As filed with the Securities and Exchange Commission on December 1, 1998
1933 Act File No. 33-30361
1940 Act File No. 811-5853
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
------ [ ]
Post-Effective Amendment No. 15 [X]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 14
(Check appropriate box or boxes.)
HERITAGE INCOME TRUST
(Exact name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, FL 33716
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (813) 573-3800
STEPHEN G. HILL, PRESIDENT
880 Carillon Parkway
St. Petersburg, FL 33716
(Name and Address of Agent for Service)
Copy to:
CLIFFORD J. ALEXANDER, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering February 1, 1999
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on February 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post- effective amendment.
<PAGE>
HERITAGE INCOME TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Heritage Income Trust - High Yield Bond Fund and
Intermediate Government Fund
Statement of Additional Information for Heritage Income Trust - High
Yield Bond Fund and Intermediate Government Fund
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
HERITAGE
INCOME
TRUST
[PICTURE]
FROM OUR FAMILY TO YOURS: THE INTELLIGENT CREATION OF WEALTH.
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
PROSPECTUS
February 1, 1999
These securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
HERITAGE
ASSET MANAGEMENT, INC.
Registered Investment Advisor--SEC
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
<PAGE>
TABLE OF CONTENTS
================================================================================
HERITAGE INCOME TRUST
=======================================================
Page 1 ..............High Yield Bond Fund
4 ..............Intermediate Government Fund
MANAGEMENT OF THE FUNDS
=======================================================
7 ..............Who Manages Your Fund
7 ..............Year 2000
YOUR INVESTMENT
=======================================================
8 ..............Before You Invest
8 ..............Choosing a Class of Shares
10 .............Sales Charge Reductions and Waivers
11 .............How to Invest
13 .............How to Sell Your Investment
14 .............How to Exchange Your Shares
15 .............Account and Transaction Policies
16 .............Dividends, Capital Gains and Taxes
FINANCIAL HIGHLIGHTS
=======================================================
18 .............Financial Highlights for Your Fund
FOR MORE INFORMATION
=======================================================
Back Cover
<PAGE>
HIGH YIELD BOND FUND
================================================================================
INVESTMENT OBJECTIVE: The High Yield Bond Fund seeks high current income.
HOW THE HIGH YIELD BOND FUND PURSUES ITS OBJECTIVE: The High Yield Bond Fund
seeks to achieve its objective by investing primarily in lower rated corporate
bonds and other fixed income securities, commonly known as "junk bonds" or "high
yield securities." High yield securities offer the potential for greater income
than securities with higher ratings. Most of the securities in which the fund
invests are rated Baa or lower by Moody's Investors Service, Inc. (Moody's) or
BBB or lower by Standard & Poor's Ratings Services (S&P). Although credit
ratings are considered, the fund's portfolio manager selects high yield
securities based primarily on its own investment analysis.
The portfolio manager's analysis may include consideration of the company'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. In addition, the portfolio manager may
consider factors such as anticipated cash flow, interest or dividend coverage,
asset coverage and earnings prospects. Normally, the portfolio manager seeks to
maintain a weighted average portfolio maturity of between 7 to 15 years.
However, the portfolio manager may vary substantially the fund's average
maturity depending on economic and market conditions. As a temporary defensive
measure because of market, economic or other conditions, the fund may invest up
to 100% of its assets in high-quality, long- and short-term debt instruments.
When the fund engages in temporary defensive measures, it may not achieve its
investment objective.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE HIGH YIELD BOND FUND: Perhaps the
biggest risk of investing in this fund is that its returns will fluctuate and
you could lose money. This fund invests in bonds whose value may decrease if
interest rates rise, credit ratings of the issuer are reduced or the financial
condition of the issuer worsens. If any of these circumstances occur, the fund's
net asset value also may decrease.
Investing in junk bonds generally involves significantly greater risks of loss
of your money than an investment in investment grade bonds. Compared with
issuers of investment grade bonds, junk bonds are more likely to encounter
financial difficulties and to be materially affected by these difficulties when
they do encounter them. Therefore, your investment may experience greater
volatility in price and yield. Additionally, due to the greater number of
considerations involved in the selection of the fund's securities, the
achievement of the fund's objective depends more on the skills of the portfolio
manager than investing only in higher rated securities.
WHO IS THE PORTFOLIO MANAGER: Heritage Asset Management, Inc., the Manager, has
selected Salomon Brothers Asset Management Inc, the Subadviser, to manage the
fund's portfolio. The Subadviser's offices are located at 7 World Trade Center,
38th floor, New York, New York 10048. Peter J. Wilby, assisted by a team of
other investment professionals, is responsible for the day-to-day management.
Mr. Wilby is a Director of the Subadviser and has been affiliated with the
Subadviser in various capacities since 1989. Mr. Wilby is a Chartered Financial
Analyst, Certified Public Accountant and a member of the New York Society of
Securities Analysts.
HOW THE HIGH YIELD BOND FUND HAS PERFORMED: The chart and table below illustrate
annual fund and market benchmark returns for the periods ended December 31,
1998. This information is intended to give you some indication of the risk of
investing in the fund by demonstrating how its returns have varied over time.
1
<PAGE>
The bar chart shows the High Yield Bond Fund's Class A share performance from
one year to another. The table shows what the return for each class of shares
would equal if you average out actual performance over various lengths of time.
Because this information is based on past performance, it is not a guarantee of
future results.
[INSERT BAR CHART]
For the nine-year period through December 31, 1998, the Class A shares' highest
quarterly return was ____% for the quarter ended _____ and the lowest quarterly
return was ____% for the quarter ended ____. These returns do not reflect sales
charges. If the sales charges were reflected, the returns would be lower than
those shown.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1998)*
Period Class A Shares Class B Shares Class C Shares S&P 500**
------ -------------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
1 Year ___% N/A ___% __%
5 Years ___% N/A N/A __%
Life of Fund ___%// ___%// ___%// __%
- ---------------------------------------------------------------------------------------------
</TABLE>
* The High Yield Bond Fund's returns are after deduction of sales charges
and expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad
look at how stock prices have performed. Its returns do not include the
effect of any sales charges. That means the actual returns would be lower
if they included the effect of sales charges.
// The inception dates for Class A shares, Class B shares and Class C shares
are March 1, 1990, February 2, 1998 and April 3, 1995, respectively.
WHAT ARE THE COSTS OF INVESTING IN THE HIGH YIELD BOND FUND: The tables below
describe the fees and expenses that you may pay if you buy and hold shares of
the High Yield Bond Fund. The fund's expenses are based on actual expenses
incurred for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a % of 3.75% None None
offering price)
Maximum Deferred Sales Charge (as a % of original None 5%* 1%**
purchase price or redemption proceeds, whichever is
lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- -----------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
2
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets)
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Management Fees* 0.60% 0.60% 0.60%
Distribution and Service (12b-1) Fees 0.29% 0.80% 0.80%
Other Expenses 0.41% 0.41% 0.41%
----- ----- -----
Total Annual Fund Operating Expenses 1.30% 1.81% 1.81%
===== ===== =====
Fee Waiver and/or Expense Reimbursement* 0.11% 0.11% 0.11%
----- ----- -----
Net Waiver 1.19% 1.70% 1.70%
===== ===== =====
- -------------------------------------------------------------------------------------------------
</TABLE>
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A annual
operating expenses exceed 1.19% and Class B and Class C annual operating
expenses exceed 1.70% of the fund's average daily net assets for the fund's
1999 fiscal year.
2A
<PAGE>
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the High Yield Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- -------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- -------------------------------------------------------------------------------
3
<PAGE>
INTERMEDIATE GOVERNMENT FUND
================================================================================
INVESTMENT OBJECTIVE: The Intermediate Government Fund seeks high current income
consistent with the preservation of capital.
HOW THE INTERMEDIATE GOVERNMENT FUND PURSUES ITS OBJECTIVE: The Intermediate
Government Fund seeks to achieve its objective by investing primarily in debt
securities issued or guaranteed by the U.S. Government and its agencies or
instrumentalities. These securities include U.S. Treasuries, mortgage-backed
securities, real estate mortgage investment conduits (REMICs) and stripped
securities among others. The fund's portfolio manager selects these securities
by considering factors such as maturity, interest rate conditions and liquidity.
The portfolio manger typically will maintain a weighted average portfolio
maturity of between 3 to 10 years under normal market conditions and attempts to
manage volatility as consistent with the fund's investment objective.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE INTERMEDIATE GOVERNMENT INCOME FUND:
Perhaps the biggest risk of investing in this fund is that its returns will
fluctuate and you could lose money. This fund invests primarily in debt
securities whose value may fluctuate with changes in interest rates. When
interest rates rise, the market value of the fund's debt securities will
decrease. If any of these circumstances occur, the fund's net asset value also
may decrease.
This fund invests in securities such as mortgage-backed and stripped securities
that involve risks that are not normally present in other debt obligations.
Mortgage-backed securities are subject to prepayment risk and extension risk.
Prepayment risk may result in increased volatility of certain mortgage-backed
securities during periods of unanticipated or rapid changes in market conditions
or interest rates. Extension risk may reduce the market value of mortgage-backed
securities if interest rates rise suddenly. Also, the market for private
mortgage-backed securities is smaller and less liquid than the market for U.S.
Government related securities. Stripped securities may be especially sensitive
to interest rates as compared to traditional debt obligations and, thus, may
involve more fluctuation in market value.
WHO IS THE PORTFOLIO MANAGER: Heritage manages the fund's portfolio. H. Peter
Wallace is responsible for the day-to-day management of the fund's investment
portfolio. 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
portfolio manager of the fund. Mr. Wallace is a Chartered Financial Analyst.
HOW THE INTERMEDIATE GOVERNMENT FUND HAS PERFORMED: The chart and table below
illustrate annual fund and market benchmark returns for the periods ended
December 31, 1998. This information is intended to give you some indication of
the risk of investing in the fund by demonstrating how its returns have varied
over time. The bar chart shows the Intermediate Government Fund's Class A share
performance from one year to another. The table shows what the return for each
class of shares would equal if you average out actual performance over various
lengths of time. Because this information is based on past performance, it's not
a guarantee of future results.
[INSERT BAR CHART]
For the nine-year period through December 31, 1998, the Class A shares' highest
quarterly return was ____% for the quarter ended _____ and the lowest quarterly
return was ____% for the quarter ended ____. These returns do not reflect sales
charges. If the sales charges were reflected, the returns would be lower than
those shown.
4
<PAGE>
- -------------------------------------------------------------------------------
Average Annual Returns (for the periods ended December 31, 1998)*
Period Class a Shares Class B Shares Class C Shares S&P 500**
- ------ -------------- -------------- -------------- ---------
1 Year ___% N/A ___% ___%
5 Years ___% N/A N/A ___%
Life of Fund ___%/ / ___%/ / ___%/ / ___%
- -------------------------------------------------------------------------------
* The Intermediate Government Fund's returns are after deduction of sales
charges and expenses.
** The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a broad look
at how stock prices have performed. Its returns do not include the effect of
any sales charges. That means the actual returns would be lower if they
included the effect of sales charges.
/ / The inception dates for Class A shares, Class B shares and Class C shares
are March 1, 1990, February 2, 1998 and April 3, 1995, respectively.
WHAT ARE THE COSTS OF INVESTING IN THE INTERMEDIATE GOVERNMENT FUND: The tables
below describe the fees and expenses that you may pay if you buy and hold shares
of the Intermediate Government Fund. The fund's expenses are based on actual
expenses incurred for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment):
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a % of offering price) 3.75% None None
Maximum Deferred Sales Charge (as a % of original purchase price or None 5%* 1%**
redemption proceeds, whichever is lower)
Wire Redemption Fee (per transaction) $5.00 $5.00 $5.00
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Declining over a six-year period as follows: 5% during the first year, 4%
during the second year, 3% during the third and fourth years, 2% during the
fifth year, 1% during the sixth year and 0% thereafter. Class B shares will
convert to Class A shares eight years after purchase.
** Declining to 0% at the first year.
- --------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES (expenses deducted from fund assets)
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees* 0.50% 0.50% 0.50%
Distribution and Service (12b-1) Fees 0.32% 0.60% 0.60%
Other Expenses 1.18% 1.18% 1.18%
----- ----- -----
Total Annual Fund Operating Expenses 2.00% 2.28% 2.28%
===== ===== =====
Fee Waiver and/or Expense Reimbursement* 1.08% 1.08% 1.08%
----- ----- -----
Net Waiver 0.92% 1.20% 1.20%
===== ===== =====
- --------------------------------------------------------------------------------
* Heritage Asset Management, Inc. has agreed to waive its investment advisory
fees and, if necessary, reimburse the fund to the extent that Class A annual
operating expenses exceed 0.92% and Class B and Class C annual operating
expenses exceed 1.20% of the fund's average daily net assets for the fund's
1999 fiscal year.
EXPENSE EXAMPLE: This Example is intended to help you compare the cost of
investing in the Intermediate Government Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the fund for
the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
5
<PAGE>
- --------------------------------------------------------------------------------
Share Class Year 1 Year 3 Year 5 Year 10
A shares $__ $__ $___ $___
B shares
Assuming redemption at end of period $__ $__ $___ $___
Assuming no redemption $__ $__ $___ $___
C shares $__ $__ $___ $___
- --------------------------------------------------------------------------------
6
<PAGE>
MANAGEMENT OF THE FUNDS
WHO MANAGES YOUR FUND
================================================================================
Heritage Asset Management, Inc., 880 Carillion Parkway, St. Petersburg,
Florida 33716, is the funds' investment adviser and administrator. Heritage 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. Heritage manages, supervises and conducts the business
and administrative affairs of the funds and the other Heritage mutual funds with
net assets totaling approximately $___ billion as of ___________, 1998.
Heritage charged each fund the following aggregate annual investment advisory
and administration fee during that fund's last fiscal year:
o High Yield Bond Fund 0.60%
o Intermediate Government Fund 0.50%
Heritage may allocate and reallocate the assets of a fund among one or more
investment subadvisers, subject to review by the Board of Trustees. In the
future, Heritage may propose the addition of one or more additional subadvisers,
subject to approval by the Board of Trustees and, if required by the Investment
Company Act of 1940, fund shareholders.
