As filed with the Securities and Exchange Commission on January 30, 1997
File No. 33-30361
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 13
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
HERITAGE INCOME TRUST
(Exact name of registrant as specified in charter)
880 Carillon Parkway
St. Petersburg, FL 33716
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 573-3800
STEPHEN G. HILL, PRESIDENT
880 Carillon Parkway
St. Petersburg, FL 33716
(Name and address of agent for service)
Copies to:
CLIFFORD J. ALEXANDER, ESQ.
Kirkpatrick & Lockhart LLP 1800 M
Street, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective on February 1, 1997
pursuant to paragraph (b) of Rule 485.
Registrant filed a notice pursuant to Rule 24f-2 under the Investment Company
Act of 1940 on or about November 27, 1996.
Page 1 of ___ Pages
Exhibit Index begins on Page ___
<PAGE>
HERITAGE INCOME TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Prospectus for the High Yield Bond Fund and Intermediate
Government Fund
Statement of Additional Information for High Yield Bond
Fund and Intermediate Government Fund
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
HERITAGE INCOME TRUST:
HIGH YIELD BOND FUND and
INTERMEDIATE GOVERNMENT FUND
N-1A CROSS-REFERENCE SHEET
PART A ITEM NO. PROSPECTUS CAPTION
- --------------- ------------------
1. Cover Page Cover Page
2. Synopsis Total Fund Expenses
3. Condensed Financial Financial Highlights;
Information Performance Information
4. General Description of Cover Page; About the Trust and
Registrant the Funds; Investment
Objectives, Policies and Risk
Factors
5. Management of the Fund Management of the Funds
5A. Management's Discussion Inapplicable
of Fund Performance
6. Capital Stock and Other Cover Page; About the Trust and
Securities and the Funds; Management of
the Funds; Choosing a Class of
Shares; Dividends and Other
Distributions; Taxes;
Shareholder Information
7. Purchase of Securities Net Asset Value; Purchase
Being Offered Procedures; Minimum Investment
Required/Accounts With Low
Balances; Systematic Investment
Programs; Retirement Plans;
Choosing a Class of Shares;
What Class A Shares Will Cost;
What Class C Shares Will Cost;
Distribution Plans
8. Redemption or Repurchase Minimum Investment Required/
Accounts With Low Balances; How
to Redeem Shares; Receiving
Payment; Exchange Privilege
9. Pending Legal Proceedings Inapplicable
<PAGE>
STATEMENT OF ADDITIONAL
PART B ITEM NO. INFORMATION CAPTION
- --------------- -------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and General Information
History
13. Investment Objectives and Investment Information -
Policies Investment Objectives,
Investment Policies and
Industry Classifications;
Investment Limitations
14. Management of the Fund Management of the Trust
15. Control Persons and Five Percent Shareholders
Principal Holders of
Securities
16. Investment Advisory and Management of the Trust,
Other Services Investment Adviser and
Administrator; Subadviser;
Distribution of Shares;
Administration of the Trust
17. Brokerage Allocation Brokerage Practices
18. Capital Stock and Other General Information; Trust
Securities Information; Potential
Liability
19. Purchase, Redemption and Net Asset Value; Investing in
Pricing of Securities the Funds; Redeeming Shares;
Being Offered Exchange Privilege
20. Tax Status Taxes
21. Underwriters Trust Information -
Distribution of Shares
22. Calculation of Performance Information
Performance Data
23. Financial Statements Reports of Independent
Accountants and Financial
Statements
- 2 -
<PAGE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.
- 3 -
<PAGE>
<PAGE> 1
[HERITAGE INCOME TRUST (TM) LOGO]
Heritage Income Trust is a mutual fund offering shares in two separate
investment portfolios, the High Yield Bond Fund and the Intermediate Government
Fund (each a "Fund" and collectively, the "Funds"). The High Yield Bond Fund has
an investment objective of high current income and 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 Intermediate Government Fund has
an investment objective of high current income consistent with the preservation
of capital and 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 Intermediate Government Fund will maintain a dollar-weighted
effective average maturity of between three and ten years. Each 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
either Fund and should be kept for future reference. A Statement of Additional
Information relating to the Funds, dated February 1, 1997, 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, 1997
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
GENERAL INFORMATION......................................... 1
About the Trust and the Funds............................. 1
Total Fund Expenses....................................... 1
Financial Highlights...................................... 3
Investment Objectives, Policies and Risk Factors.......... 5
Net Asset Value........................................... 16
Performance Information................................... 17
INVESTING IN THE FUNDS...................................... 17
Purchase Procedures....................................... 17
Minimum Investment Required/Accounts With Low Balances.... 18
Systematic Investment Programs............................ 19
Retirement Plans.......................................... 19
Choosing a Class of Shares................................ 19
What Class A Shares Will Cost............................. 20
What Class C Shares Will Cost............................. 22
How to Redeem Shares...................................... 22
Receiving Payment......................................... 24
Exchange Privilege........................................ 25
MANAGEMENT OF THE FUNDS..................................... 26
SHAREHOLDER AND ACCOUNT POLICIES............................ 27
Dividends and Other Distributions......................... 27
Distribution Plans........................................ 28
Taxes..................................................... 28
Shareholder Information................................... 29
APPENDIX.................................................... A-1
Prospectus
</TABLE>
<PAGE> 3
GENERAL INFORMATION
ABOUT THE TRUST AND THE FUNDS
------------------------------------------------------------
------------------------------------------------------------
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 High Yield Bond
Fund and the Intermediate Government Fund. The High Yield
Bond Fund is designed for individuals and fiduciaries whose
investment objective is high current income and the
Intermediate Government Fund is designed for individuals and
fiduciaries whose investment objective is high current
income consistent with the preservation of capital. Each
Fund offers two classes of shares, Class A shares ("A
shares") and Class C shares ("C shares"). Each Fund requires
a minimum initial investment of $1,000, except for certain
investment plans for which lower limits may apply. See
"Investing in the Funds."
TOTAL FUND EXPENSES
------------------------------------------------------------
------------------------------------------------------------
Shown below are Class A and Class C expenses incurred
by each Fund during its 1996 fiscal year.
<TABLE>
<CAPTION>
HIGH YIELD INTERMEDIATE
BOND FUND GOVERNMENT FUND
----------------- -----------------
CLASS A CLASS C CLASS A CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price)...................... 3.75% None 3.75% None
Maximum contingent deferred sales load (as a
percentage of original purchase price or redemption
proceeds, as applicable)........................... None 1.00%* None 1.00%*
Wire redemption fee (per transaction)................ $5.00 $5.00 $5.00 $5.00
ANNUAL PORTFOLIO OPERATING EXPENSES
Management fee (after fee waiver).................... 0.32% 0.32% 0.00% 0.00%
12b-1 distribution fee............................... 0.33% 0.80% 0.34% 0.60%
Other expenses (after expense reimbursement)......... 0.58% 0.58% 0.60% 0.60%
----- ----- ----- -----
Total Fund operating expenses (after fee waiver and
expense reimbursement)............................. 1.23% 1.70% 0.94% 1.20%
===== ===== ===== =====
</TABLE>
*Declining to 0% at the first year.
The Funds' manager, Heritage Asset Management, Inc.
(the "Manager"), voluntarily will waive its fees and, if
necessary, reimburse the High Yield Bond 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, 1997. Absent
fee waivers, the management fee for each class would have
been 0.60%, and total High Yield Bond Fund operating
expenses would have been 1.51% for A shares and 1.98% for C
shares. In addition, the Manager voluntarily will waive its
fees and, if necessary, reimburse the Intermediate
Government 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, 1997. Absent fee waivers, the management fee
and other expenses for each class would have been 0.50% and
0.77%, respectively, and total Intermediate Government Fund
operating expenses
Prospectus 1
<PAGE> 4
would have been 1.61%, for A shares and 1.87% 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 distribution fees, it is possible that
long-term shareholders of a 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 High Yield Bond Fund
Operating Expenses -- A
shares..................... 50 75 103 181
Total High Yield Bond Fund
Operating Expenses -- C
shares..................... 27 54 92 201
Total Intermediate Government
Fund Operating Expenses --
A shares................... 47 66 88 149
Total Intermediate Government
Fund 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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total High Yield Bond Fund
Operating Expenses -- A
shares..................... 50 75 103 181
Total High Yield Bond Fund
Operating Expenses -- C
shares..................... 17 54 92 201
Total Intermediate Government
Fund Operating Expenses --
A shares................... 47 66 88 149
Total Intermediate Government
Fund 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."
Prospectus 2
<PAGE> 5
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following tables show important financial information for an A share
and a C share of each 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 appearing in
the Statement of Additional Information ("SAI"). The financial statements and
the information in these tables for the fiscal year ended September 30, 1996
have been audited by Price Waterhouse LLP, independent accountants, whose report
thereon is included in the SAI, which may be obtained by calling your Fund at
(800) 421-4184. Information presented for the years ended September 30, 1995 and
prior thereto was audited by other auditors who served as the Trust's
independent accountants for those years.
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
-------------------------------------------------------------------------------------
CLASS A CLASS C
--------------------------------------------------------------- -----------------
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996(A) 1995 1994 1993 1992 1991 1990+ 1996(A) 1995++
------- ------ ------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD.................................. $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $ 9.60 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(b)................ 0.84(f) 0.72 0.69 0.81 0.83 0.87 0.43 0.79(f) 0.31
Net realized and unrealized gain (loss)
on investments........................ 0.24 0.31 (0.84) 0.07 0.59 1.00 (0.34) 0.24 0.28
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations........ 1.08 1.03 (0.15) 0.88 1.42 1.87 0.09 1.03 0.59
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (0.80) (0.74) (0.71) (0.83) (0.85) (0.87) (0.36) (0.76) (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..................... (0.80) (0.74) (0.85) (1.05) (0.89) (0.87) (0.40) (0.76) (0.30)
------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD........ $10.22 $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $10.18 $ 9.91
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(E)....................... 11.44 11.23 (1.59) 8.57 14.35 21.19 0.91(d) 10.93 6.18(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
daily net assets(b)................... 1.23 1.25 1.25 1.19 0.96 1.31 1.35(c) 1.70 1.70(c)
Net investment income to average daily
net assets............................ 8.41 7.35 6.76 7.57 8.11 9.10 8.97(c) 8.39 6.67(c)
Portfolio turnover rate................. 143 109 135 150 71 119 39(c) 143 109(c)
Net assets, end of the period
(millions)............................ $ 33 $ 30 $ 32 $ 42 $ 32 $ 15 $ 10 $ 6 $ 0.6
</TABLE>
- ---------------
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (first issuance of C shares) to September 30,
1995.
(a) Salomon Brothers Asset Management Inc became the investment subadviser to
the High Yield Bond Fund on February 1, 1996.
(b) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.03, $.03, $.02, $.02, $.05, $.07 and $.08 per A share for
the seven periods ended September 30, 1996, respectively. The operating
expense ratios including such items would have been 1.51%, 1.51%, 1.42%,
1.43%, 1.60%, 2.17% and 3.00% (annualized) for A shares for the seven
periods ended September 30, 1996, respectively. Excludes management fees
waived by the Manager in the amount of $.03 and $.03 per C share for the two
periods ended September 30, 1996, respectively. The operating expense ratio
including such items would have been 1.98% and 1.96% (annualized) for C
shares for the two periods ended September 30, 1996, respectively.
(c) Annualized.
(d) Not annualized.
(e) Does not reflect the imposition of a sales load.
(f) Amounts calculated prior to reclassification of $16,079 relating to
permanent book to tax differences. The effect of such reclassification would
have resulted in an increase in net investment income of $0.01 for A shares
and $0.01 for C shares.
Prospectus 3
<PAGE> 6
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
-----------------------------------------------------------------------------------
CLASS A CLASS C
-------------------------------------------------------------- ----------------
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------
1996* 1995 1994** 1993 1992 1991 1990+ 1996* 1995++
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $ 9.60 $ 9.27 $ 9.05
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a).................. 0.50 0.62 0.43 0.59 0.52 0.67 0.32 0.49 0.21
Net realized and unrealized gain (loss) on
investments............................. (0.21) 0.12 (0.40) (0.44) 0.10 0.49 (0.12) (0.21) 0.23
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations.......... 0.29 0.74 0.03 0.15 0.62 1.16 0.20 0.28 0.44
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income...... (0.50) (0.55) (0.37) (0.52) (0.55) (0.65) (0.27) (0.49) (0.22)
Distributions from net realized gain...... -- -- -- (0.03) (0.23) -- (0.04) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions....................... (0.50) (0.55) (0.37) (0.55) (0.78) (0.65) (0.31) (0.49) (0.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $ 9.06 $ 9.27
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(D)......................... 3.24 8.47 .36 1.58 6.47 12.64 2.11(c) 3.04 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily
net assets(a)........................... 0.94 0.95 0.95 0.91 0.78 1.07 1.10(b) 1.20 1.20(b)
Net investment income to average daily net
assets.................................. 5.42 5.50 4.60 5.99 5.66 6.87 7.04(b) 5.22 5.19(b)
Portfolio turnover rate................... 135 162 214 150 123 202 76(b) 135 162(b)
Net assets, end of the period
(millions).............................. $ 18 $ 24 $ 41 $ 102 $ 111 $ 5 $ 4 $ 0.6 $ 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 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 (first offering of C shares) to September 30,
1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.06, $.06, $.03, $.01, $.02, $.24 and $.22 per A share for
the seven periods ended September 30, 1996, respectively. The operating
expense ratios including such items would have been 1.61%, 1.47%, 1.18%,
1.03%, 1.23%, 3.58% and 5.88% (annualized) for A shares for the seven
periods ended September 30, 1996, respectively. Excludes management fees
waived and expenses reimbursed by the Manager in the amount of $.06 and $.06
per C share for the two periods ended September 30, 1996, respectively. The
operating expense ratio including such items would have been 1.87% and 1.72%
(annualized) for C shares for the two periods ended September 30, 1996,
respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
Prospectus 4
<PAGE> 7
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The investment objective of the High Yield Bond Fund is high current
income. The High Yield Bond 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 High Yield Bond Fund is not appropriate for all investors.
