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[HERITAGE INCOME TRUST(TM) LOGO]
INTERMEDIATE GOVERNMENT FUND
Heritage Income Trust is a mutual fund offering shares in separate
investment portfolios. This Prospectus relates to the Intermediate Government
Fund (the "Fund"), which prior to February 1, 1996 was known as the Limited
Maturity Government Portfolio. The Fund has an investment objective of high
current income consistent with the preservation of capital. The Fund seeks to
achieve this objective primarily by investing in securities issued by the U.S.
Government, its agencies and instrumentalities and related repurchase agreements
and forward commitments. Under normal market conditions the Fund will maintain a
dollar-weighted effective average maturity of between three and ten years. The
Fund offers two classes of shares, Class A shares (sold subject to a front-end
sales load) and Class C shares (sold subject to a contingent deferred sales
load).
This Prospectus contains information that should be read before investing
in the Fund and should be kept for future reference. A Statement of Additional
Information relating to the Fund dated February 1, 1996 has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
Prospectus. A copy of the Statement of Additional Information is available free
of charge and shareholder inquiries can be made by writing to Heritage Asset
Management, Inc. or by calling (800) 421-4184.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[HERITAGE ASSET MANAGEMENT, INC. LOGO]
Registered Investment Advisor--SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
Prospectus Dated February 1, 1996
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
GENERAL INFORMATION................................................. 1
About the Trust and the Fund...................................... 1
Total Fund Expenses............................................... 1
Financial Highlights.............................................. 3
Differences Between A Shares and C Shares......................... 4
Investment Objective, Policies and Risk Factors................... 4
Net Asset Value................................................... 8
Performance Information........................................... 9
INVESTING IN THE FUND............................................... 10
How to Buy Shares................................................. 10
Minimum Investment Required/Accounts With Low Balances............ 11
Investment Programs............................................... 11
Alternative Purchase Plans........................................ 12
What Class A Shares Will Cost..................................... 13
What Class C Shares Will Cost..................................... 15
How to Redeem Shares.............................................. 16
Receiving Payment................................................. 17
Exchange Privilege................................................ 18
MANAGEMENT OF THE FUND.............................................. 19
SHAREHOLDER AND ACCOUNT POLICIES.................................... 20
Dividends and Other Distributions................................. 20
Distribution Plans................................................ 20
Taxes............................................................. 21
Shareholder Information........................................... 22
</TABLE>
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GENERAL INFORMATION
ABOUT THE TRUST AND THE FUND
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Heritage Income Trust (the "Trust") was established as a Massachusetts
business trust under a Declaration of Trust dated August 4, 1989. The Trust is
an open-end diversified management investment company that currently offers
shares in two separate investment portfolios, the Fund and the High Yield Bond
Fund. The Fund is designed for individuals, institutions and fiduciaries whose
investment objective is high current income consistent with the preservation of
capital. The Fund offers two classes of shares, Class A shares ("A shares") and
Class C shares ("C shares"). The Fund requires a minimum initial investment of
$1,000, except for certain retirement accounts and investment plans for which
lower limits may apply. See "Investing in the Fund." This prospectus relates
exclusively to the Fund. To obtain a prospectus for the High Yield Bond Fund,
call (800) 421-4184.
TOTAL FUND EXPENSES
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Shown below are all Class A expenses incurred by the Fund during its 1995
fiscal year. Class A annual operating expenses are shown as an annualized
percentage of fiscal 1995 average daily net assets. Because C shares were not
offered for sale prior to April 3, 1995, Class C annual operating expenses are
based on estimated expenses. Shareholder transaction expenses for both classes
are expressed as a percentage of maximum public offering price, cost per
transaction, or as otherwise noted.
<TABLE>
<CAPTION>
CLASS A CLASS C
------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load "charge" on purchases................. 3.75% None
Contingent deferred sales load (as a percentage
of original purchase price or redemption (declining to 0% after
proceeds, as applicable)....................... None 1.00% the first year)
Wire redemption fee.............................. $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
Management fee (after fee waiver)................ 0.00% 0.00%
12b-1 Distribution fee*.......................... 0.35% 0.60%
Other expenses (after reimbursement)............. 0.60% 0.60%
------- -------
Total Fund Operating Expenses (after fee waiver
and reimbursement)............................. 0.95% 1.20%
====== ======
</TABLE>
* See Page 20 "Distribution Plans".
The Fund's manager, Heritage Asset Management, Inc. (the "Manager"),
voluntarily will waive its fees and, if necessary, reimburse the Fund to the
extent that Class A annual operating expenses exceed .95% and to the extent that
Class C annual operating expenses exceed 1.20% of the average daily net assets
attributable to that class for the fiscal year ending September 30, 1996. Absent
fee waivers, the management fee for each class would have been 0.50%, and other
expenses and total Fund operating expenses would have been 0.62% and 1.47%,
respectively, for A shares and 0.62 and 1.72%, respectively, for C shares. To
the extent that the
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Manager waives or reimburses its fees with respect to one class, it will do so
with respect to the other class on a proportionate basis. Due to the imposition
of Rule 12b-1 distribution fees, it is possible that long-term shareholders of
the Fund may pay more in total sales charges than the economic equivalent of the
maximum front-end sales load permitted by the rules of the National Association
of Securities Dealers, Inc.
The impact of Fund operating expenses on earnings is illustrated in the
example below assuming a hypothetical $1,000 investment, a 5% annual rate of
return, and a redemption at the end of each period shown.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ------ ------ -------
<S> <C> <C> <C> <C>
Total Operating Expenses -- A shares.......... $47 $ 67 $ 88 $ 150
Total Operating Expenses -- C shares.......... $22 $ 38 $ 66 $ 145
</TABLE>
The impact of Fund operating expenses on earnings is illustrated in the
example below assuming a hypothetical $1,000 investment, a 5% annual rate of
return, and no redemption at the end of each period shown.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ------ ------ -------
<S> <C> <C> <C> <C>
Total Operating Expenses -- A shares.......... $47 $ 67 $ 88 $ 150
Total Operating Expenses -- C shares.......... $12 $ 38 $ 66 $ 145
</TABLE>
This is an illustration only and should not be considered a representation
of future expenses. Actual expenses and performance may be greater or less than
that shown above. The purpose of the above tables is to assist investors in
understanding the various costs and expenses that will be borne directly or
indirectly by shareholders. For a further discussion of these costs and
expenses, see "Management of the Fund" and "Distribution Plans."
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FINANCIAL HIGHLIGHTS
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The following table shows important financial information for an A share
and a C share of the Fund outstanding for the periods indicated, including net
investment income, net realized and unrealized gain on investments, and certain
other information. It has been derived from financial statements that have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is included in the Statement of Additional Information ("SAI"), which
may be obtained by calling the Fund at the telephone number on the front page of
this prospectus.
<TABLE>
<CAPTION>
CLASS A*
---------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, CLASS C*
--------------------------------------------------- --------
1995 1994** 1993 1992 1991 1990+ 1995++
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD................... $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $ 9.60 $ 9.05
------ ------ ------ ------ ------ --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)................................. 0.62 0.43 0.59 0.52 0.67 0.32 0.21
Net realized and unrealized gain (loss) on investments... 0.12 (0.40) (0.44) 0.10 0.49 (0.12) 0.23
------ ------ ------ ------ ------ ------ --------
Total from Investment Operations......................... 0.74 0.03 0.15 0.62 1.16 0.20 0.44
------ ------ ------ ------ ------ ------ --------
LESS DISTRIBUTIONS:
Dividends from net investment income..................... (0.55) (0.37) (0.52) (0.55) (0.65) (0.27) (0.22)
Distributions from net realized gain..................... -- -- (0.03) (0.23) -- (0.04) --
------ ------ ------ ------ ------ ------ --------
Total Distributions...................................... (0.55) (0.37) (0.55) (0.78) (0.65) (0.31) (0.22)
------ ------ ------ ------ ------ ------ --------
NET ASSET VALUE, END OF THE PERIOD......................... $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $ 9.27
====== ====== ====== ====== ====== ====== =======
TOTAL RETURN (%)(D)........................................ 8.47 .36 1.58 6.47 12.64 2.11(c) 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a).............................................. 0.95 0.95 0.91 0.78 1.07 1.10(b) 1.20(b)
Net investment income to average daily net assets........ 5.50 4.60 5.99 5.66 6.87 7.04(b) 5.19(b)
Fund turnover rate....................................... 162 214 150 123 202 76(b) 162
Net assets, end of the period (millions)................. $ 24 $ 41 $ 102 $ 111 $ 5 $ 4 $ 0.07
</TABLE>
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* Amounts and percentages contained in Financial Highlights are per share
information applicable to periods when the Fund operated under the name
Heritage Income Trust -- Limited Maturity Government Portfolio.
** Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed method does not correspond with results of
operations.
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (commencement of C shares) to September 30,
1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.06, $.03, $.01, $.02, $.24 and $.22 per A share,
respectively. The operating expense ratios including such items would be
1.47%, 1.18%, 1.03%, 1.23%, 3.58% and 5.88% (annualized) for A shares,
respectively. Excludes management fees waived and expenses reimbursed by the
Manager in the amount of $.06 per C share. The operating expense ratio
including such items would be 1.72% (annualized) for C shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
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DIFFERENCES BETWEEN A SHARES AND C SHARES
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The primary difference between the A shares and the C shares lies in their
initial sales load and contingent deferred sales load ("CDSL") structures and in
their ongoing expenses, including asset-based sales charges in the form of
distribution fees. These differences are summarized below. In addition, each
class may bear differing amounts of certain class-specific expenses, such as
transfer agent fees, Securities and Exchange Commission ("SEC") registration
fees, state registration fees and expenses of administrative personnel and
services. Each class has distinct advantages and disadvantages for different
investors, and investors may choose the class that best suits their
circumstances and objectives. See "How to Buy Shares," "Alternative Purchase
Plans," "What Class A Shares Will Cost" and "What Class C Shares Will Cost."
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES AS A %
OF
SALES LOAD AVERAGE DAILY NET ASSETS OTHER INFORMATION
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
A Maximum initial sales load Service fee of 0.25%; Initial sales load waived
SHARES.. of 3.75% distribution fee of up to or reduced for certain
0.10% purchases
C Maximum CDSL of 1% of Service fee of 0.25%; CDSL waived for certain
SHARES.. redemption proceeds; distribution fee of 0.35% types of redemptions
declining to zero after 1
year
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
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The investment objective of the Fund is high current income consistent with
the preservation of capital. Fund shares will fluctuate in value as a result of
value changes in portfolio investments. There can be no assurance that the
Fund's investment objective will be achieved.
In seeking its objective, the Fund invests at least 80% of its assets in
debt securities (including mortgage-backed securities) issued or guaranteed by
the U.S. Government and its agencies and instrumentalities, and repurchase
agreements and when-issued and forward commitment securities involving such debt
obligations. The Fund also may lend its securities, borrow money (as discussed
in the SAI), invest in money market instruments to maintain sufficient
liquidity, seek to hedge against interest rate changes by a variety of
strategies involving the use of options, futures contracts and options on
futures contracts as described below, invest in stripped securities, inverse
floaters and invest up to 10% of its net assets in illiquid securities. Under
normal conditions the Fund will maintain a dollar-weighted effective average
maturity of between three and ten years. In times where, in its judgment,
conditions in the securities markets would make pursuing the Fund's basic
investment strategy inconsistent with the best interests of the Fund's
shareholders, the Manager may shorten the Fund's dollar-weighted effective
average maturity below three years.
The Fund's investment objective is fundamental and may not be changed
without the vote of a majority of the outstanding voting securities of the Fund,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
All policies of the Fund described in this prospectus may be changed by the
Trust's Board of Trustees (the "Board of Trustees" or the "Board") without
shareholder approval. The following is a discussion of the types of investments
in which the Fund may invest, including the risks of investing in these
securities. For a further discussion of the Fund's investment policies and
risks, see "Investment Objective and Policies of the Fund" in the SAI.
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DEBT OBLIGATIONS. The market value of the debt securities held by the Fund
will be affected by changes in interest rates. There normally is an inverse
relationship between the market value of such securities and actual changes in
interest rates. Thus, a decline in interest rates generally produces an increase
in market value, while an increase in rates generally produces a decrease in
market value. Moreover, the longer the remaining maturity of a security, the
greater will be the effect of interest rate changes on the market value of such
security.
FUTURES AND OPTIONS. The Fund may engage in transactions in options and
futures contracts in an effort to adjust the risk/return characteristics of its
investment portfolio. The Fund also may in certain circumstances purchase or
sell futures contracts or options as a substitute for the purchase or sale of
securities. The Fund may purchase and sell put and call options on debt
securities and indices of debt securities, purchase and sell futures contracts
on debt securities and indices of debt securities, and purchase and sell options
on a futures contracts. For example, if the Manager anticipates that interest
rates will rise, the Fund also may sell a debt futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge against a
decrease in the value of the Fund's securities. If the Manager anticipates that
interest rates will decline, the Fund may purchase a debt futures contract or a
call option thereon or sell a put option on futures contract to protect against
an increase in the price of securities the Fund intends to purchase.
To the extent that the Fund enters into futures contracts and options on
futures contracts other than for bona fide hedging purposes (as defined by the
Commodity Futures Trading Commission), the aggregate initial margin and premiums
required to establish those positions (excluding the amount by which options are
"in-the-money") will not exceed 5% of the liquidation value of the Fund's
investment portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Fund has entered into. The Fund may hedge
up to 100% of its net assets by such transactions. The Fund will not purchase
any option, if immediately thereafter, the aggregate cost of all outstanding
options (including options on futures described above) purchased by the Fund
would exceed 5% of the value of its total assets. The Fund may write call
options and put options on up to 15% of its total assets.
The Fund might not use any of the strategies described above, and there can
be no assurance that any strategy used will succeed. If the Manager incorrectly
forecasts interest rates in utilizing a strategy for the Fund, the Fund would be
in a better position if it had not hedged at all. Investments in futures and
options involve certain risks that are different in some respects from
investment risks associated with investment in securities. The principal risks
associated with the use of futures and options are: (1) imperfect correlation in
the price movements of securities underlying the options and futures and the
price movements of the portfolio securities subject to the hedge; (2) possible
lack of a liquid market for closing out futures or options positions; (3) the
need for additional portfolio management skills and techniques; (4) the fact
that, while hedging strategies can reduce the risk of loss, they also can reduce
the opportunity for gain, or even result in losses, by offsetting favorable
price movements in hedged investments; and (5) the possible inability of the
Fund to purchase or sell a portfolio security at a time when it would otherwise
be favorable for it to do so, or the possible need for the Fund to sell a
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate securities in connection with hedging transactions and
the possible inability of the Fund to close out or liquidate a hedged position.
For a hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being hedged. Such
equal price changes are not always possible because the security underlying the
hedging instrument may not be the same security that is being hedged. The
Manager will attempt to create a closely correlated hedge, but hedging
activities may not be completely successful in eliminating market fluctuation.
The ordinary spreads between prices in the futures markets, due to the nature of
the futures market, are subject to distortion. Due to the
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possibility of distortion, a correct forecast of market trends by the Manager
may still not result in a successful transaction. The Manager may be incorrect
in its expectation as to the extent of market movements, or the time span within
which the movements take place.
MONEY MARKET INSTRUMENTS. The types of money market instruments in which
the Fund can invest include high quality commercial paper, other high quality
short-term corporate debt obligations and various instruments issued by domestic
banks and savings and loan associations having assets of at least $1 billion and
capital, surplus and undivided profit of over $100 million as of the close of
the most recent fiscal year.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an
interest in a pool of mortgages made by lenders such as commercial banks,
savings and loan institutions, mortgage bankers and others. These securities
generally provide monthly interest and, in most cases, principal payments that
are a "pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Mortgage-backed securities may be issued by the
U.S. Government or U.S. Government-related entities or by non-governmental
entities such as banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers.
Although mortgage-backed securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably their effective maturities. This
contrasts with U.S. Treasury securities, for instance, which generally pay all
principal at maturity and typically have an effective maturity equal to the
final stated maturity. Thus, for purposes of calculating the Fund's weighted
average maturity, the Fund will apply the standard market consensus with respect
to the effective maturity of mortgage-backed securities rather than their stated
final maturities.
U.S. GOVERNMENT AND U.S. GOVERNMENT-RELATED MORTGAGE-BACKED
SECURITIES. The Government National Mortgage Association ("GNMA") is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development and is a primary issuer of U.S. Government-related
mortgage-backed securities. GNMA pass-through securities are considered to be
riskless with respect to default because the underlying mortgage loan portfolio
is comprised entirely of U.S. Government-backed loans and timely principal and
interest payments are guaranteed by the full faith and credit of the U.S.
Government. Residential mortgage loans also are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the U.S.
Government, and the Federal National Mortgage Association ("FNMA"), a U.S.
Government-sponsored corporation owned entirely by private stockholders, which
guarantee the timely payment of interest and the ultimate collection of
principal on their respective securities.
PRIVATE ISSUER MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs") that are collateralized by mortgage-backed securities
issued by FHLMC, FNMA, GNMA or pools of conventional mortgages. These securities
generally offer a higher interest rate than securities with direct or indirect
U.S. Government guarantees of payments. However, many issuers or servicers of
these securities guarantee timely payment of interest and principal, which also
may be supported by various forms of insurance, including individual loan,
title, pool and hazard policies. There can be no assurance that the private
issuers or insurers will be able to meet their obligations under the relevant
guarantee or insurance policies. Mortgage-backed securities of private issuers,
including CMOs, also have achieved broad market acceptance and, consequently, an
active secondary market has emerged. However, the market for these securities is
smaller and less liquid
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than the market for U.S. Government and U.S. Government-related mortgage pools.
The maximum permitted investment in mortgage-backed securities of private
issuers is 20% of the net assets of the Fund.
REMICS. The Fund may invest in U.S. Government and privately issued real
estate mortgage investment conduits ("REMICs"), a common form of CMO. REMICs are
entities that issue multiple-class real estate mortgage-backed securities that
qualify and elect treatment as such under the Internal Revenue Code of 1986, as
amended (the "Code"). REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to Federal
income taxation. Instead, income is passed through the entity and is taxed to
the persons who hold interests in the REMIC. A REMIC interest must consist of
one or more classes of "regular interests" and "residual interests." To qualify
as a REMIC, substantially all the assets of the entity must be directly or
indirectly secured principally by real property. The risks inherent in investing
in REMICs are similar to those of CMOs in general, as well as those of other
mortgage-backed securities as described below.
RISKS OF MORTGAGE-BACKED SECURITIES. Investments in mortgage-backed
securities entail both market and prepayment risk. Fixed-rate mortgage-backed
securities are priced to reflect, among other things, current and perceived
interest rate conditions. As conditions change, market values will fluctuate. In
addition, the mortgages underlying mortgage-backed securities generally may be
prepaid in whole or in part at the option of the individual buyer. Prepayments
of the underlying mortgages can affect the yield to maturity on mortgage-backed
securities and, if interest rates declined, the prepayment only may be invested
by the Fund at the then prevailing lower rate. Changes in market conditions,
particularly during periods of rapid or unanticipated changes in market interest
rates, may result in volatility of the market value of certain mortgage-backed
securities. The Manager will attempt to manage the Fund so that this volatility,
together with the volatility of other investments in the Fund, is consistent
with its investment objective.
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without
regard to the length of time the securities have been held. A high rate of
portfolio turnover generally leads to higher transaction costs and may result in
a greater number of taxable transactions. The Fund's portfolio turnover rate for
the fiscal years ended September 30, 1994 and 1995 was 214% and 162%,
respectively. See "Brokerage Practices" in the SAI.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities and simultaneously commits to resell the securities to
the original seller (a member bank of the Federal Reserve System or securities
dealers who are members of a national securities exchange or are market makers
in U.S. Government securities) at an agreed upon date and price reflecting a
market rate of interest unrelated to the coupon rate or the maturity of the
purchased securities. Although repurchase agreements carry certain risks not
associated with direct investment in securities, including possible decline in
the market value of the underlying securities and delays and costs to the Fund
if the other party to the repurchase agreement becomes bankrupt, the Fund
intends to enter into repurchase agreements only with banks and dealers in
transactions believed by the Manager to present minimal credit risks in
accordance with guidelines established by the Board of Trustees. The Fund may
invest up to 25% of its total assets in repurchase agreements.
STRIPPED SECURITIES. The Fund may invest in separately traded interest and
principal components of securities ("Stripped Securities"), including U.S.
Government securities. Stripped Securities are obligations representing an
interest in all or a portion of the income or principal components of an
underlying or related security, a pool of securities or other assets. In the
most extreme case, one class will receive all of the interest (the interest-only
or "IO" class), while the other class will receive all of the principal (the
principal-only or
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<PAGE> 10
"PO" class). The market values of stripped income securities tend to be more
volatile in response to changes in interest rates than are conventional debt
securities.
U.S. GOVERNMENT SECURITIES. U.S. Government securities in which the Fund
may invest include (1) direct U.S. Treasury obligations, (2) obligations issued
or guaranteed by U.S. Government agencies and instrumentalities that are
supported by the full faith and credit of the U.S. Government or the right of
the issuer to borrow specified amounts from the U.S. Government, and (3)
obligations of U.S. Government agencies and instrumentalities that are not
backed by the full faith and credit of the United States.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase U.S.
Government securities on a "when-issued" basis and may purchase or sell such
securities on a "forward commitment" basis in order to hedge against anticipated
changes in interest rates and prices. When such transactions are negotiated, the
price, which is generally expressed in terms of yield, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. At the time the Fund makes the commitment to purchase securities on
a when-issued or forward commitment basis, it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value. In addition, a segregated account consisting of cash or liquid securities
such as U.S. Government securities or other appropriate high-grade debt
obligations equal to the value of the when-issued or forward commitment
securities will be established and maintained with the Fund's custodian and will
be marked to market daily. On the delivery date, the Fund will meet its
obligations from securities that are then maturing or sales of securities held
in the segregated asset account and/or from available cash flow. When-issued and
forward commitment securities may be sold prior to the settlement date. The Fund
will engage in when-issued and forward commitment transactions only with the
intention of actually receiving or delivering the securities, as the case may
be. However, if the Fund chooses to dispose of the right to acquire a
when-issued security prior to its acquisition or dispose of its right to deliver
or receive against a forward commitment, it can incur a gain or loss. In
addition, there is always the risk that the securities may not be delivered and
that the Fund may incur a loss or will have lost the opportunity to invest the
amount set aside for such transaction in the segregated account.
If the Fund disposes of the right to acquire a when-issued or forward
commitment security prior to its acquisition or disposes of its right to deliver
against a forward commitment, it can incur a gain or loss due to market
fluctuation. In some instances, the third-party seller of when-issued or forward
commitment securities may determine prior to the settlement date that it will be
unable to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, the Fund may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for
the Fund to "roll over" its purchase commitment, the Fund may receive a
negotiated fee.
NET ASSET VALUE
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The net asset values of A shares and C shares are calculated by dividing
the value of the total assets of the Fund attributable to that class, less
liabilities attributable to that class, by the number of shares of that class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange ("Exchange") each day it is open. Fund securities are stated
at market value based on the last sales price as reported by the principal
securities exchange on which the securities are traded. If no sale is reported,
market value is based on the most recent quoted bid price. In the absence of a
readily available market quote, or if the Manager has reason to question the
validity of market quotations it receives, securities and other assets are
8
<PAGE> 11
valued using such methods as the Board of Trustees believes would reflect fair
value. Short-term investments that will mature in 60 days or less are valued at
amortized cost, which approximates market value. The per share net asset value
of A shares and C shares may differ as a result of the different daily expense
accruals applicable to each class. For more information on the calculation of
net asset value, see "Net Asset Value" in the SAI.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total return data of the A shares and C shares from time to time may be
included in advertisements about the Fund. Performance information is computed
separately for A shares and C shares in accordance with the methods described
below. Because C shares bear the expense of a higher distribution fee
attributable to the deferred sales load alternative, the performance of C shares
likely will be lower than that of A shares.
Total return with respect to a class for one-, five- and ten-year periods
or, if such periods have not yet elapsed, the period since the establishment of
that class, through the most recent calendar quarter represents that average
annual compounded rate of return on an investment of $1,000 in that class at the
public offering price (in the case of A shares, giving effect to the maximum
initial sales load of 3.75% and, in the case of C shares, giving effect to the
deduction of any CDSL that would be payable). In addition, the Fund also may
advertise its total return in the same manner, but without taking into account
the initial sales load or CDSL. The Fund also may advertise total return
calculated without annualizing the return, and total return may be presented for
other periods. By not annualizing the returns, the total return calculated in
this manner simply will reflect the increase in net asset value per A share and
C share over a period of time, adjusted for dividends and other distributions. A
share and C share performance may be compared with various indices.
The Fund also may from time to time advertise the yield of A shares and C
shares and compare these yields to those of other mutual funds with similar
investment objectives. The yield of each class of the Fund will be computed by
dividing the net investment income per share earned during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period. Yield accounting methods differ from the methods used for other
accounting purposes; accordingly, the yield for a class may not equal the
dividend income actually paid to shareholders or the net investment income per
share reported in the Fund's financial statements.
All data is based on the Fund's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Fund's
investment portfolio and the Fund's operating expenses. Investment performance
also often reflects the risks associated with the Fund's investment objective
and policies. These factors should be considered when comparing the Fund's
investment results to those of other mutual funds and other investment vehicles.
Additional performance information is contained in the Fund's annual report,
which may be obtained, without charge, by contacting the Fund at (800) 421-4184.
For more information on investment performance, see the SAI.
9
<PAGE> 12
INVESTING IN THE FUND
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the Fund continuously are offered through the Fund's principal
underwriter, Raymond James & Associates, Inc. (the "Distributor"), and through
other participating dealers or banks that have dealer agreements with the
Distributor. The Distributor receives commissions consisting of that portion of
the sales load remaining after the dealer concession is paid to participating
dealers or banks. Such dealers may be deemed to be underwriters pursuant to the
Securities Act of 1933, as amended.
Shares of the Fund may be purchased through a registered representative of
the Distributor, a participating dealer or a participating bank
("Representative") by placing an order for Fund shares with your Representative,
completing and signing the Account Application found in this prospectus, and
mailing it, along with your payment, within three business days.
The Fund offers and sells two classes of shares, A shares and C shares. A
shares may be purchased at a price equal to their net asset value per share next
determined after receipt of an order, plus a sales load imposed at the time of
purchase. C shares may be purchased at a price equal to their net asset value
per share next determined after receipt of an order. A CDSL of 1% is imposed on
C shares if you redeem those shares within one year of purchase. When you place
an order for Fund shares, you must specify which class of shares you wish to
purchase. See "Alternative Purchase Plans."
All purchase orders received by the Distributor prior to the close of
regular trading on the Exchange -- generally 4:00 p.m., Eastern time -- will be
executed at that day's offering price. Purchase orders received by your
Representative prior to the close of regular trading on the Exchange and
transmitted to the Distributor before 5:00 p.m. Eastern time on that day also
will receive that day's offering price. Otherwise, all purchase orders accepted
after the offering price is determined will be executed at the offering price
determined as of the close of regular trading on the Exchange on the next
trading day. See "What Class A Shares Will Cost" and "What Class C Shares Will
Cost."
You also may purchase shares of the Fund directly by completing and signing
the Account Application found in this prospectus and mailing it, along with your
payment, to Heritage Income Trust -- Intermediate Government Fund, c/o
Shareholder Services, Heritage Asset Management, Inc., P.O. Box 33022, St.
Petersburg, FL 33733.
Shares may be purchased with Federal funds (a commercial bank's deposit
with the Federal Reserve Bank that can be transferred to another member bank on
the same day) sent by Federal Reserve or bank wire to State Street Bank and
Trust Company, Boston, Massachusetts, ABA #011-000-028, Account #3196-769-8.
Wire instructions should include (1) the name of the Fund, (2) the class of
shares to be purchased, (3) your account number assigned by the Fund, and (4)
your name. To open a new account with Federal funds or by wire, you must contact
the Manager or your Representative to obtain a Heritage mutual fund account
number. Commercial banks may elect to charge a fee for wiring funds to State
Street Bank and Trust Company. For more information on "How to Buy Shares," see
"Investing in the Funds" in the SAI.
10
<PAGE> 13
MINIMUM INVESTMENT REQUIRED/ACCOUNTS WITH LOW BALANCES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Except as provided under "Investment Programs," the minimum initial
investment in the Fund is $1,000, and a minimum account balance of $500 must be
maintained. These minimum requirements may be waived at the discretion of the
Manager. In addition, initial investments in Individual Retirement Accounts
("IRAs") may be reduced or waived under certain circumstances. Contact the
Manager or your Representative for further information.
Due to the high cost of maintaining accounts with low balances, it is
currently the Fund's policy to redeem Fund shares in any account if the account
balance falls below the required minimum value of $500, except for retirement
accounts. The shareholder will be given 30 days' notice to bring the account
balance to the minimum required or the Fund may redeem shares in the account and
pay the proceeds to the shareholder. The Fund does not apply this minimum
account balance requirement to accounts that fall below this minimum due to
market fluctuation.
INVESTMENT PROGRAMS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A variety of automated investment options are available for the purchase of
Fund shares. These plans provide for automatic monthly investments of $50 or
more through various methods described below. You may change the amount to be
invested automatically or may discontinue this service at any time without
penalty. If you discontinue this service before reaching the required account
minimum, the account must be brought up to the minimum in order to remain open.
Shareholders desiring this service should complete the appropriate application
available from the Manager. You will receive a periodic confirmation of all
activity for your account.
AUTOMATIC INVESTMENT OPTIONS:
- ---------------------------------
1. Bank Draft Investing -- You may authorize the Manager to process a monthly
draft from your personal checking account for investment into the Fund. The
draft is returned by your bank the same way a canceled check is returned.
2. Payroll Direct Deposit -- If your employer participates in a direct deposit
program (also known as ACH Deposits) you may have all or a portion of your
payroll directed to the Fund. This will generate a purchase transaction each
time you are paid by your employer. Your employer will report to you the
amount sent from each paycheck.
3. Government Direct Deposit -- If you receive a qualifying periodic payment
from the U.S. Government or other agency that participates in Direct Deposit,
you may have all or a part of each check directed to purchase shares of the
Fund. The U.S. Government or agency will report to you all payments made.
4. Automatic Exchange -- If you own shares of another Heritage mutual fund
advised or administered by the Manager ("Heritage Mutual Fund"), you may
elect to have a preset amount redeemed from that fund and exchanged into the
corresponding class of shares of the Fund. You will receive a statement from
the other Heritage Mutual Fund confirming the redemption.
You may change or terminate any of the above options at any time.
11
<PAGE> 14
RETIREMENT PLANS:
- -------------------
Shares of the Fund may be purchased as an investment for Heritage IRA
plans. In addition, shares may be purchased as an investment for self-directed
IRAs, defined contribution plans, Simplified Employee Pension Plans ("SEPs") and
other qualified retirement plans.
