be credited with the pro rata
number of Growth Equity Fund's Class A, Class B, or Class C shares due to that
shareholder. Fractional shares of Growth Equity Fund will be rounded to the
third decimal place.
Accordingly, immediately after the Reorganization, each former shareholder
of Technology Fund Class A, Class B, or Class C shares will own shares of the
corresponding Class of Growth Equity Fund equal to the value of that
shareholder's Technology Fund shares immediately prior to the Reorganization.
Moreover, because Class A, Class B, and Class C shares of Growth Equity Fund
will be issued at net asset value in exchange for the net assets of Technology
Fund that will equal the aggregate value of those shares, the net asset value
per share of each Class of Growth Equity Fund will be unchanged. Thus, the
Reorganization will not result in a dilution of the value of any shareholder
account in either Fund. However, in general, the Reorganization will
substantially reduce the percentage ownership of each Technology Fund
shareholder below such shareholder's current percentage ownership in Technology
Fund because, while the shareholder will have the same dollar amount invested
initially in Growth Equity Fund that he or she had invested in Technology Fund,
his or her investment will represent a smaller percentage of the combined net
assets of the Funds.
Any transfer taxes payable on issuance of Class A, Class B, and Class C
shares of Growth Equity Fund in a name other than that of the registered holder
of the shares on the books of Technology Fund as of the time of transfer will be
paid by the person to whom those shares are to be issued as a condition of the
transfer. Any reporting responsibility of Technology Fund will continue to be
its responsibility up to and including the Closing Date and thereafter until it
is terminated.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Plan. The Plan may be terminated and the
Reorganization abandoned at any time prior to the Closing Date by the Board if
9
it determines that the Reorganization would be inadvisable for either Fund. The
Board also may amend the Plan in any manner. The Trust's officers may change the
Closing Date.
REASONS FOR THE REORGANIZATION
At a meeting held on August 30, 2003 and by subsequent written consent
dated November __, 2003, the Board, including a majority of the Independent
Trustees, determined that the Reorganization is in the best interests of both
Funds and that the interests of shareholders in the Funds will not be diluted as
a result of the Reorganization. The Board determined that the shareholders of
Technology Fund will benefit by becoming shareholders of Growth Equity Fund
because Growth Equity Fund has a stable asset level, consistently outperformed
Technology Fund with less volatility, and lower expense ratio. The Board also
determined that the shareholders of Growth Equity Fund will benefit from the
Reorganization because the Reorganization will result in an increase in the
assets of Growth Equity Fund, which may result in a slight decrease in the
operating expenses of Growth Equity Fund.
In considering the Reorganization, the Board considered the following
factors, among others:
(1) the historical performance of Technology Fund and the stagnant
recovery of the technology sector;
(2) the small asset base of Technology Fund and its failure to
attract new assets;
(3) the compatibility of the investment objectives and strategies of
the Funds;
(4) the reduction of expenses for Technology Fund shareholders as a
result of the lower expense ratio of Growth Equity Fund;
(5) the potential effect of the Reorganization on the expense ratio
of Growth Equity Fund, namely, that the Reorganization will
permit the fixed costs of Growth Equity Fund to be spread over a
larger asset base, effectively bringing the assets of that Fund
closer to the point where expenses borne by each shareholder
will be reduced, based upon the Fund's current fee structure;
(6) the fact that Heritage will bear the costs of the
Reorganization;
(7) the Funds' historical performance records and risk/reward
ratios, expense ratios, past growth in assets, and future
prospects;
(8) the tax neutrality of the Reorganization to investors;
(9) because of the expense cap currently in effect for Technology
Fund and Heritage's commitment to cap expenses for Growth Equity
Fund through October 31, 2004, a portion of the expenses of the
Reorganization will be borne by Heritage; and
(10) alternatives to the proposed transactions, including hiring a
new subadviser or simple liquidation of Technology Fund.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
The Trust is registered with the SEC as an open-end management investment
company, and its Trustees are authorized to issue an unlimited number of shares
of beneficial interest in each separate series (par value $0.001 per share).
Shares of each Fund represent equal proportionate interests in the assets of
that Fund only and have identical voting, dividend, redemption, liquidation, and
other rights. All issued shares are fully paid and non-assessable, and
10
shareholders have no preemptive or other rights to subscribe for any additional
shares.
The Board does not intend to hold annual meetings of shareholders of the
Funds. The Trustees will call special meetings of the shareholders of a Fund
only if required under the 1940 Act or in their discretion or upon the written
request of holders of 10% or more of the outstanding shares of that Fund
entitled to vote.
Under Massachusetts law, the shareholders of a Fund will not be personally
liable for its obligations; a shareholder is entitled to the same limitation of
personal liability extended to shareholders of a corporation. To guard against
the risk that Massachusetts law might not be applied in other states, the
Trust's Declaration of Trust requires that every written obligation of the Trust
or a Fund contain a statement that such obligation may be enforced only against
the assets of the Trust or a specific Fund and provides for indemnification out
of Trust or Fund property of any shareholder nevertheless held personally liable
for Trust or Fund obligations, respectively.
FEDERAL INCOME TAX CONSIDERATIONS
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a)(1)(C) of the Code. The Trust
will receive an opinion of Kirkpatrick & Lockhart LLP, its counsel ("Opinion"),
substantially to the effect that, based on certain representations and
assumptions and subject to certain conditions, the federal income tax purposes:
(1) Growth Equity Fund's acquisition of Technology Fund's assets in
exchange solely for Growth Equity Fund's Class A, Class B, and Class C
shares (collectively, "Growth Equity Fund Shares") and the latter's
assumption of Technology Fund's liabilities, followed by Technology Fund's
distribution of those shares pro rata to its shareholders constructively
in exchange for their Technology Fund shares, will qualify as a
"reorganization" as defined in section 368(a)(1)(C) of the Code, and each
Fund will be "a party to a reorganization" within the meaning of section
368(b) of the Code;
(2) Technology Fund will recognize no gain or loss on the transfer to
Growth Equity Fund of its assets in exchange solely for Growth Equity Fund
Shares and the latter's assumption of Technology Fund's liabilities or on
the subsequent distribution of those shares to Technology Fund's
shareholders in constructive exchange for their Technology Fund shares;
(3) Growth Equity Fund will recognize no gain or loss on its receipt
of the transferred assets in exchange solely for Growth Equity Fund Shares
and its assumption of Technology Fund's liabilities;
(4) Growth Equity Fund's basis in each transferred asset will be the
same as Technology Fund's basis therein immediately before the
Reorganization, and Growth Equity Fund's holding period for each such
asset will include Technology Fund's holding period therefor;
(5) A Technology Fund shareholder will recognize no gain or loss on
the constructive exchange of all its Technology Fund shares solely for
Growth Equity Fund Shares pursuant to the Plan; and
11
(6) A Technology Fund shareholder's aggregate basis in the Growth
Equity Fund Shares it receives in the Reorganization will be the same as
the aggregate basis in its Technology Fund shares it constructively
surrenders in exchange for those Growth Equity Fund Shares, and its
holding period for those Growth Equity Fund Shares will include, in each
instance, its holding period for those Technology Fund shares, provided
the shareholder holds them as capital assets at the Effective Time.
The Opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any transferred
asset as to which any unrealized gain or loss is required to be recognized for
federal income tax purposes at the end of a taxable year (or on the termination
or transfer thereof) under a mark-to-market system of accounting.
Growth Equity Fund's utilization after the Reorganization of
pre-Reorganization capital losses Technology Fund realized will be subject to
limitation in future years under the Code.
Shareholders of Technology Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
CAPITALIZATION
The following table shows the capitalization of each Fund as of October
31, 2003 and the pro forma combined capitalization of both Funds as if the
Reorganization had occurred on that date.
GROWTH EQUITY TECHNOLOGY PRO FORMA
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
Net Assets (000s) 165,536 28,876 93,490 9,329 4,276 6,861 174,864 33,152 100,351
Net Asset Value per share 26.05 24.21 24.21 5.32 5.15 5.15 26.05 24.21 24.21
Shares Outstanding (000s) 6,355 1,193 3,862 1,755 830 1,331 6,713 1,369 4,146
ADDITIONAL INFORMATION ABOUT GROWTH EQUITY FUND
FINANCIAL HIGHLIGHTS
For a table of the financial highlights of Growth Equity Fund, see
"Financial Highlights" in the Heritage Equity Funds Prospectus. The most recent
financial highlights of Growth Equity Fund included in the Trust's Semi-Annual
Report to Shareholders for the period ended April 30, 2003, are attached as
Appendix B. This information is derived from and should be read in conjunction
with the financial statements of Growth Equity Fund and notes thereto, included
in the Trust's Annual Report to Shareholders for the period year October 31,
2002 which are incorporated by reference into the SAI together with the report
of the independent certified public accountants, PricewaterhouseCoopers LLP,
thereon.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Growth Equity Fund's investment objective and policies
and the risk factors associated with an investment in the Fund in addition to
that included in this Prospectus, see "Growth Equity Fund" in the Heritage
Equity Funds Prospectus.
12
INVESTMENT MANAGER, SUB-ADVISER AND PORTFOLIO MANAGER
For a discussion of Growth Equity Fund's investment manager, sub-adviser,
and portfolio manager, see "Who Manages Your Fund" in the Heritage Equity Funds
Prospectus.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
See Appendix C for management's discussion of the performance of Growth
Equity Fund as included in the Trust's Annual Report to Shareholders dated
October 31, 2002 and Semi-Annual Report to Shareholders dated April 30, 2003 and
the material factors affecting this performance.
GROWTH EQUITY FUND SHARES
For a discussion of Growth Equity Fund's shares, including voting rights
and exchange rights, and how the shares may be purchased and redeemed, in
addition to that included in this Prospectus, see "Your Investment" in the
Heritage Equity Funds Prospectus.
TAXES, DIVIDENDS, AND OTHER DISTRIBUTIONS
For a discussion of Growth Equity Fund's policy with respect to dividends
and other distributions and the tax consequences of an investment in its shares,
in addition to that included in this Prospectus, see "Taxes" in the Heritage
Equity Funds Prospectus.
ADDITIONAL INFORMATION ABOUT TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS
For a table of the financial highlights of Technology Fund, see "Financial
Highlights" in the Heritage Equity Funds Prospectus. The most recent financial
highlights of Technology Fund included in the Trust's Semi-Annual Report to
Shareholders for the period ended April 30, 2003, are attached as Appendix B.
This information is derived from and should be read in conjunction with the
financial statements of Technology Fund and notes thereto, included in the
Trust's Annual Report to Shareholders for the period ended October 31, 2002
which are incorporated by reference into the SAI together with the report of the
independent certified public accountants, PricewaterhouseCoopers LLP, thereon.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Technology Fund's investment objective and policies
and the risk factors associated with an investment in the Fund in addition to
that included in this Prospectus, see "Technology Fund" in the Heritage Equity
Funds Prospectus.
INVESTMENT MANAGER, SUB-ADVISER AND PORTFOLIO MANAGER
For a discussion of Technology Fund's investment manager, sub-adviser, and
portfolio manager, see "Who Manages Your Fund" in the Heritage Equity Funds
Prospectus.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
See Appendix C for management's discussion of the performance of
Technology Fund as included in the Trust's Annual Report to Shareholders dated
October 31, 2002 and Semi-Annual Report to Shareholders dated April 30, 2003 and
the material factors affecting this performance.
13
TECHNOLOGY FUND SHARES
For a discussion of Technology Fund's shares, including voting rights and
exchange rights, and how the shares may be purchased and redeemed, in addition
to that included in this Prospectus, see "Your Investment" in the Heritage
Equity Funds Prospectus.
