As filed with the Securities and Exchange Commission on June 18, 1999
Registration No. 33-30361
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. ___
HERITAGE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, Florida 33716
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 573-3800
STEPHEN G. HILL
880 Carillon Parkway
St. Petersburg, Florida 33716
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective under the Securities Act
of 1933.
It is proposed that this filing will become effective on July 17, 1999 pursuant
to Rule 488.
Title of securities being registered: Class A Shares of beneficial
interest, no par value of the Intermediate Government Fund
No filing fee is required because of reliance on
Section 24(f) of the Investment Company Act of
1940, as amended.
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HERITAGE INCOME TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Letter to Shareholders
o Notice of Special Meeting of Shareholders
o Part A - Prospectus of Heritage Income Trust - Intermediate Government
Fund and Proxy Statement of Heritage U.S. Government Income Fund
o Part B - Statement of Additional Information
o Part C of Form N-14
o Signature Page
o Exhibits
<PAGE>
HERITAGE U.S. GOVERNMENT INCOME FUND
880 Carillon Parkway, St. Petersburg, Florida 33716
July __, 1999
Dear Fellow Shareholder:
The enclosed Combined Proxy Statement and Prospectus relates to a special
meeting of the shareholders of the Heritage U.S. Government Income Fund (the
"Government Fund") to be held on Monday, September 27, 1999. The purpose of this
meeting is to seek your approval of a proposal to reorganize the Government Fund
by combining it into the Intermediate Government Fund (the "Intermediate Fund"),
a series of Heritage Income Trust, an existing open-end management investment
company ("Reorganization"). If the proposal is approved, each Government Fund
shareholder will receive Class A shares of the Intermediate Fund in proportion
to his or her ownership in the Government Fund. In exchange, the Intermediate
Fund will receive all the assets, and assume all the liabilities, of the
Government Fund, which then will be liquidated. We expect to complete the
Reorganization on October 15, 1999.
The Government Fund's Board of Trustees ("Board") has considered and unanimously
approved the proposal. As discussed more fully in the enclosed proxy statement,
the Board believes that the Reorganization is in the best interests of the
Government Fund shareholders for the following reasons:
o The proposal, if approved, will eliminate the discount to net asset
value at which the Government Fund shares have historically traded on
the New York Stock Exchange.
o The Reorganization would provide shareholders with the benefits of an
open-end investment company form of organization, including the ability
for shareholders to exchange their shares for shares of other Heritage
mutual funds or sell shares at net asset value.
o Both Funds have substantially similar investment objectives and
policies and share the same portfolio manager.
o Heritage Asset Management, Inc., the Funds' manager, has undertaken to
cap for three years the Intermediate Fund - Class A shares' net
operating expenses at 0.95% of its daily net assets, which is lower
than the Government Fund's net operating expenses of 1.07% of its net
assets.
o The Reorganization will be free from federal income taxes to investors
and the Funds.
The Board recommends that you vote FOR the proposal.
Please take time to review the enclosed materials and vote your shares today.
Your prompt attention to this matter is appreciated. If you have any questions
or need further assistance, please call 800-421-4184.
Very truly yours,
Stephen G. Hill
President
Heritage U.S. Government Income Fund
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HERITAGE U.S. GOVERNMENT INCOME FUND
880 CARILLON PARKWAY
ST. PETERSBURG, FLORIDA 33716
---------------------------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 27, 1999
---------------------------------
To The Shareholders:
A special meeting of the holders of shares of beneficial interest in the
Heritage U.S. Government Income Fund (the "Government Fund") will be on
September 27, 1999 at 8:30 a.m. eastern time, or any adjournment(s) thereof, at
100 CARILLON PARKWAY, SUITE 250, ST. PETERSBURG, FL 33716, for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization and Termination
("Reorganization Plan") that provides for the reorganization of the
Government Fund by combining it with the Intermediate Government Fund
(the "Intermediate Fund"), a series of Heritage Income Trust (the
"Trust"). Pursuant to the Reorganization Plan, the Government Fund
will transfer all its assets to the Intermediate Fund, which will
assume all the Government Fund's liabilities, and the Trust will issue
to each Government Fund shareholder a number of full and fractional
Class A shares of the Intermediate Fund having an aggregate value
that, on the effective date of the Reorganization, is equal to the
aggregate net asset value of the shareholder's shares in the
Government Fund; and
(2) To transact other business that properly comes before the meeting or
any adjournment(s) thereof.
