<PAGE> 1
HERITAGE
INCOME
TRUST
[Assorted black and white photos of people working and playing.]
From Our Family to Yours: The Intelligent Creation of Wealth.
High Yield Bond Fund
Intermediate Government Fund
Prospectus
begins on the following page.
[HERITAGE INCOME TRUST LOGO]
Prospectus Dated February 2, 1998
<PAGE> 2
[HERITAGE INCOME TRUST(TM) LOGO]
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. LOGO]
Registered Investment Advisor--SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
Prospectus Dated February 2, 1998
<PAGE> 3
TABLE OF CONTENTS
================================================================================
<TABLE>
<S> <C>
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............................ 18
Retirement Plans.......................................... 19
Choosing a Class of Shares................................ 19
What Class A Shares Will Cost............................. 20
What Class B Shares Will Cost............................. 21
What Class C Shares Will Cost............................. 23
Minimizing the Contingent Deferred Sales Load............. 23
Waiver of the Contingent Deferred Sales Load.............. 23
How to Redeem Shares...................................... 24
Receiving Payment......................................... 25
Exchange Privilege........................................ 26
MANAGEMENT OF THE FUNDS..................................... 27
Board of Trustees......................................... 27
Investment Adviser, Fund Accountant, Administrator and
Transfer Agent......................................... 27
Subadviser................................................ 28
Portfolio Management...................................... 28
Brokerage Practices....................................... 29
SHAREHOLDER AND ACCOUNT POLICIES............................ 29
Dividends and Other Distributions......................... 29
Distribution Plans........................................ 30
Taxes..................................................... 30
About the Trust and the Funds............................. 31
Shareholder Information................................... 32
APPENDIX.................................................... A-1
</TABLE>
Prospectus
<PAGE> 4
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:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum sales load imposed on purchases (as a %
of offering price)............................ 3.75% None None
Maximum contingent deferred sales load (as a %
of original purchase price or redemption
proceeds, whichever is lower)................. None 5%* 1%**
Wire redemption fee (per transaction)........... $5.00 $5.00 $5.00
</TABLE>
- ---------------
* Declining over an eight-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth year, 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 (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
HIGH YIELD BOND FUND: ------- ------- -------
<S> <C> <C> <C>
Management fee (after fee waiver)............... 0.51% 0.51% 0.51%
12b-1 fees...................................... 0.31% 0.80% 0.80%
Other expenses.................................. 0.39% 0.39% 0.39%
----- ----- -----
Total Fund operating expenses (after fee
waiver)....................................... 1.21% 1.70% 1.70%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
INTERMEDIATE GOVERNMENT FUND: ------- ------- -------
<S> <C> <C> <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 reimbursement).... 0.60% 0.60% 0.60%
----- ----- -----
Total Fund operating expenses (after fee waiver
and expense reimbursement).................... 0.93% 1.20% 1.20%
===== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
CLASS A CLASS B AND CLASS C
------- -------------------
<S> <C> <C>
High Yield Bond Fund.................. 1.25% 1.70%
Intermediate Government Fund.......... 0.95% 1.20%
</TABLE>
Prospectus 1
<PAGE> 5
Absent such fee waivers and expense reimbursements, the management fee,
other expenses and total fund operating expenses for A shares and C shares of
each Fund for the 1997 fiscal year would have been as follows:
<TABLE>
<CAPTION>
CLASS A CLASS C
------- -------
<S> <C> <C>
High Yield Bond Fund
Management Fee............................... 0.60% 0.60%
Total Fund Operating Expenses................ 1.30% 1.79%
Intermediate Government Fund
Management Fee............................... 0.50% 0.50%
Other Expenses............................... 0.84% 0.84%
Total Fund Operating Expenses................ 1.67% 1.94%
</TABLE>
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
HIGH YIELD BOND FUND:
A shares...................... $ 49 $ 74 $ 102 $ 179
B shares (assuming sale of all
shares at end of
period)*................... $ 67 $ 84 $ 112 $ 188
B shares (assuming no sale of
shares)*................... $ 17 $ 54 $ 92 $ 188
C shares...................... $ 17 $ 54 $ 92 $ 201
INTERMEDIATE GOVERNMENT FUND:
A shares...................... $ 47 $ 66 $ 87 $ 148
B shares (assuming sale of all
shares at end of
period)*................... $ 62 $ 68 $ 86 $ 138
B shares (assuming no sale of
shares)*................... $ 12 $ 38 $ 66 $ 138
C shares...................... $ 12 $ 38 $ 66 $ 145
</TABLE>
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* Ten-year figures assume conversion of B shares to A shares at the end of the
eighth year.
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."
Prospectus 2
<PAGE> 6
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.
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. 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
FOR THE YEARS ENDED SEPTEMBER 30, 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 gain (loss)
on investments.......... 0.46 0.24 0.31 (0.84) 0.07 0.59 1.00 (0.34) 0.46 0.24 0.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
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 realized gains...... -- -- -- (0.07) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
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 daily net
assets(b)............... 1.21 1.23 1.25 1.25 1.19 0.96 1.31 1.35(c) 1.70 1.70 1.70(c)
Net investment income to
average daily net
assets.................. 8.76 8.41 7.35 6.76 7.57 8.11 9.10 8.97(c) 8.26 8.39 6.67(c)
Portfolio turnover rate... 101 143 109 135 150 71 119 39(c) 101 143 109(c)
Net assets, end of the
period ($ millions)..... 42 33 30 32 42 32 15 10 13 6 0.6
</TABLE>
- ---------------
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (first issuance of C shares) to September 30,
1995.
(a)Salomon Brothers Asset Management Inc became the investment subadviser to
the High Yield Bond Fund on February 1, 1996.
(b)Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.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.
Prospectus 3
<PAGE> 7
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
--------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS C SHARES
--------------------------------------------------------------------- ------------------------
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1997* 1996* 1995 1994* 1993 1992 1991 1990+ 1997* 1996* 1995++
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <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 income........ (0.52) (0.50) (0.55) (0.37) (0.52) (0.55) (0.65) (0.27) (0.50) (0.49) (0.22
Distributions from net
realized gain............ -- -- -- -- (0.03) (0.23) -- (0.04) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
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 ($ millions)...... $ 14 $ 18 $ 24 $ 41 $ 102 $ 111 $ 5 $ 4 $ 1 $ 0.6 $ 0.07
</TABLE>
- ---------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed method does not correspond with results of
operations.
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (first offering of C shares) to September 30,
1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.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.
Prospectus 4
<PAGE> 8
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. In
seeking to achieve this objective, the Fund will normally invest at least 65% of
its total assets 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 BOND
FUND INVESTS PRIMARILY
IN HIGH-YIELD, LOWER-
RATED CORPORATE BONDS.
THESE ARE COMMONLY
CALLED "JUNK BONDS."
BECAUSE THE VALUE OF
THESE SECURITIES WILL
FLUCTUATE, YOU CAN LOSE
MONEY BY INVESTING
IN THE FUND.
The Fund invests primarily in securities rated Baa or lower by Moody's
Investors Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings
Services ("S&P") or in securities determined by Salomon Brothers Asset
Management Inc, the Fund's investment subadviser (the "Subadviser"), to be of
comparable quality. These lower- and medium-rated, and comparable unrated
securities, offer yields that generally are superior to the yields offered by
higher-rated securities. However, such securities also involve significantly
greater risks, including price volatility and risk of default in the payment of
principal and interest. The Subadviser seeks to minimize the risks of investing
in these securities through its careful analysis of the credit status of these
issuers. For further discussion of the risks associated with investing in
lower-rated securities, see "Lower-Rated Securities -- Risk Factors" below.