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage IRA.
You may make limited contributions to a Heritage IRA through the purchase of
shares of the Fund and/or other Heritage Mutual Funds. The Code limits the
deductibility of IRA contributions to taxpayers who are not active participants
(and whose spouses are not active participants) in employer-provided retirement
plans or who have adjusted gross income below certain levels. Nevertheless, the
Code permits other individuals to make nondeductible IRA contributions up to
$2,000 per year (or $2,250, if such contributions also are made for a nonworking
spouse and a joint return is filed). A Heritage IRA also may be used for certain
"rollovers" from qualified benefit plans and from Section 403(b) annuity plans.
For more detailed information on the Heritage IRA, please contact the Manager.
Fund shares may be used as the investment medium for qualified plans
(defined benefit or defined contribution plans established by corporations,
partnerships or sole proprietorships). Contributions to qualified plans may be
made (within certain limits) on behalf of the employees, including
owner-employees, of the sponsoring entity.
OTHER RETIREMENT PLANS. Multiple participant payroll deduction retirement
plans also may purchase A shares of any Heritage Mutual Fund at a reduced sales
load on a monthly basis during the 13-month period following such a plan's
initial purchase. The sales load applicable to an initial purchase of A shares
will be that normally applicable under the schedule of sales loads set forth in
this prospectus to an investment 13 times larger than such initial purchase. The
sales load applicable to each succeeding monthly purchase of A shares will be
that normally applicable, under such schedule, to an investment equal to the sum
of (1) the total purchase previously made during the 13-month period and (2) the
current month's purchase multiplied by the number of months (including the
current month) remaining in the 13-month period. Sales loads previously paid
during such period will not be adjusted retroactively on the basis of later
purchases. Multiple participant payroll deduction retirement plans may purchase
C shares at any time.
ALTERNATIVE PURCHASE PLANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The alternative purchase plans offered by the Fund enable you to choose the
class of shares that you believe will be most beneficial given the amount of
your intended purchase, the length of time you expect to hold the shares and
other circumstances. You should consider whether, during the anticipated length
of your intended investment in the Fund, the accumulated continuing distribution
and service fees plus the CDSL on C shares would exceed the initial sales load
plus accumulated service fees on A shares purchased at the same time. Another
factor to consider is whether the potentially higher yield of A shares due to
lower ongoing charges will offset the initial sales load paid on such shares.
Representatives may receive different compensation for sales of A shares than
sales of C shares.
If you purchase sufficient shares to qualify for a reduced sales load, you
may prefer to purchase A shares because similar reductions are not available on
the C shares. For example, if you intend to invest more than $1,000,000 in
shares of the Fund, you should purchase A shares. Moreover, all A shares are
subject to a lower
12
<PAGE> 15
12b-1 fee and, accordingly, are expected to pay correspondingly higher dividends
on a per share basis. If your purchase will not qualify for a reduced sales
load, you still may wish to purchase A shares if you expect to hold your shares
for an extended period of time because, depending on the number of years you
hold the investment, the continuing distribution and service fees on C shares
would eventually exceed the initial sales load plus the continuing service fee
on A shares during the life of your investment. However, because initial sales
loads are deducted at the time of purchase, not all of the purchase payment for
A shares is invested initially.
You might determine that it would be more advantageous to purchase C shares
in order to have all of your purchase payment invested initially. However, your
investment would remain subject to continuing distribution and service fees and,
for a one year period, be subject to a CDSL. For example, based on current fees
and expenses for the Fund and the maximum A shares sales load, you would have to
hold A shares approximately ten to twelve years before the accumulated
distribution and service fees on the C shares would exceed the initial sales
load plus the accumulated service fees on the A shares.
WHAT CLASS A SHARES WILL COST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A shares are sold on each day on which the Exchange is open. A shares
are sold at their next determined net asset value plus a sales load as described
below.
<TABLE>
<CAPTION>
SALES LOAD AS A
PERCENTAGE OF
------------------------------ DEALER CONCESSION
NET AMOUNT AS A PERCENTAGE
AMOUNT OF OFFERING INVESTED OF
PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE(1)
----------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Less than $25,000............ 3.75% 3.90% 3.25%
$25,000-$49,999.............. 3.25% 3.36% 2.75%
$50,000-$99,999.............. 2.75% 2.83% 2.25%
$100,000-$249,999............ 2.25% 2.30% 1.75%
$250,000-$499,999............ 1.50% 1.52% 1.00%
$500,000-$999,999............ 0.75% 0.76% 0.25%
$1,000,000 and over(2)....... 0.00% 0.00% 0.00%
</TABLE>
(1) During certain periods, the Distributor may pay 100% of the sales load to
participating dealers. Otherwise, it will pay the Dealer Concession shown
above.
(2) The Manager may pay up to 0.50% of the purchase amount to the Distributor
for purchases exceeding $1,000,000. The Manager reserves the right to
reclaim this payment subject to certain holding period requirements.
Class A shares may be sold at net asset value without any sales load to the
Manager, current and retired officers and Trustees of the Trust; directors,
officers, and full-time employees of the Manager, Subadviser of any Heritage
Mutual Fund, Distributor, and their affiliates; registered representatives of
broker-dealers that are parties to dealer agreements with the Distributor (or
financial institutions that have arrangements with such broker-dealers);
directors, officers and full-time employees of banks that are party to agency
agreements with the Distributor; and all such persons' immediate relatives, and
their beneficial accounts. In addition, the American Psychiatric Association
(the "APA Group") has entered into an agreement with the Distributor that allows
its members to purchase A shares at a sales load equal to two-thirds of the
percentages in the above table. The Dealer Concession also will be adjusted in a
like manner. Members of the APA Group also are eligible to purchase A shares at
net asset value in amounts equal to the value of shares redeemed from other
mutual funds that were purchased under reduced sales load programs available to
their organization. A shares also may be purchased without sales loads by
investors who participate in certain broker-dealer wrap fee investment programs.
13
<PAGE> 16
Class A shares also may be purchased at net asset value by trust companies
and bank trust departments for funds over which they exercise exclusive
discretionary authority and are held in a fiduciary agency, advisory, custodial
or similar capacity. Such purchases are subject to minimum requirements with
respect to amount of purchase. Currently, the minimum purchase required is
$1,000,000, which may be invested over a period of 13 months. The minimum may be
changed from time to time by the Distributor. The minimum may be aggregated
between A shares of the Fund and A shares of any other Heritage Mutual Funds
that would be subject to a sales load. Cities, counties, states or
instrumentalities and their departments, authorities or agencies are able to
purchase A shares of the Fund at net asset value as long as certain conditions
are met.
HERITAGE NET ASSET VALUE ("NAV") TRANSFER PROGRAM
- -----------------------------------------------------------
Class A shares of the Fund may be sold at net asset value without any sales
load under the Manager's NAV Transfer Program. To qualify for the NAV Transfer
Program, you must provide adequate proof that you recently redeemed shares from
a load or no-load mutual fund other than a Heritage Mutual Fund or any money
market fund. To provide adequate proof you must complete a qualification form
and provide a statement showing the value liquidated from the other mutual fund
within time parameters set by the Manager. In addition, shares of the other fund
must have been liquidated no more than 90 days prior to the purchase of a
Heritage Mutual Fund.
COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
- -----------------------------------------------------------
You may qualify for the sales load reductions indicated in the above sales
load schedule by combining purchases of A shares into a single "purchase" if the
resulting "purchase" totals at least $25,000. The term "purchase" refers to a
single purchase by an individual, or to concurrent purchases that, in the
aggregate, are at least equal to the prescribed amounts, by an individual, his
spouse and their children under the age of 21 years, purchasing A shares for his
or their own account; a single purchase by a trustee or other fiduciary
purchasing A shares for a single trust, estate, or single fiduciary account
although more than one beneficiary is involved; or a single purchase for the
employee benefit plans of a single employer. A "purchase" also may include A
shares purchased at the same time through a single selected dealer of any other
Heritage Mutual Fund that distributes its shares subject to a sales load. To
qualify for the Combined Purchase Privilege on a purchase through a selected
dealer, the investor or selected dealer must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
STATEMENT OF INTENTION
- ------------------------
You also may obtain the reduced sales loads shown under "What Class A
Shares Will Cost" by means of a written Statement of Intention, which expresses
your intention to invest not less than $25,000 within a period of 13 months in A
shares of the Fund or A shares of any other Heritage Mutual Fund subject to a
sales load ("Statement of Intention").
Investors qualifying for the Combined Purchase Privilege described above
may purchase A shares of the Heritage Mutual Funds under a single Statement of
Intention. For example, if, at the time an investor signs a Statement of
Intention to invest at least $25,000 in A shares of the Fund, the investor and
the investor's spouse each purchase A shares worth $5,000 (for a total of
$10,000), then it will be necessary only to invest a total of
14
<PAGE> 17
$15,000 during the following 13 months in A shares or any other Heritage Mutual
Fund subject to a sales load to qualify for the reduced sales loads on the total
amount being invested.
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Statement of Intention is 5% of such amount. If you would like to enter into a
Statement of Intention in conjunction with your initial investment in A shares
of the Fund, please complete the appropriate portion of the Account Application
at the back of this prospectus. Current Fund shareholders desiring to do so can
obtain a Statement of Intention form by contacting the Manager or the
Distributor at the address or telephone number listed on the cover of this
prospectus, or from their Representative.
REINSTATEMENT PRIVILEGE
- -------------------------
A shareholder who has redeemed any or all of his A shares of the Fund may
reinvest all or any portion of the redemption proceeds in A shares at net asset
value without any sales load, provided that such reinvestment is made within 90
calendar days after the redemption date. A shareholder who has redeemed any or
all of his C shares of the Fund and has paid a CDSL on those shares or has held
those shares long enough so that the CDSL no longer applies, may reinvest all or
any portion of the redemption proceeds in C shares of the Fund at net asset
value without paying a CDSL on future redemptions of those shares, provided that
such reinvestment is made within 90 calendar days after the redemption date. A
reinstatement pursuant to this privilege will not cancel the redemption
transaction; therefore, (1) any gain realized on the transaction will be
recognized for Federal income tax purposes, while (2) any loss realized will not
be recognized to the extent the proceeds are reinvested in shares of the Fund.
See "Taxes." The reinstatement privilege may be utilized by a shareholder only
once, irrespective of the number of shares redeemed, except that the privilege
may be utilized without limitation in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Fund to his defined
contribution plan, IRA or SEP. Investors must notify the Fund if they intend to
exercise the reinstatement privilege.
For more information on "What Class A Shares Will Cost" and a further
explanation of instances in which the sales load will be waived or reduced, see
"Investing in the Funds" in the SAI.
WHAT CLASS C SHARES WILL COST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A CDSL of 1% is imposed on C shares if, within one year of purchase, you
redeem an amount that causes the current value of your account to fall below the
total dollar amount of C shares purchased subject to the CDSL. The CDSL will not
be imposed on the redemption of C shares acquired as dividends or other
distributions, or on any increase in the net asset value of the redeemed C
shares above the original purchase price. Thus, the CDSL will be imposed on the
lower of net asset value or purchase price.
Redemptions will be processed in a manner intended to minimize the amount
of redemption that will be subject to the CDSL. When calculating the CDSL, it
will be assumed that the redemption is made first of C shares acquired as
dividends, second of C shares that have been held for over one year, and finally
of C shares held for less than one year on a first-in first-out basis.
For example, assume you purchase 100 C shares at $10 per share (for a total
cost of $1,000) and, during the year you purchase such shares, the net asset
value increases to $12 per share and you acquire 10 additional shares as
dividends. If you redeem 50 shares (or $600) within the first year of purchase,
10 shares would not
15
<PAGE> 18
be subject to the CDSL because redemptions are made first of shares acquired as
dividends. With respect to the remaining shares, the CDSL is applied only to the
original cost of $10 per share and not to the higher net asset value of $12 per
share. Therefore, only 40 of the 50 shares (or $400) being redeemed would be
subject to a CDSL at a rate of 1%.
WAIVER OF THE CONTINGENT DEFERRED SALES LOAD. The CDSL currently is waived
for (1) any partial or complete redemption in connection with a distribution
without penalty under Section 72(t) of the Code from a qualified retirement
plan, including a Keogh Plan or IRA upon attaining age 70 1/2; (2) any
redemption resulting from a tax-free return of an excess contribution to a
qualified employer retirement plan or an IRA; (3) any partial or complete
redemption following death or disability (as defined in Section 72(m)(7) of the
Code) of a shareholder (including one who owns the shares as joint tenant with
his spouse) from an account in which the deceased or disabled is named, provided
the redemption is requested within one year of the death or initial
determination of disability; (4) certain periodic redemptions under the
Systematic Withdrawal Plan from an account meeting certain minimum balance
requirements, in amounts representing certain maximums established from time to
time by the Distributor (currently a maximum of 12% annually of the account
balance at the beginning of the Systematic Withdrawal Plan); or (5) involuntary
redemptions by the Fund of C shares in shareholder accounts that do not comply
with the minimum balance requirements. The Distributor may require proof of
documentation prior to waiver of the CDSL described in sections (1) through (4)
above, including distribution letters, certification by plan administrators,
applicable tax forms or death certificates or physicians certificates.
For more information about C shares, see "Reinstatement Privilege" and
"Exchange Privilege."
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Redemption of Fund shares can be made by:
CONTACTING YOUR REPRESENTATIVE. Your Representative will transmit an order
to the Fund for redemption and may charge you a fee for this service.
TELEPHONE REQUEST. You may redeem shares by placing a telephone request to
the Fund (800-421-4184) prior to the close of regular trading on the Exchange.
If you do not wish to have telephone exchange/redemption privileges, you should
so elect by completing the appropriate section of the Account Application. The
Trust, Manager, Distributor and their Trustees, directors, officers and
employees are not liable for any loss arising out of telephone instructions that
they reasonably believe are authentic. These parties will employ reasonable
procedures to confirm that telephone instructions are authentic. To the extent
that the Trust, Manager, Distributor and their Trustees, directors, officers and
employees do not follow reasonable procedures, some or all of them may be liable
for losses due to unauthorized or fraudulent transactions. For more information
on these procedures, see "Redeeming Shares -- Telephone Transactions" in the
SAI. You may elect to have the funds wired to the bank account specified on the
Account Application. Funds normally will be sent the next business day, and you
will be charged a wire fee by the Manager (currently $5.00). For redemptions of
less than $25,000, you may request that the check be mailed to your address of
record, providing that such address has not been changed in the past 60 days.
For your protection, all other redemption checks will be transferred to the bank
account specified on the Account Application.
WRITTEN REQUEST. Fund shares may be redeemed by sending a written request
for redemption to "Heritage Income Trust-Intermediate Government Fund, c/o
Shareholder Services, Heritage Asset Management, Inc., P.O. Box 33022, St.
Petersburg, Florida 33733." Signature guarantees will be required on the
16
<PAGE> 19
following types of requests: redemptions from any account that has had an
address change in the past 60 days, redemptions greater than $25,000,
redemptions that are sent to an address other than the address of record and
exchanges or transfers into other Heritage accounts that have different titles.
The Manager will transmit an order to the Fund for redemption.
SYSTEMATIC WITHDRAWAL PLAN. Withdrawal plans are available that provide
for regular periodic withdrawals of $50 or more on a monthly, quarterly,
semiannual or annual basis. Under these plans, sufficient shares of the Fund are
redeemed to provide the amount of the periodic withdrawal payment. The purchase
of A shares while participating in the Systematic Withdrawal Plan ordinarily
will be disadvantageous to you because you will be paying a sales load on the
purchase of those shares at the same time that you are redeeming A shares upon
which you may already have paid a sales load. Therefore, the Fund will not
knowingly permit the purchase of A shares through the Automatic Investment Plan
if you are at the same time making systematic withdrawals of A shares. The
Manager reserves the right to cancel systematic withdrawals if insufficient
shares are available for two or more consecutive months.
Please contact the Manager or your Representative for further information
or see "Redeeming Shares" in the SAI.
RECEIVING PAYMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If a request for redemption is received by the Fund in good order (as
described below) before the close of regular trading on the Exchange, the shares
will be redeemed at the net asset value per share determined at the close of
regular trading on the Exchange on that day, less any applicable CDSL for C
shares. Requests for redemption received by the Fund after the close of regular
trading on the Exchange will be executed at the net asset value determined at
the close of regular trading on the Exchange on the next trading day, less any
applicable CDSL for C shares.
Payment for shares redeemed by the Fund normally will be made on the
business day after the redemption was made. If the shares to be redeemed
recently have been purchased by personal check, the Fund may delay mailing a
redemption check until the purchase check has cleared, which may take up to
seven days. This delay can be avoided by wiring funds for purchases. The
proceeds of a redemption may be more or less than the original cost of Fund
shares.
A redemption request will be considered to be received in "good order" if:
- the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
- any written request is signed by the shareholder and by all co-owners of
the account with exactly the same name or names used in establishing the
account;
- any written request is accompanied by certificates representing the
shares that have been issued, if any, and the certificates have been
endorsed for transfer exactly as the name or names appear on the
certificates or an accompanying stock power has been attached; and
- the signatures on any written redemption request of $25,000 or more and
on any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company, or by any member firm of
the New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guaran-
17
<PAGE> 20
tees also will be accepted from savings banks and certain other financial
institutions that are deemed acceptable by the Manager, as transfer agent,
under its current signature guarantee program.
The Fund has the right to suspend redemption or postpone payment at times
when the Exchange is closed (other than customary weekend or holiday closings)
or during periods of emergency or other periods as permitted by the SEC. In the
case of any such suspension a shareholder may either withdraw his request for
redemption or receive payment based upon the net asset value next determined
after the suspension is lifted. If a redemption check remains outstanding after
six months, the Manager reserves the right to redeposit those funds into the
shareholder's account. For more information on receiving payment, see "Redeeming
Shares -- Receiving Payment" in the SAI.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you have held A shares or C shares for at least 30 days, you may
exchange some or all of your shares for shares of the same class of any other
Heritage Mutual Fund. All exchanges will be based on the respective net asset
values of the Heritage Mutual Funds involved. All exchanges are subject to the
minimum investment requirements and any other applicable terms set forth in the
prospectus for the Heritage Mutual Fund whose shares are being acquired.
Exchanges involving the redemption of shares recently purchased by check will be
permitted only after the Heritage Mutual Fund whose shares have been tendered
for exchange is reasonably assured that the check has cleared, normally seven
calendar days following the purchase date. Exchanges of shares of Heritage
Mutual Funds generally will result in the realization of a taxable gain or loss
for Federal income tax purposes.
For purposes of calculating the commencement of the one-year CDSL holding
period for shares exchanged from the Fund to the C shares of any other Heritage
Mutual Fund, except Heritage Cash Trust -- Money Market Fund ("Money Market
Fund"), the original purchase date of those shares exchanged will be used. Any
time period that the exchanged shares were held in the Money Market Fund will
not be included in this calculation.
If you exchange A shares or C shares for corresponding shares of the Money
Market Fund, you may, at any time thereafter, exchange such shares for the
corresponding class of shares of any other Heritage Mutual Fund. Because the
Money Market Fund is a no-load mutual fund, if you exchange shares of that fund
acquired by purchase (rather than exchange) for shares of another Heritage
Mutual Fund, you will be subject to the sales load, if any, that would be
applicable to a purchase of that Heritage Mutual Fund. In addition, if you
exchange C shares of the Fund for corresponding shares of the Money Market Fund,
the period during which an investment is held in shares of the Money Market Fund
will not count for purposes of calculating the one-year CDSL holding period for
such shares. As a result, if you redeem C shares of the Money Market Fund before
the expiration of the one-year CDSL holding period, you will be subject to the
applicable CDSL. A shares of the Fund may be exchanged for A shares of the
Heritage Cash Trust -- Municipal Money Market Fund, which is the only class of
shares offered by that fund. Because the Heritage Cash Trust -- Municipal Money
Market Fund is a no-load mutual fund, if you exchange shares of that fund
acquired by purchase (rather than exchange) for shares of another Heritage
Mutual Fund, you also will be subject to the sales load, if any, that would be
applicable to a purchase of that Heritage Mutual Fund. C shares are not eligible
for exchange into the Heritage Cash Trust -- Municipal Money Market Fund.
18
<PAGE> 21
Shares acquired pursuant to a telephone request for exchange will be held
under the same account registration as the shares redeemed through such
exchange. For a discussion of limitation of liability of certain entities, see
"How to Redeem Shares -- Telephone Request."
Telephone exchanges can be effected by calling the Manager at (800)
421-4184 or by calling your Representative. In the event that you or your
Representative are unable to reach the Manager by telephone, an exchange can be
effected by sending a telegram to Heritage Asset Management, Inc., attention:
Shareholder Services. Due to the volume of calls or other unusual circumstances,
telephone exchanges may be difficult to implement during certain time periods.
The exchange privilege is available only in states where shares of the
Heritage Mutual Fund being acquired may be legally sold. Each Heritage Mutual
Fund reserves the right to reject any order to acquire its shares through
exchange or otherwise to restrict or terminate the exchange privilege at any
time. In addition, each Heritage Mutual Fund may terminate this exchange
privilege upon 60 days' notice. For further information on this exchange
privilege, contact the Manager or your Representative and see "Exchange
Privilege" in the SAI.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The business and affairs of the Fund are managed by or under the direction
of the Board of Trustees. The Trustees are responsible for managing the Fund's
business affairs and for exercising all the Fund's powers except those reserved
to the shareholders. A Trustee may be removed by other Trustees or by a
two-thirds vote of the outstanding Fund shares.
INVESTMENT ADVISER, FUND ACCOUNTANT, ADMINISTRATOR AND TRANSFER AGENT
Heritage Asset Management, Inc. is the Fund's investment adviser, fund
accountant, administrator and transfer agent. The Manager is responsible for
reviewing and establishing investment policies for the Fund as well as
administering the Fund's noninvestment affairs. The Manager is a wholly-owned
subsidiary of Raymond James Financial, Inc., which, together with its
subsidiaries, provides a wide range of financial services to retail and
institutional clients. The Manager manages, supervises and conducts the business
and administrative affairs of the Fund and other Heritage Mutual Funds with net
assets totalling approximately $2.0 billion as of December 31, 1995. Investment
decisions for the Fund are made by the Manager. The Manager's annual investment
advisory and administration fee is 0.50% of the Fund's average daily net assets.
This fee is computed daily and paid monthly. The Fund pays the Manager directly
for fund accounting and transfer agent services.
The advisory fee may be reduced pursuant to regulations in various states
where Fund shares are qualified for sale which impose limitations on the annual
expense ratio of the Fund. The Manager reserves the right to discontinue any
voluntary waiver of its fees or reimbursement to the Fund in the future. The
Manager also may recover advisory fees waived in the two previous years if the
recovery does not cause the Fund to exceed applicable expense limitations. It
currently is not anticipated that the Manager will recover fees waived in 1994
and 1995.
19
<PAGE> 22
FUND MANAGEMENT
H. Peter Wallace serves as portfolio manager of the Fund. Mr. Wallace is
responsible for the day-to-day management of the Fund's investment portfolio
subject to the general oversight of the Manager and the Board of Trustees. Mr.
Wallace has been a Senior Vice President and Director of Fixed Income
Investments for the Manager since January 1993. In August 1993, he became a
portfolio manager of the Fund. Prior to 1993, Mr. Wallace was a Vice President
of Mortgage Products at Donaldson, Lufkin and Jenrette from 1990 through 1992
and from 1986 through 1990 he was a Senior Vice President and Director of
Mortgage Research at Shearson Lehman Brothers. Mr. Wallace is a Chartered
Financial Analyst.
SHAREHOLDER AND ACCOUNT POLICIES
DIVIDENDS AND OTHER DISTRIBUTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividends from net investment income are declared and paid monthly. The
Fund distributes to shareholders substantially all net realized capital gains on
portfolio securities after the end of the year in which the gains are realized.
Dividends and other distributions on shares held in retirement plans and by
shareholders maintaining a Systematic Withdrawal Plan generally are declared and
paid in additional Fund shares. Other shareholders may elect to:
- receive both dividends and capital gain distributions in additional Fund
shares;
- receive dividends in cash and capital gain distributions in additional
Fund shares;
- receive both dividends and capital gain distributions in cash; or
- receive both dividends and capital gain distributions for investment into
another Heritage Mutual Fund.
If you select none of these options, the first option will apply. In any
case when you receive a dividend or other distribution in additional Fund
shares, your account will be credited with additional Fund shares valued at the
net asset value of the shares determined at the close of regular trading on the
Exchange on the day following the record date for the dividend or capital gain
distribution. Distribution options can be changed at any time by notifying the
Manager in writing.
Dividends paid by the Fund with respect to its A shares and C shares are
calculated in the same manner and at the same time and will be in the same
amount relative to the aggregate net asset value of the shares in each class,
except that dividends on C shares may be lower than dividends on A shares
primarily as a result of the higher distribution fee and class-specific expenses
applicable to C shares.
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of A shares and in connection with personal
services rendered to Class A shareholders and the maintenance of Class A
shareholder accounts, the Fund may pay the Distributor a service fee of up to
0.25% of the Trust's average daily net assets attributable to A shares. The Fund
may pay the Distributor a service fee of up to 0.25% and a distribution fee of
up to 0.10% of the Fund's average daily net assets attributable to A shares
purchased prior to April 3, 1995. This fee represents compensation for
maintenance of Class A accounts. This fee is computed daily and paid monthly.
20
<PAGE> 23
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of C shares and in connection with personal
services rendered to Class C shareholders and the maintenance of Class C
shareholder accounts, the Fund pays the Distributor a service fee of up to 0.25%
and a distribution fee of 0.35% of the Fund's average daily net assets
attributable to C shares. This fee is computed daily and paid monthly.
The above-referenced fees paid to the Distributor are made under
Distribution Plans adopted pursuant to Rule 12b-1 under the 1940 Act. These
Plans authorize the Distributor to spend such fees on any activities or expenses
intended to result in the sale of A shares and C shares, including compensation
(in addition to the sales load) paid to Representatives; advertising, salaries
and other expenses of the Distributor relating to selling or servicing efforts;
expenses of organizing and conducting sales seminars; printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; and preparation and distribution of advertising material and sales
literature and other sales promotion activities. The Distributor has entered
into dealer agreements with participating dealers and/or banks who also will
distribute shares of the Fund.
If either Plan is terminated, the obligation of the Fund to make payments
to the Distributor pursuant to the Plan will cease and the Fund will not be
required to make any payments past the date the Plan terminates.
TAXES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund is treated as a separate corporation for Federal income tax
purposes and intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code. In each taxable year that the
Fund does so, it (but not its shareholders) will be relieved of Federal income
tax on that part of its investment company taxable income (generally consisting
of net investment income and net short-term capital gains) and net capital gain
(the excess of net long-term capital gain over net short-term capital loss) that
is distributed to its shareholders. Dividends from the Fund's investment company
taxable income are taxable to its shareholders as ordinary income, to the extent
of the Fund's earnings and profits, whether received in cash or in additional
Fund shares. Distributions of the Fund's realized net capital gain, when
designated as such, are taxable to its shareholders as long-term capital gains,
whether received in cash or in additional Fund shares and regardless of the
length of time the shares have been held. No substantial portion of the
dividends paid by the Fund will be eligible for the dividends-received deduction
allowed to corporations.
Dividends and other distributions declared by the Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if they are paid by the Fund during the following January.
Shareholders receive Federal income tax information regarding dividends and
other distributions after the end of each year. The Fund is required to withhold
31% of all dividends, capital gain distributions and redemption proceeds payable
to individuals and certain other non-corporate shareholders who do not provide
the Fund with a correct taxpayer identification number. Withholding at that rate
also is required from dividends and capital gain distributions payable such
shareholders who otherwise are subject to backup withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders. See the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor; for example, a portion of
the dividends paid by the Fund represents income received on direct obligations
of the U.S. Government and, accordingly, is not subject to income taxation in
most states and localities. You are therefore urged to consult your tax adviser.
21
<PAGE> 24
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Each share of the Fund gives the shareholder one vote in matters submitted
to shareholders for a vote. All A shares and C shares of the Fund have equal
voting rights, except that, in matters affecting only a particular class or
series, only shares of that class or series are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the other Trustees or shareholders at
a special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Fund's outstanding shares.
22
<PAGE> 25
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than that contained in this
Prospectus in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust or the Distributor. This Prospectus does
not constitute an offering in any state in which such offering may not lawfully
be made.
<PAGE> 26
BULK RATE [HERITAGE INCOME TRUST(TM) LOGO]
U.S. POSTAGE
PAID INTERMEDIATE
MODERN MAILING GOVERNMENT
FUND
PROSPECTUS
February 1, 1996
Heritage Income Trust
Intermediate Government Fund
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------
Address Change Requested
Prospectus
INVESTMENT ADVISER/
SHAREHOLDER SERVICING AGENT
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
(800) 421-4184
DISTRIBUTOR
Raymond James & Associates, Inc.
P.O. Box 12749
St. Petersburg, FL 33733
(813) 573-3800
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
<PAGE> 27
[HERITAGE INCOME TRUST(TM) LOGO]
HIGH YIELD BOND FUND
Heritage Income Trust is a mutual fund offering shares in separate
investment portfolios. This Prospectus relates to the High Yield Bond Fund (the
"Fund"), which prior to February 1, 1996 was known as the Diversified Portfolio.
The Fund has an investment objective of high current income. The Fund seeks to
achieve this objective primarily by investing in a portfolio of lower- and
medium-rated high yield fixed income securities. These lower-rated securities
commonly are referred to as "junk bonds" or "high yield securities." Investments
in lower-rated securities entail a high degree of risk and are predominantly
speculative. Accordingly, these securities are designed for investors willing to
assume additional risk in return for the potential for above-average income. See
"Lower-Rated Securities -- Risk Factors." The Fund offers two classes of shares,
Class A shares (sold subject to a front-end sales load) and Class C shares (sold
subject to a contingent deferred sales load).