TAXES, DIVIDENDS, AND OTHER DISTRIBUTIONS
For a discussion of Technology Fund's policy with respect to dividends and
other distributions and the tax consequences of an investment in its shares, in
addition to that included in this Prospectus, see "Taxes" in the Heritage Equity
Funds Prospectus.
INFORMATION REGARDING FIVE PERCENT SHARE OWNERSHIP AND INTERESTS OF
AFFILIATED PERSONS
FIVE PERCENT HOLDERS
On October 31, 2003 there were no beneficial or record owners of more than
5% of Growth Equity Fund or Technology Fund.
SHARES HELD BY OFFICERS AND DIRECTORS
On October 31, 2003, the trustees and officers of the Trust, as a group,
owned beneficially or of record less than 1% of the outstanding shares of each
Fund.
INTERESTS OF AFFILIATED PERSONS
Heritage, the investment manager and administrator of the Funds, may be
deemed to benefit from the Reorganization because the combination of the Funds
will eliminate expenses, such as fund accounting, legal, and shareholder
reporting, that are involved in maintaining Technology Fund as a separate series
of the Trust. Heritage anticipates that this will produce economies of scale in
Growth Equity Fund and make Growth Equity Fund more marketable, as well as
eliminate the need for further expense reimbursements with respect to Technology
Fund.
MISCELLANEOUS
AVAILABLE INFORMATION
The Trust and each series thereof are subject to the informational
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith files reports, proxy material and other information with
the SEC. Such reports, proxy material and other information can be inspected and
copied at the Public Reference Facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices in New
York (233 Broadway, New York, New York 10279). Copies of such material also can
be obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
14
LEGAL MATTERS
Certain legal matters in connection with the issuance of Growth Equity
Fund shares as part of the Reorganization will be passed upon by Kirkpatrick &
Lockhart LLP, counsel to the Trust.
EXPERTS
The Funds' audited financial statements, incorporated by reference in the
Statement of Additional Information, have been audited by PricewaterhouseCoopers
LLP, the Funds' independent certified public accountants.
15
APPENDIX A
FORM OF PLAN OF REORGANIZATION AND TERMINATION
THIS PLAN OF REORGANIZATION AND TERMINATION ("PLAN") is adopted by
Heritage Series Trust, a Massachusetts business trust ("TRUST"), on behalf of
Heritage Technology Fund ("TARGET") and Heritage Growth Equity Fund ("ACQUIRING
FUND"), each a segregated portfolio of assets ("series") thereof (each a
"FUND").
Trust wishes to effect a reorganization described in section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("CODE"), and
intends this Plan to be, and adopts it as, a "plan of reorganization" within the
meaning of the regulations under section 368(a) of the Code ("REGULATIONS"). The
reorganization will consist of (1) the transfer of Target's assets to Acquiring
Fund in exchange solely for voting shares of beneficial interest in Acquiring
Fund ("ACQUIRING FUND SHARES") and Acquiring Fund's assumption of Target's
liabilities, (2) the distribution of those shares PRO RATA to the holders of
shares of beneficial interest in Target ("TARGET SHARES") in exchange for the
Target Shares and in liquidation of Target, and (3) Target's termination, all on
the terms and conditions set forth herein (such transactions being referred to
herein collectively as the "REORGANIZATION").
Trust is a trust operating under a written declaration of trust, the
beneficial interest in which is divided into transferable shares, that is duly
organized and validly existing under the laws of The Commonwealth of
Massachusetts (a so-called "Massachusetts business trust"); and a copy of its
Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts. Before January 1, 1997, Trust "claimed" classification for
federal tax purposes as an association taxable as a corporation and has not
elected otherwise since. Trust is an "investment company" as defined in the
Investment Company Act of 1940, as amended ("1940 ACT"), that is classified as a
management company of the open-end type, and its registration with the
Securities and Exchange Commission ("SEC") as an investment company under the
1940 Act is in full force and effect. Each Fund is a duly established and
designated series of Trust.
Target Shares are divided into three classes, designated Class A
shares, Class B shares, and Class C shares ("CLASS A TARGET SHARES," "CLASS B
TARGET SHARES," and "CLASS C TARGET SHARES," respectively). Acquiring Fund
Shares also are divided into three classes, also designated Class A shares,
Class B shares, and Class C shares ("CLASS A ACQUIRING FUND SHARES," "CLASS B
ACQUIRING FUND SHARES," and "CLASS C ACQUIRING FUND SHARES," respectively). Each
class of Acquiring Fund Shares is substantially similar to the correspondingly
designated class of Target Shares, I.E., the Funds' Class A, Class B, and Class
C shares correspond to each other.
All covenants and obligations of a Fund contained herein shall be
deemed to be covenants and obligations of Trust acting on behalf of that Fund,
and all rights and benefits created hereunder in favor of a Fund shall inure to,
and shall be enforceable by, Trust acting on behalf of that Fund.
A-1
1. PLAN OF REORGANIZATION AND TERMINATION
--------------------------------------
1.1. Target shall assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("ASSETS") to Acquiring Fund. In exchange
therefor, Acquiring Fund shall --
(a) issue and deliver to Target the number of full and fractional
(rounded to the third decimal place) (i) Class A Acquiring Fund Shares
determined by dividing the net value of Target (computed as set forth
in paragraph 2.1) ("TARGET VALUE") attributable to the Class A Target
Shares by the net asset value ("NAV") of a Class A Acquiring Fund Share
(computed as set forth in paragraph 2.2), (ii) Class B Acquiring Fund
Shares determined by dividing the Target Value attributable to the
Class B Target Shares by the NAV of a Class B Acquiring Fund Share (as
so computed), and (ii) Class C Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class C Target Shares by
the NAV of a Class C Acquiring Fund Share (as so computed), and
(b) assume all of Target's liabilities described in paragraph 1.3
("LIABILITIES").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall consist of all cash, cash equivalents,
securities, receivables (including interest and dividends receivable), claims
and rights of action, rights to register shares under applicable securities
laws, books and records, deferred and prepaid expenses shown as assets on
Target's books, and other property Target owns at the Effective Time (as defined
in paragraph 3.1).
1.3. The Liabilities shall consist of all of Target's liabilities,
debts, obligations, and duties of whatever kind or nature, whether absolute,
accrued, contingent, or otherwise, whether or not arising in the ordinary course
of business, whether or not determinable at the Effective Time, and whether or
not specifically referred to in this Plan. Notwithstanding the foregoing, Target
shall use its best efforts to discharge all its known Liabilities before the
Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare
and pay to its shareholders a dividend and/or other distribution in an amount
large enough so that it will have distributed (a) substantially all (and in any
event not less than 90%) of its "investment company taxable income" (within the
meaning of section 852(b)(2) of the Code), computed without regard to any
deduction for dividends paid, and (b) substantially all of its "net capital
gain" (as defined in section 1222(11) of the Code), after reduction by any
capital loss carryforward, for the current taxable year through the Effective
Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares it receives
pursuant to paragraph 1.1(a) to its shareholders of record, determined as of the
Effective Time (each a "SHAREHOLDER"), in constructive exchange for their Target
Shares. That distribution shall be accomplished by Trust's transfer agent's
opening accounts on Acquiring Fund's share transfer books in the Shareholders'
names and transferring those Acquiring Fund Shares thereto. Each Shareholder's
account shall be credited with the respective PRO RATA number of full and
fractional (rounded to the third decimal place) Acquiring Fund Shares due that
Shareholder, by class (I.E., the account for a Shareholder of Class A Target
Shares shall be credited with the respective PRO RATA number of Class A
Acquiring Fund Shares due that Shareholder, the account for a Shareholder of
Class B Target Shares shall be credited with the respective PRO RATA number of
A-2
Class B Acquiring Fund Shares due that Shareholder, and the account for a
Shareholder of Class C Target Shares shall be credited with the respective PRO
RATA number of Class C Acquiring Fund Shares due that Shareholder). All
outstanding Target Shares, including any represented by certificates, shall
simultaneously be canceled on Target's share transfer books. Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares issued in
connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the
Acquiring Fund Shares pursuant to paragraph 1.5, but in all events within six
months after the Effective Time, Target shall be terminated as a series of Trust
and any further actions shall be taken in connection therewith as required by
applicable law.
1.7. Any reporting responsibility of Target to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
those Acquiring Fund Shares are to be issued, as a condition of that transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a)
the value of the Assets computed as of the close of regular trading on the New
York Stock Exchange ("NYSE") on the date of the Closing ("VALUATION TIME"),
using the valuation procedures set forth in Trust's then-current prospectus and
statement of additional information, less (b) the amount of the Liabilities as
of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV per share of each class
of Acquiring Fund Shares shall be computed as of the Valuation Time, using such
valuation procedures.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made
by or under the direction of Heritage Asset Management, Inc. ("ADVISER").
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts necessary to
consummate the same ("CLOSING"), shall occur at Trust's principal office on or
about December __, 2003, or at such other place and/or on such other date Trust
determines. All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or at such other
time Trust determines ("EFFECTIVE TIME"). If, immediately before the Valuation
Time, (a) the NYSE is closed to trading or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or elsewhere is disrupted, so
that accurate appraisal of Target's net value and/or the NAV per share of each
class of Acquiring Fund Shares is impracticable, the Effective Time shall be
postponed until the first business day after the day when that trading has been
fully resumed and that reporting has been restored.
A-3
3.2. Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately after the Closing, does or will
conform to that information on Target's books immediately before the Closing.
Trust's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets it holds will be transferred to Acquiring
Fund at the Effective Time and (b) all necessary taxes in conjunction with the
delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
3.3. Trust's transfer agent shall deliver at the Closing a certificate
as to the opening of accounts in the Shareholders' names on Acquiring Fund's
share transfer books and a confirmation, or other evidence satisfactory to
Trust, that the Acquiring Fund Shares to be credited to Target at the Effective
Time have been credited to Target's account on Acquiring Fund's books.