You are entitled to vote at the meeting and any adjournment(s) thereof if
you owned shares of the Government Fund as of the close of business on July 16,
1999. If you attend the meeting, you may vote your shares in person. IF YOU DO
NOT EXPECT TO ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES VIA THE INTERNET, BY
TELEPHONE OR BY COMPLETING AND RETURNING THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
By Order of the Board of Trustees,
CLIFFORD J. ALEXANDER
SECRETARY
July __, 1999
880 Carillon Parkway
St. Petersburg, Florida 33716
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YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card, date
and sign the card, and return the card in the envelope provided. If you sign,
date and return the proxy card but give no voting instructions, your shares will
be voted "FOR" the proposal noticed above. You also may vote your shares by
telephone or via the Internet by following the instructions on the enclosed
insert. In order to avoid the additional expense of further solicitation, we ask
your cooperation in returning your proxy card promptly. Unless proxy cards
submitted by corporations and partnerships are signed by the appropriate persons
as indicated in the voting instructions on the proxy card, they will not be
voted.
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<PAGE>
SUBJECT TO COMPLETION
HERITAGE U.S. GOVERNMENT INCOME FUND
HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
880 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716
TOLL FREE: (800) 421-4184
COMBINED PROXY STATEMENT AND PROSPECTUS
July __, 1999
This Combined Proxy Statement and Prospectus ("Proxy Statement") is being
furnished in connection with a Special Meeting of Shareholders of the Heritage
U.S. Government Income Fund ( the "Government Fund") to be held on September 27,
1999, or any adjournment(s) thereof ("Meeting"), at 100 Carillon Parkway, Suite
250, St. Petersburg, FL 33716. At the Meeting, shareholders of the Government
Fund will be asked to approve a proposal ("Proposal") to reorganize the
Government Fund in accordance with an Agreement and Plan of Reorganization and
Termination ("Reorganization Plan"). The Reorganization Plan provides that the
Government Fund will combine with Intermediate Government Fund (the
"Intermediate Fund"), a series of Heritage Income Trust (the "Income Trust"), an
open-end management investment company ("Reorganization"). The Reorganization
Plan is attached as Appendix A to this Proxy Statement. The Board of Trustees of
the Government Fund ("Board") has unanimously approved the Reorganization Plan
as being in the best interests of the Government Fund.
In accordance with the Reorganization Plan, the Government Fund will
transfer all its assets to the Intermediate Fund in exchange solely for
Intermediate Fund's Class A shares ("Intermediate Fund Shares") and the
assumption by the Intermediate Fund of all the Government Fund's liabilities.
The Government Fund's shareholders will receive a pro rata share of Intermediate
Fund Shares based on their ownership in the Government Fund. The value of each
Government Fund shareholder's account will not change as a result of the
Reorganization. The Government Fund's shareholders will not be assessed any
sales charges in connection with the Reorganization, and there will be no
federal income tax consequences as a result of the Reorganization. The
Government Fund will cease trading on the New York Stock Exchange ("NYSE") upon
completion of the Reorganization and thereafter will be dissolved.
The Intermediate Fund is an open-end, diversified series of Income Trust,
a Massachusetts business trust. Its investment objective is high current income
consistent with the preservation of capital. The Intermediate 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,
including mortgage-related securities.
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This Proxy Statement sets forth information that a Government Fund
shareholder should know before voting on the Reorganization Plan. It should be
read and retained for future reference. A Statement of Additional Information
("SAI"), dated July __, 1999, is incorporated herein by reference into this
Proxy Statement. The SAI is available without charge by contacting Heritage
Asset Management, Inc. ("Heritage") at the number or address listed above.