The investment objective of the Intermediate Government Fund is high
current income consistent with the preservation of capital. The Intermediate
Government 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 Intermediate Government Fund will maintain a dollar-weighted
effective average maturity of between three and ten years.
Each Fund's investment objective is fundamental and may not be changed
without the vote of a majority of the outstanding voting securities of that
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). Except as otherwise stated, all policies of each 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. Each Fund's shares will
fluctuate in value as a result of value changes in portfolio investments. There
can be no assurance that either Fund's investment objective will be achieved.
The following is a discussion of each Fund's investment securities and
practices, including the risks of investing in these securities or engaging in
these practices. For a further discussion of each Fund's investment policies and
risks, see "Investment Objective and Policies of the Funds" in the SAI.
HIGH YIELD BOND FUND
- -------------------------
THE HIGH YIELD BOND
FUND INVESTS PRIMARILY
IN HIGH-YIELD, LOWER-RATED CORPORATE BONDS.
THESE ARE COMMONLY
CALLED "JUNK BONDS".
BECAUSE THE VALUE OF
THESE SECURITIES WILL
FLUCTUATE, YOU CAN LOSE
MONEY BY INVESTING
IN THE FUND.
The High Yield Bond 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 High Yield Bond 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.
THE AVERAGE WEIGHTED
PORTFOLIO MATURITY OF
THE HIGH YIELD BOND
FUND'S INVESTMENT
PORTFOLIO WILL VARY.
The Subadviser has discretion to select the range of maturities of the debt
obligations in which the High Yield Bond Fund will invest. The Subadviser
anticipates that, under normal market conditions, the High Yield Bond 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.
Prospectus 5
<PAGE> 8
Certain of the debt securities purchased by the High Yield Bond 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 High Yield
Bond Fund will not invest in these lower-rated securities unless the Subadviser
believes that the difference in yield on these securities is sufficient to
justify the higher risk.
The High Yield Bond Fund may invest up to 10% of its total assets in
foreign fixed income securities. The High Yield Bond 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 High Yield Bond 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 High Yield Bond 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 also
may purchase equity securities not associated with fixed income securities when,
in the opinion of the Subadviser, such purchase is appropriate. The High Yield
Bond 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 High Yield Bond Fund's net assets may be invested in illiquid securities. In
times when, in its judgment, conditions in the securities markets would make
pursuing the High Yield Bond Fund's basic investment strategy inconsistent with
the best interests of the High Yield Bond 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 Moody's or S&P. See the Appendix for a description of corporate bond ratings,
and the Appendix to the SAI for commercial paper ratings, by Moody's and S&P.
THE HIGH YIELD
BOND FUND MAY
INVEST IN SECURITIES
CONVERTIBLE INTO
COMMON STOCK.
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.
THE HIGH YIELD
BOND FUND MAY
INVEST IN LOANS.
Fixed and Floating Rate Loans. The High Yield Bond 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 High Yield Bond 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 High Yield
Bond Fund considers these investments to be investments in debt securities for
purposes of this
Prospectus 6
<PAGE> 9
prospectus. The High Yield Bond 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 High Yield Bond Fund having a contractual
relationship only with the Lender, not with the borrower. The High Yield Bond
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 High Yield Bond 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
High Yield Bond Fund may not benefit directly from any collateral supporting the
Loan in which it has purchased the Participation. As a result, the High Yield
Bond 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 High Yield Bond 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 High Yield Bond Fund will acquire Participations only if
the Lender interpositioned between the High Yield Bond Fund and the borrower is
determined by the investment manager to be creditworthy. When the High Yield
Bond Fund purchases Assignments from Lenders, the High Yield Bond 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 High Yield Bond Fund may have difficulty disposing of Assignments and
Participations. Because the market for such instruments is not highly liquid,
the High Yield Bond 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 High Yield Bond 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
High Yield Bond Fund will treat investments in Participations and Assignments as
illiquid for purposes of its limitation on investments in illiquid securities.
The High Yield Bond Fund may revise this policy in the future.
THE HIGH YIELD BOND
FUND MAY INVEST IN
FIXED INCOME SECURITIES
OF FOREIGN ISSUERS.
Foreign Fixed Income Securities. The High Yield Bond 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 High Yield Bond 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. In addition, emerging markets are markets
that have risks that are different and higher than those in more developed
markets. 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,
Prospectus 7
<PAGE> 10
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 High Yield Bond 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 High Yield Bond Fund, the lack of extensive operating experience of eligible
foreign subcustodians and legal limitations on the ability of the High Yield
Bond 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 High Yield Bond Fund to obtain or enforce a judgment against the issuers
of such obligations.
THE RISKS OF LOWER-
RATED HIGHER-YIELDING
SECURITIES ARE
DIFFERENT FROM THOSE OF
HIGHER-RATED SECURITIES.
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 High Yield
Bond 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. However, allocating
investments in the High Yield Bond 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 High Yield Bond Fund may incur additional
expenses to seek recovery.
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 High Yield Bond 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
Prospectus 8
<PAGE> 11
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 High Yield Bond Fund's 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 High
Yield Bond Fund's objective depends more on its Subadviser's analytical
abilities than would be the case if it were investing only in securities in the
higher rating categories. The High Yield Bond Fund, at the discretion of its
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 High Yield Bond 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 High Yield Bond 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.
The table below shows the percentages of the High Yield Bond Fund's
assets invested during fiscal 1996 in securities assigned to the various rating
categories by Moody's and S&P and in unrated securities determined by the High
Yield Bond Fund's Subadviser to be of comparable quality. If a security is
ascribed a different rating by Moody's and S&P, it is included in the higher
category for purposes of the table below. These figures are dollar-weighted
averages of month-end portfolio holdings for the fiscal year ended September 30,
1996, presented as a percentage of total net assets. On February 1, 1996, the
High Yield Bond Fund's investment strategy was amended to allow for up to 100%
of its assets to be invested in high yield lower-rated securities. These
percentages are historical and are not
Prospectus 9
<PAGE> 12
necessarily 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
HIGH YIELD BOND HIGH YIELD BOND
MOODY'S/S&P RATINGS FUND'S ASSETS FUND'S ASSETS
------------------- ---------------------- ----------------------
<S> <C> <C>
U.S. Government
Securities.............. 15.67%
Repurchase Agreements
involving U.S.
Government Securities... 4.05%
"BB"/"Ba"................. 12.08%
"B"/"B"................... 62.17% 1.40%
"CCC"/"Caa"............... 2.73%
------ -----
96.67% 1.40%
====== =====
</TABLE>
Restricted Securities. As more fully described in the SAI, the High Yield
Bond Fund may purchase certain restricted securities ("Rule 144A securities")
for which there is a secondary market of qualified institutional buyers as
contemplated by Rule 144A under the Securities Act of 1933, as amended (the
"1933 Act"). The Board, the Manager or the Subadviser, as applicable, may
determine these securities to be liquid pursuant to Board-approved guidelines.
The High Yield Bond Fund's investment in Rule 144A securities deemed to be
liquid, when combined with illiquid securities, will not exceed 25% of the
Fund's net assets at the time of investment. The continued liquidity of Rule
144A securities depends upon various factors, including the maintenance of an
efficient institutional market in which such unregistered securities can be
readily resold and the willingness of the issuer to register the securities
under the 1933 Act.
Warrants. The High Yield Bond 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.
THE HIGH YIELD
BOND FUND MAY
INVEST IN CERTAIN
SECURITIES THAT DO
NOT PAY CASH INCOME.
ZERO COUPON AND PAY-IN-KIND BONDS. The High Yield Bond 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 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 High
Yield Bond 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-
Prospectus 10
<PAGE> 13
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 High Yield Bond Fund's 10% 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 High Yield Bond 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.
INTERMEDIATE GOVERNMENT FUND
- ---------------------------------
THE INTERMEDIATE
GOVERNMENT FUND
INVESTS PRIMARILY
IN U.S. GOVERNMENT
DEBT SECURITIES.
BECAUSE THE VALUE OF
THESE SECURITIES WILL
FLUCTUATE, YOU CAN
LOSE MONEY BY INVESTING
IN THE FUND.
The Intermediate Government 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 Intermediate Government 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 Intermediate Government 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 Intermediate Government Fund's basic investment strategy
inconsistent with the best interests of the Intermediate Government Fund's
shareholders, the Manager may shorten the Intermediate Government Fund's
dollar-weighted effective average maturity below three years.
WITHIN CERTAIN LIMITS,
THE INTERMEDIATE
GOVERNMENT FUND
MAY UTILIZE
FUTURES AND OPTIONS
ON FUTURES CONTRACTS
FOR PURPOSES OTHER
THAN HEDGING.
Futures and Options. To the extent that the Intermediate Government 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 Intermediate Government Fund's
investment portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Intermediate Government Fund has entered
into. The Intermediate Government Fund may hedge up to 100% of its net assets by
such transactions. The Intermediate Government 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 Intermediate
Government Fund would exceed 5% of the value of its total assets. The
Intermediate Government Fund may write call options and put options on up to 15%
of its total assets. The Intermediate Government Fund might not use any of the
strategies described above, and there can be no assurance that any strategy used
will succeed. For a
Prospectus 11
<PAGE> 14
description of the risks of engaging in futures and options see "Policies and
Risk Factors Applicable to both Funds -- Futures and Options" below.
Money Market Instruments. The types of money market instruments in which
the Intermediate Government 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.
THE INTERMEDIATE
GOVERNMENT FUND MAY
INVEST IN U.S.
GOVERNMENT OR
U.S. GOVERNMENT-
RELATED MORTGAGE
SECURITIES AS WELL
AS PRIVATE ISSUER
MORTGAGE-BACKED
SECURITIES.
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 Intermediate
Government Fund's weighted average maturity, the Intermediate Government 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
Fannie Mae, 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, Fannie Mae, 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
Prospectus 12
<PAGE> 15
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 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 Intermediate Government Fund.
REMICs. The Intermediate Government 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 Intermediate Government 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
Intermediate Government Fund so that this volatility, together with the
volatility of other investments in the Intermediate Government Fund, is
consistent with its investment objective.
Stripped Securities. The Intermediate Government 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 "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
Intermediate Government 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.
Prospectus 13
<PAGE> 16
POLICIES AND RISK FACTORS APPLICABLE TO BOTH FUNDS
- --------------------------------------------------------
Debt Obligations and Fund Maturity. The market value of debt securities
held by each 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 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 income securities of the
same maturity are a function of several factors, including the relative
financial strength of the issuers.
EACH FUND MAY UTILIZE
FUTURES AND OPTIONS
CONTRACTS TO ATTEMPT
TO REDUCE THE VOLATILITY
OF ITS INVESTMENT
PORTFOLIO.
Futures and Options. Each Fund may engage in transactions in options and
futures contracts in an effort to adjust the risk/return characteristics of its
investment portfolio. High Yield Bond Fund's Subadviser has no current intention
of engaging in such transactions. Each Fund also may, in certain circumstances,
purchase or sell futures contracts or options as a substitute for the purchase
or sale of securities. Each 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 Manager or
Subadviser, as applicable, anticipates that interest rates will rise, a 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 that
Fund's securities. If the Manager or Subadviser, as applicable, anticipates that
interest rates will decline, a 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 a Fund intends to purchase.
If the Manager or the Subadviser, as the case may be, incorrectly forecasts
interest rates in utilizing a strategy for the a 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 options and futures transactions and
the possible inability of the Fund to close out or liquidate an options or a
futures 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 or the Subadvisers, as the case may be, will attempt to
create a closely correlated hedge,
Prospectus 14
<PAGE> 17
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
possibility of distortion, a correct forecast of market trends by the Manager or
the Subadvisers, as the case may be, may still not result in a successful
transaction. The Manager or the Subadvisers, as the case may be, may be
incorrect in its expectation as to the extent of market movements, or the time
span within which the movements take place.
EACH FUND MAY INVEST
A PORTION OF ITS ASSETS
IN ILLIQUID SECURITIES.
Illiquid Securities. A Fund will not purchase or otherwise acquire any
security if, as a result, more than 10% of its net assets would be invested in
securities that are illiquid by virtue of the absence of a readily available
market or due to legal or contractual restrictions on resale, except as noted
under "High Yield Bond Fund -- Restricted Securities" above.