YEAR 2000
================================================================================
The funds could be affected adversely if the computer systems used by
Heritage, the funds' other service providers, or companies in which the funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Heritage has taken steps that it
believes are reasonably designed to address the potential failure of computer
systems used by them and the funds' service providers to address the Year 2000
issue. However, due to the funds' reliance on various service providers to
perform essential functions, a fund could have difficulty calculating its net
asset value, processing orders for share sales and delivering account statements
and other information to shareholders. There can be no assurance that these
steps will be sufficient to avoid any adverse impact.
7
<PAGE>
YOUR INVESTMENT
BEFORE YOU INVEST
================================================================================
Before you invest in a fund, please
o Read this prospectus carefully.
o Then, decide which fund or funds best suits your needs and your
goals.
o Next, decide which class of shares is best for you.
o Finally, decide how much you wish to invest and how you want to open
an account.
CHOOSING A CLASS OF SHARES
================================================================================
You can choose from three classes of fund shares: Class A shares, Class B
shares and Class C shares. Each class has a different combination of sales
charges and ongoing fees allowing you to choose the class that best meets your
needs. You should make this decision carefully based on:
o the amount you wish to invest,
o the different sales charges that apply to each share class,
o whether you qualify for any reduction or waiver of sales charges,
o the length of time you plan to keep the investment, and
o the class expenses.
CLASS A SHARES. You may purchase Class A shares at the "offering price" - a
price equal to their net asset value, plus a maximum sales charge of 3.75%
imposed at the time of purchase. Class A shares are subject to ongoing
distribution and service (Rule 12b-1) fees of up to 0.25% of the average daily
net assets for the High Yield Bond Fund and Intermediate Government Fund. These
fees are lower than the ongoing Rule 12b-1 fees for Class B and Class C shares.
If you choose to invest in Class A shares, you will pay a sales charge at the
time of each purchase. The table below shows the charges both as a percentage of
offering price and as a percentage of the amount you invest. If you invest more,
the sales charge will be lower. You may qualify for a reduced sales charge or
the sales charge may be waived as described below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS A SALES CHARGES
---------------------
As a % of As a % of your Dealer Concession
Your Investment offering price investment as % of offering price(1)
- --------------- -------------- ------------- -------------------------
<S> <C> <C> <C>
Less than $25,000................3.75% 3.90% 3.25%
$25,000-$49,999..................3.25% 3.36% 2.75%
$50,000-$99,999..................2.75% 2.83% 2.25%
$l00,000-$249,999................2.25% 2.30% 1.75%
$250,000-$499,999................1.75% 1.78% 1.25%
$500,000-$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 fund's distributor may pay 100% of the
sales charge 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.
8
<PAGE>
CLASS B SHARES. You may purchase Class B shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares within 6 years of
purchase, you will pay a "contingent deferred" sales charge ("CDSC") at the time
of sale of up to 5.00%. Class B shares are subject to ongoing Rule 12b-1 fees of
up to 0.80% and 0.60% of their average daily net assets for the High Yield Bond
Fund and Intermediate Government Fund, respectively. This Rule 12b-1 fee is
higher than the ongoing Rule 12b-1 fees for Class A shares but the same as for
the Class C shares. Class B shares are offered for sale only for purchases of
less than $250,000.
If you choose to invest in Class B shares, you will pay a sales charge if you
sell those shares within 6 years of purchase. The CDSC imposed on sales of Class
B shares will be calculated by multiplying the original purchase cost or the
current market value of the shares being sold, whichever is less, by the
percentage shown on the following chart. The longer you hold the shares, the
lower the rate of the CDSC. The CDSC may be waived as described below. Any
period of time you held Class B shares of the Heritage Cash Trust-Money Market
Fund will not be counted when determining your CDSC.
CLASS B DEFERRED CHARGES
---------------------------------------------------
Redemption During CDSC on shares being sold
----------------- -------------------------
1st year 5%
2nd year 4%
3rd year 3%
4th year 3%
5th year 2%
6th year 1%
After 6 years 0%
---------------------------------------------------
CONVERSION OF CLASS B SHARES. If you buy Class B shares and hold them for 8
years, we automatically will convert them to Class A shares without charge. Any
period of time you held Class B shares of the Heritage Cash Trust-Money Market
Fund will be excluded from the 8-year period. At this time, we also will convert
any Class B shares that you purchased with reinvested dividends and other
distributions. We do this to lower your investment costs due to lower Rule 12b-1
fees for Class A shares.
When we do the conversion, you will receive Class A shares in an amount equal
to the value of your Class B shares. However, because Class A and Class B shares
have different prices, you may receive more or less Class A shares after the
conversion. The dollar value will be the same, so you have not lost any money as
a result of the conversion.
CLASS C SHARES. You may purchase Class C shares at net asset value with no
initial sales charge. As a result, the entire amount of your purchase is
invested immediately. However, if you sell the shares less than 1 year after
purchase, you will pay a CDSC at the time of sale of 1.00%. Class C shares are
subject to ongoing Rule 12b-1 fees of up to 0.80% and 0.60% of their average
daily net assets for the High Yield Bond Fund and Intermediate Government Fund,
respectively. This Rule 12b-1 fee is higher than the ongoing Rule 12b-1 fees for
Class A shares and is the same as for the Class B shares. Class C shares do not
convert to any other class of shares. Any period of time you held Class C shares
of the Heritage Cash-Trust Money Market Fund will not be counted toward the
1-year period.
If you choose to invest in Class C shares, you will pay a sales charge if you
sell your shares less than 1 year after purchase. The CDSC imposed on sales of
9
<PAGE>
Class C shares will be calculated based on the original purchase cost or the
current market value of the shares being sold, whichever is less. The CDSC may
be waived as described below.
UNDERSTANDING RULE 12B-1 FEES. Each fund has adopted a plan under Rule 12b-1
that allows it to pay distribution and sales fees for the sale of its shares and
for services provided to shareholders. Because these fees are paid out of the
fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges. For Class A shares purchased prior to April 3, 1995, each fund pays a
Rule 12b-1 fee of up to 0.35% of its respective Class A average daily net
assets.
SALES CHARGE REDUCTIONS AND WAIVERS
================================================================================
We offer a number of ways to reduce or eliminate the initial sales charge on
Class A shares or the CDSC on Class B and Class C shares. If you think you are
eligible, contact Heritage or your financial advisor for further information.
REDUCING YOUR CLASS A SALES CHARGE. We offer three programs designed to
reduce your Class A sales charge. You may choose one of these programs to
combine multiple purchases of Class A shares of Heritage mutual funds to take
advantage of the reduced sales charges listed in the schedule above. Please
complete the appropriate section of your account application, contact your
financial advisor or Heritage if you would like to take advantage of these
programs.
o RIGHTS OF ACCUMULATION - Lets you combine purchases in related accounts
for purposes of calculating sales charges. Under this program, a
related account includes any other direct or beneficial accounts you
own, your spouse's accounts, or accounts held by your minor children.
o COMBINED PURCHASE PRIVILEGE - Lets you add the value of your previous
Class A investments for purposes of calculating the sales charge if the
total amount you have invested is at least $25,000.
o STATEMENT OF INTENTION - Lets you purchase Class A shares of any
Heritage mutual fund over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. You must invest at
least $25,000 to obtain the benefit of this privilege.
HERITAGE TRANSFER PROGRAM. If you have sold shares of a mutual fund other
than a Heritage mutual fund within the last 90 days, we may waive the Class A
sales charge on your investment. You may qualify for this waiver if:
o You purchase Class A shares of a Heritage mutual fund between February
1, 1999 and March 31, 1999,
o You provide a copy of your account statement showing the sale of your
other mutual fund shares, and
o You or your financial advisor submit, at the time of your purchase, a
request that your purchase be processed without a sales charge.
WAIVER OF CLASS A SHARES SALES CHARGE. Class A shares may be sold at net
asset value without any sales charge to: (1) Heritage and the subadviser; (2)
current and retired officers and Trustees of a fund; (3) directors, officers and
10
<PAGE>
full-time employees of Heritage, any subadviser of a Heritage mutual fund, their
distributor and their affiliates; (4) registered financial advisors and
employees of broker-dealers that are parties to dealer agreements with the
funds' distributor (or financial institutions that have arrangements with such
broker-dealers); and (5) 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, members of the
American Psychiatric Association may purchase Class A shares at a sales charge
equal to two-thirds of the percentages in the above table. The dealer concession
also will be adjusted in a like manner. Class A shares also may be purchased
without sales charges by investors who participate in certain broker-dealer wrap
fee investment programs.
CDSC WAIVERS. The CDSC for Class B shares and Class C shares currently is
waived if the shares are sold:
o to make certain distributions from retirement plans,
o because of shareholder death or disability (including shareholders who
own shares in joint tenancy with a spouse),
o to make payments through certain sales from a Systematic Withdrawal
Plan of up to 12% annually of the account balance at the beginning of
the plan, or
o to close out shareholder accounts that do not comply with the minimum
balance requirements.
REINSTATEMENT PRIVILEGE. If you sell shares of a Heritage mutual fund, you
may reinvest some or all of the sales proceeds up to 90 days later in the same
share class of any Heritage mutual fund without incurring additional sales
charges. If you paid a CDSC, the reinvested shares will have no holding period
requirement. You must notify your fund if you decide to exercise this privilege.
HOW TO INVEST
================================================================================
MINIMUM INITIAL INVESTMENT. Once you have chosen a share class, the next step
is to determine the amount you wish to invest. The minimum initial and
subsequent investment for each fund is:
------------------------------------------------------------
Minimum Initial Subsequent
Type of Account Investment Investment
--------------- ---------- ----------
Regular Account $1,000 No minimum
Systematic Investment $50 $50 on a monthly
Program basis
Retirement Account $1,000 No minimum
------------------------------------------------------------
Heritage may waive these minimum requirements at its discretion. Investments
in IRAs may be reduced or waived under certain circumstances. Contact Heritage
or your financial advisor for further information.
OPENING AN ACCOUNT. You may open an account in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may invest in a fund by contacting your
financial advisor. Your financial advisor can help you open a new account and
help you review your financial needs and formulate long-term investment goals
and objectives.
11
<PAGE>
BY MAIL. You may invest in a fund directly by completing and signing the
account application found in this prospectus. Indicate the fund, the class of
shares and the amount you wish to invest. If you do not specify a share class,
we will automatically choose Class A shares, which include a front-end sales
charge. Make your check payable to the specific fund and class of shares you are
purchasing. Mail the application and your payment to:
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
BY DOLLAR COST AVERAGING PLANS. We offer the following plans to allow you to
make regular, automatic investments into a fund. You determine the amount and
frequency of your investments. You can terminate your plan at any time.
Availability of these plans may be limited by your financial advisor.
o AUTOMATIC INVESTING - You may instruct us to transfer funds from a
specific bank checking account to your Heritage account. This transfer
will be effected either by electronic transfer or paper draft. Complete
the appropriate sections of the account application or the Heritage
Bank Draft Investing form to activate this service.
o DIRECT DEPOSIT - You may instruct your employer to direct all or part
of your paycheck to your Heritage account. You also may direct to your
account other types of payments you receive such as from an insurance
company or another mutual fund family. Contact your financial advisor
or Heritage for the direct deposit enrollment form. Please note the
routing instructions are different than the Federal Reserve wire
instructions discussed below.
o GOVERNMENT DIRECT DEPOSIT - Beginning in 1999, any newly established
investment programs by employees of the Federal government must be paid
through direct deposit. You can have your Social Security, military
pension, paycheck or other Federal government payment sent to your
Heritage account. Your completed Government Direct Deposit form
requires Heritage's review and approval for processing. Contact your
financial advisor or Heritage for an enrollment form.
o AUTOMATIC EXCHANGE - You may make automatic regular exchanges between
two or more Heritage mutual funds. These exchanges are subject to the
exchange requirements discussed below.
If you discontinue any of these plans before your account reaches the required
minimum investment, you must buy more shares to keep your account open.
THROUGH A RETIREMENT PLAN. Heritage mutual funds offer a range of retirement
plans, including self-directed, traditional and Roth IRA plans, Keogh Plans,
SEPs and SIMPLEs. A special application and custodial agreement is required.
Contact your financial advisor or Heritage for more information.
BY WIRE. You may invest in a fund by Federal Reserve wire sent from your
bank. Mail your completed and signed account application to Heritage. Contact
Heritage at (800) 421-4184 or your financial advisor to obtain your account
number before sending the wire. Your bank may charge a wire fee. Send your
investment and the following information by Federal Reserve or bank wire to:
State Street Bank and Trust Company
ABA #011-000-028
Account # 3196-769-8
12
<PAGE>
Name of the Fund
The class of shares to be purchased
(Your account number assigned by Heritage)
(Your name)
HOW TO SELL YOUR INVESTMENT
================================================================================
You can sell - or redeem - shares of your fund for cash at any time, subject
to certain restrictions.
APPLICATION OF CDSC. To keep your CDSC as low as possible, each time you
place a request to sell shares we will first sell any shares in your account
that carry no CDSC. If there are not enough of these to meet your request, we
will sell those shares that have the lowest CDSC. There is no CDSC on shares
acquired through reinvestment of dividends or other distributions. However, any
period of time you held Class B or Class C shares of Heritage Cash Trust-Money
Market Fund will not be counted for purposes of calculating the CDSC.
HOW TO SELL YOUR SHARES. You may contact your financial advisor or Heritage
with instructions to sell your investment in the following ways:
THROUGH YOUR FINANCIAL ADVISOR. You may sell your shares through your
financial advisor who can prepare the necessary documentation. Your financial
advisor will transmit your request to sell shares of your fund and may charge
you a fee for this service.
BY TELEPHONE. You may sell shares from your account by telephone by calling
your fund at (800) 421-4184 prior to the close of regular trading on the New
York Stock Exchange typically 4:00 p.m. eastern time. If you do not wish to have
telephone redemption privileges, you must complete the appropriate section of
the account application.
BY MAIL. You may sell shares of your fund by sending a letter of instruction.