A copy of the current prospectus of the Intermediate Fund, dated February
1, 1999, is attached to this document as Appendix B. In addition, the
management's discussion of the Intermediate Fund's performance, which is
included in the Annual Report to Shareholders of the Intermediate Fund for the
fiscal year ended September 30, 1998, is attached as Appendix C to this Proxy
Statement. The SAI of the Intermediate Fund, dated February 1, 1999, its Annual
Report to Shareholders for the period ended September 30, 1998 and its
Semi-Annual Report to Shareholders for the period ended March 31, 1999 are on
file with the Securities and Exchange Commission ("SEC") and are incorporated by
reference into this Proxy Statement. The Annual Report to Shareholders of the
Government Fund for the fiscal period ended October 31, 1998 is on file with the
SEC and is incorporated by reference into this Proxy Statement. These documents
are available without charge by calling or writing Heritage at the number or
address listed above. The SEC maintains a web site at http://www.sec.gov that
contains these documents and other information about the Intermediate Fund and
the Government Fund. Information relating to the Government Fund also is
available for inspection at the NYSE.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF
THIS PROXY STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE>
TABLE OF CONTENTS
INTRODUCTION...................................................................1
VOTING INFORMATION.............................................................1
SYNOPSIS.......................................................................3
The Proposed Reorganization.................................................3
Comparison of the Government Fund and the Intermediate Fund ................3
Forms of Organization....................................................3
Investment Objectives and Policies.......................................4
Operations of the Intermediate Fund After the Reorganization.............6
Portfolio Managers.......................................................6
Performance..............................................................6
Fees and Expenses........................................................7
Expense Example..........................................................8
Purchase Procedures......................................................9
Exchange and Redemption Procedures......................................10
Federal Income Tax Consequences.........................................10
COMPARISON OF PRINCIPAL RISK FACTORS..........................................10
Generally..................................................................10
Principal Differences......................................................11
Common Risks...............................................................11
INFORMATION ABOUT THE REORGANIZATION..........................................13
Summary of the Reorganization Plan.........................................13
Reasons for the Reorganization.............................................14
Description of Intermediate Fund Shares....................................16
Dividends and Other Distributions..........................................16
Federal Income Tax Considerations..........................................17
Rights of Shareholders.....................................................18
Capitalization.............................................................18
FINANCIAL HIGHLIGHTS OF THE INTERMEDIATE FUND ................................19
SHARE PRICE DATA..............................................................20
INVESTMENT ADVISER AND DISTRIBUTOR............................................20
LEGAL MATTERS.................................................................21
EXPERTS.......................................................................21
INFORMATION FILED WITH THE SEC AND NYSE.......................................21
ADDITIONAL INFORMATION ABOUT EACH FUND........................................22
APPENDIX A - Agreement and Plan of Reorganization and Termination............A-1
APPENDIX B - Prospectus of Heritage Income Trust - Intermediate Fund.........B-1
APPENDIX C - Management's Discussion of Intermediate Fund Performance........C-1
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<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to shareholders of the Government
Fund in connection with the solicitation of proxies by the Board for use at the
Meeting. At the Meeting, you will be asked to approve the Reorganization Plan.
The Reorganization Plan provides that the Government Fund will transfer all its
assets to the Intermediate Fund in exchange solely for Intermediate Fund Shares
and the assumption by the Intermediate Fund of all the Government Fund's
liabilities. The Intermediate Fund Shares will be distributed to shareholders of
the Government Fund in proportion to their ownership in the Government Fund. The
Reorganization will occur as of the close of business on October 15, 1999, or a
later date agreed to by Income Trust and the Government Fund ("Closing Date").
The Government Fund will be terminated as soon as is reasonably practicable
thereafter.
VOTING INFORMATION
This Proxy Statement, along with a Notice of the Meeting and proxy card,
is first being mailed to shareholders of the Government Fund on or about July
__, 1999. Only shareholders of record as of the close of business on July 16,
1999 (the "Record Date") will be entitled to notice of, and to vote at, the
Meeting or any adjournment thereof. As of the Record Date, the Government Fund
had _______ shares outstanding and entitled to vote. Holders of one-half of the
shares of the Government Fund outstanding at the close of business on the Record
Date must be present in person or represented by proxy at the Meeting to
constitute a quorum for the transaction of business at the Meeting. If a quorum
is not present at the Meeting or a quorum is present but sufficient votes to
approve the Proposal are not received, the persons named as proxies may propose
one or more adjournments of the Meeting to permit the further solicitation of
proxies. Any such adjournment will require the affirmative vote of a majority of
those shares represented at the Meeting in person or by proxy. If a quorum is
present, the persons named as proxies will vote those proxies that they are
entitled to vote FOR the Proposal in favor of an adjournment and will vote those
proxies required to be voted AGAINST the Proposal against an adjournment. A
shareholder vote may be taken on the Proposal described in this Proxy Statement
prior to any adjournment if sufficient votes have been received and it is
otherwise appropriate. APPROVAL OF THE PROPOSAL WITH RESPECT TO THE
REORGANIZATION PLAN REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF
THE GOVERNMENT FUND OUTSTANDING AND ENTITLED TO VOTE.