Portfolio Turnover. Each 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 High Yield Bond Fund's portfolio
turnover rate for the fiscal years ended September 30, 1995 and 1996 was 109%
and 143%, respectively. The Intermediate Government Fund's portfolio turnover
rate for the same periods was 162% and 135%, respectively. See "Brokerage
Practices" in the SAI.
Repurchase Agreements. Repurchase agreements are transactions in which a
Fund purchases securities and simultaneously commits to resell the securities to
the original seller (a member bank of the Federal Reserve System or a securities
dealer who is a member of a national securities exchange or is 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 a Fund if the other
party to the repurchase agreement becomes bankrupt, each Fund intends 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 Board of Trustees. Each Fund may
invest up to 25% of its total assets in repurchase agreements.
When-Issued Securities. Each Fund may purchase securities on a "when-
issued" basis and the Intermediate Government Fund may purchase or sell
securities on a forward commitment basis in order to hedge against anticipated
changes in interest rates and prices. In addition, the High Yield Bond Fund may
purchase securities on a firm commitment basis. When such transactions are
negotiated, the price, which generally is expressed in terms of yield, is fixed
at the time of entering into the transaction. Payment and delivery for
securities purchased or sold using these investment techniques, however, takes
place at a later date than is customary for that type of security. At the time a
Fund enters into the transaction, the securities purchased thereby are recorded
as an asset of the Fund and thereafter are subject to changes in value based
upon changes in the general level of interest rates. Accordingly, purchasing a
security using one of these techniques 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.
Prospectus 15
<PAGE> 18
At the time that a Fund purchases a security using one of these techniques,
a segregated account consisting of cash or liquid securities equal to the value
of the when-issued or forward or firm commitment securities will be established
and maintained with the Trust'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 Funds 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 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE NET ASSET VALUE OF
EACH CLASS OF FUND
SHARES IS CALCULATED
DAILY AS OF THE CLOSE
OF REGULAR TRADING ON
THE NEW YORK STOCK
EXCHANGE.
The net asset values of each Fund's A shares and C shares are calculated by
dividing the value of the total assets of each Fund attributable to that class,
less liabilities attributable to that class, by the number of shares outstanding
of that class. 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 a
Subadviser has reason to question the validity of market quotations it receives,
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 a 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.
Prospectus 16
<PAGE> 19
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total return data of the A shares and C shares from time to time may be
included in advertisements about each 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 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 contingent deferred sales load ("CDSL") that
would be payable). In addition, each Fund also may advertise its total return in
the same manner, but without taking into account the initial sales load or CDSL.
Each 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.
Each 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 each 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 each Fund's financial statements.
All data is based on each 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 a Fund's
investment portfolio and a Fund's operating expenses. Investment performance
also often reflects the risks associated with a Fund's investment objective and
policies. These factors should be considered when comparing a Fund's investment
results to those of other mutual funds and other investment vehicles. Additional
performance information is contained in each Fund's annual report to
shareholders, which may be obtained, without charge, by contacting your Fund at
(800) 421-4184. For more information on investment performance, see the SAI.
INVESTING IN THE FUNDS
PURCHASE PROCEDURES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HOW TO BUY SHARES:
YOU MAY BUY SHARES
OF EACH FUND BY:
Shares of each Fund are offered continuously through the Trust'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
Prospectus 17
<PAGE> 20
remaining after the dealer concession is paid to participating dealers or banks.
Such dealers may be deemed to be underwriters pursuant to the 1933 Act. For a
discussion of the classes of shares offered by each Fund, see "Choosing a Class
of Shares."
- CALLING YOUR
REPRESENTATIVE
Shares of each 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
and remitting payment to the Distributor, participating dealer or bank within
three business days.
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."
- COMPLETING THE
ACCOUNT
APPLICATION
CONTAINED IN THIS
PROSPECTUS AND
SENDING YOUR
CHECK; OR
You also may purchase shares of a 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 or Intermediate
Government Fund, as applicable, Heritage Asset Management, Inc., P.O. Box 33022,
St. Petersburg, FL 33733.
- SENDING A
FEDERAL FUNDS
WIRE.
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
Name of the Fund
The class of shares to be purchased
(Your Account Number Assigned by the Fund)
(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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AN INITIAL INVESTMENT
MUST BE AT LEAST
$1,000. A MINIMUM
BALANCE OF $500 MUST
BE MAINTAINED.
Except as provided under "Systematic Investment Programs" the minimum
initial investment in a 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
Prospectus 18
<PAGE> 21
("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 Trust'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 Trust may redeem shares in the account
and pay the proceeds to the shareholder. The Trust does not apply this minimum
account balance requirement to accounts that fall below this minimum due to
market fluctuation.
SYSTEMATIC INVESTMENT PROGRAMS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DOLLAR COST AVERAGING PLANS:
- -------------------------------
EACH FUND OFFERS
INVESTORS A VARIETY OF
CONVENIENT FEATURES AND
BENEFITS, INCLUDING DOLLAR
COST AVERAGING.
A variety of systematic investment options are available for the purchase
of Fund shares. These options provide for systematic monthly investments of $50
or more through systematic investing, payroll or government direct deposit, or
exchange from another mutual fund advised or administered by the Manager
("Heritage Mutual Fund"). 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. You will receive a periodic
confirmation of all activity for your account. For additional information on
these options, see the Account Application or contact the Manager at (800)
421-4184 or your Representative.
RETIREMENT PLANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of either 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 retirement plans. For more detailed information on retirement plans,
contact the Manager at (800) 421-4184 or your Representative and see "Investing
in the Funds" in the SAI.
CHOOSING A CLASS OF SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A SHARES HAVE A
FRONT-END SALES
LOAD AND LOWER
ANNUAL EXPENSES
THAN C SHARES.
C SHARES HAVE A
CDSL ON REDEMPTIONS
WITHIN ONE
YEAR OF PURCHASE.
Each Fund offers and sells two classes of shares, A shares and C shares.
The primary difference between the A shares and the C shares lies in their
initial sales load and CDSL structures and in their ongoing expenses, including
asset-based sales charges in the form of distribution fees. 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
hold those shares for less then one year. C shares are subject to higher ongoing
distribution fees than A shares. When you place an order for Fund shares, you
must specify which class of shares you wish to purchase.
Prospectus 19
<PAGE> 22
YOU CAN CHOOSE
A SHARE CLASS THAT
MEETS YOUR INVESTMENT
OBJECTIVES. CONSULT WITH
YOUR REPRESENTATIVE.
The purchase plans offered by each 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 a Fund, the accumulated continuing distribution and
service fees plus the CDSL on C shares would exceed the initial sales load plus
accumulated Rule 12b-1 distribution 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
C shares. For example, if you intend to invest more than $1,000,000 in shares of
a Fund, you should purchase A shares. Moreover, all A shares are subject to a
lower Rule 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 higher continuing distribution and service
fees and, if you hold your shares for less than one year, be subject to a CDSL.
For example, based on current fees and expenses for a Fund and the maximum sales
load on A shares, 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.
WHAT CLASS A SHARES WILL COST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE SALES LOAD ON
A SHARES WILL VARY
DEPENDING ON THE
AMOUNT YOU INVEST.
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
AMOUNT OF OFFERING INVESTED AS A PERCENTAGE 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 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........... 1.75% 1.78% 1.25%
$500,000 to $999,999........... 1.25% 1.27% 1.00%
$1,000,000 and over............ 0.00% 0.00% 0.00%(2)
</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 from its own resources up to 1.00% of the purchase
amount to the Distributor for purchases of $1,000,000 or more.
Prospectus 20
<PAGE> 23
A shares may be sold at net asset value without any sales load to: the
Manager and the 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, the Distributor, and their affiliates; registered
representatives and employees 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 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. A shares also may be
purchased without sales loads by investors who participate in certain
broker-dealer wrap fee investment programs.
HERITAGE NET ASSET VALUE ("NAV") TRANSFER PROGRAM
- -----------------------------------------------------------
YOU MAY QUALIFY FOR A
PURCHASE WITH NO SALES
LOAD UNDER THE HERITAGE
NAV TRANSFER PROGRAM.
A shares of either 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 within 90 days prior to the
purchase of a Heritage Mutual Fund you 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.
YOU MAY QUALIFY FOR
A REDUCED SALES LOAD
BY COMBINING PURCHASES.
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. For additional information
regarding the Combined Purchase Privilege, see the Account Application or
"Investing in the Trust" in the SAI.
STATEMENT OF INTENTION
- ------------------------
A STATEMENT OF
INTENTION ALLOWS YOU
TO REDUCE THE SALES
LOAD ON COMBINED
PURCHASES OF $25,000
OR MORE OVER ANY
13-MONTH PERIOD.
You also may obtain the reduced sales loads shown in the above sales load
schedule 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 either Fund or A shares of any other Heritage Mutual Fund subject to a
sales load ("Statement of Intention"). If you qualify for the Combined Purchase
Privilege, you may purchase A shares of the Heritage Mutual Funds under a single
Statement of Intention. In addition, if you own Class A shares of any other
Heritage Mutual Fund subject to a sales load, you may include those shares in
computing the amount necessary to qualify for a sales load reduction. The
Statement of Intention is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Statement of
Intention is 5% of such amount. If you would like to enter into a Statement of
Intention in conjunction with your initial investment in A shares of either
Fund, please complete the appropriate portion of the Account Application found
in this prospectus. Current Fund shareholders desiring to do so can obtain a
Statement of Intention by contacting the Manager or the Distributor at the
address or telephone number listed on the cover of this prospectus, or from
their Representative.
Prospectus 21
<PAGE> 24
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE CDSL, IF
APPLICABLE, IS BASED
ON THE LOWER OF
PURCHASE PRICE OR
REDEMPTION PRICE.
A CDSL of 1% is imposed on C shares if, less than one year from the date 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 one year or longer, and
finally of C shares held for less than one year on a first-in first-out basis.
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 a 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 or physicians certificates.
For more information about C shares, see "Reinstatement Privilege" and
"Exchange Privilege."
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THERE ARE SEVERAL
WAYS FOR YOU TO
SELL YOUR SHARES.
Redemption of Fund shares can be made by:
CONTACTING YOUR REPRESENTATIVE. Your Representative will transmit an order
to either Fund for redemption by that Fund and may charge you a fee for this
service.
TELEPHONE REQUEST. You may redeem shares by placing a telephone request to
your Fund (800-421-4184) prior to the close of regular trading on the Exchange.
Prospectus 22
<PAGE> 25
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 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 redemption proceeds wired to the bank account
specified on the Account Application. Redemption proceeds 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 $50,000, you may request that a
check be mailed to your address of record, providing that such address has not
been changed in the past 30 days. For your protection, the proceeds of all other
redemptions 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 or Intermediate
Government Fund, as applicable, 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 30 days, redemptions greater than $50,000,
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
applicable 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, each Fund will not knowingly permit the purchase of A shares through
the Systematic 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.
Contact the Manager or your Representative for further information or see
"Redeeming Shares" in the SAI.
YOU WILL NOT BE
CHARGED A SALES LOAD
ON A SHARES REDEEMED
AND REINVESTED WITHIN
90 DAYS OF REDEMPTION.
YOU MUST NOTIFY YOUR FUND
WHEN YOU EXERCISE.
THIS PRIVILEGE.
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed any or all of his
A shares of either 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 a 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 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
Prospectus 23
<PAGE> 26
income tax purposes, while (2) any loss realized will not be recognized to the
extent the proceeds are reinvested in shares of a Fund. 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 a Fund to his defined contribution plan, IRA or SEP.
You must notify either Fund if you intend to exercise the reinstatement
privilege.
RECEIVING PAYMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE SALES PRICE
GENERALLY IS THE
NEXT NAV COMPUTED
AFTER THE RECEIPT
OF YOUR REDEMPTION
REQUEST.
If a request for redemption is received by either 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 a 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 either 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 five
business 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 $50,000 or more and
on any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the
Federal Deposit Insurance Corporation, a trust company, or by any member
firm of the New York, American, Boston, Chicago, Pacific or Philadelphia
Stock Exchanges. Signature guarantees also will be accepted from savings
banks and certain other financial institutions that are deemed acceptable
by the Manager, as transfer agent, under its current signature guarantee
program.
Either 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
Securities and Exchange Commission. In the case of any such suspension you may
either withdraw your request for redemption or receive payment based upon the
net asset value next determined less any applicable CDSL, after the suspension
is lifted. If a redemption check remains outstanding after six months, the
Manager reserves the right to
Prospectus 24
<PAGE> 27
redeposit those funds into your account. For more information on receiving
payment, see "Redeeming Shares -- Receiving Payment" in the SAI.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY EXCHANGE
SHARES OF ONE HERITAGE
MUTUAL FUND FOR SHARES
OF THE SAME CLASS OF
ANOTHER HERITAGE
MUTUAL FUND.
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 five
business 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 CDSL holding period for
shares exchanged from either 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. As a result, if you redeem C shares of the Money
Market Fund before the expiration of the CDSL holding period, you will be
subject to the applicable CDSL.
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. If you exchange
shares of the Money Market 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.