4. CONDITIONS PRECEDENT
--------------------
4.1. Trust's obligation to implement this Plan on Acquiring Fund's
behalf shall be subject to satisfaction of the following conditions at or before
(and continuing through) the Effective Time:
4.1.1. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign,
transfer, and deliver the Assets free of any liens or other
encumbrances (except securities that are subject to "securities loans"
(as referred to in section 851(b)(2) of the Code)); and on delivery and
payment for the Assets, Acquiring Fund will acquire good and marketable
title thereto;
4.1.2. Target is not in violation of, and the adoption of this Plan
and consummation of the Reorganization will not conflict with or
violate, Massachusetts law or any provision of Trust's Declaration of
Trust or By-Laws (collectively, "GOVERNING Documents") or of any
agreement, instrument, lease, or other undertaking to which Target is a
party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target is a party or by which it is bound;
4.1.3. All material contracts and other commitments of or applicable
to Target (other than this Plan and investment contracts, including
options, futures, and forward contracts) will be terminated, or
provision for discharge of any liabilities of Target thereunder will be
made, at or prior to the Effective Time, without either Fund's
incurring any liability or penalty with respect thereto and without
diminishing or releasing any rights Target may have had with respect to
actions taken or omitted or to be taken by any other party thereto
before the Closing;
4.1.4. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Trust's knowledge) threatened against Trust with respect to Target or
any of its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the
conduct of its business; and Trust knows of no facts that might form
the basis for the institution of any such litigation, proceeding, or
A-4
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to
consummate the Reorganization;
4.1.5. Target incurred the Liabilities in the ordinary course of its
business;
4.1.6. Target is a "fund" (as defined in section 851(g)(2) of the
Code); it qualified for treatment as a regulated investment company
under Subchapter M of the Code ("RIC") for each past taxable year since
it commenced operations and will continue to meet all the requirements
for that qualification for its current taxable year; it will invest its
assets at all times through the Effective Time in a manner that ensures
compliance with the foregoing; and Target has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
4.1.7. From the time it commenced operations through the Effective
Time, Target has conducted and will conduct its "historic business"
(within the meaning of section 1.368-1(d)(2) of the Regulations) in a
substantially unchanged manner; before the Effective Time Target will
not (a) dispose of and/or acquire any assets (1) for the purpose of
satisfying Acquiring Fund's investment objective or policies or (2) for
any other reason except in the ordinary course of its business as a
RIC, or (b) otherwise change its historic investment policies; and
Trust believes, based on its review of each Fund's investment
portfolio, that most of Target's assets are consistent with Acquiring
Fund's investment objective and policies and thus can be transferred to
and held by Acquiring Fund;
4.1.8. Target is not under the jurisdiction of a court in a "title
11 or similar case" (as defined in section 368(a)(3)(A) of the Code);
4.1.9. During the five-year period ending at the Effective Time, (a)
neither Target nor any person "related" (within the meaning of section
1.368-1(e)(3) of the Regulations) to it will have acquired Target
Shares, either directly or through any transaction, agreement, or
arrangement with any other person, with consideration other than
Acquiring Fund Shares or Target Shares, except for shares redeemed in
the ordinary course of Target's business as a series of an open-end
investment company as required by section 22(e) of the 1940 Act, and
(b) no distributions will have been made with respect to Target Shares,
other than normal, regular dividend distributions made pursuant to
Target's historic dividend-paying practice and other distributions that
qualify for the deduction for dividends paid (within the meaning of
section 561 of the Code) referred to in sections 852(a)(1) and
4982(c)(1)(A) of the Code;
4.1.10. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers; and
4.1.11. Target's federal income tax returns, and all applicable
state and local tax returns, for all taxable years through and
including the taxable year ended October 31, 2002, have been timely
filed and all taxes payable pursuant to those returns have been timely
paid.
A-5
4.2. Trust's obligation to implement this Plan on Target's behalf shall
be subject to satisfaction of the following conditions at or before (and
continuing through) the Effective Time:
4.2.1. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
4.2.2. The Acquiring Fund Shares to be issued and delivered to
Target hereunder will have been duly authorized and duly registered
under the federal securities laws (and appropriate notices respecting
them will have been duly filed under applicable state securities laws)
at the Effective Time and, when issued and delivered as provided
herein, will be duly and validly issued and outstanding shares of
Acquiring Fund, fully paid and non-assessable by Trust;
4.2.3. Acquiring Fund is not in violation of, and the adoption of
this Plan and consummation of the Reorganization will not conflict with
or violate, Massachusetts law or any provision of the Governing
Documents or of any agreement, instrument, lease, or other undertaking
to which Acquiring Fund is a party or by which it is bound or result in
the acceleration of any obligation, or the imposition of any penalty,
under any agreement, judgment, or decree to which Acquiring Fund is a
party or by which it is bound;
4.2.4. No litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Trust's knowledge) threatened against Trust with respect to Acquiring
Fund or any of its properties or assets that, if adversely determined,
would materially and adversely affect Acquiring Fund's financial
condition or the conduct of its business; and Trust knows of no facts
that might form the basis for the institution of any such litigation,
proceeding, or investigation and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or
its ability to consummate the Reorganization;
4.2.5. Acquiring Fund is a "fund" (as defined in section 851(g)(2)
of the Code); it qualified for treatment as a RIC for each past taxable
year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; it
intends to continue to meet all such requirements for the next taxable
year; and it has no earnings and profits accumulated in any taxable
year in which the provisions of Subchapter M of the Code did not apply
to it;
4.2.6. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an
open-end investment company; nor does Acquiring Fund, or any person
"related" (within the meaning of section 1.368-1(e)(3) of the
Regulations) to it, have any plan or intention to acquire -- during the
five-year period beginning at the Effective Time, either directly or
through any transaction, agreement, or arrangement with any other
person -- with consideration other than Acquiring Fund Shares, any
Acquiring Fund Shares issued to the Shareholders pursuant to the
Reorganization, except for redemptions in the ordinary course of such
business as required by section 22(e) of the 1940 Act;
A-6
4.2.7. Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of section
1.368-1(d)(2) of the Regulations) and (b) will use a significant
portion of Target's "historic business assets" (within the meaning of
section 1.368-1(d)(3) of the Regulations) in a business; in addition,
Acquiring Fund has no plan or intention to sell or otherwise dispose of
any of the Assets, except for dispositions made in the ordinary course
of that business and dispositions necessary to maintain its status as a
RIC;
4.2.8. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another business trust or a corporation or
statutory trust or any "fund" thereof (as defined in section 851(g)(2)
of the Code) following the Reorganization;
4.2.9. Acquiring Fund does not directly or indirectly own, nor at
the Effective Time will it directly or indirectly own, nor has it
directly or indirectly owned at any time during the past five years,
any Target Shares;
4.2.10. During the five-year period ending at the Effective Time,
neither Acquiring Fund nor any person "related" (within the meaning of
section 1.368-1(e)(3) of the Regulations) to it will have acquired
Target Shares with consideration other than Acquiring Fund Shares;
4.2.11. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock
and securities of any one issuer and (b) not more than 50% of the value
of such assets will be invested in the stock and securities of five or
fewer issuers; and
4.2.12. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years through
and including the taxable year ended October 31, 2002, have been timely
filed and all taxes payable pursuant to such returns have been timely
paid.
4.3. Trust's obligation to implement this Plan on each Fund's behalf
shall be subject to satisfaction of the following additional conditions at or
before (and continuing through) the Effective Time:
4.3.1. The fair market value of the Acquiring Fund Shares each
Shareholder receives will be approximately equal to the fair market
value of its Target Shares it constructively surrenders in exchange
therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion
of their Target Shares before the Reorganization to any person
"related" (within the meaning of section 1.368-1(e)(3) of the
Regulations) to either Fund or (ii) any portion of the Acquiring Fund
Shares they receive in the Reorganization to any person "related"
(within such meaning) to Acquiring Fund, (b) does not anticipate
dispositions of those Acquiring Fund Shares at the time of or soon
after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target as a series of an open-end investment
company, (c) expects that the percentage of Target's shareholders'
A-7
interests that will be disposed of as a result of or at the time of the
Reorganization will be DE MINIMIS, and (d) does not anticipate that
there will be extraordinary redemptions of Acquiring Fund Shares
immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
4.3.4. The fair market value of the Assets on a going concern basis
will equal or exceed the Liabilities to be assumed by Acquiring Fund
and those to which the Assets are subject;
4.3.5. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.6. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the
fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, Target held immediately before the
Reorganization. For the purposes of the foregoing, any amounts Target
uses to pay its Reorganization expenses and to make redemptions and
distributions immediately before the Reorganization (except (a)
redemptions in the ordinary course of its business required by section
22(e) of the 1940 Act and (b) regular, normal dividend distributions
made to conform to its policy of distributing all or substantially all
of its income and gains to avoid the obligation to pay federal income
tax and/or the excise tax under section 4982 of the Code) will be
included as assets it held immediately before the Reorganization;
4.3.7. None of the compensation received by any Shareholder who is
an employee of or service provider to Target will be separate
consideration for, or allocable to, any of the Target Shares that
Shareholder held; none of the Acquiring Fund Shares any such
Shareholder receives will be separate consideration for, or allocable
to, any employment agreement, investment advisory agreement, or other
service agreement; and the compensation paid to any such Shareholder
will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's-length for similar
services;
4.3.8. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" (as defined in section 304(c) of
the Code) of Acquiring Fund;
4.3.9. Neither Fund will be reimbursed for any expenses incurred by
it or on its behalf in connection with the Reorganization unless those
expenses are solely and directly related to the Reorganization
(determined in accordance with the guidelines set forth in Rev. Rul.
73-54, 1973-1 C.B. 187) ("REORGANIZATION EXPENSES");
4.3.10. The aggregate value of the acquisitions, redemptions, and
distributions limited by paragraphs 4.1.9, 4.2.6, and 4.2.10 will not
exceed 50% of the value (without giving effect to such acquisitions,
redemptions, and distributions) of the proprietary interest in Target
at the Effective Time;
A-8
4.3.11. Trust's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended ("1933 ACT"),
and the 1940 Act, and the rules and regulations thereunder and do not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
4.3.12. This Plan has been duly authorized by all necessary action
required by the Governing Documents and applicable law, including
authorization of Trust's board of trustees, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and this
Plan constitutes a valid and legally binding obligation of each Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and other similar laws relating to or affecting creditors'
rights generally and by general principles of equity;
4.3.13. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934, as amended, or the 1940 Act for Trust's adoption of this Plan,
except for consents, approvals, authorizations, and filings that have
been made or received or may be required subsequent to the Effective
Time;
4.3.14. All necessary filings will have been made with the SEC and
state securities authorities, and no order or directive will have been
received that any other or further action is required to permit Trust
to carry out the Reorganization; and all consents, orders, and permits
of federal, state, and local regulatory authorities (including the SEC
and state securities authorities) Trust deems necessary to permit
consummation, in all material respects, of the Reorganization will have
been obtained, except where failure to obtain same would not involve a
risk of a material adverse effect on either Fund's assets or
properties;
4.3.15. At the Effective Time, no action, suit, or other proceeding
will be pending before any court or governmental agency in which it is
sought to restrain or prohibit, or to obtain damages or other relief in
connection with, the Reorganization; and
4.3.16. Trust will have received an opinion of Kirkpatrick &
Lockhart LLP ("COUNSEL"), addressed to and in form and substance
reasonably satisfactory to it, as to the federal income tax
consequences mentioned below ("TAX OPINION"). In rendering the Tax
Opinion, Counsel may assume satisfaction of all the conditions set
forth in this paragraph 4, may treat them as representations and
warranties Trust made to Counsel, and may rely as to factual matters,
exclusively and without independent verification, on such
representations and warranties and any other representations of
responsible Trust officers. The Tax Opinion will be substantially to
the effect that, based on the facts and assumptions stated therein, and
conditioned on consummation of the Reorganization in accordance with
this Plan, for federal income tax purposes:
(a) Acquiring Fund's acquisition of the Assets in
exchange solely for Acquiring Fund Shares and Acquiring Fund's
assumption of the Liabilities, followed by Target's
distribution of those shares PRO RATA to the Shareholders
constructively in exchange for their Target Shares, will
qualify as a "reorganization" as defined in section
A-9
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the
Code;
(b) Target will recognize no gain or loss on the
transfer of the Assets to Acquiring Fund in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of
the Liabilities or on the subsequent distribution of those
shares to the Shareholders in constructive exchange for their
Target Shares;
(c) Acquiring Fund will recognize no gain or loss on
its receipt of the Assets in exchange solely for Acquiring
Fund Shares and its assumption of the Liabilities;
(d) Acquiring Fund's basis in each Asset will be the
same as Target's basis therein immediately before the
Reorganization, and Acquiring Fund's holding period for each
Asset will include Target's holding period therefor;
(e) A Shareholder will recognize no gain or loss on
the constructive exchange of all its Target Shares solely for
Acquiring Fund Shares pursuant to the Reorganization; and
(f) A Shareholder's aggregate basis in the Acquiring
Fund Shares it receives in the Reorganization will be the same
as the aggregate basis in its Target Shares it constructively
surrenders in exchange for those Acquiring Fund Shares, and
its holding period for those Acquiring Fund Shares will
include, in each instance, its holding period for those Target
Shares, provided the Shareholder holds them as capital assets
at the Effective Time.