An abstention is a proxy that is properly executed, returned and
accompanied by instructions withholding authority to vote. Broker non-votes are
shares held in street name for which the broker indicates that instructions have
not been received from the beneficial owners or persons entitled to vote or with
respect to which the broker does not have discretionary voting authority.
Abstentions and broker non-votes are counted as votes present for purposes of
determining whether the requisite quorum exists. For purposes of the Proposal,
abstentions and broker non-votes will constitute a vote AGAINST the Proposal
because the Proposal requires the affirmative vote of a majority of the
Government Fund's shares outstanding and entitled to vote.
<PAGE>
The individuals named as proxies in the proxy card will vote in accordance
with your directions as indicated thereon if your proxy card is timely received
properly executed by you or by your duly appointed agent or attorney-in-fact. If
you sign, date and return the proxy card, but give no voting instructions, your
shares will be voted in favor of the Proposal described in this Proxy Statement.
The duly appointed proxies may, in their discretion, vote upon other matters
that properly come before the Meeting. You may revoke your proxy card by giving
another proxy or by letter or telegram revoking your initial proxy. To be
effective, revocation must be received by the Government Fund prior to the
Meeting, or by appearing in person and voting at the Meeting.
As of the Record Date, no shareholder held of record or owned beneficially
more than 5% of the issued and outstanding shares of either the Government Fund
or the Intermediate Fund. The Trustees and officers of the Government Fund and
the Intermediate Fund as a group own less than 1% of the shares of the
Government Fund and the Intermediate Fund, respectively. All costs associated
with the Meeting, including the solicitation of proxies, will be borne by
Heritage. Each full share of the Government Fund is entitled to one vote, and
each fractional share thereof is entitled to a proportionate share of one vote.
Solicitations will be made primarily by mail but also may include
telephone communications by regular employees of Heritage, who will not receive
any compensation therefor from the Government Fund. As an alternative to mailing
your paper proxy card to us to vote, you may vote by telephone or via the
Internet by utilizing a program provided through ADP Investor Communication
Services ("ADP"). To vote in this manner, please refer to the enclosed voting
instruction card for the toll-free telephone number and the Internet address. If
votes are recorded by telephone or via the Internet, ADP will use procedures
designed to authenticate shareholders' identities, to allow shareholders to
authorize the voting of their shares in accordance with their instructions and
to confirm that a shareholder's instructions have been properly recorded.
Proxies voted by telephone or via the Internet may be revoked at any time before
they are voted at the Meeting in the same manner that proxies voted by mail may
be revoked. Under Massachusetts business trust law, there is no specific
prohibition against shareholders voting their shares via the Internet.
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SYNOPSIS
The following discussion is a summary about the Reorganization, the
Government Fund and the Intermediate Fund. As discussed more fully below, the
Board believes that the Reorganization will benefit the Government Fund's
shareholders. The Intermediate Fund has an investment objective that is
substantially similar to the investment objective of the Government Fund and has
a substantially similar investment strategy.
THE PROPOSED REORGANIZATION
The Board considered and approved the Reorganization Plan at a meeting
held on May 17, 1999. The Reorganization Plan provides that the Government Fund
will combine with the Intermediate Fund by transferring all its assets to the
Intermediate Fund in exchange solely for Intermediate Fund Shares and the
assumption by the Intermediate Fund of all the Government Fund's liabilities.