THE AVERAGE
WEIGHTED PORTFOLIO
MATURITY OF THE
HIGH YIELD BOND
FUND'S INVESTMENT
PORTFOLIO WILL
VARY.
The Subadviser has discretion to select the range of maturities of the debt
obligations in which the Fund invests. The Subadviser seeks to maintain, under
normal market conditions, the Fund's average weighted portfolio maturity of 7 to
15 years. However, this average weighted portfolio maturity may vary
substantially from time to time depending on economic and market conditions.
Certain of the debt securities purchased by the Fund may be rated as low as
C by Moody's or D by S&P or may be considered comparable to securities having
these ratings. These lower-rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
and identifiable vulnerability to default, to be unlikely to have the capacity
to pay interest and repay principal when due in the event of adverse business,
financial or economic conditions, and/or to be in default or not current in the
payment of
Prospectus 5
<PAGE> 9
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
BOND FUND MAY
INVEST IN SECURITIES
CONVERTIBLE INTO
COMMON STOCK.
Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or
dividends paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally have higher yields than common stocks,
but lower yields than comparable non-convertible securities, are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics, and provide the potential for capital appreciation if the
market price of the underlying common stock increases.
THE HIGH YIELD
BOND FUND MAY
INVEST IN LOANS.
Fixed and Floating Rate Loans. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a corporate
borrower or a foreign sovereign entity and one or more financial institutions
("Lenders"). The Fund may invest in such loans in the form of participations in
Loans ("Participations") and assignments of all or a portion of Loans from third
parties ("Assignments"). The Fund considers these investments to be investments
in debt securities for purposes of this Prospectus. The Fund, in pursuing its
investment policies, may acquire Participations and Assignments that are high
yield, nonconvertible corporate debt securities or short duration debt
securities. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and
Prospectus 6
<PAGE> 10
the Fund may not benefit directly from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Fund will assume the
credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Participations only if the Lender interpositioned between the Fund
and the borrower is determined by the investment manager to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund will acquire direct
rights against the borrower on the Loan, except that under certain circumstances
such rights may be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower. Thus, the Fund will treat investments
in Participations and Assignments as illiquid for purposes of its limitation on
investments in illiquid securities. The Fund may revise this policy in the
future.
THE HIGH YIELD BOND
FUND MAY INVEST IN
FIXED INCOME SECURITIES
OF FOREIGN ISSUERS.
Foreign Fixed Income Securities. The Fund may invest up to 10% of its
total assets in foreign fixed income securities (including emerging market
securities) all or a portion of which may be non-U.S. dollar denominated and
which include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt obligations
of supranational entities; (c) debt obligations of the U.S. Government issued in
non-dollar securities; (d) debt obligations and other fixed income securities of
foreign corporate issuers (both dollar and non-dollar denominated); and (e) U.S.
corporate issuers (both Eurodollar and non-dollar denominated). There is no
minimum rating criteria for the Fund's investments in such securities. Investing
in the securities of foreign issuers involves special considerations that are
not typically associated with investing in the securities of U.S. issuers. 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,
Prospectus 7
<PAGE> 11
auditing and financial recordkeeping standards and requirements of U.S. issuers.
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for the High Yield Bond Fund to obtain or enforce a judgment
against the issuers of such obligations.
THE RISKS OF LOWER-
RATED HIGHER-YIELDING
SECURITIES ARE
DIFFERENT FROM THOSE OF
HIGHER-RATED SECURITIES.
LOWER-RATED SECURITIES -- RISK FACTORS. Lower-rated securities are subject
to certain risks that may not be present with investments in higher-grade
securities. Investors should consider carefully their ability to assume the
risks associated with lower-rated securities before investing in the Fund.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The lower rating of certain
high yielding corporate income securities reflects a greater possibility that
the financial condition of the issuer or adverse changes in general economic
conditions may impair the ability of the issuer to pay income and principal.
Changes by rating agencies in their ratings of a fixed income security also may
affect the value of these investments. However, allocating investments in the
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.
Prospectus 8
<PAGE> 12
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
RATED SECURITIES OF UNRATED SECURITIES
AS A PERCENTAGE OF THE AS A PERCENTAGE OF THE
MOODY'S/S&P RATINGS FUND'S ASSETS FUND'S ASSETS
------------------- ---------------------- ----------------------
<S> <C> <C>
U.S. Government Securities... 0.01%
Repurchase Agreements
involving U.S. Government
Securities................. 5.12%
"BB"/"Ba".................... 10.52%
"B"/"B"...................... 74.63% 5.64%
"CCC"/"Caa".................. 2.42%
------ -----
92.70% 5.64%
====== =====
</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 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.
Prospectus 9
<PAGE> 13
THE HIGH YIELD
BOND FUND MAY
INVEST IN CERTAIN
SECURITIES THAT DO NOT
PAY CASH INCOME.
Zero Coupon and Pay-in-Kind Bonds. The Fund may invest in zero coupon
securities and pay-in-kind bonds, which involve special risk considerations.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that 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
GOVERNMENT FUND
INVESTS PRIMARILY
IN U.S. GOVERNMENT
DEBT SECURITIES.
BECAUSE THE VALUE OF
THESE SECURITIES WILL
FLUCTUATE, YOU CAN LOSE
MONEY BY INVESTING
IN THE FUND.
The Fund invests at least 80% of its assets in debt securities (including
mortgage-backed securities) issued or guaranteed by the U.S. Government and its
agencies and instrumentalities, and repurchase agreements and when-issued and
forward commitment securities involving such debt obligations. The Fund also may
lend its securities, borrow money, invest in money market instruments to
maintain sufficient liquidity, seek to hedge against interest rate changes by a
variety of strategies involving the use of options, futures contracts and
options on futures contracts as described below, invest in stripped securities,
inverse floaters and invest up to 10% of its net assets in illiquid securities.
Under normal conditions, the Fund will maintain a dollar-weighted effective
average maturity of between three and ten years. In times where, in its
judgment, conditions in the securities markets would
Prospectus 10
<PAGE> 14
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 LIMITS,
THE INTERMEDIATE
GOVERNMENT FUND
MAY UTILIZE
FUTURES AND OPTIONS
ON FUTURES CONTRACTS
FOR PURPOSES OTHER
THAN HEDGING.
Futures and Options. To the extent that the Fund enters into futures
contracts and options on futures contracts other than for bona fide hedging
purposes (as defined by the Commodity Futures Trading Commission), the aggregate
initial margin and premiums required to establish those positions (excluding the
amount by which options are "in-the-money") will not exceed 5% of the
liquidation contracts' value of the Fund's investment portfolio, after taking
into account unrealized profits and unrealized losses on any contracts into
which 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
GOVERNMENT FUND
MAY INVEST IN U.S.
GOVERNMENT OR
U.S. GOVERNMENT-
RELATED MORTGAGE
SECURITIES AS WELL
AS PRIVATE ISSUER
MORTGAGE-BACKED
SECURITIES.
Mortgage-Backed Securities. Mortgage-backed securities represent an
interest in a pool of mortgages made by lenders such as commercial banks,
savings and loan institutions, mortgage bankers and others. These securities
generally provide monthly interest and, in most cases, principal payments that
are a "pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Mortgage-backed securities may be issued by the
U.S. Government or U.S. Government-related entities or by non-governmental
entities such as banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers.