A shares of either 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. If you exchange shares of Heritage Cash Trust -- Municipal Money
Market 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 an
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. Due to the
volume of calls or other unusual circumstances, telephone exchanges may be
difficult to implement during certain time periods.
Each Heritage Mutual Fund reserves the right to reject any order to acquire
its shares through exchange or otherwise to restrict or terminate the exchange
privilege
Prospectus 25
<PAGE> 28
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 and for a copy of any Heritage Mutual Fund prospectus, contact the
Manager or your Representative and see "Exchange Privilege" in the SAI.
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES
HERITAGE ASSET
MANAGEMENT, INC.
SERVES AS MANAGER FOR
EACH FUND, SUBJECT TO
THE DIRECTION OF THE
BOARD OF TRUSTEES.
The business and affairs of each Fund are managed by or under the direction
of the Board of Trustees. The Trustees are responsible for managing the Funds'
business affairs and for exercising all the Funds' powers except those reserved
to the shareholders. A Trustee may be removed by other Trustees or by a
two-thirds vote of the outstanding Trust shares.
INVESTMENT ADVISER, FUND ACCOUNTANT, ADMINISTRATOR AND TRANSFER AGENT
Heritage Asset Management, Inc. is each Fund's investment adviser, fund
accountant, administrator and transfer agent. The Manager is responsible for
reviewing and establishing investment policies for each Fund as well as
administering each 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 each Fund and the other Heritage Mutual Funds with
net assets totalling approximately $2.6 billion as of December 31, 1996.
Investment decisions for the Intermediate Government Fund are made by the
Manager. The Manager's annual investment advisory and administration fee is paid
monthly by each Fund to the Manager and is based on its average daily net
assets. The Manager's fee for the Intermediate Government Fund is 0.50% of its
average daily net assets. The Manager's fee for the High Yield Bond Fund is
0.60% on the first $100 million of its average net assets and 0.50% on the
average daily net assets of over $100 million. Each Fund pays the Manager
directly for fund accounting and transfer agent services.
The Manager voluntarily waives fees or reimburses expenses as explained
under "Total Fund Expenses" and reserves the right to discontinue any voluntary
waiver of its fees or reimbursements to the Fund in the future. The Manager also
may recover advisory fees waived in the two previous years.
SUBADVISER
THE MANAGER EMPLOYS
A SUBADVISER FOR
PROVIDING INVESTMENT
ADVICE AND PORTFOLIO
MANAGEMENT SERVICE
TO THE HIGH
YIELD BOND FUND.
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, to the High Yield Bond Fund. For these services, the
Manager pays the Subadviser an annual fee of 50% of the annual investment
advisory fee paid to the Manager, without regard to any reduction in the fees
actually paid to the Manager as a result of voluntary fee waivers by the
Manager. 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 December 31, 1996, the
Subadviser and its affiliates had approximately $20 billion of assets under
management.
Prospectus 26
<PAGE> 29
BROKERAGE PRACTICES
The Subadviser may use the Distributor or other affiliated broker-dealers
listed and over-the-counter securities at commission rates and under
circumstances consistent with the policy of best price and execution. See
"Brokerage Transactions" in the SAI.
PORTFOLIO MANAGEMENT
H. Peter Wallace serves as portfolio manager of the Intermediate Government
Fund. Mr. Wallace is responsible for the day-to-day management of the
Intermediate Government 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
Intermediate Government Fund. Prior to 1993, Mr. Wallace was a Vice President of
Mortgage Products at Donaldson, Lufkin and Jenrette from 1990 through 1992. Mr.
Wallace is a Chartered Financial Analyst.
Peter J. Wilby, assisted by a team of other investment professionals,
serves as portfolio manager of the High Yield Bond Fund. Mr. Wilby is primarily
responsible for the day-to-day management of the High Yield Bond Fund's
investment portfolio 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEVERAL OPTIONS EXIST
FOR RECEIVING
DIVIDENDS AND OTHER
DISTRIBUTIONS.
Dividends from net investment income are declared and paid monthly. Each
Fund distributes to its shareholders substantially all of its 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 other distributions in additional Fund
shares;
- receive dividends in cash and other distributions in additional Fund
shares;
- receive both dividends and other distributions in cash; or
- receive both dividends and other distributions in cash 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
of the shares determined at the close of regular trading on the Exchange on the
day following the record date for the dividend or other distribution.
Distribution options can be changed at any time by notifying the Manager in
writing.
Dividends paid by each 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
Prospectus 27
<PAGE> 30
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EACH FUND PAYS SERVICE
FEES AND DISTRIBUTION
FEES TO THE DISTRIBUTOR
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, each Fund may pay the Distributor distribution and service
fees of up to 0.25% of such Fund's average daily net assets attributable to A
shares of that Fund. Each Fund may pay the Distributor a fee of up to 0.35% of
that Fund's average daily net assets attributable to A shares purchased prior to
April 3, 1995. 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 High Yield Bond Fund pays the Distributor a fee of
0.80% and the Intermediate Government Fund pays the Distributor a fee of 0.60%
of the applicable 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 Fund's 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 each Fund.
If a Plan is terminated, the obligation of a 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EACH FUND IS NOT
EXPECTED TO HAVE ANY
FEDERAL TAX LIABILITY.
HOWEVER, YOUR TAX
OBLIGATIONS ARE
DETERMINED BY YOUR
PARTICULAR TAX
CIRCUMSTANCES.
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code. By doing so, each Fund (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 each Fund's investment company taxable income
are taxable to its shareholders as ordinary income, to the extent of that Fund's
earnings and profits, whether received in cash or in additional Fund shares.
Distributions of a Fund's net capital gain, when designated as such, are taxable
to its shareholders as long-term capital gains, whether received in cash or in
additional Fund shares and regardless of the length of time the shares have been
held. No substantial portion of the dividends
Prospectus 28
<PAGE> 31
paid by a Fund will be eligible for the dividends-received deduction allowed to
corporations.
WHEN YOU SELL OR
EXCHANGE SHARES IT
GENERALLY IS
CONSIDERED A
TAXABLE EVENT
TO YOU.
Dividends and other distributions declared by each 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 that Fund and received by its shareholders on
December 31 of that year 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. Each 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 that 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. When you sell or exchange shares of either Fund it generally is
considered a taxable event to you.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting each 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 therefore are urged to
consult your tax adviser.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY VOTE ON
MATTERS SUBMITTED FOR
YOUR APPROVAL. EACH
SHARE YOU OWN ENTITLES
YOU TO ONE VOTE.
Each share of a Fund gives the shareholder one vote in matters submitted to
shareholders for a vote. A shares and C shares of each 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 Trust's or a
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 Trust's
outstanding shares.
Prospectus 29
<PAGE> 32
This page is intentionally left blank.
<PAGE> 33
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 based on 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 large uncertainties or major
risk exposures to adverse conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category 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.
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.
Prospectus A-1
<PAGE> 34
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 edged." 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 some time 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 have speculative characteristics as well.
BA -- Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds that are rated Caa are of poor standing. Such issues maybe in
default or there may be present elements 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.
Prospectus A-2
<PAGE> 35
<TABLE>
<C> <S>
(LOGO) HERITAGE FAMILY OF FUNDS HERITAGE FAMILY OF FUNDS
Account Application
P.O. Box 33022, St. Petersburg, FL 33733
[ ] New Account [ ] Update to Existing Account # ------------------
(Indicate fund in Fund Selection section below)
</TABLE>
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION
<TABLE>
<S> <C> <C>
[ ] Corporation [ ] Gift to Minor
[ ] Individual [ ] Joint Tenant with Right of Survivorship [ ] Association, Partnership or other
[ ] Trust [ ] Foundation or Exempt Organization organization
- ----------------------------------------------------------- ---------------------------------------------
Name of account owner Social Security or Taxpayer ID #
- ----------------------------------------------------------- ---------------------------------------------
Joint owner/Trustee/Custodian Social Security or Taxpayer ID #
- ----------------------------------------------------------- ---------------------------------------------
Joint owner/Trustee Date of birth of first named owner
- ----------------------------------------------------------- ---------------------------------------------
Street address Daytime phone number
- ----------------------------------------------------------- ---------------------------------------------
Street address Are you a U.S. citizen? [ ] Yes [ ] No
If no, country of residence ----------------
- -----------------------------------------------------------
City, State and ZIP
</TABLE>
FUND SELECTION ($1,000 minimum initial investment unless participating in an
automatic investment plan)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Pay capital
Fund name Share class Investment amount dividends in gains in:
A C Shares Cash Shares Cash
Heritage Series Trust:
[ ] Small Cap Stock Fund [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Growth Equity Fund [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Value Equity Fund [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Eagle International Equity
[ ] Portfolio [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Heritage Capital Appreciation
[ ] Trust [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Heritage Income-Growth Trust [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Heritage Income Trust:
[ ] High Yield Bond Fund [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Intermediate Government Fund [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Heritage Cash Trust:
[ ] Money Market Fund [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Municipal Money Market Fund [ ] $ ---------------- [ ] [ ] [ ] [ ]
If none checked, all
reinvested in shares.
TOTAL INVESTMENT $ ----------------
</TABLE>
<PAGE> 36
SIGNATURES AND TAXPAYER IDENTIFICATION CERTIFICATION
Each person signing on behalf of an entity represents that his/her actions are
authorized. I have received and read a current prospectus for each fund in which
I am investing and understand that its terms are incorporated by reference into
this application. I understand that certain redemptions may be subject to a
contingent deferred sales load. I agree that the Fund, Manager, Distributor and
their Trustees, directors, officers and employees will not be held liable for
any loss, liability, damage, or expense for relying upon this application or any
instructions including telephone instructions they reasonably believe are
authentic. If a taxpayer identification number is not provided and certified,
all dividends paid will be subject to 31% Federal backup withholding.
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me).
2. I am not subject to backup withholding because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
You must cross out item 2 above if you have been notified by the IRS that you
are currently subject to backup withholding because of under reporting interest
or dividends on your tax return.
<TABLE>
<S> <C>
X X
--------------------------------------------- ---------------------------------------------
Signature Date Signature Date
</TABLE>
REDUCED SALES CHARGES
STATEMENT OF INTENT
If you agree in advance to invest at least $25,000 in Heritage Mutual Funds
other than Heritage Cash Trust within 13 months, you will pay a reduced sales
charge on those investments. Investments made up to 90 days before adopting this
agreement are eligible for this discount. All prior investments can be applied
toward meeting the investment requirement.
[ ] I agree to invest at least the amount selected below over a 13-month period
beginning / / . I understand that an additional sales charge must
be paid if I do not complete this Statement of Intent.
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000
RIGHT OF ACCUMULATION
If you, your spouse, or your minor children own shares in other Heritage Mutual
Funds, you may qualify for a reduced sales charge. Class A shares of Heritage
Cash Trust are not eligible unless purchased by exchange from another Heritage
Mutual Fund. These shares can be credited to a Statement of Intent.
[ ] I qualify for the Right of Accumulation. Please link the following Heritage
accounts.
- -------------------------------------- --------------------------------------
Fund/Account Number Fund/Account Number
- -------------------------------------- --------------------------------------
Fund/Account Number Fund/Account Number
TELEPHONE TRANSACTIONS
You may redeem shares by calling Heritage and requesting that funds be sent to
your address of record or the bank account listed in the Bank Account
Information section below. We will withdraw up to $50,000 from your account and
mail it to your address of record provided that address has not been changed in
the last 30 days.
You may also exchange between the same class shares of like-registered accounts
in any of the Heritage Mutual Funds by calling Heritage and requesting this
service. Please see the prospectus for certain requirements for exchanging
shares between funds.
If you DO NOT want to be able to process redemptions and exchanges via telephone
order, please check here: [ ]
<PAGE> 37
DOLLAR COST AVERAGING PLANS
AUTOMATIC INVESTING
You can instruct us to transfer funds from a specified bank checking account to
your Heritage Fund account. This transfer will be effected by either an
electronic transfer or by a paper draft. Complete the Bank Account Information
section below and attach a voided check to this application.
<TABLE>
<CAPTION>
Transfer Date Frequency (check one)
Month- Quar- Semi- Annu-
Fund Amount 5th 15th ly terly Annually ally
<S> <C> <C> <C> <C> <C> <C> <C>
$ [ ] [ ] [ ] [ ] [ ] [ ]
- ------------------------------- ------------------
$ [ ] [ ] [ ] [ ] [ ] [ ]
------------------
- -------------------------------
$ [ ] [ ] [ ] [ ] [ ] [ ]
------------------
- -------------------------------
Choose one or both
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
I authorize Heritage to draw on my bank account, by check or electronic transfer,
ATTACH for investment in a Heritage fund. Heritage and my bank are not liable for any loss
VOIDED resulting from delays or dishonored draws. This program can be revoked by Heritage
CHECK without prior notice if any draw is dishonored. I can discontinue this program at
HERE any time.