Notwithstanding subparagraphs (b) and (d), the Tax Opinion may state
that no opinion is expressed as to the effect of the Reorganization on
the Funds or any Shareholder with respect to any Asset as to which any
unrealized gain or loss is required to be recognized for federal income
tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
5. TERMINATION AND AMENDMENT OF PLAN
---------------------------------
5.1. Trust's board of trustees may terminate this Plan and abandon the
Reorganization at any time before the Closing if circumstances develop that, in
its judgment, make proceeding with the Reorganization inadvisable for either
Fund.
5.2. Trust's board of trustees may amend, modify, or supplement this
Plan at any time in any manner.
6. MISCELLANEOUS
-------------
6.1. This Plan shall be construed and interpreted in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between those laws and the federal securities laws, the
latter shall govern.
A-10
6.2. The Funds shall bear all the Reorganization Expenses in proportion
to their respective net assets as of the Valuation Time, provided that Adviser
shall bear part or all of the Reorganization Expenses so allocable to each Fund
to the extent Adviser is required to do so pursuant to any expense limitation it
has agreed to with Trust.
6.3. Nothing expressed or implied herein is intended or shall be
construed to confer on or give any person, firm, trust, or corporation other
than the Funds and their respective successors and assigns any rights or
remedies under or by reason of this Plan.
6.4. Notice is hereby given that this instrument is adopted on behalf
of Trust's trustees solely in their capacities as trustees, and not
individually, and that Trust's obligations under this instrument are not binding
on or enforceable against any of its trustees, officers, or shareholders or any
series of Trust other than the Funds but are only binding on and enforceable
against the respective Funds' property. Trust, in asserting any rights or claims
on either Fund's behalf under this Plan, shall look only to the other Fund's
property in settlement of such rights or claims and not to such trustees,
officers, or shareholders.
A-11
APPENDIX B-1
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
HERITAGE SERIES TRUST--GROWTH EQUITY FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period and other performance information derived
from the financial statements.
CLASS A SHARES* CLASS B SHARES*
-------------------------------------------------------------------------------------------------------
FOR THE FOR THE
SIX-MONTH SIX-MONTH
PERIOD PERIOD
ENDED FOR THE FISCAL YEARS ENDED ENDED FOR THE FISCAL YEARS ENDED
APRIL OCTOBER 31 APRIL 30, OCTOBER 31
30, 2003 ------------------------------------ 2003 --------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998 (UNAUDITED) 2002 2001 2000 1999 1998+
----------- ---- ---- ---- ---- ---- ----------- ---- ---- ---- ---- -----
Net asset value,
beginning
of period $22.18 $27.20 $50.91 $43.44 $28.82 $23.77 $20.77 $25.66 $48.87 $42.17 $28.18 $24.33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment
loss (0.03) (0.10) (0.18) (0.39) (0.20) (0.11) (0.10) (0.28) (0.40) (0.77) (0.47) (0.23)
Net realized and
unrealized gain
(loss)
on investments 0.88 (4.92) (14.92) 13.33 14.82 5.48 0.82 (4.61) (14.20) 12.94 14.46 4.08
---- ------ ------- ----- ----- ---- ---- ------ ------- ----- ----- ----
Total from
Investment
Operations 0.85 (5.02) (15.10) 12.94 14.62 5.37 0.72 (4.89) (14.60) 12.17 13.99 3.85
---- ------ ------- ----- ----- ---- ---- ------ ------- ----- ----- ----
Less Distributions:
Distributions
from net
realized gains -- -- (8.61) (5.47) -- (0.32) -- -- (8.61) (5.47) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period $23.03 $22.18 $27.20 $50.91 $43.44 $28.82 $21.49 $20.77 $25.66 $48.87 $42.17 $28.18
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%)(a) 3.83(b) (18.46) (34.31) 31.04 50.73 22.84 3.47(b)(19.06) (34.82) 30.05 49.65 15.82(b)
Ratios and Supplemental
Data
Expenses to
average
daily net
Assets(%) 1.35(c) 1.26 1.22 1.19 1.24 1.38 2.10(c) 2.01 1.97 1.94 1.98 2.11(c)
Net investment loss to
average daily net
Assets(%) (0.26)(c) (0.37) (0.53) (0.73) (0.56) (0.40) (1.0l)(c)(1.12) (1.28) (1.48) (1.30) (1.10)(c)
Portfolio turnover rate
(%) 86 158 205 392 160 54 86 158 205 392 160 54
Net assets, end of
period ($ millions) 136 117 93 135 67 40 26 27 40 45 16 5
- ----------------
* Per share amounts have been calculated using the monthly average share method.
+ For the period January 2, 1998 (commencement of Class B shares) to October 31, 1998.
(a) These returns are calculated without the imposition of either front-end or contingent deferred sales charges.
(b) Not annualized.
(c) Annualized.
- ------------------------------------------------------------------------------------------------------------------------------------
B-1a
APPENDIX B-1
FINANCIAL HIGHLIGHTS (Continued)
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST--GROWTH EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
CLASS C SHARES*
-------------------------------------------------
FOR THE
SIX-MONTH
PERIOD
ENDED FOR THE FISCAL YEARS ENDED
APRIL OCTOBER 31
30, 2003 --------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
----------- ---- ---- ---- ---- ----
Net asset value,
beginning
of period $20.77 $25.65 $48.86 $42.15 $28.18 $23.42
------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment
loss (0.10) (0.28) (0.40) (0.76) (0.47) (0.31)
Net realized and
unrealized gain
(loss)
on investments 0.81 (4.60) (14.20) 12.94 14.44 5.39
---- ------ ------- ----- ----- ----
Total from
Investment
Operations 0.71 (4.88) (14.60) 12.18 13.97 5.08
---- ------ ------- ----- ----- ----
Less Distributions:
Distributions
from net
realized gains -- -- (8.61) (5.47) -- (0.32)
------ ------- ------ ------ ----- ------
Net asset value, end of
period $21.48 $20.77 $25.65 $48.86 $42.15 $28.18
------ ====== ====== ====== ====== ====== ======
Total Return (%)(a) 3.47(b) (19.03) (34.82) 30.09 49.57 21.93
Ratios and Supplemental
Data
Expenses to
average
daily net
Assets(%) 2.10(c) 2.01 1.97 1.94 1.99 2.13
Net investment loss to
average daily net
Assets(%) (1.01)(c) (1.12) (1.28) (1.48) (1.31) (1.15)
Portfolio turnover rate
(%) 86 158 205 392 160 54
Net assets, end of
period ($ millions) 80 78 92 141 75 39
- ----------------
* Per share amounts have been calculated using the monthly average share
method.
+ For the period January 2, 1998 (commencement of Class B shares) to October
31, 1998.
(a) These returns are calculated without the imposition of either front-end or
contingent deferred sales charges.
(b) Not annualized.
(c) Annualized.
- --------------------------------------------------------------------------------
B-1b
APPENDIX B-2
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
HERITAGE SERIES TRUST--TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period and other performance information
derived from the financial statements.
CLASS A SHARES* CLASS B SHARES*
-----------------------------------------------------------------------------------------
FOR THE FOR THE
SIX-MONTH SIX-MONTH
PERIOD PERIOD
ENDED FOR THE FISCAL YEARS ENDED ENDED FOR THE FISCAL YEARS ENDED
APRIL 30, OCTOBER 31 APRIL 30, OCTOBER 31
2003 ---------------------------- 2003 --------------------------
(UNAUDITED) 2002 2001 2000+ (UNAUDITED) 2002 2001 2000+
----------- ---- ---- ----- ----------- ---- ---- -----
Net asset value, beginning of $4.42 $6.64 $17.43 $14.29 $4.32 $6.53 $17.31 $14.29
period ----- ----- ------- ------ ----- ----- ------ ------
Income from Investment Operations:
Net investment loss (0.03) (0.10) (0.13) (0.26) (0.04) (0.14) (0.21) (0.40)
Net realized and unrealized gain
(loss) on investments 0.26 (2.12) (9.70) 3.40 0.25 (2.07) (9.61) 3.42
---- ------ ------ ---- ---- ------ ------ ----
Total from Investment Operations 0.23 (2.22) (9.83) 3.14 0.21 (2.21) (9.82) 3.02
---- ------ ------ ---- ---- ------ ------ ----
Less Distributions:
Distributions from net realized -- -- (0.96) -- -- -- (0.96) --
gains ----- ------ ------ ----- ---- ------ ------ ----
Net asset value, end of period $4.65 $4.42 $6.64 $17.43 $4.53 $4.32 $6.33 $17.31
===== ===== ===== ====== ===== ===== ===== ======
Total Return(%)(a) 5.43(b) (33.43) (58.84) 21.97(b) 4.86(b) (33.84) (59.21) 21.13(b)
Ratios and Supplemental Data
Expenses to average daily net
assets
With expenses waived (%) 1.65(c) 1.65 1.65 1.62(c) 2.40(c) 2.40 2.40 2.37(c)
Without expenses waived (%) 2.93(c) 2.09 1.77 1.62(c) 3.68(c) 2.84 2.52 2.37(c)
Net investment loss to average (l.11)(c) (1.55) (1.36) (1.37)(c) (1.86)(c) (2.30) (2.11) (2.12)(c)
daily net assets (%)
Portfolio turnover rate (%) 150 243 555 441 150 243 555 441
Net assets, end of period
($ millions) 10 11 23 65 4 5 9 24
- ----------------
* Per share amounts have been calculated using the monthly average share method.
+ For the period November 18, 1999 (commencement of Class B shares) to October 31, 2000.
(a) These returns are calculated without the imposition of either front-end or contingent deferred sales charges.
(b) Not annualized.
(c) Annualized.
- -----------------------------------------------------------------------------------------------------------------------------
B-2a
APPENDIX B-2
FINANCIAL HIGHLIGHTS (Continued)
- --------------------------------------------------------------------------------
HERITAGE SERIES TRUST--TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
CLASS C SHARES*
--------------------------------------------
FOR THE
SIX-MONTH
PERIOD FOR THE FISCAL YEARS ENDED
ENDED APRIL OCTOBER 31
30, 2003 ------------------------------
(UNAUDITED) 2002 2001 2000+
----------- ---- ---- -----
Net asset value, beginning of $4.32 $6.53 $17.30 $14.29
period ----- ----- ------ ------
Income from Investment Operations;
Net investment loss (0.04) (0.14) (0.20) (0.40)
Net realized and unrealized gain
(loss) on investments 0.25 (2.07) (9.61) 3.41
---- ------ ------ ----
Total from Investment Operations 0.21 (2.21) (9.81) 3.01
---- ------ ------ ----
Less Distributions:
Distributions from net realized -- -- (0.96) --
gains ---- ------ ------ -----
Net asset value, end of period $4.33 $4.32 $6.33 $17.30
===== ===== ===== ======
Total Return(%)(a) 4.86(b) (33.84) (59.19) 21.06(b)
Ratios and Supplemental Data
Expenses to average daily net
assets
With expenses waived (%) 2.40(c) 2.40 2.40 2.37(c)
Without expenses waived (%) 3.68(c) 2.84 2.52 2.37(c)
Net investment loss to average (l.86)(c) (2.30) (2.11) (2.12)(c)
daily net assets (%)
Portfolio turnover rate (%) 150 243 555 441
Net assets, end of period
($ millions) 7 7 14 40
- ----------------
* Per share amounts have been calculated using the monthly average share
method.