Specify the fund name, your share class, your account number, the names in which
the account is registered and the dollar value or number of shares you wish to
sell. Include all signatures and any additional documents that may be required.
Mail the request to Heritage Asset Management, Inc., P.O. Box 33022, St.
Petersburg, FL 33733.
Some circumstances require a written letter requesting sale of shares, along
with a signature guarantee. These include:
o Sales from any account that has had an address change in the past 30
days
o Sales of greater than $50,000
o Sales in which payment is to be sent to an address other than the
address of record
o Sales in which payment is to be made to payees other than the exact
registration of the account or
o Exchanges or transfers into other Heritage accounts that have different
titles
We will only accept official signature guarantees from participants in our
signature guarantee program, which includes most banks and security dealers. A
notary public can not guarantee your signature.
13
<PAGE>
BY SYSTEMATIC WITHDRAWAL PLAN. This plan may be used for periodic withdrawals
from your account. To establish, complete the appropriate section of the account
application or the Heritage systematic withdrawal form (available from your
financial advisor or Heritage). And send that form to Heritage. Availability of
this plan may be limited by your financial advisor. You should consider the
following factors when establishing a plan:
o Make sure you have a sufficient amount of shares in your account.
o Determine how much you wish to withdraw. You must withdraw a minimum of
$50 for each transaction.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you also are selling shares of the
same fund is not advantageous to you, because of sales charges).
o Determine the schedule: monthly, quarterly, semiannual or annual basis.
o Determine which day of the month you would like the withdrawal to
occur. Available dates are the 1st, 5th, 10th or 20th day of the month.
If such a date falls on the weekend, the withdrawal will take place on
the next business day.
o Heritage reserves the right to cancel systematic withdrawals if
insufficient shares are available for two or more consecutive months.
RECEIVING PAYMENT. When you sell shares, payment of the proceeds generally
will be made the next business day after your order is received. If you sell
shares that were recently purchased by check or pre-authorized automatic
purchase, payment will be delayed until we verify that those funds have cleared,
which may take up to two weeks. You may receive payment of your sales proceeds
the following ways:
o BY CHECK - We will mail a check to the address of record or bank
account specified on your account application. Checks made payable to
other than the registered owners or sent to an address other than the
address of record require written instruction accompanied by a
signature guarantee, as described above.
o BY WIRE - You may request that we send your proceeds by Federal Reserve
wire to a bank account you specify. You must provide wiring
instructions to Heritage in writing. We normally will send these
proceeds the next day. A $5.00 wire fee will be charged to your
account.
o TO YOUR BROKERAGE ACCOUNT - If you place your redemption request with
your financial advisor, payment can be directed to your brokerage
account. Payment for these trades occurs three business days after you
place your sale request.
HOW TO EXCHANGE YOUR SHARES
================================================================================
If you own shares of a fund for at least 30 days, you can exchange those
shares for shares of the same class of any other Heritage mutual fund provided
you satisfy the minimum investment requirements. You may exchange your shares by
calling your financial advisor or Heritage if you exchange to like titled
Heritage accounts. Written instructions with a signature guarantee, as described
above, are required if the accounts are not identically registered.
14
<PAGE>
You may make exchanges without paying any additional sales charges. However,
if you exchange shares of the Heritage Cash Trust-Money Market Fund acquired by
purchase (rather than exchange) for shares of another Heritage mutual fund, you
must pay the applicable sales charge.
Class B and Class C shares will continue to age from the original date and
will retain the same CDSC rate as they had before the exchange. However, if you
hold Class B shares or Class C shares in the Heritage Cash Trust-Money Market
Fund, the time you hold those shares in that fund will not be counted for
purposes of calculating the CDSC.
ACCOUNT AND TRANSACTION POLICIES
================================================================================
PRICE OF SHARES. The funds' regular business days are the same as those of
the New York Stock Exchange, normally Monday through Friday. The net asset value
per share (NAV) for each class of a fund is determined each business day at the
close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
eastern time). The share price is calculated by dividing a class's net assets by
the number of its outstanding shares. Because the value of a fund's investment
portfolio changes every business day, the NAV usually changes as well.
In calculating NAV, the funds typically price their securities by using
pricing services or market quotations. However, in cases where these are
unavailable or when the portfolio manager believes that subsequent events have
rendered them unreliable, a fund may use fair-value estimates instead.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, we will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, we are not responsible for any losses that may
occur to any account due to an unauthorized telephone call. Also for your
protection, telephone redemptions are not permitted on accounts whose name or
addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
TIMING OF ORDERS. All orders to purchase or sell shares are executed at the
next NAV calculated after the order has been accepted. Orders are accepted until
the close of regular trading on the New York Stock Exchange every business day -
normally 4:00 p.m. eastern time - and are executed the same day at that day's
NAV. Otherwise, all orders will be executed at the NAV determined as of the
close of regular trading on the next trading day.
RESTRICTIONS ON ORDERS. The funds and their distributor reserve the right to
reject any purchase order and to suspend the offering of fund shares for a
period of time. There are certain times when you may not be able to sell shares
of a fund or when we may delay paying you the proceeds. This may happen during
unusual market conditions or emergencies or when a fund can not determine the
value of its assets or sell its holdings.
REDEMPTION IN KIND. We reserve the right to give you securities instead of
cash when you sell shares of your fund. If the amount of the sale is at least
either $250,000 or 1% of a fund's assets, we may give you securities from the
fund's portfolio instead of cash.
15
<PAGE>
ACCOUNTS WITH BELOW-MINIMUM BALANCES. If your account balance falls below
$500 as a result of selling shares (and not because of performance or sales
charges), each fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, each fund reserves the right to close your account and send
the proceeds to your address of record.
DIVIDENDS, CAPITAL GAINS AND TAXES
================================================================================
DISTRIBUTIONS AND TAXES. Each fund distributes to its shareholders dividends
from its net investment income monthly. Net investment income generally consists
of interest income and dividends declared and paid on investments, less
expenses. The dividends you receive from a fund will be taxed as ordinary
income.
Each fund also distributes net capital gains to its shareholders normally
once a year. Capital gains are generated by a fund when it sells assets in its
portfolio for profit. Capital gains are taxed differently depending on how long
the fund held the asset. Distributions of gains recognized on the sale of assets
held for one year or less are taxed as ordinary income; distributions of gains
recognized on the sale of assets held longer than that are taxed at lower
capital gains rates.
Fund distributions of dividends and net capital gains are automatically
reinvested in the same fund at NAV (without sales charge) unless you opt to take
your distributions in cash, in the form of a check or direct them for purchase
of shares in another Heritage mutual fund. However, if you have a retirement
plan or a Systematic Withdrawal Plan, your distributions will be automatically
reinvested.
In general, selling shares, exchanging shares and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities for taxable accounts:
----------------------------------------------------------------
Type of Transaction Tax Status
------------------- ----------
Income dividends Ordinary income rate
Short-term capital gain Ordinary income rate
distributions
Long-term capital gain Capital gains rate
distributions
Sales or exchanges of shares Capital gains or losses
owned for more than one year
Gains are treated as
Sales or exchanges of shares ordinary income; losses
owned for one year or less are subject to special
rules
----------------------------------------------------------------
Dividend distributions will vary by class and are anticipated to be generally
higher for Class A shares.
TAX REPORTING. Each year, we will send non-retirement account holders a Form
1099 that tells you the amount of distributions you received for the prior
calendar year, and the tax status of those distributions, and a list of
reportable sale transactions. Generally, fund distributions are taxable to you
in the year you receive them. However, any dividends that are declared in
October, November or December but paid in January are taxable as if received on
December of the year they are declared.
16
<PAGE>
WITHHOLDING TAXES. If a fund does not have your correct social security or
other taxpayer identification number, federal law requires us to withhold 31% of
your distributions and sale proceeds. If you are subject to backup withholding,
we also will withhold and pay to the IRS 31% of your distributions. Any tax
withheld may be applied against the tax liability on your tax return.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
17
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The financial highlights table is intended to help you understand the
performance of the Class A shares, Class B shares and Class C shares of the High
Yield Bond Fund for the periods indicated. Certain information reflects
financial results for a single Class A share, Class B share or Class C share.
The total returns in the table represent the rate that an investor would have
earned or lost on an investment in the fund (assuming reinvestment of all
dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, is included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
CLASS A CLASS B
------------------------------------------------ ----------------
FOR THE
FOR THE YEARS ENDED SEPTEMBER 30, YEAR ENDED
SEPTEMBER 30,
------------------------------------------------ ----------------
1998 1997 1996 1995 1994 1998++
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE YEAR.................... $10.69 $10.22 $9.94 $9.65 $10.65 10.57
------ ------ ----- ----- ------ -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........................... 0.88 0.90 0.84(e) 0.72 0.69 0.51
Net realized and unrealized gain (loss) on investments. (0.91) 0.46 0.24 0.31 (0.84) (0.87)
------ ----- ----- ----- ----- -----
Total from Investment Operations....................... (0.03) 1.36 1.08 1.03 (0.15) (0.36)
------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income................... (0.89) (0.89) (0.80) (0.74) (0.71) (0.48)
Distributions from net realized gains on investment.... -- -- -- -- (0.07) --
Distributions in excess of net realized gains -- -- -- -- (0.07) --
------ ----- ----- ----- ----- -----
Total Distributions.................................... (0.89) (0.89) (0.80) (0.74) (0.85) (0.48)
------ ----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR.............................. $9.77 $10.69 $10.22 $9.94 $9.65 $9.73
===== ====== ====== ===== ===== =====
TOTAL RETURN (%)(d)....................................... (0.52) 14.00 11.44 11.23 (1.59) (3.58)(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net assets(a). 1.19 1.21 1.23 1.25 1.25 1.70(b)
Net investment income (loss) to average daily net assets 8.44 8.76 8.41 7.35 6.76 7.90(b)
Portfolio turnover rate................................ 87 101 143 109 135 87
Net assets, end of year (millions) ($)................. 40 42 33 30 32 2
</TABLE>
- -----------------
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period February 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.01, $0.01, $0.03, $0.03 and $0.02 per Class A share,
respectively. The operating expense ratios including such items would have
been 1.30%, 1.30%, 1.51%, 1.51% and 1.42% per Class A share, respectively.
Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.01 per Class B share. The operating expense ratio
including such items would have been 1.80% (annualized). Excludes
management fees waived by the Manager in the amount of $0.01, $0.01, $0.03
and $0.03 per Class C share, respectively. The operating expense ratios
including such items would have been 1.80%, 1.79%, 1.98% and 1.96%
(annualized) per Class C share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
(e) Amounts calculated prior to reclassification of $16,079. The effect of such
reclassification would have resulted in net investment income of $.01 for
Class A shares and for Class C shares.
18
<PAGE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996 1995+
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE YEAR.................... $10.65 $10.18 $9.91 $9.62
------ ------ ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........................... 0.83 0.85 0.79(e) 0.31
Net realized and unrealized gain (loss) on investments. (0.91) 0.46 0.24 0.28
----- ------ ----- ----
Total from Investment Operations....................... (0.08) 1.31 1.03 0.59
----- ------ ----- ----
LESS DISTRIBUTIONS:
Dividends from net investment income................... (0.84) (0.84) (0.76) (0.30)
Distributions from net realized gains on investment.... -- -- -- --
Distributions in excess of net realized gains -- -- -- --
---- ----- ----- -----
Total Distributions.................................... (0.84) (0.84) (0.76) (0.30)
------ ----- ----- -----
NET ASSET VALUE, END OF YEAR.............................. $9.73 $10.65 $10.18 $9.91
===== ====== ====== =====
TOTAL RETURN (%)(d)....................................... (1.02) 13.53 10.93 6.18(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net assets(a). 1.70 1.70 1.70 1.70(b)
Net investment income (loss) to average daily net assets 7.93 8.26 8.39 6.67(b)
Portfolio turnover rate................................ 87 101 143 109
Net assets, end of year (millions) ($)................. 13 13 6 0.6
</TABLE>
- -----------------
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period February 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.01, $0.01, $0.03, $0.03 and $0.02 per Class A share,
respectively. The operating expense ratios including such items would have
been 1.30%, 1.30%, 1.51%, 1.51% and 1.42% per Class A share, respectively.
Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.01 per Class B share. The operating expense ratio
including such items would have been 1.80% (annualized). Excludes
management fees waived by the Manager in the amount of $0.01, $0.01, $0.03
and $0.03 per Class C share, respectively. The operating expense ratios
including such items would have been 1.80%, 1.79%, 1.98% and 1.96%
(annualized) per Class C share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
(e) Amounts calculated prior to reclassification of $16,079. The effect of such
reclassification would have resulted in net investment income of $.01 for
Class A shares and for Class C shares.
18A
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following table is intended to help you understand the performance of
the Class A shares, Class B shares and Class C shares of the Intermediate
Government Fund for the periods indicated. Certain information reflects
financial results for a single Class A share, Class B share or Class C share.
The total returns in the table represent the rate that an investor would have
earned or lost on an investment in the fund (assuming reinvestment of all
dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the fund's financial statements, is included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
CLASS A CLASS B
--------------------------------------------------------- ------------
FOR THE
FOR THE YEARS ENDED SEPTEMBER 30, YEAR ENDED
SEPT. 30,
--------------------------------------------------------- ------------
1998* 1997* 1996* 1995 1994* 1998++*
----- ----- ----- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE YEAR.................... $9.20 $9.08 $9.29 $9.10 $9.44 $9.28
----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................. 0.48 0.51 0.50 0.62 0.43 0.33
Net realized and unrealized gain (loss) on investments. 0.51 0.13 (0.21) 0.12 (0.40) 0.32
---- ---- ----- ----- ----- -----
Total from Investment Operations....................... 0.99 0.64 0.29 0.74 0.03 0.65
---- ---- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income................... (0.49) (0.52) (0.50) (0.55) (0.37) (0.26)
Distributions from net realized gain on investments.... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total Distributions.................................... (0.49) (0.52) (0.50) (0.55) (0.37) (0.26)
----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR.............................. $9.70 $9.20 $9.08 $9.29 $9.10 $9.67
===== ===== ===== ===== ===== =====
TOTAL RETURN (%)(C)....................................... 11.18 7.28 3.24 8.47 0.36 7.16(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net assets.... 0.92 0.93 0.94 0.95 0.95 1.20(b)
Net investment income to average daily net assets...... 5.18 5.65 5.42 5.50 4.60 4.59(b)
Portfolio turnover rate................................ 188 69 135 162 214 188
Net assets, end of year ($ millions)................... 13 14 18 24 41 0.13
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed income method does not correspond with results of
operations.