This Prospectus contains information that should be read before investing
in the Fund and should be kept for future reference. A Statement of Additional
Information relating to the Fund, dated February 1, 1996, has been filed with
the Securities and Exchange Commission and is incorporated by reference in this
Prospectus. A copy of the Statement of Additional Information is available free
of charge and shareholder inquiries can be made by writing to Heritage Asset
Management, Inc. or by calling (800) 421-4184.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[HERITAGE ASSET MANAGEMENT, INC. LOGO]
Registered Investment Advisor--SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
Prospectus Dated February 1, 1996
<PAGE> 28
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
GENERAL INFORMATION................................................ 1
About the Trust and the Fund............................. 1
Total Fund Expenses...................................... 1
Financial Highlights..................................... 3
Differences Between A Shares and C Shares................ 4
Investment Objective, Policies and Risk Factors.......... 4
Net Asset Value.......................................... 10
Performance Information.................................. 10
INVESTING IN THE FUND.............................................. 11
How to Buy Shares........................................ 11
Minimum Investment Required/Accounts With Low Balances... 12
Investment Programs...................................... 12
Alternative Purchase Plans............................... 14
What Class A Shares Will Cost............................ 15
What Class C Shares Will Cost............................ 17
How to Redeem Shares..................................... 18
Receiving Payment........................................ 19
Exchange Privilege....................................... 19
MANAGEMENT OF THE FUND............................................. 21
SHAREHOLDER AND ACCOUNT POLICIES................................... 22
Dividends and Other Distributions........................ 22
Distribution Plans....................................... 22
Taxes.................................................... 23
Shareholder Information.................................. 24
APPENDIX........................................................... A-1
</TABLE>
<PAGE> 29
GENERAL INFORMATION
ABOUT THE TRUST AND THE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Heritage Income Trust (the "Trust") was established as a Massachusetts
business trust under a Declaration of Trust dated August 4, 1989. The Trust is
an open-end diversified management investment company that currently offers
shares in two separate investment portfolios, the Fund and the Intermediate
Government Fund. The Fund is designed for individuals and fiduciaries whose
investment objective is high current income. The Fund offers two classes of
shares, Class A shares ("A shares") and Class C shares ("C shares"). The Fund
requires a minimum initial investment of $1,000, except for certain retirement
accounts and investment plans for which lower limits may apply. See "Investing
in the Fund." This prospectus relates exclusively to the Fund. To obtain a
prospectus for the Intermediate Government Fund, call (800) 421-4184.
TOTAL FUND EXPENSES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shown below are all Class A expenses incurred by the Fund during its 1995
fiscal year. Class A annual operating expenses are shown as an annualized
percentage of fiscal 1995 average daily net assets. Because C shares were not
offered for sale prior to April 3, 1995, Class C annual operating expenses are
based on estimated expenses. Shareholder transaction expenses for both classes
are expressed as a percentage of maximum public offering price, cost per
transaction, or as otherwise noted.
<TABLE>
<CAPTION>
CLASS A CLASS C
------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load "charge" on purchases................. 3.75% None
Contingent deferred sales load (as a percentage
of original purchase price or redemption (declining to 0% after
proceeds, as applicable)....................... None 1.00% the first year)
Wire redemption fee.............................. $5.00 $5.00
ANNUAL PORTFOLIO OPERATING EXPENSES
Management Fee (after fee waiver)................ 0.34% 0.34%
12b-1 Distribution Fee*.......................... 0.35% 0.80%
Other Expenses................................... 0.56% 0.56%
------- -------
Total Fund Operating Expenses (after fee
waiver)........................................ 1.25% 1.70%
====== ======
</TABLE>
* See Page 22 "Distribution Plans".
The Fund's manager, Heritage Asset Management, Inc. (the "Manager"),
voluntarily will waive its fees and, if necessary, reimburse the Fund to the
extent that Class A annual operating expenses exceed 1.25% and to the extent
that Class C annual operating expenses exceed 1.70% of the average daily net
assets attributable to that class for the fiscal year ending September 30, 1996.
Absent fee waivers, the management fee for each class would have been 0.60%, and
total Fund operating expenses would have been 1.51% for A shares and 1.96% for C
shares. To the extent that the Manager waives or reimburses its fees with
respect to one class, it will do so with respect to the other class on a
proportionate basis. Due to the imposition of Rule 12b-1
1
<PAGE> 30
distribution fees, it is possible that long-term shareholders of the Fund may
pay more in total sales charges than the economic equivalent of the maximum
front-end sales load permitted by the rules of the National Association of
Securities Dealers, Inc.
The impact of Fund operating expenses on earnings is illustrated in the
example below assuming a hypothetical $1,000 investment, a 5% annual rate of
return, and a redemption at the end of each period shown.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Operating Expenses -- A shares............... $ 50 $76 $ 104 $183
Total Operating Expenses -- C shares............... $ 27 $54 $ 92 $201
</TABLE>
The impact of Fund operating expenses on earnings is illustrated in the
example below assuming a hypothetical $1,000 investment, a 5% annual rate of
return, and no redemption at the end of each period shown.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Operating Expenses -- A shares............... $ 50 $76 $ 104 $183
Total Operating Expenses -- C shares............... $ 17 $54 $ 92 $201
</TABLE>
This is an illustration only and should not be considered a representation
of future expenses. Actual expenses and performance may be greater or less than
that shown above. The purpose of the above tables is to assist investors in
understanding the various costs and expenses that will be borne directly or
indirectly by shareholders. For a further discussion of these costs and
expenses, see "Management of the Fund" and "Distribution Plans."
2
<PAGE> 31
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table shows important financial information for an A share
and a C share of the Fund outstanding for the periods indicated, including net
investment income, net realized and unrealized gain on investments, and certain
other information. It has been derived from financial statements that have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is included in the Statement of Additional Information ("SAI"), which
may be obtained by calling the Fund at the telephone number on the front page of
this prospectus.
<TABLE>
<CAPTION>
CLASS A*
---------------------------------------------------------
CLASS
FOR THE YEARS ENDED SEPTEMBER 30, C*
--------------------------------------------------------- -------
1995 1994 1993 1992 1991 1990+ 1995++
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD.............. $ 9.65 $ 10.65 $ 10.82 $ 10.29 $ 9.29 $ 9.60 $ 9.62
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)............................ 0.72 0.69 0.81 0.83 0.87 0.43 0.31
Net realized and unrealized gain (loss) on 0.31 (0.84) 0.07 0.59 1.00 (0.34) 0.28
investments.......................................
------- ------- ------- ------- ------- ------- -------
Total from Investment Operations.................... 1.03 (0.15) 0.88 1.42 1.87 0.09 0.59
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................ (0.74) (0.71) (0.83) (0.85) (0.87) (0.36) (0.30)
Distributions from net realized gains............... -- (0.07) (0.22) (0.04) -- (0.04) --
Distributions in excess of net realized gains....... -- (0.07) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Distributions................................. (0.74) (0.85) (1.05) (0.89) (0.87) (0.40) (0.30)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF THE PERIOD.................... $ 9.94 $ 9.65 $ 10.65 $ 10.82 $ 10.29 $ 9.29 $ 9.91
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(D)................................... 11.23 (1.59) 8.57 14.35 21.19 0.91(c) 6.18(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net 1.25 1.25 1.19 0.96 1.31 1.35(b) 1.70(b)
assets(a).........................................
Net investment income to average daily net assets... 7.35 6.76 7.57 8.11 9.10 8.97(b) 6.67(b)
Portfolio turnover rate............................. 109 135 150 71 119 39(b) 109
Net assets, end of the period (millions)............ $ 30 $ 32 $ 42 $ 32 $ 15 $ 10 $ 0.6
</TABLE>
- ---------------
* Amounts and percentages contained in Financial Highlights are per share
information applicable to periods when the Fund was managed under the name
Heritage Income Trust -- Diversified Portfolio. The name and the investment
objective of the Fund were changed pursuant to a shareholder vote on January
24, 1996.
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (commencement of C shares) to September 30,
1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.03, $.02, $.02, $.05, $.07 and $.08 per A share,
respectively. The operating expense ratios including such items would be
1.51%, 1.42%, 1.43%, 1.60%, 2.17% and 3.0% (annualized) for A shares,
respectively. Excludes management fees waived by the Manager in the amount
of $.03 per C share. The operating expense ratio including such items would
be 1.96% (annualized) for C shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
3
<PAGE> 32
DIFFERENCES BETWEEN A SHARES AND C SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The primary difference between the A shares and the C shares lies in their
initial sales load and contingent deferred sales load ("CDSL") structures and in
their ongoing expenses, including asset-based sales charges in the form of
distribution fees. These differences are summarized below. In addition, each
class may bear differing amounts of certain class-specific expenses, such as
transfer agent fees, Securities and Exchange Commission ("SEC") registration
fees, state registration fees, and expenses of administrative personnel and
services. Each class has distinct advantages and disadvantages for different
investors, and investors may choose the class that best suits their
circumstances and objectives. See "How to Buy Shares," "Alternative Purchase
Plans," "What Class A Shares Will Cost" and "What Class C Shares Will Cost."
<TABLE>
<CAPTION>
ANNUAL RULE 12B-1 FEES AS
A % OF
SALES LOAD AVERAGE DAILY NET ASSETS OTHER INFORMATION
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
A SHARES Maximum initial sales load Service fee of 0.25%; Initial sales load waived
of 3.75% distribution fee of up to or reduced for certain
0.10% purchases
C SHARES Maximum CDSL of 1% of Service fee of 0.25%; CDSL wavied for certain
redemption proceeds; distribution fee of 0.55% types of redemptions
declining to zero after 1
year
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The investment objective of the Fund is high current income. The Fund seeks
to achieve this objective primarily by investing in a portfolio of lower- and
medium-rated high yield fixed income securities. These lower-rated securities
commonly are referred to as "junk bonds" or "high yield securities." Investments
in lower-rated securities entail a high degree of risk and are predominantly
speculative. Accordingly, an investment in the Fund is not appropriate for all
investors. Fund shares will fluctuate in value as a result of value changes in
portfolio investments. There can be no assurance that the Fund's investment
objective will be achieved.
In seeking its objective the Fund will invest primarily in securities rated
Baa or lower by Moody's Investors Service, Inc. ("Moody's") or BBB or lower by
Standard & Poor's Ratings Services ("S&P") or in securities determined by
Salomon Brothers Asset Management Inc, the Fund's investment Subadviser (the
"Subadviser"), to be of comparable quality. These lower- and medium-rated, and
comparable unrated securities offer yields that generally are superior to the
yields offered by higher-rated securities. However, such securities also involve
significantly greater risks, including price volatility and risk of default in
the payment of principal and interest. The Subadviser seeks to minimize the
risks of investing in these securities through its careful analysis of the
credit status of these issuers. For further discussion of the risks associated
with investing in lower-rated securities, see "Lower-Rated Securities -- Risk
Factors" below.
Certain of the debt securities purchased by the Fund may be rated as low as
C by Moody's or D by S&P or may be considered comparable to securities having
these ratings. These lower-rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
and identifiable vulnerability to default, to be unlikely to have the capacity
to pay interest and repay principal when due in the event of adverse business,
financial or economic conditions, and/or to be in default or not current in the
payment of interest or principal. Therefore, the Fund will not invest in these
lower-rated
4
<PAGE> 33
securities unless the Subadviser believes that the difference in yield on these
securities is sufficient to justify the higher risk.
The Fund may invest up to 10% of its total assets in foreign fixed income
securities. The Fund also may invest in zero coupon and pay-in-kind securities,
fixed and floating rate loans, high yield commercial paper, repurchase
agreements and reverse repurchase agreements. The Fund may invest up to 20% of
its assets in common stock, convertible securities, warrants, preferred stock or
other equity securities when consistent with the Fund's objectives. The Fund
generally will hold such equity investments as a result of purchases of unit
offerings of fixed income securities which include such securities or in
connection with an actual or proposed conversion or exchange of fixed income
securities, but may also purchase equity securities not associated with fixed
income securities when, in the opinion of the Subadviser, such purchase is
appropriate. The Fund may loan portfolio securities, borrow money (as discussed
in the SAI), and purchase securities on a firm commitment or when-issued basis.
Up to 10% of the Fund's total assets may be invested in illiquid securities. In
times when, in its judgment, conditions in the securities markets would make
pursuing the Fund's basic investment strategy inconsistent with the best
interests of the Fund's shareholders, the Subadviser may invest up to 100% of
its assets in money market instruments, U.S. Government securities, and long-
and short-term debt instruments that are rated A or higher by S&P or Moody's.
See the Appendix for a description of corporate bond ratings, and the Appendix
to the SAI for commercial paper ratings, by S&P and Moody's.
The Fund's investment objective is fundamental and may not be changed
without the vote of a majority of the outstanding voting securities of the Fund,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
All policies of the Fund described in this prospectus may be changed by the
Trust's Board of Trustees (the "Board of Trustees" or the "Board") without
shareholder approval. The following is a discussion of the types of investments
in which the Fund may invest, including the risks of investing in these
securities. For a further discussion of the Fund's investment policies and
risks, see "Investment Objective and Policies of the Fund" in the SAI.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or
dividends paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally have higher yields than common stocks,
but lower yields than comparable non-convertible securities, are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics, and provide the potential for capital appreciation if the
market price of the underlying common stock increases.
DEBT OBLIGATIONS AND FUND MATURITY. The Subadviser has discretion to
select the range of maturities of the debt obligations in which the Fund will
invest. The Subadviser anticipates that, under normal market conditions, the
Fund will have an average weighted portfolio maturity of 7 to 15 years. However,
this average weighted portfolio maturity may vary substantially from time to
time depending on economic and market conditions. The market value of these
securities will be affected by changes in interest rates. There normally is an
inverse relationship between the market value of such securities and actual
changes in interest rates. Thus, a decline in interest rates generally produces
an increase in market value, while an increase in rates generally produces a
decrease in market value. Moreover, the longer the remaining maturity of a
security, the greater will be the effect of interest rate changes on the market
value of such a security. In addition, changes in the ability of an issuer to
make payments of interest and principal and in the market's perception of an
issuer's creditworthiness also will affect the market value of the debt
securities of that issuer. Differing yields on fixed
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<PAGE> 34
income securities of the same maturity are a function of several factors,
including the relative financial strength of the issuers. Higher yields
generally are available from lower-rated securities.
FIRM COMMITMENT AND WHEN-ISSUED SECURITIES. The Fund may purchase
securities on a firm commitment basis, including when-issued securities.
Securities purchased on a firm commitment basis are purchased for delivery
beyond the normal settlement date at a stated price and yield. No income accrues
to the purchaser of a security on a firm commitment basis prior to delivery.
Such securities are recorded as an asset and are subject to changes in value
based upon changes in the general level of interest rates. Purchasing a security
on a firm commitment basis can involve a risk that the market price at the time
of delivery may be lower than the agreed upon purchase price, in which case
there could be an unrealized loss at the time of delivery. The Fund only will
make commitments to purchase securities on a firm commitment basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. The Fund will establish a segregated
account in which it will maintain liquid assets in an amount at least equal in
value to the Fund's commitments to purchase securities on a firm commitment
basis. If the value of these assets declines, the Fund will place additional
liquid assets in the account on a daily basis so that the value of the assets in
the account is equal to the amount of such commitments.
FIXED AND FLOATING RATE LOANS. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a corporate
borrower or a foreign sovereign entity and one or more financial institutions
("Lenders"). The Fund may invest in such loans in the form of participations in
Loans ("Participations") and assignments of all or a portion of Loans from third
parties ("Assignments"). The Fund considers these investments to be investments
in debt securities for purposes of this prospectus. The Fund, in pursuing its
investment policies, may acquire Participations and Assignments that are high
yield, nonconvertible corporate debt securities or short duration debt
securities. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Fund may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the borrower is determined by
the investment manager to be creditworthy. When the Fund purchases Assignments
from Lenders, the Fund will acquire direct rights against the borrower on the
Loan, except that under certain circumstances such rights may be more limited
than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower. Thus, the Fund will treat investments
in Participations and Assignments as illiquid for purposes of its limitation on
investments in illiquid securities. The Fund may revise this policy in the
future.
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<PAGE> 35
FOREIGN FIXED INCOME SECURITIES. The Fund may invest up to 10% of its
total assets in foreign fixed income securities (including emerging market
securities) all or a portion of which may be non-U.S. dollar denominated and
which include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt obligations
of supranational entities; (c) debt obligations of the U.S. Government issued in
non-dollar securities; (d) debt obligations and other fixed income securities of
foreign corporate issuers (both dollar and non-dollar denominated); and (e) U.S.
corporate issuers (both Eurodollar and non-dollar denominated). There is no
minimum rating criteria for the Fund's investments in such securities. Investing
in the securities of foreign issuers involves special considerations that are
not typically associated with investing in the securities of U.S. issuers.
Investments in securities of foreign issuers may involve risks arising from
restrictions on foreign investment and repatriation of capital, from differences
between U.S. and foreign securities markets, including less volume, much greater
price volatility in and relative illiquidity of foreign securities markets,
different trading and settlement practices and less governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates. Other
investment risks include the possible imposition of foreign withholding taxes on
certain amounts of the Fund's income, the possible seizure or nationalization of
foreign assets and the possible establishment of exchange controls,
expropriation, confiscatory taxation, other foreign governmental laws or
restrictions that might affect adversely payments due on securities held by the
Fund, the lack of extensive operating experience of eligible foreign
subcustodians and legal limitations on the ability of the Fund to recover assets
held in custody by a foreign subcustodian in the event of the subcustodian's
bankruptcy. In addition, there may be less publicly-available information about
a foreign issuer than about a U.S. issuer, and foreign issuers may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements of U.S. issuers. Finally, in the event of a default in any such
foreign obligations, it may be more difficult for the Fund to obtain or enforce
a judgment against the issuers of such obligations.
FUTURES AND OPTIONS. Although the Subadviser has no current intention to
do so, the Fund may engage in transactions in options and futures contracts in
an effort to adjust the risk/return characteristics of its investment portfolio.
The Fund also may, in certain circumstances, purchase or sell futures contracts
or options as a substitute for the purchase or sale of securities. The Fund may
purchase and sell put and call options on debt securities and indices of debt
securities, purchase and sell futures contracts on debt securities and indices
of debt securities, and purchase and sell options on such futures contracts. For
example, if the Subadviser anticipates that interest rates will rise, the Fund
also may sell a debt futures contract or a call option thereon or purchase a put
option on a futures contract as a hedge against a decrease in the value of the
Fund's securities. If the Subadviser anticipates that interest rates will
decline, the Fund may purchase a debt futures contract or a call option thereon
or sell a put option on a futures contract to protect against an increase in the
price of securities the Fund intends to purchase.
LOWER-RATED SECURITIES -- RISK FACTORS. Lower-rated securities are subject
to certain risks that may not be present with investments in higher-grade
securities. Investors should consider carefully their ability to assume the
risks associated with lower-rated securities before investing in the Fund.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The lower rating of
certain high yielding corporate income securities reflects a greater possibility
that the financial condition of the issuer or adverse changes in general
economic conditions may impair the ability of the issuer to pay income and
principal. Changes by rating agencies in their ratings of a fixed income
security also may affect the value of these investments.
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<PAGE> 36
However, allocating investments in the Fund among securities of
different issuers should reduce the risks of owning any such securities
separately.
The prices of these high yielding securities tend to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. During economic
downturns or periods of rising interest rates, highly leveraged issuers may
experience financial stress that adversely affects their ability to service
principal and interest payment obligations, to meet projected business goals or
to obtain additional financing, and the markets for their securities may be more
volatile. If an issuer defaults, the Fund may incur additional expenses to seek
recovery. Furthermore, the market value of zero coupon and pay-in-kind
securities is affected more greatly by interest rate changes and is more
volatile than that of similar securities that pay interest periodically in cash.
Accrued discount and "interest" on zero coupon and pay-in-kind securities are
reported as income by the Fund even though no cash actually is received by the
Fund until the securities' maturity or payment date.
Frequently, the higher yields of high-yielding securities may not
reflect the value of the income stream that holders of such securities may
expect, but rather the risk that such securities may lose a substantial portion
of their value as a result of their issuer's financial restructuring or default.
Additionally, an economic downturn or an increase in interest rates could have a
negative effect on the high yield securities market and on the market value of
the high yield securities held by the Fund, as well as on the ability of the
issuers of such securities to repay principal and interest on their borrowings.
SECURITIES RATINGS. Securities ratings are based largely on the
issuer's historical financial information and the rating agencies' investment
analysis at the time of rating. Credit ratings evaluate the safety of principal
and interest payments, not market value risk of high yield bonds. Also, credit
rating agencies may fail to timely change the credit ratings to reflect
subsequent events. Consequently, the rating assigned to any particular security
is not necessarily a reflection of the issuer's current financial condition,
which may be better or worse than the rating would indicate. Although the
Subadviser considers security ratings when making investment decisions, it
primarily relies upon its own investment analysis. This analysis may include
consideration of the issuer's experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules, and its
responsiveness to changes in business conditions and interest rates. It also
considers relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects. Because of the greater number
of investment considerations involved in investing in lower-rated securities,
the achievement of the Fund's objective depends more on the Subadviser's
analytical abilities than would be the case if it were investing only in
securities in the higher rating categories. The Fund, at the discretion of the
Subadviser, may retain a security that has been downgraded below the initial
investment criteria.
LIQUIDITY AND VALUATION. High yielding securities may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, the Fund would have to replace the security with
a lower yielding security. To the extent that there is no established retail
secondary market, there may be thin trading of high yielding securities. This
may lessen the Fund's ability to accurately value these securities and its
ability to dispose of these securities. Additionally, adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yielding securities, especially in a thinly
traded market. Certain high yielding securities may involve special registration
responsibilities, liabilities and costs and liquidity and valuation
difficulties; thus, the responsibilities of the Board of Trustees to value high
yield securities in the portfolio becomes more difficult with judgment playing a
greater role.
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The table below shows the percentages of the Fund's assets invested
during fiscal 1995 in securities assigned to the various rating categories by
Moody's and S&P and in unrated securities determined by Eagle Asset Management,
Inc., which at that time, was the Fund's investment subadviser, to be of
comparable quality. These figures are dollar-weighted averages of month-end
portfolio holdings for the fiscal year ended September 30, 1995, presented as a
percentage of total net assets. As of February 1, 1996, the Fund's investment
strategy was amended to allow for up to 100% of its assets to be invested in
high yield lower-rated securities. Therefore, these historical percentages are
not indicative of the quality of current or future portfolio holdings, which
will vary.
<TABLE>
<CAPTION>
COMPARABLE QUALITY OF
RATED SECURITIES UNRATED SECURITIES
AS A PERCENTAGE OF THE AS A PERCENTAGE OF THE
S&P/MOODY'S RATINGS FUND'S ASSETS FUND'S ASSETS
-------------------------------------- ---------------------- ----------------------
<S> <C> <C>
U.S. Government Securities............ 48.36 --
Repurchase Agreements involving U.S.
Government Securities............... 6.09 --
"BB"/"Ba"............................. 3.87 --
"B"/"B"............................... 36.37 3.13
"CCC"/"Caa"........................... 2.01 --
------ -----
96.7% 3.13%
=============== ===============
</TABLE>
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without
regard to the length of time the securities have been held. A high rate of
portfolio turnover generally leads to higher transaction costs and may result in
a greater number of taxable transactions. The Fund's portfolio turnover rate for
the fiscal years ended September 30, 1994 and 1995 was 135% and 109%,
respectively. See "Brokerage Practices" in the SAI.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities and simultaneously commits to resell the securities to
the original seller (a member bank of the Federal Reserve System or a securities
dealer who is a member of a national securities exchange or is a market maker in
U.S. Government securities) at an agreed upon date and price reflecting a market
rate of interest unrelated to the coupon rate or the maturity of the purchased
securities. Although repurchase agreements carry certain risks not associated
with direct investment in securities, including possible decline in the market
value of the underlying securities and delays and costs to the Fund if the other
party to the repurchase agreement becomes bankrupt, the Fund intends to enter
into repurchase agreements only with banks and dealers in transactions believed
by the Subadviser to present minimal credit risks in accordance with guidelines
established by the Board of Trustees. The Fund may invest up to 25% of its total
assets in repurchase agreements.
WARRANTS. The Fund may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry the right to dividends or voting rights with respect to
their underlying securities, and they do not represent any rights in assets of
the issuer. An investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund may invest in zero coupon
securities and pay-in-kind bonds, which involve special risk considerations.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that
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<PAGE> 38
investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. The Fund
also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities.
Zero coupon securities and pay-in-kind bonds tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates than ordinary
interest-paying debt securities with similar maturities. Zero coupon securities
and pay-in-kind bonds may be issued by a wide variety of corporate and
governmental issuers. Although zero coupon securities and pay-in-kind bonds
generally are not traded on a national securities exchange, such securities are
widely traded by brokers and dealers and, to such extent, will not be considered
illiquid for the purposes of the Fund's 15% limitation on investments in
illiquid securities.
Current Federal income tax law requires the holder of a zero coupon
security, certain pay-in-kind bonds and certain other securities acquired at a
discount (such as Brady Bonds) to accrue income with respect to these securities
prior to the receipt of cash payments. Accordingly, to avoid liability for
Federal income and excise taxes, the Fund may be required to distribute income
accrued with respect to these securities and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements.
NET ASSET VALUE
- --------------------------------------------------------------------------------
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The net asset values of A shares and C shares are calculated by dividing
the value of the total assets of the Fund attributable to that class, less
liabilities attributable to that class, by the number of shares of that class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange ("Exchange") each day it is open. Fund securities and other
investments are stated at market value based on the last sales price as reported
by the principal securities exchange on which the securities are traded. If no
sale is reported, market value is based on the most recent quoted bid price. In
the absence of a readily available market quote, or if the Manager or Subadviser
has reason to question the validity of market quotations they receive,
securities and other assets are valued using such methods as the Board of
Trustees believes would reflect fair value. Short-term investments that will
mature in 60 days or less are valued at amortized cost, which approximates
market value. Securities that are quoted in a foreign currency will be valued
daily in U.S. dollars at the foreign currency exchange rate prevailing at the
time the Fund calculates its net asset value per share. The per share net asset
value of A shares and C shares may differ as a result of the different daily
expense accruals applicable to each class. For more information on the
calculation of net asset value, see "Net Asset Value" in the SAI.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
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Total return data of the A shares and C shares from time to time may be
included in advertisements about the Fund. Performance information is computed
separately for A shares and C shares in accordance with the methods described
below. Because C shares bear the expense of a higher distribution fee
attributable to the deferred sales load alternative, the performance of C shares
likely will be lower than that of A shares.
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<PAGE> 39
Total return with respect to a class for the one-, five- and ten-year
periods or, if such periods have not yet elapsed, the period since the
establishment of that class, through the most recent calendar quarter represents
that average annual compounded rate of return on an investment of $1,000 in that
class at the public offering price (in the case of A shares, giving effect to
the maximum initial sales load of 3.75% and, in the case of C shares, giving
effect to the deduction of any CDSL that would be payable). In addition, the
Fund also may advertise its total return in the same manner, but without taking
into account, the initial sales load or CDSL. The Fund also may advertise total
return calculated without annualizing the return, and total return may be
presented for other periods. By not annualizing the returns, the total return
calculated in this manner simply will reflect the increase in net asset value
per A share and C share over a period of time, adjusted for dividends and other
distributions. A share and C share performance may be compared with various
indices.
The Fund also may from time to time advertise the yield of A shares and C
shares and compare these yields to those of other mutual funds with similar
investment objectives. The yield of each class of the Fund will be computed by
dividing the net investment income per share earned during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period. Yield accounting methods differ from the methods used for other
accounting purposes; accordingly, the yield for a class may not equal the
dividend income actually paid to shareholders or the net investment income per
share reported in the Fund's financial statements.
All data is based on the Fund's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Fund's
investment portfolio and the Fund's operating expenses. Investment performance
also often reflects the risks associated with the Fund's investment objective
and policies. These factors should be considered when comparing the Fund's
investment results to those of other mutual funds and other investment vehicles.
Additional performance information is contained in the Fund's annual report,
which may be obtained, without charge, by contacting the Fund at (800) 421-4184.
For more information on investment performance, see the SAI.
INVESTING IN THE FUND
HOW TO BUY SHARES
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- --------------------------------------------------------------------------------
Shares of the Fund continuously are offered through the Fund's principal
underwriter, Raymond James & Associates, Inc. (the "Distributor"), and through
other participating dealers or banks that have dealer agreements with the
Distributor. The Distributor receives commissions consisting of that portion of
the sales load remaining after the dealer concession is paid to participating
dealers or banks. Such dealers may be deemed to be underwriters pursuant to the
Securities Act of 1933, as amended.
Shares of the Fund may be purchased through a registered representative of
the Distributor, a participating dealer or a participating bank
("Representative") by placing an order for Fund shares with your Representative,
completing and signing the Account Application found in this prospectus, and
mailing it, along with your payment, within three business days.
The Fund offers and sells two classes of shares, A shares and C shares. A
shares may be purchased at a price equal to their net asset value per share next
determined after receipt of an order, plus a sales load imposed at the time of
purchase. C shares may be purchased at a price equal to their net asset value
per share
11
<PAGE> 40
next determined after receipt of an order. A CDSL of 1% is imposed on C shares
if you redeem those shares within one year of purchase. When you place an order
for Fund shares, you must specify which class of shares you wish to purchase.
See "Alternative Purchase Plans."
All purchase orders received by the Distributor prior to the close of
regular trading on the Exchange -- generally 4:00 p.m., Eastern time -- will be
executed at that day's offering price. Purchase orders received by your
Representative prior to the close of regular trading on the Exchange and
transmitted to the Distributor before 5:00 p.m. Eastern time on that day also
will receive that day's offering price. Otherwise, all purchase orders accepted
after the offering price is determined will be executed at the offering price
determined as of the close of regular trading on the Exchange on the next
trading day. See "What Class A Shares Will Cost" and "What Class C Shares Will
Cost."
You also may purchase shares of the fund directly by completing and signing
the Account Application found in this prospectus and mailing it, along with your
payment, to Heritage Income Trust -- High Yield Bond Fund, c/o Shareholder
Services, Heritage Asset Management, Inc., P.O. Box 33022, St. Petersburg, FL
33733.
Shares may be purchased with Federal funds (a commercial bank's deposit
with the Federal Reserve Bank that can be transferred to another member bank on
the same day) sent by Federal Reserve or bank wire to State Street Bank and
Trust Company, Boston, Massachusetts, ABA #011-000-028, Account #3196-769-8.
Wire instructions should include (1) the name of the Fund, (2) the class of
shares to be purchased, (3) your account number assigned by the Fund, and (4)
your name. To open a new account with Federal funds or by wire, you must contact
the Manager or your Representative to obtain a Heritage mutual fund account
number. Commercial banks may elect to charge a fee for wiring funds to State
Street Bank and Trust Company. For more information on "How to Buy Shares," see
"Investing in the Funds" in the SAI.
MINIMUM INVESTMENT REQUIRED/ACCOUNTS WITH LOW BALANCES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Except as provided under "Investment Programs" the minimum initial
investment in the Fund is $1,000 and a minimum account balance of $500 must be
maintained. These minimum requirements may be waived at the discretion of the
Manager. In addition, initial investments in Individual Retirement Accounts
("IRAs") may be reduced or waived under certain circumstances. Contact the
Manager or your Representative for further information.
Due to the high cost of maintaining accounts with low balances, it is
currently the Fund's policy to redeem Fund shares in any account if the account
balance falls below the required minimum value of $500, except for retirement
accounts. The shareholder will be given 30 days' notice to bring the account
balance to the minimum required or the Fund may redeem shares in the account and
pay the proceeds to the shareholder. The Fund does not apply this minimum
account balance requirement to accounts that fall below this minimum due to
market fluctuation.