Although mortgage-backed securities are issued with stated maturities of up to
forty years, unscheduled or early payments of principal and interest on the
underlying mortgages may shorten considerably their effective maturities. This
contrasts with U.S. Treasury securities, for instance, which generally pay all
principal at maturity and typically have an effective maturity equal to the
final stated maturity. Thus, for purposes of calculating the 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. 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
Prospectus 11
<PAGE> 15
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 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
Prospectus 12
<PAGE> 16
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 UTILIZE
FUTURES AND OPTIONS
CONTRACTS TO ATTEMPT
TO REDUCE THE VOLATILITY
OF ITS INVESTMENT
PORTFOLIO.
Futures and Options. Each Fund may engage in transactions in options and
futures contracts in an effort to adjust the risk/return characteristics of its
investment portfolio. High Yield Bond Fund's Subadviser has no current intention
of engaging in such transactions. Each Fund also may, in certain circumstances,
purchase or sell futures contracts or options as a substitute for the purchase
or sale of securities. Each Fund may purchase and sell put and call options on
debt securities and indices of debt securities, purchase and sell futures
contracts on debt securities and indices of debt securities, and purchase and
sell options on such futures contracts. For example, if the Manager or
Subadviser, as applicable, anticipates that interest rates will rise, a Fund
also may sell a debt futures contract or a call option thereon or purchase a put
option on a futures contract as a hedge against a decrease in the value of that
Fund's securities. If the Manager or Subadviser, as applicable, anticipates that
interest rates will decline, a Fund may purchase a debt futures contract or a
call option thereon or sell a put option on a futures contract to protect
against an increase in the price of securities a Fund intends to purchase.
If the Manager or the Subadviser, as applicable, incorrectly forecasts
interest rates in utilizing a hedging strategy using futures or options on
futures for a Fund,
Prospectus 13
<PAGE> 17
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
INVEST A PORTION OF
ITS ASSETS IN ILLIQUID
SECURITIES.
Illiquid Securities. The Intermediate Government Fund will not purchase or
otherwise acquire any security if, as a result, more than 10% of its net assets
would be invested in securities that are illiquid by virtue of the absence of a
readily available market or due to legal or contractual restrictions on resale.
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 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
Prospectus 14
<PAGE> 18
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 over" its purchase commitment, the Fund may receive a
negotiated fee.
Prospectus 15
<PAGE> 19
NET ASSET VALUE
================================================================================
THE NET ASSET VALUE
OF EACH FUND'S
SHARES IS CALCULATED
DAILY AS OF THE CLOSE
OF REGULAR TRADING
ON THE NEW YORK
STOCK EXCHANGE.
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading -- normally 4:00
p.m. Eastern time -- of the New York Stock Exchange ("Exchange") each day it is
open. Each Fund's net asset value per share is calculated by dividing the value
of the total assets, less liabilities, by the total number of shares
outstanding. The per share net 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 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
Prospectus 16
<PAGE> 20
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. For more
information on investment performance, see the SAI.
INVESTING IN THE FUNDS
PURCHASE PROCEDURES
================================================================================
YOU MAY BUY SHARES
OF EACH FUND BY:
Shares of each Fund are offered continuously through the Trust's principal
underwriter, Raymond James & Associates, Inc. (the "Distributor"), and through
other participating dealers or banks that have dealer agreements with the
Distributor. The Distributor receives commissions consisting of that portion of
the sales load 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
REPRESENTATIVE
Shares of each Fund may be purchased through a Financial Advisor of the
Distributor, a participating dealer 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 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 THE
ACCOUNT
APPLICATION
CONTAINED IN THIS
PROSPECTUS AND
SENDING YOUR
CHECK; OR
You also may purchase shares of a Fund directly by completing and signing
the Account Application found in this Prospectus and mailing it, along with your
payment, to Heritage Asset Management. Inc., P.O. Box 33022, St. Petersburg, FL
33733. Indicate the Fund, the class of shares and the amount you wish to invest.
Your check should be made payable to the specific Fund and class of shares you
are purchasing.
Prospectus 17
<PAGE> 21
- SENDING A
FEDERAL FUNDS
WIRE.
Shares may be purchased with Federal funds (a commercial bank's deposit
with the Federal Reserve Bank that can be transferred to another member bank on
the same day) sent by Federal Reserve or bank wire to:
State Street Bank and Trust Company
Boston, Massachusetts
ABA #011-000-028
Account #3196-769-8
Name of the Fund
The class of shares to be purchased
(Your Account Number Assigned by the Fund)
(Your Name)
To open a new account with Federal funds or by wire, you must contact the
Manager or your 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 INVESTMENT
MUST BE AT LEAST
$1,000. A MINIMUM
BALANCE OF $500 MUST
BE MAINTAINED.
Except as provided under "Systematic Investment Programs," the minimum
initial investment in a Fund is $1,000 and a minimum account balance of $500
must be maintained. These minimum requirements may be waived at the discretion
of the Manager. In addition, initial investments in Individual Retirement
Accounts ("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.
SYSTEMATIC INVESTMENT PROGRAMS
================================================================================
EACH FUND OFFERS
INVESTORS A VARIETY OF
CONVENIENT FEATURES AND
BENEFITS, INCLUDING DOLLAR
COST AVERAGING.
A variety of systematic investment options are available for the purchase
of Fund shares. These options provide for systematic monthly investments of $50
or more through systematic investing, payroll or government direct deposit, or
exchange from another mutual fund advised or administered by the Manager
("Heritage Mutual Fund"). You may change the amount to be invested automatically
or may discontinue this service at any time without penalty. If you discontinue
this service before reaching the required account minimum, the account must be
brought up to the minimum in order to remain open. You will receive a periodic
confirmation of all activity for your account. For additional information on
these options, see the Account Application or contact the Manager at (800)
421-4184 or your Financial Advisor.
Prospectus 18
<PAGE> 22
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
================================================================================
A SHARES HAVE A
FRONT-END SALES
LOAD AND LOWER
ANNUAL EXPENSES
THAN B SHARES
AND C SHARES.
B SHARES AND
C SHARES HAVE A
CDSL ON REDEMPTIONS
MADE WITHIN A
CERTAIN PERIOD
AFTER PURCHASE.
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.
- Class A Shares. A shares may be purchased at a price equal to their
net asset value per share next determined after receipt of an order, plus a
maximum sales load of 3.75% imposed at the time of purchase. Ongoing Rule
12b-1 fees for A shares are lower than the ongoing Rule 12b-1 fees for B
shares and C shares.
- Class B Shares. B 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. B shares are subject to higher ongoing 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.
YOU SHOULD CHOOSE
A SHARE CLASS THAT
MEETS YOUR INVESTMENT
OBJECTIVES. PLEASE
CONSULT WITH YOUR
FINANCIAL ADVISOR.
The purchase plans offered by each Fund enable you to choose the class of
shares that you believe will be most beneficial given the amount of your
intended purchase, the length of time you expect to hold the shares and other
circumstances.
You should consider whether, during the anticipated length of your intended
investment in a Fund, the accumulated continuing 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.
Prospectus 19
<PAGE> 23
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 SHARES WILL VARY
DEPENDING ON THE
AMOUNT YOU INVEST.