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period February 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.10, $0.07, $0.06, $0.06 and $0.03 per Class A share,
respectively. The operating expense ratios including such items would have
been 2.00%, 1.67%, 1.61%, 1.47% and 1.18% per Class A share, respectively.
Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.06 per Class B share. The operating expense ratio
including such items would have been 2.28% (annualized). Excludes
management fees waived and expenses reimbursed by the Manager in the amount
of $0.10, $0.07, $0.06 and $0.06 per Class C share, respectively. The
operating expense ratios including such items would have been 2.28%, 1.94%,
1.87% and 1.72% (annualized) per Class C share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
19
<PAGE>
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
FOR THE YEARS ENDED SEPTEMBER. 30,
---------------------------------------------
1998* 1997* 1996* 1995+
----- ----- ----- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE YEAR.................... $9.18 $9.06 $9.27 $9.05
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................. 0.41 0.49 0.49 0.21
Net realized and unrealized gain (loss) on investments. 0.55 0.13 (0.21) 0.23
---- ---- ----- -----
Total from Investment Operations....................... 0.96 0.62 0.28 0.44
---- ---- ----- -----
LESS DISTRIBUTIONS:
Dividends from net investment income................... (0.47) (0.50) (0.49) (0.22)
Distributions from net realized gain on investments.... -- -- -- --
----- ----- ----- -----
Total Distributions.................................... (0.47) (0.50) (0.49) (0.22)
------ ------ ----- -----
NET ASSET VALUE, END OF YEAR.............................. $9.67 $9.18 $9.06 $9.27
===== ===== ===== =====
TOTAL RETURN (%)(C)....................................... 10.85 7.02 3.04 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses net, to average daily net assets.... 1.20 1.20 1.20 1.20(b)
Net investment income to average daily net assets...... 4.74 5.38 5.22 5.19(b)
Portfolio turnover rate................................ 188 69 135 162
Net assets, end of year ($ millions)................... 5 1 0.6 0.7
</TABLE>
- --------------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed income method does not correspond with results of
operations.
+ For the period April 3, 1995 (first offering of Class C shares) to
September 30, 1995.
++ For the period February 2, 1998 (first offering of Class B shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.10, $0.07, $0.06, $0.06 and $0.03 per Class A share,
respectively. The operating expense ratios including such items would have
been 2.00%, 1.67%, 1.61%, 1.47% and 1.18% per Class A share, respectively.
Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $0.06 per Class B share. The operating expense ratio
including such items would have been 2.28% (annualized). Excludes
management fees waived and expenses reimbursed by the Manager in the amount
of $0.10, $0.07, $0.06 and $0.06 per Class C share, respectively. The
operating expense ratios including such items would have been 2.28%, 1.94%,
1.87% and 1.72% (annualized) per Class C share, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
19A
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FOR MORE INFORMATION
================================================================================
More information on these funds is available free upon request, including the
following:
ANNUAL/SEMIANNUAL REPORTS. Describes each fund's performance, lists portfolio
holdings and contains a letter from the fund's manager discussing recent market
conditions, economic trends and fund strategies.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Provides more details about each fund
and its policies. A current SAI is on file with the Securities and Exchange
Commission and is incorporated herein by reference (is legally considered part
of this prospectus).
To obtain information contact Heritage Mutual Funds:
By mail: 880 Carillon Parkway
St. Petersburg, Florida 33716
By telephone:(800) 421-4184
By E-mail: [email protected]
For prospectus and SAI requests only.
No fund orders will be accepted by e-mail.
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, from the Public Reference Room of the Securities
and Exchange Commission in Washington, D.C. (800-SEC-0330) and may be viewed
on-screen or downloaded from the SEC's Internet web site at http://www.sec.gov.
The funds' Investment Company and 1933 Act registration numbers are:
Heritage Income Trust: 811-5853 33-30361
High Yield Bond Fund 811-5853 33-30361
Intermediate Government Fund 811-5853 33-30361
HERITAGE
ASSET MANAGEMENT, INC.
Registered Investment Advisor--SEC
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 funds or their distributor. This Prospectus does not
constitute an offering in any state in which such offering may not lawfully be
made.
20
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
This Statement of Additional Information ("SAI") dated February 1, 1999
should be read in conjunction with the Prospectus dated February 1, 1999 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..........................................................2
INVESTMENT INFORMATION.......................................................2
Investment Strategies and Risks........................................2
Industry Classifications..............................................23
INVESTMENT LIMITATIONS......................................................23
NET ASSET VALUE.............................................................26
PERFORMANCE INFORMATION.....................................................27
INVESTING IN THE FUNDS......................................................30
Systematic Investment Options.........................................30
Retirement Plans......................................................31
Class A Combined Purchase Privilege (Right of Accumulation)...........31
Class A Statement of Intention........................................32
REDEEMING SHARES............................................................33
Systematic Withdrawal Plan............................................33
Telephone Transactions................................................34
Redemptions in Kind...................................................34
Receiving Payment.....................................................35
EXCHANGE PRIVILEGE..........................................................36
CONVERSION OF CLASS B SHARES................................................36
TAXES.......................................................................37
SHAREHOLDER INFORMATION.....................................................40
TRUST INFORMATION...........................................................41
Management of the Trust...............................................41
Five Percent Shareholders.............................................43
Investment Adviser and Administrator; Subadviser......................43
Brokerage Practices...................................................45
Distribution of Shares................................................46
Administration of the Trust...........................................48
Potential Liability...................................................49
APPENDIX...................................................................A-1
REPORT OF INDEPENDENT ACCOUNTANTS
High Yield Bond Fund.................................................A-5
Intermediate Government Fund.........................................A-5
FINANCIAL STATEMENTS
High Yield Bond Fund.................................................A-5
Intermediate Government Fund.........................................A-5
<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 charge ("Class A shares"), Class B shares sold subject
to a 5% maximum contingent deferred sales charge ("CDSC"), declining over a
six-year period ("Class B shares"), and Class C shares sold subject to a 1% CDSC
("Class C shares").
INVESTMENT INFORMATION
- ----------------------
INVESTMENT POLICIES, STRATEGIES AND RISKS
-----------------------------------------
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.
BRADY BONDS. High Yield may invest in Brady Bonds, which are debt
securities, generally denominated in U.S. dollars, issued under the framework of
the Brady Plan. The Brady Plan is an initiative announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders, as well as multilateral institutions,
such as the International Bank for Reconstruction and Development (the "World
Bank") and the International Monetary Fund (the "IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of external commercial
bank debt for newly issued bonds (Brady Bonds). Brady Bonds also may be issued
in respect of new money being advanced by existing lenders in connection with
the debt restructuring. The World Bank and/or the IMF support the restructuring
by providing funds pursuant to loan agreements or other arrangements, which
enable the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount. These arrangements with the World Bank
and/or the IMF require debtor nations to agree to the implementation of certain
domestic monetary and fiscal reforms. Such reforms have included the
liberalization of trade and foreign investment, the privatization of state-owned
enterprises and the setting of targets for public spending and borrowing. These
policies and programs seek to promote the debtor country's economic growth and
<PAGE>
development. Investors should recognize that the Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors. The Saloman Brothers Asset Management, Inc ("SBAM" or
"Subadviser") 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.
Brady Bonds have been issued for only a limited period of time, and,
accordingly, do not have a long payment history. Brady Bonds that have been
issued to date are rated in the categories "BB" or "B" by Standard & Poor's
Ratings Services ("S&P") or "Ba" or "B" by Moody's Investors Services, Inc.
("Moody's") or, in cases in which a rating by S&P or Moody's has not been
assigned, generally are considered by the Subadviser to be of comparable
quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt that carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time, and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
generally have borne interest computed semiannually at a rate equal to 13/16 of
one percent above the then current six month London Inter-Bank Offered Rate
("LIBOR").
Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, High Yield will purchase Brady Bonds in secondary
markets, as described below.
In the secondary markets, the price and yield to the investor reflect
market conditions at the time of purchase. Brady Bonds issued to date have
traded at a deep discount from their face value. Certain sovereign bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Certain Brady Bonds have been collateralized as to principal due at maturity
(typically 30 years from the date of issuance) by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
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
3
<PAGE>
markets through U.S. securities dealers and other financial institutions and
generally are maintained through European transnational securities depositories.
A substantial portion of the Brady Bonds and other sovereign debt securities in
which High Yield invests are likely to be acquired at a discount, which involves
certain considerations discussed below under "Taxes."
In the event of a default with respect to collateralized Brady Bonds as a
result of which the payment obligations of the issuer are accelerated, the U.S.
Treasury zero coupon obligations held as collateral for the payment of principal
will not be distributed to investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. Based upon current market conditions, High Yield would not intend
to purchase Brady Bonds that, at the time of investment, are in default as to
payments. However, in light of the residual risk of the Brady Bonds and, among
other factors, the history of default with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds are to be viewed as speculative.
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.
EQUITY SECURITIES. High Yield may invest up to 20% of its assets in common
stock, convertible securities, preferred stock, warrants or other equity
securities when consistent with the fund's objectives.
CONVERTIBLE SECURITIES. High Yield may invest in 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.
4
<PAGE>
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. 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.
PREFERRED STOCK. High Yield may invest in preferred stock. A preferred
stock is a blend of the characteristics of a bond and a common stock. It can
offer the higher yield of a bond and has priority over common stock in equity
ownership, but does not have the seniority of a bond and its participation in
the issuer's growth may be limited. Preferred stock has preference over common
stock in the receipt of dividends and in any residual assets after payment to
creditors should the issuer be dissolved. Although the dividend is set at a
fixed annual rate, in some circumstances it can be changed or omitted by the
issuer.
WARRANTS. High Yield 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.
FIXED AND FLOATING RATE LOANS. High Yield 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"). High Yield 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"). High Yield considers these investments to be
investments in debt securities for purposes of this Prospectus. High Yield, in
pursuing its investment policies, may acquire Participations and Assignments
that are high yield, nonconverible 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. High Yield
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, High Yield 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 High Yield 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, High Yield may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. High Yield will acquire Participations only
if the Lender interpositioned between High Yield and the borrower is determined
by the investment manager to be creditworthy. When High Yield purchases
5
<PAGE>
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.
High Yield 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. High Yield may revise this policy in the
future.
FOREIGN DEBT SECURITIES. High Yield may invest up to 10% of its total
assets in foreign fixed and floating rate 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 High Yield'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 High Yield'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 High
Yield, the lack of extensive operating experience of eligible foreign
subcustodian's and legal limitations on the ability of the High Yield to recover
assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. In addition, there may be less publicly available
information about a foreign issuer than about a U.S. issuer, and foreign issuers
may not be subject to the same accounting, auditing and financial recordkeeping
standards and requirements of U.S. issuers. Finally, in the event of a default
in any such foreign obligations, it may be more difficult for High Yield to
obtain or enforce a judgment against the issuers of such obligations.
6
<PAGE>
RISKS OF HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in
fixed and floating rate high yield foreign sovereign debt securities will expose
funds investing in such securities to the direct or indirect consequences of
political, social or economic changes in the countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging countries or the governmental authorities that control repayment of
their external debt to pay principal and interest on such debt when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which a fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries also are characterized by political
uncertainty or instability.
Additional factors that may influence the ability or willingness to
service debt include, but are not limited to: a country's cash flow situation,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, and its
government's policy towards the IMF, the World Bank and other international
agencies. The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations also will be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
affected adversely. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts.
The cost of servicing external debt also generally will be affected
adversely by rising international interest rates, because many external debt
obligations bear interest at rates that are adjusted based upon international
interest rates. The ability to service external debt also will depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on
its obligations. If such an event occurs, High Yield may have limited 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
7
<PAGE>
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which High Yield may invest will not be
subject to similar restructuring arrangements or to requests for new credit that
may affect adversely High Yield's holdings. Furthermore, certain participants in
the secondary market for such debt may be involved directly in negotiating the
terms of these arrangements and may therefore have access to information not
available to other market participants.
FORWARD COMMITMENTS. Government may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments"). Government may engage in forward commitments if it either (1)
holds, and maintains until the settlement date in a segregated account, cash or
high-grade debt obligations in an amount sufficient to meet the purchase price
or (2) enters into an offsetting contract for the forward sale of securities of
equal value that it owns. Forward commitments may be considered securities in
themselves. They involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of a fund's other assets. When such purchases are
made through dealers, a fund relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to Government of an
advantageous yield or price. Although Government generally will enter into
forward commitments with the intention of acquiring securities for its
investment portfolios, Government may dispose of a commitment prior to
settlement and may realize short-term profits or losses upon such disposition.
ILLIQUID AND RESTRICTED SECURITIES. 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
8
<PAGE>
Yield is permitted to invest in restricted securities that are sold in reliance
on Rule 144A ("Rule 144A Securities"). These securities generally are deemed to
be illiquid and, thus, are subject to High Yield's investment limit that
restricts investments in illiquid securities to no more than 10% of its net
assets. However, pursuant to High Yield's Guidelines for Purchase of Rule 144A
Securities ("Guidelines") adopted by the Board of Trustees, High Yield's
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.) 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. 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.
INVERSE FLOATERS. Government may invest in U.S. Government securities,
including mortgage-backed securities, on which the rate of interest varies
inversely with interest rates on similar securities or the value of an index.
These derivative securities commonly are known as inverse floaters. As market
interest rates rise, the interest rate on the inverse floater goes down, and
vice versa. Inverse floaters include components of securities on which interest
is paid in two separate parts -- an auction component, which pays interest at a
rate that is set periodically through an auction process or other method, and a
residual component, the interest on which varies inversely with that on a
similar security or the value of an index. The residual component may be
established by multiplying the rate of interest paid on such security or the
applicable index by a factor (a "multiplier feature") or by adding or
subtracting the factor to or from such interest rate or index. The secondary
market for inverse floaters may be limited. The market value of inverse floaters
is often significantly more volatile than that of a fixed-rate obligation and,
like most debt obligations, will vary inversely with changes in interest rates.