INVESTMENT PROGRAMS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A variety of automated investment options are available for the purchase of
Fund shares. These plans provide for automatic monthly investments of $50 or
more through various methods described below. You may change the amount to be
invested automatically or may discontinue this service at any time without
penalty. If you discontinue this service before reaching the required account
minimum, the account must be
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<PAGE> 41
brought up to the minimum in order to remain open. Shareholders desiring this
service should complete the appropriate application available from the Manager.
You will receive a periodic confirmation of all activity for your account.
AUTOMATIC INVESTMENT OPTIONS:
- ---------------------------------
1. Bank Draft Investing -- You may authorize the Manager to process a monthly
draft from your personal checking account for investment into the Fund. The
draft is returned by your bank the same way a canceled check is returned.
2. Payroll Direct Deposit -- If your employer participates in a direct deposit
program (also known as ACH Deposits) you may have all or a portion of your
payroll directed to the Fund. This will generate a purchase transaction each
time you are paid by your employer. Your employer will report to you the
amount sent from each paycheck.
3. Government Direct Deposit -- If you receive a qualifying periodic payment
from the U.S. Government or other agency that participates in Direct Deposit,
you may have all or a part of each check directed to purchase shares of the
Fund. The U.S. Government or agency will report to you all payments made.
4. Automatic Exchange -- If you own shares of another Heritage mutual fund
advised or administered by the Manager ("Heritage Mutual Fund"), you may
elect to have a preset amount redeemed from that fund and exchanged into the
corresponding class of shares of the Fund. You will receive a statement from
the other Heritage Mutual Fund confirming the redemption.
You may change or terminate any of the above options at any time.
RETIREMENT PLANS:
- -------------------
Shares of the Fund may be purchased as an investment for Heritage IRA
plans. In addition, shares may be purchased as an investment for self-directed
IRAs, defined contribution plans, Simplified Employee Pension Plans ("SEPs") and
other qualified retirement plans.
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage IRA.
You may make limited contributions to a Heritage IRA through the purchase of
shares of the Fund and/or other Heritage Mutual Funds. The Internal Revenue Code
of 1986, as amended (the "Code") limits the deductibility of IRA contributions
to taxpayers who are not active participants (and whose spouses are not active
participants) in employer-provided retirement plans or who have adjusted gross
income below certain levels. Nevertheless, the Code permits other individuals to
make nondeductible IRA contributions up to $2,000 per year (or $2,250, if such
contributions also are made for a nonworking spouse and a joint return is
filed). A Heritage IRA also may be used for certain "rollovers" from qualified
benefit plans and from Section 403(b) annuity plans. For more detailed
information on the Heritage IRA, please contact the Manager.
Fund shares may be used as the investment medium for qualified plans
(defined benefit or defined contribution plans established by corporations,
partnerships or sole proprietorships). Contributions to qualified plans may be
made (within certain limits) on behalf of the employees, including
owner-employees, of the sponsoring entity.
OTHER RETIREMENT PLANS. Multiple participant payroll deduction retirement
plans also may purchase A shares of any Heritage Mutual Fund at a reduced sales
load on a monthly basis during the 13-month period
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<PAGE> 42
following such a plan's initial purchase. The sales load applicable to such
initial purchase of A shares will be that normally applicable under the schedule
of sales loads set forth in this prospectus to an investment 13 times larger
than such initial purchase. The sales load applicable to each succeeding monthly
purchase of A shares will be that normally applicable, under such schedule, to
an investment equal to the sum of (1) the total purchase previously made during
the 13-month period and (2) the current month's purchase multiplied by the
number of months (including the current month) remaining in the 13-month period.
Sales loads previously paid during such period will not be adjusted
retroactively on the basis of later purchases. Multiple participant payroll
deduction retirement plans may purchase C shares at any time.
ALTERNATIVE PURCHASE PLANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The alternative purchase plans offered by the Fund enable you to choose the
class of shares that you believe will be most beneficial given the amount of
your intended purchase, the length of time you expect to hold the shares and
other circumstances. You should consider whether, during the anticipated length
of your intended investment in the Fund, the accumulated continuing distribution
and service fees plus the CDSL on C shares would exceed the initial sales load
plus accumulated service fees on A shares purchased at the same time. Another
factor to consider is whether the potentially higher yield of A shares due to
lower ongoing charges will offset the initial sales load paid on such shares.
Representatives may receive different compensation for sales of A shares than
sales of C shares.
If you purchase sufficient shares to qualify for a reduced sales load, you
may prefer to purchase A shares because similar reductions are not available on
the C shares. For example, if you intend to invest more than $1,000,000 in
shares of the Fund, you should purchase A shares. Moreover, all A shares are
subject to a lower 12b-1 fee and, accordingly, are expected to pay
correspondingly higher dividends on a per share basis. If your purchase will not
qualify for a reduced sales load, you still may wish to purchase A shares if you
expect to hold your shares for an extended period of time because, depending on
the number of years you hold the investment, the continuing distribution and
service fees on C shares would eventually exceed the initial sales load plus the
continuing service fee on A shares during the life of your investment. However,
because initial sales loads are deducted at the time of purchase, not all of the
purchase payment for A shares is invested initially.
You might determine that it would be more advantageous to purchase C shares
in order to have all of your purchase payment invested initially. However, your
investment would remain subject to continuing distribution and service fees and,
for a one year period, be subject to a CDSL. For example, based on current fees
and expenses for the Fund and the maximum A shares sales load, you would have to
hold A shares approximately seven years before the accumulated distribution and
service fees on the C shares would exceed the initial sales load plus the
accumulated service fees on the A shares.
14
<PAGE> 43
WHAT CLASS A SHARES WILL COST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A shares are sold on each day on which the Exchange is open. A shares
are sold at their next determined net asset value plus a sales load as described
below.
<TABLE>
<CAPTION>
SALES LOAD AS A PERCENTAGE OF
------------------------------------
NET AMOUNT DEALER CONCESSION
INVESTED AS A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE (NET ASSET VALUE) OFFERING PRICE(1)
- ------------------------------------ -------------- ----------------- --------------------
<S> <C> <C> <C>
Less than $25,000................... 3.75% 3.90% 3.25%
$25,000 to $49,999.................. 3.25% 3.36% 2.75%
$50,000 to $99,999.................. 2.75% 2.83% 2.25%
$100,000 to $249,999................ 2.25% 2.30% 1.75%
$250,000 to $499,999................ 1.50% 1.52% 1.00%
$500,000 to $999,999................ 0.75% 0.76% 0.25%
$1,000,000 and over(2).............. 0.00% 0.00% 0.00%
</TABLE>
(1) During certain periods, the Distributor may pay 100% of the sales load to
participating dealers. Otherwise, it will pay the Dealer Concession shown
above.
(2) The Manager may pay up to 0.50% of the purchase amount to the Distributor
for purchases exceeding $1,000,000. The Manager reserves the right to
reclaim this payment subject to certain holding period requirements.
Class A shares may be sold at net asset value without any sales load to the
Manager and Subadviser; current and retired officers and Trustees of the Trust;
directors, officers, and full-time employees of the Manager, Subadviser of any
Heritage Mutual Fund, Distributor, and their affiliates; registered
representatives of broker-dealers that are parties to dealer agreements with the
Distributor (or financial institutions that have arrangements with such
broker-dealers); directors, officers and full time employees of banks that are
party to agency agreements with the Distributor; and all such persons' immediate
relatives, and their beneficial accounts. In addition, the American Psychiatric
Association (the "APA Group") has entered into an agreement with the Distributor
that allows its members to purchase A shares at a sales load equal to two-thirds
of the percentages in the above table. The Dealer Concession also will be
adjusted in a like manner. Members of the APA Group also are eligible to
purchase A shares at net asset value in amounts equal to the value of shares
redeemed from other mutual funds that were purchased under reduced sales load
programs available to their organization. A shares also may be purchased without
sales loads by investors who participate in certain broker-dealer wrap fee
investment programs.
Class A shares also may be purchased at net asset value by trust companies
and bank trust departments for funds over which they exercise exclusive
discretionary authority and are held in a fiduciary, agency, advisory, custodial
or similar capacity. Such purchases are subject to minimum requirements with
respect to amount of purchase. Currently, the minimum purchase required is
$1,000,000, which may be invested over a period of 13 months. The minimum may be
changed from time to time by the Distributor. The minimum may be aggregated
between A shares of the Fund and A shares of any other Heritage Mutual Fund that
would be subject to a sales load. Cities, counties, states or instrumentalities,
and their departments, authorities or agencies are able to purchase A shares of
the Fund at net asset value as long as certain conditions are met.
HERITAGE NET ASSET VALUE ("NAV") TRANSFER PROGRAM
Class A shares of the Fund may be sold at net asset value without any sales
load under the Manager's NAV Transfer Program. To qualify for the NAV Transfer
Program, you must provide adequate proof that you recently redeemed shares from
a load or no-load mutual fund other than a Heritage Mutual Fund or any
15
<PAGE> 44
money market fund. To provide adequate proof you must complete a qualification
form and provide a statement showing the value liquidated from the other mutual
fund within time parameters set by the Manager. In addition, shares of the other
fund must have been liquidated no more than 90 days prior to the purchase of a
Heritage mutual fund.
COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
You may qualify for the sales load reductions indicated in the above sales
load schedule by combining purchases of A shares into a single "purchase" if the
resulting "purchase" totals at least $25,000. The term "purchase" refers to a
single purchase by an individual, or to concurrent purchases that, in the
aggregate, are at least equal to the prescribed amounts, by an individual, his
spouse and their children under the age of 21 years, purchasing A shares for his
or their own account; a single purchase by a trustee or other fiduciary
purchasing A shares for a single trust, estate, or single fiduciary account
although more than one beneficiary is involved; or a single purchase for the
employee benefit plans of a single employer. A "purchase" also may include A
shares purchased at the same time through a single selected dealer of any other
Heritage Mutual Fund that distributes its shares subject to a sales load. To
qualify for the Combined Purchase Privilege on a purchase through a selected
dealer, the investor or selected dealer must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
STATEMENT OF INTENTION
You also may obtain the reduced sales loads shown under "What Class A
Shares Will Cost" by means of a written Statement of Intention, which expresses
your intention to invest not less than $25,000 within a period of 13 months in A
shares of the Fund or A shares of any other Heritage Mutual Fund subject to a
sales load ("Statement of Intention").
Investors qualifying for the Combined Purchase Privilege described above
may purchase A shares of the Heritage Mutual Funds under a single Statement of
Intention. For example, if, at the time an investor signs a Statement of
Intention to invest at least $25,000 in A shares of the Fund, the investor and
the investor's spouse each purchase A shares worth $5,000 (for a total of
$10,000), then it will be necessary only to invest a total of $15,000 during the
following 13 months in A shares or any other Heritage Mutual Fund subject to a
sales load to qualify for the reduced sales loads on the total amount being
invested.
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Statement of Intention is 5% of such amount. If you would like to enter into a
Statement of Intention in conjunction with your initial investment in A shares
of the Fund, please complete the appropriate portion of the Account Application
at the back of this prospectus. Current Fund shareholders desiring to do so can
obtain a Statement of Intention form by contacting the Manager or the
Distributor at the address or telephone number listed on the cover of this
prospectus, or from their Representative.
REINSTATEMENT PRIVILEGE
A shareholder who has redeemed any or all of his A shares of the Fund may
reinvest all or any portion of the redemption proceeds in A shares at net asset
value without any sales load, provided that such reinvestment is made within 90
calendar days after the redemption date. A shareholder who has redeemed any or
all of his
16
<PAGE> 45
C shares of the Fund and has paid a CDSL on those shares or has held those
shares long enough so that the CDSL no longer applies, may reinvest all or any
portion of the redemption proceeds in C shares of the Fund at net asset value
without paying a CDSL on future redemptions of those shares, provided that such
reinvestment is made within 90 calendar days after the redemption date. A
reinstatement pursuant to this privilege will not cancel the redemption
transaction; therefore, (1) any gain realized on the transaction will be
recognized for Federal income tax purposes, while (2) any loss realized will not
be recognized to the extent the proceeds are reinvested in shares of the Fund.
See "Taxes." The reinstatement privilege may be utilized by a shareholder only
once, irrespective of the number of shares redeemed, except that the privilege
may be utilized without limitation in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Fund to his defined
contribution plan, IRA or SEP. Investors must notify the Fund if they intend to
exercise the reinstatement privilege.
For more information on "What Class A Shares Will Cost" and a further
explanation of instances in which the sales load will be waived or reduced, see
"Investing in the Funds" in the SAI.
WHAT CLASS C SHARES WILL COST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A CDSL of 1% is imposed on C shares if, within one year of purchase, you
redeem an amount that causes the current value of your account to fall below the
total dollar amount of C shares purchased subject to the CDSL. The CDSL will not
be imposed on the redemption of C shares acquired as dividends or other
distributions, or on any increase in the net asset value of the redeemed C
shares above the original purchase price. Thus, the CDSL will be imposed on the
lower of net asset value or purchase price.
Redemptions will be processed in a manner intended to minimize the amount
of redemption that will be subject to the CDSL. When calculating the CDSL, it
will be assumed that the redemption is made first of C shares acquired as
dividends, second of C shares that have been held for over one year, and finally
of C shares held for less than one year on a first-in first-out basis.
For example, assume you purchase 100 C shares at $10 per share (for a total
cost of $1,000) and, during the year you purchase such shares, the net asset
value increases to $12 per share and you acquire 10 additional shares as
dividends. If you redeem 50 shares (or $600) within the first year of purchase,
10 shares would not be subject to the CDSL because redemptions are made first of
shares acquired as dividends. With respect to the remaining shares, the CDSL is
applied only to the original cost of $10 per share and not to the higher net
asset value of $12 per share. Therefore, only 40 of the 50 shares (or $400)
being redeemed would be subject to a CDSL at a rate of 1%.
WAIVER OF THE CONTINGENT DEFERRED SALES LOAD. The CDSL currently is waived
for (1) any partial or complete redemption in connection with a distribution
without penalty under Section 72(t) of the Code from a qualified retirement
plan, including a Keogh Plan or IRA upon attaining age 70 1/2; (2) any
redemption resulting from a tax-free return of an excess contribution to a
qualified employer retirement plan or an IRA; (3) any partial or complete
redemption following death or disability (as defined in Section 72(m)(7) of the
Code) of a shareholder (including one who owns the shares as joint tenant with
his spouse) from an account in which the deceased or disabled is named, provided
the redemption is requested within one year of the death or initial
determination of disability; (4) certain periodic redemptions under the
Systematic Withdrawal Plan from an account meeting certain minimum balance
requirements, in amounts representing certain maximums established from time to
time by the Distributor (currently a maximum of 12% annually of the account
balance at the beginning of the Systematic Withdrawal Plan); or (5) involuntary
redemptions by the Fund of
17
<PAGE> 46
C shares in shareholder accounts that do not comply with the minimum balance
requirements. The Distributor may require proof of documentation prior to waiver
of the CDSL described in sections (1) through (4) above, including distribution
letters, certification by plan administrators, applicable tax forms or death
certificates or physicians certificates.
For more information about C shares, see "Reinstatement Privilege" and
"Exchange Privilege."
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Redemption of Fund shares can be made by:
CONTACTING YOUR REPRESENTATIVE. Your Representative will transmit an order
to the Fund for redemption and may charge you a fee for this service.
TELEPHONE REQUEST. You may redeem shares by placing a telephone request to
the Fund (800-421-4184) prior to the close of regular trading on the Exchange.
If you do not wish to have telephone exchange/redemption privileges, you should
so elect by completing the appropriate section of the Account Application. The
Trust, Manager, Distributor and their Trustees, directors, officers and
employees are not liable for any loss arising out of telephone instructions that
they reasonably believe are authentic. These parties will employ reasonable
procedures to confirm that telephone instructions are authentic. To the extent
that the Trust, Manager, Distributor and their Trustees, directors, officers and
employees do not follow reasonable procedures, some or all of them may be liable
for losses due to unauthorized or fraudulent transactions. For more information
on these procedures, see "Redeeming Shares -- Telephone Transactions" in the
SAI. You may elect to have the funds wired to the bank account specified on the
Account Application. Funds normally will be sent the next business day, and you
will be charged a wire fee by the Manager (currently $5.00). For redemptions of
less than $25,000, you may request that the check be mailed to your address of
record, providing that such address has not been changed in the past 60 days.
For your protection, all other redemption checks will be transferred to the bank
account specified on the Account Application.
WRITTEN REQUEST. Fund shares may be redeemed by sending a written request
for redemption to "Heritage Income Trust-High Yield Bond Fund, c/o Shareholder
Services, Heritage Asset Management, Inc., P.O. Box 33022, St. Petersburg,
Florida 33733." Signature guarantees will be required on the following types of
requests: redemptions from any account that has had an address change in the
past 60 days, redemptions greater than $25,000, redemptions that are sent to an
address other than the address of record and exchanges or transfers into other
Heritage accounts that have different titles. The Manager will transmit an order
to the Fund for redemption.
SYSTEMATIC WITHDRAWAL PLAN. Withdrawal plans are available that provide
for regular periodic withdrawals of $50 or more on a monthly, quarterly,
semiannual or annual basis. Under these plans, sufficient shares of the Fund are
redeemed to provide the amount of the periodic withdrawal payment. The purchase
of A shares while participating in the Systematic Withdrawal Plan ordinarily
will be disadvantageous to you because you will be paying a sales load on the
purchase of those shares at the same time that you are redeeming A shares upon
which you may already have paid a sales load. Therefore, the Fund will not
knowingly permit the purchase of A shares through the Automatic Investment Plan
if you are at the same time making systematic withdrawals of A shares. The
Manager reserves the right to cancel systematic withdrawals if insufficient
shares are available for two or more consecutive months.
18
<PAGE> 47
Please contact the Manager or your Representative for further information
or see "Redeeming Shares" in the SAI.
RECEIVING PAYMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If a request for redemption is received by the Fund in good order (as
described below) before the close of regular trading on the Exchange, the shares
will be redeemed at the net asset value per share determined at the close of
regular trading on the Exchange on that day, less any applicable CDSL for C
shares. Requests for redemption received by the Fund after the close of regular
trading on the Exchange will be executed at the net asset value determined at
the close of regular trading on the Exchange on the next trading day, less any
applicable CDSL for C shares.
Payment for shares redeemed by the Fund normally will be made on the
business day after the redemption was made. If the shares to be redeemed
recently have been purchased by personal check, the Fund may delay mailing a
redemption check until the purchase check has cleared, which may take up to
seven days. This delay can be avoided by wiring funds for purchases. The
proceeds of a redemption may be more or less than the original cost of Fund
shares.
A redemption request will be considered to be received in "good order" if:
- the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
- any written request is signed by the shareholder and by all co-owners of
the account with exactly the same name or names used in establishing the
account;
- any written request is accompanied by certificates representing the
shares that have been issued, if any, and the certificates have been
endorsed for transfer exactly as the name or names appear on the
certificates or an accompanying stock power has been attached; and
- the signatures on any written redemption request of $25,000 or more and
on any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the
Federal Deposit Insurance Corporation, a trust company, or by any member
firm of the New York, American, Boston, Chicago, Pacific or Philadelphia
Stock Exchanges. Signature guarantees also will be accepted from savings
banks and certain other financial institutions that are deemed acceptable
by the Manager, as transfer agent, under its current signature guarantee
program.
The Fund has the right to suspend redemption or postpone payment at times
when the Exchange is closed (other than customary weekend or holiday closings)
or during periods of emergency or other periods as permitted by the SEC. In the
case of any such suspension a shareholder may either withdraw his request for
redemption or receive payment based upon the net asset value next determined
after the suspension is lifted. If a redemption check remains outstanding after
six months, the Manager reserves the right to redeposit those funds into the
shareholder's account. For more information on receiving payment, see "Redeeming
Shares -- Receiving Payment" in the SAI.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you have held A shares or C shares for at least 30 days, you may
exchange some or all of your shares for shares of the same class of any other
Heritage Mutual Fund. All exchanges will be based on the respective
19
<PAGE> 48
net asset values of the Heritage Mutual Funds involved. All exchanges are
subject to the minimum investment requirements and any other applicable terms
set forth in the prospectus for the Heritage Mutual Fund whose shares are being
acquired. Exchanges involving the redemption of shares recently purchased by
check will be permitted only after the Heritage Mutual Fund whose shares have
been tendered for exchange is reasonably assured that the check has cleared,
normally seven calendar days following the purchase date. Exchanges of shares of
Heritage Mutual Funds generally will result in the realization of a taxable gain
or loss for Federal income tax purposes.
For purposes of calculating the commencement of the one-year CDSL holding
period for shares exchanged from the Fund to the C shares of any other Heritage
Mutual Fund, except Heritage Cash Trust -- Money Market Fund ("Money Market
Fund"), the original purchase date of those shares exchanged will be used. Any
time period that the exchanged shares were held in the Money Market Fund will
not be included in this calculation.
If you exchange A shares or C shares for corresponding shares of the Money
Market Fund, you may, at any time thereafter, exchange such shares for the
corresponding class of shares of any other Heritage Mutual Fund. Because the
Money Market Fund is a no-load mutual fund, if you exchange shares of that fund
acquired by purchase (rather than exchange) for shares of another Heritage
Mutual Fund, you will be subject to the sales load, if any, that would be
applicable to a purchase of that Heritage Mutual Fund. In addition, if you
exchange C shares of the Fund for corresponding shares of the Money Market Fund,
the period during which an investment is held in shares of the Money Market Fund
will not count for purposes of calculating the one-year CDSL holding period for
such shares. As a result, if you redeem C shares of the Money Market Fund before
the expiration of the one-year CDSL holding period, you will be subject to the
applicable CDSL. A shares of the Fund may be exchanged for A shares of the
Heritage Cash Trust -- Municipal Money Market Fund, which is the only class of
shares offered by that fund. Because the Heritage Cash Trust -- Municipal Money
Market Fund is a no-load mutual fund, if you exchange shares of that fund
acquired by purchase (rather than exchange) for shares of another Heritage
Mutual Fund, you also will be subject to the sales load, if any, that would be
applicable to a purchase of that Heritage Mutual Fund. C shares are not eligible
for exchange into the Heritage Cash Trust -- Municipal Money Market Fund.
Shares acquired pursuant to a telephone request for exchange will be held
under the same account registration as the shares redeemed through such
exchange. For a discussion of limitation of liability of certain entities, see
"How to Redeem Shares -- Telephone Request."
Telephone exchanges can be effected by calling the Manager at (800)
421-4184 or by calling your Representative. In the event that you or your
Representative are unable to reach the Manager by telephone, an exchange can be
effected by sending a telegram to Heritage Asset Management, Inc., attention:
Shareholder Services. Due to the volume of calls or other unusual circumstances,
telephone exchanges may be difficult to implement during certain time periods.
The exchange privilege is available only in states where shares of the
Heritage Mutual Fund being acquired may be legally sold. Each Heritage Mutual
Fund reserves the right to reject any order to acquire its shares through
exchange or otherwise to restrict or terminate the exchange privilege at any
time. In addition, each Heritage Mutual Fund may terminate this exchange
privilege upon 60 days' notice. For further information on this exchange
privilege, contact the Manager or your Representative and see "Exchange
Privilege" in the SAI.
20
<PAGE> 49
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The business and affairs of the Fund are managed by or under the direction
of the Board of Trustees. The Trustees are responsible for managing the Fund's
business affairs and for exercising all the Fund's powers except those reserved
to the shareholders. A Trustee may be removed by other Trustees or by a
two-thirds vote of the outstanding Fund shares.
INVESTMENT ADVISER, FUND ACCOUNTANT, ADMINISTRATOR AND TRANSFER AGENT
Heritage Asset Management, Inc. is the Fund's investment adviser, fund
accountant, administrator and transfer agent. The Manager is responsible for
reviewing and establishing investment policies for the Fund as well as
administering the Fund's noninvestment affairs. The Manager is a wholly-owned
subsidiary of Raymond James Financial, Inc., which, together with its
subsidiaries, provides a wide range of financial services to retail and
institutional clients. The Manager manages, supervises and conducts the business
and administrative affairs of the Fund and other Heritage Mutual Funds with net
assets totalling approximately $2.0 billion as of December 31, 1995. The annual
investment advisory and administration fee paid monthly by the Fund to the
Manager is based on the Fund's average daily net assets as shown on the chart
below. The Fund pays the Manager separately for fund accounting and transfer
agent services.
<TABLE>
<CAPTION>
ADVISORY FEE AS A %
OF
AVERAGE DAILY NET
AVERAGE DAILY NET ASSETS ASSETS
-------------------------------------------------------- -------------------
<S> <C>
First $100 million...................................... 0.60%
Over $100 million....................................... 0.50%
</TABLE>
The advisory fee may be reduced pursuant to regulations in various states
where Fund shares are qualified for sale which impose limitations on the annual
expense ratio of the Fund. The Manager reserves the right to discontinue any
voluntary waiver of its fees or reimbursement to the Fund in the future. The
Manager also may recover advisory fees waived in the two previous years if the
recovery does not cause the Fund to exceed applicable expense limitations. It
currently is not anticipated that the Manager will recover fees waived in fiscal
1994 and 1995.
SUBADVISER
The Manager has entered into an agreement with Salomon Brothers Asset
Management Inc, 7 World Trade Center, 38th floor, New York, New York 10048, to
provide investment advice and portfolio management services, including placement
of securities orders, for an annual fee payable by the Manager of 50% of the
annual investment advisory fee paid to the Manager, without regard to any
reduction in the fees paid to the Manager as a result of any statutory,
regulatory or voluntary limitation of the fund expenses. The Subadviser is a
wholly-owned subsidiary of Salomon Inc. The Subadviser was incorporated in 1987
and, together with its affiliates, provides a broad range of fixed income and
equity investment advisory services to various individual and institutional
clients located throughout the world and serves an investment adviser to various
investment companies. As of October 31, 1995, the Subadviser and its affiliates
had approximately $13.1 billion of assets under management.
PORTFOLIO MANAGEMENT
Peter J. Wilby, assisted by a team of other investment professionals,
serves as portfolio manager of the Fund. Mr. Wilby is primarily responsible for
the day-to-day management of the Fund's investment portfolio
21
<PAGE> 50
subject to the general oversight of the Board of Trustees. Mr. Wilby is a
Director of the Subadviser and has been affiliated with Subadviser in various
capacities since 1989. Mr. Wilby is a Chartered Financial Analyst, a Certified
Public Accountant, and a member of the New York Society of Securities Analysts.
SHAREHOLDER AND ACCOUNT POLICIES
DIVIDENDS AND OTHER DISTRIBUTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividends from net investment income are declared and paid monthly. The
Fund distributes to shareholders substantially all net realized capital gains on
portfolio securities after the end of the year in which the gains are realized.
Dividends and other distributions on shares held in retirement plans and by
shareholders maintaining a Systematic Withdrawal Plan generally are declared and
paid in additional Fund shares. Other shareholders may elect to:
- receive both dividends and capital gain distributions in additional
Fund shares;
- receive dividends in cash and capital gain distributions in
additional Fund shares;
- receive both dividends and capital gain distributions in cash; or
- receive both dividends and capital gain distributions for investment
into another Heritage Mutual Fund.
If you select none of these options, the first option will apply. In any
case when you receive a dividend or other distribution in additional Fund
shares, your account will be credited with shares valued at the net asset value
determined at the close of regular trading on the Exchange on the day following
the record date for the dividend or capital gain distribution. Distribution
options can be changed at any time by notifying the Manager in writing.
Dividends paid by the Fund with respect to its A shares and C shares are
calculated in the same manner and at the same time and will be in the same
amount relative to the aggregate net asset value of the shares in each class,
except that dividends on C shares may be lower than dividends on A shares
primarily as a result of the higher distribution fee and class-specific expenses
applicable to C shares.
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of A shares and in connection with personal
services rendered to Class A shareholders and the maintenance of Class A
shareholder accounts, the Fund may pay the Distributor a service fee of up to
0.25% of the Trust's average daily net assets attributable to A shares. The Fund
may pay the Distributor a service fee of up to 0.25% and a distribution fee of
up to 0.10% of the Fund's average daily net assets attributable to A shares
purchased prior to April 3, 1995. This fee represents compensation for
maintenance of Class A accounts. This fee is computed daily and paid monthly.
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of C shares and in connection with personal
services rendered to Class C shareholders and the maintenance of Class C
shareholder accounts, the Fund pays the Distributor a service fee of up to 0.25%
and
22
<PAGE> 51
a distribution fee of 0.55% of the Fund's average daily net assets attributable
to C shares. This fee is computed daily and paid monthly.
The above-referenced fees paid to the Distributor are made under
Distribution Plans adopted pursuant to Rule 12b-1 under the 1940 Act. These
Plans authorize the Distributor to spend such fees on any activities or expenses
intended to result in the sale of A shares and C shares, including compensation
(in addition to the sales load) paid to Representatives; advertising, salaries
and other expenses of the Distributor relating to selling or servicing efforts;
expenses of organizing and conducting sales seminars; printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; and preparation and distribution of advertising material and sales
literature and other sales promotion activities. The Distributor has entered
into dealer agreements with participating dealers who also will distribute
shares of the Fund.
If either Plan is terminated, the obligation of the Fund to make payments
to the Distributor pursuant to the Plan will cease and the Fund will not be
required to make any payments past the date the Plan terminates.
TAXES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund is treated as a separate corporation for Federal income tax
purposes and intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code. In each taxable year that the
Fund does so, it (but not its shareholders) will be relieved of Federal income
tax on that part of its investment company taxable income (generally consisting
of net investment income and net short-term capital gains) and net capital gain
(the excess of net long-term capital gain over net short-term capital loss) that
is distributed to its shareholders. Dividends from the Fund's investment company
taxable income are taxable to its shareholders as ordinary income, to the extent
of the Fund's earnings and profits, whether received in cash or in additional
Fund shares. Distributions of the Fund's realized net capital gain, when
designated as such, are taxable to its shareholders as long-term capital gains,
whether received in cash or in additional Fund shares and regardless of the
length of time the shares have been held. No substantial portion of the
dividends paid by the Fund will be eligible for the dividends-received deduction
allowed to corporations.
Dividends and other distributions declared by the Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if they are paid by the Fund during the following January.
Shareholders receive Federal income tax information regarding dividends and
other distributions after the end of each year. The Fund is required to withhold
31% of all dividends, capital gain distributions and redemption proceeds payable
to individuals and certain other non-corporate shareholders who do not provide
the Fund with a correct taxpayer identification number. Withholding at that rate
also is required from dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders. See the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are therefore urged to
consult your tax adviser.
23
<PAGE> 52
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Each share of the Fund gives the shareholder one vote in matters submitted
to shareholders for a vote. All A shares and C shares of the Fund have equal
voting rights, except that, in matters affecting only a particular class or
series, only shares of that class or series are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the other Trustees or shareholders at
a special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Fund's outstanding shares.