X X
---------------------------------------- ----------------------------------------
Signature on checking account Signature on checking account
TO THE BANK NAMED BELOW:
</TABLE>
In consideration of your compliance with the request and authorization of the
depositor named above, Heritage Asset Management, Inc. agrees (1) To indemnify
and hold you harmless from any loss you may suffer as a consequence of your
actions resulting from or in connection with the execution and issuance of any
check, draft, or order, whether or not genuine, purporting to be executed and
received by you in the regular course of business under pre-authorized draft
arrangement of the Heritage funds, including any costs or expenses reasonably
incurred in connection therewith; (2) That in the event any such check, draft,
or order shall be dishonored, whether with or without cause, and whether
intentionally or inadvertently, to indemnify you and hold harmless from any loss
resulting from such dishonor including your costs and reasonable expenses,
except any losses due to your payment of any draw against insufficient funds;
(3) To defend at our cost and expense any action which might be brought by any
depositor or any other persons because of your actions taken pursuant to the
foregoing requests, or in any manner arising by reason of your participation in
the foregoing plan; and (4) That your participation in the plan or that of the
depositor may be terminated by notice from either party to the other.
AUTOMATIC EXCHANGE
You can instruct us to periodically exchange funds from one Heritage Mutual Fund
to a like-registered account in the same class of another Heritage Mutual Fund.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Frequency (choose one): [ ] Monthly [ ] Quarterly [ ] Semiannually [ ] Annually
Day of month (choose
one): [ ] 1st [ ] 5th [ ] 10th [ ] 20th
Fund to exchange from Fund to exchange to Amount
$
- ------------------------------------- ------------------------------------- ---------------
$
---------------
- ------------------------------------- -------------------------------------
$
---------------
- ------------------------------------- -------------------------------------
</TABLE>
DIRECTED DIVIDENDS
You can direct the dividend payments from one Heritage Mutual Fund into a
like-registered account in the same class of another Heritage Mutual Fund. In
the Fund Selection section above, check the box for cash dividends.
<TABLE>
<S> <C> <C> <C>
From fund To fund
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
</TABLE>
<PAGE> 38
SYSTEMATIC WITHDRAWAL PLAN (SWP)
You can receive monthly, quarterly, semiannually, or annually checks from your
account. The checks can be sent to you at your address of record, to an account
at a bank or other financial institution, or to another person you designate.
You may send checks to more than one place. If you begin a SWP in Class C shares
of a fund, you may redeem up to 12% annually of your current account value
without incurring a contingent deferred sales load.
<TABLE>
<S> <C> <C>
- ----------------------------------------------- Frequency (choose one): [ ] Monthly
Fund for Withdrawal [ ] Quarterly
[ ] Semiannually
[ ] Annually
</TABLE>
Day of month (choose one): [ ] 1st [ ] 5th [ ] 10th [ ] 20th
<TABLE>
<S> <C> <C>
Send payment to: Amount
[ ] My address of record. $ ---------------------------------
---------- Payee name
[ ] The bank account listed in
the Bank Account Information $ ---------------------------------
section below. ---------- Payee address
[ ] The payee listed at the
right. (If you have more
than one payee, please $ ---------------------------------
attach a separate sheet ---------- City, State and ZIP
indicating the amount to be
sent to each.)
---------------------------------
Payee account number (if
applicable)
</TABLE>
BANK ACCOUNT INFORMATION
Provide bank checking account information if you are participating in an
Automatic Investment or Systematic Withdrawal Plan or if you wish for redemption
proceeds to be sent directly to your bank.
- ---------------------------------- -----------------------------------------
Bank name Bank account number
- ---------------------------------- -----------------------------------------
Address Bank routing (ABA) number (from your bank)
- ----------------------------------
City, State and ZIP
DEALER INFORMATION
We hereby authorize the Distributor to act as our agent in connection with
transactions under this authorization form and agree to notify the Distributor
of any purchases made under a Letter of Intent or Right of Accumulation. We
guarantee the signatures on this application and the legal capacity of the
signers.
If a Systematic Withdrawal Plan is being established, we believe that the amount
to be withdrawn is reasonable in light of the investor's circumstances and we
recommend establishment of the account.
- -------------------------------- ------------------- ----------------------
Representative's name Branch number Representative's
number
- --------------------------------- --------------------------------------------
Dealer name Branch office location
- --------------------------------- --------------------------------------------
Main office address Branch phone number
- --------------------------------- X-------------------------------------------
City, State and ZIP Authorized representative's signature
<PAGE> 39
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> 40
This page is intentionally left blank.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information dated February 1, 1997,
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, 1997. This statement is not a prospectus itself.
To receive the prospectus for 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
Systematic Investment Options...................................... 24
Retirement Plans................................................... 25
Alternative Purchase Plans......................................... 25
Class A Combined Purchase Privilege (Right of Accumulation)........ 26
Class A Statement of Intention .................................... 27
REDEEMING SHARES............................................................ 28
Systematic Withdrawal Plan......................................... 28
Telephone Transactions............................................. 29
Redemptions in Kind................................................ 29
Receiving Payment.................................................. 30
EXCHANGE PRIVILEGE ........................................................ 30
TAXES....................................................................... 31
TRUST INFORMATION........................................................... 34
Management of the Trust............................................ 34
Five Percent Shareholders.......................................... 37
Investment Adviser and Administrator; Subadviser................... 38
Brokerage Practices................................................ 40
Distribution of Shares............................................. 42
Administration of the Trust........................................ 44
Potential Liability................................................ 45
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-14
<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 Limited Maturity Government
Portfolio prior to 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 the prospectus.
Investment Policies
-------------------
The following information is in addition to and supplements each Fund's
investment policies set forth in the 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 for public spending and borrowing. These
policies and programs seek to promote the debtor country's economic growth and
<PAGE>
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 Standard &
Poor's Ratings Services ("S&P") or "Ba" or "B" by Moody's Investors Services,
Inc. ("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
2
<PAGE>
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 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
3
<PAGE>
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.
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
4
<PAGE>
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 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 Fund may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased return,
5
<PAGE>
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 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 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 S&P or Prime-1 or Prime-2 by
Moody's. For a description of these ratings, see "Commercial Paper Ratings" in
the Appendix.
6
<PAGE>
(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 the
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.
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
7
<PAGE>
exchanges upon which options and futures are traded, and the Commodity Futures
Trading Commission ("CFTC"). 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 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
8
<PAGE>
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 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 Derivative Instruments 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 and
9
<PAGE>
liquid assets with a value, marked-to-market daily, sufficient to cover its
potential obligations to the extent not covered as provided in (1) above. The
Funds will comply with SEC guidelines regarding cover for such transactions and
will, if the guidelines so require, set aside cash or other liquid assets 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 of the underlying investment
and general market conditions. For this reason, the successful use of options
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.
10
<PAGE>
(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, as a practical matter, acquire and hold
an investment portfolio containing exactly the same securities as underlie the
index and, as a result, bears 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
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<PAGE>
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 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.
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<PAGE>
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 rate
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
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<PAGE>
when the purchase or sale of a futures contract would not, such as when there is
no movement in the price of the underlying investment.
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.
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RESTRICTED AND ILLIQUID SECURITIES. As stated in the 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 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
15
<PAGE>
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 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
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<PAGE>
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.
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.
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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 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.
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<PAGE>
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.
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 the 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.
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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 assets, such borrowing will be promptly
reduced to the extent necessary to comply with the limitation.
NET ASSET VALUE
- ---------------
The net asset values of 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 or the
security is traded in the OTC market, the most recent bid price is used. When
market quotations for options and futures
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<PAGE>
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 market quotes are not
deemed to reliable, 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 net asset value 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 regular 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 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 shares, when redeemed, may be worth more or less
than their original cost. Average annual total return quotes for each
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<PAGE>
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 1, 5, 10 year
period (or fractional portion thereof).
In calculating the ending redeemable value for A shares, each Fund's
maximum sales load 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, the total return, or "T" in the formula above, is computed by
finding the average annual compounded rates of return over the period that would
equate the initial amount invested to the ending redeemable value. The average
annualized total return for High Yield A shares for the period March 1, 1990
(commencement of operations) to September 30, 1996, for the five-year period
ended September 30, 1996, and for the fiscal year ended September 30, 1996 was
9.17%, 7.81% and 7.24%, respectively. The average annualized total return for
Government A shares for the same periods was 4.61%, 3.18% and -0.63%,
respectively. The average annualized total return for High Yield C shares for
the period April 3, 1995 (first offering of C shares) to September 30, 1995, and
for the fiscal year ended September 30, 1996 was 11.36% and 9.93%, respectively.
The average annualized total return for Government C shares for the same periods
was 5.34% and 2.04%, respectively.
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 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
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<PAGE>
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 High Yield A shares cumulative returns using this formula for the
year and five years ended September 30, 1996, and for the period March 1, 1990
(commencement of operations) to September 30, 1996 were 11.44%, 51.41% and
85.16%, respectively. The cumulative returns for Government A shares for the
same periods were 3.24%, 21.54% and 39.79%, respectively. Cumulative returns for
High Yield C shares for the period April 3, 1995 (first offering of C shares) to
September 30, 1995, and for the fiscal year ended September 30, 1996 was 17.78%
and 10.93%, respectively. Cumulative returns for Government C shares for the
same periods was 8.09% and 3.04%, respectively. 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;
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
23
<PAGE>
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, 1996, the 30-day yield for High
Yield and Government A shares was 9.23% and 5.58%, respectively. At September
30, 1996, the 30-day yield for High Yield and Government C shares was 9.17%
and 5.53%, 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 the prospectus under "Investing in the Fund."
Systematic Investment Options
-----------------------------
1. Systematic Investing -- You may authorize the Manager to process a
monthly draft from your personal checking account for investment into the Trust.
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 Trust. 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 Trust. 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 Trust. You will receive a statement from
the other Heritage Mutual Fund confirming the redemption.
24
<PAGE>
You may change or terminate any of the above options at any time.
Retirement Plans
----------------
HERITAGE IRA. Individuals who earn compensation and who have not
reached age 70 1/2 before the close of the year generally may establish a
Heritage IRA. An individual may make limited contributions to a Heritage IRA
through the purchase of shares of the Trust and/or other Heritage Mutual Funds.
The Internal Revenue Code of 1986, as amended (the "Code"), limits the
deductibility of IRA contributions to taxpayers who are not active participants
(and whose spouses are not active participants) in employer-provided retirement
plans or who have adjusted gross income below certain levels. Nevertheless, the
Code permits other individuals to make nondeductible IRA contributions up to
$2,000 per year (or $4,000, if such contributions also are made for a nonworking
spouse and a joint return is filed). 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.
Trust 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 the 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
--------------------------
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
25
<PAGE>
business, subject to a 1% CDSL if the investor redeems such shares in less than
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 prospectus. 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.
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. 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.
The applicable A shares initial sales load will be based on the total
of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous day)
of (a) all A shares of a Fund held by the investor and (b) all A shares of
any other Heritage mutual fund advised or administered by the Manager
26
<PAGE>
("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 purchases with that of
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.
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.
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. In addition, if you own Class A
shares of any other Heritage Mutual Fund subject to a sales load, you may
include those shares in computing the amount necessary to qualify for a sales
load reduction.
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Statement of Intention is 5% of such amount. 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
27
<PAGE>
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 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 the 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 less than 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
28
<PAGE>
extent that the total amount of the payments exceeds the tax basis of the shares
sold. If the periodic with- drawals exceed reinvested dividends and other
distributions, the amount of the original investment may be correspondingly
reduced.
Ordinarily, a shareholder should not purchase additional A shares of a
Fund if maintaining a Systematic Withdrawal Plan of A shares because the
shareholder may incur tax liabilities in connection with such purchases and
withdrawals. A Fund will not knowingly accept purchase orders from shareholders
for additional A shares if they maintain a Systematic Withdrawal Plan unless the
purchase is equal to at least one year's scheduled withdrawals. In addition, 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.
29
<PAGE>
Receiving Payment
-----------------
If a request for redemption is received by a Fund in good order (as
described in the 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.
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 the prospectus and
below.
30
<PAGE>
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.
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. 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 as a
regulated investment company ("RIC") under 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
31
<PAGE>
those other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
A redemption of Fund shares will result in a taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales load paid on A shares). An exchange of shares of
either Fund for shares of 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 90-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, 1996, High Yield had a capital loss carryforward of
$1,450,395, which may be applied against any net realized gains until its
expiration dates of September 30, 2003 (as to $1,402,139) and September 30, 2004
(as to $48,256). In addition, from November 1, 1994 to September 30, 1995, High
32
<PAGE>
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, 1996, Government had a capital loss carryforward of
$7,246,344, 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), September 30, 2003 (as to $2,492,779) and September 30, 2004 (as
to $526,773). 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.
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
33
<PAGE>
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 pur- chase 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 tax- payer acquired
the security is disregarded. Market discount gen- erally 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 secu- rity 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.
Investors are advised to consult their own tax advisers regarding the
status of an investment in the Funds under state and local tax laws.
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.
34
<PAGE>
Position with Principal Occupation
Name the Trust During Past Five Years
---- --------- ----------------------
Thomas A. James* Trustee Chairman of the Board since
880 Carillon Parkway 1986 and Chief Executive
St. Petersburg, FL Officer since 1969 of RJF;
33716 Chairman of the Board of RJA
since 1986; Chairman of the
Board of Eagle Asset
Management, Inc. ("Eagle")
since 1984 and Chief
Executive Officer of Eagle,
1994 to 1996.
