As filed with the Securities and Exchange Commission on December 2, 1997
1933 Act File No. 30361
1940 Act File No. 811-5853
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 14 [ X ]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 13
--
(Check appropriate box or boxes.)
HERITAGE INCOME TRUST
(Exact name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, FL 33716
(Address of Principal Executive Office) (Zip Code)
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)
Copy to:
CLIFFORD J. ALEXANDER, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on February 2, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Page 1 of Pages
Exhibit Index Appears 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 Heritage Income Trust - High Yield Bond Fund
and Intermediate Government Fund
Statement of Additional Information for Heritage Income Trust -
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
<TABLE>
<CAPTION>
PART A ITEM NO. PROSPECTUS CAPTION
- --------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Total Fund Expenses
3. Condensed Financial Information Financial Highlights; Performance Information
4. General Description of Registrant Cover Page; About the Trust and the Funds; Investment
Objectives, Policies and Risk Factors
5. Management of the Fund Management of the Funds
5A. Management's Discussion of Fund Performance Inapplicable
6. Capital Stock and Other Securities Cover Page; About the Trust and the Funds; Management of the
Funds; Choosing a Class of Shares; What Class A Shares Will
Cost; What Class B Shares Will Cost; What Class C Shares Will
Cost; Dividends and Other Distributions; Taxes; Shareholder
Information
7. Purchase of Securities Being Offered Net Asset Value; Purchase 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 B 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 History General Information
13. Investment Objectives and Policies Investment Information, Investment Limitations
14. Management of the Fund Fund Information - Management of the Funds
15. Control Persons and Principal Holders of Fund Information - Management of the Funds - Five Percent
Securities Shareholders
16. Investment Advisory and Other Services Fund Information - Management of the Funds, Investment Advisers
and Administrator; Subadvisers; Distribution of Shares;
Administration of the Funds
17. Brokerage Allocation Fund Information; Brokerage Practices
18. Capital Stock and Other Securities General Information; Fund Information - Management of the Funds;
Potential Liability; Conversion of Class B Shares
19. Purchase, Redemption and Pricing of Net Asset Value; Investing in the Funds; Redeeming Shares;
Securities Being Offered Exchange Privilege; Conversion of Class B Shares
20. Tax Status Conversion of Class B Shares; Taxes
21. Underwriters Trust Information - Distribution of Shares
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
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.
-2-
<PAGE>
HERITAGE
----------------------
INCOME TRUST(TM)
----------------------
High Yield Bond Fund
And
Intermediate Government Fund
The Heritage Income Trust ("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 Class A shares (sold subject to a 3.75% maximum front-end
sales load) ("A shares"), Class B shares (sold subject to a 5% maximum
contingent deferred sales load, declining over an eight-year period) ("B
shares") and Class C shares (sold subject to a 1% contingent deferred sales
load) ("C shares"). Each Fund requires a minimum initial investment of $1,000,
except for certain investment plans for which lower limits may apply.
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 ("SAI") dated February 2, 1998 relating to the Funds has
been filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus. A copy of the SAI 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.
----------------------
Registered Investment Advisor-SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
Prospectus Dated February 2, 1998
<PAGE>
================================================================================
TABLE OF CONTENTS
================================================================================
GENERAL INFORMATION...........................................................1
Total Fund Expenses........................................................1
Financial Highlights.......................................................3
Investment Objectives, Policies and Risk Factors...........................5
Net Asset Value...........................................................16
Performance Information...................................................16
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 B Shares Will Cost.............................................22
What Class C Shares Will Cost.............................................23
Minimizing the Contingent Deferred Sales Load.............................24
Waiver of the Contingent Deferred Sales Load..............................24
How to Redeem Shares......................................................24
Receiving Payment.........................................................26
Exchange Privilege........................................................27
MANAGEMENT OF THE FUNDS......................................................28
Board of Trustees.........................................................28
Investment Adviser, Fund Accountant, Administrator and Transfer Agent.....28
Subadviser................................................................28
Portfolio Management......................................................29
Brokerage Practices.......................................................29
SHAREHOLDER AND ACCOUNT POLICIES.............................................30
Dividends and Other Distributions.........................................30
Distribution Plans........................................................31
Taxes.....................................................................31
About the Trust and the Funds.............................................32
Shareholder Information...................................................33
APPENDIX....................................................................A-1
<PAGE>
GENERAL INFORMATION
Total Fund Expenses
===============================================================================
The following tables are intended to assist investors in understanding
the expenses associated with investing in each class of shares of each Fund.
Because B shares were not offered for sale prior to the date of this Prospectus,
all expenses for B shares are based on estimated expenses.
SHAREHOLDER TRANSACTION EXPENSES:
Class A Class B Class C
------- ------- -------
Maximum Sales Load Imposed on
Purchases (as a % of offering 3.75% None None
price)..........................
Maximum Contingent Deferred Sales
Load (as a % of original
purchase price or redemption None 5.00%* 1.00%**
proceeds, whichever is lower)...
Wire Redemption Fee (per $5.00 $5.00 $5.00
transaction)....................
----------
* Declining over an eight-year period as follows: 5% during
the first year, 4% during the second year, 3% during the
third and fourth years, 2% during the fifth year, 1%
during the sixth year and 0% thereafter. B shares will
convert to A shares eight years after purchase.
** Declining to 0% at the first year.
ANNUAL OPERATING EXPENSES:
High Yield Bond Fund:
CLASS A CLASS B CLASS C
------- ------- -------
Management fee (after fee waiver).. 0.50% 0.50% 0.50%
12b-1 fees......................... 0.31% 0.80% 0.80%
Other expenses..................... 0.40% 0.40% 0.40%
----- ----- -----
Total Fund operating expenses
(after fee waiver)............... 1.21% 1.70% 1.70%
===== ===== =====
Intermediate Government Fund:
CLASS A CLASS B CLASS C
------- ------- -------
Management fee (after fee waiver). 0.00% 0.00% 0.00%
12b-1 fees........................ 0.33% 0.60% 0.60%
Other expenses (after expense 0.60% 0.60% 0.60%
----- ----- -----
reimbursement)....................
Total Fund operating expenses
(after fee waiver and expense
reimbursement).................... 0.93% 1.20% 1.20%
===== ===== =====
Page 1
<PAGE>
The Funds' manager, Heritage Asset Management, Inc. (the "Manager"),
voluntarily will waive its investment advisory fees and, if necessary, reimburse
each Fund to the extent that Class A, Class B and Class C annual operating
expenses exceed that Fund's average daily net assets attributable to that class
for the 1998 fiscal year as follows:
Class A Class B And Class C
------- -------------------
High Yield Bond Fund 1.25% 1.70%
Intermediate Government Fund 0.95% 1.20%
Absent such fee waivers and expense reimbursements, the management fee
and other expenses for each class of each Fund for the 1997 fiscal year would
have been as follows:
Class A Class C
------- -------
High Yield Bond Fund
Management Fee 0.60% 0.60%
Total Fund
Operating Expenses 1.31% 1.80%
Intermediate Government Fund
Management Fee 0.50% 0.50%
Other Expenses 0.84% 0.84%
Total Fund
Operating Expenses 1.67% 1.94%
EXAMPLES OF THE EFFECT OF FUND EXPENSES:
The impact of Fund operating expenses on earnings is illustrated in the
examples below assuming a hypothetical $1,000 investment and a 5% annual rate of
return.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
High Yield Bond Fund:
A shares............................. $___ $___ $___ $___
B shares (assuming sale of all $___ $___ $___ $___
shares at end
of period).........................
B shares (assuming no sale of $___ $___ $___ $___
shares)............................
C shares ............................ $___ $___ $___ $___
Intermediate Government Fund:
A shares............................. $___ $___ $___ $___
B shares (assuming sale of all $___ $___ $___ $___
shares at end of period)...........
B shares (assuming no sale of $___ $___ $___ $___
shares)............................
C shares ............................ $___ $___ $___ $___
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. Due to the imposition of Rule 12b- 1 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.
For a further discussion of these costs and expenses, see "Management of the
Funds" and "Distribution Plans."
Page 2
<PAGE>
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 SAI. The financial statements and the information in these tables for the
two fiscal years ended September 30, 1997 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. No B
shares were outstanding prior to the date of this Prospectus.
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
-------------------------------------------------------------------------------
Class A Shares Class C Shares
------------------------------------------------------ -----------------------
For the Years Ended September 30, For the Years Ended
September 30,
- -------------------------------------------------------------------------------------------------------- ------------------------
1997 1996(a) 1995 1994 1993 1992 1991 1990+ 1997 1996(a) 1995++
---- ------- ---- ---- ---- ---- ---- ----- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD $10.22 $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $ 9.60 $10.18 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b) 0.90 0.84(f) 0.72 0.69 0.81 0.83 0.87 0.43 0.85 0.79(f) 0.31
Net realized and unrealized 0.46 0.24 0.31 (0.84) 0.07 0.59 1.00 (0.34) 0.46 0.24 0.28
gain loss on investments ---- ---- ---- ------ ---- ---- ---- ------ ---- ---- ----
Total from Investment Operations 1.36 1.08 1.03 (0.15) 0.88 1.42 1.87 0.09 1.31 1.03 0.59
---- ---- ---- ------ ---- ---- ---- ---- ---- ---- ----
LESS DISTRIBUTIONS:
Dividends from net investment income (0.89) (0.80) (0.74) (0.71) (0.83) (0.85) (0.87) (0.36). (0.84) (0.76) (0.30)
Distributions from net realized gains -- -- -- (0.07) (0.22) (0.04) -- (0.04) -- -- --
Distributions in excess of net -- -- -- (0.07) -- -- -- -- -- -- --
realized gains ----- ----- ----- ------ ----- ----- ----- ----- ----- ----- ---
Total Distributions (0.89) (0.80) (0.74) (0.85) (1.05) (0.89) (0.87) (0.40) (0.84) (0.76) (0.30)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD $10.69 $10.22 $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $10.65 $10.18 $9.91
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(E) 14.00 11.44 11.23 (1.59) 8.57 14.35 21.19 0.91(d) 13.53 10.93 6.18(d)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average 1.21 1.23 1.25 1.25 1.19 0.96 1.31 1.35(c) 1.70 1.70 1.70(c)
daily net assets(b)
Net investment income to average 8.76 8.41 7.35 6.76 7.57 8.11 9.10 8.97(c) 8.26 8.39 6.67(c)
daily net assets
Portfolio turnover rate 101 143 109 135 150 71 119 39(c) 101 143 109(c)
Net assets, end of the period 42 33 30 32 42 32 15 10 13 6 0.6
($ millions)
</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 $.01, $.03, $.03, $.02, $.02, $.05, $.07 and $.08 per A share
for the eight periods ended September 30, 1997, respectively. The operating
expense ratios including such items would have been 1.30%, 1.51%, 1.51%,
1.42%, 1.43%, 1.60%, 2.17% and 3.00% (annualized) for A shares for the
eight periods ended September 30, 1997, respectively. Excludes management
fees waived by the Manager in the amount of $.01, $.03 and $.03 per C share
for the three periods ended September 30, 1997, respectively. The operating
expense ratio including such items would have been 1.79%, 1.98% and 1.96%
(annualized) for C shares for the three periods ended September 30, 1997,
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.
Page 3
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
-----------------------------------------------------------------------------------------------
Class A Shares Class C Shares
--------------------------------------------------------------------- ------------------------
For the Years Ended September 30, For the Years Ended
September 30,
--------------------------------------------------------------------- ------------------------
1997* 1996(a)* 1995 1994* 1993 1992 1991 1990+ 1997* 1996* 1995++
----- -------- ---- ----- ---- ---- ---- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD $9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $ 9.60 $9.06 $ 9.27 $ 9.05
----- ------ ------ ------ ------ ------ ------ ------ ----- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.51 0.50 0.62 0.43 0.59 0.52 0.67 0.32 0.49 0.49 0.21
Net realized and unrealized gain
(loss) on investments 0.13 (0.21) 0.12 (0.40) (0.44) 0.10 0.49 (0.12) 0.13 (0.21) 0.23
---- ------ ---- ------ ------ ---- ------ ------ ---- ------ ----
Total from Investment Operations 0.64 0.29 0.74 0.03 0.15 0.62 1.16 0.20 0.62 0.28 0.44
---- ---- ---- ---- ---- ---- ------ ---- ---- ---- ----
LESS DISTRIBUTIONS:
Dividends from net investment (0.52) (0.50) (0.55) (0.37) (0.52) (0.55) (0.65) (0.27) (0.50) (0.49) (0.22)
income
Distributions from net realized -- -- -- -- (0.03) (0.23) -- (0.04) -- -- --
----- ----- ----- ----- ------ ----- ------ ------ ----- ----- ----
gain
Total Distributions (0.52) (0.50) (0.55) (0.37) (0.55) (0.78) (0.65) (0.31) (0.50) (0.49) (0.22)
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD $9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.84 $10.00 $ 9.49 $9.18 $ 9.06 $ 9.27
===== ====== ====== ====== ====== ====== ====== ====== ===== ====== ======
TOTAL RETURN (%)(D) 7.28 3.24 8.47 0.36 1.58 6.47 12.64 2.11 (c) 7.02 3.04 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net assets(a) 0.93 0.94 0.95 0.95 0.91 0.78 1.07 1.10(b) 1.20 1.20 1.20(b)
Net investment income to average
daily net assets 5.65 5.42 5.50 4.60 5.99 5.66 6.87 7.04(b) 5.38 5.22 5.19(b)
Portfolio turnover rate 69 135 162 214 150 123 202 76(b) 69 135 162(b)
Net assets, end of the period 14 18 24 41 102 111 5 4 1 0.6 0.07
($ millions)
</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 $.07, $.06, $.06, $.03, $.01, $.02, $.24 and $.22 per A share
for the eight periods ended September 30, 1997, respectively. The operating
expense ratios including such items would have been 1.67%, 1.61%, 1.47%,
1.18%, 1.03%, 1.23%, 3.58% and 5.88% (annualized) for A shares for the
eight periods ended September 30, 1997, respectively. Excludes management
fees waived and expenses reimbursed by the Manager in the amount of $.07,
$.06 and $.06 per C share for the three periods ended September 30, 1997,
respectively. The operating expense ratio including such items would have
been 1.94%, 1.87% and 1.72% (annualized) for C shares for the three periods
ended September 30, 1997, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
Page 4
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
============================================================
Each Fund has its own investment objective and seeks to
achieve that objective through separate and distinct
investment policies. 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 can 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
objective, principal investments and practices, including
the risks of investing in these investments or engaging in
these practices. For a further discussion of each Fund's
investment policies, practices and risks, see "Investment
Objective and Policies of the Funds" in the SAI.
High Yield Bond Fund
--------------------
The High Yield Bond Fund's investment objective is high
current income. The Fund seeks to achieve this objective
primarily by investing in a portfolio of lower- and
medium-rated high yield fixed income securities. These
lower-rated securities commonly are referred to as "junk
bonds" or "high yield securities." Investments in
lower-rated securities entail a high degree of risk and are
predominantly speculative. Accordingly, an investment in the
Fund is not appropriate for all investors.
THE HIGH YIELD The Fund invests primarily in securities rated Baa or
BOND FUND INVESTS lower by Moody's Investors Service, Inc. ("Moody's") or BBB
PRIMARILY IN or lower by Standard & Poor's Ratings Services ("S&P") or in
HIGH-YIELD, securities determined by Salomon Brothers Asset Management
LOWER-RATED Inc, the Fund's investment subadviser (the "Subadviser"),
CORPORATE BONDS. to be of comparable quality. These lower- and medium-rated,
THESE ARE and comparable unrated securities, offer yields that
COMMONLY CALLED generally are superior to the yields offered by higher-rated
"JUNK BONDS." securities. However, such securities also involve
BECAUSE THE VALUE significantly greater risks, including price volatility and
OF THESE risk of default in the payment of principal and interest.
SECURITIES WILL The Subadviser seeks to minimize the risks of investing in
FLUCTUATE, YOU these securities through its careful analysis of the credit
CAN LOSE MONEY BY status of these issuers. For further discussion of the risks
INVESTING IN THE associated with investing in lower-rated securities, see
FUND. "Lower-Rated Securities - Risk Factors" below.
THE AVERAGE The Subadviser has discretion to select the range of
WEIGHTED maturities of the debt obligations in which the Fund
PORTFOLIO invests. The Subadviser seeks to maintain, under normal
MATURITY OF THE market conditions, the Fund's average weighted portfolio
HIGH YIELD BOND maturity of 7 to 15 years. However, this average weighted
FUND'S INVESTMENT portfolio maturity may vary substantially from time to time
PORTFOLIO WILL depending on economic and market conditions.
VARY.
Certain of the debt securities purchased by the Fund
may be rated as low as C by Moody's or D by S&P or may be
considered comparable to securities having these ratings.
These lower-rated securities are considered to have
extremely poor prospects of ever attaining any real
investment standing, to have a current and identifiable
Page 5
<PAGE>
vulnerability to default, to be unlikely to have the
capacity to pay interest and repay principal when due in the
event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of
interest or principal. Therefore, the Fund will not invest
in these lower-rated securities unless the Subadviser
believes that the difference in yield on these securities is
sufficient to justify the higher risk.
The Fund may invest up to 10% of its total assets in
foreign fixed income securities. The Fund also may invest in
zero coupon and pay-in-kind securities, fixed and floating
rate loans, high yield commercial paper, repurchase
agreements and reverse repurchase agreements. The Fund may
invest up to 20% of its assets in common stock, convertible
securities, warrants, preferred stock or other equity
securities when consistent with the Fund's objectives. The
Fund generally will hold such equity investments as a result
of purchases of unit offerings of fixed income securities
which include such securities or in connection with an
actual or proposed conversion or exchange of fixed income
securities, but also may purchase equity securities not
associated with fixed income securities when, in the opinion
of the Subadviser, such purchase is appropriate. The Fund
may loan portfolio securities, borrow money (as discussed in
the SAI), and purchase securities on a firm commitment or
when-issued basis. Up to 10% of the Fund's net assets may be
invested in illiquid securities. In times when, in its
judgment, conditions in the securities markets would make
pursuing the Fund's basic investment strategy inconsistent
with the best interests of the Fund's shareholders, the
Subadviser may invest up to 100% of its assets in money
market instruments, U.S. Government securities, and long-
and short term debt instruments that are rated A or higher
by 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 CONVERTIBLE SECURITIES. A convertible security is a
BOND FUND MAY bond, debenture, note, preferred stock or other security
INVEST IN that may be converted into or exchanged for a prescribed
SECURITIES amount of common stock of the same or a different issuer
CONVERTIBLE INTO within a particular period of time at a specified price or
COMMON STOCK. 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 FIXED AND FLOATING RATE LOANS. The Fund may invest in
BOND FUND MAY fixed and floating rate loans ("Loans") arranged through
INVEST IN LOANS. private negotiations between a corporate borrower or a
foreign sovereign entity and one or more financial
institutions ("Lenders"). The Fund may invest in such loans
in the form of participations in Loans ("Participations")
and assignments of all or a portion of Loans from third
parties ("Assignments"). The Fund considers these
investments to be investments in debt securities for
purposes of this Prospectus. The Fund, in pursuing its
investment policies, may acquire Participations and
Assignments that are high yield, nonconvertible corporate
debt securities or short duration debt securities.
Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the
borrower. The Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the
borrower with the terms of the loan agreement relating to
the Loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral
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<PAGE>
supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit
risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The Fund will
acquire Participations only if the Lender interpositioned
between the Fund and the borrower is determined by the
investment manager to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire
direct rights against the borrower on the Loan, except that
under certain circumstances such rights may be more limited
than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments
and Participations. Because the market for such instruments
is not highly liquid, the Fund anticipates that such
instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid
secondary market may have an adverse impact on the value of
such instruments and will have an adverse impact on the
Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event,
such as deterioration in the creditworthiness of the
borrower. Thus, the Fund will treat investments in
Participations and Assignments as illiquid for purposes of
its limitation on investments in illiquid securities. The
Fund may revise this policy in the future.
THE HIGH YIELD FOREIGN FIXED INCOME SECURITIES. The Fund may invest up
BOND FUND MAY to 10% of its total assets in foreign fixed income
INVEST IN FIXED securities (including emerging market securities) all or a
INCOME SECURITIES portion of which may be non-U.S. dollar denominated and
OF FOREIGN which include: (a) debt obligations issued or guaranteed by
ISSUERS. foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or
instrumentalities, including Brady Bonds; (b) debt
obligations of supranational entities; (c) debt obligations
of the U.S. Government issued in non-dollar securities; (d)
debt obligations and other fixed income securities of
foreign corporate issuers (both dollar and non-dollar
denominated); and (e) U.S. corporate issuers (both
Eurodollar and non-dollar denominated). There is no minimum
rating criteria for the Fund's investments in such
securities. Investing in the securities of foreign issuers
involves special considerations that are not typically
associated with investing in the securities of U.S. issuers.
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, different trading
and settlement practices and less governmental supervision
and regulation, from changes in currency exchange rates,
from high and volatile rates of inflation, from economic,
social and political conditions and, as with domestic
multinational corporations, from fluctuating interest rates.
Other investment risks include the possible imposition of
foreign withholding taxes on certain amounts of the Fund's
income, the possible seizure or nationalization of foreign
assets and the possible establishment of exchange controls,
expropriation, confiscatory taxation, other foreign
governmental laws or restrictions that might affect
adversely payments due on securities held by the Fund, the
lack of extensive operating experience of eligible foreign
subcustodian's and legal limitations on the ability of the
Fund to recover assets held in custody by a foreign
subcustodian in the event of the subcustodian's bankruptcy.
In addition, there may be less publicly available
information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same
accounting, auditing and financial recordkeeping standards
and requirements of U.S. issuers. Finally, in the event of a
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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 SECURITIES--RISK FACTORS. Lower-rated
LOWER-RATED securities are subject to certain risks that may not be
HIGHER-YIELDING present with investments in higher-grade securities.
SECURITIES ARE Investors should consider carefully their ability to assume
DIFFERENT FROM the risks associated with lower-rated securities before
THOSE OF investing in the Fund.
HIGHER-RATED
SECURITIES.
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
Fund among securities of different issuers should reduce the
risks of owning any such securities separately.
The prices of these high yielding securities tend to be
less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic changes
or individual corporate developments. During economic
downturns or periods of rising interest rates, highly
leveraged issuers may experience financial stress that
adversely affects their ability to service principal and
interest payment obligations, to meet projected business
goals or to obtain additional financing, and the markets for
their securities may be more volatile. If an issuer
defaults, the Fund may incur additional expenses to seek
recovery.
Frequently, the higher yields of high-yielding
securities may not reflect the value of the income stream
that holders of such securities may expect, but rather the
risk that such securities may lose a substantial portion of
their value as a result of their issuer's financial
restructuring or default. Additionally, an economic downturn
or an increase in interest rates could have a negative
effect on the high yield securities market and on the market
value of the high yield securities held by the Fund, as well
as on the ability of the issuers of such securities to repay
principal and interest on their borrowings.
SECURITIES RATINGS. Securities ratings are based
largely on the issuer's historical financial information and
the rating agencies' investment analysis at the time of
rating. Credit ratings evaluate the safety of principal and
interest payments, not market value risk of high yield
bonds. Also, credit rating agencies may fail to timely
change the credit ratings to reflect subsequent events.
Consequently, the rating assigned to any particular security
is not necessarily a reflection of the issuer's current
financial condition, which may be better or worse than the
rating would indicate. Although the 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
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 Fund, at
the discretion of its Subadviser, may retain a security that
has been downgraded below the initial investment criteria.
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<PAGE>
LIQUIDITY AND VALUATION. High yielding securities may
contain redemption or call provisions. If an issuer
exercises these provisions in a declining interest rate
market, the Fund would have to replace the security with a
lower yielding security. To the extent that there is no
established retail secondary market, there may be thin
trading of high yielding securities. This may lessen the
Fund's ability to accurately value these securities and its
ability to dispose of these securities. Additionally,
adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of high yielding securities, especially in a
thinly traded market. Certain high yielding securities may
involve special registration responsibilities, liabilities
and costs and liquidity and valuation difficulties; thus,
the responsibilities of the Board of Trustees to value high
yield securities in the portfolio becomes more difficult
with judgment playing a greater role.
The table below shows the percentages of the Fund's
assets invested during fiscal year 1997 in securities
assigned to the various rating categories by Moody's and S&P
and in unrated securities determined by the Fund's
Subadviser to be of comparable quality. These figures are
dollar-weighted averages of month-end Fund holdings for the
fiscal year ended September 30, 1997, presented as a
percentage of total net assets. These percentages are
historical and are not necessarily indicative of the quality
of current or future portfolio holdings, which will vary.
<TABLE>
<CAPTION>
Comparable
quality of
Rated securities unrated
as a percentage securities as a
of the Fund's percentage of
Moody's/S&P Ratings assets the Fund's assets
------------------- ------------------ -----------------
Moody's S&P Moody's S&P
------- --- ------- ---
<S> <C> <C> <C> <C>
U.S. Government Securities % % % %
Repurchase Agreements % % % %
involving U.S.
Government Securities
BB /Ba % % % %
B/B % % % %
CCC/Caa % % % %
Total % % % %
===== == == == ==
</TABLE>
RESTRICTED SECURITIES. The 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 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. This
policy is more fully described in the SAI.
WARRANTS. The Fund may invest in warrants, which are
securities permitting, but not obligating, their holder to
subscribe for other securities. Warrants do not carry the
right to dividends or voting rights with respect to their
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<PAGE>
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 ZERO COUPON AND PAY-IN-KIND BONDS. The Fund may invest
BOND FUND MAY in zero coupon securities and pay-in-kind bonds, which
INVEST IN CERTAIN involve special risk considerations. Zero coupon securities
SECURITIES THAT are debt securities that pay no cash income but are sold at
DO NOT PAY CASH substantial discounts from their value at maturity. When a
INCOME. 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 Fund also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities.
Zero coupon securities and pay-in-kind bonds tend to be
subject to greater price fluctuations in response to changes
in interest rates than are ordinary interest-paying debt
securities with similar maturities. The value of zero coupon
securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising
interest rates than ordinary interest-paying debt securities
with similar maturities. Zero coupon securities and
pay-in-kind bonds may be issued by a wide variety of
corporate and governmental issuers. Although zero coupon
securities and pay-in-kind bonds generally are not traded on
a national securities exchange, such securities are widely
traded by brokers and dealers and, to such extent, will not
be considered illiquid for the purposes of the Fund's 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 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 make the necessary distributions.