24
<PAGE> 53
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC -- Debt rated "BB," "B" and "CCC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by larger uncertainties or
major risk exposures to adverse conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied "BBB- rating".
B -- Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions likely will impair capacity or
willingness to pay interest and repay principal. The "B" rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-1
<PAGE> 54
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC.
AAA -- Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
likely are to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA -- Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than the Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact has speculative characteristics as well.
BA -- Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds that are rated Caa are of poor standing. Such issues maybe in
default or there may be present of danger with respect to principal or interest.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bonding rating system. The
modifier 1 indicates that the company ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the company ranks in the lower end of its generic rating
category.
A-2
<PAGE> 55
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than that contained in this
Prospectus in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust or the Distributor. This Prospectus does
not constitute an offering in any state in which such offering may not lawfully
be made.
<PAGE> 56
BULK RATE [HERITAGE INCOME TRUST(TM) LOGO]
U.S. POSTAGE
PAID HIGH YIELD
MODERN MAILING BOND FUND
PROSPECTUS
February 1, 1996
Heritage Income Trust
High Yield Bond Fund
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------------------
Address Change Requested
Prospectus
INVESTMENT ADVISER/
SHAREHOLDER SERVICING AGENT
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
(800) 421-4184
DISTRIBUTOR
Raymond James & Associates, Inc.
P.O. Box 12749
St. Petersburg, FL 33733
(813) 573-3800
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information dated February 1, 1996,
should be read with the prospectuses of the High Yield Bond and
Intermediate Government Funds of Heritage Income Trust (the "Trust"), each
dated February 1, 1996. This statement is not a prospectus itself. To
receive a prospectus for either of the Funds, write to Heritage Asset
Management, Inc. at the address below or call (800) 421-4184.
HERITAGE ASSET MANAGEMENT, INC.
880 Carillon Parkway
St. Petersburg, Florida 33716
TABLE OF CONTENTS
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Objectives . . . . . . . . . . . . . . . . . . . 1
Investment Policies . . . . . . . . . . . . . . . . . . . . 1
Industry Classifications . . . . . . . . . . . . . . . . . . 18
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . 18
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 21
INVESTING IN THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . 24
Alternative Purchase Plans . . . . . . . . . . . . . . . . . 24
Class A Purchases at Net Asset Value . . . . . . . . . . . . 24
Class A Combined Purchase Privilege (Right of
Accumulation) . . . . . . . . . . . . . . . . . . . 25
Class A Statement of Intention . . . . . . . . . . . . . . 26
REDEEMING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . 27
Telephone Transactions . . . . . . . . . . . . . . . . . . . 28
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . 28
Receiving Payment . . . . . . . . . . . . . . . . . . . . . 28
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . 29
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
TRUST INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Management of the Trust . . . . . . . . . . . . . . . . . . 33
Investment Adviser and Administrator; Subadviser . . . . . . 36
Brokerage Practices . . . . . . . . . . . . . . . . . . . . 38
Distribution of Shares . . . . . . . . . . . . . . . . . . . 40
Administration of the Trust . . . . . . . . . . . . . . . . 42
Potential Liability . . . . . . . . . . . . . . . . . . . . 43
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
REPORT OF INDEPENDENT ACCOUNTS
High Yield Bond Fund . . . . . . . . . . . . . . . . . . . . A-2
Intermediate Government Fund . . . . . . . . . . . . . . . . A-3
FINANCIAL STATEMENTS
High Yield Bond Fund . . . . . . . . . . . . . . . . . . . . A-4
Intermediate Government Fund . . . . . . . . . . . . . . . . A-13
<PAGE>
GENERAL INFORMATION
-------------------
The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 4, 1989. It is registered as an
open-end diversified management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and is composed of the
High Yield Bond Fund (known as the Diversified Portfolio prior to February
1, 1996) ("High Yield") and the Intermediate Government Fund (known as the
Government Portfolio prior to February 2, 1992 and Limited Maturity
Government Portfolio from February 2, 1992 through January 31, 1996)
("Government") (each a "Fund" and, collectively, the "Funds"). Each Fund
constitutes a separate investment portfolio with distinct investment
objectives, purposes and strategies. Each Fund offers two classes of
shares, Class A shares, sold subject to a front-end sales load ("A
shares"), and Class C shares, sold subject to a contingent deferred sales
load ("CDSL") ("C shares").
INVESTMENT INFORMATION
----------------------
Investment Objectives
---------------------
The investment objective of each Fund is stated in its respective
prospectus.
Investment Policies
-------------------
The following information is in addition to and supplements each
Fund's investment policies set forth in its prospectus.
BRADY BONDS. High Yield may invest in Brady Bonds, which are
debt securities, generally denominated in U.S. dollars, issued under the
framework of the Brady Plan. The Brady Plan is an initiative announced by
former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism
for debtor nations to restructure their outstanding external commercial
bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders,
as well as multilateral institutions, such as the International Bank for
Reconstruction and Development (the "World Bank") and the International
Monetary Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly
issued bonds (Brady Bonds). Brady Bonds also may be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements, which
enable the debtor nation to collateralize the new Brady Bonds or to
repurchase outstanding bank debt at a discount. These arrangements with
the World Bank and/or the IMF require debtor nations to agree to the
implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment,
the privatization of state-owned enterprises and the setting of targets
<PAGE>
for public spending and borrowing. These policies and programs seek to
promote the debtor country's economic growth and development. Investors
should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor
nations and their creditors. High Yield's subadviser, Salomon Brothers
Asset Management Inc (the "Subadviser" or "SBAM"), believes economic
reforms, undertaken by countries in connection with the issuance of Brady
Bonds, make the debt of those countries that have issued or announced
plans to issue Brady Bonds an attractive opportunity for investment.
However, there can be no assurance that SBAM's expectations with respect
to Brady Bonds will be realized.
Investors also should recognize that Brady Bonds have been issued
only recently, and, accordingly, do not have a long payment history.
Brady Bonds that have been issued to date are rated in the categories "BB"
or "B" by S&P or "Ba" or "B" by Moody's or, in cases in which a rating by
S&P or Moody's has not been assigned, generally are considered by the
Subadviser to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed
to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options
have included the exchange of outstanding commercial bank debt for bonds
issued at 100% of face value of such debt that carry a below-market stated
rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount
bonds), bonds bearing an interest rate which increases over time, and
bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady
Plan generally have borne interest computed semiannually at a rate equal
to 13/16 of one percent above the then current six month London Inter-Bank
Offered Rate ("LIBOR").
Regardless of the stated face amount and stated interest rate of
the various types of Brady Bonds, High Yield will purchase Brady Bonds in
secondary markets, as described below.
In the secondary markets, the price and yield to the investor
reflect market conditions at the time of purchase. Brady Bonds issued to
date have traded at a deep discount from their face value. Certain
sovereign bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Certain Brady Bonds have been
collateralized as to principal due at maturity (typically 30 years from
the date of issuance) by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral
is not available to investors until the final maturity of the Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types
of Brady Bonds may be collateralized by cash or high-grade securities in
- 2 -
<PAGE>
amounts that typically represent between 12 and 18 months of interest
accruals on these instruments with the balance of the interest accruals
being uncollateralized. High Yield may purchase Brady Bonds with limited
or no collateralization, and will rely for payment of interest and (except
in the case of principal collateralized Brady Bonds) principal primarily
on the willingness and ability of the foreign government to make payment
in accordance with the terms of the Brady Bonds. Brady Bonds issued to
date are purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and generally are maintained
through European transnational securities depositories. A substantial
portion of the Brady Bonds and other sovereign debt securities in which
High Yield invests are likely to be acquired at a discount, which involves
certain considerations discussed below under "Taxes."
In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral
for the payment of principal will not be distributed to investors, nor
will such obligations be sold and the proceeds distributed. The
collateral will be held by the collateral agent to the scheduled maturity
of the defaulted Brady Bonds, which will continue to be outstanding, at
which time the face amount of the collateral will equal the principal
payments that would have then been due on the Brady Bonds in the normal
course. Based upon current market conditions, High Yield would not intend
to purchase Brady Bonds that, at the time of investment, are in default as
to payments. However, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing
Brady Bonds, investments in Brady Bonds are to be viewed as speculative.
CONVERTIBLE SECURITIES. High Yield may invest in convertible
securities. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock. The extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells
above its value as a fixed-income security. The Subadviser will decide to
invest in convertible securities based upon a fundamental analysis of the
long-term attractiveness of the issuer and the underlying common stock,
the evaluation of the relative attractiveness of the current price of the
underlying common stock, and the judgment of the value of the convertible
security relative to the common stock at current prices. Convertible
securities in which High Yield may invest include corporate bonds, notes
and preferred stock that can be converted into common stock. Convertible
securities combine the fixed-income characteristics of bonds and preferred
stock with the potential for capital appreciation. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates
decline. While convertible securities generally offer lower interest or
dividend yields than nonconvertible debt securities of similar quality,
they do enable the investor to benefit from increases in the market price
of the underlying common stock.
- 3 -
<PAGE>
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. High Yield may
invest in high yield foreign sovereign debt securities. Investing in
fixed and floating rate high yield foreign sovereign debt securities will
expose funds investing in such securities to the direct or indirect
consequences of political, social or economic changes in the countries
that issue the securities. The ability and willingness of sovereign
obligors in developing and emerging countries or the governmental
authorities that control repayment of their external debt to pay principal
and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those
in which a Fund may invest have historically experienced, and may continue
to experience, high rates of inflation, high interest rates, exchange rate
trade difficulties and extreme poverty and unemployment. Many of these
countries also are characterized by political uncertainty or instability.
Additional factors that may influence the ability or willingness to
service debt include, but are not limited to: a country's cash flow
situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the
economy as a whole, and its government's policy towards the IMF, the World
Bank and other international agencies. The ability of a foreign sovereign
obligor to make timely payments on its external debt obligations also will
be strongly influenced by the obligor's balance of payments, including
export performance, its access to international credits and investments,
fluctuations in interest rates and the extent of its foreign reserves. A
country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To
the extent that a country receives payment for its exports in currencies
other than dollars, its ability to make debt payments denominated in
dollars could be affected adversely. If a foreign sovereign obligor
cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from
foreign governments, commercial banks and multilateral organizations, and
inflows of foreign investment. The commitment on the part of these
foreign governments, multilateral organizations and others to make such
disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds, which
may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt also generally will be
affected adversely by rising international interest rates, because many
external debt obligations bear interest at rates that are adjusted based
upon international interest rates. The ability to service external debt
also will depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain
sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default
on its obligations. If such an event occurs, High Yield may have limited
- 4 -
<PAGE>
legal recourse against the issuer and/or guarantor. Remedies must, in
some cases, be pursued in the courts of the defaulting party itself, and
the ability of the holder of foreign sovereign debt securities to obtain
recourse may be subject to the political climate in the relevant country.
In addition, no assurance can be given that the holders of commercial bank
debt will not contest payments to the holders of other foreign sovereign
debt obligations in the event of default under their commercial bank loan
agreements.
Sovereign obligors in developing and emerging countries are among
the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions.
These obligors have in the past experienced substantial difficulties in
servicing their external debt obligations, which led to defaults on
certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest
to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further
loans to their issuers. There can be no assurance that the Brady Bonds
and other foreign sovereign debt securities in which High Yield may invest
will not be subject to similar restructuring arrangements or to requests
for new credit that may affect adversely High Yield's holdings.
Furthermore, certain participants in the secondary market for such debt
may be involved directly in negotiating the terms of these arrangements
and may therefore have access to information not available to other market
participants.
BORROWING. Each of the Funds may borrow in certain limited
circumstances. See "Investment Limitations." Borrowing creates an
opportunity for increased return, but, at the same time, creates special
risks. For example, borrowing may exaggerate changes in the net asset
value of a Fund's shares and in the return on the Fund's investment
portfolio. Although the principal of any borrowing will be fixed, a
Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at
a time when it would be disadvantageous to do so in order to make payments
with respect to any borrowing, which could affect the investment manager's
strategy and the ability of the Fund to comply with certain provisions of
the Internal Revenue Code of 1986, as amended (the "Code") in order to
provide "pass-through" tax treatment to shareholders. Furthermore, if a
Fund were to engage in borrowing, an increase in interest rates could
reduce the value of the Fund's shares by increasing the Fund's interest
expense.
INVERSE FLOATERS. Government may invest in U.S. Government
securities, including mortgage-backed securities, on which the rate of
interest varies inversely with interest rates on similar securities or the
value of an index. These derivative securities commonly are known as
inverse floaters. As market interest rates rise, the interest rate on the
- 5 -
<PAGE>
inverse floater goes down, and vice versa. Inverse floaters include
components of securities on which interest is paid in two separate parts -
- an auction component, which pays interest at a rate that is set
periodically through an auction process or other method, and a residual
component, the interest on which varies inversely with that on a similar
security or the value of an index. The residual component may be
established by multiplying the rate of interest paid on such security or
the applicable index by a factor (a "multiplier feature") or by adding or
subtracting the factor to or from such interest rate or index. The
secondary market for inverse floaters may be limited. The market value of
inverse floaters is often significantly more volatile than that of a
fixed-rate obligation and, like most debt obligations, will vary inversely
with changes in interest rates. The interest rates on inverse floaters
may be significantly reduced, even to zero, if interest rates rise.
MONEY MARKET INSTRUMENTS. In addition to the investments
described in the each Fund's prospectus, the Funds also may invest in
money market instruments including the following:
(1) Instruments such as certificates of deposit, demand and time
deposits, savings shares and bankers' acceptances of domestic banks and
savings and loans that have assets of at least $1 billion and capital,
surplus, and undivided profits of over $100 million as of the close of
their most recent fiscal year, or instruments that are insured by the Bank
Insurance Fund or the Savings Institution Insurance Fund of the Federal
Deposit Insurance Corporation.
(2) Commercial paper rated A-l or A-2 by Standard & Poor's
Ratings Services ("S&P") or Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's"). For a description of these ratings, see
"Commercial Paper Ratings" in the Appendix.
(3) High quality, short-term, corporate debt obligations,
including variable rate demand notes, having a maturity of one year or
less. Because there is no secondary trading market in demand notes, the
inability of the issuer to make required payments could impact adversely a
Fund's ability to resell when it deems advisable to do so.
OPTIONS, FUTURES AND OPTIONS ON FUTURES TRADING. As discussed in
each Fund's prospectus, the Funds may use options, futures and options on
futures ("Derivative Investments") in order to hedge their investments
and, in certain circumstances, may purchase or sell Derivative Investments
as a substitute for the purchase and sale of securities. Certain special
characteristics of and risks with these strategies are discussed below.
Hedging strategies can be categorized broadly as "short hedges"
and "long hedges." A short hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential declines in the
value of one or more investments held in a Fund's investment portfolio.
Thus, in a short hedge a Fund takes a position in a Derivative Instrument
whose price is expected to move in the opposite direction of the price of
the investment being hedged.
- 6 -
<PAGE>
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in
the acquisition cost of one or more investments that a Fund intends to
acquire. Thus, in a long hedge a Fund takes a position in a Derivative
Instrument whose price is expected to move in the same direction as the
price of the prospective investment being hedged. A long hedge is
sometimes referred to as an anticipatory hedge. In an anticipatory hedge
transaction, a Fund does not own a corresponding security and, therefore,
the transaction does not relate to a security the Fund owns. Rather, it
relates to a security that the Fund intends to acquire. If a Fund does
not complete the hedge by purchasing the security it anticipated
purchasing, the effect on the Fund's investment portfolio is the same as
if the transaction were entered into for speculative purposes.
Derivative Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions
that a Fund owns or intends to acquire. Derivative Instruments on
indices, in contrast, generally are used to attempt to hedge against price
movements in market sectors in which a Fund has invested or expects to
invest. Derivative Instruments on debt securities may be used to hedge
either individual securities or broad debt market sectors.
Use of these instruments is subject to applicable regulations of
the Securities and Exchange Commission ("SEC"), the several options and
futures exchanges upon which options and futures are traded, such as the
Commodity Futures Trading Commission ("CFTC"), and various state
regulatory authorities. In addition, the Funds' ability to use these
instruments will be limited by tax considerations. See "Taxes."
SPECIAL RISKS. The use of Derivative Instruments
involves special considerations and risks, certain of which are described
below. Risks pertaining to particular Derivative Instruments are
described in the sections that follow.
(1) Successful use of most Derivative Instruments
depends upon the ability of the Funds' Manager, Heritage Asset Management,
Inc. (the "Manager"), or, for High Yield, the Subadviser, as the case may
be, to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any
particular strategy will succeed.
(2) There might be imperfect correlation, or even no
correlation, between price movements of a Derivative Instrument and price
movements of the investments being hedged. For example, if the value of a
Derivative Instrument used in a short hedge increased by less than the
decline in value of the hedged investment, the hedge would not be fully
successful. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Derivative
Instruments are traded. The effectiveness of hedges using Derivative
Instruments on indices will depend on the degree of correlation between
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price movements in the index and price movements in the securities being
hedged.
Because there are a limited number of types of exchange-
traded options and futures contracts, it is likely that the standardized
contracts available will not match a Fund's current or anticipated
investments exactly. A Fund may invest in options and futures contracts
based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices also can diverge from the
prices of their underlying instruments, even if the underlying instruments
match a Fund's investments well. Options and futures prices are affected
by such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time remaining
until expiration of the contract, which may not affect security prices the
same way. Imperfect correlation also may result from differing levels of
demand in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading
halts. A Fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends
to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not
be successful in all cases. If price changes in a Fund's options or
futures positions are correlated poorly with its other investments, the
positions may fail to produce anticipated gains or result in losses that
are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can
reduce risk of loss by wholly or partially offsetting the negative effect
of unfavorable price movements. However, such strategies also can reduce
opportunity for gain by offsetting the positive effect of favorable price
movements. For example, if a Fund entered into a short hedge because the
Manager or the Subadviser, as the case may be, projected a decline in the
price of a security in the Fund's investment portfolio, and the price of
that security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the Derivative
Instrument. Moreover, if the price of the Derivative Instrument declined
by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not attempted to hedge at all.
(4) As described below, a Fund might be required to
maintain assets as "cover," maintain segregated accounts or make margin
payments when it takes positions in Derivative Instruments involving
obligations to third parties (i.e., Derivative Instruments other than
purchased options). If a Fund were unable to close out its positions in
such Derivative Instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired
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<PAGE>
or matured. These requirements might impair a Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise
be favorable to do so, or require that a Fund sell a portfolio security at
a disadvantageous time. A Fund's ability to close out a position in a
Derivative Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of the other party to the transaction
("counterparty") to enter into a transaction closing out the position.
Therefore, there is no assurance that any position can be closed out at a
time and price that is favorable to a Fund.
COVER. The Funds will not use leverage in their hedging
strategies. A Fund will not enter into a hedging strategy that exposes it
to an obligation to another party unless its owns either (1) an offsetting
("covered") position in securities or other options or futures contracts
or (2) cash, receivables and short-term debt securities with a value
sufficient to cover its potential obligations. The Funds will comply with
SEC guidelines regarding cover for such transactions and will, if the
guidelines so require, set aside cash, U.S. Government securities or other
liquid, high-grade debt securities in a segregated account with their
custodian in the amount prescribed.
Assets used as cover or held in a segregated account
cannot be sold while the corresponding futures contract or options
position is open, unless they are replaced with similar assets. As a
result, the commitment of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
GUIDELINES, CHARACTERISTICS AND RISKS OF OPTIONS TRADING.
The Funds effectively may terminate their right or obligation under an
option by entering into a closing transaction. If a Fund wishes to
terminate its obligation under a put or call option it has written, the
Fund may purchase a put or call option of the same series (i.e., an option
identical in its terms to the option previously written); this is known as
a closing purchase transaction. Conversely, in order to terminate its
right to purchase or sell under a call or put option it has purchased, the
Fund may write an option of the same series as the option held. This is
known as a closing sale transaction. Closing transactions essentially
permit a Fund to realize profits or limit losses on its options positions
prior to the exercise or expiration of the option. Whether a profit or
loss is realized from a closing transaction depends on the price movement
of the underlying security, index or futures contract, and the market
value of the option.
In considering the use of options to hedge, particular
note should be taken of the following:
(1) The value of an option position will reflect, among
other things, the current market price of the underlying security, index,
or futures contract, the time remaining until expiration, the relationship
of the exercise price to the market price, the historical price volatility
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of the underlying investment and general market conditions. For this
reason, the successful use of options as a hedging strategy depends upon
the ability of the Manager or Subadviser, as the case may be, to forecast
the direction of price fluctuations in the underlying investment.
(2) Prior to its expiration, the exercise price of an
option may be below, equal to, or above the current market value of the
underlying investment. Purchased options that expire unexercised have no
value. Unless an option purchased by a Fund is exercised or unless a
closing transaction is effected with respect to that position, a loss will
be realized in the amount of the premium paid.
(3) A position in an exchange-listed option may be
closed out only on an exchange that provides a secondary market for
identical options. Most exchange-listed options relate to futures
contracts and stocks. Exchange markets for options on debt securities
exist, and the ability to establish and close out positions on the
exchanges is subject to the maintenance of a liquid secondary market.
Closing transactions may be effected with respect to options traded in the
over-the-counter ("OTC") markets (currently the primary markets of options
on debt securities) only by negotiating directly with the other party to
the option contract or in a secondary market for the option if such market
exists. In the event of the insolvency of a Fund's counterparty, the Fund
might be unable to close out an OTC option position at any time prior to
its expiration. Although the Funds intend to purchase or write only those
options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular
option at any specific time. In such event, it may not be possible to
effect closing transactions with respect to certain options, with the
result that a Fund would have to exercise those options that it has
purchased in order to realize any profit. With respect to options written
by a Fund, the inability to enter into a closing transaction may result in
material losses to the Fund. For example, because a Fund may maintain a
covered position with respect to any call option it writes on a security,
the Fund may not sell the underlying security during the period it is
obligated under such option. This requirement may impair the Fund's
ability to sell a portfolio security or make an investment at a time when
such a sale or investment might be advantageous.
(4) Activities in the options market may result in a
higher portfolio turnover rate and additional brokerage costs. However,
the Funds also may save on commissions by using options as a hedge rather
than buying or selling individual securities in anticipation of market
movements.
(5) The risks of investment in options on indices may be
greater than options on securities. Because index options are settled in
cash, when a Fund writes a call on an index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the
underlying securities. A Fund can offset some of the risk of writing a
call index option by holding a diversified portfolio of securities similar
to those on which the underlying index is based. However, a Fund cannot,
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as a practical matter, acquire and hold an investment portfolio containing
exactly the same securities as underlie the index and, as a result, bear
the risk that the value of the securities held will vary from the value of
the index.
Even if a Fund could assemble a securities portfolio that
exactly reproduced the composition of the underlying index, it still would
not be fully covered from a risk standpoint because of the "timing risk"
inherent in writing index options. When an index option is exercised, the
amount of cash that the holder is entitled to receive is determined by the
difference between the exercise price and the closing index level on the
date when the option is exercised. As with other kinds of options, a Fund
as the call writer will not learn that it has been assigned until the next
business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as
of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the
writer of an index call holds securities that exactly match the
composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those securities against payment of
the exercise price. Instead, it will be required to pay cash in an amount
based on the closing index value on the exercise date. By the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its securities portfolio. This
"timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If a Fund has purchased an index option and exercises it
before the closing index value for that day is available, it runs the risk
that the level of the underlying index subsequently may change. If such a
change causes the exercised option to fall out-of-the-money, the Fund will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the
assigned writer.
GUIDELINES, CHARACTERISTICS AND RISKS OF FUTURES AND
OPTIONS ON FUTURES TRADING. When a Fund purchases or sells a futures
contract, the Fund will be required to deposit an amount of cash or U.S.
Treasury bills equal to a varying specified percentage of the contract
amount. This amount is known as initial margin. Cash held in the margin
account is not income producing. Subsequent payments, called variation
margin, to and from the broker through which such Fund entered into the
futures contract, will be made on a daily basis as the price of the
underlying security or index fluctuates making the futures contract more
or less valuable, a process known as marking-to-market.
If a Fund writes an option on a futures contract, it will
be required to deposit initial and variation margin pursuant to
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requirements similar to those applicable to futures contracts. Premiums
received from the writing of an option on a future are included in the
initial margin deposit.
Most of the exchanges on which futures contracts and
options on futures contracts are traded limit the amount of fluctuation
permitted in futures contract and option prices during a single trading
day. The daily price limit establishes the maximum amount that the price
of a futures contract or option may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the
daily price limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily
price limit governs only price movement during a particular trading day
and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures contract and
option prices occasionally have moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some traders to substantial
losses.
Another risk in employing futures contracts and options
on futures contracts as a hedge is the prospect that futures and options
prices will correlate imperfectly with the behavior of cash prices for the
following reasons. First, rather than meeting additional margin deposit
requirements, investors may close contracts through offsetting
transactions. Second, the liquidity of the futures and options markets
depends on participants entering into offsetting transactions rather than
making or taking delivery. To the extent that participants decide to make
or take delivery, liquidity in these markets could be reduced, thus
producing distortion. Third, from the point of view of speculators, the
deposit requirements in the futures and options markets are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures and options market may cause
temporary price distortions. In addition, activities of large traders in
both the futures and securities markets involving arbitrage, "program
trading," and other investment strategies might result in temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest trends by the Manager or Subadviser, as applicable, still
may not result in a successful transaction.
In addition to the risks that apply to all options
transactions, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions of
such options will be subject to the maintenance of a liquid secondary
market.
Compared to the purchase or sale of futures contracts,
the purchase of call or put options on futures contracts involves less
potential risk to the Funds because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures
contract would result in a loss to a Fund when the purchase or sale of a
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futures contract would not, such as when there is no movement in the price
of the underlying investment.
If a Fund enters into futures contracts or options on
futures contracts for other than bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish
these positions (excluding the amount by which options are "in-the-money")
may not exceed 5% of the liquidation value of the Fund's investment
portfolio, after taking into account any unrealized profits and unrealized
losses on any such contracts it has entered into. (In general, a call
option on a futures contract is "in-the-money" if the value of the
underlying futures contract exceeds the strike, i.e., exercise, price of
the call; a put option on a futures contract is "in-the-money" if the
value of the underlying futures contract is exceeded by the strike price
of the put.) This limitation does not limit the percentage of a Fund's
assets at risk to 5%.
PREFERRED STOCK. High Yield may invest in preferred stock. A
preferred stock is a blend of the characteristics of a bond and a common
stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a
bond and its participation in the issuer's growth may be limited.
Preferred stock has preference over common stock in the receipt of
dividends and in any residual assets after payment to creditors should the
issuer be dissolved. Although the dividend is set at a fixed annual rate,
in some circumstances it can be changed or omitted by the issuer.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase
agreements. Although repurchase agreements carry certain risks not
associated with direct investments in securities, including decline in the
market value of the underlying securities and delays and costs to a Fund
if the other party to the repurchase agreement becomes bankrupt, the Funds
intend to enter into repurchase agreements only with banks and dealers in
transactions believed by the Manager or Subadviser, as applicable, to
present minimal credit risks in accordance with guidelines established by
the Trust's Board of Trustees (the "Board of Trustees" or the "Board").
The period of these repurchase agreements usually will be short, from
overnight to one week, and at no time will a Fund invest in repurchase
agreements of more than one year. The securities that are subject to
repurchase agreements, however, may have maturity dates in excess of one
year from the effective date of the repurchase agreement. A Fund always
will receive as collateral securities whose market value, including
accrued interest, will be at least equal to 100% of the dollar amount
invested by the Fund in each agreement, and the Fund will make payment for
such securities only upon physical delivery or evidence of book-entry
transfer to the account of its custodian bank.
RESTRICTED AND ILLIQUID SECURITIES. As stated in each Fund's
prospectus, the Funds will not purchase or otherwise acquire any security
if, as a result, more than 10% of their net assets (taken at current
value) would be invested in securities that are illiquid by virtue of the
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absence of a readily available market or due to legal or contractual
restrictions on resale.
Purchased OTC options, which may be purchased by the Funds, are
considered illiquid securities. Each Fund also may sell OTC options and,
in connection therewith, segregate assets or cover its obligations with
respect to OTC options written by that Fund. The assets used as cover for
OTC options written by a Fund will be considered illiquid unless the OTC
options are sold to qualified dealers who agree that the Fund may
repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
REVERSE REPURCHASE AGREEMENTS. High Yield may borrow by entering
into reverse repurchase agreements. Under a reverse repurchase agreement,
High Yield sells securities and agrees to repurchase them at a mutually
agreed to price. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an
approved custodian containing liquid high grade securities, marked-to-
market daily, having a value not less than the repurchase price (including
accrued interest). One reason to enter into a reverse repurchase
agreement is to raise cash without liquidating any investment portfolio
positions. In this case, reverse repurchase agreements involve the risk
that the market value of securities retained in lieu of sale by High Yield
may decline below the price of the securities the Fund has sold but is
obliged to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the
securities and the Fund's use of the proceeds of the reverse repurchase
agreement effectively may be restricted pending such decisions. Reverse
repurchase agreements create leverage, a speculative practice, and will be
considered borrowings for the purpose of the Fund's limitation on
borrowing.
SECURITIES LOANS. The Funds may loan portfolio securities to
qualified broker-dealers. Such loans may be terminated by a Fund at any
time and the market risk applicable to any security loaned remains a risk
to the Fund. Although voting rights, or rights to consent, with respect
to the loaned securities pass to the borrower, a Fund retains the right to
call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by the Fund if the holders of such
securities are asked to vote upon or consent to matters materially
affecting the investment. A Fund also may call such loans in order to
sell the securities involved. The borrower must add to the collateral
whenever the market value of the securities rises above the level of such
collateral. The Funds could incur a loss if the borrower should fail
financially at a time when the value of the loaned securities is greater
than the collateral. The primary objective of securities lending is to
supplement a Fund's income through investment of the cash collateral in
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short-term interest bearing obligations. Securities loans may not exceed
25% of a Fund's total assets and will be fully collateralized at all
times. However, securities loans do involve some risk. If the other
party to the securities loan defaults or becomes involved in bankruptcy
proceedings, a Fund may incur delays and costs in selling or recovering
the underlying security or may suffer a loss of principal and interest.
STRIPPED SECURITIES. Government may invest in separately traded
interest and principal components of securities ("Stripped Securities"),
including U.S. Government securities, as discussed below. Stripped
Securities are obligations representing an interest in all or a portion of
the income or principal components of an underlying or related security, a
pool of securities or other assets. In the most extreme case, one class
will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or
"PO" class). The market values of stripped income securities tend to be
more volatile in response to changes in interest rates than are
conventional debt securities.
Government also may invest in stripped mortgage-backed
securities, which are derivative multi-class mortgage securities.