The Government Fund will then distribute those Intermediate Fund Shares to its
shareholders. Each shareholder of the Government Fund will receive the number of
full and fractional Intermediate Fund Shares that is equal in total value to the
value of the shareholder's holdings in the Government Fund as of the Closing
Date. The Government Fund will be terminated as soon as is reasonably
practicable thereafter.
For the reasons set forth below under "Reasons for the Reorganization,"
the Board, including its Trustees who are not "interested persons," as that term
is defined in the Investment Company Act of 1940, as amended ("1940 Act"), of
the Government Fund, Income Trust or Heritage ("Independent Trustees"), has
determined that the Reorganization is in the best interests of the Government
Fund, that the terms of the Reorganization are fair and reasonable and that the
interests of the Government Fund's shareholders will not be diluted as a result
of the Reorganization. Accordingly, the Board recommends approval of the
Reorganization Plan. Additionally, the Board of Trustees of Income Trust has
determined that the Reorganization is in the best interests of the Intermediate
Fund, that the terms of the Reorganization are fair and reasonable and that the
interests of the Intermediate Fund's shareholders will not be diluted as a
result of the Reorganization.
COMPARISON OF THE GOVERNMENT FUND AND THE INTERMEDIATE FUND
FORMS OF ORGANIZATION
The Intermediate Fund is organized as a series of Income Trust, an
open-end Massachusetts business trust. The Intermediate Fund offers for sale
three classes of shares, including Class A shares. The Government Fund is a
closed-end fund also organized as a Massachusetts business trust. Its shares are
traded on the NYSE. Open-end funds, such as the Intermediate Fund, continuously
offer and redeem their shares, causing their total assets to fluctuate. In
contrast, most closed-end funds like the Government Fund make a single offering
of non-redeemable shares and thus retain a stable pool of assets, which changes
only upon appreciation or depreciation of their portfolio investments.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
SUMMARY:
The investment objectives and policies of the Intermediate Fund and the
Government Fund (each, a "Fund") are set forth below. The Intermediate Fund's
investment objective is generally similar to the Government Fund's investment
objective in that each Fund seeks high current income. The Intermediate Fund
attempts to achieve its objective while preserving capital. the Government Fund,
however, has a secondary objective of capital appreciation. The investment
policies of each Fund permit investments in debt securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, mortgage-related
securities, certain derivative mortgage instruments, corporate debt obligations
and money market securities, among others. Further, the Government Fund may
utilize techniques such as borrowing in a greater amount than the Intermediate
Fund. Since the Government Fund also pursues capital appreciation, it may invest
in a broader range of securities that may exhibit greater risk than securities
held by the Intermediate Fund.
The Intermediate Fund invests substantially all its assets in U.S.
Treasury securities, mortgage-related securities issued by U.S. government
agencies and repurchase agreements. The Government Fund invests not only in
these same types of securities, but also in mortgage dollar rolls, reverse
repurchase agreements and delayed delivery obligations. The Intermediate Fund
typically maintains a weighted average portfolio maturity of between 3 and 10
years. The Government Fund's weighted average portfolio maturity is about 6.3
years (as of March 31, 1999). There can be no assurance that either Fund will
achieve its investment objective(s).
THE INTERMEDIATE FUND:
The investment objective of the Intermediate Fund is high current income
consistent with the preservation of capital. It seeks to achieve its objective
by investing primarily in debt securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and related repurchase agreements.
Under normal conditions, the Intermediate Fund invests at least 80% of its
assets in these debt securities, including mortgage-backed securities. Up to 25%
of the Intermediate Fund's assets may be invested in repurchase agreements. The
Intermediate Fund may invest its remaining assets in derivative securities, such
as options, futures contracts and stripped securities, short-term corporate debt
or other money market instruments. No more than 20% of the Intermediate Fund's
net assets, however, may be invested in mortgage-backed securities of private
issuers. Although the Intermediate Fund is permitted to borrow up to 15% of its
assets, it may do so only as a temporary measure for extraordinary or emergency
purposes, including to meet redemption requests.
The portfolio manager selects securities for the Intermediate Fund's
portfolio by considering factors such as maturity, interest rate conditions and
liquidity. The portfolio manager attempts to manage volatility consistent with
the Intermediate Fund's investment objective. In an effort to help reduce the
impact of interest rate changes, the portfolio manager may engage in options
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transactions by hedging up to 100% of the Intermediate Fund's net assets. The
Intermediate Fund may write call and put options on up to 15% of its total
assets.