A Fund's public offering price for A shares is the next determined net
asset value per share plus a sales load determined in accordance with the
following schedule:
<TABLE>
<CAPTION>
SALES LOAD AS A
PERCENTAGE OF
----------------------------
NET AMOUNT DEALER CONCESSION
AMOUNT OF OFFERING INVESTED AS A PERCENTAGE OF
PURCHASE PRICE (NET ASSET VALUE) OFFERING PRICE(1)
--------- -------- ----------------- ------------------
<S> <C> <C> <C>
Less than $25,000.............. 3.75% 3.90% 3.25%
$25,000 to $49,999............. 3.25% 3.36% 2.75%
$50,000 to $99,999............. 2.75% 2.83% 2.25%
$100,000 to $249,999........... 2.25% 2.30% 1.75%
$250,000 to $499,999........... 1.75% 1.78% 1.25%
$500,000 to $999,999........... 1.25% 1.27% 1.00%
$1,000,000 and over............ 0.00% 0.00% 0.00%(2)
</TABLE>
- ---------------
(1) During certain periods, the Distributor may pay 100% of the sales load to
participating dealers. Otherwise, it will pay the dealer concession shown
above.
(2) For purchases of $1 million or more, Heritage may pay from its own resources
up to 1.00% of the purchase amount on the first $3 million and 0.80% on
assets thereafter. This amount will be paid to the Distributor pro rata over
an 18-month period.
In addition, A shares are subject to a Rule 12b-1 fee of 0.25% of their
respective average daily net assets.
THE SALES LOAD ON
A SHARES MAY BE
WAIVED UNDER CERTAIN
CIRCUMSTANCES.
A shares may be sold at net asset value without any sales load to: the
Manager and the Subadviser; current and retired officers and Trustees of the
Trust; directors, officers, and full-time employees of the Manager, Subadviser
of any Heritage Mutual Fund, the Distributor, and their affiliates; registered
representatives and employees of broker-dealers that are parties to dealer
agreements with the Distributor (or financial institutions that have
arrangements with such broker-dealers); directors, officers and full-time
employees of banks that are party to agency agreements with the Distributor, and
all such persons' immediate relatives and their beneficial accounts. In
addition, the American Psychiatric Association has entered into an agreement
with the Distributor that allows its members to purchase A shares at a sales
load equal to two-thirds of the percentages in the above table. The dealer
concession also will be adjusted in a like manner. A shares also may be
purchased
Prospectus 20
<PAGE> 24
without sales loads by investors who participate in certain broker-dealer wrap
fee investment programs.
HERITAGE NET ASSET VALUE ("NAV") TRANSFER PROGRAM
- -----------------------------------------------------------
YOU MAY QUALIFY FOR
A PURCHASE WITH NO
SALES LOAD UNDER THE
HERITAGE NAV TRANSFER
PROGRAM.
Until March 1, 1998, Class A shares of either Fund may be purchased at net
asset value without any sales load under the Manager's NAV Transfer Program. To
qualify for the NAV Transfer Program, you must provide adequate proof that
within 90 days prior to the purchase of a Heritage Mutual Fund you redeemed
shares from a load or no-load mutual fund other than a Heritage Mutual Fund or
any money market fund. To provide adequate proof you must complete a
qualification form and provide a statement showing the value liquidated from the
other mutual fund.
COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
- -----------------------------------------------------------
YOU MAY QUALIFY FOR
A REDUCED SALES LOAD
BY COMBINING PURCHASES.
You may qualify for the sales load reductions indicated in the above sales
load schedule by combining purchases of A shares into a single "purchase" if the
resulting "purchase" totals at least $25,000. For additional information
regarding the Combined Purchase Privilege, see the Account Application or
"Investing in the Trust" in the SAI.
STATEMENT OF INTENTION
- ------------------------
A STATEMENT OF
INTENTION ALLOWS YOU
TO REDUCE THE SALES
LOAD ON COMBINED
PURCHASES OF $25,000
OR MORE OVER ANY
13-MONTH PERIOD.
You also may obtain the reduced sales loads shown in the above sales load
schedule by means of a written Statement of Intention, which expresses your
intention to invest not less than $25,000 within a period of 13 months in A
shares of either Fund or A shares of any other Heritage Mutual Fund subject to a
sales load ("Statement of Intention"). If you qualify for the Combined Purchase
Privilege, you may purchase A shares of the Heritage Mutual Funds under a single
Statement of Intention. In addition, if you own Class A shares of any other
Heritage Mutual Fund subject to a sales load, you may include those shares in
computing the amount necessary to qualify for a sales load reduction. The
Statement of Intention is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Statement of
Intention is 5% of such amount. If you would like to enter into a Statement of
Intention in conjunction with your initial investment in A shares of either
Fund, please complete the appropriate portion of the Account Application found
in this Prospectus. Current Fund shareholders 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
ON REDEMPTIONS OF
B SHARES WILL DEPEND
ON THE AMOUNT
OF TIME YOU HAVE
HELD B SHARES.
B shares may be purchased at net asset value without a front-end sales
charge, but are subject to a 5% maximum CDSL on redemption of B shares held for
less than an eight-year period. In addition, B shares are subject to a Rule
12b-1 fee of 0.80% of the average daily net assets of the High Yield Bond Fund
and 0.60% of the average daily net assets of the Intermediate Government Fund. B
shares are offered for sale only for purchases of less than $250,000.
Prospectus 21
<PAGE> 25
THE CDSL, IF
APPLICABLE, IS BASED
ON THE LOWER OF
PURCHASE PRICE OR
REDEMPTION PRICE.
The CDSL imposed on redemptions of B shares will be calculated by
multiplying the offering price (net asset value at the time of purchase) or the
net asset value of the shares at the time of redemption, whichever is less, by
the percentage shown on the following chart. The CDSL will not 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.
<TABLE>
<CAPTION>
CDSL AS A PERCENTAGE
OF THE LESSER OF NET ASSET VALUE
AT REDEMPTION OR THE
REDEMPTION DURING: ORIGINAL PURCHASE PRICE
- ------------------ --------------------------------
<S> <C>
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%
</TABLE>
The CDSL imposed depends on the amount of time you have held B shares. For
example, if you invest $10,000 in a Fund's B shares and redeem those shares
within one year of investment you will be charged a CDSL of 5% or $500. 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
CONVERT TO A SHARES
IF YOU HAVE HELD
THEM FOR MORE THAN
EIGHT YEARS.
B shares will convert to A shares eight years after the end of the calendar
month in which the shareholder's order to purchase was accepted. The conversion
will be effected at the net asset value per share. Dividends and other
distributions paid to shareholders by a Fund in the form of 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
3.25% of the purchase price of the B shares.
Prospectus 22
<PAGE> 26
WHAT CLASS C SHARES WILL COST
================================================================================
A CDSL WILL BE
IMPOSED ON THE
REDEMPTION OF C
SHARES IF YOU HAVE
HELD THEM FOR LESS
THAN ONE YEAR.
THE CDSL, IF
APPLICABLE, IS BASED
ON THE LOWER OF
PURCHASE PRICE OR
REDEMPTION PRICE.
A CDSL of 1% is imposed on C shares if, less than one year from the date of
purchase, you redeem an amount that causes the current value of your account to
fall below the total dollar amount of C shares purchased subject to the CDSL.
The CDSL will not be imposed on the redemption of C shares acquired as dividends
or other distributions, or on any increase in the net asset value of the
redeemed C shares above the original purchase price. Thus, the CDSL will be
imposed on the lower of net asset value or purchase price. In addition, C shares
are subject to a Rule 12b-1 fee of 0.80% of the average daily net assets of the
High Yield Bond Fund and 0.60% of the Intermediate Government Fund.
Under certain circumstances, the CDSL will be waived. See "Waiver of the
Contingent Deferred Sales Load" below.
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
SHARES AND C SHARES
WILL BE WAIVED FOR
CERTAIN SHAREHOLDERS.