The interest rates on inverse floaters may be significantly reduced, even to
zero, if interest rates rise.
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
9
<PAGE>
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.
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 High Yield.
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, High Yield 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 High Yield, as well as on the ability of the
issuers of such securities to repay principal and interest on their borrowings.
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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.
LIQUIDITY AND VALUATION. High yielding securities may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, High Yield 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 High Yield'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.
MONEY MARKET INSTRUMENTS. The funds may invest in (1) 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, and in the case of High Yield, other lower quality commercial paper.
For a description of these ratings, see "Commercial Paper Ratings" in the
Appendix; and
(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.
MORTGAGE-BACKED SECURITIES. Government may invest in mortgage-backed
securities 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. In general, 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. 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
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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-RELATED MORTGAGE-BACKED SECURITIES. The Government
National Mortgage Association ("GNMA") is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development and is a
primary issuer of U.S. Government-related mortgage-backed securities. GNMA
pass-through securities are considered to be riskless with respect to default
because the underlying mortgage loan portfolio is comprised entirely of U.S.
Government-backed loans and timely principal and interest payments are
guaranteed by the full faith and credit of the U.S. Government. Residential
mortgage loans also are pooled by the Federal Home Loan Mortgage Corporation
("FHLMC"), a corporate instrumentality of the U.S. Government, and Fannie Mae, a
U.S. Government-sponsored corporation owned entirely by private stockholders,
which guarantee the timely payment of interest and the ultimate collection of
principal on their respective securities.
PRIVATE ISSUER MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs") that are collateralized by mortgage-backed securities
issued by FHLMC, Fannie Mae, GNMA or pools of conventional mortgages. These
securities generally offer a higher interest rate than securities with direct or
indirect U.S. Government guarantees of payments. However, many issuers or
servicers of these securities guarantee timely payment of interest and
principal, which also may be supported by various forms of insurance, including
individual loan, title, pool and hazard policies. There can be no assurance that
the private issuers or insurers will be able to meet 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 Government's net assets.
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
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rates, may result in volatility or the market value of certain mortgage-backed
securities. The Manager will attempt to manage the fund so that this volatility,
together with the volatility of other investments in Government, is consistent
with its investment objective.
OPTIONS, FUTURES AND OPTIONS ON FUTURES TRADING. Each fund may engage in
transactions in options and futures contracts in an effort to adjust the
risk/return characteristics of its investment portfolios and, in certain
circumstances, may purchase and sell options and futures contracts as a
substitute for the purchase and 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 ("Derivative
Instruments").
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 Commodity Futures Trading
Commission ("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%.
Government may hedge up to 100% of its net assets by such
transactions. Government will not purchase any option, if immediately
thereafter, the aggregate cost of all outstanding options (including options on
futures described above) purchased would exceed 5% of the value of its total
assets. Government may write call options and put options on up to 15% of its
total assets. Government might not use any of the strategies described above,
and there can be no assurance that any strategy used will succeed. High Yield
currently has no intention of engaging in futures and options transactions.
HEDGING STRATEGIES. Hedging strategies can be categorized broadly as
"short hedges" and "long hedges." A short hedge is a purchase or sale of a
Derivative Instrument intended partially or fully to offset potential declines
in the value of one or more investments held in a fund's investment portfolio.
Thus, in a short hedge, a fund takes a position in a Derivative Instrument whose
price is expected to move in the opposite direction of the price of the
investment being hedged.
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Derivative Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, a fund does not own a
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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 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 Asset Management, Inc. ("Heritage" or "Manager") 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 investment limitations and applicable
regulatory authorities.
SPECIAL RISKS. The use of Derivative Instruments involves special
considerations and risks, certain of which are described below.
(1) Successful use of most Derivative Instruments depends upon the
ability of the funds' 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. 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, the fund would
be in a better position if it had not hedged at all.
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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.
(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
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
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offsetting the positive effect of favorable price movements. For example, if a
fund entered into a short hedge because the Manager or the Subadviser, as the
case may be, projected a decline in the price of a security in the fund's
investment portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
fund could suffer a loss. In either such case, the fund would have been in a
better position had it not attempted to hedge at all.
(4) As described below, a fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If a fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction ("counterparty") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to a
fund.
COVER. The funds will not use leverage in their hedging strategies. A
fund will not enter into a Derivative Instruments strategy that exposes it to an
obligation to another party unless its owns either (1) an offsetting ("covered")
position in securities or other options or futures contracts or (2) cash and
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.
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GUIDELINES, CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The funds
effectively may terminate their right or obligation under an option by entering
into a closing transaction. If a fund wishes to terminate its obligation under a
put or call option it has written, the fund may purchase a put or call option of
the same series (i.e., an option identical in its terms to the option previously
written); this is known as a closing purchase transaction. Conversely, in order
to terminate its right to purchase or sell under a call or put option it has
purchased, the fund may write an option of the same series as the option held.
This is known as a closing sale transaction. Closing transactions essentially
permit a fund to realize profits or limit losses on its options positions prior
to the exercise or expiration of the option. Whether a profit or loss is
realized from a closing transaction depends on the price movement of the
underlying security, index or futures contract, and the market value of the
option.
In considering the use of options to hedge, particular note should be
taken of the following:
(1) The value of an option position will reflect, among other things,
the current market price of the underlying security, index, or futures contract,
the time remaining until expiration, the relationship of the exercise price to
the market price, the historical price volatility of the underlying investment
and general market conditions. For this reason, the successful use of options
depends upon the ability of the Manager or Subadviser, as the case may be, to
forecast the direction of price fluctuations in the underlying investment.
(2) Prior to its expiration, the exercise price of an option may be
below, equal to, or above the current market value of the underlying investment.
Purchased options that expire unexercised have no value. Unless an option
purchased by a fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(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
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obligated under such option. This requirement may impair the fund's ability to
sell a portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
(4) Activities in the options market may result in a higher portfolio
turnover rate and additional brokerage costs. However, the funds also may save
on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation of market movements.
(5) The risks of investment in options on indices may be greater than
options on securities. Because index options are settled in cash, when a fund
writes a call on an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. A
fund can offset some of the risk of writing a call index option by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, a fund cannot, as a practical matter, acquire and hold
an investment portfolio containing exactly the same securities as underlie the
index and, as a result, bears the risk that the value of the securities held
will vary from the value of the index.
Even if a fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, a fund as the call writer will not
learn that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date. By the time it learns that it has been assigned, the index
may have declined, with a corresponding decline in the value of its securities
portfolio. This "timing risk" is an inherent limitation on the ability of index
call writers to cover their risk exposure by holding securities positions.
If a fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index subsequently may change. If such a change causes the
exercised option to fall out-of-the-money, the fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
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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
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
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the purchase or sale of a futures contract would not, such as when there is no
movement in the price of the underlying investment.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS (REMICS). Government may invest
in U.S. Government and privately issued 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 above.
REPURCHASE AGREEMENTS. The funds may enter into repurchase agreements.
Repurchase agreements are transactions in which a fund purchases securities and
simultaneously commits to resell the securities to the original seller (a member
bank of the Federal Reserve System or a securities dealer who is a member of a
national securities exchange or is a market maker in U.S. Government securities)
at an agreed upon date and price reflecting a market rate of interest unrelated
to the coupon rate or the maturity of the purchased securities. Although
repurchase agreements carry certain risks not associated with direct investment
in securities, including possible decline in the market value of the underlying
securities and delays and costs to a fund if the other party to the repurchase
agreement becomes bankrupt, each fund intends to enter into repurchase
agreements only with banks and dealers in transactions believed by the Manager
or Subadviser, as applicable, to present minimal credit risks in accordance with
guidelines established by the Board of Trustees.
Each fund may invest up to 25% of its total assets in repurchase
agreements. 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.
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
20
<PAGE>
risk that the market value of securities retained in lieu of sale by High Yield
may decline below the price of the securities the fund has sold but is obliged
to repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
fund's obligation to repurchase the securities and the fund's use of the
proceeds of the reverse repurchase agreement effectively may be restricted
pending such decisions. Reverse repurchase agreements create leverage, a
speculative practice, and will be considered borrowings for the purpose of the
fund's limitation on borrowing.
STRIPPED SECURITIES. Government 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.
Government also may invest in stripped mortgage-backed securities, which
are derivative multi-class mortgage securities. Stripped mortgage-backed
securities in which it may invest will be issued by agencies or
instrumentalities of the U.S. Government. Stripped mortgage-backed securities
are structured with two classes that receive different proportions of the
interest and principal distributions on a pool of assets represented by
mortgages ("Mortgage Assets"). A common type of stripped mortgage-backed
security will have one class receiving a small portion of the interest and a
larger portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. The yields to maturity on IOs and POs are sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and principal payments may have a material effect on yield to maturity.
In addition, the market value of stripped mortgage-backed securities is subject
to greater risk of fluctuation in response to changes in market interest rates
than other mortgage-backed securities. In the case of mortgage-backed IOs, if
the underlying assets experience greater than anticipated prepayments of
principal, there is a greater possibility that Government may not fully recoup
its initial investment. Conversely, if the underlying assets experience slower
than anticipated principal payments, the yield on the PO class will be affected
more severely than would be the case with traditional mortgage-backed
securities.
The SEC staff takes the position that IOs and POs generally are illiquid
securities. The staff also takes the position, however, that the Board of
Trustees (or the Manager pursuant to delegation by the Board) may determine that
U.S. Government-issued IOs or POs backed by fixed-rate mortgages are liquid,
where the Board determines that such securities can be disposed of promptly in
the ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share. Accordingly, certain of the IO and PO
securities in which Government invests may be deemed liquid.
21
<PAGE>
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.
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
22
<PAGE>
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.
ZERO COUPON AND PAY-IN-KIND BONDS. High Yield 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. High Yield
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 High Yield'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, High Yield 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.
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
- ----------------------
FUNDAMENTAL POLICIES:
--------------------
23
<PAGE>
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
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 (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.
24
<PAGE>
SELLING SHORT AND BUYING ON MARGIN. Neither fund may sell any
securities short, purchase any securities on margin or maintain a short position
in any security, but may obtain such short-term credits as may be necessary for
clearance of purchase and sales of securities; provided, however, the funds may
make margin deposits and may maintain short positions in connection with the use
of options, futures contracts and options on futures contracts as described
previously.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST. Neither fund may purchase or retain the securities of any
issuer if the officers and Trustees of the Trust or the Manager or its
Subadviser, as applicable, own individually more than 1/2 of 1% of the issuer's
securities or together own more than 5% of the issuer's securities.
REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES. Neither fund
may enter into repurchase agreements with respect to more than 25% of its total
assets or lend portfolio securities amounting to more than 25% of its total
assets.
NONFUNDAMENTAL POLICIES:
-----------------------
Each fund has adopted the following additional restrictions that are
nonfundamental policies and may not 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.
25
<PAGE>
NET ASSET VALUE
- ---------------
The net asset value per share of Class A shares, Class B shares and Class
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 The Exchange normally is open for business Monday through Friday except
the following holidays: New Year's Day, Martin Luther King's Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
Each fund values its securities and other assets based on their market
value determined as follows. A security listed or traded on the Exchange, or on
The Nasdaq Stock Market, 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,
market value is based on the most recent quoted bid price. 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 be reliable by the
Manager or Subadviser, are valued at fair value using such methods as 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 net asset
value Class A shares, Class B shares and Class 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 or other assets 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 may be valued at fair
value by methods as determined in good faith by or under procedures established
by the Board of Trustees.
The Board of Trustees 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 practicable for the
fund fairly to determine the value of its net assets, or (4) for such other
26
<PAGE>
periods as the SEC may by order permit for the protection of the holders of fund
shares.
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. Because Class B shares and Class C shares bear higher Rule 12b-1
fees, the performance of Class B shares and Class C shares of a fund likely will
be lower than that of Class A shares.
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 for the one
year, five year and ten year periods (or life of the fund) according to the
following formula:
P(1+T)n(SUPERSCRIPT)=ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period at the end of that period
In calculating the ending redeemable value for Class A shares, each fund's
current maximum sales charge of 3.75% is deducted from the initial $1,000
payment and, for Class B shares and Class C shares, the applicable CDSC imposed
on a redemption of Class B shares or Class 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.
In connection with communicating its total return to current or
prospective shareholders, each fund 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. 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 investment
vehicles.
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 or Government's Class A shares, Class B shares or Class C shares
27
<PAGE>
total return with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc., Morningstar Mutual Funds or with such market
indices as the Lehman Brothers Government Corporate Composite Index, Lehman
Intermediate Government Corporate Index, and the Merrill Lynch Domestic Master
Index, 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 charges charged on Class A shares or CDSCs charged
on Class B shares and Class C shares. By not annualizing the performance and
excluding the effect of the front-end sales charge on Class A shares and the
CDSC on Class B shares and Class C shares, the 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 sales charge or CDSC results in a
higher rate of return than calculating total return net of the front-end sales
charge.
The average annualized total return and cumulative return are as follows
for each period of each fund below.