Richard K. Riess* Trustee Chief Executive Officer of
880 Carillon Parkway Eagle since 1996, President,
St. Petersburg, FL 1995 to present, Chief
33716 Operating Officer, 1988 to
1996, Executive Vice
President, 1988 to 1993;
President of Heritage Mutual
Funds, 1985 to 1991.
Donald W. Burton Trustee President of South Atlantic
614 W. Bay Street Capital Corporation (venture
Suite 200 capital) since 1981.
Tampa, FL 33606
C. Andrew Graham Trustee Vice President of Financial
Financial Designs, Designs Ltd. since 1992;
Ltd. Executive Vice President of
1775 Sherman Street the Madison Group, Inc.,
Suite 1900 1991 to 1992; Principal of
Denver, CO 80203 First Denver Financial
Corporation (investment
banking) since 1987.
David M. Phillips Trustee Chairman and Chief Executive
World Trade Center Officer of CCC Information
Chicago Services, Inc. since 1994
444 Merchandise Mart and of InfoVest Corporation
Chicago, IL 60654 (information services to the
insurance and auto
industries and consumer
households) since 1982.
Eric Stattin Trustee Litigation Consultant/Expert
2587 Fairway Village Witness and private investor
Drive since 1988.
Park City, UT 84060
35
<PAGE>
James L. Pappas Trustee Lykes Professor of Banking
University of South and Finance since 1986 at
Florida University of South Florida;
College of Business Dean of College of Business
Administration Administration, 1987 to
Tampa, FL 33620 1996.
Stephen G. Hill President Chief Executive Officer and
880 Carillon Parkway President of the Manager
St. Petersburg, FL since 1989 and Director
33716 since 1994; Director of
Eagle since 1995.
Donald H. Glassman Treasurer Treasurer of the Manager
880 Carillon Parkway since 1989; Treasurer of
St. Petersburg, FL Heritage Mutual Funds since
33716 1989.
Clifford J. Alexander Secretary Partner, Kirkpatrick &
1800 Massachusetts Lockhart LLP (law firm).
Ave., N.W.
Washington, DC 20036
Patricia Schneider Assistant Compliance Administrator of
880 Carillon Parkway Secretary the Manager.
St. Petersburg, FL
33716
Robert J. Zutz Assistant Partner, Kirkpatrick &
1800 Massachusetts Secretary Lockhart LLP (law firm).
Ave., N.W.
Washington, DC 20036
* These Trustees are "interested persons" as defined
in section 2(a)(19) of the 1940 Act.
The Trustees and officers of the Trust as a group, own less than 1% of
each class 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 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 $1,455 annually and $364 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
36
<PAGE>
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 September 30, 1996.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Pension or Compensation From
Aggregate Retirement the Trust and the
Compensation Benefits Accrued Estimated Heritage Family
Name of Person, From the as Part of the Annual Benefits of Funds Paid
Position Trust Trust's Expenses Upon Retirement to Trustees
-------- ----- ---------------- --------------- -----------
<S> <C> <C> <C> <C>
Donald W. Burton, $2,911 $0 $0 $17,000
Trustee
C. Andrew Graham, $2,911 $0 $0 $17,000
Trustee
David M. Phillips, $2,547 $0 $0 $15,000
Trustee
Eric Stattin, $2,911 $0 $0 $17,000
Trustee
James L. Pappas, $2,911 $0 $0 $17,000
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
</TABLE>
Five Percent Shareholders
-------------------------
As of December 31, 1996, the following shareholders owned of record
five percent or more of the outstanding C shares of the High Yield Income Fund
or the Intermediate Goverment Fund:
High Yield Bond Fund - C shares
-------------------------------
Raymond James & Associates Inc..................5.47%
FAO Barbara Maister
Elite Acct
1121 W. Cypress Drive
Pompano Beach, FL 33069
37
<PAGE>
Intermediate Government Fund - C shares
---------------------------------------
Raymond James & Assoc.,Inc. ............................... 7.84%
Custodian-Daniel E. Bonbrisco
P.O. Box 12749
St. Petersburg, FL 33733
David S. Knapp ............................................12.16%
2265 SW 15th Street
Fort Lauderdale, FL 33312
Morongo Band of Mission Indians ...........................10.37%
Administrative Reserve Account
11581 Potrero Road
Banning, CA 92220
Morongo Band of Missions Indians .......................... 6.17%
Community Service Reserve Account
11581 Potrero Road
Banning, CA 92220
Morongo Band of Mission Indian ...........................10.50%
Designated Reserves Account
Attn: Elaine Matthews
11581 Potrero Road
Banning, CA 92220
William Munro, Trustee ...................................13.25%
For Munro Sales Target Benefit Plan
G-4136 Holiday Drive
Flint, MI 48507
Raymond James & Assoc., Inc...............................16.56%
Thomas W. Farrow
5216 10th Avenue, South
Gulfport, FL 33707
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.
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
38
<PAGE>
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, as defined under the 1940
Act) 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 (1) a vote, cast in person at a
meeting called for that purpose, of a majority of those Trustees who are not
"interested persons" of the Manager, Subadviser or the Trust, and by (2) the
majority vote of either the full Board of Trustees or the vote of a majority of
the outstanding shares of each applicable Fund. The Advisory and Subadvisory
Agreements each automatically terminates on assignment, and each is terminable
on not more than 60 days' written notice by the Trust to either party. In
addition, the Advisory Agreement may be terminated on not less than 60 days'
written notice by the Manager to 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 misfeasance, 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.
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."
39
<PAGE>
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 total annual operating expenses attributable to A shares
exceed 1.25% of the average daily net assets or to the extent that total annual
operating expenses attributable to C shares exceed 1.70% 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, 1994,
1995 and 1996 management fees amounted to $238,964, $194,363, and $200,042
respectively. For the same periods, the Manager waived its fees in the amount of
$66,556, $83,663, and $94,308 respectively. For the fiscal years ended September
30, 1994, 1995 and 1996, the Manager paid subadvisory fees to Eagle Asset
Management, Inc., High Yield's former subadviser, of $59,753, $48,591, and
$15,507 respectively for such Fund, and paid subadvisory fees to Salomon for the
fiscal year ended September 30, 1996 of $69,007.
For Government, the Manager voluntarily has agreed to waive its fees to
the extent that Fund expenses attributable to A shares exceed 1.20% of the
average daily net assets or to the extent that Fund expenses attributable to C
shares exceed 0.95% of average daily net assets attributable to that class for
this fiscal year. For the fiscal years ended September 30, 1994, 1995 and 1996,
management fees amounted to $324,438, $146,658, and $105,455 respectively. For
the same periods, the Manager waived its fees in the amount of $146,407,
$146,658, and $105,455 respectively. For the fiscal year ended 1996, the Manager
reimbursed Government for expenses totaling $35,322.
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.
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
40
<PAGE>
fiscal year ended September 30, 1995 and 1996 were 109% and 143%, respectively,
for High Yield, and 162% and 135%, 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 may use the Distributor as broker for agency transactions in
listed and OTC securities at commission rates and under circumstances consistent
with the policy of best execution. Commissions 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.
41
<PAGE>
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 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 the
prospectus and printing and distributing 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 the 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 to
42
<PAGE>
0.35% of average daily net assets of each Fund for A shares purchased prior to
April 3, 1995, and 0.25% of average daily net assets of each Fund for A shares
purchased on or after April 3, 1995. For the fiscal year ended September 30,
1996 the Distributor received 12b-1 fees in the amount of $100,300 and $70,332
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, 1996, the Distributor received 12b-1 fees in the amount of $23,630
and $2,265, 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 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.
43
<PAGE>
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, 1994, 1995 and 1996 the
Distributor received $138,242, $53,388 and $159,739 respectively, of which it
retained $22,027, $7,667 and $19,066 respectively, for High Yield, and $0,
$7,285 and $17,353 respectively, of which it retained $0, $1,013 and $2,577
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, 1994, 1995 and
44
<PAGE>
1996, the Manager earned $38,623, $29,973 and $13,244 respectively, from
Government for its services as transfer agent. For the same three fiscal years
the Manager earned $26,724, $28,181 and $18,691 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 fiscal years ended September
30, 1995 and 1996, the Manager earned approximately $12,569, $28,242 and
$29,201, respectively, from the Government for its services as fund accountant.
For the same periods the Manager earned $11,969, $28,242 and $31,311,
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.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 400 North Ashley Street,
Suite 2800, Tampa, Florida 33602, are the independent public accountants for the
Trust. The Financial Statements and Financial Highlights of the Funds for the
fiscal year ended September 30, 1996 that appear in this SAI have been audited
by Price Waterhouse LLP, and are included herein in reliance upon the report of
said firm of accountants, which is given upon their authority as experts in
accounting and auditing. The Financial Highlights for the fiscal years ended
prior thereto and the Statement of Changes in Net Assets for the year ended
September 30, 1995 were audited by other independent public accountants.
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 shareholder. On request, the Trust will defend any claim made and
pay any judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself
45
<PAGE>
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
46
<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; and 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 appropriate, 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 highest category 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>
The Reports of Independent Accountants and Financial Statements are
incorporated herein by reference from each Fund's Annual Report to Shareholders
for the fiscal year ended September 30, 1996, filed with the Securities and
Exchange Commission on December 10, 1996, Accession No. 950144-96-008965 (High
Yield Bond Fund) and Accession No. 950144-96-008966 (Intermediate Government
Fund).
<PAGE>
HERITAGE INCOME TRUST
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A of the Registration Statement:
Financial Highlights -- High Yield Bond Fund and
Intermediate Government Fund: Class A Shares for the
period March 1, 1990 (commencement of operations) to
September 30, 1990, and for each of the six years
ended September 30, 1996; Class C Shares for the
period April 3, 1995 (first offering of Class C
Shares) to September 30, 1995, and the one year
period ended September 30, 1996.
Included in Part B of the Registration Statement on
behalf of both the High Yield Bond Fund and the
Intermediate Government Fund:
Investment Portfolio - September 30, 1996 Statement
of Assets and Liabilities - September 30,
1996
Statement of Operations - September 30, 1996
Statements of Changes in Net Assets for the year
ended September 30, 1996 and 1995
Notes to Financial Statements
Report of Price Waterhouse LLP, Independent
Accountants dated November 12, 1996
(b) Exhibits:
(1) Declaration of Trust*
(2) (a) Bylaws*
(b) Amended and Restated Bylaws*
(3) Voting trust agreement -- none
(4) (a)(i) Specimen security High Yield Bond
Fund Class A***
(a)(ii) Specimen security High Yield Bond
Fund Class C***
(b)(i) Specimen security Intermediate
Government Class A***
C - 1
<PAGE>
(b)(ii) Specimen security Intermediate
Government Class C***
(5) (a) Investment Advisory and Administration
Agreement*
(b) Subadvisory Agreement between Heritage
Asset Management, Inc. and Eagle Asset
Management, Inc.*
(c) Subadvisory Agreement between Heritage
Asset Management, Inc. and Salomon
Brothers Asset Management Inc*
(6) Distribution Agreement*
(7) Bonus, profit sharing or pension plans
-- none
(8) Custodian Agreement*
(9) (a) Transfer Agency and Service Agreement*
(b) Fund Accounting and Pricing Service
Agreement*
(10) Opinion and consent of counsel**
(11) Accountants' consent (filed herewith)
(12) Financial statements omitted from
prospectus -- none
(13) Letter of investment intent*
(14) Prototype retirement plan***
(15) (a) Class A Plan pursuant to Rule 12b-1*
(b) Class C Plan pursuant to Rule 12b-1*
(16) (a) Performance Computation Schedule
Relating to High Yield Bond Fund*
(b) Performance Computation Schedule
Relating to Intermediate Government
Fund*
(17) Electronic Filers -- Financial Data Schedule:
(a) Financial Data Schedule Relating to
High Yield Bond Fund Class A*
C - 2
<PAGE>
(b) Financial Data Schedule Relating to
High Yield Bond Fund Class C (filed
herewith)
(c) Financial Data Schedule Relating to
Intermediate Government Fund Class A
(filed herewith)
(d) Financial Data Schedule Relating to
Intermediate Government Fund Class C
(filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
- ---------------
* Incorporated by reference from the Post-Effective Amendment
No. 11 to the Registration Statement of the Trust, SEC File
No. 33-30361, filed previously on December 1, 1995.
** Incorporated by reference to the Trust's Rule 24f-2 Notice,
filed previously on November 27, 1996.
*** To be filed by subsequent amendment.
Item 25. Persons Controlled by or under
Common Control with Registrant
------------------------------
None.
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class December 31, 1996
- -------------- -----------------
Shares of Beneficial Interest
High Yield Bond Fund
Class A Shares 1,830
Class C Shares 332
Intermediate Government Fund
Class A Shares 1,039
Class C Shares 32
Item 27. Indemnification
- -------- ---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides
that:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
C - 3
<PAGE>
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as "Covered Person") shall be indemnified by
the Trust to the fullest extent permitted by law against liability and against
all expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or thereafter,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
C - 4
<PAGE>
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking,
(ii) the Trust is insured against losses arising out of
any such advance payments or
(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the
Trust is a trust, not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Portfolio or the Trustees.