The CDSL for B shares and C shares currently is waived for: (1) any partial
or complete redemption in connection with a distribution without penalty under
Section 72(t) of the Code, from a qualified retirement plan, including a Keogh
Plan or IRA upon attaining age 70 1/2; (2) any redemption resulting from a
tax-free return of an excess contribution to a qualified employer retirement
plan or an IRA; (3) any partial or complete redemption following death or
disability (as defined in Section 72(m) (7) of the Code) of a shareholder
(including one who owns the shares as joint tenant with his spouse) from an
account in which the deceased or disabled is named, provided the redemption is
requested within one year of the death or initial determination of disability;
(4) certain periodic redemptions under the Systematic Withdrawal Plan from an
account meeting certain minimum balance requirements, in amounts representing
certain maximums established from time to time by the Distributor (currently a
maximum of 12% annually of the account balance at the beginning of the
Systematic Withdrawal Plan); or (5) involuntary redemptions by a Fund of 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."
Prospectus 23
<PAGE> 27
HOW TO REDEEM SHARES
================================================================================
THERE ARE SEVERAL WAYS
FOR YOU TO SELL
YOUR SHARES.
Redemption of Fund shares can be made by:
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 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.
Prospectus 24
<PAGE> 28
YOU WILL NOT BE
CHARGED A SALES LOAD
ON A SHARES REDEEMED
AND REINVESTED WITHIN
90 DAYS OF REDEMPTION.
YOU MUST NOTIFY YOUR
FUND WHEN YOU EXERCISE
THIS PRIVILEGE.
REINSTATEMENT PRIVILEGE. If you redeem any or all of your A shares of
either Fund, you may reinvest all or any portion of the redemption proceeds in A
shares at net asset value without any sales load, provided that such
reinvestment is made within 90 calendar days after the redemption date. If you
redeem any or all of your B shares or C shares of a Fund and paid a CDSL on
those shares or held those shares long enough so that the CDSL no longer
applies, you may reinvest all or any portion of the redemption proceeds in the
same class of shares at net asset value without paying a CDSL on future
redemptions of those shares, provided that such reinvestment is made within 90
calendar days after the redemption date. A reinstatement pursuant to this
privilege will not cancel the redemption transaction; therefore, (1) any gain
realized on the transaction will be recognized for Federal income tax purposes,
while (2) any loss realized will not be recognized to the extent the proceeds
are reinvested in shares of a Fund. The reinstatement privilege may be utilized
by a shareholder only once, irrespective of the number of shares redeemed,
except that the privilege may be utilized without limitation in connection with
transactions whose sole purpose is to transfer a shareholder's interest in a
Fund to his defined contribution plan, IRA, 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 SALES PRICE
GENERALLY IS THE
NEXT NAV COMPUTED
AFTER THE RECEIPT
OF YOUR REDEMPTION
REQUEST.
If a request for redemption is received by either Fund in good order (as
described below) before the close of regular trading on the Exchange, the shares
will be redeemed at the net asset value per share determined at the close of
regular trading on the Exchange on that day, less any applicable CDSL for 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
Prospectus 25
<PAGE> 29
Deposit Insurance Corporation, a trust company, or by any member firm of
the New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guarantees also will be accepted from savings banks
and certain other financial institutions that are deemed acceptable by the
Manager, as transfer agent, under its current signature guarantee program.
Either Fund has the right to suspend redemption or postpone payment at
times when the Exchange is closed (other than customary weekend or holiday
closings) or during periods of emergency or other periods as permitted by the
Securities and Exchange Commission. In the case of any such suspension, you may
either withdraw your request for redemption or receive payment based upon the
net asset value next determined, less any applicable CDSL, after the suspension
is lifted. If a redemption check remains outstanding after six months, the
Manager reserves the right to redeposit those funds into your account. For more
information on receiving payment, see "Redeeming Shares -- Receiving Payment" in
the SAI.
EXCHANGE PRIVILEGE
================================================================================
YOU MAY EXCHANGE
SHARES OF ONE HERITAGE
MUTUAL FUND FOR SHARES
OF THE SAME CLASS OF
ANOTHER HERITAGE
MUTUAL FUND.
If you have held A shares, B shares or C shares for at least 30 days, you
may exchange some or all of your shares for shares of the same class of any
other Heritage Mutual Fund. All exchanges will be based on the respective net
asset values of the Heritage Mutual Funds involved. All exchanges are subject to
the minimum investment requirements and any other applicable terms set forth in
the prospectus for the Heritage Mutual Fund whose shares are being acquired.
Exchanges 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."
Prospectus 26
<PAGE> 30
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 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
MANAGEMENT, INC. SERVES
AS MANAGER FOR EACH
FUND, SUBJECT TO
THE DIRECTION OF
THE BOARD OF TRUSTEES.
Heritage Asset Management, Inc. is each Fund's investment adviser, fund
accountant, administrator and transfer agent. The Manager is responsible for
reviewing and establishing investment policies for each Fund as well as
administering each Fund's non-investment affairs. The Manager is a wholly owned
subsidiary of Raymond James Financial, Inc., which, together with its
subsidiaries, provides a wide range of financial services to retail and
institutional clients. The Manager manages, supervises and conducts the business
and administrative affairs of each Fund and the other Heritage Mutual Funds with
net assets totalling approximately $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.
Prospectus 27
<PAGE> 31
SUBADVISER
================================================================================
THE MANAGER EMPLOYS
A SUBADVISER FOR
PROVIDING INVESTMENT
ADVICE AND PORTFOLIO
MANAGEMENT SERVICE
TO THE HIGH YIELD
BOND FUND.
The Manager has entered into an agreement with Salomon Brothers Asset
Management Inc ("Salomon" or "Subadviser"), 7 World Trade Center, 38th floor,
New York, New York 10048, to provide investment advice and portfolio management
services, including placement of securities orders, on behalf of the High Yield
Bond Fund. For these services, the Manager pays the Subadviser an annual fee of
50% of the annual investment advisory fee paid to the Manager, without regard to
any reduction in the fees actually paid to the Manager as a result of voluntary
fee waivers by the Manager. As of September 30, 1997, the Subadviser had
approximately $19.3 billion of assets under management.
RE-APPOINTMENT OF SALOMON. On or about November 28, 1997, Salomon became
an indirect wholly owned subsidiary of Travelers Group ("Travelers") as a result
of a merger between a wholly owned subsidiary of Travelers and Salomon Inc., the
Subadviser's parent corporation. As a consequence of the merger and in order to
retain the services of the Subadviser and its investment management personnel,
at its November 10, 1997 meeting, the Board of Trustees was required to approve
the re-appointment of the Subadviser to the High Yield Bond Fund. This
re-appointment is subject to shareholder approval at a Special Shareholders
Meeting to be held on February 23, 1998, or any adjournment(s) thereof. Pursuant
to an exemptive order received from the SEC, the Subadviser may act as the
Fund's subadviser pending shareholder approval. Subadvisory fees to be received
by the Subadviser will be held in escrow until shareholder approval.
If approved by shareholders, the Subadviser would provide investment advice
and portfolio management services with respect to High Yield Bond Fund assets
allocated to it by the Manager. The Subadviser intends to continue to manage the
Fund using the same trading strategies and substantially the same investment
personnel it currently uses.
PORTFOLIO MANAGEMENT
================================================================================
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.
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.
Prospectus 28
<PAGE> 32
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.
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 EXIST
FOR RECEIVING
DIVIDENDS AND OTHER
DISTRIBUTIONS.
Dividends from each Fund's net investment income are declared and paid
monthly. Each Fund also distributes to its shareholders substantially all of its
net realized capital gains on portfolio securities after the end of the year in
which the gains are realized. High Yield Bond Fund also 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.