+ For the period November 18, 1999 (commencement of Class B shares) to
October 31, 2000.
(a) These returns are calculated without the imposition of either front-end or
contingent deferred sales charges.
(b) Not annualized.
(c) Annualized.
- --------------------------------------------------------------------------------
B-2b
APPENDIX C-1
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
GROWTH EQUITY FUND Portfolio Commentary
- ---------------------------------------
May 27, 2003
Dear Valued Shareholders:
We are pleased to provide you with the semiannual report for the seven
portfolios (the "Funds") of the Heritage Series Trust for the six-month
reporting period ended April 30, 2003. From November through March weak economic
data, a few instances of corporate malfeasance, a Code Orange terror alert,
heightened war worries, higher oil prices pushed stock prices lower. In April,
better-than-expected first-quarter earnings coupled with a successful conclusion
to Operation Iraqi Freedom augmented returns for the Funds as well as the
overall market. Below is a more detailed discussion of how each of the Funds
performed during the reporting period.
For the six-month reporting period the HERITAGE SERIES TRUST--AGGRESSIVE GROWTH
FUND Class A shares returned +9.34% outperforming its benchmark, the Russell
2000 Growth Index, which returned +7.67%. The fund benefited from its positions
in the technology sector including purchases of shares of Amdocs, Comverse
Technology, Datastream Systems, Eclipsys Corporation and Vishay Intertechnology.
Another strong performer for the fund was Multimedia Games, which reported an
increase in revenues of 29% for the six-month period ended March 31, 2003.
Outside of the technology sector, Genesco and Laboratory Corporation of America
were also up strongly. All of the above-named securities continued to be held in
the fund's portfolio at the end of the reporting period.
Not all investments in the fund fared well. The Aggressive Growth Fund
established a position in Tech Data Corporation, but a downgrade by Smith Barney
Citigroup on April 30, 2003 (the last day covered in this report) resulted in a
decrease in the stock price of more than 8%. As of the date of this letter, a
full position in Tech Data remains in the fund and the price of the stock has
recovered. The fund also initiated a position in Cadence Design Systems which
was sold in early January resulting in a loss to the fund. The fund's position
in Copart, a provider of salvage vehicle auction services, was doubled during
the period as the price per share declined.
The fund also realized losses in Mandalay Resort Group, Rockwell Collins, Main
Street & Main and Scientific Games which were sold as their price performance
weakened during the reporting period.
The HERITAGE SERIES TRUST--GROWTH EQUITY FUND Class A shares returned +3.83% for
the reporting period, while its benchmark index, the Standard & Poor's 500
Composite Stock Price Index, returned +4.47%. The technology, healthcare,
financial services, and consumer sectors each contributed positively to
performance. In the technology sector, purchases of Cisco, (up more than 30%
during the reporting period), and holdings in EMC Corporation, up more than 75%
C-1
during the reporting period, affected the fund's performance favorably.
Semiconductor stocks including Intel Corporation, Linear Technology, Maxim
Integrated, Texas Instruments, Taiwan Semiconductor Manufacturing Company and
National Semiconductor Corporation (which was purchased and subsequently
divested during the reporting period), were all strong performers for the fund.
The software industry underperformed within the technology sector, as Microsoft
Corporation and Intuit lagged the market.
The healthcare sector's contribution to the Growth Equity Fund's performance
benefited from an increase in the price per share of St. Jude Medical, Amgen,
Wyeth, and Merck. St. Jude Medical's growing sales in the Implantable Cardiac
Defibrillator market has contributed to strong recent earnings growth. Shares of
HCA were weak during the reporting period and detracted from the fund's
performance. The fund added to positions in Baxter and Abbott Labs. Financial
services holdings in Travelers Property Casualty, Lehman Brothers, American
Express, Citigroup, and Merrill Lynch outperformed the index, while Hartford
Financial, Freddie Mac, and American International Group underperformed the
index. The fund's weighting in the group was reduced during the reporting period
by selling Lehman Brothers and trimming positions in American international
Group and Citigroup. In the consumer sector, investments in Cendant, Univision,
Walt Disney, and Home Depot outperformed, while beverage holdings declined in
value. Coca Cola's price per share declined during the reporting period and was
sold. With Anheuser-Busch, the fund continued to build its position despite a
slight decline in share price. Also during the reporting period,
aerospace/defense name Lockheed Martin and conglomerate SPX Corporation
detracted from the performance of the fund. As a reminder, investors often pay
higher prices for "growth companies" based upon an expectation that earnings
growth will exceed the average of all companies. If earnings expectations are
not met, prices may decline due to a contraction in the price earnings ratio in
addition to a reduction in the estimated earnings expected.
For the reporting period, HERITAGE SERIES TRUST--INTERNATIONAL EQUITY FUND Class
A shares returned +2.38% compared to +2.04% for its benchmark, the Morgan
Stanley Capital International Europe, Australia, Far East Index. The
outperformance of the fund's portfolio was due primarily to stock selection. In
the United Kingdom, increasing the fund's positions in telecommunications
company, Vodafone and in Royal Bank of Scotland resulted in gains as prices per
share increased by more than 20% and 10%, respectively. However, Hilton Group,
Regents Inns, and Pearson experienced price declines.
In France, BNP Paribas and OTP Bank, two new additions to the fund during the
reporting period, performed well. Doubling the fund's position in
telecommunication equipment maker Alcatel was advantageous, as its price per
share during the reporting period rose more than 60%. Oil company Total Fina and
construction material producer Lafarge continued to disappoint, but their
positions were maintained. In Germany, cosmetic and personal care company Wella
performed exceptionally (with a price per share increase of more than 90%) on
news that Procter & Gamble had signed an agreement to purchase a controlling
interest from the majority voting shareholders. Stada Arzneimittel, one of
Europe's leading companies for non-patented medical products (mainly comprised
of generics), rebounded during the period and continues to perform well as of
the date of this letter. In Spain, an initial investment position in electric
utility Endesa provided positive performance for the fund. UniCredito Italiano,
Vinci, Orkla and especially Erste Bank der Oesterreichischen (whose price per
share increased more than 35% during the reporting period) were among other
continental European companies that substantially rebounded and were top
contributors to the fund. The fund continues to hold, and in some cases
increase, its position in two Norwegian banks, Sparebanken Midt-Norge and
Sparebanken Rogaland, as well as Akzo Nobel, a diversified chemical product
manufacturer headquartered in the Netherlands.
The fund portfolio managers continued to increase their positions in Canadian
oil companies, which provided positive performance during the reporting period.
Price per share of Canadian Natural Resources, EnCana, Petro-Canada and Suncor
C-2
Energy increased from 12% to 22% from the beginning to end of the reporting
period. Maintaining the position in Royal Bank of Canada also helped the fund,
as the price per share increased by 19%. Unfortunately, regardless of sector,
industry or market-cap, most of the fund's portfolio investments in Japan
decreased in value during this reporting period. While the fund did divest its
entire position in Honda Motor Company, the positions in most of the securities
invested in Japanese companies were increased during the reporting period. It is
important to remember that investments in international securities involve
certain risks that differ from the risks of investments in domestic securities.
International securities are susceptible to fluctuations in currency exchange
rates, political or economic conditions and regulatory requirements that could
affect the fund's return.
The HERITAGE SERIES TRUST--MID CAP STOCK FUND Class A shares returned +4.28%,
slightly outperforming the +3.97% return of the Standard & Poor's MidCap 400
Index. The top performer for the fund was Doral Financial, whose price per share
rose more than 50%. Gains were realized on investments in diversified insurance
brokerage company Brown & Brown, computerized online lottery systems operator
GTECH Holdings and internet commerce giant USA Interactive. Another top
contributor for the Fund was A.O. Smith Corporation as its price per share rose
over 35% during the reporting period. The fund's performance also benefited from
new positions in Delta & Pine Land Company, ITT Educational Services and Liberty
Media Corporation.
However, not all new stock selections performed positively. T he fund's
investments in Mantech International and Amsurg Corporation penalized returns.
Losses were realized on investments in Scientific Games, G&K Services, Salem
Communications and Tech Data and the positions were sold. As a reminder,
investments in mid cap companies and especially small cap companies, carry
increased risks of business failure and are thus more volatile than larger
companies. For example, H&R Block, a mid cap security with more than $7 billion
in market capitalization, declined sharply (price per share declined more than
25%) within the first week of the reporting period, due to class action suits
brought against it on allegations of misleading investors with regards to its
financial results.
During the reporting period, the fund expanded the holdings in the oil and gas
industry. Positions in Ensco International, GlobalSantaFe Corporation, Noble
Corporation and Rowan Companies were all initiated and subsequently lost value.
However, as of the date of this letter, all have substantially rebounded and,
with the exception of Noble, all have generated unrealized gains.
For the six-month reporting period the HERITAGE SERIES TRUST--SMALL CAP STOCK
FUND Class A shares returned +3.14%,(a) underperforming the Russell 2000 Index
(b)return of +7.55%.
Avid Technologies, with a price per share increase of more than 90%, became a
top contributor to the fund's return. The price per share for Capital Crossing
Bank, Iron Mountain, GTECH Holdings, Multimedia Games, Patterson-Uti Energy,
Sola International, and John Wiley & Sons continued to increase during the
reporting period. Some of last fiscal year's laggards rebounded during the
reporting period and made substantial contributions to the fund's return. Among
these contributors were, Cognex Corporation, Coherent, FactSet Research Systems,
Medics Pharmaceutical, NCO Group, Spartech Corporation, and DataStream, whose
price per share increased by more than 50%, during the reporting period. After
substantial unrealized losses last fiscal year, Eclipsys, Plantronics and
Universal Electronics price per share increased more than 85%, 20% and 33%,
respectively.
Most notably, Investment Technology's price per share decreased by more than 60%
before it was sold, and Kansas City Southern was sold towards the end of the
reporting period as its price per share declined. Both of these securities
entered this reporting period with substantial unrealized gains. MCG Capital
Corporation's price per share continued to decrease since last fiscal year and
the position was subsequently sold. Positions were maintained in Rayovac, three
commercial services companies, Hall Kinion & Associates, SOURCECORP and TeleTech
C-3
Holdings, even as unrealized losses penalized results. Although the fund has a
net unrealized gain in Investors Financial Services and North Fork
Bancorporation, the decrease in their price per share during the reporting
period of more than 25% and 15%, respectively, impacted the fund's returns. As a
reminder, investments in small cap companies generally involve greater risks
than medium- or large-capitalization companies due to their more limited
managerial and financial resources. 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.
While the HERITAGE SERIES TRUST--TECHNOLOGY FUND'S Class A shares returned
+5.43%(a) during the reporting period, it fell short when compared to the
Goldman Sachs Technology Index(b) return of +10.29%. The fund's underperformance
of its benchmark index can be attributed primarily to a defensive investment
strategy initiated in mid January 2003. This defensive positioning helped the
fund's return for several months. However, during the market rally through the
latter part of March and April of 2003, this investment strategy detracted from
the fund's performance. High cash balances (20% or more of net assets in cash)
and the purchase of a put option on the benchmark index, was consistent with the
portfolio manager's view at the time that the market yielded a limited number of
attractive investment opportunities within the technology sector.