Intermediate Government Fund
----------------------------
The Intermediate Government Fund's investment objective
is high current income consistent with the preservation of
capital. The Fund seeks to achieve this objective primarily
by investing in securities issued by the U.S. Government,
its agencies and instrumentalities, and related repurchase
agreements and forward commitments.
THE INTERMEDIATE The Fund invests at least 80% of its assets in debt
GOVERNMENT FUND securities (including mortgage-backed securities) issued or
INVESTS PRIMARILY guaranteed by the U.S. Government and its agencies and
IN U.S. GOVERNMENT instrumentalities, and repurchase agreements and when-issued
DEBT SECURITIES. and forward commitment securities involving such debt
BECAUSE THE VALUE obligations. The Fund also may lend its securities, borrow
OF THESE money, invest in money market instruments to maintain
SECURITIES WILL sufficient liquidity, seek to hedge against interest rate
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<PAGE>
FLUCTUATE, YOU CAN changes by a variety of strategies involving the use of
LOSE MONEY BY options, futures contracts and options on futures contracts
INVESTING IN THE as described below, invest in stripped securities, inverse
FUND. floaters and invest up to 10% of its net assets in illiquid
securities. Under normal conditions, the Fund will maintain
a dollar-weighted effective average maturity of between
three and ten years. In times where, in its judgment,
conditions in the securities markets would make pursuing the
Fund's basic investment strategy inconsistent with the best
interests of the Fund's shareholders, the Manager may
shorten the Fund's dollar-weighted effective average
maturity below three years.
WITHIN CERTAIN FUTURES AND OPTIONS. To the extent that the Fund enters
LIMITS THE into futures contracts and options on futures contracts
INTERMEDIATE other than for BONA FIDE hedging purposes (as defined by the
GOVERNMENT FUND Commodity Futures Trading Commission), the aggregate initial
MAY UTILIZE margin and premiums required to establish those positions
FUTURES AND (excluding the amount by which options are "in-the-money")
OPTIONS ON FUTURES will not exceed 5% of the liquidation value of the Fund's
CONTRACTS FOR investment portfolio, after taking into account unrealized
PURPOSES OTHER profits and unrealized losses on any contracts into which
THAN HEDGING the Fund has entered. The Fund may hedge up to 100% of its
net assets by such transactions. The Fund will not purchase
any option, if immediately thereafter, the aggregate cost of
all outstanding options (including options on futures
described above) purchased by the would exceed 5% of the
value of its total assets. The Fund may write call options
and put options on up to 15% of its total assets. The Fund
might not use any of the strategies described above, and
there can be no assurance that any strategy used will
succeed. For a 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 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 MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
GOVERNMENT FUND represent an interest in a pool of mortgages made by lenders
MAY INVEST IN U.S. such as commercial banks, savings and loan institutions,
GOVERNMENT OR U.S. mortgage bankers and others. These securities generally
GOVERNMENT-RELATED provide monthly interest and, in most cases, principal
MORTGAGE payments that are a "pass-through" of the monthly payments
SECURITIES AS WELL made by the individual borrowers on their residential
AS PRIVATE ISSUER mortgage loans, net of any fees paid to the issuer or
MORTGAGE-BACKED guarantor of such securities. Mortgage-backed securities may
SECURITIES. be issued by the U.S. Government or U.S. Government-related
entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market
issuers. Although mortgage-backed securities are issued with
stated maturities of up to forty years, unscheduled or early
payments of principal and interest on the underlying
mortgages may shorten considerably their effective
maturities. This contrasts with U.S. Treasury securities,
for instance, which generally pay all principal at maturity
and typically have an effective maturity equal to the final
stated maturity. Thus, for purposes of calculating the
Fund's weighted average maturity, the Fund applies 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.
Page 11
<PAGE>
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 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 Fund's net
assets.
REMICS. The Fund may invest in U.S. Government and
privately issued real estate mortgage investment conduits
("REMICs"), a common form of CMO. REMICs are entities that
issue multiple-class real estate mortgage-backed securities
that qualify and elect treatment as such under the Internal
Revenue Code of 1986, as amended (the "Code"). REMICs may
take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the
entity is not subject to Federal income taxation. Instead,
income is passed through the entity and is taxed to the
persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests"
and "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be directly
or indirectly secured principally by real property. The
risks inherent in investing in REMICs are similar to those
of CMOs in general, as well as those of other
mortgage-backed securities as described below.
RISKS OF MORTGAGE-BACKED SECURITIES. Investments in
mortgage-backed securities entail both market and prepayment
risk. Fixed-rate mortgage-backed securities are priced to
reflect, among other things, current and perceived interest
rate conditions. As conditions change, market values will
fluctuate. In addition, the mortgages underlying
mortgage-backed securities generally may be prepaid in whole
or in part at the option of the individual buyer.
Prepayments of the underlying mortgages can affect the yield
to maturity on mortgage-backed securities and, if interest
rates declined, the prepayment only may be invested by the
Fund at the then prevailing lower rate. Changes in market
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<PAGE>
conditions, particularly during periods of rapid or
unanticipated changes in market interest rates, may result
in volatility of the market value of certain mortgage-backed
securities. The Manager will attempt to manage the Fund so
that this volatility, together with the volatility of other
investments in the Fund, is consistent with its investment
objective.
STRIPPED SECURITIES. The Fund may invest in separately
traded interest and principal components of securities
("Stripped Securities"), including U.S. Government
securities. Stripped Securities are obligations representing
an interest in all or a portion of the income or principal
components of an underlying or related security, a pool of
securities or other assets. In the most extreme case, one
class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The market
values of stripped income securities tend to be more
volatile in response to changes in interest rates than are
conventional debt securities.
U.S. GOVERNMENT SECURITIES. U.S. Government securities
in which the Fund may invest include (1) direct U.S.
Treasury obligations, (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities that are
supported by the full faith and credit of the U.S.
Government or the right of the issuer to borrow specified
amounts from the U.S. Government, and (3) obligations of
U.S. Government agencies and instrumentalities that are not
backed by the full faith and credit of the United States.
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 FUTURES AND OPTIONS. Each Fund may engage in
UTILIZE FUTURES transactions in options and futures contracts in an effort
AND OPTIONS to adjust the risk/return characteristics of its investment
CONTRACTS TO portfolio. High Yield Bond Fund's Subadviser has no current
ATTEMPT TO REDUCE intention of engaging in such transactions. Each Fund also
THE VOLATILITY OF may, in certain circumstances, purchase or sell futures
ITS INVESTMENT contracts or options as a substitute for the purchase or
PORTFOLIO. 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.
Page 13
<PAGE>
If the Manager or the Subadviser, as applicable,
incorrectly forecasts interest rates in utilizing a hedging
strategy using futures or options on futures for 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 liquid assets 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
Subadviser, as applicable, will attempt to create a closely
correlated hedge, but hedging activities may not be
completely successful in eliminating market fluctuation. The
ordinary spreads between prices in the futures and options
on futures markets, due to the nature of these markets, are
subject to distortion. Due to the possibility of distortion,
a correct forecast of market trends by the Manager or the
Subadviser, as applicable, may still not result in a
successful transaction. The Manager or the Subadviser, as
applicable, 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 ILLIQUID SECURITIES. The Intermediate Government Fund
INVEST A PORTION will not purchase or otherwise acquire any security if, as a
OF ITS ASSETS IN result, more than 10% of its net assets would be invested in
ILLIQUID securities that are illiquid by virtue of the absence of a
SECURITIES. readily available market or due to legal or contractual
restrictions on resale. The High Yield Bond Fund has a
similar policy except that it excludes certain restricted
securities from the 10% limit 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 rates for the fiscal years
ended September 30, 1996 and 1997 were 143% and 101%,
respectively. The Intermediate Government Fund's portfolio
turnover rates for the same periods were 135% and 69%,
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
Page 14
<PAGE>
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.
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 or on the Fund's
books and records 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
Page 15
<PAGE>
over" its purchase commitment, the Fund may receive a
negotiated fee.
NET ASSET VALUE
============================================================
THE NET ASSET The net asset value of each Fund's shares fluctuates
VALUE OF EACH and is determined separately for each class as of the close
FUND'S SHARES IS of regular trading - normally 4:00 p.m. Eastern time - of
CALCULATED DAILY the New York Stock Exchange ("Exchange") each day it is
AS OF THE CLOSE OF open. Each Fund's net asset value per share is calculated by
REGULAR TRADING ON dividing the value of the total assets, less liabilities, by
THE NEW YORK STOCK the total number of shares outstanding. The per share net
EXCHANGE. asset value of each class of shares may differ as a result
of the different daily expense accruals applicable to that
class.
Each Fund values its securities and assets 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. For more information on the
calculation of net asset value, see "Net Asset Value" in the
SAI.
PERFORMANCE INFORMATION
===========================================================
Total return data of each class from time to time may
be included in advertisements about each Fund. Performance
information is computed separately for each class in
accordance with the methods described below. Because B
shares and C shares bear the expense of higher Rule 12b-1
fees, the performance of B shares and C shares of each Fund
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 B shares and 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, B share and C share over a period of
time, adjusted for dividends and other distributions. A
share, B 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, B shares and C shares and compare these
Page 16
<PAGE>
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
===========================================================
YOU MAY BUY SHARES Shares of each Fund are offered continuously through
OF EACH FUND BY: 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 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."
When placing an order to buy shares, you should specify
whether the order is for A shares, B shares or C shares of a
Fund. All purchase orders that fail to specify a class
automatically will be invested in A shares, which include a
front-end sales load. The Funds and the Distributor reserve
the right to reject any purchase order and to suspend the
offering of Fund shares for a period of time. Certificates
will not be issued for B shares.
. CALLING YOUR Shares of each Fund may be purchased through a
FINANCIAL Financial Advisor of the Distributor, a participating dealer
ADVISOR or a participating bank ("Financial Advisor") by placing an
order for ; Fund shares with your Financial Advisor 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 Financial
Advisor 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
Page 17
<PAGE>
trading on the Exchange on the next trading day. See "What
Class A Shares Will Cost," "What Class B Shares Will Cost"
and "What Class C Shares Will Cost."
. COMPLETING You also may purchase shares of a Fund directly by
THE ACCOUNT completing and signing the Account Application found in this
APPLICATION Prospectus and mailing it, along with your payment, to
CONTAINED IN Heritage Asset Management. Inc., P.O. Box 33022, St.
THIS Petersburg, FL 33733. Indicate the Fund, the class of shares
PROSPECTUS and the amount you wish to invest. Your check should be made
AND SENDING payable to the specific Fund and class of shares you are
YOUR CHECK; purchasing.
OR
. SENDING A Shares may be purchased with Federal funds (a
FEDERAL commercial bank's deposit with the Federal Reserve Bank that
FUNDS WIRE 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 Financial Advisor 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 Except as provided under "Systematic Investment
INVESTMENT MUST BE Programs," the minimum initial investment in a Fund is
AT LEAST $1,000. A $1,000 and a minimum account balance of $500 must be
MINIMUM BALANCE OF maintained. These minimum requirements may be waived at the
$500 MUST BE discretion of the Manager. In addition, initial investments
MAINTAINED. in Individual Retirement Accounts ("IRAs") may be reduced or
waived under certain circumstances. Contact the Manager or
your Financial Advisor 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. You 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 you the proceeds. The
Trust does not apply this minimum account balance
requirement to accounts that fall below this minimum due to
market fluctuation.
Page 18
<PAGE>
SYSTEMATIC INVESTMENT PROGRAMS
============================================================
EACH FUND OFFERS A variety of systematic investment options are
INVESTORS A available for the purchase of Fund shares. These options
VARIETY OF provide for systematic monthly investments of $50 or more
CONVENIENT through systematic investing, payroll or government direct
FEATURES AND deposit, or exchange from another mutual fund advised or
BENEFITS, administered by the Manager ("Heritage Mutual Fund"). You
INCLUDING DOLLAR may change the amount to be invested automatically or may
COST AVERAGING. 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
Financial Advisor.
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, Section 403(b)
annuity plans, defined contribution plans, self-employed
individual retirement plans ("Keogh Plans"), Simplified
Employee Pension Plans ("SEPs"), Savings Incentive Match
Plans for Employees ("SIMPLEs") and other retirement plans.
For more detailed information on retirement plans, contact
the Manager at (800) 421-4184 or your Financial Advisor and
see "Investing in the Funds" in the SAI.
CHOOSING A CLASS OF SHARES
===========================================================
Each Fund offers three classes of shares, A shares, B
shares and C shares. The primary difference among these
classes lies in their sales load structures and ongoing
expenses.
A SHARES HAVE A CLASS A SHARES. A shares may be purchased at a price
FRONT-END SALES equal to B their net asset value per share next
LOAD AND LOWER determined after receipt of an order, plus a maximum
ANNUAL EXPENSES sales load of 3.75% imposed at the time CDSL of
THAN B SHARES AND purchase. Ongoing Rule 12b-1 fees for A shares are
CLASS A SHARES. lower than the ongoing Rule 12b-1 fees for B shares and
C SHARES. C shares.
SHARES AND C
SHARES HAVE A CLASS B SHARES. B shares may be purchased at net
ON REDEMPTIONS asset value with no initial sales charge. As a result,
MADE WITHIN A the entire amount of your purchase is invested
CERTAIN PERIOD immediately. B shares are subject to higher ongoing
AFTER PURCHASE. Rule 12b-1 fees than A shares. A maximum contingent
deferred sales load ("CDSL") of 5% may be imposed on
redemptions of B shares made within six years of
purchase. After eight years, B shares convert to A
shares, which have lower ongoing Rule 12b-1 fees and no
CDSL.
. CLASS C SHARES. C shares may be purchased at net asset
value with no initial sales charge. As a result, the
entire amount of your purchase is invested immediately.
C shares are subject to higher ongoing Rule 12b-1 fees
than A shares. A maximum CDSL of 1% may be imposed on
redemptions of C shares made in less than one year of
purchase. C shares do not convert to any other class of
shares.
Page 19
<PAGE>
YOU SHOULD CHOOSE The purchase plans offered by each Fund enable you to
SHARE CLASS THAT choose A the class of shares that you believe will be most
given MEETS YOUR beneficial the amount of your intended purchase, the length
expect INVESTMENT of time you to hold the shares and other circumstances.
OBJECTIVES. PLEASE
CONSULT WITH You should consider whether, during the anticipated
YOUR FINANCIAL length of your intended investment in a Fund, the
ADVISOR. accumulated continuing ongoing Rule 12b-1 fees plus the CDSL
on B shares and C shares would exceed the initial sales load
plus accumulated ongoing Rule 12b-1 fees on A shares
purchased at the same time. For short-term investments, A
shares are subject to higher costs than B shares and C
shares because of the initial sales charge. For longer
investments, A shares are more suitable than B shares and C
shares because A shares are subject to lower ongoing Rule
12b-1 fees. Depending on the number of years you hold A
shares, the continuing Rule 12b-1 fees on B shares or C
shares eventually would exceed the initial sales load plus
the ongoing Rule 12b-1 fees on A shares during the life of
your investment.
You might determine that it would be more advantageous
to purchase B shares and C shares in order to invest all of
your purchase payment initially. However, your investment
would remain subject to higher ongoing Rule 12b-1 fees and
be subject to a CDSL if you redeem B shares during the first
eight years after purchase and C shares less than one year
after purchase. Another factor to consider is whether the
potentially higher yield on A shares due to lower ongoing
charges will offset the initial sales load paid on such
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 B shares and
C shares. For example, if you intend to invest more than
$1,000,000 in shares of a Fund, you should purchase A shares
to take advantage of the sales load waiver.
Financial Advisors may receive different compensation
for sales of A shares than sales of B shares or C shares.
WHAT CLASS A SHARES WILL COST
===========================================================
THE SALES LOAD ON A Fund's public offering price for A shares is the next
A SHARES WILL VARY determined net asset value per share plus a sales load
DEPENDING ON THE determined in accordance with the following schedule:
AMOUNT YOU INVEST.
Page 20
<PAGE>
Sales Load as a
Percentage of
---------------------------
Net Amount Dealer
Amount of Offering Invested Concession as a
Purchase Price (Net Asset Percentage of
Value) Offering Price(1)
-----------------------------------------------------------------------
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)
----------------
(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.
THE SALES LOAD ON A shares may be sold at net asset value without any
A SHARES MAY BE sales load to: the Manager and the Subadviser; current and
WAIVED UNDER retired officers and Trustees of the Trust; directors,
CERTAIN officers, and full-time employees of the Manager, Subadviser
CIRCUMSTANCES. 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.
Fund shares also may be purchased without a sales
charge if (1) within 90 days of the purchase of Trust shares
the purchaser redeemed shares of one or more mutual funds
for which a retail broker/dealer or its affiliate was
principal underwriter (proprietary funds), provided that the
purchaser either paid a sales charge to invest in those
funds or held shares of those shares for the period required
not to pay the otherwise applicable CDSL, and (2) the total
value of shares of all Heritage Mutual Funds purchased under
this sales charge waiver does not exceed the amount of the
purchaser's redemption proceeds from the proprietary funds.
To take advantage of this waiver, you must provide
satisfactory evidence that all the above-noted conditions
are met. Qualifying investors should contact their Financial
Advisors for more information.
Heritage Net Asset Value ("Nav") Transfer Program
-------------------------------------------------
YOU MAY QUALIFY A shares of either Fund may be purchased at net asset
FOR A PURCHASE value without any sales load under the Manager's NAV
WITH NO SALES LOAD Transfer Program. To qualify for the NAV Transfer Program,
UNDER THE HERITAGE you must provide adequate proof that within 90 days prior to
NAV TRANSFER the purchase of a Heritage Mutual Fund you redeemed shares
PROGRAM. from a load or no-load mutual fund other than a Heritage
Page 21
<PAGE>
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.
Combined Purchase Privilege (Right Of Accumulation)
---------------------------------------------------
YOU MAY QUALIFY You may qualify for the sales load reductions indicated
FOR A REDUCED in the above sales load schedule by combining purchases of A
a SALES LOAD BY shares into single "purchase" if the resulting "purchase"
COMBINING totals at least $25,000. For additional information
PURCHASES. regarding the Combined Purchase Privilege, see the Account
Application or "Investing in the Trust" in the SAI.
Statement Of Intention
----------------------
A STATEMENT OF You also may obtain the reduced sales loads shown in
INTENTION ALLOWS the above sales load schedule by means of a written
YOU TO REDUCE THE Statement of Intention, which expresses your intention to
SALES LOAD ON invest not less than $25,000 within a period of 13 months in
COMBINED PURCHASES A shares of either Fund or A shares of any other Heritage
OF $25,000 OR MORE Mutual Fund subject to a sales load ("Statement of
OVER ANY 13-MONTH Intention"). If you qualify for the Combined Purchase
PERIOD. 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 can
obtain a Statement of Intention from the Manager or the
Distributor at the address or telephone number listed on the
cover of this Prospectus or from their Financial Advisor.
For more information on the reduction or waiver of the
sales load, see "Investing in the Funds" in the SAI.
WHAT CLASS B SHARES WILL COST
============================================================
THE CDSL IMPOSED B shares may be purchased at net asset value without a
ON REDEMPTIONS OF front-end sales charge, but are subject to a 5% maximum CDSL
B SHARES WILL on redemption of B shares held for less than an eight-year
DEPEND ON THE period. In addition, B shares are subject to a Rule 12b-1
AMOUNT OF TIME fee of 0.80% of the average daily net assets of the High
YOU HAVE HELD B Yield Bond Fund and 0.60% of the average daily net assets of
SHARES the Intermediate Government Fund. B shares are offered for
sale only for purchases of less than $250,000.
THE CDSL, IF The CDSL imposed on redemptions of B shares will be
APPLICABLE, IS calculated by multiplying the offering price (net asset
of BASED ON THE value at the time purchase) or the net asset value of the
LOWER OF PURCHASE shares at the time of redemption, whichever is less, by the
PRICE OR percentage shown on the following chart. The CDSL will not
REDEMPTION PRICE. be imposed on the redemption of B shares acquired as
dividends or other distributions, or on any increase in the
net asset value of the redeemed B shares above the original
purchase price. Thus, the CDSL will be imposed on the lower
of net asset value or purchase price.
Page 22
<PAGE>
CDSL as a Percentage
of the Lesser of Net Asset
Value at Redemption or the
Redemption During: Original Purchase Price
------------------ -------------------------
1st year since purchase 5%
2nd year since purchase 4%
3rd year since purchase 3%
4th year since purchase 3%
5th year since purchase 2%
6th year since purchase 1%
Thereafter 0%
The CDSL imposed depends on the amount of time you have
held B shares. If you own B shares for more than six years,
you do not have to pay a sales charge when redeeming those
shares. Any period of time during which B shares are held in
the Heritage Cash Trust-Money Market Fund ("Money Market
Fund") will be excluded from calculating the holding period.
B shares of the Money Market Fund obtained through an
exchange from another Heritage Mutual Fund are subject to
any applicable CDSL due at redemption.
Under certain circumstances, the CDSL will be waived.
See "Waiver of the Contingent Deferred Sales Load" below.
B SHARES WILL B shares will convert to A shares eight years after the
CONVERT TO end of the calendar month in which the shareholder's order
A SHARES IF YOU to purchase was accepted. The conversion will be effected at
HAVE HELD THEM the net asset value per share. Dividends and other
FOR MORE THAN distributions paid to shareholders by a Fund in the form of
EIGHT YEARS. additional B shares also will convert to A shares on a pro
rata basis. A conversion to B shares will benefit the
shareholder because A shares have lower ongoing Rule 12b-1
fees than B shares. If you have exchanged B shares between
Heritage Mutual Funds, the length of the holding period will
be calculated from the date of original purchase, excluding
any periods during which you held B shares of the Money
Market Fund. Such conversion will not be treated as a
taxable event.
The Distributor may pay sales commissions to dealers
who sell a Fund's B shares at the time of the sale. Payments
with respect to B shares will equal 3% of the purchase price
of the B shares.
WHAT CLASS C SHARES WILL COST
============================================================
A CDSL WILL BE A CDSL of 1% is imposed on C shares if, less than one
IMPOSED ON THE year from the date of purchase, you redeem an amount that
REDEMPTION OF C causes the current value of your account to fall below the
SHARES IF YOU total dollar amount of C shares purchased subject to the
HAVE HELD THEM CDSL. The CDSL will not be imposed on the redemption of C
FOR LESS THAN ONE shares acquired as dividends or other distributions, or on
YEAR. any increase in the net asset value of the redeemed C shares
above the original purchase price. Thus, the CDSL will be
THE CDSL, IF imposed on the lower of net asset value or purchase price.
APPLICABLE, IS In addition, C shares are subject to a Rule 12b-1 fee of
BASED ON THE 0.80% of the average daily net assets of the High Yield Bond
LOWER OF Fund and 0.60% of the Intermediate Government Fund.
PURCHASEPRICE OR
REDEMPTION PRICE. Under certain circumstances, the CDSL will be waived.
See " Waiver of the Contingent Deferred Sales Load" below.
Page 23
<PAGE>
The Distributor may pay sales commissions to dealers
who sell the Funds' C shares at the time of the sale.
Payments with respect to C shares will equal 0.80% and 0.60%
of the purchase price of High Yield Bond Fund C shares and
Intermediate Government Fund C Shares, respectively.
MINIMIZING THE CONTINGENT DEFERRED SALES LOAD
============================================================
When you redeem B shares and C shares, the Funds
automatically will minimize the CDSL by assuming you are
selling:
. First, B shares or C shares owned through
reinvested dividends, upon which no CDSL is
imposed; and
. Second, B shares or C shares held in the
customer's account the longest.
WAIVER OF THE CONTINGENT DEFERRED SALES LOAD
===========================================================
THE CDSL ON B The CDSL for B shares and C shares currently is waived
SHARES AND C for: (1) any partial or complete redemption in connection
SHARES WILL BE with a distribution without penalty under Section 72(t) of
WAIVED FOR the Code, from a qualified retirement plan, including a
CERTAIN Keogh Plan or IRA upon attaining age 70 1/2; (2) any
SHAREHOLDERS. 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 B shares or 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 B shares and C shares, see
"Reinstatement Privilege" and "Exchange Privilege."
HOW TO REDEEM SHARES
============================================================
THERE ARE SEVERAL Redemption of Fund shares can be made by:
WAYS FOR YOU TO
SELL YOUR SHARES. CONTACTING YOUR FINANCIAL ADVISOR. Your Financial
Advisor 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. 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
Page 24
<PAGE>
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 Asset
Management, Inc., P.O. Box 33022. St. Petersburg, Florida
33733. Indicate the Fund, the class, the amount of shares
you wish to redeem, along with your account number.
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.
YOU WILL NOT BE REINSTATEMENT PRIVILEGE. If you redeem any or all of
CHARGED A SALES your A shares of either Fund, you may reinvest all or any
LOAD ON A SHARES portion of the redemption proceeds in A shares at net asset
REDEEMED AND value without any sales load, provided that such
REINVESTED WITHIN reinvestment is made within 90 calendar days after the
90 DAYS OF redemption date. If you redeem any or all of your B shares
REDEMPTION. YOU or C shares of a Fund and paid a CDSL on those shares or
MUST NOTIFY YOUR held those shares long enough so that the CDSL no longer
FUND WHEN YOU applies, you may reinvest all or any portion of the
EXERCISE THIS redemption proceeds in the same class of shares at net asset
PRIVILEGE. value without paying a CDSL on future redemptions of those
shares, provided that such reinvestment is made within 90
calendar days after the redemption date. A reinstatement
pursuant to this privilege will not cancel the redemption
transaction; therefore, (1) any gain realized on the
transaction will be recognized for Federal income tax
purposes, while (2) any loss realized will not be recognized
to the extent the proceeds are reinvested in shares of 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
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<PAGE>
his defined contribution plan, IRA, SEP or SIMPLE. You must
notify either Fund if you intend to exercise the
reinstatement privilege.
Contact the Manager or your Financial Advisor for
further information or see "Redeeming Shares" in the SAI.
RECEIVING PAYMENT
============================================================
THE REDEMPTION If a request for redemption is received by either Fund
PRICE GENERALLY IS in good order (as described below) before the close of
THE NEXT NAV regular trading on the Exchange, the shares will be redeemed
COMPUTED AFTER THE at the net asset value per share determined at the close of
RECEIPT OF YOUR regular trading on the Exchange on that day, less any
REDEMPTION REQUEST. applicable CDSL for B shares or 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 B shares or C shares.