Stripped mortgage-backed securities in which it may invest will be issued
by agencies or instrumentalities of the U.S. Government. Stripped
mortgage-backed securities are structured with two classes that receive
different proportions of the interest and principal distributions on a
pool of assets represented by mortgages ("Mortgage Assets"). A common
type of stripped mortgage-backed security will have one class receiving a
small portion of the interest and a larger portion of the principal from
the Mortgage Assets, while the other classes will receive primarily
interest and only a small portion of the principal. The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying Mortgage Assets, and
principal payments may have a material effect on yield to maturity. In
addition, the market value of stripped mortgage-backed securities is
subject to greater risk of fluctuation in response to changes in market
interest rates than other mortgage-backed securities. In the case of
mortgage-backed IOs, if the underlying assets experience greater than
anticipated prepayments of principal, there is a greater possibility that
Government may not fully recoup its initial investment. Conversely, if
the underlying assets experience slower than anticipated principal
payments, the yield on the PO class will be affected more severely than
would be the case with traditional mortgage-backed securities.
The SEC staff takes the position that IOs and POs generally are
illiquid securities. The staff also takes the position, however, that the
Board of Trustees (or the Manager pursuant to delegation by the Board) may
determine that U.S. Government-issued IOs or POs backed by fixed-rate
mortgages are liquid, where the Board determines that such securities can
be disposed of promptly in the ordinary course of business at a value
reasonably close to that used in the calculation of net asset value per
share. Accordingly, certain of the IO and PO securities in which
Government invests may be deemed liquid.
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U.S. GOVERNMENT SECURITIES. High Yield may invest in U.S.
Government securities, including a variety of securities that are issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements secured thereby. These securities include:
securities issued and guaranteed by the U.S. Government, such as Treasury
bills, Treasury notes, and Treasury bonds; obligations backed by the "full
faith and credit" of the United States, such as Government National
Mortgage Association securities; obligations supported by the right of the
issuer to borrow from the U.S. Treasury, such as those of the Federal Home
Loan Banks; and obligations supported only by the credit of the issuer,
such as those of the Federal Intermediate Credit Banks.
ZERO COUPON AND PAY-IN-KIND SECURITIES. High Yield may invest in
zero coupon and pay-in-kind securities. Zero coupon securities are debt
obligations that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin
paying current interest. Zero coupon securities are issued and traded at
a discount from their face amounts or par value, which discount rate
varies depending on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived
credit quality of the issuer. Pay-in-kind securities are those that pay
interest through the issuance of additional units of the same securities.
The market prices of zero coupon and pay-in-kind securities generally are
more volatile than the prices of securities that pay interest periodically
and in cash and are likely to respond to changes in interest rates to a
greater degree than do other types of debt securities having similar
maturities and credit value.
Industry Classifications
------------------------
For purposes of determining industry classifications, the Funds
rely upon classifications established by the Manager that are based upon
classifications contained in the Directory of Companies Filing Annual
Reports with the SEC and in the Standard & Poor's Corporation Industry
Classifications.
INVESTMENT LIMITATIONS
----------------------
In addition to the limits disclosed in "Investment Policies," the
Funds are subject to the following investment limitations, which are
fundamental policies and may not be changed without the vote of a majority
of the outstanding voting securities of the applicable Fund. Under the
1940 Act, a "vote of a majority of the outstanding voting securities" of a
Fund means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares present at
a shareholders meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
BORROWING MONEY. Neither Fund may borrow money, except from
banks as a temporary measure for extraordinary or emergency purposes
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including the meeting of redemption requests that might require the
untimely disposition of securities. The payment of interest on such
borrowings will reduce the Funds' net investment income during the period
of such borrowing. Borrowing in the aggregate may not exceed 15% and
borrowing for purposes other than meeting redemptions may not exceed 5% of
a Fund's total assets at the time the borrowing is made. A Fund will not
make additional investments when borrowings exceed 5% of its total assets.
DIVERSIFICATION. Neither Fund will invest more than 5% of its
total assets in securities of any one issuer other than the U.S.
Government or its agencies or instrumentalities or buy more than 10% of
the voting securities or any other class of securities of any issuer.
INDUSTRY CONCENTRATION. Neither Fund will purchase securities
if, as a result, more than 25% of its total assets would be invested in
any one industry with the exception of U.S. Government securities.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. Neither Fund
may invest in commodities, commodity contracts, oil, gas or other mineral
programs, real estate limited partnerships, or real estate, except that it
may (1) purchase securities secured by real estate, or issued by companies
that invest in or sponsor such interests, (2) futures contracts and
options and (3) engage in transactions in forward commitments.
UNDERWRITING. Neither Fund may underwrite the securities of
other issuers, except that a Fund may invest in securities that are not
readily marketable without registration under the Securities Act of 1933,
as amended (the "1933 Act") (restricted securities), as provided in the
Fund's prospectus and this Statement of Additional Information.
LOANS. Neither Fund may make loans, except to the extent that
the purchase of a portion of an issue of publicly distributed or privately
placed notes, bonds or other evidences of indebtedness or deposits with
banks and other financial institutions may be considered loans, and
further provided that a Fund may enter into repurchase agreements and
securities loans as permitted under the Fund's investment policies.
Privately placed securities typically are either restricted as to resale
or may not have readily available market quotations, and therefore may not
be as liquid as other securities.
ISSUING SENIOR SECURITIES. Neither Fund may issue senior
securities, except as permitted by the investment objectives and policies
and investment limitations of that Fund.
SELLING SHORT AND BUYING ON MARGIN. Neither Fund may sell any
securities short, purchase any securities on margin or maintain a short
position in any security, but may obtain such short-term credits as may be
necessary for clearance of purchase and sales of securities; provided,
however, the Funds may make margin deposits and may maintain short
positions in connection with the use of options, futures contracts and
options on futures contracts as described previously.
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<PAGE>
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST. Neither Fund may purchase or retain the
securities of any issuer if the officers and Trustees of the Trust or the
Manager or its Subadviser, as applicable, own individually more than 1/2
of 1% of the issuer's securities or together own more than 5% of the
issuer's securities.
REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES.
Neither Fund may enter into repurchase agreements with respect to more
than 25% of its total assets or lend portfolio securities amounting to
more than 25% of its total assets.
Each Fund has adopted the following additional restrictions that,
together with certain limits described in its prospectus, are
nonfundamental policies and may be changed by the Board of Trustees
without shareholder approval in compliance with applicable law, regulation
or regulatory policy.
INVESTING IN INVESTMENT COMPANIES. Neither Fund may invest in
securities issued by other investment companies, except as permitted by
the 1940 Act.
CONTROL PURPOSE. Neither Fund may make investments for the
purpose of gaining control of an issuer's management.
PLEDGING SECURITIES. Neither Fund may pledge any securities,
except in an amount of not more than 15% of its total assets, to secure
borrowings for temporary and emergency purposes. (The deposit in escrow of
underlying securities in connection with the writing of covered call
options is not deemed to be a pledge or other encumbrance. The Funds also
may pledge their assets in connection with its use of options and futures
contracts without limit.)
UNSEASONED ISSUERS. Neither Fund may invest more than 5% of its
net assets in securities of companies (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities),
including their predecessors, which have been in continuous operation for
less than three years and in equity securities that do not have readily
available market quotations (other than restricted securities).
ILLIQUID SECURITIES. Neither Fund may invest more than 10% of
its net assets in the aggregate in repurchase agreements of more than
seven days' duration, in securities without readily available market
quotations, and in restricted securities including privately placed
securities.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of the investment, a later increase
or decrease in the percentage resulting from any change in value or net
assets will not result in a violation of such restriction. If at any
time, a Fund's borrowing exceeds its limitations due to a decline in net
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<PAGE>
assets, such borrowing will be promptly reduced to the extent necessary to
comply with the limitation.
NET ASSET VALUE
---------------
The net asset values of the A shares and C shares are determined
daily, Monday through Friday, except for New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day, as of the close of regular trading on the New York
Stock Exchange (the "Exchange"). Net asset value for each class is
calculated by dividing the value of the total assets of the Fund
attributable to that class, less all liabilities (including accrued
expenses) attributable to that class, by the number of class shares
outstanding, the result being adjusted to the nearest whole cent. A
security listed or traded on the Exchange, or other stock exchanges, is
valued at its last sales price on the principal exchange on which it is
traded prior to the time when assets are valued. If no sale is reported
at that time, the most recent bid price is used. When market quotations
for options and futures positions held by a Fund are readily available,
those positions will be valued based upon such quotations. Market
quotations generally will not be available for options traded in the OTC
market. Securities and other assets for which market quotations are not
readily available, or for which the Manager or the Subadviser, as
applicable, has reason to question the validity of quotations they
receive, are valued at fair value as determined in good faith by the Board
of Trustees. Securities in a foreign currency will be valued daily in
U.S. dollars at the foreign currency exchange rates prevailing at the time
High Yield calculates the daily net asset value of each class. Short-term
investments having a maturity of 60 days or less are valued at cost with
accrued interest or discount earned included in interest receivables.
High Yield is open for business on days on which the Exchange is
open (each a "Business Day"). High Yield's close of business on each
Business Day normally continues well after trading in securities on
European and Far Eastern securities exchanges and OTC markets normally is
completed. In addition, European or Far Eastern securities trading may
not take place on all Business Days. Furthermore, trading takes place in
various foreign capital markets on days that are not Business Days and on
which High Yield's net asset value are not calculated. Calculation of A
shares and C shares does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities
used in such calculation. High Yield calculates net asset value per
share, and therefore effects sales and redemptions, as of the close of
trading on the Exchange each Business Day. If events materially affecting
the value of such securities occur between the time when their prices are
determined and the time when High Yield's net asset value is calculated,
such securities will be valued at fair value by methods as determined in
good faith by or under the direction of the Board of Trustees.
The Board may suspend the right of redemption or postpone payment
for more than seven days at times (1) during which the Exchange is closed
- 19 -
<PAGE>
other than for customary weekend and holiday closings, (2) during which
trading on the Exchange is restricted as determined by the SEC, (3) during
which an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not
reasonably practical for the Fund fairly to determine the value of its net
assets, or (4) for such other periods as the SEC may by order permit for
the protection of the holders of A shares and C shares.
PERFORMANCE INFORMATION
-----------------------
Performance data for each class of each Fund quoted in
advertising and other promotional materials represents past performance
and is not intended to indicate future performance. The investment return
and principal value will fluctuate so that an investor's redeemed shares
may be worth more or less than their original cost. Average annual total
return quotes for each class used in each Fund's advertising and
promotional materials are calculated according to the following formula:
n
P(1+T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the period at the end of
that period.
In calculating the ending redeemable value for A shares, each
Fund's maximum sales charge of 3.75% is deducted from the initial $1,000
payment and all dividends and other distributions by each Fund are assumed
to have been reinvested at net asset value on the reinvestment dates
during the period. Based on this formula, total return, or "T" in the
formula above, is computed by finding the average annual compounded rates
of return over the period that would equate the initial amount invested to
the ending redeemable value. The average annualized total return for High
Yield A shares for the period March 1, 1990 (commencement of operations)
to September 30, 1995, for the five year period ended September 30, 1995,
and for the fiscal year ended September 30, 1995 was 8.77%, 9.64% and
7.06%, respectively. The average annualized total return for Government A
shares for the same periods was 4.86%, 5.00% and 4.40%, respectively. The
average annualized total return for High Yield C shares for the period
April 3, 1995 (commencement of C shares) to September 30, 1995 was 10.60%.
The average annualized total return for Government C shares for the same
period was 8.23%.
In connection with communicating the total returns for each Fund
to current or prospective shareholders, each Fund also may compare these
figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes that may assume reinvestment
- 20 -
<PAGE>
of dividends but generally do not reflect deductions for administrative
and management costs. In addition, each Fund from time to time may
include in advertising and promotional materials total return figures that
are not calculated according to the method set forth above for each class
of shares. For example, in comparing High Yield's A shares or C shares
total return with such market indices as the Lehman Brothers Government
Corporate Composite Index and the Merrill Lynch Domestic Master Index, and
Government's A shares or C shares total return with such market indices as
the Lehman Brothers Government Composite Index, the Lehman Intermediate
Government Corporate Index and the Lipper United States Government Fund
Average, each class of each Fund calculates its aggregate total return for
each class for the specified periods of time by assuming an investment of
$10,000 in that class of shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment
date. Percentage increases are determined by subtracting the initial
value of the investment from the ending value and by dividing the
remainder by the beginning value. The Funds do not, for these purposes,
deduct from the initial value invested any amount representing sales loads
charged on A shares or CDSLs charged on C shares.
The A shares cumulative returns using this formula for High Yield
for the year and five years ended September 30, 1995, and for the period
March 1, 1990 (commencement of operations) to September 30, 1995 were
11.23%, 64.65% and 66.15%, respectively. The cumulative returns for
Government A shares for the same periods were 8.47%, 32.61% and 35.40%,
respectively. Cumulative returns for High Yield C shares for the period
April 3, 1995 (commencement of operations for C shares) to September 30,
1995 was 7.09%. Cumulative returns for Government C shares for the same
period was 5.84%. By not annualizing the performance and excluding the
effect of the front-end sales load on A shares and the CDSL on C shares,
total return calculated in this manner simply will reflect the increase in
net asset value per share over a period of time, adjusted for dividends
and other distributions. Calculating total return without taking into
account the front-end sales load or CDSL results in a higher rate of
return than calculating total return net of the sales load or CDSL.
Yields used in each Fund's performance advertisements for each
class are calculated by dividing each Fund's interest income for a
thirty-day period ("Period") attributable to that class, net of expenses
attributable to that class, by the average number of shares of that class
entitled to receive dividends during the Period, and expressing the result
as an annualized percentage (assuming semi-annual compounding) of the
maximum offering price per share at the end of the Period. Yield
quotations are calculated according to the following formula:
6
YIELD = 2X[(a-b+1) -1]
---
c x d
where: a = interest earned during the Period;
- 21 -
<PAGE>
b = expenses accrued for the Period (net of
reimbursements);
c = the average daily number of shares
outstanding during the Period that were
entitled to receive a dividend; and
d = the maximum offering price per share on
the last day of the Period.
Except as noted below, in determining net investment income
earned during the Period (variable "a" in the above formula), each Fund
calculates interest earned on each debt obligation held by it during the
Period by (1) computing the obligation's yield to maturity, based on the
market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the Period
that the obligation is in the Fund. Once interest earned is calculated in
this fashion for each debt obligation held by the Fund, interest earned
during the Period is then determined by totalling the interest earned on
all debt obligations. For purposes of these calculations, the maturity of
an obligation with one or more call provisions is assumed to be the next
date on which the obligation reasonably can be expected to be called or,
if none, the maturity date. At September 30, 1995, the 30-day yield for
High Yield and Government A shares was 6.68% and 4.76%, respectively.
At September 30, 1995, the 30-day yield for High Yield and Government C
shares was 6.49% and 4.70%, respectively.
INVESTING IN THE FUNDS
----------------------
A shares and C shares are sold at their next determined net asset
value on Business Days. The procedures for purchasing shares of a Fund
are explained in each Fund's prospectus under "Investing in the Fund."
Alternative Purchase Plans
--------------------------
A shares are sold at their next determined net asset value plus a
front-end sales load on days the Exchange is open for business. C shares
are sold at their next determined net asset value on days the Exchange is
open for business, subject to a 1% CDSL if the investor redeems such
shares within one year. The Manager, as the Trust's transfer agent, will
establish an account with the Trust and will transfer funds to State
Street Bank and Trust Company (the "Custodian"). Normally, orders will be
accepted upon receipt of funds and will be executed at the net asset value
determined as of the close of regular trading on the Exchange on that day
plus any applicable sales load. See "Alternative Purchase Plans" in the
prospectuses. The Funds reserve the right to reject any order for a
Fund's shares. The Funds' distributor, Raymond James & Associates, Inc.
("RJA" or the "Distributor"), has agreed that it will hold each Fund
harmless in the event of loss as a result of cancellation of trades in
Fund shares by the Distributor, its affiliates or its customers.
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<PAGE>
Class A Purchases at Net Asset Value
------------------------------------
Cities, counties, states or instrumentalities and their
departments, authorities or agencies are able to purchase A shares of a
Fund at net asset value as long as certain conditions are met: the
governmental entity is prohibited by applicable investment laws, codes or
regulations from paying a sales load in connection with the purchase of
shares of a registered investment company; the governmental entity has
determined that such A shares are a legally permissible investment; and
any relevant minimum purchase amounts are met.
In the instance of discretionary fiduciary assets or trusts, or
Class A purchases by a governmental entity through a registered broker-
dealer with which the Distributor has a dealer agreement, the Manager may
make a payment out of its own resources to the Distributor, who may
reallow the payment to the selling broker-dealer. However, the
Distributor and the selling broker-dealer may be required to reimburse the
Manager for these payments if investors redeem A shares within specified
periods.
Class A Combined Purchase Privilege (Right of Accumulation)
-----------------------------------------------------------
Certain investors may qualify for the Class A sales load
reductions indicated in the sales load schedule in each Fund's prospectus
by combining purchases of A shares of a Fund into a single "purchase," if
the resulting purchase totals at least $25,000. The term "purchase"
refers to a single purchase by an individual, or to concurrent purchases
that, in the aggregate, are at least equal to the prescribed amounts, by
an individual, his spouse and their children under the age of 21 years
purchasing A shares of a Fund for his or their own account; a single
purchase by a trustee or other fiduciary purchasing A shares for a single
trust, estate or single fiduciary account although more than one
beneficiary is involved; or a single purchase for the employee benefit
plans of a single employer. The term "purchase" also includes purchases
by a "company," as the term is defined in the 1940 Act, but does not
include purchases by any such company that has not been in existence for
at least six months or that has no purpose other than the purchase of A
shares of a Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit card holders of a company, policy holders
of an insurance company, customers of either a bank or broker-dealer, or
clients of an investment adviser.
The applicable A shares sales load will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on
the previous day) of (a) all A shares of a Fund held by the
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<PAGE>
investor and (b) all A shares of any other mutual fund advised or
administered by the Manager ("Heritage Mutual Fund") held by the
investor and purchased at a time when A shares of such other fund
were distributed subject to a sales load (including Heritage Cash
Trust shares acquired by exchange); and
(iii) the net asset value of all A shares described in
paragraph (ii) owned by another shareholder eligible to combine
his purchase with that of the investor into a single "purchase."
A shares of Government purchased from February 1, 1992 through
July 31, 1992, without payment of a sales load will be deemed to fall
under the provisions of paragraph (ii) as if they had been distributed
without being subject to a sales load, unless those shares were acquired
through an exchange of other shares that were subject to a sales load.
Class A Statement of Intention
------------------------------
Investors also may obtain the reduced sales loads shown in each
Fund's prospectus by means of a written Statement of Intention, which
expresses the investor's intention to invest not less than $25,000 within
a period of 13 months in A shares of a Fund or any other Heritage Mutual
Fund. Each purchase of A shares under a Statement of Intention will be
made at the public offering price or prices applicable at the time of such
purchase to a single transaction of the dollar amount indicated in the
Statement. At the investor's option, a Statement of Intention may include
purchases of A shares of a Fund or any other Heritage Mutual Fund made not
more than 90 days prior to the date that the investor signs a Statement of
Intention. However, the 13-month period during which the Statement is in
effect will begin on the date of the earliest purchase to be included.
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Statement of Intention is 5% of such amount. A shares
purchased with the first 5% of such amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales load applicable to the shares actually purchased if the full
amount indicated is not purchased, and such escrowed A shares will be
involuntarily redeemed to pay the additional sales load, if necessary.
When the full amount indicated has been purchased, the escrow will be
released. To the extent an investor purchases more than the dollar amount
indicated on the Statement of Intention and qualifies for a further
reduced sales load, the sales load will be adjusted for the entire amount
purchased at the end of the 13-month period. The difference in sales load
will be used to purchase additional A shares of a Fund, subject to the
rate of sales load applicable to the actual amount of the aggregate
purchases. An investor may amend his/her Statement of Intention to
increase the indicated dollar amount and begin a new 13-month period. In
that case, all investments subsequent to the amendment will be made at the
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<PAGE>
sales load in effect for the higher amount. The escrow procedures
discussed above will apply.
REDEEMING SHARES
----------------
The methods of redemption are described in the section of each
Fund's prospectus entitled "How to Redeem Shares."
Systematic Withdrawal Plan
--------------------------
Shareholders may elect to make systematic withdrawals from their
Fund account of a minimum of $50 on a periodic basis. The amounts paid
each period are obtained by redeeming sufficient shares from an account to
provide the withdrawal amount specified. The Systematic Withdrawal Plan
currently is not available for shares held in an Individual Retirement
Account, Section 403(b) annuity plan, defined contribution plan,
Simplified Employee Pension Plan or other retirement plans, unless the
shareholder establishes to the Manager's satisfaction that withdrawals
from such an account may be made without imposition of a penalty.
Shareholders may change the amount to be paid without charge not more than
once a year by written notice to the Distributor or the Manager.
Redemptions will be made at net asset value determined as of the
close of regular trading on the Exchange on the 10th day of each month or
the 10th day of the last month of each period, whichever is applicable.
Systematic withdrawals of C shares, if made within one year of the date of
purchase, will be charged a CDSL of 1%. If the Exchange is not open for
business on that day, the shares will be redeemed at net asset value
determined as of the close of regular trading on the Exchange on the
preceding Business Day, minus any applicable CDSL for C shares. The check
for the withdrawal payment usually will be mailed on the next business day
following redemption. If a shareholder elects to participate in the
Systematic Withdrawal Plan, dividends and other distributions on all
shares in the account must be reinvested automatically in shares of the
Fund in which they invest. A shareholder may terminate the Systematic
Withdrawal Plan at any time without charge or penalty by giving written
notice to the Manager or the Distributor. The Funds, their transfer
agent, and Distributor also reserve the right to modify or terminate the
Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than
as a dividend or a capital gain distribution. These payments are taxable
to the extent that the total amount of the payments exceeds the tax basis
of the shares sold. If the periodic withdrawals exceed reinvested
dividends and other distributions, the amount of the original investment
may be correspondingly reduced.
Ordinarily, a shareholder should not purchase additional A shares
of a Fund if maintaining a Systematic Withdrawal Plan of A shares because
the shareholder may incur tax liabilities in connection with such
- 25 -
<PAGE>
purchases and withdrawals. A Fund will not knowingly accept purchase
orders from shareholders for additional A shares if they maintain a
Systematic Withdrawal Plan unless the purchase is equal to at least one
year's scheduled withdrawals. In addition, if a shareholder who maintains
such a Plan may not make periodic investments under each Fund's Automatic
Investment Plan.
Telephone Transactions
----------------------
Shareholders may redeem shares by placing a telephone request to
a Fund. The Trust, Manager, Distributor and their Trustees, directors,
officers and employees are not liable for any loss arising out of
telephone instructions they reasonably believe are authentic. In acting
upon telephone instructions, these parties use procedures that are
reasonably designed to ensure that such instructions are genuine, such as
(1) obtaining some or all of the following information: account number,
name(s) and social security number registered to the account, and personal
identification; (2) recording all telephone transactions; and (3) sending
written confirmation of each transaction to the registered owner. If the
Trust, Manager, Distributor and their Trustees, directors, officers and
employees do not follow reasonable procedures, some or all of them may be
liable for any such losses.
Redemptions in Kind
-------------------
The Trust is obligated to redeem shares of each Fund for any
shareholder for cash during any 90-day period up to $250,000 or 1% of the
Fund's net asset value, whichever is less. Any redemption beyond this
amount also will be in cash unless the Board of Trustees determine that
further cash payments will have a material adverse effect on remaining
shareholders. In such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in the same
way as the Fund determines net asset value. The portfolio instruments
will be selected in a manner that the Board of Trustees deem fair and
equitable. A redemption in kind is not as liquid as a cash redemption.
If a redemption is made in kind, a shareholder receiving portfolio
instruments could receive less than the redemption value thereof and could
incur certain transaction costs.
Receiving Payment
-----------------
If a request for redemption is received by a Fund in good order
(as described in each prospectus) before the close of regular trading on
the Exchange, the shares will be redeemed at the net asset value per share
determined at such close, minus any applicable CDSL for C shares.
Requests for redemption received by a Fund after the close of regular
trading on the Exchange will be executed at the net asset value determined
as of such close on the next trading day, minus any applicable CDSL for C
shares.
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<PAGE>
If shares of a Fund are redeemed by a shareholder through the
Distributor or a participating dealer, the redemption is settled with the
shareholder as an ordinary transaction. If a request for redemption is
received before the close of regular trading on the Exchange, shares will
be redeemed at the net asset value per share determined on that day, minus
any applicable CDSL for C shares. Requests for redemption received after
the close of regular trading on the Exchange will be executed on the next
trading day. Payment for shares redeemed normally will be made by a Fund
to the Distributor or a participating dealer by the third business day
after the day the redemption request was made, provided that certificates
for shares have been delivered in proper form for transfer to the Trust
or, if no certificates have been issued, a written request signed by the
shareholder has been provided to the Distributor or a participating dealer
prior to settlement date.
Other supporting legal documents may be required from
corporations or other organizations, fiduciaries or persons other than the
shareholder of record making the request for redemption. Questions
concerning the redemption of shares of a Fund can be directed to
registered representatives of the Distributor or a participating dealer,
or to the Manager.
EXCHANGE PRIVILEGE
------------------
Shareholders who have held shares of a Fund for at least 30 days
may exchange some or all of their A shares or C shares for shares of
corresponding classes of any other Heritage Mutual Fund. All exchanges
will be based on the respective net asset values of the Heritage Mutual
Funds involved. An exchange is effected through the redemption of the
shares tendered for exchange and the purchase of shares being acquired at
their respective net asset values as next determined following receipt by
the Heritage Mutual Fund whose shares are being exchanged of (1) proper
instructions and all necessary supporting documents as described in such
fund's prospectus, or (2) a telephone request for such exchange in
accordance with the procedures set forth in each Fund's prospectus and
below.
A shares of Government purchased from February 1, 1992 through
July 31, 1992, without payment of an initial sales load may be exchanged
into A shares of another Heritage Mutual Fund without payment of any sales
load. A shares of Government purchased after July 31, 1992 without a
sales load will be subject to a sales load when exchanged into A shares of
another Heritage Mutual Fund, unless those shares were acquired through an
exchange of other shares that were subject to an initial sales load.
Shares acquired pursuant to a telephone request for exchange will
be held under the same account registration as the shares redeemed through
such exchange. For a discussion of limitation of liability of certain
entities, see "Telephone Transactions" above.
- 27 -
<PAGE>
Telephone exchanges can be effected by calling the Manager at
800-421-4184 or by calling a registered representative of the Distributor,
a participating dealer or participating bank ("Representative"). In the
event that a shareholder or his Representative is unable to reach the
Manager by telephone, a telephone exchange can be effected by sending a
telegram to Heritage Asset Management, Inc., attention: Shareholder
Services. Telephone or telegram requests for an exchange received by a
Fund before the close of regular trading on the Exchange will be effected
at the close of regular trading on that day. Requests for an exchange
received after the close of regular trading will be effected on the
Exchange's next trading day. Due to the volume of calls or other unusual
circumstances, telephone exchanges may be difficult to implement during
certain time periods.
TAXES
-----
Each Fund is treated as a separate corporation for Federal income
tax purposes. In order to continue to qualify for the favorable tax
treatment afforded to a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"), each Fund must
distribute annually to its shareholders at least 90% of its investment
company taxable income (generally consisting of net investment income plus
net short-term capital gain) ("Distribution Requirement") and must meet
several additional requirements. With respect to each Fund, these
requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other
disposition of securities, or other income (including gains from options
or futures contracts) derived with respect to its business of investing in
securities ("Income Requirement"); (2) the Fund must derive less than 30%
of its gross income each taxable year from the sale or other disposition
of securities, options or futures contracts held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities
of other RICs and other securities, with those other securities limited,
in respect of any one issuer, to an amount that does not exceed 5% of the
value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of
each quarter of the Fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ending on October 31 of
that year, plus certain other amounts.
A redemption of Fund shares will result in a taxable gain or loss
to the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
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<PAGE>
shares (which normally includes any sales load paid on A shares). An
exchange of shares of either Fund for shares of another Heritage Mutual
Fund generally will have similar tax consequences. However, special rules
apply when a shareholder disposes of shares of a Fund through a redemption
or exchange within 90 days after purchase thereof and subsequently
reacquires shares of that Fund or acquires shares of another Heritage
Mutual Fund (including the other Fund) without paying a sales load due to
the 30-day reinstatement or exchange privilege. In these cases, any gain
on the disposition of the original Fund shares will be increased, or loss
decreased, by the amount of the sales load paid when those shares were
acquired, and that amount will increase the adjusted basis of the shares
subsequently acquired. In addition, if Fund shares are purchased (whether
pursuant to the reinstatement privilege or otherwise) within 30 days
before or after redeeming other shares of that Fund (regardless of class)
at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
If shares of a Fund are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
are purchased shortly before the record date for a dividend or other
distribution, the shareholder will pay full price for the shares and
receive some portion of the price back as a taxable distribution.
As of September 30, 1995, High Yield had a capital loss
carryforward of $1,402,142, which may be applied against any net realized
gains until its expiration date of September 30, 2003. In addition, from
November 1, 1994 to September 30, 1995, High Yield realized $1,002,808 of
net realized capital losses, which will be deferred and treated as arising
on October 1, 1995, in accordance with regulations under the Code.
As of September 30, 1995, Government had a capital loss
carryforward of $6,719,571, which may be applied against any net realized
gains until its expiration dates of September 30, 2001 (as to $388,071),
September 30, 2002 (as to $3,838,721) and September 30, 2003 (as to
$2,492,779). In addition, from November 1, 1994 to September 30, 1995,
Government realized $607,914 of net capital losses, which will be deferred
and treated as arising on October 1, 1995, in accordance with regulations
under the Code.
The use of hedging strategies, such as purchasing and selling
(writing) options and futures contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition
of the gains and losses each Fund realizes in connection therewith. Gains
from options and futures contracts derived by a Fund with respect to its
business of investing in securities will qualify as permissible income
under the Income Requirement. However, income from the disposition of
options and futures contracts will be subject to the Short-Short
Limitation if they are held for less than three months.
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<PAGE>
If a Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining
whether the Fund satisfies the Short-Short Limitation. Thus, only the net
gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation. To the extent this treatment is not
available, a Fund may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a
RIC.
High Yield may acquire zero coupon or other securities issued
with original issue discount ("OID"). As a holder of such securities,
High Yield must include in its income the OID that accrues thereon during
the taxable year, even if it receives no corresponding payment on them
during the year. Similarly, High Yield must include in its gross income
securities it receives as "interest" on pay-in-kind securities. Because
High Yield annually must distribute substantially all of its investment
company taxable income, including any OID and other non-cash income, to
satisfy the Distribution Requirement and to avoid imposition of the Excise
Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from High Yield's cash assets
or from the proceeds of sales of portfolio securities, if necessary. High
Yield may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net
capital gain (the excess of net long-term capital gain over net short-term
capital loss). In addition, any such gains may be realized on the
disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce High Yield's ability
to sell other securities, options or futures held for less than three
months that it might wish to sell in the ordinary course of its portfolio
management.