Positions in the software industry benefited the fund's performance. Roxio and
Vignette Corporation were top performers for the fund. Citrix Systems and Bea
Systems, two other top contributors for the fund from the software industry,
were sold during November and December 2002 as their price per share continued
to increase. Parametric Technology also performed well; one-third of its
position was sold during the reporting period, and about another third was sold
since the date of this letter. However, the fund's investment in Activision, an
interactive entertainment and leisure software company, penalized results. The
fund has maintained its position in the company and its price per share has
increased after the company raised its projected revenues for the fourth quarter
of its fiscal 2003 year. Outside of the software industry, the fund benefited
from its investment in WebMD, as its price per share rose more than 50% during
the reporting period. JDS Uniphase bounced back from its lows during October
2002 and closed up over 40% at the end of the reporting period.
The Technology Fund's return was affected adversely by investments in the
semiconductor industry. The price of TriQuint Semiconductor dropped by more than
30% during the reporting period. Integrated Device Technology, a manufacturer of
a broad range of high-performance semiconductor products, was sold during the
reporting period but not before it negatively impacted the fund's performance.
Outside the semiconductor industry, Merix Corporation and StorageNetworks hurt
the fund's performance. As you are aware, the fund concentrates its investments
in the information technology sector. As a result, the fund's investments are
subject to specific sector risk in addition to general market risks.
For the reporting period, the Class A shares of the HERITAGE SERIES TRUST--VALUE
EQUITY FUND returned +2.79%(a) as compared to the Russell 1000 Value Index(b)
return of +5.25%. Insurance companies Anthem, Travelers Property Casualty, ACE
and MBIA (a provider of loan guarantees) all contributed to the fund's return.
With the exception of credit card issuer MBNA, financial service companies, such
as Fannie Mae, Citigroup, Goldman Sachs and Merrill Lynch also contributed to
the fund's return. However, the finance sector's contribution to the fund's
return was reduced by its holdings in the banking industry including Wells
Fargo, Regions Financial Corp and Mellon Financial. Positions in Beckman
Coulter, a designer and manufacturer of laboratory instruments, were established
in November and December and by the end of the reporting period the stock was
the top contributor to the fund's performance. Investments in Dow Chemical and
Arrow Electronics were top performers during the period as their price per share
increased by more than 25%.
C-4
The fund's investments in the energy sector hurt performance. Positions in
Transocean, BP and ChevronTexaco decreased in value; however, as of the date of
this letter, their stock prices have rebounded. Investments in the consumer
goods sector also impacted negatively on the fund's performance. The price of
Safeway quickly dropped by 17% on April 16, 2003, after the company announced
flat first-quarter comparable-store sales and lower earnings. Following a
downgrade by Salomon Smith Barney the following day, part of the position was
divested and the rest sold off at the end of the reporting period. Jones Apparel
Group, a consumer goods designer and marketer of branded apparel, declined by
11% following a press release in February disclosing that a license to market
the profitable Lauren brand could expire in 2003 instead of 2006 as originally
expected. Several other consumer good stocks such as Kimberly-Clark, CVS
Corporation and McDonald's did not perform well for the fund. Boeing was sold in
early April as its price per share had decreased by more than 15%.
We would like to note that Dreman Value Management, L.L.C. was appointed to
serve as the new subadviser to the Value Equity Fund, effective June 1, 2003.
Dreman Value is an experienced "contrarian" value manager which has been engaged
in the money management business since 1977. The firm currently manages in
excess of $6.3 billion as of March 31, 2003. David Dreman, chairman of Dreman
Value Management, will serve as the fund's portfolio manager.
WE THANK YOU FOR YOUR CONTINUED INVESTMENTS IN THE FUNDS. We are pleased to be
given the opportunity to provide to you an account of what occurred in your
fund(s) during this reporting period(a). In conjunction with our philosophy,
"The Intelligent Creation of Wealth", it is important that you understand the
risks involved in your investments and we urge you to read your prospectus
carefully and understand the principal risks involved with each investment in
the Heritage Series Trust. Please contact your financial advisor or Heritage
Asset Management (800) 421-4184 with any questions you may have.
Sincerely,
Richard K. Riess
President
C-5
APPENDIX C-2
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
GROWTH EQUITY FUND Portfolio Commentary
- ---------------------------------------
November 26, 2002
Dear Fellow Shareholders:
While equities have been volatile, over the long term the Heritage Series Trust
- -- Growth Equity Fund (the "Fund") continues to perform well. The Fund's
performance fell between the Standard & Poor's 500 Composite Stock Price
Index(a) ("S&P 500 Index") and the Russell 1000 Growth Index(a) during the
fiscal year ended October 31, 2002, but returns remain strong long-term. The
table below depicts how our Fund's Class A shares compare to these indices for
the period ended October 31, 2002.
CALENDAR
YEAR TO DATE 1-YEAR 3-YEAR 5-YEAR
------------ ------ ------ ------
Growth Equity Fund Class A
shares(b) -26.14% -18.46% -11.13% +5.38%
S&P 500 Index -21.84% -15.11% -12.22% +0.73%
Russell 1000 Growth Index -26.52% -19.62% -19.19% -2.45%
As illustrated in the table below, the Fund's Class A shares have compared
favorably among its mutual fund peers as measured by Morningstar Inc.(c) and
Lipper Analytic Services(c) rankings for the periods ended October 31, 2002.
PERCENT RANKING IN CATEGORY
-----------------------------------------------------
1-YEAR 2-YEAR 3-YEAR 5-YEAR
------ ------ ------ ------
MORNINGSTAR, INC. Top 48% N/A Top 17% Top 5%
LARGE GROWTH CATEGORY (our of 1,133) (out of 773) (out of 507)
(a) Please refer to the inside back cover for index descriptions.
(b) Total returns are annualized (with the exception of "Year to Date") and
include the effect of reinvesting dividends. See the letter on page 1 by
Richard K. Riess for a full statement of returns. Performance numbers do not
reflect a front-end sales charge or contingent deferred sales charge. Past
performance does not guarantee future results. Performance data quoted
represents past performance and 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 the original cost.
(c) Morningstar Inc. and Lipper Analytic Services base their respective category
rankings on the fund's total-return percentile rank for the specified period
relative to all funds in the same category. Both rankings do not adjust
total return for either front-end or contingent deferred sales charges. The
highest (or most favorable) percentile rank is I and the lowest (or least
favorable) percentile rank is 100. Past performance is no guarantee of
future results.
C-6
LIPPER ANALYTIC SERVICES Top 40% Top 33% Top 8% Top 3%
LARGE CAP GROWTH EQUITY (out of 643) (out of 578) (out of 427) (out of 298)
CATEGORY
We continue to focus our efforts on those areas that have the strongest growth
potential. The types of companies that we seek have an articulated vision for
the future. Such companies are typically franchise names with consistent,
predictable cash flow and earnings, have strong management with a history of
execution, and hold a sustainable competitive advantage giving them a dominant
position within their industry.
Risk in the Fund is controlled through careful stock selection and disciplined
industry exposure. The recent market events have demonstrated to us the
importance of our active portfolio risk management process, which has always
been a central feature of our investment process. Our portfolio risk management
process focuses upon an in-depth knowledge of individual company fundamentals
and a thorough understanding of the company's business. We conduct regular
reviews of sector weightings and company-specific risk factors. Significant
overweighting/underweighting to sectors or securities are made only when
convictions are particularly strong. In this difficult market we have seen the
inherent value of our process, as evidenced by the fact that we continue to have
strong performance relative to our peers in a down market.
MARKET ENVIRONMENT
Encouraging economic data continues to offer evidence of impending economic
stability. The labor market has held relatively steady over the past 12 months,
as jobless claims and help wanted advertising have had a prolonged period of
stability. While new job creation remains virtually at a standstill, companies
are likely to make capital investments in new projects when they are sure the
worst is over. Despite the flat job market, the consumer remains a positive
influence on the economy. Mortgage rates continue to decline facilitating a
continual wave of refinancing, keeping consumers flush with cash. On the
macroeconomic front, the Federal Reserve cut the federal funds rate 50 basis
points to 1.25%, a new 40-year low. This was the first rate cut by the Fed since
2001. The cut will improve liquidity and encourage loans to corporations at
lower rates. A lower cost of capital could potentially renew corporate
investment, and eventually spark economic growth.
The market typically outperforms during times of gridlock between the
legislative and executive branches. Market experts, however, feel that a unified
mandate will facilitate an economic recovery by keeping major projects from
being stalled. A Republican Congress could increase the probability of tax cuts
for both business and investors. Traditionally, lower tax rates have augmented
economic activity, at least in the intermediate term.
Potential accounting issues and the geopolitical situation tended to overshadow
the constructive economic data, dominating the headlines in the first half of
the year. In recent months, however, we are encouraged by indications that
earnings quality is improving and there is some resolve on the geopolitical
issues. Markets do not like uncertainty and instability. Therefore, as we get
clarity on these issues, a favorable interest rate environment and an improving
economy should provide a favorable backdrop for valuation expansion. This
scenario has historically benefited large cap growth equities.
PORTFOLIO REVIEW
The consumer/retail sector was a major contributor to outperformance during the
fiscal year. We have been successfully navigating the mixed signals received
from various consumer-reporting agencies. On the positive side, consumer
spending continued to hold up. Relatively stable employment levels and no
C-7
substantial downturn in personal income have supported this phenomenon. Making
consumers more cautious has been, economic worries, stock market declines, and
the prospects of global conflict, Throughout the economic downturn, the consumer
continued to spend at strong levels. The consumer staple segment in particular
has enjoyed positive performance as many companies in the group are beating
expectations, estimates are being raised, and they have high, improving earnings
quality backed by strong cash flows. Anheuser-Busch and Proctor & Gamble are
examples of the consumer staple names that were up significantly during the
period. Viacom, UPS, Gannett, and Wal-Mart were other winners in the sector,
while Home Depot and Liberty Media detracted from performance.
The financial services sector was a slight drag to performance during the last
12 months. While strong early in the year, they suffered from both a weak stock
market and the highly publicized conflicts of interest between investment
banking and research divisions at major securities firms. Profitable initial
public offerings and merger and acquisition activity remained weak, hurting the
profits of equity-related businesses. In addition, a series of disclosures of
corporate malfeasance further eroded investor confidence in the group. Goldman
Sachs, Freddie Mac, Citigroup, and Lehman Brothers were all moderately negative
during the period. A modest economic recovery and a benign rate environment
should allow the financial group to perform relatively well going forward. Also,
as strength in the consumer persists, consumer-sensitive areas of the finance
sector will likely outperform.
The healthcare sector is generally seen as a "safe haven" for investors during
difficult economic times. Leading large-cap pharmaceutical companies like
Pfizer, Merck, and Bristol-Myers, were perceived as low risk because of their
reliably high growth and profitability. But in the last few quarters, several
pharmaceutical companies have lowered their earnings and growth expectations.
The increasingly cautious FDA has become a factor. Many leading companies were
not successful in securing new drug approvals.
The FDA has also stepped up the scrutiny of several companies' manufacturing
processes. This coupled with political pressure on drug pricing issues also
worked to keep a cap on valuations. At this point however, the worst may be
behind the major pharmaceutical companies. Pipelines are looking more promising
and manufacturing issues are being worked through. With growth prospects looking
at least as favorable as the overall market, and with valuations still
attractive, the group should move higher going into 2003. In the last 12 months,
the healthcare stocks held within the Fund performed in-line with the broader
market on a relative basis. Strong performance from Pharmacia, Forest
Laboratories, Medtronic, and Johnson & Johnson was overshadowed by the poor
performance of Wyeth, Pfizer, and Bristol-Myers Squibb. The healthcare companies
that we will continue to hold in the Fund generate solid free cash flow and the
confidence in earnings at several companies is quite high. While issues remain
on the political front and in some cases on a company level, demographics
continue to favor the group.