<TABLE>
<CAPTION>
AVERAGE
ANNUALIZED TOTAL
FUND SHARES PERIOD TOTAL RETURN RETURN
---- ------ ------ ------------ -----
<S> <C> <C> <C> <C> <C>
High Yield Class A . One-year period ended % %
September 30, 1998
. Five-year period ended
September 30, 1998 % %
. March 1, 1990
(commencement of
operations) to September
30, 1998 % %
Class B . February 2, 1998 (initial % %
offering of Class B
shares) to September 30,
1998
Class C . One-year period ended
September 30, 1998 % %
. April 3, 1995 (initial
offering of shares) to % %
September 30, 1998
Intermediate Class A . One-year period ended % %
Government September 30, 1998
28
<PAGE>
AVERAGE
ANNUALIZED TOTAL
FUND SHARES PERIOD TOTAL RETURN RETURN
---- ------ ------ ------------ -----
<S> <C> <C> <C> <C> <C>
. Five-year period ended
September 30, 1998 % %
. March 1, 1990
(commencement of
operations) to September
30, 1998 % %
Class B . February 2, 1998 (initial % %
offering of Class B
shares) to September 30,
1998
Class C . One-year period ended
September 30, 1998 % %
. April 3, 1995 (initial
offering of shares) to % %
September 30, 1998
</TABLE>
Each fund may from time to time advertise the yield of Class A shares,
Class B shares and Class C shares and compare these yields to those of other
mutual funds with similar investment objectives. The yield of each class of each
fund is 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 accounting methods differ from the methods
used for other accounting purposes; accordingly, the yield for a class may not
equal the dividend income actually paid to shareholders or the net investment
income per share reported in each fund's financial statements. Yield quotations
are calculated according to the following formula:
YIELD = 2x[(a-b+1)6(SUPERSCRIPT)-1]
---
cxd
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
29
<PAGE>
(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 totaling 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, 1998, the 30-day yield for High Yield
and Government Class A shares was ____% and ____%, respectively. At September
30, 1998, the 30-day yield for High Yield and Government Class B shares was
____% and ____%, respectively. At September 30, 1998, the 30-day yield for High
Yield and Government Class C shares was ____% and ____%, respectively.
INVESTING IN THE FUNDS
- ----------------------
Class A shares, Class B shares and Class 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
-----------------------------
The options below allow you to invest continually in one or more funds at
regular intervals.
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.
30
<PAGE>
RETIREMENT PLANS
----------------
HERITAGE IRA. Individuals who earn compensation and who have not reached
age 70 1/2 before the close of the year generally may establish a Heritage
Individual Retirement Account ("IRA"). An individual may make limited
contributions to a Heritage IRA through the purchase of shares of a fund and/or
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, under certain circumstances, whose spouses are not
active participants, unless their combined adjusted gross income does not exceed
$150,000) 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 Class A shares of any Heritage mutual fund at a reduced
sales charge on a monthly basis during the 13-month period following such a
plan's initial purchase. The sales charge applicable to an initial purchase of
Class A shares will be that normally applicable under the schedule of sales
charges set forth in the Prospectus to an investment 13 times larger than such
initial purchase. The sales charge applicable to each succeeding monthly
purchase of Class 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 charges previously paid during such period will not be adjusted
retroactively on the basis of later purchases. Multiple participant payroll
deduction retirement plans may purchase Class B shares and Class C shares at any
time.
CLASS A COMBINED PURCHASE PRIVILEGE (RIGHT OF ACCUMULATION)
-----------------------------------------------------------
Certain investors may qualify for the Class A sales charge reductions
indicated in the sales charge schedule in the Prospectus by combining purchases
of Class 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 Class A shares of a fund for his or their
31
<PAGE>
own account; a single purchase by a trustee or other fiduciary purchasing Class
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 Class 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 Class 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 charge.
The applicable Class A shares initial sales charge 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 Class A shares of a fund held by the investor and (b) all
Class A shares of any other Heritage mutual fund held by the investor and
purchased at a time when Class A shares of such other fund were
distributed subject to a sales charge (including Heritage Cash Trust
shares acquired by exchange); and
(iii) the net asset value of all Class A shares described in
paragraph (ii) owned by another shareholder eligible to combine his
purchases with that of the investor into a single "purchase."
Class A shares of Government purchased from February 1, 1992 through July
31, 1992, without payment of a sales charge will be deemed to fall under the
provisions of paragraph (ii) as if they had been distributed without being
subject to a sales charge, unless those shares were acquired through an exchange
of other shares that were subject to a sales charge.
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 charges 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 Class A shares of a fund or any other Heritage mutual fund subject to
a sales charge. Each purchase of Class 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
32
<PAGE>
fund subject to a sales charge, you may include those shares in computing the
amount necessary to qualify for a sales charge 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. Class 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 charge
applicable to the shares actually purchased if the full amount indicated is not
purchased, and such escrowed Class A shares will be involuntarily redeemed to
pay the additional sales charge, 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 charge, the sales charge will be
adjusted for the entire amount purchased at the end of the 13-month period. The
difference in sales charge will be used to purchase additional Class A shares of
a fund, subject to the rate of sales charge applicable to the actual amount of
the aggregate purchases. An investor may amend his/her Statement of Intention to
increase the indicated dollar amount and begin a new 13-month period. In that
case, all investments subsequent to the amendment will be made at the sales
charge 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 Sell Your Investment."
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
Heritage.
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 Class C shares,
if made less than one year of the date of purchase, will be charged a CDSC of
1%. Systematic withdrawals of Class B shares, if made in less than six years of
the date of purchase, will be charged the applicable CDSC 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 CDSC for Class B
shares and Class C shares. If a shareholder elects to participate in the
Systematic Withdrawal Plan, dividends and other distributions on all shares in
33
<PAGE>
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 Heritage or the Distributor. The funds, their
transfer agent, and Distributor also reserve the right to modify or terminate
the Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or a capital gain distribution. These payments are taxable to the
extent that the total amount of the payments exceeds the tax basis of the shares
sold. If the periodic withdrawals exceed reinvested dividends and other
distributions, the amount of the original investment may be correspondingly
reduced.
Ordinarily, a shareholder should not purchase additional Class A shares of
a fund if maintaining a Systematic Withdrawal Plan of Class 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 Class 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.
34
<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 in good order (as
described below) and 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 CDSC for Class B shares and Class 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 Heritage.
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 a shareholder and by all co-owners of the
account with exactly the same name or names used in establishing the account;
. any written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed for
transfer exactly as the name or names appear on the certificates or an
accompanying stock power has been attached; and
. the signatures on any written redemption request of $50,000 or more and on
any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company, or by any member firm of the
New York, American, Boston, Chicago, Pacific or Philadelphia Stock Exchanges.
Signature guarantees also will be accepted from savings banks and certain
other financial institutions that are deemed acceptable by Heritage, as
transfer agent, under its current signature guarantee program.
Each 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 CDSC, after the suspension is lifted.
If a redemption check remains outstanding after six months, Heritage reserves
the right to redeposit those funds into your account.
35
<PAGE>
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.
In the event that you or your Financial Advisor (a financial advisor of
the distributor, a particpating dealer or participating bank) are unable to
reach Heritage by telephone, an exchange can be effected by sending a telegram
to Heritage. Due to the volume of calls or other unusual circumstances,
telephone exchanges may be difficult to implement during certain time periods.
Class A shares of Government purchased from February 1, 1992 through July
31, 1992, without payment of a front-end sales charge may be exchanged into
Class A shares of another Heritage mutual fund without payment of any sales
charge. Class A shares of Government purchased after July 31, 1992 without a
front-end sales charge will be subject to a front-end sales charge when
exchanged into Class A shares of another Heritage mutual fund, unless those
shares were acquired through an exchange of other shares that were subject to a
front-end sales charge.
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.
CONVERSION OF CLASS B SHARES
- ----------------------------
Class B shares of each fund automatically will convert to Class 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 Class B shares, the date of initial issuance shall mean (1) the
date on which such Class B shares were issued or (2) for Class B shares obtained
through an exchange, or a series of exchanges, the date on which the original
Class B shares were issued. For purposes of conversion to Class A shares, Class
B shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account. Each
time any Class B shares in the shareholder's regular account (other than those
in the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares in the sub-account will also convert to Class A shares. The portion will
be determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
36
<PAGE>
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 Class A shares and Class 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 Class B shares would not be converted and would continue to be subject to
the higher ongoing expenses of the Class 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
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.
By qualifying for treatment as a RIC, a fund (but not its shareholders)
will be relieved of Federal income tax on the part of its investment company
taxable income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that it distributes to its shareholders. If a
fund failed to qualify as a RIC for any taxable year, it would be taxed on the
full amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and the shareholders would treat all
those distributions, including distributions of net capital gain, as dividends
(that is, ordinary income) to the extent of the fund's earnings and profits.
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, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
37
<PAGE>
normally includes any sales charge paid on Class 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 another fund) without
paying a sales charge 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 charge paid when those
shares were acquired, and that amount will increase the adjusted basis of the
shares subsequently acquired. In addition, if fund shares are purchased (whether
pursuant to the reinstatement privilege or otherwise) within 30 days before or
after redeeming other shares of that fund (regardless of class) at a loss, all
or a portion of that loss will not be deductible and will increase the basis of
the newly purchased shares.
If shares of a fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for a dividend or other distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
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
noncorporate 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 to 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.
High Yield credited undistributed net investment income and charged
accumulated net realized gain of $44,735 in the current year ended September 30,
1998. High Yield utilized $716,301 of net tax basis capital losses during the
current year against net realized gains from investment transactions.
As of September 30, 1997, Government had a net tax basis capital loss
carryforwards of $7,095,646, which may be applied against any net realized
taxable gains until their expiration dates of September 30, 2001 (as to
38
<PAGE>
$237,373), September 30, 2002 (as to $3,838,721), September 30, 2003 (as to
$2,492,779) and September 30, 2004 (as to $526,773). Government utilized
$150,698 of net tax basis capital losses during the current year against net
realized gains from investment transactions.
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.
Certain options and futures in which a fund may invest will be "section
1256 contracts." Section 1256 contracts held by a fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which it has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Section 1092
generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
fund of straddle transactions are not entirely clear.
If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
39
<PAGE>
property will be deemed a constructive sale.
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 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.
SHAREHOLDER INFORMATION
- -----------------------
Each share of a fund gives the shareholder one vote in matters submitted
to shareholders for a vote. Class A shares, Class B shares and Class 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.
40
<PAGE>
TRUST INFORMATION
- -----------------
MANAGEMENT OF THE TRUST
-----------------------
BOARD OF TRUSTEES. The business 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 the other
Trustees or by a two-thirds vote of the outstanding Trust shares.
BACKGROUND OF THE TRUSTEES AND OFFICERS. Trustees and officers are listed
below with their addresses, principal occupations and present positions,
including any affiliation with Raymond James Financial, Inc. ("RJF"), RJA and
the Manager.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
<S> <C> <C>
Thomas A. James* (56) Trustee Chairman of the Board since 1986 and Chief
880 Carillon Parkway Executive Officer since 1969 of RJF;
St. Petersburg, FL 33716 Chairman of the Board of RJA since 1986;
Chairman of the Board of Eagle Asset
Management, Inc. ("Eagle") since 1984 and
Chief Executive Officer of Eagle, 1994 to
1996.
Richard K. Riess* (49) Trustee Chief Executive Officer of Eagle since
880 Carillon Parkway 1996, President, 1995 to present, Chief
St. Petersburg, FL 33716 Operating Officer, 1988 to 1996, Executive
Vice President, 1988 to 1993.
Donald W. Burton* (54) Trustee President of South Atlantic Capital Corporation
614 W. Bay Street, Suite 200 (venture capital) since 1981.
Tampa, FL 33606
C. Andrew Graham (58) Trustee Vice President of Financial Designs Ltd.
Financial Designs, Ltd. since 1992; Executive Vice President of
1775 Sherman Street the Madison Group, Inc., 1991 to 1992;
Suite 1900 Principal of First Denver Financial
Denver, CO 80203 Corporation (investment banking) since
1987.
David M. Phillips (59) Trustee Chairman and Chief Executive Officer of
World Trade Center Chicago CCC Information Services, Inc. since 1994
444 Merchandise Mart and of InfoVest Corporation (information
Chicago, IL 60654 services to the insurance and auto
industries and consumer households) since
1982.
Eric Stattin (65) Trustee Litigation Consultant/Expert Witness and
1975 Evening Star Drive private investor since 1988.
Park City, UT 84060
41
<PAGE>
Position with Principal Occupation
Name the Trust During Past Five Years
---- ------------- ----------------------
<S> <C> <C>
James L. Pappas (55) Trustee Lykes Professor of Banking and Finance
University of South Florida since 1986 at University of South Florida;
College of Business Dean of College of Business Administration,
Administration 1987 to 1996.
Tampa, FL 33620
Stephen G. Hill (39) President Chief Executive Officer and President of
880 Carillon Parkway the Manager since 1989 and Director since
St. Petersburg, FL 33716 1994; Director of Eagle since 1995.
Donald H. Glassman (41) Treasurer Treasurer of the Manager since 1989;
880 Carillon Parkway Treasurer of Heritage Mutual Funds since
St. Petersburg, FL 33716 1989.
Clifford J.Alexander (54) Secretary Partner, Kirkpatrick & Lockhart LLP (law
1800 Massachusetts firm).
Ave., N.W.
Washington, DC 20036
Patricia Schneider (57) Assistant Compliance Administrator of the Manager.
880 Carillon Parkway Secretary
St. Petersburg, FL 33716
Robert J. Zutz (45) Assistant Partner, Kirkpatrick & Lockhart LLP (law
1800 Massachusetts Secretary firm).
Ave., N.W.
Washington, DC 20036
- -----------
</TABLE>
* These Trustees are "interested persons" as defined in section 2(a)(19) of the
1940 Act.
The Trustees and officers of the Trust as a group, own less than 1% of
each class of each fund's shares outstanding. The Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or mistakes
of fact or law. However, they are not protected against any liability to which
they would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
The Trust currently pays Trustees who are not employees of the Manager or
its affiliates $________ annually and $___ 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, 1998.
42
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Aggregate Pension or Estimated Compensation
Compensation Retirement Annual Benefits From the Trust
Name of Person, From the Benefits Accrued Upon Retirement and the Heritage
Position Trust as Part of the Family of Funds
Trust's Expenses Paid to
Trustees
<S> <C> <C> <C> <C>
Donald W. Burton, $____ $0 $0 $_____
Trustee
C. Andrew Graham, $____ $0 $0 $_____
Trustee
David M. Phillips, $____ $0 $0 $_____
Trustee
Eric Stattin, Trustee $____ $0 $0 $_____
James L. Pappas, $____ $0 $0 $_____
Trustee
Richard K. Riess, $0 $0 $0 $0
Trustee
Thomas A. James, $0 $0 $0 $0
Trustee
</TABLE>
FIVE PERCENT SHAREHOLDERS
- -------------------------
As of __________, 199_, the following shareholders owned of record or were
known by the funds to own beneficially five percent or more of the outstanding
Class C shares of Government.