Prospectus 29
<PAGE> 33
DISTRIBUTION PLANS
================================================================================
EACH FUND PAYS
SERVICE FEES AND
DISTRIBUTION FEES TO
THE DISTRIBUTOR.
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of A shares and in connection with personal
services rendered to Class A shareholders and the maintenance of Class A
shareholder accounts, each Fund may pay the Distributor distribution and service
fees of up to 0.25% of such Fund's average daily net assets attributable to A
shares of that Fund. Each Fund may pay the Distributor a fee of up to 0.35% of
that Fund's average daily net assets attributable to A shares purchased prior to
April 3, 1995. This fee is computed daily and paid monthly.
As compensation for services rendered and expenses borne by the Distributor
in connection with the distribution of 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
EXPECTED TO HAVE ANY
FEDERAL TAX LIABILITY.
HOWEVER, YOUR TAX
OBLIGATIONS ARE
DETERMINED BY YOUR
PARTICULAR TAX
CIRCUMSTANCES.
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code. By doing so, each Fund (but not its
shareholders) will be relieved of Federal income tax on that part of its
investment company taxable income (generally consisting of net investment income
and net short-term capital gains and, in the case of the High Yield Bond Fund,
net gains from certain foreign currency transactions) and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) that is distributed to its shareholders.
Dividends from each Fund's investment company taxable income are taxable to
its shareholders as ordinary income, to the extent of that Fund's earnings and
profits, whether received in cash or in additional Fund shares. Distributions of
a Fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gains, whether received in cash or in
additional Fund shares and regardless of the length of time the shares have been
held. Under the Taxpayer 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
Prospectus 30
<PAGE> 34
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
EXCHANGE SHARES, IT
GENERALLY IS
CONSIDERED A TAXABLE
EVENT TO YOU.
Dividends and other distributions declared by each Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by that Fund and received by its shareholders on
December 31 if they are paid by the Fund during the following January.
Shareholders receive Federal income tax information regarding dividends and
other distributions after the end of each year. The 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.
Prospectus 31
<PAGE> 35
SHAREHOLDER INFORMATION
================================================================================
YOU MAY VOTE ON
MATTERS SUBMITTED FOR
YOUR APPROVAL. EACH
SHARE YOU OWN ENTITLES
YOU TO ONE VOTE.
Each share of a Fund gives the shareholder one vote in matters submitted to
shareholders for a vote. A shares, B shares and C shares of each Fund have equal
voting rights except that in matters affecting only a particular class or
series, only shares of that class or series are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or a Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by the other Trustees or
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of the Trust's outstanding shares.
The Manager and the Subadviser have taken steps that they believe are
reasonably designed to address any adverse impact on the Funds due to the
potential failure of computer programs used by the Manager, Subadivser and the
Funds' service providers as a result of the advent of the year 2000.
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.
Prospectus 32
<PAGE> 36
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
AAA -- Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC -- Debt rated "BB," "B" and "CCC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions likely will impair capacity or
willingness to pay interest and repay principal. The "B" rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
Prospectus A-1
<PAGE> 37
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.
Prospectus A-2
<PAGE> 38
<TABLE>
<C> <S>
HERITAGE FAMILY OF FUNDS [LOGO] HERITAGE FAMILY OF FUNDS
Account Application
P.O. Box 33022, St. Petersburg, FL 33733
[ ] New Account [ ] Update to Existing Account # ------------------
(Indicate fund in Fund Selection section below)
</TABLE>
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION
<TABLE>
<S> <C> <C> <C> <C>
[ ] Corporation [ ] Gift to Minor
[ ] Individual [ ] Joint Tenant with Right of Survivorship [ ] Association, Partnership or other
[ ] Trust [ ] Foundation or Exempt Organization organization
- ----------------------------------------------------------- ---------------------------------------------
Name of account owner Social Security or Taxpayer ID #
- ----------------------------------------------------------- ---------------------------------------------
Joint owner/Trustee/Custodian Social Security or Taxpayer ID #
- ----------------------------------------------------------- ---------------------------------------------
Joint owner/Trustee Date of birth of first named owner
- ----------------------------------------------------------- ---------------------------------------------
Street address Daytime phone number
- ----------------------------------------------------------- ---------------------------------------------
Street address Are you a U.S. citizen? [ ] Yes [ ] No
If no, country of residence
- ----------------------------------------------------------- -----------------
City, State and ZIP
</TABLE>
FUND SELECTION ($1,000 minimum initial investment unless participating in an
automatic investment plan)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pay dividends Pay capital
Fund name Share class Investment amount in: gains in:
A B C Shares Cash Shares Cash
Heritage Series Trust:
[ ] Small Cap Stock Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Growth Equity Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Value Equity Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Mid Cap Growth Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Eagle International Equity Portfolio [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Heritage Capital Appreciation Trust [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Heritage Income-Growth Trust [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Heritage Income Trust:
[ ] High Yield Bond Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Intermediate Government Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
Heritage Cash Trust:
[ ] Money Market Fund [ ] [ ] [ ] $ ---------------- [ ] [ ] [ ] [ ]
[ ] Municipal Money Market Fund [ ] N/A N/A $ ---------------- [ ] [ ] [ ] [ ]
If none checked, all reinvested
in shares.
TOTAL INVESTMENT $ ----------------
</TABLE>
<PAGE> 39
SIGNATURES AND TAXPAYER IDENTIFICATION CERTIFICATION
Each person signing on behalf of an entity represents that his/her actions are
authorized. I have received and read a current prospectus for each fund in which
I am investing and understand that its terms are incorporated by reference into
this application. I understand that certain redemptions may be subject to a
contingent deferred sales load. I agree that the Fund, Manager, Distributor and
their Trustees, directors, officers and employees will not be held liable for
any loss, liability, damage, or expense for relying upon this application or any
instructions including telephone instructions they reasonably believe are
authentic. If a taxpayer identification number is not provided and certified,
all dividends paid will be subject to 31% Federal backup withholding.
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me).
2. I am not subject to backup withholding because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
You must cross out item 2 above if you have been notified by the IRS that you
are currently subject to backup withholding because of under reporting interest
or dividends on your tax return.
<TABLE>
<S> <C>
X X
--------------------------------------------------- --------------------------------------------------
Signature Date Signature Date
</TABLE>
REDUCED SALES CHARGES
STATEMENT OF INTENT
If you agree in advance to invest at least $25,000 in Heritage Mutual Funds
other than Heritage Cash Trust within 13 months, you will pay a reduced sales
charge on those investments. Investments made up to 90 days before adopting this
agreement are eligible for this discount. All prior investments can be applied
toward meeting the investment requirement.
[] I agree to invest at least the amount selected below over a 13-month period
beginning / / . I understand that an additional sales charge must
be paid if I do not complete this Statement of Intent.
[] $25,000 [] $50,000 [] $100,000 [] $250,000 [] $500,000 [] $1,000,000
RIGHT OF ACCUMULATION
If you, your spouse, or your minor children own shares in other Heritage Mutual
Funds, you may qualify for a reduced sales charge. Class A shares of Heritage
Cash Trust are not eligible unless purchased by exchange from another Heritage
Mutual Fund. These shares can be credited to a Statement of Intent.
[ ] I qualify for the Right of Accumulation. Please link the following Heritage
accounts.