Although a recovery is not yet evident in the near term fundamental outlook for
the technology industry, the operating environment is likely to significantly
improve in 2003. During the last 12 months however, the technology sector was a
significant drag on performance. Price appreciation in Intuit and Dell was not
enough to overcome weakness in Intel, Taiwan Semiconductor, Cisco, and Texas
Instruments. The hardware segment held up much better than many other industries
in the technology sector. Dell Computer's performance was noteworthy during the
year. Despite sluggish PC industry sales trends, the company continued to gain
market share and grow revenues. Dell put in place initiatives aimed at gaining
new customers and expanding its product line. In addition, the company stated
that it would begin to sell its PCs through U.S. dealers, a break from its
direct-to-consumer sales model. Dell also announced that it would begin to
compete directly with Hewlett-Packard and others by getting into the printer
business. We will continue to hold the technology companies, such as Dell, that
are using innovative methods to gain market share, streamline operations, and
improve operating margins. This increased leverage will lead to outsized profit
growth once we see a sustained increase in end demand.
C-8
Outlook
Large-company valuations have come down dramatically -- asset prices are
significantly cheaper -- since the market peaked 2 1/2 years ago. Stocks have
corrected approximately 70% versus bonds over the past few years. During the
l930s and the depression era, stocks corrected approximately 90% versus bonds.
Price risk has decreased at existing levels that reflect lower, and perhaps more
realistic, earnings expectations. Several key predicted-growth measurements, for
instance, are now about half what they were in early 2000. The market is now
discounting earnings per share growth of approximately 6% to 7%. Relative to
equities, bonds are now priced much higher on a valuation basis with little
prospect for growth, while equities are priced at approximately 16 times
earnings with expected growth rates of 6% to 7%. This is in line with historical
averages.
On the corporate side, companies are adjusting to the current economic
environment. Corporations are concentrating on cutting costs and cleaning up
balance sheets, which historically has helped return them to profit growth. In
addition to these measures, we would like to see sustained positive trends in
unit growth, productivity, pricing and capital spending. The resulting profit
growth will likely regain investor interest.
Several conditions in the macro backdrop are also turning positive. We appear to
be moving toward at least some resolution on the War on Terror and the
disarmament of Iraq. In the United States, interest rates are at historical lows
and further tax cuts will likely be pushed through Congress. Businesses are
being forced to come clean with accounting indiscretions and the quality of
earnings is improving. We would like more clarity on pension and stock option
issues. These policy initiatives and macroeconomic developments are likely to
stimulate growth in the coming quarters. We have a great deal of confidence in
the strength of the United States, its financial markets, and its systems that
are in place. Equities will recover.
We feel that it is an opportune time to increase one's allocation to large-cap
growth equities, as expectations are considerably muted and strengthening
fundamentals are emerging. We thank you for investing with us and look forward
to working with you in the years to come.
Sincerely,
Ashi Parikh
Managing Director
Eagle Asset Management, Inc.
Portfolio Manager, Growth Equity Fund
C-9
APPENDIX C-3
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
TECHNOLOGY FUND PORTFOLIO COMMENTARY
- ------------------------------------
November 15, 2002
Dear Fellow Shareholders:
The sell-off in technology stocks continued as company-specific and
industry-wide issues were brought to the forefront. The Heritage Series Trust --
Technology Fund (the "Fund") has not avoided the declining value in the
technology sector. The Fund's Class A shares produced a total return of
- -33.43%(1) for the fiscal year ended October 31, 2002. Over this same period,
the Goldman Sachs Technology Index(2) (the "GSTI") declined -31.58%. While the
performance of the Fund was off during the past twelve months, we have
outperformed many of our technology fund competitors. For the one-year period
ended October 31, 2002, Morningstar(3) ranked the Fund's Class A shares in the
top 45% out of 358 specialty technology funds. The Fund's Class A shares also
outperformed a majority of its peers in Lipper's(c) Science and Technology
Category Average, ranking in the 44th percentile out of 377 funds for the
one-year period ended October 31, 2002.
MARKET OVERVIEW
Concerns in the overall economy have been exacerbated in the technology sector.
These concerns include a perceived lack of liquidity in the U.S., thereby
creating deflation, a credit crunch, and a lack of pricing power. Companies have
been forced to lower prices to maintain market share or realize any type of
sales growth. This resulted in collapsed profit margins, which increased debt
levels relative to profits, which in turn caused credit quality downgrades and
higher corporate borrowing costs. Companies were obliged to forego growth plans,
which then resulted in investor pessimism about corporate balance sheet health
and a slower than normal recovery from economic recession. A weaker dollar,
however, combined with the Federal Reserve's latest 50 basis point (0.50%) rate
(1) Total returns include the effect of reinvesting dividends. Performance
numbers do not reflect a front-end sales charge or contingent deferred sales
charge. Past performance does not guarantee future results. Performance data
quoted represents past performance and 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 the original cost.
(2) Please refer to the inside back cover for index descriptions.
(3) Morningstar Inc. and Lipper Analytic Services base their respective category
ranking on the fund's total-return percentile rank for the specified period
relative to all funds that have the same category. Both rankings do not adjust
total return for either front-end or contingent deferred sales charges. The
highest (or most favorable) percentile rank is I and the lowest (or least
favorable) percentile rank is 100. Past performance is no guarantee of future
results.
C-10
cut, significantly improves the liquidity outlook. Following the Federal
Reserve's most recent action, overnight interest rates are currently 1.25% which
is 5.25% lower than in May 2000 and at a 40-year low.
While propping up the macroeconomy through interest rate cuts and fiscal stimuli
is favorable to the long-term outlook of many information technology companies,
a few problems arise. The fundamental problem of overbuilt capital stock will
take longer to correct in the current environment. As a result, there is the
prospect of a sustained period of depressed returns on capital. Additionally,
the net cash position one finds on many tech companies' balance sheets is
arguably retarding the necessary consolidation of this sector.
Investment in technology, however, remains one of the keys to continued
productivity and growth. At this point, our channel checks are turning up
continued weakness, but we are seeing some signs of improvement. We observe an
expansion in profit margins primarily attributed to cost cutting. Furthermore,
government statistics have shown a small but significant rise in domestic
business spending on information technology equipment and software since the
fourth quarter of 2001. While the corporate sector is reluctant to invest in
large capital spending projects, limited investments are being made. Company
managements are simply unwilling to take the risk of engaging in large-scale
projects at this point but are replacing depreciated hardware and improving
business processes by selectively purchasing and implementing new software and
systems. The lean companies that emerge from this economic slowdown will be able
to use this leverage to grow profits exponentially. While we are not prepared to
claim that the economic and industry-wide instability is over, the picture does
appear to be brighter.
PORTFOLIO PERFORMANCE
Like most investors, we are not pleased to see bear markets such as the one
occurring in the technology sector. In spite of these declines, we remain
committed to our long-term investment philosophy and will continue to
concentrate the Fund's holdings in the following areas of technology:
communications, hardware, Internet, semiconductors, services, and software.
Software now makes up the largest allocation in the Fund. It also produced the
best returns during the period, finishing relatively flat. Although we are not
seeing a strong demand for high-priced application software, efficiency-oriented
product sales continue to grow. During the last 12 months, Symantec, Intuit, and
Electronic Arts performed exceptionally well and Microsoft's performance was
relatively strong. Roxio, Citrix Systems, and E.piphany were a drag on
performance.
Hardware companies are experiencing slow sales, but we are seeing inventory
being worked down. Brocade and Celestica were the negative performers in this
group. Dell and American Power Conversion turned in strong performances for the
12-month period. The Internet/Service space was also negatively impacted by the
performance of Vignette, BearingPoint, and Braun Consulting. DoubleClick was a
relatively strong performer in the Internet space.
We believe the current environment will continue to favor use of standardized
computing technologies that offer better performance at lower prices. These
conditions substantially favor vendors such as Microsoft, Dell, and other low
cost providers at the expense of proprietary solutions offered by the likes of
Sun Microsystems and others. We believe this trend will persist for some time.
The deteriorating financial condition of traditional and emerging
telecommunications companies, cable providers, and wireless communications
companies has gone well beyond our original expectations over the past 12
months. As a result, it is likely that these companies' bondholders will soon be
in a position to exert substantial influence over capital spending budgets and
operating plans. We believe this will lead to another round of substantial cuts
C-11
in telecommunications equipment spending, further delaying any rebound in
revenue and earnings growth for select telecommunications companies. ADC
Telecommunications and Tellabs were detractors from performance in this space,
while 3Com showed strength. Now is the time to invest in those
telecommunications equipment companies positioned to thrive at the expense of
their competitors. These companies will be characterized by strong balance
sheets, broad product portfolios, experienced management teams, and an ability
to focus on their business without undue scrutiny on the part of bondholders,
ratings agencies, and securities regulators.
In the semiconductor space, International Rectifier, Intersil, Fairchild
Semiconductor, Linear Technology, Maxim, and Taiwan Semiconductor each turned in
negative performances. Integrated Circuit Systems was the lone positive
performer in this group. Due to their cyclical nature, semiconductor companies
are more dependent on improvement in the overall economy than other areas of
technology. We believe the operating environment for semiconductor companies
(unit demand, pricing power, and order visibility) is likely to significantly
improve in 2003. Consequently, we believe now is the time to build positions in
companies with reasonable valuations that are positioned to exploit a recovery
with above average earnings growth. Although a recovery is not yet evident in
the near term fundamental outlook for the industry, we believe the potential
upside reward far outweighs the downside risk in select semiconductor stocks.
OUTLOOK
After a sharp decline in capital investment by businesses in the past 12 months,
particularly in technology-related equipment, the trend appears to be reversing.
The first sign of improvement is a pick up in production and a rise in capacity
utilization, typically resulting in acceleration in business investment.
Secondly, we are seeing signs of improving corporate profits. Rising corporate
profits indicates that the corporate sector has the capital to finance
investment. Typically, an upturn in technology stock prices lags an increase in
corporate profits by approximately six months. Finally, we are seeing technology
companies streamline operations and improve operating margins. This increased
leverage will lead to outsized profit growth once we see a sustained increase in
end demand.
The current market environment is offering select but identifiable technology
investment opportunities. A recovery in technology companies is inevitable due
to the huge cuts in inventories and overhead that producers have made. These
restructured companies are leaner, more efficient, and have lowered their
break-even points considerably. With stocks trading at low valuations and modest
expectations for GDP growth, any positive surprise would be amplified. The
Heritage Series Trust--Technology Fund will continue to own companies that will
come out on the other side of this economic downturn positioned as leaders in
their field with strong financials enabling them to take advantage of the
pockets in demand we are now seeing. We continue to believe the most attractive
investment opportunities in technology reside toward the lower end of the market
cap spectrum.
Thank you for your continued support.
Sincerely,
Duane A. Eatherly, CFA
Eagle Asset Management, Inc.