Article XII, Section 2 of the Declaration of Trust provides that,
subject to the provisions of Section 1 of Article XII and to Article XI, the
Trustees are not liable for errors of judgment or mistakes of fact or law, or
for any act or omission in accordance with advice of counsel or other experts or
for failing to follow such advice. A Trustee, however, is not protected from
liability due to willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Paragraph 8 of the Investment Advisory and Administration Agreement of
Heritage Income Trust ("Advisory Agreement") between the Trust and Heritage
Asset Management, Inc. ("Heritage" or the "Manager") provides that the Manager
shall not be liable for any error of judgment or mistake of law for any loss
suffered by the Trust in connection with the matters to which the Advisory
Agreement relates except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Advisory Agreement. Any
person, even though also an officer, partner, employee, or agent of the Manager,
who may be or become an officer, director, employee or agent of the Trust shall
be deemed, when rendering services to the Trust or acting in
C - 5
<PAGE>
any business of the Trust, to be rendering such services to or acting solely for
the Trust and not as an officer, partner, employee, or agent or one under the
control or direction of the Manager even though paid by it.
Paragraph 9 of the Heritage Income Trust Subadvisory Agreement
("Subadvisory Agreement") between the Manager and Salomon Brothers Asset
Management Inc ("Subadviser" or "Salomon") provides that, in the absence of bad
faith, negligence or disregard of its obligations and duties under the
Subadvisory Agreement, the Subadviser shall not be subject to any liability to
the Trust, or to any of its Shareholders, for any act or omission in the course
of, or connected with, rendering services under the Subadvisory Agreement.
Paragraph 7 of the Distribution Agreement of Heritage Income Trust
("Distribution Agreement") between the Trust and Raymond James & Associates,
Inc. ("Raymond James") provides that the Trust agrees to indemnify, defend and
hold harmless Raymond James, its several officers and directors, and any person
who controls Raymond James within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "1933 Act") from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Raymond James, its officers or Trustees, or any such
controlling person may incur under the 1933 Act or under common law or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of Additional
Information or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, provided that in no event shall
anything contained in the Distribution Agreement be construed so as to protect
Raymond James against any liability to the Trust or its shareholders to which
Raymond James would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under the Distribution
Agreement.
Paragraph 13 of the Heritage Funds Accounting and Pricing Services
Agreement ("Accounting Agreement") between the Trust and Heritage provides that
the Trust shall indemnify and hold harmless Heritage and its nominees from all
losses, damages, costs, charges, payments, expenses (including reasonable
counsel fees), and liabilities arising directly or indirectly from any action
that Heritage takes or does or omits to take to do (i) at the request or on the
direction of or in reasonable reliance on the written advice of the Trust or
(ii) upon Proper Instructions (as defined in the Accounting Agreement),
provided, that neither Heritage nor any of its nominees shall be indemnified
against any liability to the
C - 6
<PAGE>
Trust or to its shareholders (or any expenses incident to such liability)
arising out of Heritage's own willful misfeasance, willful misconduct, gross
negligence or reckless disregard of its duties and obligations specifically
described in the Accounting Agreement or its failure to meet the standard of
care set forth in the Accounting Agreement.
Item 28. I. Business and Other Connections
of Investment Adviser
------------------------------
Heritage Asset Management, Inc. is a Florida corporation that offers
investment management services. Information as to the officers and directors of
Heritage is included in its current Form ADV filed with the Securities and
Exchange Commission ("SEC") and is included by reference herein.
II. Business and Other Connections of Subadviser
--------------------------------------------
Salomon is a registered investment adviser. It is a wholly owned
subsidiary of Salomon Inc. Salomon primarily is engaged in the investment
advisory business. Information as to the officers and directors of Salomon is
included in its current Form ADV filed with the SEC and is incorporated by
reference herein.
Item 29. Principal Underwriter
---------------------
(a) Raymond James & Associates, Inc. is the principal underwriter for
each of the following investment companies: Heritage Cash Trust, Heritage
Capital Appreciation Trust, Heritage Income-Growth Trust, Heritage Income Trust
and Heritage Series Trust.
(b) The directors and officers of the Registrant's principal
underwriter are:
Positions & Offices Positions & Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
Thomas A. James Chief Executive Officer, Trustee
Director
Robert F. Shuck Executive V.P., Director None
Thomas S. Franke President, Chief Operating None
Officer, Director
Lynn Pippenger Secretary/Treasurer, Chief None
Financial Officer, Director
Dennis Zank Executive Vice President of None
C - 7
<PAGE>
Operations and Administration,
Director
Thom Tremaine Senior Vice President None
Francis Godbold Executive Vice President None
Paul Matecki Chief Legal Officer None
Joseph Tuorto Chief Compliance Officer None
Anne Rettig Assistant Treasurer None
Jodi Campos Vice President Comptroller None
Michael Cahill Assistant Vice President, None
Assistant Controller
Sharry Mauney Assistant Secretary None
Grace Palsha Assistant Secretary None
The principal business address for each director and officer listed above is 880
Carillon Parkway, St. Petersburg, Florida 33716.
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained in the physical possession of the
Trust's custodian through February 28, 1994, except that: Heritage will maintain
some or all of the records required by Rule 31a-(b)(l), (2) and (8); and the
Subadviser will maintain some or all of the records required by Rule
31a-1(b)(2), (5), (6), (9), (10) and (11). Since March 1, 1994, the required
records will be maintained by Heritage and the Subadviser.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
The Trust hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C - 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 13 to its Registration Statement (No.
33-30361) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Petersburg and the State of Florida, on the 30th
day of January, 1997.
HERITAGE INCOME TRUST
By:/s/ Stephen G. Hill
------------------------
Stephen G. Hill
President
Attest:
/s/ Donald H. Glassman
- -----------------------------
Donald H. Glassman
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 13 to the Registration Statement has been
signed below by the following persons in the capacity and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Stephen G. Hill
- ------------------- President January 30, 1997
Stephen G. Hill
/s/ Thomas A. James* Trustee January 30, 1997
- --------------------
Thomas A. James
/s/ Richard K. Riess* Trustee January 30, 1997
- ---------------------
Richard K. Riess
/s/ C. Andrew Graham* Trustee January 30, 1997
- ---------------------
C. Andrew Graham
/s/ David M. Phillips* Trustee January 30, 1997
- ---------------------
David M. Phillips
/s/ James L. Pappas* Trustee January 30, 1997
- ---------------------
James L. Pappas
/s/ Donald W. Burton* Trustee January 30, 1997
- ---------------------
Donald W. Burton
/s/Eric Stattin* Trustee January 30, 1997
- ---------------------
Eric Stattin
/s/ Donald H. Glassman
- ---------------------- Treasurer January 30, 1997
Donald H. Glassman
*By /s/ Donald H. Glassman
-----------------------
Donald H. Glassman,
Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
1 Declaration of Trust*
2 (a) Bylaws*
2 (b) Amended and Restated Bylaws*
3 Voting trust agreement -- none
4 (a)(i) Specimen security High Yield Bond Fund
Class A***
(a)(ii) Specimen security High Yield Bond Fund
Class C***
(b)(i) Specimen security Intermediate Government
Class A***
(b)(ii) Specimen security Intermediate Government
Class C***
5 (a) Investment Advisory and Administration
Agreement*
(b) Subadvisory Agreement between Heritage Asset
Management, Inc. and Eagle Asset Management, Inc.*
(c) Subadvisory Agreement between Heritage Asset
Management, Inc. and Salomon Brothers Asset
Management Inc*
6 Distribution Agreement*
7 Bonus, profit sharing or pension plans -- none
8 Custodian Agreement*
9 (a) Transfer Agency and Service Agreement*
9 (b) Fund Accounting and Pricing Service Agreement*
10 Opinion and consent of counsel**
11 Accountants' consent (filed herewith)
12 Financial statements omitted from prospectus - none
13 Letter of investment intent*
14 Prototype retirement plan***
- 1 -
<PAGE>
15 (a) Class A Plan pursuant to Rule 12b-1*
(b) Class C Plan pursuant to Rule 12b-1*
16 (a) Performance Computation Schedule Relating to High
Yield Bond Fund (formerly Diversified Portfolio)*
(b) Performance Computation Schedule Relating to
Intermediate Government Fund (formerly Limited
Maturity Government Portfolio)*
17 Electronic Filers -- Financial Data Schedule:
(a) Financial Data Schedule Relating to High Yield Bond
Fund (formerly Diversified Portfolio) Class A
(filed herewith)
(b) Financial Data Schedule Relating to High Yield Bond
Fund (formerly Diversified Portfolio) Class C
(filed herewith)
(c) Financial Data Schedule Relating to Intermediate
Government Fund (formerly Limited Maturity
Government Portfolio) Class A (filed herewith)
(d) Financial Data Schedule Relating to Intermediate
Government Fund (formerly Limited Maturity
Government Portfolio) Class C (filed herewith)
18 Plan pursuant to Rule 18f-3 (filed herewith)
- ---------------
* Incorporated by reference from the Post-Effective Amendment
No. 11 to the Registration Statement of the Trust, SEC File
No. 33-30361, filed previously on December 1, 1995.
** Incorporated by reference to the Trust's Rule 24f-2 Notice,
filed previously on November 27, 1996.
*** To be filed by subsequent amendment.
- 2 -
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Statement Additional Information
constituting part of this Post-Effective Amendment No. 13 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
November 12, 1996, relating to the financial statements and financial highlights
of The Heritage Income Trust - High Yield Bond Fund and Intermediate Government
Fund, which appear in such Statement of Additional Information, and to the
incorporation by reference of our reports into the Prospectus which constitutes
part of this Registration Statement. We also consent to the reference to us
under the heading "Independent Accountants" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
Price Waterhouse LLP
400 North Ashley Street, Suite 2800
Tampa, Florida 33602
January 28, 1997
HERITAGE CASH TRUST
HERITAGE CAPITAL APPRECIATION TRUST
HERITAGE INCOME-GROWTH TRUST
HERITAGE INCOME TRUST
HERITAGE SERIES TRUST
Multiple Class Plan Pursuant to Rule 18f-3
The investment companies listed on Appendix A attached hereto (each a
"Fund" and collectively, the "Funds") hereby adopt this Multiple Class Plan
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"). This Plan describes the classes of shares of interest of the Funds
on or after August 9, 1996.
A. CLASSES OFFERED.
----------------
1. CLASS A. Class A shares are offered to investors of each of
the Funds subject to an initial sales charge. The maximum sales charge
varies between 0.00% and 4.75% of the amount invested and may decline
based on discounts for volume purchases. The initial sales charge may
be waived for certain eligible purchasers or under certain
circumstances. If no initial sales charge is imposed on a purchase of
shares, a contingent deferred sales load ("CDSL") of up to 1% may be
imposed on any redemption of those shares within two years of the
purchase (consistent with the disclosure in the Fund's prospectus).
Class A shares also are subject to an annual service fee ranging from
0.15% to 0.25% and a distribution fee ranging from 0.00% to 0.25% of
the average daily net assets of the Class A shares paid pursuant to a
plan of distribution adopted pursuant to Rule 12b-1. Class A shares
require an initial investment of $1,000, except for certain retirement
accounts and investment plans for which lower limits may apply.
2. CLASS C. Class C shares are offered to investors of each of
the Funds subject to a CDSL on redemptions of shares held less than one
year. The Class C CDSL is equal to 1% of the lower of: (1) the net
asset value of the shares at the time of purchase or (2) the net asset
value of the shares at the time of redemption. Class C shares held
longer than one year and Class C shares acquired through reinvestment
of dividends or capital gains distributions on shares otherwise subject
to a Class C CDSL are not subject to the CDSL. The CDSL for Class C
shares of the Funds may be waived under certain circumstances.
Class C shares are subject to an annual service fee ranging from 0.15%
to 0.25% of average daily net assets and a distribution fee ranging
from 0.00% to 0.75% of average daily net assets of the Class C shares
of the Fund, each paid pursuant to a plan of distribution adopted
pursuant to Rule 12b-1. Class C shares require an initial investment of
$1,000, except for certain retirement accounts and investment plans for
which lower limits may apply.
<PAGE>
3. EAGLE CLASS. The Eagle International Equity Portfolio of
Heritage Series Trust offers the Eagle Class of Shares. Eagle Class
shares are offered to all investors without the imposition of an
initial sales charge or a contingent deferred sales load. Eagle Class
shares require an initial investment of $50,000, except for investors
who already maintain an account with Eagle Asset Management, Inc. for
which a $25,000 minimum initial investment applies. Eagle Class
shareholders incur an annual service fee of .25% of average daily net
assets and a distribution fee of .75% of average daily net assets of
the Eagle Class shares of the Portfolio, each paid pursuant to a plan
of distribution adopted pursuant to Rule 12b-1 under the 1940 Act
("Rule 12b-1"). All of the shares of the Portfolio issued pursuant to a
Portfolio prospectus effective prior to the Implementation Date and
that are outstanding on the Implementation Date will be designated as
Eagle Class shares.
B. EXPENSE ALLOCATIONS OF EACH CLASS. Certain expenses may be attributable
to a particular class of shares of the Portfolio ("Class Expenses"). Class
Expenses are charged directly to the net assets of the particular class and,
thus are borne on a pro rata basis by the outstanding shares of that class.