- ------------------------------------ --------------------------------------
Fund/Account Number Fund/Account Number
- ------------------------------------ --------------------------------------
Fund/Account Number Fund/Account Number
TELEPHONE TRANSACTIONS
You may redeem shares by calling Heritage and requesting that funds be sent to
your address of record or the bank account listed in the Bank Account
Information section below. We will withdraw up to $50,000 from your account and
mail it to your address of record provided that address has not been changed in
the last 30 days.
You may also exchange between the same class shares of like-registered accounts
in any of the Heritage Mutual Funds by calling Heritage and requesting this
service. Please see the prospectus for certain requirements for exchanging
shares between funds.
If you DO NOT want to be able to process redemptions and exchanges via telephone
order, please check here: []
<PAGE> 40
DOLLAR COST AVERAGING PLANS
AUTOMATIC INVESTING
You can instruct us to transfer funds from a specified bank checking account to
your Heritage Fund account. This transfer will be effected by either an
electronic transfer or by a paper draft. Complete the Bank Account Information
section below and attach a voided check to this application.
<TABLE>
<CAPTION>
Transfer Date Frequency (check one)
Semi-
Fund Amount 5th 15th Monthly Quarterly Annually Annually
<S> <C> <C> <C> <C> <C> <C> <C>
$ [] [] [] [] [] []
- ---------------------------------------- ------------------
$ [] [] [] [] [] []
- ---------------------------------------- ------------------
$ [] [] [] [] [] []
- ---------------------------------------- ------------------
Choose one or both
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
I authorize Heritage to draw on my bank account, by check or electronic transfer, for
ATTACH investment in a Heritage Fund. Heritage and my bank are not liable for any loss resulting
VOIDED from delays or dishonored draws. This program can be revoked by Heritage without prior
CHECK notice if any draw is dishonored. I can discontinue this program at any time.
HERE
X X
-------------------------------------------- --------------------------------------------
Signature on checking account Signature on checking account
TO THE BANK NAMED BELOW:
</TABLE>
In consideration of your compliance with the request and authorization of the
depositor named above, Heritage Asset Management, Inc. agrees (1) To indemnify
and hold you harmless from any loss you may suffer as a consequence of your
actions resulting from or in connection with the execution and issuance of any
check, draft, or order, whether or not genuine, purporting to be executed and
received by you in the regular course of business under pre-authorized draft
arrangement of the Heritage Funds, including any costs or expenses reasonably
incurred in connection therewith; (2) That in the event any such check, draft,
or order shall be dishonored, whether with or without cause, and whether
intentionally or inadvertently, to indemnify you and hold you harmless from any
loss resulting from such dishonor including your costs and reasonable expenses,
except any losses due to your payment of any draw against insufficient funds;
(3) To defend at our cost and expense any action which might be brought by any
depositor or any other persons because of your actions taken pursuant to the
foregoing requests, or in any manner arising by reason of your participation in
the foregoing plan; and (4) That your participation in the plan or that of the
depositor may be terminated by notice from either party to the other.
AUTOMATIC EXCHANGE
You can instruct us to periodically exchange funds from one Heritage Mutual Fund
to a like-registered account in the same class of another Heritage Mutual Fund.
<TABLE>
<S> <C> <C> <C> <C> <C>
Frequency (choose one): [] Monthly [] Quarterly [] Semiannually [] Annually
Day of month (choose one): [] 1st [] 5th [] 10th [] 20th
Fund to exchange from Fund to exchange to Amount
$
- ----------------------------------------- ----------------------------------------- ---------------
$
- ----------------------------------------- ----------------------------------------- ---------------
$
- ----------------------------------------- ----------------------------------------- ---------------
</TABLE>
DIRECTED DIVIDENDS
You can direct the dividend payments from one Heritage Mutual Fund into a
like-registered account in the same class of another Heritage Mutual Fund. In
the Fund Selection section above, check the box for cash dividends.
<TABLE>
<S> <C>
From Fund To Fund
- ----------------------------------------- -----------------------------------------
- ----------------------------------------- -----------------------------------------
</TABLE>
<PAGE> 41
SYSTEMATIC WITHDRAWAL PLAN (SWP)
You can receive monthly, quarterly, semiannually, or annually checks from your
account. The checks can be sent to you at your address of record, to an account
at a bank or other financial institution, or to another person you designate.
You may send checks to more than one place. If you begin a SWP in Class C shares
of a fund, you may redeem up to 12% annually of your current account value
without incurring a contingent deferred sales load.
<TABLE>
<S> <C> <C>
- ---------------------------------------------------- Frequency (choose one): [] Monthly
Fund for Withdrawal [] Quarterly
[] Semiannually
[] Annually
</TABLE>
Day of month (choose one): [] 1st [] 5th [] 10th [] 20th
<TABLE>
<S> <C> <C>
Send payment to: Amount
[ ] My address of record. $
------------- ------------------------------------
[ ] The bank account listed in the Payee name
Bank Account Information section
below. $
------------- ------------------------------------
Payee address
[ ] The payee listed at the right.
(If you have more than one
payee, please attach a separate $
sheet indicating the amount to ------------- ------------------------------------
be sent to each.) City, State and ZIP
------------------------------------
Payee account number (if applicable)
</TABLE>
BANK ACCOUNT INFORMATION
Provide bank checking account information if you are participating in an
Automatic Investment or Systematic Withdrawal Plan or if you wish for redemption
proceeds to be sent directly to your bank.
- ---------------------------------- --------------------------------------
Bank name Bank account number
- ---------------------------------- --------------------------------------
Address Bank routing (ABA) number
(from your bank)
- ----------------------------------
City, State and ZIP
DEALER INFORMATION
We hereby authorize the Distributor to act as our agent in connection with
transactions under this authorization form and agree to notify the Distributor
of any purchases made under a Letter of Intent or Right of Accumulation. We
guarantee the signatures on this application and the legal capacity of the
signers.
If a Systematic Withdrawal Plan is being established, we believe that the amount
to be withdrawn is reasonable in light of the investor's circumstances and we
recommend establishment of the account.
<TABLE>
<S> <C> <C>
- ------------------------------------------------- -------------- -----------------------
Representative's name Branch number Representative's number
- ------------------------------------------------- ---------------------------------------------------------
Dealer name Branch office location
- ------------------------------------------------- ---------------------------------------------------------
Main office address Branch phone number
X
- ------------------------------------------------- ---------------------------------------------------------
City, State and ZIP Authorized representative's signature
</TABLE>
<PAGE> 42
[Assorted black and white photos of people working and playing.]
[HERITAGE FAMILY OF FUNDS LOGO]
From our Family to Yours:
The Intelligent Creation of Wealth
Raymond James & Associates, Inc. Distributor
Member New York Stock Exchange/81PC
P.O. Box 33022, St. Petersburg, FL 33733
813-573-8143 - 800-421-4184
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..........................................48
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
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
1
<PAGE>
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").
2
<PAGE>
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
3
<PAGE>
as to payments. However, in light of the residual risk of the Brady Bonds and,
among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
CONVERTIBLE SECURITIES. High Yield may invest in convertible
securities. While no securities investment is without some risk, investments in
convertible securities generally entail less risk than the issuer's common
stock. The extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a
fixed-income security. 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
residual component, the interest on which varies inversely with that on a
6
<PAGE>
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
7
<PAGE>
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
consistent with a Fund's investment objective and permitted by the Fund's
8
<PAGE>
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
and the securities markets, from structural differences in how options and
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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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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,
investors may close contracts through offsetting transactions. Second, the
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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
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assets. However, pursuant to High Yield's Guidelines for Purchase of Rule 144A
Securities ("Guidelines") adopted by the Board of Trustees, High Yield's
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
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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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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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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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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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<PAGE>
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
annualized total return for Government A shares for the same periods was 4.95%,
24
<PAGE>
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
25
<PAGE>
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
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:
6
YIELD = 2x[(a-b+1) -1]
---
c x d
where: a = interest earned during the Period;
b = expenses accrued for the Period (net of reimbursements);
c = the average daily number of shares
outstanding during the Period that were entitled to receive
a dividend; and
d = the maximum offering price per share on the last day of the
Period.