High Yield may invest in Brady Bonds and other sovereign debt
securities that are purchased with "market discount." For these purposes,
market discount is the amount by which a security's purchase price is
exceeded by its stated redemption price at maturity or, in the case of a
security that was issued with OID, the sum of its issue price plus accrued
OID, except that market discount less than the product of (1) 0.25% of the
redemption price at maturity times (2) the number of complete years to
maturity after the taxpayer acquired the security is disregarded. Market
discount generally is accrued ratably, on a daily basis, over the period
from the acquisition date to the date of maturity. Gain on the disposi-
tion of such a security purchased by High Yield (other than a security
with a fixed maturity date within one year from its issuance), generally
is treated as ordinary income, rather than capital gain, to the extent of
the security's accrued market discount at the time of disposition. In
lieu of treating the disposition gain as above, High Yield may elect to
include market discount in its gross income currently, for each taxable
year to which it is attributable.
- 30 -
<PAGE>
TRUST INFORMATION
-----------------
Management of the Trust
-----------------------
TRUSTEES AND OFFICERS. Trustees and officers are listed below
with their addresses, principal occupations and present positions,
including any affiliation with Raymond James Financial, Inc. ("RJF"), RJA
and the Manager.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
<S> <C> <C>
Thomas A. James* Trustee Chairman of the Board since 1986 and Chief
880 Carillon Parkway Executive Officer since 1969 of RJF; Chairman
St. Petersburg, FL of the Board of RJA since 1986; Chairman of
33716 the Board of Eagle Asset Management, Inc.
("Eagle") since 1984 and Chief Executive
Officer of Eagle since July 1994.
Richard K. Riess* Trustee President of Eagle, January 1995 to present,
880 Carillon Parkway Chief Operating Officer, July 1988 to present,
St. Petersburg, FL Executive Vice President, July 1988-December
33716 1993; President of Heritage Mutual Funds, June
1985-November 1991.
Donald W. Burton Trustee President of South Atlantic Capital
614 W. Bay Street Corporation (venture capital) since October
Suite 200 1981.
Tampa, FL 33606
C. Andrew Graham Trustee Vice President of Financial Designs Ltd. since
Financial Designs, Ltd. 1992; Executive Vice President of the Madison
1775 Sherman Street Group, Inc., October 1991-1992; Principal of
Suite 1900 First Denver Financial Corporation (investment
Denver, CO 80203 banking) since 1987.
David M. Phillips Trustee Chairman and Chief Executive Officer of CCC
World Trade Center Information Services, Inc. since 1994 and of
Chicago InfoVest Corporation (information services to
444 Merchandise Mart the insurance and auto industries and consumer
Chicago, IL 60654 households) since October 1982.
- 31 -
<PAGE>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
Eric Stattin Trustee Litigation Consultant/Expert Witness and
2587 Fairway Village private investor since February 1988.
Drive
Park City, UT 84060
James L. Pappas Trustee Dean of College of Business Administration
University of South since August 1987 and Lykes Professor of
Florida Banking and Finance since August 1986 at
College of Business University of South Florida.
Administration
Tampa, FL 33620
Stephen G. Hill President Chief Executive Officer and President of the
880 Carillon Parkway Manager since April 1989 and Director since
St. Petersburg, FL December 31, 1994.
33716
Donald H. Glassman Treasurer Treasurer of the Manager since May 1989;
880 Carillon Parkway Treasurer of Heritage Mutual Funds since May
St. Petersburg, FL 1989.
33716
Clifford J. Alexander Secretary Partner, Kirkpatrick & Lockhart LLP.
1800 Massachusetts
Ave., N.W.
Washington, DC 20036
Patricia Schneider Assistant Compliance Administrator of the Manager.
880 Carillon Parkway Secretary
St. Petersburg, FL
33716
Robert J. Zutz Assistant Partner, Kirkpatrick & Lockhart LLP.
1800 Massachusetts Secretary
Ave., N.W.
Washington, DC 20036
</TABLE>
* These Trustees are "interested persons" as
defined in section 2(a)(19) of the 1940 Act.
The Trustees and officers of the Trust as a group, own less than
1% of each Fund's shares outstanding. The Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or
mistakes of fact or law. However, they are not protected against any
liability to which they would otherwise be subject by reason of willful
- 32 -
<PAGE>
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of their office.
The Trust currently pays Trustees who are not "interested
persons" of the Trust $1,333.33 annually and $333.33 per meeting of the
Board of Trustees. Trustees also are reimbursed for any expenses incurred
in attending meetings. Because the Manager performs substantially all of
the services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of the Manager receives any
compensation from the Fund for acting as a director or officer. The
following table shows the compensation earned by each Trustee for the
fiscal year ended October 31, 1995.
Compensation Table
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Pension or Retirement the Fund and the
Compensation From Benefits Accrued as Estimated Annual Heritage Family of
Name of Person, the Part of the Benefits Funds Paid
Position Fund Fund's Expenses Upon Retirement to Trustees
--------------- ----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Donald W. Burton, Trustee $2,333 $0 $0 $14,000
C. Andrew Graham, Trustee $2,667 $0 $0 $16,000
David M. Phillips, Trustee $2,333 $0 $0 $14,000
Eric Stattin, Trustee $2,667 $0 $0 $16,000
James L. Pappas, Trustee $2,667 $0 $0 $16,000
Richard K. Riess, Trustee $0 $0 $0 $0
Thomas A. James, Trustee $0 $0 $0 $0
</TABLE>
Investment Adviser and Administrator; Subadviser
------------------------------------------------
The Trust's investment adviser and administrator, Heritage Asset
Management, Inc., was organized as a Florida corporation in 1985. All the
capital stock of the Manager is owned by RJF. RJF is a holding company
that, through its subsidiaries, is engaged primarily in providing
customers with a wide variety of financial services in connection with
securities, limited partnerships, options, investment banking and related
fields.
- 33 -
<PAGE>
Under an Investment Advisory and Administration Agreement
("Advisory Agreement") dated January 19, 1990, between the Trust, on
behalf of the Funds, and the Manager, and subject to the control and
direction of the Board of Trustees, the Manager is responsible for
reviewing and establishing investment policies for the Trust as well as
administering the Trust's noninvestment affairs. Under a Subadvisory
Agreement, dated February 1, 1996, the Subadviser, subject to direction by
the Manager and Board of Trustees, will provide investment advice and
portfolio management services to High Yield for a fee payable by the
Manager.
The Manager also is obligated to furnish the Trust with office
space, administrative, and certain other services as well as executive and
other personnel necessary for the operation of the Trust. The Manager and
its affiliates also pay all the compensation of Trustees of the Trust who
are employees of the Manager and its affiliates. Each Fund pays all its
other expenses that are not assumed by the Manager. Each Fund also is
liable for such nonrecurring expenses as may arise, including litigation
to which the Trust may be a party. Each Fund also may have an obligation
to indemnify Trustees and officers of the Trust with respect to any such
litigation.
The Advisory Agreement and the Subadvisory Agreement each were
approved by the Board of Trustees of the Trust (including all of the
Trustees who are not "interested persons" of the Manager or Subadviser)
and the shareholders of the applicable Fund, in compliance with the 1940
Act. Each Agreement will continue in force for two years unless its
continuance is approved at least annually thereafter by (i) a vote, cast
in person at a meeting called for that purpose, of a majority of those
Trustees who are not "interested persons" of the Manager, Subadviser or
the Trust, and by (ii) the majority vote of either the full Board of
Trustees or the vote of a majority of the outstanding shares of each
applicable Fund. The Advisory and Subadvisory Agreements each
automatically terminate upon assignment, and each is terminable on not
more than 60 days' written notice by the Trust to either party. In
addition, the Advisory Agreement may be terminated on not less than 60
days' written notice by the Manager to the Trust and the Subadvisory
Agreement may be terminated on not less than 60 days' written notice by
the Manager or 90 days' written notice by the Subadviser. Under the terms
of the Advisory Agreement, the Manager automatically becomes responsible
for the obligations of the Subadviser upon termination of the Subadvisory
Agreement. In the event the Manager ceases to be the Manager of the Trust
or the Distributor ceases to be principal distributor of each Fund's
shares, the right of the Trust to use the identifying name of "Heritage"
may be withdrawn.
The Manager and Subadviser shall not be liable to the Trust or
any shareholder for anything done or omitted by them, except acts or
omissions involving willful malfeasance, bad faith, gross negligence or
reckless disregard of the duties imposed upon them by their agreements
with the Trust or for any losses that may be sustained in the purchase,
holding or sale of any security.
- 34 -
<PAGE>
All of the officers of the Trust except for Messrs. Alexander and
Zutz are officers or directors of the Manager. These relationships are
described under "Management of the Trust."
ADVISORY AND ADMINISTRATION FEE. The annual investment advisory
fee paid monthly by each Fund to the Manager is based on the applicable
Fund's average daily net assets as listed in each Fund's prospectus. The
Manager has entered into an agreement with the Subadviser wherein the
Subadviser will provide investment advice and portfolio management
services to High Yield for an annual fee paid by the Manager equal to .30%
of High Yield's average daily net assets without regard to any reduction
in fees actually paid to the Manager as a result of expense limitations.
For High Yield, the Manager voluntarily has agreed to waive
management fees to the extent that Fund expenses attributable to A shares
exceed 1.30% of the average daily net assets or to the extent that Fund
expenses attributable to C shares exceed 1.75% of average daily net assets
attributable to that class for this fiscal year. To the extent that the
Manager waives its fees for one class, it will waive its fees for the
other class on a proportionate basis. For the fiscal years ended
September 30, 1993, 1994 and 1995 management fees amounted to $135,963,
$238,964, and $194,363, respectively. For the same periods, the Manager
waived its fees in the amount of $86,812, $66,556, and $83,663
respectively. For the fiscal years ended September 30, 1993, 1994 and
1995 , the Manager paid subadvisory fees to Eagle Asset Management, Inc.,
High Yield's former subadviser, of $55,694, $59,753, and $48,591
respectively for such Fund.
For Government, the Manager voluntarily has agreed to waive its
fees to the extent that Fund expenses attributable to A shares exceed .95%
of the average daily net assets or to the extent that Fund expenses
attributable to C shares exceed 1.20% of average daily net assets
attributable to that class for this fiscal year. For the fiscal years
ended September 30, 1993, 1994 and 1995, management fees amounted to
$444,183, $324,438 and $146,658, respectively. For the same periods, the
Manager waived its fees in the amount of $142,627, $146,407 and $146,658,
respectively. For the fiscal year ended 1995, the Manager reimbursed
Government for expenses totaling $5,225.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate
certain of its expenses (in addition to distribution fees) to the specific
classes of the Fund's shares to which those expenses are attributable.
STATE EXPENSE LIMITATIONS. Certain states have established
expense limitations for investment companies whose shares are registered
for sale in that state. If a Fund's operating expenses (including the
investment advisory fee, but not including distribution fees, brokerage
commissions, interest, taxes and extraordinary expenses) exceed state
expense limits, the Manager will reimburse a Fund for its expenses over
the limitation. If a Fund's monthly projected operating expenses exceed
applicable state expense limitations, the investment advisory fee paid
will be reduced on a monthly basis by the amount of the excess, unless
- 35 -
<PAGE>
waivers of the expense limitations are obtained by the Trust. If
applicable state expense limitations are exceeded, the amount to be
reimbursed by the Manager will be limited to the amount of the investment
advisory fee and a Fund may have to cease offering its shares for sale in
such states until the expense ratio declines. Any fees waived by the
Manager can be recovered by it from the applicable Fund when such recovery
would not cause the Fund to exceed its expense limits. The most
restrictive current state expense limit is 2.5% of the Fund's first $30
million in average net assets, 2.0% of the next $70 million in assets and
1.5% of all excess average net assets.
Brokerage Practices
-------------------
Each Fund's portfolio turnover rate is computed by dividing the
lesser of purchases or sales of securities for the period by the average
value of portfolio securities for that period. The annualized portfolio
turnover for the fiscal year ended September 30, 1994 and 1995 were 135%
and 109%, respectively, for High Yield, and 214% and 162%, respectively,
for Government.
The Manager is responsible for the execution of each Fund's
investment portfolio transactions but has delegated that responsibility to
the Subadviser for a portion of the Diversified Fund's portfolio
transactions. In executing portfolio transactions, both the Manager and
the Subadviser must seek the most favorable price and execution for such
transactions. Best execution, however, does not mean that the Fund
necessarily will be paying the lowest commission or spread available.
Rather, each Fund also will take into account such factors as size of the
order, difficulty of execution, efficiency of the executing broker's or
dealer's facilities, and any risk assumed by the executing broker or
dealer.
It is a common practice in the investment advisory business for
advisers of investment companies and other institutional investors to
receive research, statistical and quotation services from broker-dealers
who execute portfolio transactions for the clients of such advisers.
Consistent with the policy of most favorable price and execution, both the
Manager and the Subadviser may give consideration to research, statistical
and other services furnished by brokers or dealers. In addition, they may
place orders with brokers or dealers who provide supplemental investment
and market research and securities and economic analysis and may pay to
these brokers a higher brokerage commission or spread than may be charged
by other brokers or dealers, provided that the Manager or Subadviser, as
applicable, determines in good faith that such commission is reasonable in
relation to the value of brokerage and research services provided. Such
research and analysis may be useful to the Manager and the Subadviser in
connection with services to clients other than a Fund.
Each Fund generally uses the Distributor as broker for agency
transactions in listed and OTC securities at commission rates and under
circumstances consistent with the policy of best execution. Commissions
- 36 -
<PAGE>
paid to the Distributor will not exceed "usual and customary brokerage
commissions." Rule 17e-1 under the 1940 Act defines "usual and customary"
commissions to include amounts that are "reasonable and fair compared to
the commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time."
The Manager and Subadviser also may select other brokers to
execute portfolio transactions. In the OTC market, each Fund generally
deals with primary market-makers unless a more favorable execution can
otherwise be obtained.
Each Fund effects its portfolio transactions in bonds with bond
dealers. Generally, bonds are traded on the OTC market on a "net" basis
without a stated commission through dealers acting for their own account
and not as brokers. Prices paid to dealers in principal transactions
generally include a "spread," which is the difference between the prices
at which the dealer is willing to purchase and sell a specific security at
that time. The spread includes the dealer's normal profit.
The Funds may not buy securities from, or sell securities to, the
Distributor as principal. However, the Board of Trustees has adopted
procedures in conformity with Rule 10f-3 under the 1940 Act whereby the
each Fund may purchase securities that are offered in underwritings in
which the Distributor is a participant. The Board of Trustees will
consider the possibilities of seeking to recapture for the benefit of each
Fund expenses of certain portfolio transactions, such as underwriting
commissions and tender offer solicitation fees, by conducting such
portfolio transactions through affiliated entities, including the
Distributor, but only to the extent such recapture would be permissible
under applicable regulations, including the rules of the National
Association of Securities Dealers, Inc. and other self-regulatory
organizations.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934,
as amended, each Fund expressly consented to the Distributor executing
transactions on an exchange on the Trust's behalf.
Distribution of Shares
----------------------
The Distributor and Representatives with whom the Distributor has
entered into dealer agreements offer shares of each Fund as agents on a
best efforts basis and are not obligated to sell any specific amount of
shares. Pursuant to its Distribution Agreement with the Trust with
respect to A shares and C shares of each Fund, the Distributor bears the
cost of making information about the Trust available through advertising,
sales literature and other means, the cost of printing and mailing
prospectuses to persons other than shareholders, and salaries and other
expenses relating to selling efforts. The Distributor also pays service
fees to dealers for providing personal services to Class A and C
- 37 -
<PAGE>
shareholders and for maintaining shareholder accounts. Each Fund pays the
cost of registering and qualifying their shares under state and federal
securities laws and pays its proportionate share for typesetting of its
prospectuses and printing and distributing such prospectuses to existing
shareholders.
As compensation for the services provided and expenses borne by
the Distributor pursuant to the Distribution Agreement with respect to A
shares, each Fund pays the Distributor the sales load described in its
prospectus and a 12b-1 fee in accordance with the Class A Plan described
below. The fee is accrued daily and paid monthly, and currently is equal
on an annual basis of an amount up to 0.35% of average daily net assets of
each Fund. For the fiscal year ended September 30, 1995 the Distributor
received 12b-1 fees in the amount of $112,311 and $102,284 for High Yield
and Government, respectively.
As compensation for the services provided and expenses borne by
the Distributor pursuant to the Distribution Agreement with respect to C
shares, the Trust pays the Distributor a 12b-1 fee in accordance with the
Class C Plan described below. The fee is accrued daily and paid monthly,
and currently is equal on an annual basis to 0.80% of average daily net
assets for High Yield and 0.60% of average daily net assets for
Government. For the fiscal year ended September 30, 1995, the Distributor
received 12b-1 fees in the amount of $1,355 and $69, respectively.
In reporting amounts expended under the Plans to the Board of
Trustees, the Distributor will allocate expenses attributable to the sale
of A shares and C shares to the applicable class based on the ratio of
sales of shares of that class to the sales of all the classes of shares of
the applicable Fund. The fees paid by one class of shares will not be
used to subsidize the sale of any other class of shares.
The Trust has adopted a Class A Distribution Plan on behalf of
each Fund (the "Class A Plan") which, among other things, permits it to
pay the Trust's Distributor the above-described fee out of each Fund's net
assets to finance activity that is intended to result in the sale and
retention of A shares of each such Fund. As required by Rule 12b-1 under
the 1940 Act, the Class A Plan was approved by the shareholders of each
Fund and the Board of Trustees, including a majority of the Trustees who
are not interested persons of the Trust (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Plan or the Distribution Agreement (the "Independent Trustees") after
determining that there is a reasonable likelihood that each Fund and its
Class A shareholders will benefit from the Class A Plan.
The Trust also has adopted a Class C Distribution Plan on behalf
of each Fund (the "Class C Plan") which, among other things, permits it to
pay the Distributor the above-described fee out of its net assets to
finance activity that is intended to result in the sale and retention of C
shares. The Distributor, on C shares, may retain the first 12 months
distribution fee for reimbursement of amounts paid to the broker-dealer at
the time of purchase. The Class C Plan was approved by the Board of
- 38 -
<PAGE>
Trustees, including a majority of the Independent Trustees after
determining that there is a reasonable likelihood that the Trust and its
Class C shareholders will benefit from the Class C Plan.
The Class A Plan and the Class C Plan each may be terminated by
vote of a majority of the Independent Trustees, or by vote of a majority
of the outstanding voting securities of the each Fund. The Board of
Trustees review quarterly a written report of Plan costs and the purposes
for which such costs have been incurred. A Plan may be amended by vote of
the Board of Trustees, including a majority of the Independent Trustees
cast in person at a meeting called for such purpose. Any change in a Plan
that would materially increase the distribution cost to a class of shares
of a Fund requires the approval of that class of shareholders.
The Distribution Agreement may be terminated at any time on 60
days' written notice without payment of any penalty by either party. The
Trust may effect such termination by vote of a majority of the outstanding
voting securities of the Trust or by vote of a majority of the Independent
Trustees. For so long as either the Class A Plan or the Class C Plan is
in effect, selection and nomination of the Independent Trustees shall be
committed to the discretion of such disinterested persons.
The Distribution Agreement and each of the above referenced Plans
will continue in effect for successive one-year periods, provided that
each such continuance is specifically approved (1) by the vote of a
majority of the Independent Trustees and (2) by the vote of a majority of
the entire Board of Trustees cast in person at a meeting called for that
purpose.
For the fiscal years ended September 30, 1993, 1994 and 1995 the
Distributor received $409,069, $138,242 and $53,388, respectively, of
which it retained $60,737, $22,027 and $7,667, respectively, for High
Yield, and $0, $0 and $7,285, respectively, of which it retained $0, $0
and $1,013, respectively for Government, as compensation for the sale of
these Funds' A shares.
Administration of the Trust
---------------------------
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. The
Manager, subject to the control of the Board of Trustees, will manage,
supervise and conduct the administrative and business affairs of the Trust
and of each Fund; furnish office space and equipment; oversee the
activities of the Subadviser and Custodian; and pay all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. The Manager also will provide certain shareholder servicing
activities for customers of the Trust.
The Manager also is the fund accountant and transfer and dividend
disbursing agent for the Trust. The Trust pays the Manager the Manager's
cost plus ten percent for its services as fund accountant and transfer and
dividend disbursing agent. For the three fiscal years ended September 30,
- 39 -
<PAGE>
1993, 1994 and 1995, the Manager earned $43,063, $38,623 and $29,973,
respectively, from Government for its services as transfer agent. For the
same three fiscal years the Manager earned $20,560, $26,724 and $28,181,
respectively from High Yield for its services as transfer agent.
For the period March 1, 1994 (commencement of Manager's
engagement as fund accountant) to September 30, 1994, and for the year
ended September 30, 1995, the Manager earned approximately $12,569 and
$28,242, respectively, from the Government for its services as fund
accountant. For the same periods the Manager earned $11,969 and $28,242,
respectively, from High Yield for its services as fund accountant.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 1912,
Boston, Massachusetts 02105, serves as custodian of the Trust's assets and
provides portfolio accounting and certain other services.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, serves as counsel to the Trust.
Schifino & Fleischer, P.A., of 1 Tampa City Center, Suite 200, Tampa,
Florida 33602, serves as counsel to the Distributor.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., One Post
Office Square, Boston, Massachusetts 02109, is the independent accountant
for the Trust. The Financial Statements and Financial Highlights of the
Trust that appear in this Statement of Additional Information have been
audited by Coopers & Lybrand L.L.P. included herein in reliance upon the
report of said firm of accountants, which is given upon their authority as
experts in accounting and auditing.
Potential Liability
-------------------
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for obligations of the Trust.
To protect its shareholders, the Trust has filed legal documents with
Massachusetts that expressly disclaim the liability of its shareholders
for acts or obligations of the Trust. These documents require notice of
this disclaimer to be given in each agreement, obligation or instrument
the Trust or its Trustees enter into or sign. In the unlikely event a
shareholder is held personally liable for the Trust's obligations, the
Trust is required to use its property to protect or compensate the share-
holder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will
occur only if the Trust itself cannot meet its obligations to indemnify
shareholders and pay judgments against them.
- 40 -
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
The rating services' descriptions of commercial paper ratings in which the
Funds may invest are:
Description of Moody's Investors Services, Inc. Short-Term Debt Ratings
-----------------------------------------------------------------------
Prime-1. Issuers (or supporting institutions) rated PRIME-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal
cash generation; well established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2. Issuers (or supporting institutions) rated PRIME-2 (P-2) have a
strong ability for repayment of senior short-term debt obligations. This
normally will be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while still
appropri-ate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Description of Standard & Poor's Ratings Services Commercial Paper Ratings
--------------------------------------------------------------------------
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment of issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-1
<PAGE>
<PAGE> 1
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Income Trust-Limited Maturity Government Portfolio:
We have audited the accompanying statement of assets and liabilities of
Heritage Income Trust-Limited Maturity Government Portfolio, including the
investment portfolio, as of September 30, 1995, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage Income Trust-Limited Maturity Government Portfolio as of September 30,
1995, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
/s/Coopers & Lybrand
Boston, Massachusetts
November 27, 1995
11
<PAGE> 2
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
REPURCHASE AGREEMENT--2.3%(A) VALUE
- ---------------------------------------------------------------------------------------- -----------
<S> <C> <C>
Repurchase Agreement with State Street Bank and Trust Company, dated September 29, 1995, @
6.10%, to be repurchased at $565,287 on October 2, 1995, collateralized by $445,000 United
States Treasury Bonds, 10.375% due November 15, 2009 (market value $585,217 including accrued
interest) (cost $565,000)....................................................................... $ 565,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C>
<CAPTION>
PRINCIPAL MATURITY
AMOUNT DATE
----------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--96.4%(A)
U.S. TREASURIES--91.9%
$5,000,000 U.S. Treasury Notes, 7.5%..............................................
01/31/97 5,107,810
1,500,000 U.S. Treasury Notes, 5.625%............................................
06/30/97 1,494,843
2,000,000 U.S. Treasury Notes, 6.5%..............................................
08/15/97 2,021,250
750,000 U.S. Treasury Notes, 7.375%............................................
11/15/97 771,328
6,500,000 U.S. Treasury Notes, 6.125%............................................
05/15/98 6,534,528
1,000,000 U.S. Treasury Notes, 7.0%..............................................
04/15/99 1,032,500
2,500,000 U.S. Treasury Notes, 6.875%............................................
08/31/99 2,575,000
1,500,000 U.S. Treasury Notes, 6.125%............................................
07/31/00 1,505,625
1,500,000 U.S. Treasury Notes, 6.25%.............................................
08/31/00 1,513,593
-----------
Total U.S. Treasuries.................................................. 22,556,477
-----------
U.S. GOVERNMENT AGENCIES--4.5%
FEDERAL HOME LOAN MORTGAGE CORPORATION:
664,652 REMIC, 7.0%, 1164 F PAC................................................
03/15/05 667,357
81,869 REMIC, 10.0%, 16 C TAC.................................................
02/15/13 84,130
271,609 REMIC, 6.5%, 1177 GC PAC...............................................
06/15/17 270,965
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
85,815 REMIC, 1989-16 C, Principal Only TAC, 5.63%*...........................
03/25/19 84,508
-----------
Total U.S. Government Agencies......................................... 1,106,960
-----------
Total U.S. Government and Agency Securities (cost $23,413,567)......... 23,663,437
-----------
TOTAL INVESTMENT PORTFOLIO (COST $23,978,567)(B) 98.7%(A).................................... 24,228,437
OTHER ASSETS AND LIABILITIES, NET, 1.3%(A)................................................... 337,565
-----------
NET ASSETS, 100.0%........................................................................... $24,566,002
===========
</TABLE>
- -------------------
* Yield to maturity (unaudited)
(a) Percentages are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is the same.
Market value includes net unrealized appreciation of $249,870, which
consists of aggregate gross unrealized appreciation for all securities in
which there is an excess of market value over tax cost of $256,766 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value of $6,896.
PAC-Planned Amortization Class
REMIC-Real Estate Mortgage Investment Conduit
TAC-Targeted Amortization Class
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 3
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $23,413,567) (Note 1)....................... $ 23,663,437
Repurchase agreement (identified cost $565,000) (Note 1).................................. 565,000
Cash...................................................................................... 2,186
Receivables:
Interest................................................................................ 349,464
From Manager............................................................................ 15,921
Fund shares sold........................................................................ 23,100
Deferred state registration expenses (Note 1)............................................. 11,479
Prepaid insurance......................................................................... 2,434
------------
Total assets...................................................................... 24,633,021
Liabilities
Payables (Note 4):
Fund shares redeemed.................................................................... $ 13,272
Accrued professional fees............................................................... 24,733
Accrued distribution fee................................................................ 7,016
Other accrued expenses.................................................................. 21,998
--------
Total liabilities................................................................. 67,019
------------
Net assets, at market value............................................................... $ 24,566,002
===========
Net Assets
Net assets consist of:
Undistributed net investment income (Note 1)............................................ $ 721,566
Net unrealized appreciation on investments.............................................. 249,870
Accumulated net realized loss (Note 1).................................................. (7,327,485)
Paid-in capital......................................................................... 30,922,051
------------
Net assets, at market value............................................................... $ 24,566,002
===========
Class A Shares
Net asset value and redemption price per share ($24,499,439 divided by 2,636,948 shares of
beneficial interest outstanding, no par value) (Note 2)................................. $9.29
====
Maximum offering price per share (100/96.25 of $9.29)..................................... $9.65
====
Class C Shares
Net asset value, offering price and redemption price per share ($66,563 divided by 7,181
shares of beneficial interest outstanding, no par value) (Notes 1 and 2)................ $9.27
====
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 4
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest................................................................................ $ 1,892,860
Expenses (Notes 1 and 4):
Management fee.......................................................................... $ 146,658
Distribution fee........................................................................ 102,354
Professional fees....................................................................... 40,949
Custodian/Fund accounting fees.......................................................... 38,862
Amortization of state registration expenses............................................. 31,925
Shareholder servicing fees.............................................................. 29,973
Reports to shareholders................................................................. 18,404
Trustees' fees and expenses............................................................. 9,725
Insurance............................................................................... 4,971
Amortization of organization expenses................................................... 4,167
Other................................................................................... 2,239
---------
Total expenses before waiver and reimbursement........................................ 430,227
Fees waived by Manager (Note 4)....................................................... (146,658)
Reimbursement from Manager............................................................ (5,225) 278,344
--------- -----------
Net investment income..................................................................... 1,614,516
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investment transactions............................................ (712,069)
Net increase in unrealized appreciation of investments during the year.................... 1,324,202
-----------
Net gain on investments........................................................... 612,133
-----------
Net increase in net assets resulting from operations...................................... $ 2,226,649
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------ ------------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income........................................................ $ 1,614,516 $ 2,985,426
Net realized loss from investment transactions............................... (712,069) (2,506,763)
Net increase (decrease) in unrealized appreciation of investments during the
year....................................................................... 1,324,202 (132,920)
------------------ ------------------
Net increase in net assets resulting from operations......................... 2,226,649 345,743
Distributions to shareholders from:
Net investment income, Class A Shares ($0.55 and $0.37 per share,
respectively).............................................................. (1,803,106) (2,604,342)
Net investment income, Class C Shares ($0.22 per share)...................... (702) --
Decrease in net assets from Fund share transactions (Note 2)................... (16,931,280) (58,333,599)
------------------ ------------------
Decrease in net assets......................................................... (16,508,439) (60,592,198)
Net assets, beginning of year.................................................. 41,074,441 101,666,639
------------------ ------------------
Net assets, end of year (including undistributed net investment income of
$721,566 and $909,583, respectively)......................................... $ 24,566,002 $ 41,074,441
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------------
CLASS C
FOR THE YEARS ENDED SEPTEMBER 30, SHARES
---------------------------------------------------------- -------
1995 1994* 1993 1992 1991 1990 + 1995 ++
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD.................... $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $9.60 $ 9.05
------ ------ ------ ------ ------ ------ -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a)...... 0.62 0.43 0.59 0.52 0.67 0.32 0.21
Net realized and unrealized
gain (loss) on
investments................. 0.12 (0.40) (0.44) 0.10 0.49 (0.12) 0.23
------ ------ ------ ------ ------ ------ -------
Total from Investment
Operations.................. 0.74 0.03 0.15 0.62 1.16 0.20 0.44
------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... (0.55) (0.37) (0.52) (0.55) (0.65) (0.27) (0.22)
Distributions from net
realized gains.............. -- -- (0.03) (0.23) -- (0.04) --
------ ------ ------ ------ ------ ------ -------
Total Distributions........... (0.55) (0.37) (0.55) (0.78) (0.65) (0.31) (0.22)
------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE
PERIOD........................ $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $9.49 $ 9.27
====== ====== ====== ====== ====== ====== =======
TOTAL RETURN (%)(D)............. 8.47 .36 1.58 6.47 12.64 2.11 (c) 4.90 (c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a)................... 0.95 0.95 0.91 0.78 1.07 1.10 (b) 1.20 (b)
Net investment income to
average daily net assets.... 5.50 4.60 5.99 5.66 6.87 7.04 (b) 5.19 (b)
Portfolio turnover rate....... 162 214 150 123 202 76 (b) 162
Net assets, end of the period
($ millions)................ 24 41 102 111 5 4 0.07
</TABLE>
- ---------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed income method does not correspond with results of
operations.