Payment for shares redeemed by either Fund normally
will be made on the business day after the redemption was
made. Proceeds from a redemption of shares by check or
pre-authorized automatic purchase may be delayed until the
funds have cleared, which may take up to 15 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
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to 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 If you have held A shares, B shares or C shares for at
SHARES OF ONE least 30 days, you may exchange some or all of your shares
HERITAGE MUTUAL for shares of the same class of any other Heritage Mutual
FUND FOR SHARES OF Fund. All exchanges will be based on the respective net
THE SAME CLASS OF asset values of the Heritage Mutual Funds involved. All
ANOTHER HERITAGE exchanges are subject to the minimum investment requirements
MUTUAL FUND. and any other applicable terms set forth in the prospectus
for the Heritage Mutual Fund whose shares are being
acquired. Exchanges of shares of Heritage Mutual Funds
generally will result in the realization of a taxable gain
or loss for Federal income tax purposes. See "Taxes."
For purposes of calculating the commencement of the
CDSL holding period for shares exchanged from either Fund to
B shares or C shares of any other Heritage Mutual Fund,
except the 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 B shares or 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, B 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. B
shares and 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 Financial
Advisor. In the event that you or your Financial Advisor 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 at
any time. In addition, each Heritage Mutual Fund may
terminate this exchange privilege upon 60 days' notice. For
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<PAGE>
further information on this exchange privilege and for a
copy of any Heritage Mutual Fund prospectus, contact the
Manager or your Financial Advisor and see "Exchange
Privilege" in the SAI.
MANAGEMENT OF THE FUNDS
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 Heritage Asset Management, Inc. is each Fund's
MANAGEMENT, INC. investment adviser, fund accountant, administrator and
SERVES AS MANAGER transfer agent. The Manager is responsible for reviewing and
FOR EACH FUND, establishing investment policies for each Fund as well as
SUBJECT TO THE administering each Fund's non-investment affairs. The
DIRECTION OF THE Manager is a wholly owned subsidiary of Raymond James
BOARD OF TRUSTEES. 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 $3.2 billion as of September 30,
1997. 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 The Manager has entered into an agreement with Salomon
EMPLOYS A Brothers Asset Management Inc ("Salomon" or "Subadviser"),
SUBADVISER FOR 7 World Trade Center, 38th floor, New York, New York 10048,
PROVIDING to provide investment advice and portfolio management
INVESTMENT ADVICE services, including placement of securities orders, on
AND PORTFOLIO behalf of the High Yield Bond Fund. For these services, the
MANAGEMENT SERVICE Manager pays the Subadviser an annual fee of 50% of the
TO THE HIGH YIELD annual investment advisory fee paid to the Manager, without
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<PAGE>
BOND FUND. 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 as investment adviser to various investment
companies. As of December 31, 1996, the Subadviser and its
affiliates had approximately $20 billion of assets under
management.
APPOINTMENT OF SALOMON SMITH BARNEY HOLDINGS, INC. On
or about November 26, 1997, Salomon merged with a wholly
owned subsidiary of Travelers Group ("Travelers") and
changed its name to Salomon Smith Barney Holdings, Inc.
("SSBH"). In order to retain the services of the Fund's
portfolio manager, Peter J. Wilby, at its November 10, 1997
meeting, the Board of Trustees approved the appointment of
SSBH as the Subadviser to the High Yield Bond Fund. This
appointment is subject to a shareholder approval at a
Special Shareholders Meeting to be held on February __,
1998, or any adjournment(s) thereof. Pursuant to an
exemptive order received from the SEC, SSBH may act as the
Fund's subadviser pending shareholder approval. Subadvisory
fees to be received by SSBH will be held in escrow until
shareholder approval.
If approved by shareholders, SSBH would provide
investment advice and portfolio management services with
respect to High Yield Bond Fund assets allocated to it by
the Manager. SSBH intends to follow the same investment
approach employed by Salomon.
PORTFOLIO MANAGEMENT
============================================================
INTERMEDIATE GOVERNMENT FUND. H. Peter Wallace serves
as portfolio manager of the Intermediate Government Fund.
Mr. Wallace is responsible for the day-to-day management of
the Fund's investment portfolio subject to the general
oversight of the Manager and the Board of Trustees. Mr.
Wallace has been a Senior Vice President and Director of
Fixed Income Investments for the Manager since January 1993.
In August 1993, he became a portfolio manager of the Fund.
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.
HIGH YIELD BOND FUND. 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 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.
BROKERAGE PRACTICES
============================================================
Each Fund 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.
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<PAGE>
In selecting broker-dealers, the Manager or the
Subadviser, as applicable, may consider research and
brokerage services furnished to it and its affiliates.
Subject to seeking the most favorable price and execution
available, the Manager or the Subadviser, as applicable, may
consider sales of shares of a Fund as a factor in the
selection of broker-dealers. See "Brokerage Practices" in
the SAI.
SHAREHOLDER AND ACCOUNT POLICIES
DIVIDENDS AND OTHER DISTRIBUTIONS
============================================================
SEVERAL OPTIONS Dividends from each Fund's net investment income are
EXIST FOR declared and paid monthly. Each Fund also distributes to its
RECEIVING shareholders substantially all of its net realized capital
DIVIDENDS AND gains on portfolio securities after the end of the year in
OTHER which the gains are realized. High Yield Bond Fund also
DISTRIBUTIONS. annually distributes to its shareholders any net realized
gains on foreign currency transactions. 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
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, B shares and C shares are calculated in the same
manner and at the same time and will be in the same amount
relative to the aggregate net asset value of the shares in
each class, except that dividends on B shares and C shares
of a Fund may be lower than dividends on its A shares
primarily as a result of the higher distribution fee and
class-specific expenses applicable to B shares and C shares.
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<PAGE>
DISTRIBUTION PLANS
===========================================================
EACH FUND PAYS As compensation for services rendered and expenses
SERVICE FEES AND borne by the Distributor in connection with the distribution
DISTRIBUTION of A shares and in connection with personal services
FEES TO THE rendered to Class A shareholders and the maintenance of
DISTRIBUTOR. 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 B shares and C shares and in connection with personal
services rendered to Class B and Class C shareholders and
the maintenance of Class B and Class C shareholder accounts,
the 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 B shares and 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, B shares and C
shares, including compensation (in addition to the sales
load) paid to Financial Advisors; 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 Each Fund intends to continue to qualify for treatment
EXPECTED TO HAVE as a regulated investment company under the Code. By doing
ANY FEDERAL TAX so, each Fund (but not its shareholders) will be relieved of
LIABILITY. Federal income tax on that part of its investment company
HOWEVER, YOUR TAX taxable income (generally consisting of net investment
OBLIGATIONS ARE income and net short-term capital gains and, in the case of
DETERMINED BY YOUR the High Yield Bond Fund, net gains from certain foreign
PARTICULAR TAX currency transactions) and net capital gain (i.e., the
CIRCUMSTANCES. 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,
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<PAGE>
whether received in cash or in additional Fund shares and
regardless of the length of time the shares have been held.
Under the Tyaxpayer Relief Act of 1997, different maximum
tax rates apply to non-corporate taxpayers' net capital gain
depending on the taxpayer's holding period and marginal tax
rate of Federal income tax - generally, 28% for gain
recognized on capital assets held for more than one year but
not more than 18 months and 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on capital
assets held for more than 18 months. A notice issued by the
Internal Revenue Service in November 1997 permits each Fund
to divide each net capital gain distribution into a 28% rate
gain distribution and a 20% rate gain distribution (in
accordance with the Fund's holding periods for the
securities it sold that generated the distributed gain) and
requires its shareholders to treat those portions
accordingly. No substantial portion of the dividends paid by
a Fund will be eligible for the dividends-received deduction
allowed to corporations.
WHEN YOU SELL OR Dividends and other distributions declared by each Fund
EXCHANGE SHARES, in December of any year and payable to shareholders of
IT GENERALLY IS record on a date in that month will be deemed to have been
CONSIDERED A paid by that Fund and received by its shareholders on
TAXABLE EVENT TO December 31 if they are paid by the Fund during the
YOU. following January.
Shareholders receive Federal income tax information
regarding dividends and other distributions after the end
of each year. The information regarding capital gain
distributions designates the portions of those
distributions that are subject to the different maximum
rates of tax applicable to non-corporate taxpayers' net
capital gain indicated above.
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. The portion of
the dividends paid the Intermediate Government Fund
attributable to the interest earned on its U.S. Government
securities generally is not subject to state and local
income taxes, although distributions by that Fund to its
shareholders of net realized gains on the disposition of
those securities are fully subject to those taxes. You
should consult your tax adviser to determine the taxability
of dividends and other distributions by that Fund in your
state and locality.
The foregoing is only a summary of some of the
important 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.
ABOUT THE TRUST AND THE FUNDS
===========================================================
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. Each Fund offers three classes
of shares, A shares, B shares and C shares.
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<PAGE>
SHAREHOLDER INFORMATION
===========================================================
YOU MAY VOTE ON Each share of a Fund gives the shareholder one vote in
MATTERS SUBMITTED matters submitted to shareholders for a vote. A shares, B
FOR YOUR APPROVAL shares and C . shares of each Fund have equal voting rights
EACH SHARE YOU OWN except that in matters affecting only a particular class or
ENTITLES YOU TO series, only shares of that class or series are entitled to
ONE VOTE. 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.
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<PAGE>
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
A-1
<PAGE>
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.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) or MINUS ( - ): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
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 bond rating system. The
modifier 1 indicates that the company ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the company ranks in the lower end of its generic rating
category.
A-2
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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.
A-3
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STATEMENT OF ADDITIONAL INFORMATION
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information ("SAI") dated February 2, 1998,
should be read in conjunction with the Prospectus dated February 2, 1998 of the
High Yield Bond and Intermediate Government Funds of Heritage Income Trust (the
"Trust"). This SAI is not a prospectus itself. To receive a copy of the Funds'
Prospectus write to Heritage Asset Management, Inc. at the address below or call
(800) 421-4184.
HERITAGE ASSET MANAGEMENT, INC.
880 Carillon Parkway
St. Petersburg, Florida 33716
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION..........................................................1
INVESTMENT INFORMATION.......................................................1
Investment Objectives................................................1
Investment Policies..................................................1
Industry Classifications............................................20
INVESTMENT LIMITATIONS......................................................20
NET ASSET VALUE.............................................................23
PERFORMANCE INFORMATION.....................................................24
INVESTING IN THE FUNDS......................................................27
Systematic Investment Options.......................................27
Retirement Plans....................................................27
Class A Combined Purchase Privilege (Right of Accumulation).........28
Class A Statement of Intention......................................30
REDEEMING SHARES............................................................30
Systematic Withdrawal Plan..........................................31
Telephone Transactions..............................................32
Redemptions in Kind.................................................32
Receiving Payment...................................................32
EXCHANGE PRIVILEGE..........................................................33
CONVERSION OF CLASS B SHARES................................................34
TAXES.......................................................................34
TRUST INFORMATION...........................................................37
Management of the Trust.............................................37
Five Percent Shareholders...........................................40
Investment Adviser and Administrator; Subadviser....................41
Brokerage Practices.................................................44
Distribution of Shares..............................................46
Administration of the Trust.........................................47
Potential Liability.................................................48
APPENDIX...................................................................A-1
REPORT OF INDEPENDENT ACCOUNTANTS
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 three classes of shares, Class A shares sold subject to a 3.75%
maximum front-end sales load ("A shares"), Class B shares sold subject to a 5%
maximum contingent deferred sales load ("CDSL"), declining over an eight-year
period ("B Shares"), and Class C shares sold subject to a 1% 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
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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
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").
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Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, High Yield will purchase Brady Bonds in secondary
markets, as described below.
In the secondary markets, the price and yield to the investor reflect
market conditions at the time of purchase. Brady Bonds issued to date have
traded at a deep discount from their face value. Certain sovereign bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Certain Brady Bonds have been collateralized as to principal due at maturity
(typically 30 years from the date of issuance) by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in 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,
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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.
Convertible securities in which High Yield may invest include corporate bonds,
notes and preferred stock that can be converted into common stock. Convertible
securities combine the fixed-income characteristics of bonds and preferred stock
with the potential for capital appreciation. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. While
convertible securities generally offer lower interest or dividend yields than
nonconvertible debt securities of similar quality, they do enable the investor
to benefit from increases in the market price of the underlying common stock.
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
4
<PAGE>
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
affected adversely. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts.
The cost of servicing external debt also generally will be affected
adversely by rising international interest rates, because many external debt
obligations bear interest at rates that are adjusted based upon international
interest rates. The ability to service external debt also will depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, High Yield may have limited 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.
5
<PAGE>
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,
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.
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
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<PAGE>
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.
(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 purchase and sell options, futures and options on
futures ("Derivative Investments") in order to hedge their investments and, in
certain circumstances, may purchase and 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
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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
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."
In addition to the instruments and strategies described above, the Funds
expect to discover additional opportunities in connection with options, futures
contracts and other hedging techniques. These new opportunities may become
available as Heritage or SBAM, as applicable, develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
options, futures contracts or other techniques are developed. Heritage or SBAM,
as applicable, may utilize these opportunities to the extent that it is
8
<PAGE>
consistent with a Fund's investment objective and permitted by the Fund's
investment limitations and applicable regulatory authorities.
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
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and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Fund's options or futures
positions are correlated poorly with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) Derivative Instruments, if successful, 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.
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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
other 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 to cover or hold in segregated accounts 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
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depends upon the ability of the Manager or Subadviser, as the case may be, to
forecast the direction of price fluctuations in the underlying investment.
(2) Prior to its expiration, the exercise price of an option may be
below, equal to, or above the current market value of the underlying investment.
Purchased options that expire unexercised have no value. Unless an option
purchased by a Fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Most
exchange-listed options relate to futures contracts and stocks. Exchange markets
for options on debt securities exist, and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter ("OTC") markets (currently the primary markets of options
on debt securities) only by negotiating directly with the other party to the
option contract or in a secondary market for the option if such market exists.
In the event of the insolvency of a Fund's counterparty, the Fund might be
unable to close out an OTC option position at any time prior to its expiration.
Although the Funds intend to purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any specific
time. In such event, it may not be possible to effect closing transactions with
respect to certain options, with the result that a Fund would have to exercise
those options that it has purchased in order to realize any profit. With respect
to options written by a Fund, the inability to enter into a closing transaction
may result in material losses to the Fund. For example, because a Fund may
maintain a covered position with respect to any call option it writes on a
security, the Fund may not sell the underlying security during the period it is
obligated under such option. This requirement may impair the Fund's ability to
sell a portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
(4) Activities in the options market may result in a higher portfolio
turnover rate and additional brokerage costs. However, the Funds also may save
on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation of market movements.
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(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
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.
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<PAGE>
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 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.
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,
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<PAGE>
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. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Funds because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to a Fund when the purchase
or sale of a futures contract would not, such as when there is no movement in
the price of the underlying investment.
LIMITATIONS ON THE USE OF OPTIONS AND FUTURES. To the extent that 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" at the time of purchase) will 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
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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.
The period of these repurchase agreements usually will be short, from overnight
to one week, and at no time will a Fund invest in repurchase agreements of more
than one year. The securities that are subject to repurchase agreements,
however, may have maturity dates in excess of one year from the effective date
of the repurchase agreement. A Fund always will receive as collateral securities
whose market value, including accrued interest, will be at least equal to 100%
of the dollar amount invested by the Fund in each agreement, and the Fund will
make payment for such securities only upon physical delivery or evidence of
book-entry transfer to the account of its custodian bank.
RESTRICTED AND ILLIQUID SECURITIES. As stated in the Prospectus,
Government will not purchase or otherwise acquire any security if, as a result,
more than 10% of its net assets (taken at current value) would be invested in
securities that are illiquid by virtue of the absence of a readily available
market or due to legal or contractual restrictions on resale.
High Yield has a similar 10% limit on illiquid securities, but not all
restricted securities are deemed illiquid for this purpose. In recent years a
large institutional market has developed for certain securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"). Rule
144A under the 1933 Act permits certain sales of unregistered securities by
investors to "qualified institutional buyers" such as High Yield. Institutional
markets for restricted securities have developed as a result of Rule 144A,
providing both readily ascertainable values for restricted securities and the
ability to liquidate an investment to satisfy share redemption orders. High
Yield is permitted to invest in restricted securities that are sold in reliance
on Rule 144A ("Rule 144A Securities"). These securities generally are deemed to
be illiquid and, thus, are subject to High Yield's investment limit that
restricts investments in illiquid securities to no more than 10% of its net
assets. However, pursuant to High Yield's Guidelines for Purchase of Rule 144A
Securities ("Guidelines") adopted by the Board of Trustees, High Yield's
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<PAGE>
investment subadviser may determine that certain Rule 144A Securities are
liquid. The subadviser takes into account a number of factors in reaching
liquidity decisions, including (1) the total amount of Rule 144A Securities
being offered, (2) the number of potential purchasers of the Rule 144A
Securities, (3) the number of dealers that have undertaken to make a market in
the Rule 144A Securities, (4) the frequency of trading in the 144A Securities,
and (5) the nature of the 144A Securities and how trading is effected (e.g., the
time needed to sell the 144A Securities, how offers are solicited and the
mechanics of transfer.) High Yield's investments in Rule 144A Securities that
are deemed to be liquid cannot exceed 25% of its net assets at the time of
investment, when combined with the 10% limit on the purchase of illiquid
securities.
OTC options and their underlying collateral 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
17
<PAGE>
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.
LOANS OF PORTFOLIO SECURITIES. The Funds may loan portfolio securities
to qualified broker-dealers. Each Fund may terminate such loans at any time and
the market risk applicable to any security loaned remains a risk to the Fund.
Although voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, a Fund retains the right to call the loans at
any time on reasonable notice, and it will do so in order that the securities
may be voted by the Fund if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. A Fund also may
call such loans in order to sell the securities involved. The 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. The collateral for each Fund's loans will be "marked to market" daily so
that the collateral at all times exceeds 100% of the value of the loans. The
borrower must add to the collateral whenever the market value of the securities
rises above the level of such collateral. 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
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<PAGE>
instrumentalities of the U.S. Government. Stripped mortgage-backed securities
are structured with two classes that receive different proportions of the
interest and principal distributions on a pool of assets represented by
mortgages ("Mortgage Assets"). A common type of stripped mortgage-backed
security will have one class receiving a small portion of the interest and a
larger portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. The yields to maturity on IOs and POs are sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and principal payments may have a material effect on yield to maturity.
In addition, the market value of stripped mortgage-backed securities is subject
to greater risk of fluctuation in response to changes in market interest rates
than other mortgage-backed securities. In the case of mortgage-backed IOs, if
the underlying assets experience greater than anticipated prepayments of
principal, there is a greater possibility that Government may not fully recoup
its initial investment. Conversely, if the underlying assets experience slower
than anticipated principal payments, the yield on the PO class will be affected
more severely than would be the case with traditional mortgage-backed
securities.
The SEC staff takes the position that IOs and POs generally are illiquid
securities. The staff also takes the position, however, that the Board of
Trustees (or the Manager pursuant to delegation by the Board) may determine that
U.S. Government-issued IOs or POs backed by fixed-rate mortgages are liquid,
where the Board determines that such securities can be disposed of promptly in
the ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share. Accordingly, certain of the IO and PO
securities in which Government invests may be deemed liquid.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities, including a variety of securities that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
secured thereby. These securities include: securities issued and guaranteed by
the U.S. Government, such as Treasury bills, Treasury notes, and Treasury bonds;
obligations 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.
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<PAGE>
ZERO COUPON AND PAY-IN-KIND SECURITIES. High Yield may invest in zero
coupon and pay-in-kind securities. Zero coupon securities are debt obligations
that do not entitle the holder to any periodic payment of interest prior to
maturity or a specified date when the securities begin paying current interest.
Zero coupon securities are issued and traded at a discount from their face
amounts or par value, which discount rate varies depending on the time remaining
until cash payments begin, prevailing interest rates, liquidity of the security
and the perceived credit quality of the issuer. Pay-in-kind securities are those
that pay interest through the issuance of additional units of the same
securities. The market prices of zero coupon and pay-in-kind securities
generally are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than do other types of debt securities having similar
maturities and credit value.
Industry Classifications
------------------------
For purposes of determining industry classifications, the Funds rely
upon classifications established by the Manager that are based upon
classifications contained in the Directory of Companies Filing Annual Reports
with the SEC and in the Standard & Poor's Corporation Industry Classifications.
INVESTMENT LIMITATIONS
- ----------------------
In addition to the limits disclosed in "Investment Policies" above and
the investment limitations described in the Prospectus, the Funds are subject to
the following investment limitations that are fundamental policies and may not
be changed without the vote of a majority of the outstanding voting securities
of the 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
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<PAGE>
is made. A Fund will not make additional investments when borrowings exceed 5%
of its total assets.
DIVERSIFICATION. Neither Fund will invest more than 5% of its total
assets in securities of any one issuer other than the U.S. Government or its
agencies or instrumentalities or buy more than 10% of the voting securities or
any other class of securities of any issuer.
INDUSTRY CONCENTRATION. Neither Fund will purchase securities if, as a
result, more than 25% of its total assets would be invested in any one industry
with the exception of U.S. Government securities.
INVESTING IN COMMODITIES, MINERALS OR REAL ESTATE. Neither Fund may
invest in commodities, commodity contracts, oil, gas or other mineral programs,
real estate limited partnerships, or real estate, except that it may (1)
purchase securities secured by real estate, or issued by companies that invest
in or sponsor such interests, (2) futures contracts and options and (3) engage
in transactions in forward commitments.
UNDERWRITING. Neither Fund may underwrite the securities of other
issuers, except that a Fund may invest in securities that are not readily
marketable without registration under the Securities Act of 1933, as amended
(the "1933 Act") (restricted securities), as provided in the Fund's prospectus
and this Statement of Additional Information.
LOANS. Neither Fund may make loans, except to the extent that the
purchase of a portion of an issue of publicly distributed or privately placed
notes, bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans, and further provided that a Fund
may enter into repurchase agreements and securities loans as permitted under the
Fund's investment policies. Privately placed securities typically are either
restricted as to resale or may not have readily available market quotations, and
therefore may not be as liquid as other securities.
ISSUING SENIOR SECURITIES. Neither Fund may issue senior securities,
except as permitted by the investment objectives and policies and investment
limitations of that Fund.
SELLING SHORT AND BUYING ON MARGIN. Neither Fund may sell any securities
short, purchase any securities on margin or maintain a short position in any
security, but may obtain such short-term credits as may be necessary for
clearance of purchase and sales of securities; provided, however, the Funds may
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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.
ILLIQUID SECURITIES. Government may not 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. High Yield has a
similar limitation however, it may invest up to 25% of its net assets in
restricted securities that are sold in reliance on Rule 144A deemed to be liquid
pursuant to Board-approved guidelines, when combined with the 10% limit on the
purchase of illiquid 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.
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NET ASSET VALUE
- ---------------
The net asset value per share of A shares, B shares and C shares is
determined separately daily as of the close of regular trading on the New York
Stock Exchange (the "Exchange") each day the Exchange is open for business.
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 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 and other assets in 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 receivable.
Each Fund is open for business on days on which the Exchange is open
(each a "Business Day"). Trading in securities on European and Far Eastern
securities exchanges and OTC markets normally is completed well before the
Funds' close of business on each Business Day. In addition, European or Far
Eastern securities trading may not take place on all Business Days. Furthermore,
trading takes place in various foreign capital markets on days that are not
Business Days and on which the Funds do not calculate net asset value.
Calculation of A shares, B 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. The Funds calculate net asset
value per share, and therefore, effect sales and redemptions as of the close of
regular trading on the Exchange each Business Day. If events materially
affecting the value of such securities occur between the time when their prices
are determined and the time when the Funds' net asset value is calculated, such
securities and other assets will be valued at fair value by methods as
determined in good faith by or under the direction of the Board of Trustees.
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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 Fund shares.
PERFORMANCE INFORMATION
- -----------------------
The Funds' performance data quoted in advertising and other promotional
materials represents past performance and is not intended to indicate future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Average annual total return quotes for each class used
in each Fund's advertising and promotional materials are calculated according to
the following formula:
P(1+T)n = 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
current maximum sales load of 3.75% is deducted from the initial $1,000 payment
and, for B shares and C shares, the applicable CDSL imposed on a redemption of B
shares or C shares held for the period is deducted. 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, 1997, for the
five-year period ended September 30, 1997, and for the fiscal year ended
September 30, 1997 was 9.79%, 7.75% and 9.73%, respectively. The average
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annualized total return for Government A shares for the same periods was 4.95%,
3.34% and 3.25%, 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, 1997, and for the fiscal year ended September 30, 1997 was 13.33%
and 13.53%, respectively. The average annualized total return for Government C
shares for the same periods was 6.01% and 7.02%, respectively.
In connection with communicating its total return to current or
prospective shareholders, each Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes that may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs. In addition,
each Fund from time to time may include in advertising and promotional materials
total return figures that are not calculated according to the formula set forth
above for each class of shares. For example, in comparing High Yield's A shares,
B 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, B shares or C shares total return with
such market indices as the Lehman Brothers Government Composite Index, the
Lehman Intermediate Government Corporate Index and the Lipper United States
Government Fund Average, each class of each Fund calculates its aggregate total
return for each class for the specified periods of time by assuming an
investment of $10,000 in that class of shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Funds do not, for these purposes, deduct from the initial value
invested any amount representing front-end sales loads charged on A shares or
CDSLs charged on B shares and C shares.
The High Yield A shares cumulative returns using this formula for the
year and five years ended September 30, 1997, and for the period March 1, 1990
(commencement of operations) to September 30, 1997 were 14.0%, 50.94% and
111.06%, respectively. The cumulative returns for Government A shares for the
same periods were 7.28%, 22.46% and 49.96%, respectively. Cumulative returns for
High Yield C shares for the period April 3, 1995 (first offering of C shares) to
September 30, 1997, and for the fiscal year ended September 30, 1997 were 33.72%
and 13.53%, respectively. Cumulative returns for Government C shares for the
same periods were 15.67% and 7.02%, respectively. By not annualizing the
performance and excluding the effect of the front-end sales load on A shares and
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the CDSL on B shares and 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:
YIELD = 2x[(A-B+1)6-1]
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
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, 1997, the 30-day yield for High
26
<PAGE>
Yield and Government A shares was 7.82% and 5.60%, respectively. At September
30, 1997, the 30-day yield for High Yield and Government C shares was 7.62% and
5.54%, respectively.