Portfolio Manager, Technology Fund
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DRAFT: 11/12/03
----------------
HERITAGE SERIES TRUST
GROWTH EQUITY FUND
880 Carillon Parkway
St. Petersburg, Florida 33716
------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------
This Statement of Additional Information ("SAI") relates specifically to
the reorganization of Heritage Technology Fund ("Technology Fund") into Heritage
Growth Equity Fund ("Growth Equity Fund"), whereby Technology Fund will transfer
all of its assets to Growth Equity Fund, and shareholders in Technology Fund
will receive Class A, Class B or Class C shares of Growth Equity Fund, in
exchange for their shares of the corresponding Class of Technology Fund. This
Statement of Additional Information consists of the information set forth herein
and the following described documents, each of which is incorporated by
reference herein (legally forms a part of the SAI):
(1) The audited financial statements of Growth Equity Fund and Technology
Fund (series of Heritage Series Trust) included in the Annual Report
to Shareholders of Heritage Series Trust for the fiscal year ended
October 31, 2002, previously filed on EDGAR, Accession Number
0001045969-02-002138.
(2) The unaudited financial statements of Growth Equity Fund and
Technology Fund (series of Heritage Series Trust) included in the
Semi-Annual Report to Shareholders of Heritage Series Trust for the
fiscal period April 30, 2003, previously filed on EDGAR, Accession
Number 0000931763-03-001999.
(3) The Statement of Additional Information of Heritage Series Trust,
dated January 2, 2003, previously filed on EDGAR, Accession Number
0000898432-02-000942.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Information Statement dated
_________, 2003 relating to the above-referenced matter. A copy of the
Prospectus and Information Statement may be obtained by calling Heritage Asset
Management, Inc. at 800-421-4184.
HERITAGE SERIES TRUST
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
---------------
Article XI, Section 2 of Heritage Series Trust's Declaration of Trust
provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate portfolios to the fullest extent permitted by law against liability
and against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
C-1
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking;
(ii) the Trust is insured against losses arising out of any such
advance payments; or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust
is a trust, not a partnership. Trustees are not liable personally to any person
extending credit to, contracting with or having any claim against the Trust, a
particular Portfolio or the Trustees. A Trustee, however, is not protected from
liability due to willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of Section
1 of Article XII and to Article XI, the Trustees are not liable for errors of
judgment or mistakes of fact or law, or for any act or omission in accordance
with advice of counsel or other experts or for failing to follow such advice.
Paragraph 8 of the Investment Advisory and Administration Agreement
("Advisory Agreement") between the Trust and Heritage Asset Management, Inc.
("Heritage"), provides that Heritage shall not be liable for any error of
judgment or mistake of law for any loss suffered by the Trust or any Portfolio
in connection with the matters to which the Advisory Agreement relate except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Advisory Agreement. Any person, even though
also an officer, partner, employee, or agent of Heritage, who may be or become
an officer, trustee, employee or agent of the Trust shall be deemed, when
rendering services to the Trust or acting in any business of the Trust, to be
rendering such services to or acting solely for the Trust and not as an officer,
partner, employee, or agent or one under the control or direction of Heritage
even though paid by it.
C-2
Paragraph 9 of the Investment Advisory and Administration Agreement
("Advisory Agreement") between Heritage and Eagle Asset Management, Inc.
("Eagle"), provides that Eagle shall not be liable for any error of judgment or
mistake of law for any loss suffered by the Trust or any Portfolio in connection
with the matters to which the Advisory Agreement relate except a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Advisory Agreement. Any person, even though also an
officer, partner, employee, or agent of Heritage, who may be or become an
officer, trustee, employee or agent of the Trust shall be deemed, when rendering
services to the Trust or acting in any business of the Trust, to be rendering
such services to or acting solely for the Trust and not as an officer, partner,
employee, or agent or one under the control or direction of Heritage even though
paid by it.
Paragraph 7 of the Distribution Agreement between the Trust and Raymond
James & Associates, Inc. ("Raymond James") provides that, the Trust agrees to
indemnify, defend and hold harmless Raymond James, its several officers and
directors, and any person who controls Raymond James within the meaning of
Section 15 of the Securities Act of 1933, as amended (the "1933 Act") from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Raymond James, its officers
or Trustees, or any such controlling person may incur under the 1933 Act or
under common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement, Prospectus
or Statement of Additional Information or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
provided that in no event shall anything contained in the Distribution Agreement
be construed so as to protect Raymond James against any liability to the Trust
or its shareholders to which Raymond James would otherwise be subject by reason
of willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under the Distribution Agreement.
Paragraph 13 of the Heritage Funds Accounting and Pricing Services
Agreement ("Accounting Agreement") between the Trust and Heritage Asset
Management, Inc. ("Heritage") provides that the Trust agrees to indemnify and
hold harmless Heritage and its nominees from all losses, damages, costs,
charges, payments, expenses (including reasonable counsel fees), and liabilities
arising directly or indirectly from any action that Heritage takes or does or
omits to take to do (i) at the request or on the direction of or in reasonable
reliance on the written advice of the Trust or (ii) upon Proper Instructions (as
defined in the Accounting Agreement), provided, that neither Heritage nor any of
its nominees shall be indemnified against any liability to the Trust or to its
shareholders (or any expenses incident to such liability) arising out of
Heritage's own willful misfeasance, willful misconduct, gross negligence or
reckless disregard of its duties and obligations specifically described in the
Accounting Agreement or its failure to meet the standard of care set forth in
the Accounting Agreement.
ITEM 16. EXHIBITS
--------
C-3
Exhibit
Number Description
- ------ -----------
(1) Declaration of Trust, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-33-57986, filed previously on December
1, 1995.
(2) Bylaws, incorporated by reference from the Post-Effective
Amendment No. 10 to the Registration Statement of the Trust, SEC
File No. 33-57986, filed previously on December 1, 1995.
(3) Voting trust agreement -- none
(4) Agreement and Plan of Reorganization and Termination is attached
as Appendix A to the Prospectus contained in the Registration
Statement.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII, VIII,
X, and XI of the Declaration of Trust, as amended, which were
filed as part of an Exhibit to Post-Effective Amendment No. 10 on
December 1, 1995 and are hereby incorporated by reference, and
Article III of the Bylaws which were filed as a part of an
Exhibit to Post-Effective Amendment No. 10 on December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., incorporated by
reference from the Post-Effective Amendment No. 10 to the
Registration Statement of the Trust, SEC File No. 33-57986, filed
previously on December 1, 1995. (b) Subadvisory Agreement between
Heritage Asset Management, Inc. and Eagle Asset Management, Inc.,
incorporated by reference from the Post-Effective Amendment No.
10 to the Registration Statement of the Trust, SEC File No.
33-57986, filed previously on December 1, 1995.
(7) Distribution Agreement, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(10) (a) Class A Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
C-4
Exhibit
Number Description
- ------ -----------
(b) Class C Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
(c) Class B Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
(d) Plan pursuant to Rule 18f-3, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(e) Amended Plan pursuant to Rule 18f-3, incorporated by reference
from the Post-Effective Amendment No. 29 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on November 1, 2002.
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 30 to the Registration Statement
of the Trust, SEC File No. 33-57986, filed previously on December
23, 2002.
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP - to be filed
as an amendment.
(13) (a) Transfer Agency and Service Agreement, incorporated by reference
from the Post-Effective Amendment No. 29 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on November 1, 2002.
(b) Fund Accounting and Pricing Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 29 to the
Registration Statement of the Trust, SEC File No. 33-57986, filed
previously on November 1, 2002.
(14) Consent of Independent Auditors - to be filed as an amendment.
(15) Omitted Financial Statements - None.
(16) (a) Power of Attorney for William J. Meurer - filed herewith
(b) Powers of Attorney incorporated by reference from the
Post-Effective Amendment No. 30 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December
23, 2002.
(17) Additional Exhibits - none
ITEM 17. UNDERTAKINGS.
-------------
(1) The undersigned Registrant agrees that prior to any public reoffering of the
securities registered through the use of the prospectus which is a part of this
Registration Statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, the re-offering
C-5
prospectus will contain the information called for by the applicable
registration form for re-offering by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the Registration
Statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new Registration Statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned registrant agrees to file an amendment to the registration
statement, pursuant to Rule 485(b) of Regulation C of the 1933 Act, for the
purpose of including Exhibits 12 and 14within a reasonable time after receipt of
such Exhibits.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of St.
Petersburg and State of Florida on the 21st day of November 2003.
HERITAGE SERIES TRUST
By: /s/K.C. Clark
---------------------------------------
K.C. Clark, Executive Vice President,
Principal Executive Officer
Attest:
/s/Andrea N. Mullins
- ----------------------------
Andrea N. Mullins, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on form N-14 has been signed below by the following
persons in the capacities indicated on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Richard K. Riess* President and Trustee November 26, 2003
- -------------------
Richard K. Riess
/s/Thomas A. James* Trustee November 26, 2003
- -------------------
Thomas A. James
/s/C. Andrew Graham* Trustee November 26, 2003
- --------------------
C. Andrew Graham
/s/William J. Meurer* Trustee November 26, 2003
- ---------------------
William J. Meurer
/s/James L. Pappas* Trustee November 26, 2003
- -------------------
James L. Pappas
/s/David M. Phillips* Trustee November 26, 2003
- ---------------------
David M. Phillips
/s/Deborah L. Talbot* Trustee November 26, 2003
- ---------------------
Deborah L. Talbot
/s/Eric Stattin* Trustee November 26, 2003
- ------------------
Eric Stattin
/s/Andrea N. Mullins Treasurer November 26, 2003
- --------------------
Andrea N. Mullins
*By: /s/K.C. Clark
----------------
K.C. Clark,
Attorney-In-Fact
1
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
(1) Declaration of Trust, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-33-57986, filed previously on December
1, 1995.
(2) Bylaws, incorporated by reference from the Post-Effective
Amendment No. 10 to the Registration Statement of the Trust, SEC
File No. 33-57986, filed previously on December 1, 1995.
(3) Voting trust agreement -- none
(4) Agreement and Plan of Reorganization and Termination is attached
as Appendix A to the Prospectus contained in the Registration
Statement.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII, VIII,
X, and XI of the Declaration of Trust, as amended, which were
filed as part of an Exhibit to Post-Effective Amendment No. 10 on
December 1, 1995 and are hereby incorporated by reference, and
Article III of the Bylaws which were filed as a part of an
Exhibit to Post-Effective Amendment No. 10 on December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., incorporated by
reference from the Post-Effective Amendment No. 10 to the
Registration Statement of the Trust, SEC File No. 33-57986, filed
previously on December 1, 1995.
(b) Subadvisory Agreement between Heritage Asset Management, Inc. and
Eagle Asset Management, Inc., incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(7) Distribution Agreement, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
1
Exhibit
Number Description
- ------ -----------
(10) (a) Class A Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
(b) Class C Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
(c) Class B Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 10 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on December 1, 1995.
(d) Plan pursuant to Rule 18f-3, incorporated by reference from the
Post-Effective Amendment No. 10 to the Registration Statement of
the Trust, SEC File No. 33-57986, filed previously on December 1,
1995.
(e) Amended Plan pursuant to Rule 18f-3, incorporated by reference
from the Post-Effective Amendment No. 29 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on November 1, 2002.
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 30 to the Registration Statement
of the Trust, SEC File No. 33-57986, filed previously on December
23, 2002.
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP - to be filed
as an amendment.
(13) (a) Transfer Agency and Service Agreement, incorporated by reference
from the Post-Effective Amendment No. 29 to the Registration
Statement of the Trust, SEC File No. 33-57986, filed previously
on November 1, 2002.
(b) Fund Accounting and Pricing Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 29 to the
Registration Statement of the Trust, SEC File No. 33-57986, filed
previously on November 1, 2002.
(14) Consent of Independent Auditors - to be filed as an amendment.
(15) Omitted Financial Statements - None.
(16) Powers of Attorney - filed herewith.
(17) Additional Exhibits - none.
2