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), each Fund calculates
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
Yield and Government A shares was 7.82% and 5.60%, respectively. At September
26
<PAGE>
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
27
<PAGE>
contributions to a Heritage IRA through the purchase of shares of a Fund and/or
other Heritage Mutual Funds. The Internal Revenue Code of 1986, as amended (the
"Code"), limits the deductibility of IRA contributions to taxpayers who are not
active participants (and whose spouses are not active participants) in
employer-provided retirement plans or who have adjusted gross income below
certain levels. Nevertheless, the Code permits other individuals to make
nondeductible IRA contributions up to $2,000 per year (or $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.
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<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
extent that the total amount of the payments exceeds the tax basis of the shares
31
<PAGE>
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.
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<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, eight years after
the end of the calendar month in which the shareholder's order to purchase was
accepted. 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
35
<PAGE>
purchased (whether pursuant to the reinstatement privilege or otherwise) within
30 days before or after redeeming other shares of that Fund (regardless of
class) at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
If shares of a Fund are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
As of September 30, 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
securities. Because High Yield annually must distribute substantially all of its
36
<PAGE>
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 Chief
880 Carillon Parkway Executive Officer since 1969 of RJF; Chairman of
St. Petersburg, FL the Board of RJA since 1986; Chairman of the
33716 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 1996,
880 Carillon Parkway President, 1995 to present, Chief Operating
St. Petersburg, FL Officer, 1988 to 1996, Executive Vice President,
33716 1988 to 1993.
Donald W. Burton (53) Trustee President of South Atlantic Capital Corporation
614 W. Bay Street (venture capital) since 1981.
Suite 200
Tampa, FL 33606
C. Andrew Graham (57) Trustee Vice President of Financial Designs Ltd. since
Financial Designs, Ltd. 1992; Executive Vice President of the Madison
1775 Sherman Street Group, Inc., 1991 to 1992; Principal of First
Suite 1900 Denver Financial Corporation (investment banking)
Denver, CO 80203 since 1987.
David M. Phillips (58) Trustee Chairman and Chief Executive Officer of CCC
World Trade Center Information Services, Inc. since 1994 and of
Chicago InfoVest Corporation (information services to the
444 Merchandise Mart insurance and auto industries and consumer
Chicago, IL 60654 households) since 1982.
Eric Stattin (64) Trustee Litigation Consultant/Expert Witness and private
1975 Evening Star Drive 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 since 1986
University of South at University of South Florida; Dean of College
Florida of Business Administration, 1987 to 1996.
College of Business
Administration
Tampa, FL 33620
Stephen G. Hill (38) President Chief Executive Officer and President of the
880 Carillon Parkway Manager since 1989 and Director since 1994;
St. Petersburg, FL Director of Eagle since 1995.
33716
Donald H. Glassman (40) Treasurer Treasurer of the Manager since 1989; Treasurer of
880 Carillon Parkway Heritage Mutual Funds since 1989.
St. Petersburg, FL
33716
Clifford J. Secretary Partner, Kirkpatrick & Lockhart LLP (law firm).
Alexander (53)
1800 Massachusetts
Ave., N.W.
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 (law firm).
1800 Massachusetts Secretary
Ave., N.W.
Washington, DC 20036
</TABLE>
* These Trustees are "interested persons" as defined in section
2(a)(19) of the 1940 Act.
The Trustees and officers of the Trust as a group, own less than 1% of
each 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.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation From
Aggregate Retirement the Trust and the
Compensation Benefits Accrued Estimated Annual Heritage Family
Name of Person, From the as Part of the Benefits Upon of Funds Paid
Position Trust 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 January 13, 1998, 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.
Name and Address Percent Owned
David S. Knapp 7.07%
Catherine Y. Knapp JT WROS
2265 SW 15th Street
Ft. Lauderdale, FL 33312
40
<PAGE>
Raymond James & Assoc Inc 6.30%
Cust Daniel E Bonbrisco
PO Box 12749
St. Petersburg, FL 33733-2749
Raymond James & Assoc Inc. 5.25%
Cust Gerry A. Gilpin
PO Box 12749
St. Petersburg, FL 33733-2749
William Munro Trste 10.64%
For Munro Sales Target Ben Plan
G-4136 Holiday Dr
Flint, MI 48507
Morongo Band of Mission Indians 8.33%
Administrative Reserve Account
11581 Portero Rd
Banning, CA 92220-6946
Morongo Band of Mission Indians 8.43%
Designated Reserves Account
Attn: Elaine Mathews
11581 Portero Rd
Banning, CA 92220-6946
Ronald J. Bowers 15.52%
Gdn Giles A. Hosch
PO Box 4407
Salisbury, NC 28145-4407
Investment Adviser and Administrator; Subadviser
- ------------------------------------------------
The Trust's investment adviser and administrator, Heritage Asset
Management, Inc., was organized as a Florida corporation in 1985. All the
capital stock of the Manager is owned by RJF. RJF is a holding company that,
through its subsidiaries, is engaged primarily in providing customers with a
wide variety of financial services in connection with securities, limited
partnerships, options, investment banking and related fields.
Under an Investment Advisory and Administration Agreement ("Advisory
Agreement") dated January 19, 1990, between the Trust, on behalf of the Funds,
41
<PAGE>
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.
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,
43
<PAGE>
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 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
44
<PAGE>
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 most purchases and sales of its portfolio investments
with bond dealers acting as principal. 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. Thus, the Funds do not expect to pay
significant brokerage commissions. Prices paid to dealers in principal
transactions generally include a "spread," which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at that time. The spread includes the dealer's normal profit.
The Funds may not buy securities from, or sell securities to, the
Distributor as principal. However, the Board of Trustees has adopted procedures
in conformity with Rule 10f-3 under the 1940 Act whereby the each Fund may
purchase securities that are offered in underwritings in which the Distributor
is a participant. The Board of Trustees will consider the possibilities of
seeking to recapture for the benefit of each Fund expenses of certain portfolio
transactions, such as underwriting commissions and tender offer solicitation
fees, by conducting such portfolio transactions through affiliated entities,
including the Distributor, but only to the extent such recapture would be
permissible under applicable regulations, including the rules of the National
Association of Securities Dealers, Inc. and other self-regulatory organizations.
45
<PAGE>
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 Funds used all
Class A and Class C 12b-1 fees to pay the Distributor. 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 A shares of High Yield and
Government, respectively. For the fiscal year ended September 30, 1997, the
Distributor received 12b-1 fees in the amount of $88,981 and $4,586 for C shares
of High Yield and Government, respectively.
46
<PAGE>
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 two fiscal
years ended September 30, 1997, the Distributor received $1,011 and $4,491,
respectively, of which it retained $1,011 and $4,491, respectively, for the sale
of High Yield C shares, and $150 and $1,057, respectively, of which it retained
$150 and $1,057, respectively, 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.
48
<PAGE>
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036, serves as counsel to the Trust.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 400 North Ashley Street,
Suite 2800, Tampa, Florida 33602, is the independent accountant for the Trust.
The Financial Statements and Financial Highlights of the Funds for the two
fiscal years 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
incorported 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.