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.06, $.03, $.01, $.02, $.24 and $.22 per Class A Share,
respectively. The operating expense ratios including such items would be
1.47%, 1.18%, 1.03%, 1.23%, 3.58% and 5.88% (annualized) for Class A
Shares, respectively. Excludes management fees waived and expenses
reimbursed by the Manager in the amount of $.06 per Class C Share. The
operating expense ratio including such items would be 1.72% (annualized)
for Class C Shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
7
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage Income Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company consisting of three separate investment
portfolios, the Limited Maturity Government Portfolio (the "Fund"), the
Diversified Portfolio and the Institutional Government Portfolio. The
Fund currently issues Class A and Class C Shares. Class A Shares are
sold subject to a maximum sales charge of 3.75% of the amount invested
payable at the time of purchase. Class C Shares, which were offered to
shareholders beginning April 3, 1995, are sold subject to a contingent
deferred sales charge of 1% of the lower of net asset value or purchase
price payable upon any redemptions within one year after purchase. The
policies described below are followed consistently by the Fund in the
preparation of financial statements for the Fund in conformity with
generally accepted accounting principles. Financial statements for the
Diversified Portfolio and the Institutional Government Portfolio are
presented separately.
Security Valuation: The Fund values investment securities at market
value based on the last sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, market value is based on the most recent quoted bid price and
in the absence of a market quote, securities are valued using such
methods as the Board of Trustees believes would reflect fair market
value. Investments in certain debt instruments not traded in an
organized market, are valued on the basis of valuations furnished by
independent pricing services or broker/dealers that utilize information
with respect to market transactions in such securities or comparable
securities, quotations from dealers, yields, maturities, ratings and
various relationships between securities. Short term investments having
a maturity of 60 days or less are valued at cost, which when combined
with accrued interest included in interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund is treated as a single corporate taxpayer
as provided for in The Tax Reform Act of 1986, as amended. It is the
Fund's policy to comply with the requirements of the Internal Revenue
Code of 1986, as amended, which are applicable to regulated investment
companies and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no provision has been made for federal
income and excise taxes. As of September 30, 1995, the Fund has net tax
basis capital loss carry forwards of $6,719,571, which may be applied
against any realized net taxable gains until their expiration dates of
September 30, 2001 ($388,071), September 30, 2002 ($3,838,721) and
September 30, 2003 ($2,492,779). In addition, from November 1, 1994 to
September 30, 1995, the Fund incurred $607,914 of net realized capital
losses, which will be deferred and treated as arising on October 1, 1995
in accordance with regulations under the Internal Revenue Code.
Distribution of Income and Gains: Distributions of net investment income
are made monthly. Net realized gains from investment transactions for
the Fund during any particular year in excess of available capital loss
carryforwards, which, if not distributed, would be taxable to the Fund,
will be distributed to shareholders in the following fiscal year. The
Fund uses the identified cost method for determining realized gain or
loss on investments for both financial and federal income tax reporting
purposes.
Expenses: The Fund is charged for those expenses which are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are allocated proportionately among the
Portfolios. Expenses of the Fund are allocated to each class of shares
based upon their relative percentage of current net assets. All expenses
that are directly attributable to a specific class of shares, such as
distribution fees, are allocated to that class.
State Registration Expenses: State registration fees are amortized based
either on the time period covered by the registration or as related
shares are sold, whichever is appropriate for each state.
Organization Expenses: Expenses incurred in connection with the
formation of the Trust were deferred equally between the Portfolios and
amortized on a straight-line basis over 60 months from the date of
commencement of operations.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of Class A or Class C Shares of the Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All
premiums/original issue discounts are amortized/accreted for both
federal income tax and financial reporting purposes.
8
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At September 30, 1995, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A Shares of the Fund during the years ended
September 30, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Class A Shares
Shares sold.......................................... 261,509 $ 2,378,159 1,328,760 $ 12,386,246
Shares issued on reinvestment of distributions....... 174,641 1,583,746 254,068 2,360,924
Shares redeemed...................................... (2,312,072) (20,959,770) (7,843,995) (73,080,769)
---------- ------------ ---------- ------------
Net decrease......................................... (1,875,922) $(16,997,865) (6,261,167) $(58,333,599)
=========== ===========
Shares outstanding:
Beginning of the year.............................. 4,512,870 10,774,037
---------- ----------
End of the year.................................... 2,636,948 4,512,870
========= =========
</TABLE>
Transactions for Class C Shares of the Fund from April 3, 1995
(commencement of Class C Shares) to September 30, 1995 were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
----- -------
<S> <C> <C>
Class C Shares
Shares sold................................................. 7,432 $68,909
Shares issued on reinvestment of distributions.............. 76 702
Shares redeemed............................................. (327) (3,026)
----- -------
Net increase................................................ 7,181 $66,585
=======
Shares outstanding:
Beginning of period....................................... --
-----
End of period............................................. 7,181
=====
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the year ended September 30,
1995, purchases, sales and paydowns of investment securities (excluding
repurchase agreements and short-term obligations) aggregated
$44,549,320, $56,734,502 and $3,386,940, respectively.
Note 4: MANAGEMENT, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND TRUSTEES'
FEES. Under the Fund's Investment Advisory and Administration Agreement
with Heritage Asset Management, Inc. (the "Manager"), the Fund agrees to
pay to the Manager a fee equal to an annual rate of 0.50% of the Fund's
average daily net assets, computed daily and payable monthly. The
agreement also provides for a reduction in such fees in any year to the
extent that operating expenses of the Fund exceed applicable state
expense limitations. From inception of the Fund, the Manager has reduced
its investment advisory fees and reimbursed the Fund to the extent that
operating expenses have exceeded amounts ranging from .60% to 1.15% of
average daily net assets. Effective March 1, 1993, the Manager
voluntarily agreed to waive its fee and, if necessary, reimburse the
Fund to the extent that the Fund operating expenses exceed .95% for
Class A Shares (1.20% for Class C Shares effective April 3, 1995), on an
annual basis, of the Fund's average daily net assets attributable to
each class of shares. This agreement is more restrictive than any state
expense limitation. Under the agreement, management fees waived and
expenses reimbursed totalled $151,883 ($0.06 per share for each class)
for the year ended September 30, 1995. If total Fund expenses fall below
the expense limitation agreed to by the Manager before the end of the
year ending September 30, 1997, the Fund may be required to pay the
Manager a portion or all of the waived management fee. In addition, the
Fund may be required to pay the Manager a portion or all of the
management fee waived ($146,407) in the prior year ended September 30,
1994, if total Fund expenses fall below the annual expense limitation
before the end of the year ending September 30, 1996.
The Manager is also the Dividend Paying and Shareholder Servicing Agent
for the Fund. The amount payable to the Manager for such expenses as of
September 30, 1995 was $7,200. In addition, the Manager performs Fund
accounting services and charged $28,242 during the current year of which
$6,900 was payable as of September 30, 1995.
9
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-LIMITED MATURITY GOVERNMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Pursuant to the Class A Distribution Plan adopted in accordance with
Rule 12b-1 of the Investment Company Act of 1940, as amended, the Fund
is authorized to pay Raymond James & Associates, Inc. (the
"Distributor") a fee equal to .35% of the average daily net assets for
Class A Shares purchased on or before March 31, 1995. The Fund paid the
Distributor a fee equal to .25% for Class A Shares purchased after March
31, 1995. Under the Class C Distribution Plan the Fund paid the
Distributor a fee equal to .60% of the average daily net assets for
Class C Shares. The Distributor, on Class C Shares, may retain the first
12 months distribution fee for reimbursement of amounts paid to the
broker/dealer at the time of purchase. Such fees are accrued daily and
payable monthly. During the period $102,285 and $69 were paid for
distribution fees for Class A Shares and Class C Shares, respectively.
The Manager, Distributor, Fund Accountant and Shareholder Servicing
Agent are all wholly-owned subsidiaries of Raymond James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Income-Growth Trust, Heritage Capital Appreciation Trust,
Heritage Series Trust and Heritage U. S. Government Income Fund, mutual
funds that are also advised by the Manager of the Fund (collectively
referred to as the Heritage mutual funds). Each Trustee of the Heritage
mutual funds who is not an interested person of the Manager receives an
annual fee of $8,000 and an additional fee of $2,000 for each combined
quarterly meeting of the Heritage mutual funds attended. Trustees' fees
and expenses are shared equally by each of the Heritage mutual funds.
10
<PAGE> 9
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Income Trust - Diversified Portfolio:
We have audited the accompanying statement of assets and liabilities of
Heritage Income Trust-Diversified Portfolio, including the investment portfolio,
as of September 30, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage Income Trust-Diversified Portfolio as of September 30, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods indicated therein, in conformity with generally accepted
accounting principles.
/s/Coopers & Lybrand
Boston, Massachusetts
November 27, 1995
14
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
GOVERNMENT SECTOR--58.6%(A)
REPURCHASE AGREEMENT--8.0%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated September 29, 1995 @ 6.10%,
to be repurchased at $2,451,245 on October 2, 1995, (collateralized by $1,920,000 United States
Treasury Bonds, 10.375%, due November 15, 2009, with market value of $2,524,983, including
interest) (cost $2,450,000). ..................................................................... $ 2,450,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY
-------- DATE
--------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--50.6%(A)
- --------------------------------------------
U.S. TREASURIES--39.3%
--------------------
$1,000,000 U.S. Treasury Notes, 6.125%.............................................. 05/15/98 1,005,312
1,000,000 U.S. Treasury Notes, 7.75%............................................... 01/31/00 1,064,685
1,000,000 U.S. Treasury Notes, 6.125%.............................................. 09/30/00 1,002,500
3,750,000 U.S. Treasury Notes, 7.50%............................................... 02/15/05 4,082,813
3,250,000 U.S. Treasury Notes, 6.50%............................................... 05/15/05 3,322,108
1,500,000 U.S. Treasury Bonds, 6.875%.............................................. 08/25/25 1,576,406
-----------
Total U.S. Treasuries.................................................... 12,053,824
-----------
U.S. GOVERNMENT AGENCIES--11.2%
-----------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION:
-----------------------------------------
311,859 REMIC, 1259 J, 6.25%..................................................... 01/15/97 311,541
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
--------------------------------------
128,723 REMIC, 1989-16 C, Principal Only TAC, 5.6%*.............................. 03/25/19 126,763
1,000,000 REMIC, 1991-99 H, PAC, 7.5%.............................................. 12/25/20 1,006,250
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
------------------------------------------
1,000,000 REMIC, 1995-2 E, 8.5%.................................................... 07/20/18 1,025,313
934,309 Pool #385895, 8.5%....................................................... 09/15/24 972,755
-----------
Total U.S. Government Agencies........................................... 3,442,622
-----------
Total U.S. Government and Agency Securities (cost $15,121,443)........... 15,496,446
-----------
CORPORATE BONDS--43.1%(A)
- ------------------------
ADVERTISING/COMMUNICATIONS--1.4%
--------------------------------
400,000 Katz Corporation, 12.75%................................................. 11/15/02 438,000
-----------
AUTO PARTS/EQUIPMENT--0.6%
---------------------------
200,000 Venture Holdings Trust, 9.75%............................................ 04/01/04 172,000
-----------
BEVERAGES--1.6%
----------------
500,000 Royal Crown Corporation, 9.75%........................................... 08/01/00 485,000
-----------
BROADCASTING--1.6%
-------------------
500,000 Storer Communications, 10%............................................... 05/15/03 498,750
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
BUILDING--1.4%
---------------
$500,000 Oriole Homes Corporation, 12.5%.......................................... 01/15/03 $ 430,000
-----------
CONTAINERS--3.6%
-----------------
550,000 Owens-Illinois, Inc., 10.5%.............................................. 06/15/02 573,375
500,000 Riverwood International Corporation, 11.25%.............................. 06/15/02 541,875
-----------
1,115,250
-----------
ELECTRONICS/ELECTRIC--4.4%
-------------------------
700,000 Harman International Industries, Inc., 12%............................... 08/01/02 770,000
550,000 MagneTek, Inc., 10.75%................................................... 11/15/98 580,938
-----------
1,350,938
-----------
FINANCE--1.8%
--------------
550,000 Scotsman Group, Inc., 9.5%............................................... 12/15/00 539,000
-----------
FOODS--1.5%
-------------
500,000 Specialty Foods Acquisition Corporation, 10.25%.......................... 08/15/01 472,500
-----------
HEALTH CARE CENTERS--5.2%
-------------------------
250,000 OrNda HealthCorp, 11.375%................................................ 08/15/04 279,375
250,000 OrNda HealthCorp, 12.25%................................................. 05/15/02 277,500
500,000 Paracelsus Healthcare, Inc., 9.875%...................................... 10/15/03 503,750
500,000 Tenet Healthcare Corporation, 10.125%.................................... 03/01/05 529,375
-----------
1,590,000
-----------
HOTELS/MOTELS/INNS--2.0%
-------------------------
500,000 La Quinta Inns, Inc., 9.25%.............................................. 05/15/03 517,500
100,000 Prime Hospitality Corporation, 7%(c)..................................... 04/15/02 107,000
-----------
624,500
-----------
JEWELRY, SILVERWARE, TIMEPIECES, CHINA--2.2%
-----------------------------------------
1,000,000 Finlay Enterprises, Inc., 0% to 5/1/98, 12% to maturity.................. 05/01/05 675,000
-----------
LAND DEVELOPMENT/REAL ESTATE--0.7%
-----------------------------------
250,000 Alexander Haagen Properties, Inc., 7.5%(c)............................... 01/15/01 208,125
-----------
LEISURE/AMUSEMENT--1.6%
-------------------------
500,000 Selmer Company, Inc., 11.0%.............................................. 05/15/05 487,500
-----------
MEDICAL EQUIPMENT/SUPPLY--2.4%
-------------------------------
250,000 Amsco International Corporation, 4.5% to 10/15/95, 6.5% to maturity(c)... 10/15/02 237,500
500,000 Wright Medical Technology, 10.75%, Series "B"............................ 07/01/00 502,500
-----------
740,000
-----------
OIL & GAS--3.7%
----------------
600,000 Global Marine, Inc., 12.75%.............................................. 12/15/99 663,000
475,000 Tuboscope Vetco International, Inc., 10.75%.............................. 04/15/03 475,000
-----------
1,138,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
RETAIL--4.0%
-------------
$750,000 Big 5 Holdings Corporation, 13.625%...................................... 09/15/02 $ 735,000
500,000 Comp USA, Inc., 9.5%..................................................... 06/15/00 498,750
-----------
1,233,750
-----------
TELECOMMUNICATIONS--3.3%
-------------------------
250,000 Centennial Cellular Corporation, 10.125%................................. 05/15/05 252,188
1,000,000 Comcast Cellular Corporation, Series "A", Zero Coupon Bond, 11.7%*....... 03/05/00 761,250
-----------
1,013,438
-----------
Total corporate bonds (cost $12,997,741)................................. 13,211,751
-----------
WARRANTS--0.1%(A)
- --------------
UNITS
----
MEDICAL EQUIPMENT/SUPPLIES
---------------------------
206 Wright Medical Technology................................................ 33,970
-----------
Total Warrants (cost $40)................................................ 33,970
-----------
TOTAL INVESTMENT PORTFOLIO (cost $30,569,224)(b), 101.8%(a).................................. 31,192,167
OTHER ASSETS AND LIABILITIES, NET, (1.8%)(a)................................................. (545,500)
-----------
NET ASSETS, 100.0%........................................................................... $30,646,667
==========
</TABLE>
- ---------------
* Yield to Maturity (unaudited)
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
$30,571,490. Market value includes net unrealized appreciation of $620,677,
which consists of aggregate gross unrealized appreciation for all securities
in which there is an excess of market value over tax cost of $830,205 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value of $209,528.
(c) Convertible security.
PAC-Planned Amortization Class
REMIC-Real Estate Mortgage Investment Conduit
TAC-Targeted Amortization Class
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 13
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $28,119,224) (Note 1)...................... $28,742,167
Repurchase agreement (identified cost $2,450,000) (Note 1)............................... 2,450,000
Cash..................................................................................... 774
Receivables:
Interest............................................................................... 527,494
Fund shares sold....................................................................... 30,710
Deferred state registration expenses (Note 1)............................................ 10,373
Prepaid insurance........................................................................ 2,434
-----------
Total assets..................................................................... 31,763,952
Liabilities
Payables (Note 4):
Investments purchased.................................................................. $1,002,500
Fund shares redeemed................................................................... 3,498
Accrued professional fees.............................................................. 25,533
Accrued management fee................................................................. 42,420
Accrued distribution fee............................................................... 8,949
Other accrued expenses................................................................. 34,385
----------
Total liabilities................................................................ 1,117,285
-----------
Net assets, at market value.............................................................. $30,646,667
==========
Net Assets
Net assets consist of:
Undistributed net investment income (Note 1)........................................... $ 93,090
Net unrealized appreciation on investments............................................. 622,943
Accumulated net realized loss (Note 1)................................................. (2,407,214)
Paid-in capital........................................................................ 32,337,848
-----------
Net assets, at market value.............................................................. $30,646,667
==========
Class A Shares
Net asset value and redemption price per share ($30,004,403 divided by 3,018,826 shares
of beneficial interest outstanding, no par value) (Note 2)............................. $ 9.94
=====
Maximum offering price per share (100/96.25 of $9.94).................................... $10.33
=====
Class C Shares
Net assets value, offering price and redemption price per share ($642,264 divided by
64,783 shares of beneficial interest outstanding, no par value) (Notes 1 and 2)........ $ 9.91
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 14
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Interest................................................................................... $ 2,783,575
Expenses (Notes 1 and 4):
Management fee........................................................................... $194,363
Distribution fee......................................................................... 113,666
Custodian/Fund accounting fees........................................................... 41,821
Professional fees........................................................................ 38,699
Shareholder servicing fees............................................................... 28,181
Amortization of state registration expenses.............................................. 30,176
Reports to shareholders.................................................................. 21,065
Amortization of organization expenses.................................................... 4,167
Trustees' fees and expenses.............................................................. 9,800
Insurance................................................................................ 4,971
Other.................................................................................... 1,966
--------
Total expenses before waiver........................................................... 488,875
Fees waived by Manager (Note 4)........................................................ (83,663) 405,212
-------- -----------
Net investment income...................................................................... 2,378,363
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investment transactions............................................. (1,106,214)
Net increase in unrealized appreciation of investments during the year..................... 2,100,137
-----------
Net gain on investments............................................................ 993,923
-----------
Net increase in net assets resulting from operations....................................... $ 3,372,286
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------ ------------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income.................................................. $ 2,378,363 $ 2,692,274
Net realized loss from investment transactions......................... (1,106,214) (1,014,329)
Net increase (decrease) in unrealized appreciation of investments
during the year...................................................... 2,100,137 (2,338,323)
------------------ ------------------
Net increase (decrease) in net assets resulting from operations........ 3,372,286 (660,378)
Distributions to shareholders from:
Net investment income, Class A Shares ($.74 and $.71 per share,
respectively)........................................................ (2,484,241) (2,770,014)
Net investment income, Class C Shares ($.30 per share)................. (10,482) --
Net realized gains, Class A Shares ($.07 per share).................... -- (270,959)
Distribution in excess of net realized gains, Class A Shares ($.07 per
share)............................................................... -- (277,151)
Decrease in net assets from Fund share transactions (Note 2)............. (6,054,028) (2,402,711)
------------------ ------------------
Decrease in net assets................................................... (5,176,465) (6,381,213)
Net assets, beginning of the year........................................ 35,823,132 42,204,345
------------------ ------------------
Net assets, end of the year (including undistributed net investment
income of $93,090 and $199,940, respectively).......................... $ 30,646,667 $ 35,823,132
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 15
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------
CLASS C
FOR THE YEARS ENDED SEPTEMBER 30, SHARES
------------------------------------------ -------
1995 1994 1993 1992 1991 1990+ 1995++
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD................ $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $9.60 $ 9.62
------ ------ ------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a).............................. 0.72 0.69 0.81 0.83 0.87 0.43 0.31
Net realized and unrealized gain (loss) on
investments......................................... 0.31 (0.84) 0.07 0.59 1.00 (0.34 ) 0.28
------ ------ ------ ------ ------ ------ -------
Total from Investment Operations...................... 1.03 (0.15) 0.88 1.42 1.87 0.09 0.59
------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income.................. (0.74) (0.71) (0.83) (0.85) (0.87) (0.36 ) (0.30 )
Distributions from net realized gains................. -- (0.07) (0.22) (0.04) -- (0.04 ) --
Distribution in excess of net realized gains.......... -- (0.07) -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total Distributions................................... (0.74) (0.85) (1.05) (0.89) (0.87) (0.40 ) (0.30 )
------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE PERIOD...................... $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $9.29 $ 9.91
====== ====== ====== ====== ====== ======= =========
TOTAL RETURN (%)(D)..................................... 11.23 (1.59) 8.57 14.35 21.19 0.91 (c) 6.18 (c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a)........................................... 1.25 1.25 1.19 0.96 1.31 1.35 (b) 1.70 (b)
Net investment income to average daily net assets..... 7.35 6.76 7.57 8.11 9.10 8.97 (b) 6.67 (b)
Portfolio turnover rate............................... 109 135 150 71 119 39 (b) 109
Net assets, end of the period ($ millions)............ 30 36 42 32 15 10 0.6
</TABLE>
- ---------------
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.03, $.02, $.02, $.05, $.07 and $.08 per Class A Share,
respectively. The operating expense ratios including such items would be
1.51%, 1.42%, 1.43%, 1.60%, 2.17% and 3.00% (annualized) for Class A Shares,
respectively. Excludes management fees waived by the Manager in the amount
of $0.03 per Class C Share. The operating expense ratio including such items
would be 1.96% (annualized) for Class C Shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
10
<PAGE> 16
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage Income Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company consisting of three separate investment
portfolios, the Diversified Portfolio (the "Fund"), the Limited Maturity
Government Portfolio and the Institutional Government Portfolio. The
Fund currently issues Class A and Class C Shares. Class A Shares are
sold subject to a maximum sales charge of 3.75% of the amount invested
payable at the time of purchase. Class C Shares, which were offered to
shareholders beginning April 3, 1995, are sold subject to a contingent
deferred sales charge of 1% of the lower of net asset value or purchase
price payable upon any redemptions within one year after purchase. The
policies described below are followed consistently by the Fund in the
preparation of financial statements for the Fund in conformity with
generally accepted accounting principles. Financial statements for the
Limited Maturity Government Portfolio and the Institutional Government
Portfolio are presented separately.
Security Valuation: The Fund values investment securities at market
value based on the last sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, market value is based on the most recent quoted bid price and
in the absence of a market quote, securities are valued using such
methods as the Board of Trustees believes would reflect fair market
value. Investments in certain debt instruments not traded in an
organized market, are valued on the basis of valuations furnished by
independent pricing services or broker/dealers that utilize information
with respect to market transactions in such securities or comparable
securities, quotations from dealers, yields, maturities, ratings and
various relationships between securities. Short term investments having
a maturity of 60 days or less are valued at cost, which when combined
with accrued interest included in the interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund is treated as a single corporate
taxpayer as provided for in The Tax Reform Act of 1986, as amended. The
Fund's policy is to comply with the requirements of the Internal Revenue
Code of 1986, as amended which are applicable to regulated investment
companies and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no provision has been made for federal
income and excise taxes. As of September 30, 1995, the Fund had a net
tax basis capital loss carryforward of $1,402,142, which may be applied
against any realized net taxable gains until its expiration date of
September 30, 2003. From November 1, 1994 to September 30, 1995, the
Fund incurred $1,002,808 of net realized capital losses, which will be
deferred and treated as arising on October 1, 1995, in accordance with
regulations under the Internal Revenue Code.
Distribution of Income and Gains: Distributions of net investment
income are made monthly. Net realized gains from investment transactions
for the Fund during any particular year in excess of available capital
loss carryforwards, which, if not distributed, would be taxable to the
Fund, will be distributed to shareholders in the following fiscal year.
The Fund uses the identified cost method for determining realized gain
or loss on investments for both financial and federal income tax
reporting purposes.
Expenses: The Fund is charged for those expenses that are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are allocated proportionately among the
Portfolios. Expenses of the Fund are allocated to each class of shares
based upon their relative percentage of current net assets. All expenses
that are directly attributable to a specific class of shares, such as
distribution fees, are allocated to that class.
State Registration Expenses: State registration fees are amortized
based either on the time period covered by the registration or as
related shares are sold, whichever is appropriate for each state.
Organization Expenses: Expenses incurred in connection with the
formation of the Trust were deferred equally between the Portfolios and
amortized on a straight-line basis over 60 months from the date of
commencement of operations.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of Class A or Class C Shares of the Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. All premiums/original issue discounts are
amortized/accreted for both federal income tax and financial reporting
purposes.
11
<PAGE> 17
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At September 30, 1995, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A Shares of the Fund during the years ended September
30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------------- -------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold.............................................. 189,017 $ 1,831,973 601,368 $ 6,198,262
Shares issued on reinvestment of distributions........... 194,940 1,881,075 250,301 2,562,687
Shares redeemed.......................................... (1,079,005) (10,410,508) (1,099,200) (11,163,660)
---------- ------------ ---------- ------------
Net decrease............................................. (695,048) $ (6,697,460) (247,531) $ (2,402,711)
=========== ===========
Shares outstanding:
Beginning of the year.................................. 3,713,874 3,961,405
---------- ----------
End of the year........................................ 3,018,826 3,713,874
========= =========
</TABLE>
Transactions for Class C Shares of the Fund from April 3, 1995 (commencement
of Class C Shares) to September 30, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS C SHARES SHARES AMOUNT
---------------------------------------------------------------- ------ --------
<S> <C> <C> <C> <C>
Shares sold..................................................... 64,725 $642,880
Shares issued on reinvestment of distributions.................. 582 5,752
Shares redeemed................................................. (524) (5,200)
----- -------
Net increase.................................................... 64,783 $643,432
-------
-------
Shares outstanding:
Beginning of period........................................... --
-----
End of period................................................. 64,783
-----
-----
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the year ended September 30,
1995, purchases, sales and paydowns of investment securities (excluding
repurchase agreements and short-term obligations) were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
- --------------------------------------------------- -------------------------------
PURCHASES SALES PAYDOWNS PURCHASES SALES
- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$27,900,236 $30,074,393 $ 713,931 $ 4,763,905 $ 8,175,225
</TABLE>
Note 4: MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND
TRUSTEES' FEES. Under the Fund's Investment Advisory and Administration
Agreement with Heritage Asset Management, Inc. (the "Manager"), the Fund
agrees to pay to the Manager a fee equal to an annualized rate of 0.60%
of the first $100,000,000 of the Fund's average daily net assets, and
0.50% of any excess over $100,000,000 of such net assets, computed daily
and payable monthly. The agreement also provides for a reduction in such
fees in any year to the extent that operating expenses of the Fund
exceed applicable state expense limitations. From inception of the Fund,
the Manager has reduced its investment advisory fees and reimbursed the
Fund to the extent that operating expenses have exceeded amounts ranging
from .85% to 1.35% of average daily net assets. Effective April 1, 1993,
the Manager voluntarily agreed to waive its fee and, if necessary,
reimburse the Fund to the extent that the Fund operating expenses exceed
1.25% for Class A Shares (1.70% for Class C Shares effective April 3,
1995), on an annual basis, of the Fund's average daily net assets
attributable to each class of shares. This agreement is more restrictive
than any state expense limitation. Under the agreement, management fees
of $83,663 ($0.03 per share for each class) were waived in the year
ended September 30, 1995. If total Fund expenses fall below the expense
limitation agreed to by the Manager before the end of the year ending
September 30, 1997, the Fund may be required to pay the Manager a
portion or all of the waived management fee. In addition, the Fund may
be required to pay the Manager a portion or all of the management fee
waived ($66,556) in the prior year ended September 30, 1994, if total
Fund expenses fall below the annual expense limitation before the end of
the year ending September 30, 1996.
12
<PAGE> 18
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
The Manager has entered into an agreement with Eagle Asset Management,
Inc. (the "Subadviser") for the Subadviser to provide to the Fund
investment advice, portfolio management services (including the
placement of brokerage orders) and certain compliance and other services
for a fee payable by the Manager equal to 25% of the fees payable by the
Fund to the Manager without regard to any reduction due to the
imposition of expense limitations.
The Manager is also the Dividend Paying and Shareholder Servicing Agent
for the Fund. The amount payable to the Manager for such expenses as of
September 30, 1995 was $7,050. In addition, the Manager performs Fund
accounting services and charged $28,242 during the current year of which
$6,900 was payable as of September 30, 1995.
Pursuant to the Class A Distribution Plan adopted in accordance with
Rule 12b-1 of the Investment Company Act of 1940, as amended, the Fund
is authorized to pay Raymond James & Associates, Inc. (the
"Distributor") a fee equal to .35% of the average daily net assets for
Class A Shares purchased on or before March 31, 1995. The Fund paid the
Distributor a fee equal to .25% for Class A Shares purchased after March
31, 1995. Under the Class C Distribution Plan, the Fund paid the
Distributor a fee equal to .80% of the average daily net assets for
Class C Shares. The Distributor, on Class C Shares, may retain the first
12 months distribution fee for reimbursement of amounts paid to the
broker/dealer at the time of purchase. Such fees are accrued daily and
payable monthly. During the period $112,311 and $1,355 were paid for
distribution fees for Class A Shares and Class C Shares, respectively.
The Manager, Distributor, Fund Accountant and Shareholder Servicing
Agent are all wholly-owned subsidiaries of Raymond James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Income-Growth Trust, Heritage Capital Appreciation Trust,
Heritage Series Trust and Heritage U.S. Government Income Fund, mutual
funds which are also advised by the Manager of the Fund (collectively
referred to as the Heritage mutual funds). Each Trustee of the Heritage
mutual funds who is not an interested person of the Manager receives an
annual fee of $8,000 and an additional fee of $2,000 for each combined
quarterly meeting of the Heritage mutual funds attended. Trustees' fees
and expenses are shared equally by each of the Heritage mutual funds.
13
<PAGE>