In addition to the distribution and service fees described above, each
class also may pay a different amount of the following other expenses: (1) 12b-1
fees, (2) transfer agent fees identified as being attributable to a specific
class, (3) stationery, printing, postage, and delivery expenses related to
preparing and distributing materials such as shareholder reports, prospectuses,
and proxy statements to current shareholders of a class, (4) Blue Sky
registration fees incurred by a specific class of shares, (5) Securities and
Exchange Commission registration fees incurred by a specific class of shares,
(6) expenses of administrative personnel and services required to support the
shareholders of a specific class, (7) trustees' fees or expenses incurred as a
result of issues relating to a specific class of shares, (8) accounting expenses
relating solely to a specific class of shares, (9) auditors' fees, litigation
expenses, and legal fees and expenses relating to a specific class of shares,
and (10) expenses incurred in connection with shareholders meetings as a result
of issues relating to a specific class of shares.
C. EXCHANGE FEATURES. If an investor has held Class A or Class C shares for at
least 30 days, the investor may exchange those shares for shares of the
corresponding class of any other mutual fund for which Heritage Asset
Management, Inc. serves as investment adviser ("Heritage mutual funds"). All
exchanges are subject to the minimum investment requirements and any other
applicable terms set forth in the prospectus for the Heritage mutual funds whose
shares are being acquired. Class C shares, however, are not eligible for
exchange into the Heritage Municipal Money Market Fund.
These exchange privileges may be modified or terminated by the
Portfolio, and exchanges may be made only into funds that are registered legally
for sale in the investor's state of residence.
D. ADDITIONAL INFORMATION. This Multiple Class Plan is qualified by and subject
to the terms of the then current prospectus for the applicable classes;
provided, however, that none of the terms set forth in any such prospectus shall
be inconsistent with the terms of the classes contained in this Plan. The
prospectuses for the Eagle Class and for the Class A and Class C contain
additional information about those classes and the Portfolio's multiple class
structure.
Dated: August 9, 1996, as amended on November 18, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> HIGH YIELD BOND FUND - A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $38,425,159
<INVESTMENTS-AT-VALUE> $38,989,367
<RECEIVABLES> $1,636,361
<ASSETS-OTHER> $13,715
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $40,639,443
<PAYABLE-FOR-SECURITIES> $756,250
<SENIOR-LONG-TERM-DEBT> $0
<OTHER-ITEMS-LIABILITIES> $276,390
<TOTAL-LIABILITIES> $1,032,640
<SENIOR-EQUITY> $0
<PAID-IN-CAPITAL-COMMON> $40,249,690
<SHARES-COMMON-STOCK> 3,879,307
<SHARES-COMMON-PRIOR> 3,083,609
<ACCUMULATED-NII-CURRENT> $229,488
<OVERDISTRIBUTION-NII> $0
<ACCUMULATED-NET-GAINS> ($1,436,583)
<OVERDISTRIBUTION-GAINS> $0
<ACCUM-APPREC-OR-DEPREC> $564,208
<NET-ASSETS> $39,606,803
<DIVIDEND-INCOME> $0
<INTEREST-INCOME> $3,227,942
<OTHER-INCOME> $0
<EXPENSES-NET> $424,168
<NET-INVESTMENT-INCOME> $2,803,774
<REALIZED-GAINS-CURRENT> $970,631
<APPREC-INCREASE-CURRENT> ($58,735)
<NET-CHANGE-FROM-OPS> $3,715,670
<EQUALIZATION> $0
<DISTRIBUTIONS-OF-INCOME> $2,667,376
<DISTRIBUTIONS-OF-GAINS> $0
<DISTRIBUTIONS-OTHER> $0
<NUMBER-OF-SHARES-SOLD> 1,524,750
<NUMBER-OF-SHARES-REDEEMED> (930,406)
<SHARES-REINVESTED> 201,354
<NET-CHANGE-IN-ASSETS> $7,911,842
<ACCUMULATED-NII-PRIOR> $2,378,363
<ACCUMULATED-GAINS-PRIOR> ($1,106,214)
<OVERDISTRIB-NII-PRIOR> $0
<OVERDIST-NET-GAINS-PRIOR> $0
<GROSS-ADVISORY-FEES> $105,734
<INTEREST-EXPENSE> $0
<GROSS-EXPENSE> $459,915
<AVERAGE-NET-ASSETS> $30,386,588
<PER-SHARE-NAV-BEGIN> $9.94
<PER-SHARE-NII> $0.84
<PER-SHARE-GAIN-APPREC> $0.24
<PER-SHARE-DIVIDEND> $0.80
<PER-SHARE-DISTRIBUTIONS> $0.00
<RETURNS-OF-CAPITAL> $0.00
<PER-SHARE-NAV-END> $10.22
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> $0
<AVG-DEBT-PER-SHARE> $0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> HIGH YIELD BOND FUND - C SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $38,425,159
<INVESTMENTS-AT-VALUE> $38,989,367
<RECEIVABLES> $1,636,361
<ASSETS-OTHER> $13,715
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $40,639,443
<PAYABLE-FOR-SECURITIES> $756,250
<SENIOR-LONG-TERM-DEBT> $0
<OTHER-ITEMS-LIABILITIES> $276,390
<TOTAL-LIABILITIES> $1,032,640
<SENIOR-EQUITY> $0
<PAID-IN-CAPITAL-COMMON> $40,249,690
<SHARES-COMMON-STOCK> 3,879,307
<SHARES-COMMON-PRIOR> 3,083,609
<ACCUMULATED-NII-CURRENT> $229,488
<OVERDISTRIBUTION-NII> $0
<ACCUMULATED-NET-GAINS> ($1,436,583)
<OVERDISTRIBUTION-GAINS> $0
<ACCUM-APPREC-OR-DEPREC> $564,208
<NET-ASSETS> $39,606,803
<DIVIDEND-INCOME> $0
<INTEREST-INCOME> $3,227,942
<OTHER-INCOME> $0
<EXPENSES-NET> $424,168
<NET-INVESTMENT-INCOME> $2,803,774
<REALIZED-GAINS-CURRENT> $970,631
<APPREC-INCREASE-CURRENT> ($58,735)
<NET-CHANGE-FROM-OPS> $3,715,670
<EQUALIZATION> $0
<DISTRIBUTIONS-OF-INCOME> $2,667,376
<DISTRIBUTIONS-OF-GAINS> $0
<DISTRIBUTIONS-OTHER> $0
<NUMBER-OF-SHARES-SOLD> 1,524,750
<NUMBER-OF-SHARES-REDEEMED> (930,406)
<SHARES-REINVESTED> 201,354
<NET-CHANGE-IN-ASSETS> $7,911,842
<ACCUMULATED-NII-PRIOR> $2,378,363
<ACCUMULATED-GAINS-PRIOR> ($1,106,214)
<OVERDISTRIB-NII-PRIOR> $0
<OVERDIST-NET-GAINS-PRIOR> $0
<GROSS-ADVISORY-FEES> $105,734
<INTEREST-EXPENSE> $0
<GROSS-EXPENSE> $58,560
<AVERAGE-NET-ASSETS> $2,953,669
<PER-SHARE-NAV-BEGIN> $9.91
<PER-SHARE-NII> $0.79
<PER-SHARE-GAIN-APPREC> $0.24
<PER-SHARE-DIVIDEND> $0.76
<PER-SHARE-DISTRIBUTIONS> $0.00
<RETURNS-OF-CAPITAL> $0.00
<PER-SHARE-NAV-END> $10.18
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> $0
<AVG-DEBT-PER-SHARE> $0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> INTERMEDIATE GOVERNMENT FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $19,724,071
<INVESTMENTS-AT-VALUE> $19,424,388
<RECEIVABLES> $1,207,681
<ASSETS-OTHER> $15,342
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $20,647,411
<PAYABLE-FOR-SECURITIES> $2,485,165
<SENIOR-LONG-TERM-DEBT> $0
<OTHER-ITEMS-LIABILITIES> $46,245
<TOTAL-LIABILITIES> $2,531,410
<SENIOR-EQUITY> $0
<PAID-IN-CAPITAL-COMMON> $24,935,800
<SHARES-COMMON-STOCK> 1,995,001
<SHARES-COMMON-PRIOR> 2,644,129
<ACCUMULATED-NII-CURRENT> $697,509
<OVERDISTRIBUTION-NII> $0
<ACCUMULATED-NET-GAINS> ($7,217,625)
<OVERDISTRIBUTION-GAINS> $0
<ACCUM-APPREC-OR-DEPREC> ($299,683)
<NET-ASSETS> $18,116,001
<DIVIDEND-INCOME> $0
<INTEREST-INCOME> $1,342,595
<OTHER-INCOME> $0
<EXPENSES-NET> $199,164
<NET-INVESTMENT-INCOME> $1,143,431
<REALIZED-GAINS-CURRENT> $109,860
<APPREC-INCREASE-CURRENT> ($549,553)
<NET-CHANGE-FROM-OPS> $703,738
<EQUALIZATION> $0
<DISTRIBUTIONS-OF-INCOME> $1,167,488
<DISTRIBUTIONS-OF-GAINS> $0
<DISTRIBUTIONS-OTHER> $0
<NUMBER-OF-SHARES-SOLD> 176,370
<NUMBER-OF-SHARES-REDEEMED> (934,655)
<SHARES-REINVESTED> 109,157
<NET-CHANGE-IN-ASSETS> ($5,986,251)
<ACCUMULATED-NII-PRIOR> $1,614,516
<ACCUMULATED-GAINS-PRIOR> ($712,069)
<OVERDISTRIB-NII-PRIOR> $0
<OVERDIST-NET-GAINS-PRIOR> $0
<GROSS-ADVISORY-FEES> $0
<INTEREST-EXPENSE> $0
<GROSS-EXPENSE> $332,894
<AVERAGE-NET-ASSETS> $20,713,521
<PER-SHARE-NAV-BEGIN> $9.29
<PER-SHARE-NII> $0.50
<PER-SHARE-GAIN-APPREC> ($0.21)
<PER-SHARE-DIVIDEND> $0.50
<PER-SHARE-DISTRIBUTIONS> $0.00
<RETURNS-OF-CAPITAL> $0.00
<PER-SHARE-NAV-END> $9.08
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> $0
<AVG-DEBT-PER-SHARE> $0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> INTERMEDIATE GOVERNMENT FUND - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> $19,724,071
<INVESTMENTS-AT-VALUE> $19,424,388
<RECEIVABLES> $1,207,681
<ASSETS-OTHER> $15,342
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $20,647,411
<PAYABLE-FOR-SECURITIES> $2,485,165
<SENIOR-LONG-TERM-DEBT> $0
<OTHER-ITEMS-LIABILITIES> $46,245
<TOTAL-LIABILITIES> $2,531,410
<SENIOR-EQUITY> $0
<PAID-IN-CAPITAL-COMMON> $24,935,800
<SHARES-COMMON-STOCK> 1,995,001
<SHARES-COMMON-PRIOR> 2,644,129
<ACCUMULATED-NII-CURRENT> $697,509
<OVERDISTRIBUTION-NII> $0
<ACCUMULATED-NET-GAINS> ($7,217,625)
<OVERDISTRIBUTION-GAINS> $0
<ACCUM-APPREC-OR-DEPREC> ($299,683)
<NET-ASSETS> $18,116,001
<DIVIDEND-INCOME> $0
<INTEREST-INCOME> $1,342,595
<OTHER-INCOME> $0
<EXPENSES-NET> $199,164
<NET-INVESTMENT-INCOME> $1,143,431
<REALIZED-GAINS-CURRENT> $109,860
<APPREC-INCREASE-CURRENT> ($549,553)
<NET-CHANGE-FROM-OPS> $703,738
<EQUALIZATION> $0
<DISTRIBUTIONS-OF-INCOME> $1,167,488
<DISTRIBUTIONS-OF-GAINS> $0
<DISTRIBUTIONS-OTHER> $0
<NUMBER-OF-SHARES-SOLD> 176,370
<NUMBER-OF-SHARES-REDEEMED> (934,655)
<SHARES-REINVESTED> 109,157
<NET-CHANGE-IN-ASSETS> ($5,986,251)
<ACCUMULATED-NII-PRIOR> $1,614,516
<ACCUMULATED-GAINS-PRIOR> ($712,069)
<OVERDISTRIB-NII-PRIOR> $0
<OVERDIST-NET-GAINS-PRIOR> $0
<GROSS-ADVISORY-FEES> $0
<INTEREST-EXPENSE> $0
<GROSS-EXPENSE> $7,049
<AVERAGE-NET-ASSETS> $377,529
<PER-SHARE-NAV-BEGIN> $9.27
<PER-SHARE-NII> $0.49
<PER-SHARE-GAIN-APPREC> ($0.21)
<PER-SHARE-DIVIDEND> $0.49
<PER-SHARE-DISTRIBUTIONS> $0.00
<RETURNS-OF-CAPITAL> $0.00
<PER-SHARE-NAV-END> $9.06
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> $0
<AVG-DEBT-PER-SHARE> $0
</TABLE>