INVESTING IN THE FUNDS
- ----------------------
The options below allow you to invest continually in either Fund at
regular intervals.
A shares, B shares and C shares of each Fund 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 "Purchase Procedures."
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.
You may change or terminate any of the above options at any time.
Retirement Plans
----------------
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage
Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of a Fund and/or
27
<PAGE>
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). In addition, individuals whose earnings (together with their spouse's
earnings) do not exceed a certain level may establish an "education IRA" and/or
a "Roth IRA"; although contributions to these new types of IRAs (established by
the Taxpayer Relief Act of 1997 ("Tax Act")) are nondeductible, withdrawals from
them will not be taxable under certain circumstances. A Heritage IRA also may be
used for certain "rollovers" from qualified benefit plans and from Section
403(b) annuity plans. For more detailed information on the Heritage IRA, please
contact the Manager.
Fund shares also may be used as the investment medium for qualified
plans (defined benefit or defined contribution plans established by
corporations, partnerships or sole proprietorships). Contributions to qualified
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 B shares and C shares at any time.
28
<PAGE>
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 the 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 ("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 the investor into a single "purchase."
29
<PAGE>
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 Raymond James &
Associates, Inc. (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 the
Prospectus by means of a written Statement of Intention, which expresses the
investor's intention to invest not less than $25,000 within a period of 13
months in 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 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
30
<PAGE>
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 a day of each month chosen by the
shareholders or a day of the last month of each period chosen by the
shareholders, whichever is applicable. Systematic withdrawals of C shares, if
made less than one year of the date of purchase, will be charged a CDSL of 1%,
and B shares, if made within the eight-year holding period, will be charged the
applicable CDSL for the holding period. 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 B shares and C shares. If a shareholder elects to
participate in the Systematic Withdrawal Plan, dividends and other distributions
on all shares in the account must be reinvested automatically in Fund shares. A
shareholder may terminate the Systematic Withdrawal Plan at any time without
charge or penalty by giving written notice to 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
31
<PAGE>
extent that the total amount of the payments exceeds the tax basis of the shares
sold. If the periodic withdrawals exceed reinvested dividends and other
distributions, the amount of the original investment may be correspondingly
reduced.
Ordinarily, a shareholder should not purchase additional A shares of a
Fund if maintaining a Systematic Withdrawal Plan of A shares because the
shareholder may incur tax liabilities in connection with such purchases and
withdrawals. A Fund will not knowingly accept purchase orders from shareholders
for additional A shares if they maintain a Systematic Withdrawal Plan unless the
purchase is equal to at least one year's scheduled withdrawals. In addition, a
shareholder who maintains such a Plan may not make periodic investments under
each Fund's Automatic Investment Plan.
Telephone Transactions
----------------------
Shareholders may redeem shares by placing a telephone request to a Fund.
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.
32
<PAGE>
Receiving Payment
-----------------
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 B shares and 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 Fund
shares can be directed to registered representatives of the Distributor or a
participating dealer, or to the Manager.
EXCHANGE PRIVILEGE
- ------------------
An exchange is effected through the redemption of the shares tendered
for exchange and the purchase of shares being acquired at their respective net
asset values as next determined following receipt by the Heritage Mutual Fund
whose shares are being exchanged of (1) proper instructions and all necessary
supporting documents 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. 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.
A shares of Government purchased from February 1, 1992 through July 31,
1992, without payment of a front-end 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 front-end sales load will be
subject to a front-end sales load when exchanged into A shares of another
33
<PAGE>
Heritage Mutual Fund, unless those shares were acquired through an exchange of
other shares that were subject to a front-end sales load.
CONVERSION OF CLASS B SHARES
- ----------------------------
B shares of each Fund automatically will convert to A shares, based on
the relative net asset values per share of the two classes, as of the close of
business on the last business day of the month in which the eighth anniversary
of the initial issuance of such B shares occurs. For the purpose of calculating
the holding period required for conversion of B shares, the date of initial
issuance shall mean (1) the date on which such B shares were issued or (2) for B
shares obtained through an exchange, or a series of exchanges, the date on which
the original B shares were issued. For purposes of conversion to A shares, B
shares purchased through the reinvestment of dividends and other distributions
paid in respect of B shares will be held in a separate sub-account. Each time
any B shares in the shareholder's regular account (other than those in the
sub-account) convert to A shares, a pro rata portion of the B shares in the
sub-account will also convert to A shares. The portion will be determined by the
ratio that the shareholder's B shares converting to A shares bears to the
shareholder's total B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on A shares and B shares will not result in "preferential
dividends" under the Code and the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available, the B shares
would not be converted and would continue to be subject to the higher ongoing
expenses of the B shares beyond eight years from the date of purchase. Heritage
has no reason to believe that this condition for the availability of the
conversion feature will not be met.
TAXES
- -----
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 and net short-term capital
gain and, in the case of High Yield, net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
34
<PAGE>
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options or futures contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer.
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 its 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 (which will be long-term capital gain, and subject to
Federal income tax at the rates indicated above, if the shares were held for
more than one year), 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
35
<PAGE>
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, 1997, High Yield had a capital loss carryforward of
$755,051, which may be applied against any net realized capital gains until its
expiration dates of September 30, 2003 (as to $706,795), and September 30, 2004
(as to $48,256).
As of September 30, 1997, Government had a capital loss carryforward of
$7,246,344, which may be applied against any net realized capital 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, 1996 to September 30, 1997,
Government realized $129,884 of net capital losses, which will be deferred and
treated as arising on October 1, 1997, in accordance with regulations under the
Code.
HEDGING STRATEGIES. 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 amount, character and timing of
recognition of the gains and losses each Fund realizes in connection therewith.
Gains realized by High Yield from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options and futures contracts derived by a Fund with respect to its business of
investing in securities or, for High Yield, foreign currencies, will qualify as
permissible income under the Income Requirement.
ORIGINAL ISSUE DISCOUNT AND PAY-IN-KIND SECURITIES. High Yield may
acquire zero coupon or other securities issued with original issue discount
("OID"). As a holder of those 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
36
<PAGE>
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 avoid imposition of the Excise Tax,
it may be required in a particular year to distribute as a dividend an amount
that is greater than the total amount of cash it actually receives. Those
distributions will be made from High Yield's cash assets or from the proceeds of
sales of portfolio securities, if necessary. High Yield may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain (the excess of net
long-term capital gain over net short-term capital loss).
High Yield may invest in debt securities that are purchased with "market
discount," including Brady Bonds and other sovereign debt securities. For these
purposes, market discount is the amount by which a security's purchase price is
exceeded by its stated redemption price at maturity or, in the case of a
security that was issued with OID, the sum of its issue price plus accrued OID,
except that market discount less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the security is disregarded. Gain on the disposition of such a
security purchased by High Yield (other than a security with a fixed maturity
date within one year from its issuance), generally is treated as ordinary
income, rather than capital gain, to the extent of the security's accrued market
discount at the time of disposition. In lieu of treating the disposition gain as
above, High Yield may elect to include all market discount (for the taxable year
in which it makes the election and all subsequent taxable years) in its gross
income currently, for each taxable year to which the discount 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.
37
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name The Trust During Past Five Years
---- --------- ----------------------
<S> <C> <C>
Thomas A. James* (55) Trustee Chairman of the Board since 1986 and
880 Carillon Parkway Chief Executive Officer since 1969 of
St. Petersburg, FL RJF; Chairman of the Board of RJA since
33716 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* (48) Trustee Chief Executive Officer of Eagle since
880 Carillon Parkway 1996, President, 1995 to present, Chief
St. Petersburg, FL Operating Officer, 1988 to 1996,
33716 Executive Vice President, 1988 to 1993.
Donald W. Burton (53) Trustee President of South Atlantic Capital
614 W. Bay Street Corporation (venture capital) since
Suite 200 1981.
Tampa, FL 33606
C. Andrew Graham (57) Trustee Vice President of Financial Designs
Financial Designs, Ltd. Ltd. since 1992; Executive Vice
1775 Sherman Street President of the Madison Group, Inc.,
Suite 1900 1991 to 1992; Principal of First Denver
Denver, CO 80203 Financial Corporation (investment
banking) since 1987.
David M. Phillips (58) Trustee Chairman and Chief Executive Officer of
World Trade Center CCC Information Services, Inc. since
Chicago 1994 and of InfoVest Corporation
444 Merchandise Mart (information services to the insurance
Chicago, IL 60654 and auto industries and consumer
households) since 1982.
Eric Stattin (64) Trustee Litigation Consultant/Expert Witness
1975 Evening Star Drive and private investor since 1988.
Park City, UT 84060
38
<PAGE>
Position with Principal Occupation
Name The Trust During Past Five Years
---- --------- ----------------------
James L. Pappas (54) Trustee Lykes Professor of Banking and Finance
University of South since 1986 at University of South
Florida Florida; Dean of College of Business
College of Business Administration, 1987 to 1996.
Administration
Tampa, FL 33620
Stephen G. Hill (38) President Chief Executive Officer and President
880 Carillon Parkway of the Manager since 1989 and Director
St. Petersburg, FL since 1994; Director of Eagle since
33716 1995.
Donald H. Glassman (40) Treasurer Treasurer of the Manager since 1989;
880 Carillon Parkway Treasurer of Heritage Mutual Funds
St. Petersburg, FL since 1989.
33716
Clifford J. Alexander (53) Secretary Partner, Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W. (law firm).
Washington, DC 20036
Patricia Schneider (56) Assistant Compliance Administrator of the Manager.
880 Carillon Parkway Secretary
St. Petersburg, FL 33716
Robert J. Zutz (44) Assistant Partner, Kirkpatrick & Lockhart LLP
1800 Massachusetts Secretary (law firm).
Ave., N.W.
Washington, DC 20036
</TABLE>
* These Trustees are "interested persons" as defined in section 2(a)(19)
of the 1940 Act.
The Trustees and officers of the Trust as a group, own less than 1% of
each 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.
39
<PAGE>
The Trust currently pays Trustees who are not "interested persons" of
the Trust $1,333.33 annually and $500 per meeting of the Board of Trustees.
Trustees also are reimbursed for any expenses incurred in attending meetings.
Because the Manager performs substantially all of the services necessary for the
operation of the Fund, the Fund requires no employees. No officer, director or
employee of the Manager receives any compensation from the Fund for acting as a
director or officer. The following table shows the compensation earned by each
Trustee for the fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total Compensation
Aggregate Pension or From the Trust and
Compensation Retirement Benefits Estimated Annual the Heritage Family
Name of Person, From the Accrued as Part of Benefits Upon of Funds Paid
Position Trust the Trust's Expenses Retirement To Trustees
- --------------- ------------ -------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Donald W. Burton, $2,909 $0 $0 $16,000
Trustee
C. Andrew Graham, $2,909 $0 $0 $16,000
Trustee
David M. Phillips, $2,182 $0 $0 $12,000
Trustee
Eric Stattin, $2,909 $0 $0 $16,000
Trustee
James L. Pappas, $2,545 $0 $0 $14,000
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
</TABLE>
FIVE PERCENT SHAREHOLDERS
-------------------------
As of November 28, 1997, the following shareholders owned of record or
were known by the Funds to own beneficially five percent or more of the
outstanding C shares of Government.
40
<PAGE>
NAME AND ADDRESS PERCENT OWNED
- ---------------- -------------
Raymond James Assoc Inc Csdn 11.01%
Cust Thomas W Fvarrow IRA
5216 10th Ave S
Gulfport, FL 33707
Raymond James & Assoc Inc 8.59%
Cust Daniel E Bonbrisco
Po Box 18749
St Petersburg, FL 33733-2749
William Munro Trste 14.52%
For Munro Sales Target Ben Plan
G-4136 Holiday Dr
Flint, MI 46587
Morongo Band of Mission Indians 5.13%
Obligated Reserve Account
11581 Portero Rd
Banning, CA 92220
Morongo Band Of Mission Indians 11.37%
Administrative Reserve Account
11581 Portero Rd
Banning, CA 92220
Morongo Band Of Mission Indians 11.51%
Designated Reserves Account
Attn Elaine Mathews
11581 Portero Rd
Banning, CA 92220
Morongo Bands Of Mission Indians 6.77%
Comty Service Reserve Acct
11581 Portero Rd
Banning, CA 92220-6246
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.
41
<PAGE>
Under an Investment Advisory and Administration Agreement ("Advisory
Agreement") dated January 19, 1990, between the Trust, on behalf of the Funds,
and the Manager, and subject to the control and direction of the Board of
Trustees, the Manager is responsible for reviewing and establishing investment
policies for the Trust as well as administering the Trust's noninvestment
affairs. Under a Subadvisory Agreement, dated February 1, 1996, the Subadviser,
subject to direction by the Manager and Board of Trustees, will provide
investment advice and portfolio management services to High Yield for a fee
payable by the Manager.
The Manager also is obligated to furnish the Trust with office space,
administrative, and certain other services as well as executive and other
personnel necessary for the operation of the Trust. The Manager and its
affiliates also pay all the compensation of Trustees of the Trust who are
employees of the Manager and its affiliates. Each Fund pays all its other
expenses that are not assumed by the Manager. Each Fund also is liable for such
nonrecurring expenses as may arise, including litigation to which the Trust may
be a party. Each Fund also may have an obligation to indemnify Trustees and
officers of the Trust with respect to any such litigation.
The Advisory Agreement and the Subadvisory Agreement each were approved
by the Board of Trustees of the Trust (including all of the Trustees who are not
"interested persons" of the Manager or Subadviser, as defined under the 1940
Act) and the shareholders of the applicable Fund, in compliance with the 1940
Act. Each Agreement provides that it will be in force for an initial two- year
period and it must be approved each year thereafter by (1) a vote, cast in
person at a meeting called for that purpose, of a majority of those Trustees who
are not "interested persons" of 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.
42
<PAGE>
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."
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 the 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 50% of the annual investment advisory fee paid to the
Manager, without regard to any reduction in fees actually paid to the Manager as
a result of voluntary fee waivers by the Manager.
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 B shares and C shares each exceed 1.70% of
average daily net assets attributable to that class for this fiscal year. For
the fiscal years ended September 30, 1995, 1996 and 1997 management fees
amounted to $194,363, $200,042 and $287,069, respectively. For the same periods,
the Manager waived its fees in the amounts of $83,663, $94,308 and $45,839,
respectively. For the fiscal year ended September 30, 1995 and for the period
October 1, 1995 through January 31, 1996, the Manager paid subadvisory fees to
Eagle Asset Management, Inc., High Yield's former subadviser, of $48,591 and
$15,507, respectively for such Fund, and paid subadvisory fees to Salomon for
the period February 1, 1996 through September 30, 1996 and the fiscal year ended
September 30, 1997, of $69,007 and $143,535, respectively.
43
<PAGE>
For Government, the Manager voluntarily has agreed to waive its fees to
the extent that Fund expenses attributable to A shares exceed .95% of the
average daily net assets or to the extent that Fund expenses attributable to B
shares and C shares each exceed 1.20% of average daily net assets attributable
to that class for this fiscal year. For the fiscal years ended September 30,
1995, 1996 and 1997, management fees amounted to $146,658, $105,455 and $81,847,
respectively. For the same periods, the Manager waived its fees in the amounts
of $146,658, $105,455 and $81,847, respectively. For the fiscal years ended
September 30, 1996 and 1997, the Manager reimbursed Government for expenses
totaling $35,322 and $39,456, respectively.
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
fiscal years ended September 30, 1996 and 1997 were 143% and 101%, respectively,
for High Yield, and 135% and 69%, 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 High Yield 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
44
<PAGE>
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.
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
45
<PAGE>
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. In
this connection, the Distributor makes distribution and servicing payments to
participating dealers in connection with the sale of Fund shares. Pursuant to
its Distribution Agreement with the Trust with respect to A shares, B 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, B 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.
The Trust has adopted a Distribution Plan for each class of shares on
behalf of each Fund (each a "Plan" and collectively the "Plans"). These Plans
permit each Fund to pay the Distributor the monthly distribution and service fee
out of the Fund's net assets to finance activity that is intended to result in
the sale and retention of A shares, B shares and 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. Each Plan was
approved by the Board of Trustees, including a majority of the Independent
Trustees after determining that there is a reasonable likelihood that each Fund
and its shareholders will benefit from each Plan.
For the fiscal year ended September 30, 1997 the Distributor received
12b-1 fees in the amount of $112,342 and $51,820 for High Yield and Government,
46
<PAGE>
respectively. For the fiscal year ended September 30, 1997, the Distributor
received 12b-1 fees in the amount of $88,981 and $4,586, 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, B
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.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of a
class of a Fund. The Board of Trustees reviews quarterly a written report of
Plan costs and the purposes for which such costs have been incurred. A Plan may
be amended by vote of the Board 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
requires shareholder approval of that class.
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 a 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 Plan will continue in effect for
successive one-year periods, provided that each such continuance is specifically
approved (1) by the vote of a majority of the Independent Trustees and (2) by
the vote of a majority of the entire Board of Trustees cast in person at a
meeting called for that purpose.
47
<PAGE>
For the three fiscal years ended September 30, 1997, the Distributor
received as compensation for the sale of High Yield A shares $53,388, $159,739
and $216,612, respectively, of which it retained $7,667, $19,066 and $28,693,
respectively. For the same periods, the Distributor received as compensation for
the sale of Government A shares $7,285, $17,353 and $8,937, respectively, of
which it retained $1,013, $2,577 and $1,139, respectively. For the fiscal year
ended September 30, 1997, the Distributor received $4,491 of which it retained
$4,491 for the sale of High Yield C shares, and $1,057 of which it retained
$1,057 for the sale of Government C shares. Class B shares were not offered for
sale prior to the date of this SAI.
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, 1997 the Manager earned
approximately $28,242, $29,201 and $28,200, respectively, from Government for
its services as fund accountant. For the same periods the Manager earned
$28,242, $31,311 and $32,320, 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. The Custodian
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.
48
<PAGE>
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 400 North Ashley Street,
Suite 2800, Tampa, Florida 33602, is the independent accountant for the Trust.
The Financial Statements and Financial Highlights of the Funds for the fiscal
year ended September 30, 1997 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 in 1995 and prior
thereto were audited by other independent 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 cannot meet its obligations to indemnify shareholders
and pay judgments against them.
49
<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 appropri-ate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description Of Standard & Poor's Ratings Services Commercial Paper Ratings
- --------------------------------------------------------------------------
A-1. This 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 the Independent Accountants and Financial Statements are
incorporated herein by reference from the Trust's Annual Report to Shareholders
for the fiscal year ended September 30, 1997, filed with the Securities and
Exchange Commission on November 26, 1997, Accession No. 0000950144-97-012865.
<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 seven years
ended September 30, 1997; Class C Shares for the
period April 3, 1995 (first offering of Class C
Shares) to September 30, 1995, and the two years
ended September 30, 1997.
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, 1997
Statement of Assets and Liabilities - September 30,
1997
Statement of Operations - September 30, 1997
Statements of Changes in Net Assets for the years
ended September 30, 1997 and 1996
Notes to Financial Statements
Report of Price Waterhouse LLP, Independent
Accountants dated November 12, 1997
(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***
C-1
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(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*
(b) Fund Accounting and Pricing Service
Agreement*
(10) Opinion and consent of counsel (filed
herewith)
(11) Accountants' consent (filed herewith)
(12) Financial statements omitted from prospectus
-- none
(13) Letter of investment intent*
(14) Prototype retirement plan (filed herewith)
(15) (a) Class A Plan pursuant to Rule 12b-1*
(b) Class C Plan pursuant to Rule 12b-1*
(c) Class B plan pursuant to Rule 12b-1
(filed herewith)
C-2
<PAGE>
(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 (filed herewith)
(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) (a) Plan pursuant to Rule 18f-3**
(b) Amended 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 from the Post-Effective Amendment No. 13 to
the Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on January 29, 1997.
*** To be filed by subsequent amendment.
Item 25. Persons Controlled by or under
Common Control With Registrant
------------------------------
None.
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<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class October 31, 1997
- -------------- ------------------------
Shares of Beneficial Interest
High Yield Bond Fund
Class A Shares 2,044
Class B Shares 0
Class C Shares 492
Intermediate Government Fund
Class A Shares 850
Class B Shares 0
Class C Shares 74
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:
(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
C-4
<PAGE>
(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.
(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.
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<PAGE>
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 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
C-6
<PAGE>
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 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.
C-7
<PAGE>
(b) The directors and officers of the Registrant's principal
underwriter are:
<TABLE>
<CAPTION>
Positions & Offices Positions & Offices
Name with Underwriter with Registrant
---- ---------------- ---------------
<S> <C> <C>
Thomas A. James Chief Executive Officer, Trustee
Robert F. Shuck Executive V.P., Director None
Thomas S. Franke President, Chief Operating None
Officer, Director
Lynn Pippenger Secretary/Treasurer, Chief Financial None
Officer, Director
Dennis Zank Executive Vice President of None
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, Assistant None
Controller
Sharry Mauney Assistant Secretary None
Grace Palsha Assistant Secretary None
</TABLE>
The principal business address for each director and officer listed above is 880
Carillon Parkway, St. Petersburg, Florida 33716.
C-9
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 were maintained in the physical possession of the
Trust's custodian through February 28, 1994, except that: Heritage maintained
some or all of the records required by Rule 31a-(b)(l), (2) and (8); and the
Subadviser maintained 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 have
been 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.
<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. 14 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 1st
day of December, 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. 14 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
- ------------------------
Stephen G. Hill President December 1, 1997
Thomas A. James*
- ------------------------
Thomas A. James Trustee December 1, 1997
Richard K. Riess*
- ------------------------
Richard K. Riess Trustee December 1, 1997
C. Andrew Graham*
- ------------------------
C. Andrew Graham Trustee December 1, 1997
David M. Phillips*
- ------------------------
David M. Phillips Trustee December 1, 1997
James L. Pappas*
- ------------------------
James L. Pappas Trustee December 1, 1997
Donald W. Burton*
- ------------------------
Donald W. Burton Trustee December 1, 1997
<PAGE>
Eric Stattin*
- ------------------------
Eric Stattin Trustee December 1, 1997
Donald H. Glassman Treasurer December 1, 1997
*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*
(b) Fund Accounting and Pricing Service Agreement*
10 Opinion and consent of counsel (filed herewith)
11 Accountants' consent (filed herewith)
-3-
<PAGE>
12 Financial statements omitted from prospectus - none
13 Letter of investment intent*
14 Prototype retirement plan (filed herewith)
15 (a) Class A Plan pursuant to Rule 12b-1*
(b) Class C Plan pursuant to Rule 12b-1*
(c) Class B plan pursuant to Rule 12b-1 (filed herewith)
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 (filed herewith)
(b) Financial Data Schedule Relating to High Yield Bond 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(a) Plan pursuant to Rule 18f-3**
(b) Amended Plan pursuant to Rule 18f-3 (filed herewith)
- --------------
-4-
<PAGE>
* 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 from the Post-Effective Amendment No. 13 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on January 29, 1997.
*** To be filed by subsequent amendment.
-5-
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> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 14,679,955
<INVESTMENTS-AT-VALUE> 14,734,757
<RECEIVABLES> 169,534
<ASSETS-OTHER> 15,270
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,919,561
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49,566
<TOTAL-LIABILITIES> 49,566
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,487,772
<SHARES-COMMON-STOCK> 1,615,874
<SHARES-COMMON-PRIOR> 1,995,001
<ACCUMULATED-NII-CURRENT> 703,649
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,376,228)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,802
<NET-ASSETS> 14,869,995
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,076,911
<OTHER-INCOME> 0
<EXPENSES-NET> 154,809
<NET-INVESTMENT-INCOME> 922,102
<REALIZED-GAINS-CURRENT> (136,028)
<APPREC-INCREASE-CURRENT> 354,485
<NET-CHANGE-FROM-OPS> 1,140,559
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 938,537
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 74,720
<NUMBER-OF-SHARES-REDEEMED> 545,157
<SHARES-REINVESTED> 91,310
<NET-CHANGE-IN-ASSETS> (3,246,006)
<ACCUMULATED-NII-PRIOR> 726,228
<ACCUMULATED-GAINS-PRIOR> (7,246,344)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 145,638
<AVERAGE-NET-ASSETS> 15,605,017
<PER-SHARE-NAV-BEGIN> 9.08
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> 0.52
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.20
<EXPENSE-RATIO> 0.93
<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> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 14,679,955
<INVESTMENTS-AT-VALUE> 14,734,757
<RECEIVABLES> 169,534
<ASSETS-OTHER> 15,270
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,919,561
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49,566
<TOTAL-LIABILITIES> 49,566
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,487,772
<SHARES-COMMON-STOCK> 1,615,874
<SHARES-COMMON-PRIOR> 1,995,001
<ACCUMULATED-NII-CURRENT> 703,649
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,376,228)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,802
<NET-ASSETS> 14,869,995
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,076,911
<OTHER-INCOME> 0
<EXPENSES-NET> 154,809
<NET-INVESTMENT-INCOME> 922,102
<REALIZED-GAINS-CURRENT> (136,028)
<APPREC-INCREASE-CURRENT> 354,485
<NET-CHANGE-FROM-OPS> 1,140,559
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 938,537
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 74,720
<NUMBER-OF-SHARES-REDEEMED> 545,157
<SHARES-REINVESTED> 91,310
<NET-CHANGE-IN-ASSETS> (3,246,006)
<ACCUMULATED-NII-PRIOR> 726,228
<ACCUMULATED-GAINS-PRIOR> (7,246,344)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,172
<AVERAGE-NET-ASSETS> 764,285
<PER-SHARE-NAV-BEGIN> 9.06
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> 0.50
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.18
<EXPENSE-RATIO> 1.20
<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> 2
<NAME> HIGH YIELD BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 50,455,460
<INVESTMENTS-AT-VALUE> 52,395,448
<RECEIVABLES> 3,180,022
<ASSETS-OTHER> 566,924
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 56,142,394
<PAYABLE-FOR-SECURITIES> 1,253,633
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 271,055
<TOTAL-LIABILITIES> 1,524,688
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,979,288
<SHARES-COMMON-STOCK> 5,113,039
<SHARES-COMMON-PRIOR> 3,879,307
<ACCUMULATED-NII-CURRENT> 414,731
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (716,301)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,939,988
<NET-ASSETS> 54,617,706
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,767,908
<OTHER-INCOME> 0
<EXPENSES-NET> 632,107
<NET-INVESTMENT-INCOME> 4,135,801
<REALIZED-GAINS-CURRENT> 778,438
<APPREC-INCREASE-CURRENT> 1,375,780
<NET-CHANGE-FROM-OPS> 6,290,019
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,010,981
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,097,628
<NUMBER-OF-SHARES-REDEEMED> 1,154,673
<SHARES-REINVESTED> 290,777
<NET-CHANGE-IN-ASSETS> 15,010,903
<ACCUMULATED-NII-PRIOR> 245,567
<ACCUMULATED-GAINS-PRIOR> (1,450,395)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 241,230
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 443,023
<AVERAGE-NET-ASSETS> 36,722,295
<PER-SHARE-NAV-BEGIN> 10.22
<PER-SHARE-NII> 0.90
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> 0.89
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.69
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> HIGH YIELD BOND FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 50,455,460
<INVESTMENTS-AT-VALUE> 52,395,448
<RECEIVABLES> 3,180,022
<ASSETS-OTHER> 566,924
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 56,142,394
<PAYABLE-FOR-SECURITIES> 1,253,633
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 271,055
<TOTAL-LIABILITIES> 1,524,688
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,979,288
<SHARES-COMMON-STOCK> 5,113,039
<SHARES-COMMON-PRIOR> 3,879,307
<ACCUMULATED-NII-CURRENT> 414,731
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (716,301)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,939,988
<NET-ASSETS> 54,617,706
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,767,908
<OTHER-INCOME> 0
<EXPENSES-NET> 632,107
<NET-INVESTMENT-INCOME> 4,135,801
<REALIZED-GAINS-CURRENT> 778,438
<APPREC-INCREASE-CURRENT> 1,375,780
<NET-CHANGE-FROM-OPS> 6,290,019
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,010,981
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,097,628
<NUMBER-OF-SHARES-REDEEMED> 1,154,673
<SHARES-REINVESTED> 290,777
<NET-CHANGE-IN-ASSETS> 15,010,903
<ACCUMULATED-NII-PRIOR> 245,567
<ACCUMULATED-GAINS-PRIOR> (1,450,395)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 241,230
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 189,084
<AVERAGE-NET-ASSETS> 11,122,612
<PER-SHARE-NAV-BEGIN> 10.18
<PER-SHARE-NII> 0.85
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> 0.84
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
ROBERT J. ZUTZ
(202) 778-9059
December 2, 1997
Heritage Income Trust
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
You have requested our opinion as to certain matters regarding the
issuance by Heritage Income Trust (the "Trust") of Class A shares, Class B
shares and Class C shares of beneficial interest of its High Yield Bond Fund
series and its Intermediate Government Fund series (collectively, the "Shares").