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 Raymond James Financial ("RJF"). RJF is
a holding company that, through its subsidiaries, is engaged primarily in
providing customers with a wide variety of financial services in connection with
securities, limited partnerships, options, investment banking and related
fields.
Under an Investment Advisory and Administration Agreement ("Advisory
Agreement") dated January 19, 1990, between the Trust, on behalf of the funds,
and the Manager, and subject to the control and direction of the Board of
Trustees, the Manager is responsible for reviewing and establishing investment
policies for the Trust as well as administering the Trust's noninvestment
affairs. Under a Subadvisory Agreement, dated February 1, 1996, the Subadviser,
subject to direction by the Manager and Board of Trustees, will 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
43
<PAGE>
"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.
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's fee for the High
Yield is 0.60% on the first $100 million of its average daily net assets and
0.50% on the average daily net assets of over $100 million. The Manager's fee
for Government is 0.50% of its average daily net assets. 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 Class A
shares exceed 1.25% of the average daily net assets or to the extent that total
annual operating expenses attributable to Class B shares and Class 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, 1996, 1997 and 1998
management fees amounted to $200,042, $287,069 and $_______, respectively. For
the same periods, the Manager waived its fees in the amounts of $94,308, $45,839
and $_______, respectively. 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 $15,507, for such fund, and paid subadvisory fees
to Salomon for the period February 1, 1996 through September 30, 1996 and the
44
<PAGE>
fiscal years ended September 30, 1997 and 1998, of $69,007, $143,535 and
$________, respectively.
For Government, the Manager [voluntarily] has agreed to waive its fees to
the extent that fund expenses attributable to Class A shares exceed .95% of the
average daily net assets or to the extent that fund expenses attributable to
Class B shares and Class 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, 1996, 1997 and 1998, management fees amounted to $105,455, $81,847
and $________, respectively. For the same periods, the Manager waived its fees
in the amounts of $105,455, $81,847 and $______, respectively. For the fiscal
years ended September 30, 1996, 1997 and 1998, the Manager reimbursed Government
for expenses totaling $35,322, $39,456 and $_______, 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, 1997 and 1998 were 101% and 87%, respectively,
for High Yield, and 69% and 188%, 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 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.
45
<PAGE>
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.
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
- ----------------------
Shares of each fund are offered continuously through the funds' principal
underwriter, 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 charge 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.
The Distributor and Financial Advisors with whom the Distributor has
entered into dealer agreements offer shares of each fund as agents on a best
46
<PAGE>
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 Class A shares, Class
B shares and Class 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 Class A shares, Class B shares and Class C shares. The
funds used all Class A and Class C 12b-1 fees to pay the Distributor. The
Distributor, on Class C shares, may retain the first 12 months distribution fee
for reimbursement of amounts paid to the broker-dealer at the time of purchase.
Each Plan was approved by the Board of Trustees, including a majority of the
Trustees who are not interested persons of a fund (as defined in the 1940 Act)
and who have no direct or indirect financial interest in the operation of the
Plan or the Distribution Agreement. In approving such Plans, the Board
determined that there is a reasonable likelihood that each fund and its
shareholders will benefit from each Plan.
As compensation for services rendered and expenses borne by the
Distributor in connection with the distribution of Class 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 Class 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 Class 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 Class B shares and Class 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,
High Yield pays the Distributor a fee of 0.80% and Government pays the
Distributor a fee of 0.60% of the applicable fund's average daily net assets
attributable to Class B shares and Class C shares. This fee is computed daily
and paid monthly.
For the fiscal year ended September 30, 1998 the Distributor received
12b-1 fees in the amount of $______ and $_____ for Class A shares of High Yield
and Government, respectively. For the fiscal year ended September 30, 1998, the
Distributor received 12b-1 fees in the amount of $______ and $________ for Class
B shares of High Yield and Government, respectively. For the fiscal year ended
September 30, 1998, the Distributor received 12b-1 fees in the amount of $______
and $______ for Class C shares of High Yield and Government, respectively.
47
<PAGE>
In reporting amounts expended under the Plans to the Board of Trustees,
the Distributor will allocate expenses attributable to the sale of Class A
shares, Class B shares and Class 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.
For the three fiscal years ended September 30, 1998, the Distributor
received as compensation for the sale of High Yield A shares $159,739, $216,612
and $__________, respectively, of which it retained $19,066, $28,693 and
$__________, respectively. For the same periods, the Distributor received as
compensation for the sale of Government A shares $17,353, $8,937 and
$__________, respectively, of which it retained $2,577, $1,139 and $________,
respectively. For the period January 2, 1998 to September 30, 1998, the
Distributor received $________ and $________ of which it retained the entire
amounts for the sale of High Yield Class B and Government Class B, respectively.
For the three fiscal years ended September 30, 1998, the Distributor received
$1,011, $4,491 and $__________, respectively, of which it retained $1,011,
$4,491 and $__________, respectively, for the sale of High Yield C shares, and
$150, $1,057 and $_______, respectively, of which it retained $150, $1,057 and
$________, respectively, for the sale of Government C shares.
ADMINISTRATION OF THE TRUST
- ---------------------------
ADMINISTRATIVE, FUND ACCOUNTING AND TRANSFER AGENT SERVICES. The Manager,
subject to the control of the Board of Trustees, will manage, supervise and
conduct the administrative and business affairs of the Trust and of each fund;
furnish office space and equipment; oversee the activities of the Subadviser and
48
<PAGE>
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, 1998 the Manager earned
approximately $29,201, $28,200 and $_______, respectively, from Government for
its services as fund accountant. For the same periods the Manager earned
$31,311, $32,320 and $_____, respectively, from High Yield for its services as
fund accountant.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as custodian of the Trust's assets. The Custodian
provides portfolio accounting and certain other services.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036, serves as counsel to the Trust.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers 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
five fiscal years ended September 30, 1998 that appear in this SAI have been
audited by PricewaterhouseCoopers 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.
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 fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER DEBT RATINGS
- ----------------------------------------------------------------------------
PRIME-L. Issuers (or supporting institutions) rated PRIME-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2. Issuers (or supporting institutions) rated PRIME-2 (P-2) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
- ---------------------------------------------------------
A-1. This designation indicates that the degree of safety regarding timely
payment is very 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".
CORPORATE DEBT RATINGS
The rating services' descriptions of corporate debt ratings in which the fund
may invest are:
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE DEBT RATINGS
- ---------------------------------------------------------------------
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally 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 are likely
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 are generally 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
A-1
<PAGE>
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than the Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds that are rated Baa are considered 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 may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
- -------------------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
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-2
<PAGE>
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, CC, C - Debt rated "BB," "B," "CCC," "CC," and "C" 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 and "C" the highest 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 is also 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 will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also 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 is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no interest is being
paid.
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
A-3
<PAGE>
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.
A-4
<PAGE>
The Report of the Independent Accounts and Financial Statements are incorporated
herein by reference from the Trust's Annual Report to Shareholders for the
fiscal year ended September 30, 1998, filed with the Securities and Exchange
Commission on November 30, 1998, Accession No. 0000950144-98-013421.
A-5
<PAGE>
HERITAGE INCOME TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits
--------
(a) Declaration of Trust*
(b)(i) Bylaws*
(ii) Amended and Restated Bylaws*
(c) Voting trust agreement -- none
(d)(i) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc.*
(ii) Subadvisory Agreement between Heritage Asset Management, Inc. and
Eagle Asset Management, Inc.*
(iii) Subadvisory Agreement between Heritage Asset Management, Inc. and
Salomon Brothers Asset Management Inc*
(e) Distribution Agreement*
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement*
(h)(i) Transfer Agency and Service Agreement*
(ii) Fund Accounting and Pricing Service Agreement*
(i) Opinion and consent of counsel (filed herewith)
(j) Consent of Independent Auditors (filed herewith)
(k) Financial statements omitted from prospectus -- none
(l) Letter of investment intent*
(m)(i) Class A Plan pursuant to Rule 12b-1*
C-1
<PAGE>
(ii) Class C Plan pursuant to Rule 12b-1*
(iii) Class B plan pursuant to Rule 12b-1***
(n)(i) Financial Data Schedule Relating to High Yield Bond Fund Class A
(filed herewith)
(ii) Financial Data Schedule Relating to High Yield Bond Fund Class C
(filed herewith)
(iii) Financial Data Schedule Relating to High Yield Bond Fund Class B
(filed herewith)
(iv) Financial Data Schedule Relating to Intermediate Government Fund
Class A (filed herewith)
(v) Financial Data Schedule Relating to Intermediate Government Fund
Class C (filed herewith)
(vi) Financial Data Schedule Relating to Intermediate Government Fund
Class B (filed herewith)
(o)(i) Plan pursuant to Rule 18f-3**
(ii) Amended Plan pursuant to Rule 18f-3***
- ------------------
* Incorporated by reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
** Incorporated by reference from the Post-Effective Amendment No. 13 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on January 29, 1997.
*** Incorporated by reference from the Post Effective Amendment No. 14 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 2, 1997.
Item 24. Persons Controlled by or under
Common Control with Registrant
------------------------------
None.
Item 25. Indemnification
---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
C-2
<PAGE>
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
Trust to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
C-3
<PAGE>
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust
is a trust, not a partnership. Trustees are not liable personally to any person
extending credit to, contracting with or having any claim against the Trust, a
particular Portfolio or the Trustees.
Article XII, Section 2 of the Declaration of Trust provides that, subject
to the provisions of Section 1 of Article XII and to Article XI, the Trustees
are not liable for errors of judgment or mistakes of fact or law, or for any act
or omission in accordance with advice of counsel or other experts or for failing
to follow such advice. A Trustee, however, is not protected from liability due
to willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Paragraph 8 of the Investment Advisory and Administration Agreement of
Heritage Income Trust ("Advisory Agreement") between the Trust and Heritage
Asset Management, Inc. ("Heritage" or the "Manager") provides that the Manager
shall not be liable for any error of judgment or mistake of law for any loss
suffered by the Trust in connection with the matters to which the Advisory
Agreement relates except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Advisory Agreement. Any
person, even though also an officer, partner, employee, or agent of the Manager,
who may be or become an officer, director, employee or agent of the Trust shall
be deemed, when rendering services to the Trust or acting in any business of the
Trust, to be rendering such services to or acting solely for the Trust and not
as an officer, partner, employee, or agent or one under the control or direction
of the Manager even though paid by it.
Paragraph 9 of the Heritage Income Trust Subadvisory Agreement
("Subadvisory Agreement") between the Manager and Salomon Brothers Asset
Management Inc ("Subadviser" or "Salomon") provides that, in the absence of bad
faith, negligence or disregard of its obligations and duties under the
Subadvisory Agreement, the Subadviser shall not be subject to any liability to
the Trust, or to any of its Shareholders, for any act or omission in the course
of, or connected with, rendering services under the Subadvisory Agreement.
C-4
<PAGE>
Paragraph 7 of the Distribution Agreement of Heritage Income Trust
("Distribution Agreement") between the Trust and Raymond James & Associates,
Inc. ("Raymond James") provides that the Trust agrees to indemnify, defend and
hold harmless Raymond James, its several officers and directors, and any person
who controls Raymond James within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "1933 Act") from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Raymond James, its officers or Trustees, or any such
controlling person may incur under the 1933 Act or under common law or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of Additional
Information or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, provided that in no event shall
anything contained in the Distribution Agreement be construed so as to protect
Raymond James against any liability to the Trust or its shareholders to which
Raymond James would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under the Distribution
Agreement.
Paragraph 13 of the Heritage Funds Accounting and Pricing Services
Agreement ("Accounting Agreement") between the Trust and Heritage provides that
the Trust shall indemnify and hold harmless Heritage and its nominees from all
losses, damages, costs, charges, payments, expenses (including reasonable
counsel fees), and liabilities arising directly or indirectly from any action
that Heritage takes or does or omits to take to do (i) at the request or on the
direction of or in reasonable reliance on the written advice of the Trust or
(ii) upon Proper Instructions (as defined in the Accounting Agreement),
provided, that neither Heritage nor any of its nominees shall be indemnified
against any liability to the Trust or to its shareholders (or any expenses
incident to such liability) arising out of Heritage's own willful misfeasance,
willful misconduct, gross negligence or reckless disregard of its duties and
obligations specifically described in the Accounting Agreement or its failure to
meet the standard of care set forth in the Accounting Agreement.
Item 26. I. Business and Other Connections of Investment Adviser
----------------------------------------------------
Heritage Asset Management, Inc. is a Florida corporation that offers
investment management services. Heritage's offices are located at 880 Carillon
Parkway, St. Petersburg, Florida 33716. Information as to the officers and
directors of Heritage is included in its current Form ADV filed with the
Securities and Exchange Commission ("SEC") and is included by reference herein.
II. Business and Other Connections of Subadviser
--------------------------------------------
Salomon, 7 World Trade Center, 38th floor, New York, New York 10048, is a
registered investment adviser. It is a wholly owned subsidiary of Salomon.
Salomon primarily is engaged in the investment advisory business. Information as
to the officers and directors of Salomon is included in its current Form ADV
filed with the SEC and is incorporated by reference herein.
C-5
<PAGE>
Item 27. Principal Underwriter
---------------------
(a) Raymond James & Associates, Inc., 880 Carillon Parkway, St.
Petersburg, Florida 33716, is the principal underwriter for each of the
following investment companies: Heritage Cash Trust, Heritage Capital
Appreciation Trust, Heritage Income-Growth Trust, Heritage Income Trust and
Heritage Series Trust.