The Trust is about to file Post-Effective Amendment No. 14 to its Registration
Statement on Form N-1A ("PEA No. 14") for the purpose of adding Class B shares,
providing current financial information and amending such other information as
appropriate.
We have, as counsel, participated in various business and other matters
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Trust's Declaration of Trust and By-Laws and such
other documents relating to the authorization and issuance of the Shares as we
have deemed relevant, and we generally are familiar with the Trust's business
affairs. Based on the foregoing, it is our opinion that the Shares to be issued
pursuant to PEA No. 14 may be issued in accordance with the Trust's Declaration
of Trust and By-Laws, subject to compliance with the 1933 Act, the 1940 Act and
applicable state laws regulating the distribution of securities, and when so
issued, those Shares will be legally issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust shall look only to the assets of the Trust for payment. It
also requires that notice of such disclaimer be given in each contract or
instrument made or issued by the officers or the Trustees of the Trust on behalf
of the Trust. The Declaration of Trust further provides: (i) for the Trust to
indemnify and hold each shareholder harmless from Trust assets for all loss and
expense of any shareholder held personally liable for the obligations of the
Trust by virtue of ownership of Shares of the Trust; and (ii) for the Trust to
assume the defense of any claim against the shareholder for any act or
obligation of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust would be unable to meet its obligations.
<PAGE>
Heritage Income Trust
December 2, 1997
Page 2
We hereby consent to this opinion accompanying the Registration
Statement that you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm in the statement of
additional information filed as part of PEA No. 14.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
----------------------------
Robert J. Zutz
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 12, 1997, relating to the financial statements and financial highlights
of the Heritage Income Trust -- High Yield Bond Fund and Intermediate Government
Fund, which appears in such Statement of Additional Information, and to the
incorporation by reference of our report 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.
/s/ Price Waterhouse LLP
- ------------------------------------
Price Waterhouse LLP
400 North Ashley Street, Suite 2800
Tampa, Florida 33602
December 1, 1997
<PAGE> 1
INDIVIDUAL
RETIREMENT
ACCOUNT
[Assorted black and white photos of people working and playing.]
From Our Family to Yours: The Intelligent Creation of Wealth.
TAX DEFERRING TODAY'S INCOME
FOR TOMORROW'S NEEDS
[LOGO]
Authorized for distribution only if accompanied or preceded by a current
prospectus of the Heritage Asset Management, Inc. sponsored mutual funds, which
contains information concerning the applicable sales charge or fees and other
important facts. Please read it before investing.
<PAGE> 2
HERITAGE IRA
DISCLOSURE STATEMENT
- ------------------------------------------------------------
This Disclosure Statement describes the general requirements of an Individual
Retirement Account ("IRA"), as well as the specific features of the Heritage
Individual Retirement Custodial Account Agreement (the "Heritage IRA"). It is
provided in accordance with Internal Revenue Service regulations.
I. REVOCATION
If you receive this Disclosure Statement and the accompanying IRA Custodial
Account Agreement less than seven days before you establish your IRA, you are
entitled to revoke your Heritage IRA at any time within seven days after it is
established. You may do so by mailing or delivering a written notice of
revocation to Heritage Asset Management, Inc., P.O. Box 33022, St. Petersburg,
FL 33733. Any notice of revocation will be deemed mailed on the date of postmark
(or if sent by certified or registered mail, the date of certification or
registration) if it is deposited in the United States mail in a properly
addressed envelope, or other appropriate wrapper, first class postage prepaid.
Upon revocation, you will be entitled to a full refund of your entire IRA
contribution without adjustment for administrative expenses, sales commissions
(if any) or fluctuations in market value. If you have any questions about your
right of revocation, please call 800-421-4184 during normal business hours.
II. ESTABLISHING YOUR HERITAGE IRA ACCOUNT
A. STATUTORY REQUIREMENTS
An IRA is a trust or custodial account established for the exclusive benefit of
you or your beneficiaries. An IRA must be created by a written document which
meets all of the following requirements:
BANK TRUSTEE OR CUSTODIAN. An IRA must be established with a qualified trustee
or custodian which is a bank or other person approved by the Internal Revenue
Service. You cannot be your own trustee or custodian. The custodian of your
Heritage IRA is State Street Bank and Trust Company.
CASH CONTRIBUTIONS UP TO $2,000. All contributions to your IRA must be made in
cash. The total amount of contributions for any taxable year, excluding any
rollover contributions or SEP contributions as described in Article VI, may not
exceed the lesser of $2,000 or 100% of your compensation for that year.
NONFORFEITABILITY. The balance of your IRA account is fully vested and
nonforfeitable at all times.
PROHIBITIONS AGAINST LIFE INSURANCE AND COMMINGLING. No part of your IRA assets
may be invested in life insurance contracts, nor may your IRA assets be
commingled with other property except in a common trust fund or common
investment fund.
DISTRIBUTION RULES. Your IRA must comply with certain minimum distribution
requirements, which are described in detail in Article VII, both during your
lifetime and after your death.
B. TAX CONSEQUENCES
The primary Federal income tax consequences of establishing an IRA are the
following:
TAX-DEFERRED EARNINGS. Earnings on the contributions to your IRA will not be
subject to tax until you actually start receiving distributions (or are deemed
to receive distributions) from your IRA. However, your IRA may be subject to tax
if you engage in transactions that generate unrelated business taxable income
for your IRA.
CONTRIBUTIONS; TOTAL OR PARTIAL
DEDUCTIBILITY. You are permitted to make contributions each year to your IRA in
an amount up to the lesser of $2,000 ($4,000 if you also establish a spousal
IRA), or 100% of your current year's compensation. Generally, your contribution
is fully tax-deductible if you file as a single taxpayer and your adjusted gross
income does not exceed $25,000 or if you file a joint income tax return and you
and your spouse's combined adjusted gross income does not exceed $40,000. (There
are special rules for married individuals who file separate tax returns.) Above
those levels, the deduction phases out, that is, your contribution is partially
deductible; the deduction is eliminated altogether if your adjusted gross income
exceeds a second, higher level. These rules are explained in detail in Article
III(B).
NONDEDUCTIBLE CONTRIBUTIONS. You are permitted to make "designated nondeductible
contributions" to your IRA. See Article III(C) for more details.
TAXABLE DISTRIBUTIONS. Distributions from your IRA (other than certain returns
of excess IRA contributions) that are not rolled over to another retirement plan
are generally taxable as ordinary income in the year of receipt. However,
distributions from an IRA that contains designated nondeductible contributions
may be treated partly as a nontaxable return of the nondeductible IRA
contributions and partly as a taxable distribution of IRA earnings and any
deductible IRA contributions. See Article VII(A) for more details.
TAX-FREE ROLLOVERS. You may be eligible to make a rollover contribution to your
IRA of cash you receive or are eligible to receive from another individual
retirement plan or employer-maintained retirement plan. In addition, you may be
eligible to roll over the taxable amount you withdraw from your IRA to another
individual retirement plan or, in certain cases, to an employer-maintained
retirement plan. See Article V for further details.
III. IRA CONTRIBUTIONS
A. AMOUNT AND TIMING OF CONTRIBUTIONS
MAXIMUM ANNUAL CONTRIBUTIONS. The total amount of contributions to your IRA for
any taxable year (excluding any rollover contributions as described in Article V
or SEP contributions as described in Article VI) may not exceed the lesser of
$2,000 or 100% of your compensation for the taxable year. You cannot make any
contributions (other than rollover contributions described in Article V or SEP
contributions described in Article VI) to your IRA for the taxable year in which
you attain age 70 1/2 or thereafter. Remember that all permissible contributions
to your IRA are not necessarily tax-deductible. The rules for deductibility are
described in Paragraph B below.
SPOUSAL IRA. You can also open an IRA for your spouse for any year, if you and
your spouse file a joint income tax return for the year, your spouse is less
than 70 1/2 years of age at the end of the year, and your spouse has (or elects
to be treated as having) no compensation for the year. Your total contribution
could then be increased to the lesser of $4,000 or 100% of your compensation for
the year. The total permissible contribution may be allocated among your IRA and
the IRA you open for your spouse so long as no more than $2,000 is allocated to
a single IRA. (If you are 70 1/2 years of age or older at the end of a year but
your spouse is less than 70 1/2, you may open an IRA for your spouse if the
above conditions are satisfied; the maximum
1
<PAGE> 3
permissible contribution to that IRA would then be the lesser of $2,000 or 100%
of your compensation.) Distributions from a spousal IRA do not have to begin
until the spouse for whom the account is maintained reaches age 70 1/2. With the
exception of the contribution limitations, all rules that apply to an IRA
generally apply to a spousal IRA.
DEFINITION OF COMPENSATION. For purposes of the IRA contribution limits, your
compensation includes all taxable wages, salaries, fees, bonuses and other
amounts you receive for providing personal services, and any earned income from
self-employment (even if that earned income is not subject to self-employment
tax because of your religious beliefs). It does not include earnings and profits
from property such as dividends, interest or capital gains, or amounts received
as a pension or annuity, or as deferred compensation. Your compensation includes
any taxable alimony or separate maintenance payments you may receive under a
decree of divorce or separate maintenance.
CONTRIBUTIONS IN CASH. All contributions to your IRA must be made in cash or by
check or money order. Thus, you cannot make contributions of property to your
IRA. If you wish to use shares of a previously established Heritage Fund account
for your annual IRA contribution, you must first redeem the amount of shares you
wish to invest, and then use the cash proceeds as your IRA contribution.
CONTRIBUTIONS UP TO THE DATE YOUR RETURN IS DUE (April 15). You may make
contributions to your IRA for a taxable year at any time during the year, either
periodically or in a lump sum, up to the due date for filing your Federal income
tax return for the taxable year, but not including extensions. For taxpayers who
file on a calendar-year basis, the latest date for any year is April 15 of the
following year. If you do not inform the Custodian of the year for which an IRA
contribution is made, the Custodian will assume the contribution is being made
for the year in which it is received.
MAXIMUM CONTRIBUTIONS NOT REQUIRED. You do not have to contribute to your IRA
every year, nor are you required to make the maximum contribution for any year.
However, if you decide in any year not to make the maximum IRA contribution, you
may not make up the missed contribution amount in later years. Under the
Heritage IRA, there is a minimum initial contribution required when you
establish your account, as described in Article X.
CUSTODIAL OR TRUSTEE FEES. The Internal Revenue Service has ruled that a
custodian's or trustee's administrative fees, which are billed separately and
paid by you in connection with your IRA, may be separately deductible as
expenses. (The deduction for all such expenses is generally limited to the
amount of such expenses that, when combined with certain other miscellaneous
deductions, exceeds 2% of an individual's adjusted gross income; this deduction
is also subject to reduction in the case of a high-income individual whose
adjusted gross income exceeds $100,000, or $50,000 in the case of a separate
return by a married individual). Thus, the separate payment of your IRA
custodial or trustee's fees should not serve to limit the maximum amount of
contributions you are otherwise eligible to make to your IRA. Under the Heritage
IRA, you are provided the opportunity to pay your annual custodial fee
separately, as explained in Article X.
B. DEDUCTIBLE IRA CONTRIBUTIONS
The deductibility of your IRA contributions is determined by the rules explained
below.
a. INDIVIDUALS WHO ARE NOT "ACTIVE PARTICIPANTS" IN OTHER RETIREMENT
ARRANGEMENTS. If neither you nor your spouse are an active participant in an
employer-maintained retirement arrangement, the full amount of your permissible
contribution to an IRA will be tax deductible. Your marital status for this
purpose is determined as of the end of the year, except that in the taxable year
of the death of a spouse, active participation is determined as if the spouse
were alive at year-end.
b. ACTIVE PARTICIPANT DEFINED. Generally, an individual is an active participant
in an employer-maintained retirement arrangement if he or she is not excluded
from eligibility under a defined benefit arrangement, such as a pension plan, or
if contributions -- whether made by the employer or the employee -- or
forfeitures are allocated to the individual's account under a defined
contribution plan such as a profit sharing or 401(k) plan. You are not
considered an active participant if you have not satisfied the plan's minimum
age or service conditions required for participation. The determination whether
you are an active participant is made without regard to whether your rights
under the plan are nonforfeitable (that is, vested). Employer-maintained
retirement arrangements include, for this purpose, tax qualified pension or
profit sharing plans, annuity plans of various kinds, certain deferred
compensation arrangements maintained by state and local governments or tax
exempt organizations, simplified employee pension plans, and certain
arrangements to which only employees contribute. Coverage under the social
security or railroad retirement systems does not itself count as coverage by an
employer-maintained arrangement, and you are not considered an active
participant in a previous employer's plan merely because you are receiving
retirement benefits from that plan. The Form W-2 that you receive should have a
check in the "Pension Plan" check box if you are an active participant in a
retirement arrangement of the employer involved. You should be certain to
contact your employer if you are not sure whether you are covered by a
retirement plan at work, or you are otherwise unsure of your status as an active
participant, because the rules as to "active participation" can be complicated
in particular situations.
c. INDIVIDUALS WHO ARE "ACTIVE PARTICIPANTS" IN OTHER RETIREMENT ARRANGEMENTS.
If you are an active participant in a retirement arrangement, or your spouse is
an active participant and you file a joint income tax return, or even if you
file a separate return but lived with your spouse at any time during the taxable
year, the degree to which your contribution to an IRA will be tax deductible
depends on your income tax filing status and the level of your adjusted gross
income (your "AGI") or the AGI of you and your spouse in the case of a joint
return.
i. Adjusted Gross Income ("AGI") Thresholds. Your contribution remains fully
deductible if your AGI falls below the dollar threshold for your filing
status. Above that threshold, your deduction phases out, that is, your
contribution is partially deductible; the deduction is eliminated
altogether if your AGI exceeds a second, higher level. The following
chart illustrates the effect of the AGI thresholds on an IRA deduction,
for each income tax filing status.
ii. Computation of AGI. In computing your AGI to determine the limit of your
IRA deduction, you can consult your tax return. Adjusted gross income for
this purpose is generally the amount shown on Form 1040 as Total Income
reduced by the sum of the amounts listed as adjustments to income (other
than you or your spouse's IRA deduction) on Form 1040. You will note that
your adjusted gross income is not reduced, for this purpose, by any
deductible IRA contributions you make for the taxable year.
2
<PAGE> 4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
STATUS FULL DEDUCTION PHASEOUT LEVELS NO DEDUCTION
<S> <C> <C> <C>
If you (or your spouse if Your contribution Your deduction Your contribution
you file a joint return or if is fully deductible is reduced if is not deductible
you file a separate return and if your AGI is your AGI is if your AGI is:
you and your spouse lived within the full within the
together at any time during deduction range phaseout range
the year) are an active partici- of: of:
pant and you file as:
Single, or $25,000 $25,001 - $35,000 or
Head of $34,999 more
household
Married -- joint $40,000 $40,001 - $50,000 or
return, or $49,999 more
Qualifying
widow(er)
Married -- None $0 - $10,000 or
separate $9,999 more
return
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
iii. Phaseout of Deduction. If you are an active participant whose AGI is no
more than $10,000 above the dollar threshold for your filing status, you
are entitled to a partial tax deduction for the amount of your contribution
to an IRA. The deduction phases out (that is, becomes smaller) as your AGI
approaches the $10,000 limit. The following worksheet can be used to figure
the maximum permissible deduction for an individual who is an active
participant and whose AGI is in the $10,000 phaseout range.
MAXIMUM PARTIAL DEDUCTION
(Use this worksheet only if you are within the AGI phaseout range)
<TABLE>
<S> <C>
IF YOU FILE AS: ENTER ON LINE 1:
Single, or Head of
household $35,000
Married -- joint return
or Qualifying widow(er) $50,000
Married -- separate
return $10,000
1) Amount from above $
----------
2) Adjusted gross income
----------
3) Subtract line 2 from line 1 $
----------
4) Maximum partial deduction. Multiply
Line 3 by 20% (.20). If the result
is not a multiple of $10, round it
to the next highest multiple of $10
(for example, $611.40 rounded to
$620). However, if the result is
less than $200, but more than zero,
enter $200. $
----------
</TABLE>
This is the maximum partial deduction you can claim. You will note that you are
permitted a minimum deduction of $200, so long as your AGI is within the
phaseout range.
Please Note: More detailed worksheets for computing your IRA deduction appear in
your Form 1040 instruction book.
If you file a joint income tax return, the maximum partial deduction applies
independently to you and to your spouse. Remember, however, that your deduction
cannot exceed 100% of your taxable compensation for the year, your spouse cannot
make use of any part of your maximum permissible deduction that you cannot or do
not use, and you cannot make use of any part of your spouse's maximum
permissible deduction that your spouse cannot or does not use.
SPOUSAL IRA. If you are an active participant and open a spousal IRA, the
maximum deduction that you may claim is also reduced pursuant to the rules
outlined above if your AGI is in the phaseout range and is eliminated if your
AGI exceeds the phaseout range. In order to compute the maximum permissible
deduction for a spousal IRA, you should first compute your maximum permissible
deduction, using the worksheet that appears above; you should then compute your
maximum permissible deduction for the combination of your IRA and the spousal
IRA, by using the same worksheet, but multiplying the number on line 3 by 40%
rather than 20%. The result of the second computation is the maximum amount that
may be deducted for contributions to the two IRAs; the result of the first
computation is the maximum deduction that may be claimed for contribution to a
single one of the two IRAs.
The following chart summarizes the various rules as to the deductibility of an
IRA contribution.
3
<PAGE> 5
CAN YOU TAKE AN IRA DEDUCTION?
THIS CHART SUMS UP WHETHER YOU CAN TAKE A FULL DEDUCTION, A PARTIAL DEDUCTION OR
NO DEDUCTION AS DISCUSSED EARLIER.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF YOU ARE NOT
IF COVERED BY A
YOUR IF YOU ARE COVERED BY A RETIREMENT PLAN AT WORK RETIREMENT PLAN
AGI IS AND YOUR FILING STATUS IS: AT WORK AND YOUR
FILING STATUS IS:
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
* Single, or * Married Filing * Married Filing * Married Filing
Jointly (even Separately (even Jointly (and
* Head of if your spouse if your spouse is your spouse is
Household is covered by covered by a covered by a
a plan at work) plan at work) plan at work)
BUT * Qualifying
AT LESS Widow(er)
LEAST THAN
YOU CAN TAKE YOU CAN TAKE YOU CAN TAKE YOU CAN TAKE
- ---------------------------------------------------------------------------------------------------------
$-0- $10,000 Full deduction Full deduction Partial deduction Full deduction
$10,001 $25,000 Full deduction Full deduction No deduction Full deduction
$25,001 $35,000 Partial deduction Full deduction No deduction Full deduction
$35,001 $40,000 No deduction Full deduction No deduction Full deduction
$40,001 $50,000 No deduction Partial deduction No deduction Partial deduction
$50,001 or over No deduction No deduction No deduction No deduction
<CAPTION>
IF
YOUR
AGI IS IF YOU ARE NOT COVERED BY A RETIREMENT PLAN
AT WORK AND YOUR FILING STATUS IS:
---------------------------------------------------------------
<S> <C> <C> <C> <C>
* Married Filing * Single, or * Married Filing
Separately Jointly or
(even if your * Head of Separately (and
spouse is Household, or your spouse is
covered by a not covered by a
plan at work) * Married Filing plan at work)
Separately (and
you have lived * Qualifying
BUT apart from your Widow(er)
AT LESS spouse the
LEAST THAN entire year)
YOU CAN TAKE YOU CAN TAKE YOU CAN TAKE
- ----------------------------------------------------------------------------------------------------------------------------------
$-0- $10,000 Partial deduction
$10,001 $25,000 No deduction
Full Full
$25,001 $35,000 No deduction Deduction Deduction
$35,001 $40,000 No deduction
$40,001 $50,000 No deduction
$50,001 or over No deduction
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Maximum Deduction: You can deduct IRA contributions up to the amount of the
deduction (full or partial) you can take, or 100% of your taxable compensation,
whichever is less.
$200 floor: The partial deduction has a $200 floor. For example, if your
deduction would have been reduced to less than $200, (but not zero), you can
deduct IRA contributions up to $200 or 100% of your taxable compensation,
whichever is less. If the deduction is completely phased out (reduced to zero),
no deduction is allowed.
4
<PAGE> 6
C. NONDEDUCTIBLE IRA CONTRIBUTIONS.
As indicated above, the maximum contribution that you are permitted to make to
an Accumulation IRA each year may well exceed the amount of the contribution
that is tax-deductible. You may make a nondeductible contribution in the amount
of the difference between the maximum permissible contribution amount and the
amount, if any, of the contribution that is tax-deductible. Thus, your maximum
permissible nondeductible contribution is the lesser of $2,000 ($4,000 in the
case of a spousal IRA) or 100% of your taxable compensation, minus the amount of
your IRA contribution that you can claim as a tax deduction. You may make
nondeductible contributions in lieu of deductible contributions (up to the
maximum permissible amount); you might wish to do so, for example, if you had no
taxable income for the year after taking into account your other deductions.
TAX ADVANTAGE OF NONDEDUCTIBLE IRA CONTRIBUTIONS. The primary tax advantage of
nondeductible IRA contributions is that all earnings attributable to those
contributions will be free of income tax until distribution. Unlike deductible
contributions, your nondeductible contributions themselves are not taxed when
they are distributed to you. (Nondeductible contributions create a "cost basis"
in your IRA). If you have made both deductible and nondeductible contributions
to an IRA, part of each distribution is treated as a nontaxable return of
capital to the extent it represents your actual nondeductible IRA contributions;
the remainder of each distribution (attributable to deductible contributions and
earnings on deductible and nondeductible contributions) is included in taxable
income. You should retain careful and complete records of the amount of your
nondeductible contributions, since you will be responsible for calculating the
extent to which any distributions from your IRA are nontaxable because they
represent a return of nondeductible contributions; neither the custodian of your
IRA nor the Heritage Family of Funds will possess the information to tell you
what portion of your contributions was nondeductible.
You must designate on your income tax return the amount of your IRA contribution
that constitutes a nondeductible contribution for the year. You should exercise
care in doing so, because an overstatement of the amount of your nondeductible
IRA contributions may subject you to a $100 penalty unless you can show that the
overstatement was due to reasonable cause. (You need not inform the Heritage
Family of Funds or State Street Bank and Trust Company whether your
contributions are deductible or nondeductible.) In addition, you will be
required each year to include with your tax return a completed Internal Revenue
Service Form 8606 to indicate the amount of designated nondeductible
contributions you have made for all preceding taxable years, the aggregate
distributions you have received from your IRA(s) and the value of all your IRAs.
A penalty of $50 is imposed if you do not do so.
D. EXCESS CONTRIBUTIONS
Generally, an excess contribution is the amount of any contributions to your IRA
(other than a proper rollover contribution as described in Article V) for a
taxable year which exceeds your IRA contribution limit for the taxable year. An
excise tax equal to 6% of the amount of any excess contribution will be assessed
for the year for which the excess contribution is made and for each subsequent
year until the excess amount is eliminated.
RETURN OF EXCESS CONTRIBUTION BY DATE YOUR RETURN IS DUE. If you make a
contribution to your IRA for a taxable year which exceeds your IRA contribution
limit, whether deductible or nondeductible, you may be permitted to designate
the contribution as a nondeductible IRA contribution by the due date for filing
your Federal income tax return, not including extensions. As an alternative, you
may withdraw the contribution from your IRA and the earnings thereon at any time
prior to the due date for filing your Federal income tax return, including
extensions, for the taxable year for which the contribution was made. If this is
done, the return of the contribution will not be includible in your gross income
as an IRA distribution, and the contribution will not be subject to the 6%
excise tax on excess contributions (assuming the contribution is not deducted on
your return). However, the earnings on the contribution will be taxable income
in the year for which the contribution was made, and may possibly be subject to
the 10% tax on early distributions if you are under age 59 1/2 (see Article
VII(A) below).
RETURN OF EXCESS CONTRIBUTION AFTER DATE YOUR RETURN IS DUE. If you make an
excess contribution to your IRA which exceeds your IRA contribution limit, and
you withdraw the excess contribution after the due date for filing your Federal
income tax return (including extensions), the returned excess contribution will
not be includible in your gross income as an IRA distribution (subject to
possible premature distribution penalties) if: (1) your total IRA contributions
for the year were not more than $4,000 and (2) you did not deduct the excess
contribution on your return (or if the deduction you claimed was disallowed by
the Internal Revenue Service). However, you must pay the 6% excise tax on the
excess contribution for each taxable year that it is still in your IRA at the
end of the following year. Under this procedure, you are not required to
withdraw any earnings attributable to the excess contribution.
APPLYING EXCESS CONTRIBUTION TO SUBSEQUENT YEAR. You may also eliminate an
excess contribution from your IRA in a subsequent year by not contributing the
maximum amount for that year and applying the excess contribution to the
subsequent year's contribution. You may be entitled to a deduction for the
amount of the excess contribution that is applied in the subsequent year,
provided you did not previously deduct the excess contribution (or if the
deduction you claimed was disallowed by the Internal Revenue Service). However,
if you incorrectly deducted an excess contribution in a closed taxable year
(i.e., one for which the period to assess a deficiency has expired), the amount
of the excess contribution cannot be deducted again in the subsequent year in
which it is applied.
IV. TRANSFERS
A. TRANSFER FROM EXISTING IRA TO HERITAGE IRA.
To give you greater investment flexibility, you are permitted to transfer IRA
assets directly from one trustee or custodian to another on a tax-free basis.
Thus, if you already have an IRA with another trustee or custodian, you may
authorize a direct transfer of your IRA assets to a Heritage IRA without paying
taxes, subject to the rules and restrictions of your existing account. Of
course, such a transfer of assets to the Heritage IRA is not tax-deductible. If
you wish to authorize the Custodian to arrange a direct transfer of assets from
the trustee or custodian of your existing IRA to a Heritage IRA, please complete
Heritage's IRA Asset Transfer Authorization Form in addition to the IRA
Agreement.
B. TRANSFER FROM HERITAGE IRA.
If you so direct in writing, the Custodian will transfer all or any portion of
the assets held in your Heritage IRA directly to the trustee or custodian of
another IRA established on your behalf, provided the trustee or custodian
certifies in writing that it will accept the direct transfer of assets and will
deposit the transferred assets in an IRA established on your behalf.
C. TRANSFER INCIDENT TO DIVORCE.
All or any portion of your IRA assets may be transferred tax-free to your spouse
or former spouse pursuant to a divorce or separation instrument, in which case
the transferred assets will be held as a separate IRA for the benefit of your
spouse or former spouse.
5
<PAGE> 7
V. ROLLOVER CONTRIBUTIONS
A. TAX-FREE ROLLOVERS IN GENERAL.
A rollover contribution is a contribution to your IRA of cash or other assets
you receive or are eligible to receive as a distribution from another individual
retirement arrangement or employer retirement plan. A rollover transaction is
tax-free, in that the amounts properly rolled over to your IRA will not be
currently taxable in the year of receipt. Of course, a rollover contribution to
your IRA is not tax-deductible.
NOTE: The rules applicable to eligible rollover distributions from an employer
retirement plan are different from those applicable to distributions from
another IRA. As described in Section C below, an eligible rollover distribution
that is paid to you, rather than paid directly to your IRA, will be subject to
20% income tax withholding.
B. ROLLOVER FROM EXISTING IRA TO HERITAGE IRA.
If you receive a distribution of assets from an existing IRA, you may make a
tax-free rollover contribution, in cash, of all or part of the assets you
receive, to a Heritage IRA. The rollover must be completed within 60 days after
you receive the distribution from your existing IRA. You may only make such a
tax-free rollover once every 12 months (beginning on the date you receive the
IRA distribution that is rolled over, not on the date you make the rollover
contribution). You may not roll over any minimum distribution amounts you are
required to receive from your IRA upon attaining age 70 1/2 (see Article VII
below).
NOTE: A tax-free transfer of funds from one trustee or custodian to another, as
described in Article IV, Section A or B above, is not a rollover and is not
affected by the 12-month waiting period applicable to IRA rollovers.
C. ROLLOVER FROM EMPLOYER RETIREMENT PLAN TO HERITAGE IRA.
Most any distribution from your employer's qualified retirement plan (such as a
pension, profit-sharing or stock bonus plan) or section 403(b) annuity or
custodial account program may be rolled over to an IRA without regard to whether
it is a total or a partial distribution, except for certain distributions which
are not eligible rollover distributions. The distributions which are not
eligible for rollover treatment include, in general, the following: one of a
series of substantially equal periodic payments made at least annually for your
life or joint lives (or life expectancy/expectancies) of you and your
beneficiary, or for a specified period of ten years or more; minimum required
distributions; distributions which are not includible in your gross income;
returns of elective deferrals or other corrective distributions; certain loans;
and certain payments to non-spouse beneficiaries and alternate payees.
DIRECT ROLLOVER OF ELIGIBLE DISTRIBUTION. If you are entitled to receive a
distribution from your employer's qualified retirement plan or section 403(b)
program, you may wish to have your eligible rollover distribution paid directly
to a Heritage IRA in order to avoid mandatory 20% income tax withholding on the
distribution. If you have a direct rollover of your eligible distribution, no
income tax will be withheld and your distribution will not be taxed until it is
distributed or withdrawn from your IRA.
RECEIPT OF ELIGIBLE ROLLOVER DISTRIBUTION. If your eligible rollover
distribution is paid to you, rather than directly to your IRA, the distribution
will be subject to mandatory 20% income tax withholding (which will be sent to
the Internal Revenue Service and credited against your Federal income tax
liability). Accordingly, you will receive only 80% of the payment, all or a
portion of which may be rolled over into a Heritage IRA within 60 days after you
receive the payment. The amount which is properly rolled over will not be taxed
until it is distributed or withdrawn from your IRA. In order to avoid being
taxed on the amount that is withheld, you will need to find other money to
replace the 20% that was withheld and contribute it to your IRA within the
60-day period. If you receive a payment before you reach age 59 1/2 and you do
not roll it over, then, in addition to the regular income tax, you may have to
pay an additional tax equal to 10% of the taxable portion of the payment, as
described further in Article VII, Section A below.
An eligible rollover distribution that is not rolled over may be eligible for
special tax treatment. If your eligible rollover distribution is not rolled over
and it qualifies as a "lump sum distribution," it may be eligible for special
tax treatment. A lump sum distribution generally is a payment, within one year,
of your entire balance under your employer's qualified retirement plan or
section 403(b) program that is payable to you because you have reached age
59 1/2 or have separated from service with your employer (or, in the case of a
self-employed individual, because you have reached age 59 1/2 or have become
disabled). For a payment to qualify as a lump sum distribution, you must have
been a participant in the plan for at least 5 years. If you receive a lump sum
distribution after you are age 59 1/2, you may be able to make a one-time
election to figure the tax on the payment by using 5-year averaging. If you
receive a lump sum distribution and you were born before January 1, 1936, you
may make a one-time election to figure the tax on the payment by using 10-year
averaging (using 1986 tax rates) instead of 5-year averaging (using current tax
rates). In addition, if you receive a lump sum distribution and you were born
before January 1, 1936, you may elect to have the part of your payment that is
attributable to your pre-1974 participation in your employer's qualified
retirement plan or section 403(b) program (if any) taxed as long-term capital
gain at a rate of 20%.
You can generally elect this special tax treatment for lump sum distributions
only once in your lifetime, and the election applies to all lump sum
distributions that you receive in that same year. If you have previously rolled
over a payment from your employer's qualified retirement plan or section 403(b)
program (or certain other similar plans of the employer), you cannot use this
special tax treatment for later payments from your employer's qualified
retirement plan or section 403(b) program. If you roll over your payment to an
IRA, you will not be able to use this special tax treatment for later payments
from the IRA. Also, if you roll over only a portion of your payment to an IRA,
this special tax treatment is not available for the rest of the payment.
DISTRIBUTIONS OF PROPERTY. If you receive an eligible rollover distribution from
an employer retirement plan that consists of property other than cash, you may
sell the property received and roll over the cash proceeds to your IRA within 60
days of the date of your receipt of the distribution, in which case no gain or
loss will be recognized on the sale if the entire proceeds are rolled over.
ROLLOVER BY SURVIVING SPOUSE. A surviving spouse of a deceased employee may
choose to have an eligible rollover distribution paid directly to an IRA or paid
to the surviving spouse, in which latter case the distribution may then be
rolled over into an IRA within 60 days after received.
ROLLOVER PURSUANT TO DIVORCE OR SIMILAR PROCEEDINGS. If you are entitled to
receive an eligible rollover distribution from an employer's qualified
retirement plan pursuant to a "qualified domestic relations order" (within the
meaning of section 414(p) of the Internal Revenue Code) resulting from divorce
or similar proceedings, you may choose to have the distribution paid directly to
your IRA or paid to you, in which latter case the distribution may then be
rolled over into an IRA within 60 days after received.
IMPORTANT: Because of the strict limitations and complex rules that apply to IRA
rollovers to or from employer retirement plans, you should seek competent tax
advice in this area.
6
<PAGE> 8
D. ROLLOVERS FROM A HERITAGE IRA.
The rules for rollover of assets withdrawn from your Heritage IRA to a different
IRA are the same as the rules for rollover of assets from an existing IRA to a
Heritage IRA, described above. Also, a withdrawal of the full amount of a
Heritage IRA that was maintained solely to hold and invest the proceeds of a
prior rollover of a total distribution from an employer maintained retirement
plan may be eligible for rollover to a second employer retirement plan by which
you subsequently become covered.
VI. SIMPLIFIED EMPLOYEE PENSION
A Simplified Employee Pension or "SEP" is a special IRA plan which permits
employers to make deductible contributions to the separate IRAs established for
their employees. If your employer has adopted a SEP, your employer may make
deductible SEP contributions directly to your Heritage IRA each year in an
amount up to the lesser of $30,000 or 15% of your current-year compensation.
(The $30,000 figure may be reduced for certain highly compensated employees in
certain circumstances.)
EXCLUSION FROM GROSS INCOME. The amount of SEP contributions made by your
employer to your IRA will be excludible from your gross income provided they do
not exceed the $30,000/15% of compensation limit. (Previously, SEP contributions
were includible in gross income but employees were permitted to deduct these
contributions on their Federal income tax return.) In addition, you may make
your own annual contributions to your IRA each year up to the lesser of $2,000
or 100% of current-year compensation. Thus, if you are covered by a SEP, it is
possible to have total contributions of up to $32,000 made to your IRA for any
taxable year (or $34,000 if a Spousal IRA is also established). Of course, your
own contributions may not be tax deductible, or may be only partially
deductible.
DETERMINATION OF COMPENSATION. The 15% of compensation limit that applies to SEP
contributions includes only the amount of your current-year compensation from
the employer making the SEP contribution, (but not the amount of the SEP
contribution). In the case of a self-employed individual, the term
"compensation" includes the individual's earned income from self-employment,
reduced by the amount of deductible retirement plan contributions.
CONTRIBUTIONS AFTER AGE 70 1/2.
SEP contributions may be made to your IRA by your employer even after you have
attained age 70 1/2.
VII. DISTRIBUTIONS
A. TAX TREATMENT
In general, distributions from your IRA are includible in your gross income in
the year of receipt and are taxed as ordinary income. However, as indicated
above, no tax is imposed on a distribution that is properly rolled over to
another IRA (or in some cases to an employer retirement plan), no tax is imposed
on the part of any distribution that represents nondeductible IRA contributions
made by you, and no tax is imposed on certain returns of excess IRA
contributions.
NONTAXABLE AMOUNT OF DISTRIBUTION FROM IRA THAT CONTAINS NONDEDUCTIBLE IRA
CONTRIBUTIONS. The nontaxable portion of a distribution from an IRA that
contains nondeductible contributions is the percentage of the distribution that
is the same as the percentage of the total value of your IRAs (including
rollover IRAs and SEPs) represented by your aggregate nondeductible
contributions. For this purpose all distributions in a given year are treated as
one distribution.
<TABLE>
<S> <C> <C> <C>
1) Amount distributed from
IRAs during the year. $
------
2) Total nondeductible
contributions for all years to
IRAs minus any tax-free
withdrawals in prior years. $
------
3) Fair market value of all IRAs
at end of year plus amount on
line 1. $
------
4) Divide line 2 by line 3. (Enter
decimal figure.)
------
5) Multiply line 1 by line 4. This
is the amount that may be
excluded from gross income. $
------
6) Subtract line 5 from line 1.
This is the amount that must be
included in gross income. $
------
</TABLE>
EXAMPLE: An individual withdraws a total of $3,000 from several IRAs during a
year. At the end of the year, the aggregate balance of his IRA is $21,000 and
the aggregate amount of his designated nondeductible contributions not
previously withdrawn is $4,000. $500 of the withdrawal is non-taxable.
<TABLE>
<S> <C> <C> <C>
1) Amounts distributed from IRAs during
the year. $ 3,000
2) Total nondeductible contributions for
all years to IRAs minus any tax-free
withdrawals in prior year. $ 4,000
3) Fair market value of all IRAs at end
of year plus amount on line 1 ($21,000
+ $3,000). $ 24,000
4) Divide line 2 by line 3. (Enter
decimal figure.) .167
5) Multiply line 1 by line 4. This is the
amount that may be excluded from gross
income. $ 500
6) Subtract line 5 from line 1. This is
the amount that must be included in
gross income. $ 2,500
</TABLE>
10% ADDITIONAL TAX ON EARLY DISTRIBUTIONS. Your IRA is intended to provide you
with retirement income. For this reason, the law imposes a special additional
tax on a distribution from your IRA before you reach age 59 1/2 for any reason
other than those indicated below. This special tax is equal to 10% of the amount
of the distribution that is includible in your gross income, and must be paid in
addition to the ordinary income tax on the distribution. The additional tax is
not imposed on distributions paid because you separate from service with your
employer during or after the year you reach age 55, paid because you retire due
to disability or when used to pay certain medical expenses. The additional tax
will also not apply to any distribution that is part of a series of
substantially equal periodic payments made (not less frequently than annually)
for your life or life expectancy, or for the joint lives or life expectancies of
you and your beneficiary (see Section B below). The additional tax may apply if
you are deemed to receive a distribution from your IRA before age 59 1/2 as a
result of borrowing from your IRA or pledging your IRA as security for a loan,
as described in Article IX.
15% EXCISE TAX ON EXCESS DISTRIBUTIONS FROM ALL RETIREMENT PLANS. If you receive
aggregate distributions from your IRA and from any qualified retirement plans
and tax-sheltered annuities in excess of the current maximum for the calendar
year, you may be subject to a 15% excise tax on the excess distributions
(although certain exceptions and transitional rules may apply). You should
consult with your tax advisor if it is likely you will be receiving aggregate
distributions from your IRA and your other retirement plans in excess of the
allowable amount, the base amount upon which the indexed figure is determined,
for any calendar year.
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<PAGE> 9
B. METHOD OF DISTRIBUTION
Under the Heritage IRA, you may elect to have all or a portion of your account
distributed in one or a combination of the following ways:
(1) a lump-sum payment, or
(2) monthly, quarterly or annual installment payments over a period not
extending beyond your life expectancy or the joint and last survivor life
expectancy of you and your designated beneficiary.
The method of distribution you select must comply with the minimum distribution
requirements described in Section C below. You may change your selected method
of distribution at any time by notifying the Custodian in writing.
DISTRIBUTIONS IN CASH OR IN KIND. Distributions from the Heritage IRA will be
made in cash.
C. MINIMUM DISTRIBUTION REQUIREMENTS
COMMENCEMENT OF DISTRIBUTION. You must start receiving distributions from your
IRA no later than April 1 following the calendar year in which you attain age
70 1/2. You may receive your distribution either in a lump sum or in a series of
equal or substantially equal payments for a specified period that may not be
longer than your life expectancy or the life expectancy of you and your
designated beneficiary. Even if distributions begin to be made on a periodic
basis, you may at any time elect to receive the balance in your account as a
lump sum. If you do not elect a method of distribution by April 1 of the year
following the year you reach age 70 1/2, distribution will be made to you in a
single lump sum payment. In subsequent years, the annual distribution must be
made from your account by December 31 of that year.
MINIMUM AMOUNT REQUIRED TO BE DISTRIBUTED. The minimum amount required to be
distributed to you each year, beginning no later than the date your distribution
is required to commence, is determined by dividing the entire value of your
account as of the beginning of the year by your life expectancy, or the joint
and last survivor life expectancy of you and your designated beneficiary.
However, if there is a significant difference between your life expectancy and
the life expectancy of your beneficiary the minimum amount required to be
distributed to you each year may have to be increased, under Internal Revenue
Service regulations, to ensure that you, rather than your beneficiary, receive a
significant portion of your total benefit.
RECALCULATION OF LIFE EXPECTANCY. Your life expectancy, or the joint and last
survivor expectancy of you and your designated beneficiary, will be determined
according to Internal Revenue Service regulations. Your life expectancy and the
life expectancy of your spouse (if your spouse is your designated beneficiary)
will be recalculated annually unless you elect not to have those life
expectancies recalculated. You may not recalculate the life expectancy of any
beneficiary other than your spouse.
PENALTY TAX ON INSUFFICIENT DISTRIBUTIONS. An excise tax will be imposed if the
amount actually distributed to you each year beginning after you attain age
70 1/2 is less than the minimum amount required to be distributed. The tax is
50% of the difference between the amount actually distributed and the minimum
amount required to be distributed. This penalty tax may be waived in certain
cases provided you can establish to the satisfaction of the Internal Revenue
Service that the deficit in the amount distributed was due to reasonable error
and you are taking steps to remedy the problem.
D. DISTRIBUTION UPON DEATH
If you die prior to the complete distribution of your account, the remaining
balance in your Heritage IRA will be distributed to your designated beneficiary
in a lump-sum payment or a series of payments, subject to the requirements
stated below. In general, distributions your beneficiary receives from your IRA
that are includible in gross income will be taxed as ordinary income (with the
exception that, if your designated beneficiary is your surviving spouse, your
spouse may make a tax-free rollover, within 60 days of receipt, to another
individual retirement arrangement).
IF DISTRIBUTION HAD ALREADY COMMENCED. If distribution of your account had
already commenced prior to your death, the balance of your Heritage IRA must be
distributed to your designated beneficiary at least as rapidly as under the
method of distribution in effect prior to your death.
IF DISTRIBUTION HAD NOT COMMENCED. If distribution of your account had not
commenced prior to your death, the general rule is that the balance of your
Heritage IRA must be distributed to your designated beneficiary within five
years after your death. However, the balance of your account may be distributed
in substantially equal monthly, quarterly, or annual installment payments over
your beneficiary's life expectancy if distribution commences (i) within one year
after the date of your death or (ii) if your beneficiary is your surviving
spouse, within the later of one year after the date of your death and the date
you would have attained age 70 1/2. Your beneficiary must elect the form in
which he or she will receive the distribution from your IRA by December 31 of
the year following the year of your death. If no election is made, distribution
will be made within five years of your death to any beneficiary other than your
spouse, and distribution will be made over the life or life expectancy of your
beneficiary if your beneficiary is your spouse.
DESIGNATION OF BENEFICIARY. Under the Heritage IRA, you may designate one or
more persons (who may be designated contingently or successively) as your
beneficiary. You will initially designate your beneficiary by completing the
Application and Agreement for the Heritage IRA. You may subsequently change or
revoke your beneficiary designation at any time by notifying the Custodian or
Heritage Asset Management, Inc. in writing. If you fail to designate a
beneficiary or if your designated beneficiary (or each of your designated
beneficiaries) predeceases you, your beneficiary will be your estate.
E. FEDERAL ESTATE AND GIFT TAXATION
GIFT TAX CONSEQUENCES. Your designation of a beneficiary (or beneficiaries) to
receive distributions from your IRA upon your death will not be considered a
transfer of property for Federal gift tax purposes.
ESTATE TAX CONSEQUENCES. Generally amounts remaining in your IRA after your
death will be includible in your gross estate for Federal estate tax purposes.
In many cases, the impact of the inclusion of your IRA will be offset by the
unlimited Federal estate tax marital deduction that applies where your spouse is
your designated beneficiary. In other cases, the impact may be offset by the
increased unified credit against Federal estate and gift taxes.
F. FEDERAL INCOME TAX WITHHOLDING
The Internal Revenue Code requires the withholding of Federal income tax on
payments from an IRA unless the recipient affirmatively elects not to have
withholding apply. The amount of Federal income tax required to be withheld on
any payment under the Heritage IRA will generally equal 10% of the amount
redeemed from the account. Upon a request for a distribution under the Heritage
IRA, the Custodian will notify the recipient of his or her right to elect not to
have withholding apply (or to revoke any prior election), and will supply the
recipient with an appropriate election form.
VIII. INCOME TAX RETURNS; ETC.
If you are eligible to make deductible contributions to your IRA, you may claim
your deduction for IRA contributions on your Federal income tax return (Form
1040 or Form 1040A) even if you do not itemize deductions. In May of each year,
the Custodian will send you a Form 5498 (Individual Retirement Arrangement
Information) showing your preceding-year IRA contributions. If you make
designated
8
<PAGE> 10
nondeductible contributions to your IRA for the taxable year, or if you receive
any distributions from your IRA during the year and you have at any time made
nondeductible contributions to any of your IRAs, you will be required to
complete Form 8606 as part of your Federal income tax return for that year.
PENALTY TAXES. If one or more of the following situations occur, you will be
required to file Form 5329 (Return for Individual Retirement Account Taxes) with
the Internal Revenue Service:
(1) payment of a 6% excise tax because of an excess contribution;
(2) payment of a 10% additional tax because of an early distribution before
age 59 1/2; or
(3) payment of a 50% excise tax because of an insufficient distribution from
your IRA after age 70 1/2.
If Form 5329 must be filed, it should be attached to your Federal income tax
return, or should be filed separately if you are not required to file a Federal
income tax return.
DISTRIBUTIONS. When you receive taxable distributions from your Heritage IRA,
the Custodian will send you form 1099-R showing your total distributions.
Distributions from your IRA to you or your beneficiary are subject to Federal
income tax withholding unless the distributee elects otherwise. Further
information about your IRA can be obtained from any district office of the
Internal Revenue Service.
IX. PROHIBITED TRANSACTIONS
Generally, a prohibited transaction is any improper use of your IRA. Examples of
prohibited transactions include borrowing money from your account or selling
property to the account.
EFFECT ON IRA. Generally, if you engage in a prohibited transaction, your IRA
will lose its tax-exempt status and you will be required to include the entire
value of the account in your gross income. If your account is disqualified
before you reach 59 1/2, you may also be required to pay the 10% additional tax
on early distributions referred to in Article VII.
PLEDGING YOUR IRA AS SECURITY. Pledging your IRA as security for a loan will
cause the portion pledged to be treated as a distribution to you, includible in
gross income and subject to the 10% additional tax on early distributions if you
are under age 59 1/2.
INVESTMENT IN COLLECTIBLES. If your IRA is invested in collectibles, the amount
invested will be considered a distribution to you in the year of investment. For
this reason, the Heritage IRA specifically precludes investments in collectibles
which include art works, rugs, antiques, metals, gems, stamps, coins (but not
gold or silver coins issued by the United States or by an individual state
thereof), alcoholic beverages and certain other tangible personal property.
X. OTHER INFORMATION
A. THE CUSTODIAN
The custodian of your Heritage IRA is State Street Bank and Trust Company, a
trust company incorporated under Massachusetts banking laws.
B. AMENDMENTS
The Custodian is specifically authorized to make any amendments to the Heritage
IRA necessary to comply with the applicable provisions of the Internal Revenue
Code. The Custodian will inform you of any such amendments.
C. HERITAGE IRA INVESTMENTS
Your Heritage IRA may be invested in shares of the mutual funds advised by
Heritage Asset Management, Inc. (the "Heritage Funds").
REINVESTMENT OF EARNINGS. All dividends and capital gains received on shares of
a Heritage Fund held in your Heritage IRA which are permitted to be paid in
additional shares of the Heritage Fund shall be automatically paid in additional
shares of the Heritage Fund. Otherwise, any distribution of earnings received
with respect to assets held in your account shall be reinvested solely at your
direction in shares of another Heritage Fund.
GROWTH IN VALUE. The growth in value of your Heritage IRA will depend on the
investment decisions made by you and is neither guaranteed nor projected.
D. HERITAGE IRA MINIMUMS
MINIMUM CONTRIBUTIONS. Under the Heritage IRA, the minimum initial contribution
is generally $1,000 for each Heritage Fund account established for your IRA.
E. CUSTODIAL FEE AND OTHER EXPENSES
There is an annual custodial fee of $10 for each Heritage IRA that is open at
any time during the calendar year. You may pay this fee annually by separate
check, provided that payment for any calendar year must be received by the
Custodian no later than December 31 of that year (if received later, the payment
will be applied to the next year's custodial fee). If you do not choose to pay
your annual custodial fee by separate check, the Custodian will redeem
sufficient shares from your account of each year to pay the fee for the
preceding calendar year.
HERITAGE FUND INFORMATION. For complete information about the advisory fees and
other expenses, and the method of calculating the price per share for each
Heritage Fund you may select for your Heritage IRA, you should read the Fund's
prospectus.
F. CUSTODIAL ACCOUNT AGREEMENT--FORM 5305-A
This IRA makes use of Form 5305-A, which has been prepared by the Internal
Revenue Service as a model custodial account agreement that satisfies the
requirements of section 408(a) of the Internal Revenue Code. The provisions of
Article VIII of the Custodial Agreement were prepared by Heritage and the
Custodian, State Street Bank and Trust Company, as an addition to the Form, as
contemplated by the Form. However, neither the provisions of Article VIII nor
other aspects of this IRA, except the model custodial account agreement, have
been approved by the Internal Revenue Service.