(b) The directors and officers of the Registrant's principal
underwriter are:
Positions & Offices Positions & Offices
Name with Underwriter with Registrant
---- ---------------- ---------------
Thomas A. James Chief Executive Officer, Trustee
Director
Robert F. Shuck Executive V.P., Director None
Thomas S. Franke President, Chief None
Operating Officer,
Director
Lynn Pippenger Secretary/Treasurer, None
Chief Financial Officer,
Director
Dennis Zank Executive Vice President None
of Operations and
Administration, Director
Thom Tremaine Senior Vice President None
Francis Godbold Executive Vice President None
Paul Matecki Chief Legal Officer None
Joseph Tuorto Chief Compliance Officer None
Anne Rettig Assistant Treasurer None
Jodi Campos Vice President Comptroller None
Michael Cahill Assistant Vice President, None
Assistant Controller
C-6
<PAGE>
Sharry Mauney Assistant Secretary None
Grace Palsha Assistant Secretary None
The principal business address for each director and officer listed above is 880
Carillon Parkway, St. Petersburg, Florida 33716.
Item 28. Location of Accounts and Records
--------------------------------
The books and other documents required by Rule 31a-1 under the Investment
Company Act of 1940 were maintained in the physical possession of the Trust's
custodian through February 28, 1994, except that: Heritage maintained some or
all of the records required by Rule 31a-(b)(l), (2) and (8); and the Subadviser
maintained some or all of the records required by Rule 31a-1(b)(2), (5), (6),
(9), (10) and (11). Since March 1, 1994, the required records have been
maintained by Heritage and the Subadviser.
Item 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
The Trust hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 15 to its Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Petersburg and the State of Florida, on the 30th
day of November, 1998.
HERITAGE INCOME TRUST
By: /s/ Stephen G. Hill
-------------------
Stephen G. Hill
President
Attest:
/s/ Donald H. Glassman
- ----------------------
Donald H. Glassman
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 15 to the Registration Statement has been
signed below by the following persons in the capacity and on the dates
indicated.
Signature Title Date
/s/ Stephen G. Hill
- -------------------
Stephen G. Hill President November 30, 1998
Thomas A. James*
- -------------------
Thomas A. James Trustee November 30, 1998
Richard K. Riess*
- -------------------
Richard K. Riess Trustee November 30, 1998
C. Andrew Graham*
- -------------------
C. Andrew Graham Trustee November 30, 1998
David M. Phillips*
- -------------------
David M. Phillips Trustee November 30, 1998
James L. Pappas*
- -------------------
James L. Pappas Trustee November 30, 1998
C-8
<PAGE>
Donald W. Burton*
- -------------------
Donald W. Burton Trustee November 30, 1998
Eric Stattin*
- -------------------
Eric Stattin Trustee November 30, 1998
/s/ Donald H. Glassman
- ---------------------- Treasurer November 30, 1998
Donald H. Glassman
*By /s/ Donald H. Glassman
----------------------
Donald H. Glassman,
Attorney-in-Fact
C-9
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
(a) Declaration of Trust*
(b)(i) Bylaws*
(ii) Amended and Restated Bylaws*
(c) Voting trust agreement - none
(d)(i) Investment Advisory and Administration Agreement
between Registrant and Heritage Asset Management,
Inc.*
(ii) Subadvisory Agreement between Heritage Asset
Management, Inc. and Eagle Asset Management, Inc.*
(iii) Subadvisory Agreement between Heritage Asset
Management, Inc. and Salomon Brothers Asset
Management Inc.*
(e) Distribution Agreement*
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement*
(h)(i) Transfer Agency and Service Agreement*
(ii) Fund Accounting and Pricing Service Agreement*
(i) Opinion and consent of counsel (filed herewith)
(j) Consent of Independent Auditors (filed herewith)
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent*
(m)(i) Class A Plan pursuant to Rule 12b-1*
<PAGE>
(ii) Class C Plan pursuant to Rule 12b-1*
(iii) Class B plan pursuant to Rule 12b-1***
(n)(i) Financial Data Schedule Relating to High Yield Bond
Fund Class A (filed herewith)
(ii) Financial Data Schedule Relating to High Yield Bond
Class C (filed herewith)
(iii) Financial Data Schedule Relating to High Yield Bond
Class B (filed herewith)
(iv) Financial Data Schedule Relating to Intermediate
Government Fund Class A (filed herewith)
(v) Financial Data Schedule Relating to Intermediate
Government Fund Class C (filed herewith)
(vi) Financial Data Schedule Relating to Intermediate
Government Fund Class B (filed herewith)
(o)(i) Plan pursuant to Rule 18f-3**
(ii) Amended Plan pursuant to Rule 18f-3***
- --------------
* Incorporated by reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
** Incorporated by reference from the Post-Effective Amendment No. 13 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on January 29, 1997.
*** Incorporated by reference from the Post-Effective Amendment No. 14 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 2, 1997.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> INTERMEDIATE GOVERNMENT FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 16,947,141
<INVESTMENTS-AT-VALUE> 17,587,641
<RECEIVABLES> 174,321
<ASSETS-OTHER> 87,231
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,849,193
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,615
<TOTAL-LIABILITIES> 71,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,549,673
<SHARES-COMMON-STOCK> 1,834,861
<SHARES-COMMON-PRIOR> 1,615,874
<ACCUMULATED-NII-CURRENT> 683,051
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,095,646)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 640,500
<NET-ASSETS> 17,777,578
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 887,268
<OTHER-INCOME> 0
<EXPENSES-NET> 139,103
<NET-INVESTMENT-INCOME> 748,165
<REALIZED-GAINS-CURRENT> 280,582
<APPREC-INCREASE-CURRENT> 585,698
<NET-CHANGE-FROM-OPS> 1,614,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 768,763
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 673,156
<NUMBER-OF-SHARES-REDEEMED> 528,834
<SHARES-REINVESTED> 74,665
<NET-CHANGE-IN-ASSETS> 2,907,583
<ACCUMULATED-NII-PRIOR> 4,822,472
<ACCUMULATED-GAINS-PRIOR> (7,353,652)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 72,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 119,841
<AVERAGE-NET-ASSETS> 12,984,859
<PER-SHARE-NAV-BEGIN> 9.20
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.51
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.49
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.70
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> INTERMEDIATE GOVERNMENT FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 16,947,141
<INVESTMENTS-AT-VALUE> 17,587,641
<RECEIVABLES> 174,321
<ASSETS-OTHER> 87,231
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,849,193
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,615
<TOTAL-LIABILITIES> 71,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,549,673
<SHARES-COMMON-STOCK> 1,834,861
<SHARES-COMMON-PRIOR> 1,615,874
<ACCUMULATED-NII-CURRENT> 683,051
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,095,646)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 640,500
<NET-ASSETS> 17,777,578
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 887,268
<OTHER-INCOME> 0
<EXPENSES-NET> 139,103
<NET-INVESTMENT-INCOME> 748,165
<REALIZED-GAINS-CURRENT> 280,582
<APPREC-INCREASE-CURRENT> 585,698
<NET-CHANGE-FROM-OPS> 1,614,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 768,763
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 673,156
<NUMBER-OF-SHARES-REDEEMED> 528,834
<SHARES-REINVESTED> 74,665
<NET-CHANGE-IN-ASSETS> 2,907,583
<ACCUMULATED-NII-PRIOR> 4,822,472
<ACCUMULATED-GAINS-PRIOR> (7,353,652)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 72,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 437
<AVERAGE-NET-ASSETS> 36,429
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 0.32
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.26
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> INTERMEDIATE GOVERNMENT FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 16,947,141
<INVESTMENTS-AT-VALUE> 17,587,641
<RECEIVABLES> 174,321
<ASSETS-OTHER> 87,231
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,849,193
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,615
<TOTAL-LIABILITIES> 71,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,549,673
<SHARES-COMMON-STOCK> 1,834,861
<SHARES-COMMON-PRIOR> 1,615,874
<ACCUMULATED-NII-CURRENT> 683,051
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,095,646)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 640,500
<NET-ASSETS> 17,777,578
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 887,268
<OTHER-INCOME> 0
<EXPENSES-NET> 139,103
<NET-INVESTMENT-INCOME> 748,165
<REALIZED-GAINS-CURRENT> 280,582
<APPREC-INCREASE-CURRENT> 585,698
<NET-CHANGE-FROM-OPS> 1,614,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 768,763
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 673,156
<NUMBER-OF-SHARES-REDEEMED> 528,834
<SHARES-REINVESTED> 74,665
<NET-CHANGE-IN-ASSETS> 2,907,583
<ACCUMULATED-NII-PRIOR> 4,822,472
<ACCUMULATED-GAINS-PRIOR> (7,353,652)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 72,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,826
<AVERAGE-NET-ASSETS> 1,568,802
<PER-SHARE-NAV-BEGIN> 9.18
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.47
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> HIGH YIELD BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 57,569,164
<INVESTMENTS-AT-VALUE> 53,565,051
<RECEIVABLES> 1,707,545
<ASSETS-OTHER> 16,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,289,068
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527,947
<TOTAL-LIABILITIES> 527,947
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,312,952
<SHARES-COMMON-STOCK> 5,610,454
<SHARES-COMMON-PRIOR> 5,113,039
<ACCUMULATED-NII-CURRENT> 407,071
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,004,113)
<NET-ASSETS> 59,761,121
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,585,327
<OTHER-INCOME> 0
<EXPENSES-NET> 767,327
<NET-INVESTMENT-INCOME> 4,818,000
<REALIZED-GAINS-CURRENT> 761,512
<APPREC-INCREASE-CURRENT> (5,944,103)
<NET-CHANGE-FROM-OPS> (364,591)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,825,660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,591,387
<NUMBER-OF-SHARES-REDEEMED> 1,417,529
<SHARES-REINVESTED> 323,557
<NET-CHANGE-IN-ASSETS> 143,415
<ACCUMULATED-NII-PRIOR> 9,966,668
<ACCUMULATED-GAINS-PRIOR> (658,145)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 347,856
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 510,619
<AVERAGE-NET-ASSETS> 42,874,592
<PER-SHARE-NAV-BEGIN> 10.69
<PER-SHARE-NII> 0.88
<PER-SHARE-GAIN-APPREC> (0.91)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.89
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.77
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> HIGH YIELD BOND FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 57,569,164
<INVESTMENTS-AT-VALUE> 53,565,051
<RECEIVABLES> 1,707,545
<ASSETS-OTHER> 16,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,289,068
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527,947
<TOTAL-LIABILITIES> 527,947
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,312,952
<SHARES-COMMON-STOCK> 5,610,454
<SHARES-COMMON-PRIOR> 5,113,039
<ACCUMULATED-NII-CURRENT> 407,071
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,004,113)
<NET-ASSETS> 59,761,121
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,585,327
<OTHER-INCOME> 0
<EXPENSES-NET> 767,327
<NET-INVESTMENT-INCOME> 4,818,000
<REALIZED-GAINS-CURRENT> 761,512
<APPREC-INCREASE-CURRENT> (5,944,103)
<NET-CHANGE-FROM-OPS> (364,591)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,825,660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,591,387
<NUMBER-OF-SHARES-REDEEMED> 1,417,529
<SHARES-REINVESTED> 323,557
<NET-CHANGE-IN-ASSETS> 143,415
<ACCUMULATED-NII-PRIOR> 9,966,668
<ACCUMULATED-GAINS-PRIOR> (658,145)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 347,856
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,085
<AVERAGE-NET-ASSETS> 770,556
<PER-SHARE-NAV-BEGIN> 10.57
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> (0.87)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.48
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> HIGH YIELD BOND FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 57,569,164
<INVESTMENTS-AT-VALUE> 53,565,051
<RECEIVABLES> 1,707,545
<ASSETS-OTHER> 16,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,289,068
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 527,947
<TOTAL-LIABILITIES> 527,947
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,312,952
<SHARES-COMMON-STOCK> 5,610,454
<SHARES-COMMON-PRIOR> 5,113,039
<ACCUMULATED-NII-CURRENT> 407,071
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,004,113)
<NET-ASSETS> 59,761,121
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,585,327
<OTHER-INCOME> 0
<EXPENSES-NET> 767,327
<NET-INVESTMENT-INCOME> 4,818,000
<REALIZED-GAINS-CURRENT> 761,512
<APPREC-INCREASE-CURRENT> (5,944,103)
<NET-CHANGE-FROM-OPS> (364,591)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,825,660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,591,387
<NUMBER-OF-SHARES-REDEEMED> 1,417,529
<SHARES-REINVESTED> 232,557
<NET-CHANGE-IN-ASSETS> 143,415
<ACCUMULATED-NII-PRIOR> 9,966,668
<ACCUMULATED-GAINS-PRIOR> (658,145)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 347,856
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 243,623
<AVERAGE-NET-ASSETS> 14,330,781
<PER-SHARE-NAV-BEGIN> 10.65
<PER-SHARE-NII> 0.83
<PER-SHARE-GAIN-APPREC> (0.91)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.84
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
December 1, 1998
Heritage Income Trust
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
You have requested our opinion, as counsel to Heritage Income Trust (the
"Trust"), as to certain matters regarding the issuance of Shares of the Trust.
As used in this letter, the term "Shares" means the Class A, Class B and Class C
shares of beneficial interest of the Heritage Income Trust - High Yield Bond
Fund and the Heritage Income Trust Intermediate Government Fund, both a series
of the Trust.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the issuance
of the Shares has been duly authorized by the Trust and that, when sold in
accordance with the terms contemplated by the Post-Effective Amendment No. 15 to
the Trust's Registration Statement on Form N-1A ("PEA"), including receipt by
the Trust of full payment for the Shares and compliance with the 1933 Act and
the 1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that all persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally liable
therefor. It also requires that every note, bond, contract or other undertaking
issued by or on behalf of the Trust or the Trustees relating to the Trust shall
include a recitation limiting the obligation represented thereby to the Trust
and its assets. The Declaration of Trust further provides: (1) for
indemnification from the assets of the Trust for all loss and expense of any
shareholder held personally liable for the obligations of the Trust by virtue of
ownership of shares of the Trust; and (2) for the Trust to assume the defense of
<PAGE>
Heritage Income Trust
December 1, 1998
Page 2
any claim against the shareholder for any act or obligation of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust or series would be
unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
------------------------
Robert J. Zutz
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 15 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 12, 1998, relating to the financial statements and financial highlights
of the Heritage Income Trust -- High Yield Bond Fund and Intermediate Government
Fund, which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the reference to us
under the heading "Independent Accountants" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
400 North Ashley Street, Suite 2800
Tampa, Florida 33602
December 1, 1998