9
<PAGE> 11
HERITAGE INDIVIDUAL
RETIREMENT CUSTODIAL
ACCOUNT AGREEMENT
(UNDER SECTION 408(A) OF THE INTERNAL REVENUE CODE)
FORM 5305-A* (Revised October 1992)
- ------------------------------------------------------------
Department of the Treasury
Internal Revenue Service
The Depositor and the Custodian make the following agreement:
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3), or an employer contribution to a simplified
employee pension plan as described in section 408(k). Rollover contributions
before January 1, 1993, include rollovers described in section 402(a)(5),
402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or an employer
contribution to a simplified employee pension plan as described in section
408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or begin to
be, distributed by the Depositor's required beginning date. (April 1 following
the calendar year end in which the Depositor reaches age 70 1/2). By that date,
the Depositor may elect, in a manner acceptable to the Custodian, to have the
balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to him
or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor or, if the
Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either:
(i) Be distributed by the December 31 of the year containing the fifth
anniversary of the Depositor's death; or
(ii) Be distributed in equal or substantially equal payments over the life or
life expectancy of the designated beneficiary or beneficiaries starting by
December 31 of the year following the year of the Depositor's death. If,
however, the beneficiary is the Depositor's surviving spouse, then this
distribution is not required to begin before December 31 of the year in
which the Depositor would have turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the requirements
of section 408(b)(3) and its related regulations has irrevocably commenced,
distributions are treated as having begun on the Depositor's required beginning
date, even though payments may actually have been made before that date.
(d) If the Depositor dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional cash
contributions or rollover contributions may be accepted in the account.
5. In the case of a distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies). In the case of distributions under paragraph 3,
determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of a distribution in accordance with
* Introductory information and signature lines are omitted herein because they
are included in the Application and Agreement governing the Account.
A complete copy of Form 5305-A is available upon request of the Internal
Revenue Service.
10
<PAGE> 12
paragraph 4(b)(ii), determine life expectancy using the attained age of the
designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
The following provisions constitute Article VIII of the Individual Retirement
Custodial Account Agreement for use with the Heritage Individual Retirement
Account program. Article VIII deals with the Depositor's individual retirement
custodial account and the appointment, obligations, and rights of State Street
Bank and Trust Company as custodian of that account. Although Article VIII is a
part of the agreement contained in Internal Revenue Service Form 5305-A, Article
VIII was written by representatives of Heritage Asset Management, Inc. and State
Street Bank and Trust Company.
1. DEFINITIONS.
For purposes of this Article VIII, the following terms, when capitalized, shall
have the following meanings:
(a) "Account" shall mean the individual retirement custodial account established
by the Depositor by execution of this Agreement.
(b) "Agreement" means the Individual Retirement Custodial Account agreement (on
Internal Revenue Service Form 5305-A) of which this Article VIII forms a part,
for use in establishing an individual retirement account in the Heritage
Individual Retirement Account program.
(c) "Beneficiary" shall mean the person or persons designated in accordance with
section 7 of this Article VIII to receive any amount remaining in the Account
upon the death of the Depositor.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Custodian" shall mean State Street Bank and Trust Company, a trust company
incorporated under the laws of Massachusetts.
(f) "Excess Contribution" shall mean (i) the excess (if any) of the Regular
Contributions made to the Account for a taxable year over the amount allowable
as a deduction for such contribution under section 219 of the Code for such
year, plus (ii) any other amount permitted to be distributed from the Account
without inclusion in gross income by virtue of the provisions of sections
408(d)(4) or 408(d)(5) of the Code.
(g) "Regular Contribution" shall mean a contribution by the Depositor to the
Account, under the provisions of Article I of the Agreement, other than a
Rollover Contribution or a SEP Contribution.
(h) "Rollover Contribution" shall mean a contribution to the Account of the
Depositor (i) of a distribution of all or any portion of the balance to the
credit of the Depositor in a qualified plan, as described in sections 402(c) or
403(a)(4) of the Code, or (ii) that is qualified as a rollover contribution from
an annuity contract, another individual retirement account, an individual
retirement annuity, a qualified bond purchase plan, or a U.S. retirement bond,
as described, respectively, in sections 403(b)(8) and 408(d)(3) of the Code, or
former sections 405(d)(3) or 409(b)(3)(C) of the Internal Revenue Code of 1954,
as amended.
(i) "SEP Contribution" shall mean a contribution to the Account on behalf of the
Depositor by his or her employer under a simplified employee pension arrangement
described in section 408(k) of the Code.
(j) "Heritage" shall mean Heritage Asset Management, Inc., a Florida
corporation, or any successor thereto.
(k) "Heritage Funds" shall mean one or more mutual funds for which Heritage
serves as an investment advisor and for which Raymond James and Associates,
Inc., an affiliate of Heritage, serves as principal underwriter, that are
available for investment by individual retirement accounts in the Heritage
Individual Retirement Account program.
2. APPOINTMENT OF CUSTODIAN.
The Depositor, by execution of this Agreement, has appointed State Street Bank
and Trust Company to serve, under the terms of the Agreement, as custodian of
the Account.
3. CONTRIBUTIONS.
(a) General. All contributions to the Account by or on behalf of the Depositor
shall be made in cash.
(b) Regular Contributions. The Depositor shall designate, in such manner as the
Custodian may prescribe, the year for which any Regular Contribution is made.
The Depositor shall have, and by execution of this Agreement accepts, full and
sole responsibility for assuring that each Regular Contribution made to the
Account complies with the rules for, and does not exceed the limitations on,
permissible contributions to individual retirement accounts under applicable
provisions of the Code.
(c) Rollover Contributions. A Rollover Contribution may be made by the Depositor
to the Account at any time and must be designated as such. Prior to the making
of a contribution that is designated as a Rollover Contribution, the Depositor
shall complete such forms as the Custodian may require describing the source of
such contribution and containing such other information as the Custodian shall
reasonably request. By making a contribution that is designated as a Rollover
Contribution, the Depositor more specifically warrants that:
(i) the entire amount of such contribution was received by the Depositor within
sixty days prior to its transfer to the Custodian (if such contribution was
not paid directly to the Custodian by the administrator of the employer plan
or the payor of a section 403(b) program);
11
<PAGE> 13
(ii) the entire amount of such contribution satisfies the definition of
Rollover Contribution in section 1(h) of this Agreement and all of the
requirements for rollover contributions contained in applicable
provisions of the Code;
(iii) any such contribution of a distribution from an employee's trust or
employee annuity contains only the amount of such distribution in excess
of amounts contributed to the distribution trust or annuity by the
Depositor (other than accumulated deductible employee contributions,
within the meaning of section 72(o)(5) of the Code, that may be the
subject of a rollover contribution); and
(iv) if the contribution involves a distribution from an individual retirement
account or annuity, the Depositor did not receive, within 12 months prior
to the date of receipt of such distribution, another distribution of the
same funds from such an account or annuity, or of other funds from the
distributor account or annuity, that the Depositor transferred to an
individual retirement account as a "rollover contribution."
The Depositor shall have, and by execution of this Agreement accepts, full and
sole responsibility for determining whether a contribution to the Account
designated as a Rollover Contribution qualifies as such under this Agreement and
applicable provisions of the Code.
(d) SEP Contributions. Any SEP Contribution must be designated as such, and must
be accompanied by a designation of the year for which such SEP Contribution is
made. Prior to the making of a contribution that is designated as a SEP
Contribution, the Depositor shall complete such forms as the Custodian may
require to certify that the Depositor is covered under a simplified employee
pension, as described in section 408(k) of the Code, established by his or her
employer and containing such other information as the Custodian shall reasonably
request. The Depositor shall have, and by execution of this Agreement accepts,
full and sole responsibility for determining whether a contribution to the
Account designated as a SEP Contribution qualifies as such under this Agreement
and applicable provisions of the Code.
(e) Excess Contributions. If the Depositor notifies the Custodian in writing
that all or any portion of the amount contributed to the account constitutes an
Excess Contribution, the Custodian shall, if so directed by the Depositor,
distribute an amount equal to all or part of such Excess Contribution to the
Depositor in accordance with the provisions of section 5(a) of this Article
VIII. If the Depositor's notice states that the distribution is intended to
comply with section 408(d)(4) of the Code (concerning a return of Excess
Contributions and net income attributable thereto prior to the due date for the
Depositor's Federal income tax return for the taxable year for which the
contribution is made), the Custodian shall include in the amount of such
distribution an amount equal to the net income attributable to the Excess
Contribution (or portion hereof) so distributed. The Depositor shall have the
sole responsibility for determining whether any return of an Excess Contribution
under this section 3(e) satisfies the requirements of sections 408(d)(4) or
408(d)(5) of the Code.
(f) Responsibility of Custodian and Heritage. Neither the Custodian nor Heritage
shall have any responsibility for determining (i) whether or the extent to which
any contribution by or on behalf of the Depositor to the Account is deductible
for Federal income tax purposes, (ii) whether any Regular Contribution complies
with the rules for, and does not exceed the limitations on, permissible
contributions to Individual Retirement Accounts, (iii) whether any contribution
to the Account qualifies as a Rollover Contribution or SEP Contribution, or (iv)
whether any return of an Excess Contribution satisfies the requirements of
Sections 408(d)(4) or 408(d)(5) of the Code.
4. INVESTMENT OF CONTRIBUTIONS.
(a) Heritage Funds. The Depositor directs the Custodian to invest all
contributions to the Account in shares of one or more Heritage Funds in
accordance with such specific designation as may be made by the Depositor on
such forms as Heritage or the Custodian may provide for that purpose. By
directing that assets of the Account be invested in a particular Heritage Fund,
the Depositor will be deemed to have acknowledged receipt of the current
prospectus for such Fund.
(b) Reinvestment. All dividend and capital gain distributions received with
respect to shares of a Heritage Fund by the Account shall, unless payable to the
Account in additional shares of such Fund, be reinvested in such shares. If no
such shares are available for reinvestment, the Custodian shall so inform the
Depositor and such distributions shall be invested in shares of a money market
fund pending receipt of instructions from the Depositor. If any distribution
from a Heritage Fund is payable in additional shares of such Fund at the
election of a shareholder, the Custodian shall elect to receive such
distribution in the form of additional shares of such Fund.
(c) Change in Designation of Fund. The Depositor may change his or her
designation of the Heritage Fund or Heritage Funds in which the Account is to be
invested by following such procedures as the Custodian shall specify from time
to time.
(d) Registration and Voting of Fund Shares. All Heritage Fund shares held in the
Account shall be registered in the name of the Custodian or of its nominee. The
Custodian shall deliver, or cause to be delivered, to the Depositor all notices,
prospectuses, financial statements, proxies, and proxy soliciting materials
relating to Heritage Fund shares held in the Account. The Custodian shall not
vote any such Heritage Fund shares except in accordance with the written
instructions of the Depositor.
(e) Responsibility of Custodian and Heritage. In making any investment or
reinvestment of assets in the Account, the Custodian shall be fully entitled to
rely on the directions furnished to it by the Depositor under the terms of this
Agreement and shall have no obligation to make any inquiry or investigation with
respect thereto. The Depositor hereby acknowledges that neither the Custodian
nor Heritage undertakes to render any investment advice whatsoever to the
Depositor in connection with this Agreement.
5. DISTRIBUTIONS.
(a) Order for Distributions. Distribution of the assets of the Account shall be
made only on the written order of the Depositor (or of the Depositor's
Beneficiary or authorized representative, if the Depositor is deceased), or as
otherwise required by the terms of this Agreement. Such order shall (i) be made
by completion of such form or forms as the Custodian shall specify, (ii) shall
specify the occasion for the distribution and (unless the distribution is a
distribution of Excess Contributions pursuant to section 3(e) of this Article
VIII) the elected manner of distribution (as described in sections 3(a), 3(d),
or 3(e) or, in the case of a Beneficiary, section 4(b)(i-ii), of Article IV of
this Agreement), and (iii) shall contain any declaration required by Article V
of this Agreement. Any such order once made may be altered, once distributions
begin, only to the extent permitted by Article IV of this Agreement.
(b) Rules for Installment Distributions.
(i) Installments Must be Permitted Under Fund Rules. A distribution may be made
in installments if and to the extent that the rules of the Heritage Fund or
Heritage Funds whose shares are held in the Account permit periodic
liquidation to yield the cash to pay each installment.
(ii) Form. An installment distribution must be one that is permitted to be made
from an individual retirement account by Article IV of this Agreement and
by applicable provisions of section 408(a)(6) of the Code and the
regulations promulgated thereunder or with respect thereto.
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<PAGE> 14
(iii) Life Expectancies. The life expectancies referred to in this Agreement
shall be determined pursuant to, and by using such actuarial tables as may
be adopted to comply with, section 408(a)(6) of the Code and the
regulations promulgated thereunder or with respect thereto. Under proposed
Treasury Regulation section 1.401(a)(9)-1, Q & A E3 and E4, those tables
are Tables V and VI found in Treasury Regulation section 1.72-9.
(iv) Incidental Benefit Requirement. An installment distribution under this
Agreement must satisfy any applicable incidental benefit requirement
imposed by section 408(a)(6) of the Code and the regulations promulgated
thereunder or with respect thereto. The tables necessary for measuring
compliance with the incidental benefit requirement, are found in Q & A 4
through 6 of proposed Treasury Regulation section 1.401(a)(9)-2.
(c) Treatment of Payments to Children. For purposes of Article IV of this
Agreement, any amounts paid from the Account to the child of the Depositor shall
be treated as if such amounts had been paid to the surviving spouse of the
Depositor if such amounts shall become payable to such surviving spouse when
such child reaches the age of majority.
(d) Responsibility of Depositor and Custodian. The Custodian shall have no
responsibility to make any distribution until an order that meets the
requirements of this section is received. It is the sole responsibility of the
Depositor or, in the case of distributions following the death of the Depositor,
of any Beneficiary entitled to receive such distributions, (i) to notify the
Custodian of such individual's age and the timing and manner of such
distributions in sufficient time to permit the commencement of distributions
from the Account, (A) in the case of the Depositor, prior to the April 1 next
following the year in which the Depositor attains age 70 1/2, or (B) in the case
of such Beneficiary, at the time required by section 4 of Article IV of this
Agreement, and (ii) to order a distribution in a sufficient amount to satisfy
the applicable provisions of Article IV of this Agreement and the minimum
distribution rules contained in such Article IV and in section 408(a)(6) of the
Code and any regulations promulgated thereunder or with respect thereto. The
Custodian shall have no liability for failing to commence distributions in any
year in the absence of receipt of such notice of the Depositor's age and a fully
completed order for such distributions that is in full compliance with the
requirements of Articles IV, V, and VIII of this Agreement, provided that (i) if
notice of the age of the Depositor and an order for commencement of
distributions is received without any indication of the manner of such
distribution, such distribution shall be made in a single lump sum, and (ii) if
the Custodian has received notice of the death of the Depositor, prior to the
commencement of distributions from the Account, and no election of a manner of
distribution is made by the applicable Beneficiary, the Custodian shall make
distributions in accordance with the provisions of section 4(b)(ii) of Article
IV of this Agreement.
(e) Taxes on Distributions and Excess Contributions. The Custodian shall have no
responsibility for the income or other tax consequences, to the Depositor or any
Beneficiary, of any contribution to or distribution from the Account, provided
that the Custodian shall withhold and pay over to the Internal Revenue Service
or any state tax authority any amount required to be so withheld from any
distribution by the Code or other applicable law. In the absence of
instructions, the Custodian shall have no obligation to withhold any taxes from
distributions made from the Account, except to the extent the Custodian is
required to withhold such taxes by applicable law.
6. TRANSFERS.
(a) Transfers to Account. Assets held on behalf of the Depositor in another
individual retirement account may be transferred by the trustee or custodian
thereof directly to the Custodian, in a form or manner acceptable to the
Custodian, to be held in the Account on behalf of the Depositor under this
Agreement. In accepting any such direct transfer of assets, the Custodian
assumes no responsibility for the tax consequences of the transfer, and
responsibility for any such tax consequences rests solely with the Depositor.
(b) Transfers from Account. If so directed by the Depositor in a manner
acceptable to the Custodian, the Custodian shall, subject to the provisions of
section 8 of this Article VIII, transfer assets held in the Account directly to
the trustee or custodian of another individual retirement account established on
behalf of the Depositor. In making any such direct transfer of assets, the
Custodian assumes no responsibility for the tax consequences of the transfer,
and responsibility for any such tax consequences rests solely with the
Depositor.
(c) Transfers Incident to Divorce. All or any portion of the Depositor's
interest in the Account may be transferred to a spouse or former spouse under a
divorce or separation instrument as provided in section 408(d)(6) of the Code,
in which event the transferred portion of the Account shall be held as a
separate individual retirement account for the benefit of such spouse in
accordance with the terms and conditions of this Agreement.
7. BENEFICIARIES.
(a) Designation. The Depositor may designate a person or persons to receive any
amount remaining in the Account at the time of the Depositor's death. The person
or persons so designated shall be the Depositor's Beneficiaries while such
designation is effective. If no designation is made or is in effect at the time
of the Depositor's death, the Depositor's Beneficiary shall be his or her
estate.
(b) Change in Designation. Any change in the designation of a Beneficiary or
designation of an additional Beneficiary subsequent to the date of this
Agreement shall be made on such form as the Custodian or Heritage shall provide.
To be effective, the designation of Beneficiary form must be signed by the
Depositor and filed with the Custodian or Heritage during the Depositor's
lifetime. The effective designation form last received from a person by the
Custodian or Heritage before a distribution is to commence shall be controlling
and, whether or not fully dispositive of the Account, shall revoke all forms
previously filed by that person. The Custodian shall accept all forms relating
to the designation of Beneficiaries only in the Commonwealth of Massachusetts,
and Heritage shall accept all forms relating to the designation of beneficiaries
only in the State of Florida, and such forms, once effective, shall be
considered a part of this Agreement.
(c) Status of Beneficiaries, Designations by Beneficiaries. When, but only when,
distribution of an Account or an interest therein to a Beneficiary commences,
all rights and obligations assigned to the Depositor under the Agreement shall
inure to and be enjoyed or exercised, as the case may be, by such Beneficiary to
the extent of such Beneficiary's interest in the Account. The term "Depositor"
shall include, for purposes of the rules of this Agreement relating to the
designation of Beneficiaries, and the investment and maintenance of the Account,
the person or persons who begin to receive a portion of the Account pursuant to
a prior designation (by the Depositor or a prior Beneficiary), but designations
by such a person or persons shall relate solely to the balance of such person's
interest remaining in the Account as of the date a distribution pursuant to a
designation by such person is to commence.
8. TERMINATION OF ACCOUNT.
(a) Final Distribution. This Agreement shall terminate upon the complete
distribution of the Account to the Depositor or his Beneficiaries or the
complete transfer of the Account to such successor individual retirement
accounts or annuities as the Depositor shall designate.
(b) Effect of Termination. Upon termination of the Account, the Custodian shall
be relieved from all further liability with respect to this
13
<PAGE> 15
Agreement, the Account, and all assets thereof so distributed. Neither Heritage
nor the Custodian shall be liable for, or in any way responsible with respect
to, any penalty or any other loss incurred by any person with respect to a
distribution or transfer made hereunder.
9. MAINTENANCE OF RECORDS; REPORTS BY CUSTODIAN; PROVISION OF INFORMATION TO
CUSTODIAN.
(a) Records, Annual Reports. The Custodian shall keep adequate records of the
transaction and status of the Account and the performance of the Custodian's
obligations under this Agreement. The Custodian shall render an annual report to
the Depositor (or, following the Depositor's death, each Beneficiary) on or
before January 31 of each calendar year, showing the fair market value of the
Account as determined as of December 31 of the immediately preceding calendar
year. The Custodian shall also render another report to the Depositor (or,
following the Depositor's death, each Beneficiary) on or before May 31 of each
calendar year, containing such information with respect to the immediately
preceding calendar year as is required to be furnished on Internal Revenue
Service Form 5498 (Individual Retirement Arrangement Information) or its
equivalent (if the Form 5498 contains any information other than the fair market
value of the Account on December 31 of the immediately preceding calendar year).
(b) Information Required by, and Reports to, the Internal Revenue Service. The
Depositor shall provide information to the Custodian at such times and in such
manner and detail as will enable the Custodian to prepare reports required by
the Internal Revenue Service pursuant to section 408(i) of the Code and the
regulations promulgated thereunder or to any other section of the Code relating
to reporting of contributions to, operation of, or distributions from individual
retirement accounts. The Custodian shall submit such reports to the Internal
Revenue Service and to the Depositor, the Depositor's Beneficiary, or both, in
such manner and at such times as may be required by the Code and any applicable
regulations.
10. PAYMENT OF CUSTODIAN'S FEES AND TAXES AND EXPENSES OF THE ACCOUNT.
The Custodian shall be entitled to receive such reasonable fees with respect to
the administration of the Account as are established by it from time to time,
and to receive reimbursement for all reasonable expenses incurred by it in the
performance of this Agreement. The Custodian may change its fee schedule upon
thirty (30) days prior written notice to the Depositor. The custodian's fees,
any taxes of any kind imposed on the assets of the Account, and all other
administrative expenses incurred by the Custodian in the performance of this
Agreement, including fees for legal services rendered to the Custodian, may be
charged to the Account, and the Custodian shall have the right to liquidate
Heritage Fund shares held in the Account to secure cash for payment of such
fees, taxes, and expenses.
11. DUTIES OF CUSTODIAN; INDEMNIFICATION.
(a) Limitation of Liability of Custodian. The Custodian shall have no investment
responsibility or discretion with respect to the assets of the Account. The
Custodian's service hereunder shall not be construed as an endorsement of the
Heritage Funds.
(b) Delegation by Custodian. The Custodian may perform any of its administrative
duties through other persons designated by the Custodian from time to time,
except that Heritage Fund shares must be registered as stated in sections 4(d)
of this Article VIII.
(c) Indemnification. The Depositor shall always fully indemnify the Custodian
and hold it harmless from any and all liability whatsoever which may arise in
connection with this Agreement and the matters which it contemplates, except
that which arises due to the Custodian's bad faith, gross negligence or willful
misconduct.
(d) Reliance on Authenticity of Documents. The Custodian may conclusively rely
upon and shall be protected in acting in good faith upon any written order from
or authorized by the Depositor or any Beneficiary or upon any other document
believed by it to be genuine and to have been issued in proper form and with
proper authority.
12. AMENDMENT.
The Custodian and Heritage are authorized to amend the Agreement in any respect
and at any time (including retroactively) to comply with the applicable
provisions of the Code and the regulations thereunder. Any other amendment to
the Agreement may be made by the Custodian but shall require the consent of the
Depositor. For these purposes, the Depositor shall be deemed to have consented
to any amendment to the Agreement unless, within thirty (30) days after having
received written notice of the amendment from the Custodian, the Depositor
either (i) gives the Custodian a proper written order for a lump-sum
distribution of the Account, or (ii) removes the Custodian and simultaneously
appoints a successor custodian as provided in section 13 of this Article VIII.
The Custodian's freedom to change its fee schedules or delegate responsibilities
hereunder shall not be deemed to be an amendment of this Agreement.
13. RESIGNATION OR REMOVAL OF CUSTODIAN.
(a) Resignation; Removal; Successor. The Custodian may resign at any time upon
at least thirty (30) days prior notice in writing to the Depositor and may be
removed by the Depositor any time upon at least thirty (30) days prior notice in
writing to the Custodian. Upon such resignation or removal, the Depositor shall
appoint a successor to serve as custodian under the Agreement. If within forty
(40) days after the Custodian's resignation or removal, the Depositor has not
appointed a successor, the Custodian may itself appoint such a successor. Every
successor custodian appointed to serve under this Agreement must be a bank, as
defined in section 408(n)(1) of the Code, or such other person as qualifies to
serve as Custodian under section 408(a)(2) of the Code, and must satisfy the
Depositor, the Custodian, or both, upon request as to such qualification.
(b) Effect of Appointment of Successor. Upon receipt by the Custodian of written
acceptance of appointment by its successor the Custodian shall transfer to such
successor the assets of the Account and all necessary records (or copies
thereof) pertaining thereto, after reserving such reasonable amount as it deems
necessary for payment of its fees and expenses. The Custodian shall then be
relieved of all further responsibility with respect to this Agreement, the
Account, and the assets thereof.
14. ACCEPTANCE OF AGREEMENT.
This Agreement shall be deemed accepted by the Custodian upon the earlier of (i)
the date this Agreement is executed by an authorized representative of the
Custodian, and (ii) the date the Custodian accepts for investment the
Depositor's initial contribution made in accordance with the terms of this
Agreement and the Depositor's individual retirement account application.
15. MISCELLANEOUS.
(a) Exclusive Benefit; Nonforfeitability. The Account is established for the
exclusive benefit of the Depositor and his or her Beneficiary or Beneficiaries.
The interest of the Depositor in the balance of the Account shall at all times
be nonforfeitable.
(b) Non-alienation. Neither the Depositor nor any Beneficiary shall have any
right or power to anticipate any part of his or her interest in the
14
<PAGE> 16
Account or to sell, assign, transfer, pledge or hypothecate any part thereof.
The Account shall not be liable for the debts of the Depositor or any
Beneficiary or subject to any seizure, attachment, execution or other legal
process in respect thereto.
(c) Prohibited Transactions. The Depositor shall not engage in any transaction
with respect to the Account which is prohibited under section 4975 of the Code
and which, under section 408(e) of the Code, would cause the Account no longer
to qualify as an individual retirement account.
(d) Entire Agreement. This document constitutes the entire contract between
Depositor and Custodian. No representative of Heritage, nor of any
broker-dealer, shall be deemed to be a representative of or acting on behalf of
the Custodian nor shall any representative have any authority to make
representations or to bind the Custodian beyond the terms of this document.
(e) Notices. Except where otherwise specifically required in this Agreement, any
notice from the Custodian to any person provided for in this Agreement shall be
effective if sent by first-class mail to such person at that person's last
address on the Custodian's records.
(f) Governing Law. This Agreement is accepted by the Custodian in the
Commonwealth of Massachusetts and shall be construed and administered in
accordance with the law of such commonwealth, except to the extent such law is
superseded by applicable Federal law. This Agreement is intended to qualify
under section 408 of the Code as an individual retirement custodian account
agreement and for the retirement savings deduction, if any, permitted under
section 219 of the Code. If any provision hereof is subject to more than one
interpretation or any term used herein is subject to more than one construction,
such ambiguity shall be resolved in favor of that interpretation or construction
which is consistent with such intent.
GENERAL INSTRUCTIONS
(Section references are to the Internal Revenue Code unless otherwise noted.)
PURPOSE OF FORM
Form 5305-A is a model custodial account agreement that meets the requirements
of section 408(a) and has been automatically approved by the IRS. An individual
retirement account (IRA) is established after the form is fully executed by both
the individual (Depositor) and the Custodian and must be completed not later
than the due date of the individual's income tax return for the tax year
(without regard to extensions). This account must be created in the United
States for the exclusive benefit of the Depositor or his/her beneficiaries.
Individuals may rely on regulations for the Tax Reform Act of 1986 to the extent
specified in those regulations.
Do not file Form 5305-A with the IRS. Instead, keep it for your records.
For more information on IRAs, including the required disclosure statement you
can get from your custodian, get Publication 590, Individual Retirement
Arrangements (IRAs).
DEFINITIONS
"Custodian" - The custodian must be a bank or savings and loan association, as
defined in section 408(n), or other person who has the approval of the IRS to
act as custodian.
"Depositor" - The Depositor is the person who establishes the custodial account.
IDENTIFYING NUMBER
The depositor's social security number will serve as the identification number
of his or her IRA. An employer identification number is only required for an IRA
for which a return is filed to report unrelated business taxable income. An
employer identification number is required for a common fund created for IRAs.
IRA FOR NON-WORKING SPOUSE
Form 5305-A may be used to establish the IRA custodial account for a non-working
spouse.
Contributions to an IRA custodial account for a non-working spouse must be made
to a separate IRA custodial account established by the non-working spouse.
SPECIFIC INSTRUCTIONS
Article IV - Distributions made under this Article may be made in a single sum,
periodic payment, or a combination of both. The distribution option should be
reviewed in the year the Depositor reaches age 70 1/2 to make sure the
requirements of section 408(a)(6) have been met.
Article VIII - This Article and any that follow it may incorporate additional
provisions that are agreed upon by the depositor and custodian to complete the
agreement. They may include, for example: definitions, investment powers, voting
rights, exculpatory provisions, amendment and termination, removal of custodian,
custodian's fees, state law requirements, beginning date of distributions,
accepting only cash, treatment of excess contributions, prohibited transactions
with the depositor, etc.
15
<PAGE> 17
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<PAGE> 18
LOGO HERITAGE IRA APPLICATION AND AGREEMENT
The individual named below ("Depositor") hereby adopts a Heritage IRA,
appointing State Street Bank and Trust Co. of Boston, MA to serve as
"Custodian," to perform the administrative services required by the Individual
Retirement Custodial Account Agreement, effective upon acceptance by the
Custodian.
TYPE OF ACCOUNT
- --------------------------------------------------------------------------------
[ ] Individual [ ] Spousal* [ ] SEP** [ ] SIMPLE**
[ ] Rollover (letter attached) [ ] Transfer of Assets (letter attached)
* A spousal IRA may be opened by a spouse without earned income. You may invest
a total of $4,000 in both IRAs each year ($2,000 annual maximum for either
spouse). If you and your spouse are establishing a Heritage IRA, each of you
must complete a separate IRA Application and Agreement.
** Depositor should verify that his or her employer has established a Plan.
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip
------------------ -------------------- ------------------------
Social Security Number Birthdate
--------------------------- -------------------
Investment (List amount to be invested in each Fund separately)
<TABLE>
<S> <C>
$
- ------------------------------------------------------------ ----------------
$
- ------------------------------------------------------------ ----------------
$
- ------------------------------------------------------------ ----------------
Establishment Fee $ 5.00
----------------
Total $
----------------
</TABLE>
[ ] I qualify for a reduced sales charge under the Rights of Accumulation
privilege as described in the Fund's Prospectus. Below are listed all the
accounts which should be considered in determining the Rights of
Accumulation.
- --------------------------- --------------------------- ----------------------
APPLICANT MUST SIGN AND DATE THIS AGREEMENT ON REVERSE.
DEALER INFORMATION (COMPLETED BY INVESTMENT DEALER)
- --------------------------------------------------------------------------------
We hereby authorize the Distributor, Raymond James and Associates, Inc. to act
as our agent in connection with transactions under this agreement and agree to
notify the Distributor of any purchases made under the Rights of Accumulation
privilege. We guarantee the shareholder's signature.
<TABLE>
<S> <C>
- ---------------------------------------- --------------------------------------------
Name of Investment Dealer Name and No. of Registered Representative
- ---------------------------------------- --------------------------------------------
Name and No. of Branch Office Signature of Registered Representative
</TABLE>
<PAGE> 19
IRA ROLLOVER
- --------------------------------------------------------------------------------
[ ] This is a rollover from a qualified corporate pension or profit-sharing
plan, Keogh plan or 403(b) tax-sheltered annuity,* or a distribution from
another IRA. (*Distributions in which you actually receive proceeds from these
plans may be invested in an IRA within 60 days after they are received.)
TELEPHONE EXCHANGE*
- --------------------------------------------------------------------------------
[ ] If you do not want to have Telephone Exchange privilege, please check here.
* I understand the Trust, Manager, Distributor and their Trustees, directors,
officers and employees are not responsible for any loss arising out of
telephone instructions that they reasonably believe are authentic, provided
they follow reasonable procedures as described in the Prospectus and SAI.
BENEFICIARY INSTRUCTIONS
- --------------------------------------------------------------------------------
I name the beneficiary(ies) below according to the provisions of my Individual
Retirement Custodial Account Agreement. I direct that all benefits to which I
may be entitled shall be paid as follows upon my death:
Primary Beneficiary(ies)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Name Address Relationship SSN Birthdate Allocation %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Contingent Beneficiary(ies)
- ------------------------------------------------------------------------------------------------------------------------
Name Address Relationship SSN Birthdate Allocation %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(If more than one person is listed, all persons in the group living at the time
of Depositor's death will share equally, unless otherwise provided.)
CONSENT OF SPOUSE (APPLICABLE IN COMMUNITY PROPERTY STATES WHEN SPOUSE IS NOT
SOLE PRIMARY BENEFICIARY): I consent to the above beneficiary designation. By
signing this consent, I intend to change the portion (if any) of this Individual
Retirement Account which is community property into the separate property of my
spouse.
Signature Date
----------------------------- ------------------------------------
PLACE SIGNATURE GUARANTEE HERE.
IRA AGREEMENT AND CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
- --------------------------------------------------------------------------------
By execution of this Application and Agreement, I adopt and accept the
Individual Retirement Custodial Account Agreement (IRS Form 5305-A) for use in
connection with the Heritage IRA Program. The executed Custodial Account
Agreement establishes an Individual Retirement Custodial Account, of which State
Street Bank and Trust Company is appointed Custodian. I have received and read
the text of Form 5305-A, in which I am directing an investment and the
accompanying IRA disclosure statement. I have also read and received a current
prospectus for each Fund in which I am directing an investment and a description
of any option selected, and I agree that an annual maintenance fee of $10.00
will be deducted from each IRA plan in February of each year for the prior
calendar year unless I have paid such fee by December 31 of the prior year.
Heritage may be required to withhold Federal income tax of 31% from all
dividends, capital gains and liquidations if I have not certified my Taxpayer ID
Number, and unless I certify that I am not subject to backup withholding. I will
strike out clause (2) below if the IRS has notified me that I am subject to
backup withholding and the IRS has not since notified me that backup withholding
has ended. Under penalties of perjury, I certify (1) that my Taxpayer ID Number
under Account Information is correct, and (2) that I am not subject to backup
withholding because (a) I have not been notified that I am subject to backup
withholding as a result of failure to report all interest or dividends, or (b)
the IRS has notified me that I am no longer subject to backup withholding.
Signature of Depositor Date
------------------------------ ---------------------
Signature of Custodian Date
----------------------------- ---------------------
(Custodian's signature is not intended to certify Depositor's Taxpayer ID
Number)
MAILING INSTRUCTIONS
- --------------------------------------------------------------------------------
Mail Agreement and check(s) made payable to State Street Bank and Trust Co.
to: Heritage Asset Management,Inc.
PO Box 33022
St. Petersburg, FL 33733
<PAGE> 20
LOGO HERITAGE IRA APPLICATION AND AGREEMENT
The individual named below ("Depositor") hereby adopts a Heritage IRA,
appointing State Street Bank and Trust Co. of Boston, MA to serve as
"Custodian," to perform the administrative services required by the Individual
Retirement Custodial Account Agreement, effective upon acceptance by the
Custodian.
TYPE OF ACCOUNT
- --------------------------------------------------------------------------------
[ ] Individual [ ] Spousal* [ ] SEP** [ ] SIMPLE**
[ ] Rollover (letter attached) [ ] Transfer of Assets (letter attached)
* A spousal IRA may be opened by a spouse without earned income. You may invest
a total of $4,000 in both IRAs each year ($2,000 annual maximum for either
spouse). If you and your spouse are establishing a Heritage IRA, each of you
must complete a separate IRA Application and Agreement.
** Depositor should verify that his or her employer has established a Plan.
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip
------------------ -------------------- ------------------------
Social Security Number Birthdate
--------------------------- -------------------
Investment (List amount to be invested in each Fund separately)
<TABLE>
<S> <C>
$
- ------------------------------------------------------------ ----------------
$
- ------------------------------------------------------------ ----------------
$
- ------------------------------------------------------------ ----------------
Establishment Fee $ 5.00
----------------
Total $
----------------
</TABLE>
[ ] I qualify for a reduced sales charge under the Rights of Accumulation
privilege as described in the Fund's Prospectus. Below are listed all the
accounts which should be considered in determining the Rights of
Accumulation.
- --------------------------- --------------------------- ----------------------
APPLICANT MUST SIGN AND DATE THIS AGREEMENT ON REVERSE.
DEALER INFORMATION (COMPLETED BY INVESTMENT DEALER)
- --------------------------------------------------------------------------------
We hereby authorize the Distributor, Raymond James and Associates, Inc. to act
as our agent in connection with transactions under this agreement and agree to
notify the Distributor of any purchases made under the Rights of Accumulation
privilege. We guarantee the shareholder's signature.
<TABLE>
<S> <C>
- ---------------------------------------- --------------------------------------------
Name of Investment Dealer Name and No. of Registered Representative
- ---------------------------------------- --------------------------------------------
Name and No. of Branch Office Signature of Registered Representative
</TABLE>
<PAGE> 21
IRA ROLLOVER
- --------------------------------------------------------------------------------
[ ] This is a rollover from a qualified corporate pension or profit-sharing
plan, Keogh plan or 403(b) tax-sheltered annuity,* or a distribution from
another IRA. (*Distributions in which you actually receive proceeds from these
plans may be invested in an IRA within 60 days after they are received.)
TELEPHONE EXCHANGE*
- --------------------------------------------------------------------------------
[ ] If you do not want to have Telephone Exchange privilege, please check here.
* I understand the Trust, Manager, Distributor and their Trustees, directors,
officers and employees are not responsible for any loss arising out of
telephone instructions that they reasonably believe are authentic, provided
they follow reasonable procedures as described in the Prospectus and SAI.
BENEFICIARY INSTRUCTIONS
- --------------------------------------------------------------------------------
I name the beneficiary(ies) below according to the provisions of my Individual
Retirement Custodial Account Agreement. I direct that all benefits to which I
may be entitled shall be paid as follows upon my death:
Primary Beneficiary(ies)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Name Address Relationship SSN Birthdate Allocation %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Contingent Beneficiary(ies)
- ------------------------------------------------------------------------------------------------------------------------
Name Address Relationship SSN Birthdate Allocation %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(If more than one person is listed, all persons in the group living at the time
of Depositor's death will share equally, unless otherwise provided.)
CONSENT OF SPOUSE (APPLICABLE IN COMMUNITY PROPERTY STATES WHEN SPOUSE IS NOT
SOLE PRIMARY BENEFICIARY): I consent to the above beneficiary designation. By
signing this consent, I intend to change the portion (if any) of this Individual
Retirement Account which is community property into the separate property of my
spouse.
Signature Date
----------------------------- ------------------------------------
PLACE SIGNATURE GUARANTEE HERE.
IRA AGREEMENT AND CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
- --------------------------------------------------------------------------------
By execution of this Application and Agreement, I adopt and accept the
Individual Retirement Custodial Account Agreement (IRS Form 5305-A) for use in
connection with the Heritage IRA Program. The executed Custodial Account
Agreement establishes an Individual Retirement Custodial Account, of which State
Street Bank and Trust Company is appointed Custodian. I have received and read
the text of Form 5305-A, in which I am directing an investment and the
accompanying IRA disclosure statement. I have also read and received a current
prospectus for each Fund in which I am directing an investment and a description
of any option selected, and I agree that an annual maintenance fee of $10.00
will be deducted from each IRA plan in February of each year for the prior
calendar year unless I have paid such fee by December 31 of the prior year.
Heritage may be required to withhold Federal income tax of 31% from all
dividends, capital gains and liquidations if I have not certified my Taxpayer ID
Number, and unless I certify that I am not subject to backup withholding. I will
strike out clause (2) below if the IRS has notified me that I am subject to
backup withholding and the IRS has not since notified me that backup withholding
has ended. Under penalties of perjury, I certify (1) that my Taxpayer ID Number
under Account Information is correct, and (2) that I am not subject to backup
withholding because (a) I have not been notified that I am subject to backup
withholding as a result of failure to report all interest or dividends, or (b)
the IRS has notified me that I am no longer subject to backup withholding.
Signature of Depositor Date
------------------------------ ---------------------
Signature of Custodian Date
----------------------------- ---------------------
(Custodian's signature is not intended to certify Depositor's Taxpayer ID
Number)
MAILING INSTRUCTIONS
- --------------------------------------------------------------------------------
Mail Agreement and check(s) made payable to State Street Bank and Trust Co.
to: Heritage Asset Management,Inc.
PO Box 33022
St. Petersburg, FL 33733
<PAGE> 22
HERITAGE FAMILY OF FUNDS(TM)
REQUEST FOR TRANSFER OR DIRECT ROLLOVER
1. GENERAL INFORMATION:
<TABLE>
<S> <C>
- ------------------------------------------------------------ ---------------------------------------------
Name of Current Custodian Name of Account Holder
- ------------------------------------------------------------ ---------------------------------------------
Address of Current Custodian Social Security Number
- ------------------------------------------------------------ ---------------------------------------------
City State Zip Daytime Phone Number
- ------------------------------------------------------------
Current Fund and Account Number
</TABLE>
[ ] TRANSFER REQUEST: (CHECK HERE IF TRANSFERRING FROM AN IRA)
I authorize and direct you, the above current Custodian/Trustee of my IRA,
to send as a transfer to State Street Bank and Trust Company as successor
fiduciary the assets indicated in section 2 below.
[ ] DIRECT ROLLOVER REQUEST: (CHECK HERE FOR DIRECT ROLLOVERS FROM A QUALIFIED
PLAN)
I authorize and direct you, the above Plan Administrator of my qualified
plan or tax sheltered annuity, to directly rollover to State Street Bank and
Trust Company as successor fiduciary the assets indicated in section 2
below.
2. PAYMENT INFORMATION:
A. I authorize and direct you to send my assets as follows:
_________ 1. Immediately liquidate all assets and send the cash proceeds.
_________ 2. Immediately liquidate and send cash proceeds in the amount of
__________________.
_________ 3. Send cash proceeds of all investments at maturity.
B. I authorize you to send the proceeds indicated above to State Street Bank
and Trust Company as successor fiduciary payable as follows:
HERITAGE ASSET MANAGEMENT, INC.
ATTN: RETIREMENT PLAN COORDINATOR
FBO ___________________
P.O. BOX 33022
ST. PETERSBURG, FL 33733
C. Conduit IRA. I would like to keep these funds in a separate IRA
_________ Yes
_________ No
3. INSTRUCTIONS FOR TRANSFEREE CUSTODIAN:
_________ A. I am opening a new account and have attached a Heritage
Individual Retirement Account Agreement.
_________ B. Deposit the proceeds to my existing Heritage Account _______
Fund: ___________________________________ Percentage ____________________
Fund: ___________________________________ Percentage ____________________
Fund: ___________________________________ Percentage ____________________
4. SIGNATURES:
I certify that I have/will establish an IRA with the State Street Bank and Trust
Company Custodian/Trustee. I agree to the terms of this form. I understand that
I am responsible for determining my eligibility for all transfers or direct
rollovers and I agree to indemnify and to hold the Custodian/Trustee harmless
against any and all situations arising from an ineligible transfer or direct
rollover. I acknowledge that the Custodian/Trustee cannot provide legal advice
and I agree to consult with my own tax professional for advice. I certify that I
am aware of any fees or penalties that may be imposed by the present
Custodian/Trustee. I have received and read the prospectus for the fund(s) in
which I am making my investment. I understand that if I am 70 1/2, I must meet
my Required Minimum Distribution obligation from my current account before I can
transfer any assets into my State Street Bank & Trust Custodial Account.
State Street Bank and Trust Company has established an IRA plan qualified under
IRC Section 408 for this individual and will accept the transfer or direct
rollover of assets.
Executed this __________ day of _________________, 19________.
<TABLE>
<S> <C>
__________________________________________________________ __________________________________________________________
Signature of Individual Place Signature Guarantee Here
Accepted by Transferee Custodian, State Street Bank and Trust Company
By: ______________________________________________________ __________________________
Signature of Custodian/Trustee Date
</TABLE>
QUESTIONS CONCERNING THIS FORM?
PLEASE CALL OUR CLIENT SERVICE REPRESENTATIVES AT 1-800-421-4184.
<PAGE> 23
This page is intentionally left blank.
<PAGE> 24
LOGO
HERITAGE FAMILY OF
MUTUAL FUNDS
HERITAGE SERIES TRUST-
EAGLE INTERNATIONAL EQUITY PORTFOLIO
Capital appreciation
principally through investment in an
international portfolio of equity securities.
HERITAGE SERIES TRUST-
SMALL CAP STOCK FUND
Long-term capital appreciation
through the purchase of equity securities
of companies with small market capitalization.
HERITAGE SERIES TRUST-
GROWTH EQUITY FUND
Growth through long-term capital appreciation.
HERITAGE CAPITAL APPRECIATION TRUST
Long-term capital appreciation.
HERITAGE SERIES TRUST-
VALUE EQUITY FUND
Long-term capital appreciation
with a secondary objective of current income.
HERITAGE INCOME-GROWTH TRUST
Long-term total return
by seeking, with approximately equal emphasis,
current income and capital appreciation.
HERITAGE INCOME TRUST-
HIGH YIELD BOND FUND
High current income
by investing in a portfolio of lower-
and medium-rated high yield,
fixed income securities.
HERITAGE INCOME TRUST-
INTERMEDIATE GOVERNMENT FUND
High current income consistent with the
preservation of capital.
HERITAGE CASH TRUST-
MUNICIPAL MONEY MARKET FUND
Maximum current income
exempt from
Federal income tax consistent
with stability of principal.
HERITAGE CASH TRUST-
MONEY MARKET FUND
Maximum current income
consistent with the stability of principal.
For complete information, including charges and expenses,
please ask your financial advisor for a prospectus.
Read it carefully before you invest or send money.
<PAGE> 25
This page is intentionally left blank.
<PAGE> 26
[Assorted black and white photos of people working and playing.]
The Heritage Individual Retirement Custodial Account Agreement and related
documents are intended to comply with current provisions of the Internal
Revenue Code. However Heritage Asset Management, Inc. assumes no responsibility
as to the efficiency or legal sufficiency under federal, state or local law of
this Agreement in a particular case.
[LOGO]
HERITAGE ASSET MANAGEMENT, INC.
880 CARILLON PARKWAY, P.O. BOX 33022
ST. PETERSBURG, FL. 33733
(813) 573-8143, (800) 421-4184
RAYMOND JAMES & ASSOCIATES, INC. DISTRIBUTOR
MEMBER NEW YORK STOCK EXCHANGE/SIPC
HERITAGE INCOME TRUST
CLASS B
DISTRIBUTION PLAN
WHEREAS, Heritage Income Trust (the "Trust") is engaged in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust, on behalf of its one or more designated series
presently existing or hereafter established (hereinafter referred to as
"Portfolios"), desires to adopt a Class B ("Class") Distribution Plan pursuant
to Rule l2b-1 under the 1940 Act and the Board of Trustees of the Trust has
determined that there is a reasonable likelihood that adoption of this
Distribution Plan will benefit the Trust and the Class B shareholders; and
WHEREAS, the Trust intends to employ a registered broker-dealer as
Distributor of the securities of which it is the issuer;
NOW, THEREFORE, the Trust, with respect to its Class B shares, hereby
adopts this Distribution Plan (the "Plan") in accordance with Rule l2b-1 under
the 1940 Act on the following terms and conditions:
1. PAYMENT OF FEES. The Trust is authorized to pay distribution and service
for the Class B shares of each Portfolio listed on Schedule A of this Plan, as
such schedule may be amended from time to time by the Board of Trustees in the
manner provided for approval of this Plan in Paragraph 4 up to the maximum rate
set forth in Schedule A, as such schedule may be amended from time to time. Such
fees shall be calculated and accrued daily and paid monthly or at such other
intervals as shall be determined by the Board in the manner provided for
approval of this Plan in Paragraph 4. The distribution and service fees shall be
payable by the Trust on behalf of the Class B shares of a Portfolio regardless
of whether those fees exceed or are less than the actual expenses, described in
Paragraph 2 below, incurred by the Distributor with respect to such Class in a
particular year.
2. DISTRIBUTION AND SERVICE EXPENSES. The fee authorized by Paragraph 1 of
this Plan shall be paid pursuant to an appropriate Distribution Agreement in
payment for any activities or expenses intended to result in the sale and
retention of Trust shares, including, but not limited to, compensation paid to
registered representatives of the Distributor and to participating dealers which
have entered into sales agreements with the Distributor, 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, preparation and distribution of advertising material and sales
literature and other sales promotion expenses, or for providing ongoing services
to Class B shareholders.
3. ADDITIONAL COMPENSATION. This Plan shall not be construed to prohibit or
limit additional compensation derived from sales charges or other sources that
may be paid to the Distributor pursuant to the aforementioned Distribution
Agreement.
<PAGE>
4. BOARD APPROVAL. This Plan shall not take effect with respect to any
Class until it has been approved, together with any related agreements, by vote
of a majority of both (a) the Board of Trustees and (b) those members of the
Board who are not "interested persons" of the Trust, as defined in the 1940 Act,
and have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it (the "Independent Trustees"), cast in person at
a meeting or meetings called for the purpose of voting on this Plan and such
related agreements.
5. RENEWAL OF PLAN. This Plan shall continue in full force and effect with
respect to the Class B shares of a Portfolio for successive periods of one year
from its initial effectiveness for so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Paragraph 4.
6. REPORTS. Any Distribution Agreement entered into pursuant to this Plan
shall provide that the Distributor shall provide to the Board of Trustees and
the Board shall review, at least quarterly, or at such other intervals as
reasonably requested by the Board, a written report of the amounts so expended
and the purposes for which such expenditures were made.
7. TERMINATION. This Plan may be terminated with respect to the Class B
shares of a Portfolio at any time by vote of a majority of the Independent
Trustees or by a vote of a majority of the outstanding voting securities of such
Class, voting separately from any other Class of the Trust.
8. AMENDMENTS. Any change to the Plan that would materially increase the
distribution costs to the Class B shares of a Portfolio may not be instituted
unless such amendment is approved in the manner provided for board approval in
Paragraph 4 hereof and approved by a vote of at least a majority of such Class'
outstanding voting securities, as defined in the 1940 Act, voting separately
from any other Class of the Trust. Any other material change to the Plan may not
be instituted unless such change is approved in the manner provided for initial
approval in Paragraph 4 hereof.
9. NOMINATION OF TRUSTEES. While this Plan is in effect, the selection and
nomination of Independent Trustees of the Trust shall be committed to the
discretion of the Independent Trustees then in office.
10. RECORDS. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 6 hereof for a period of
not less than six years from the date of execution of this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
Date: February 2, 1998
<PAGE>
HERITAGE INCOME TRUST
CLASS B
DISTRIBUTION PLAN
Schedule A
The maximum annualized fee rate of the average daily rate asset pursuant to
Paragraph 1 of the Heritage Income Trust Distribution Plan shall be as follows:
HIGH YIELD BOND FUND.........................................1.00%
INTERMEDIATE GOVERNMENT FUND.................................1.00%
Dated: February 2, 1998
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").
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 the initial sales charge is waived on a purchase of shares, a contingent
deferred sales load ("CDSL") of up to 1.0% may be imposed on any redemption of
those sales within two (2) years of the purchase. 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 B. Class B shares are offered to investors of each of the Funds
subject to a CDSL, but without imposition of an initial sales charge. The
maximum CDSL for Class B shares of each Fund is equal to 5% 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. The CDSL will decline over a
eight-year period after purchase to 0%, at the end of which the Class B shares
will convert to Class A shares at relative net asset value.
Class B shares are subject to an annual service fee of up to 0.25% of
average daily net assets and a distribution fee of up to 0.75% of average daily
net assets of the Class B shares of each Fund, each paid pursuant to a plan of
distribution adopted pursuant to Rule 12b-1 under the 1940 Act. Class B shares
require an initial investment of $1,000, except for certain retirement accounts
and investment plans for which lower limits may apply.
3. 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>
4. 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
each Fund ("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.
Each class may pay a different amount of the following other expenses: (1)
distribution and service 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, Class B 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. Eagle Class Shares are not exchangeable.
These exchange privileges may be modified or terminated by a Fund, 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, Class B and Class C shares contain additional
information about those classes and each Fund's multiple class structure.
Dated: January 2, 1998
2
<PAGE>
APPENDIX A
TO THE HERITAGE MUTUAL FUNDS
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
Heritage Cash Trust:
Money Market Fund -- Class A, Class B and Class C shares
Municipal Money Market Fund - Class A shares
Heritage Capital Appreciation Trust -- Class A, Class B and Class C shares
Heritage Income-Growth Trust -- Class A, Class B and Class C shares
Heritage Income Trust:
High Yield Bond Fund -- Class A, Class B and Class C shares Intermediate
Government Fund -- Class A, Class B and Class C shares
Heritage Series Trust:
Small Cap Stock Fund -- Class A, Class B and Class C shares
Value Equity Fund -- Class A, Class B and Class C shares
Growth Equity Fund -- Class A Class B and Class C shares
Mid Cap Growth Fund - Class A, Class B and Class C shares
Eagle International Equity Portfolio -- Class A, Class B, Class C and
Eagle Class shares
Dated: January 2, 1998