THE GOVERNMENT FUND:
The primary investment objective of the Government Fund is to provide a
high level of current income. Its secondary investment objective is capital
appreciation. The Government Fund seeks to achieve these objectives through the
active management of a portfolio of securities including primarily
mortgage-related securities and mortgages. Under normal conditions, the
Government Fund invests at least 65% of its assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, including
mortgage-related securities. The Government Fund may invest its remaining assets
in private issuer mortgage-related securities, individual mortgages, non-U.S.
government mortgage derivative securities, unregistered securities and corporate
debt, among others. In addition, the Government Fund may invest in repurchase
agreements. Unlike the Intermediate Fund, the Government Fund may borrow up to
33 1/3% of its assets to increase leverage. It also may loan its respective
portfolio securities to earn additional income. Historically, the Government
Fund has borrowed by entering into reverse repurchase agreements and mortgage
dollar rolls transactions and delayed delivery transactions. The Government Fund
may invest up to 30% of its total assets in derivative mortgage-backed
securities.
The portfolio manager selects mortgage-related securities based on factors
such as income potential, liquidity and general economic conditions. Further,
the portfolio manager may consider potential benefits from changes in interest
rates when selecting mortgage-related securities. With respect to individual
mortgages, the portfolio manager may consider criteria such as interest rates on
the mortgage, the type of mortgage (I.E., fixed or adjustable), payment history
on the mortgage and the size of the mortgage. Historically, however, the
Government Fund has not invested in individual mortgages. In an effort to help
reduce the impact of interest rate changes, the portfolio manager may engage in
options transactions by hedging up to 100% of the Government Fund's net assets.
At any time, the Government Fund may invest up to 100% of its total assets in
U.S. Treasury securities, including U.S. Treasury bonds, bills and notes.
OTHER POLICIES:
Each Fund may purchase securities on a "when-issued basis," which means
that settlement of the purchase takes place in the future. In addition, each
Fund may purchase or sell securities on a "forward commitment" basis. The
portfolio manager may use a "forward commitment" strategy, which permits
settlement in the future, to hedge against anticipated changes in interest rates
and prices. Each Fund may invest a portion of its respective assets in illiquid
securities -- up to 10% for the Intermediate Fund and up to 15% for the
Government Fund.
Each Fund is actively managed. Securities may be purchased and sold
relatively quickly due to changes in economic or market conditions.
Consequently, each Fund may be subject to a high rate of portfolio turnover. A
high rate of portfolio turnover generally leads to higher transaction costs and
higher short-term capital gains.
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Each Fund may invest in high quality commercial paper. Each Fund also may
invest in deposit instruments such as certificates of deposit issued by domestic
banks with at least $1 billion in assets and capital surplus of at least $100
million as of the bank's most recent fiscal year.
OPERATIONS OF THE INTERMEDIATE FUND AFTER THE REORGANIZATION
As noted previously, the investment objectives and policies of each Fund
are substantially similar. The Intermediate Fund does not intend to change any
investment objective or policies as a result of the Reorganization. Heritage,
the Funds' manager, believes that substantially all the assets held by the
Government Fund will be consistent with the investment objective and policies of
the Intermediate Fund and thus could be transferred to and held by the
Intermediate Fund if the Reorganization is approved. If any of the assets owned
by the Government Fund, however, are inconsistent with the investment objective
and policies of the Intermediate Fund, those assets will be sold prior to the
Reorganization. The proceeds of those sales will be held in temporary
investments or reinvested in other assets that qualify for inclusion in the
Intermediate Fund's portfolio. The need, if any, for the Government Fund to sell
assets prior to the Reorganization may result in the Government Fund selling
assets at a disadvantageous time and may result in the Government Fund realizing
losses that would not otherwise have been realized, the net proceeds of which
would be included in a distribution to its shareholders before the
Reorganization.
PORTFOLIO MANAGERS
H. Peter Wallace is responsible for the day-to-day management of each
Fund's investment portfolio. Mr. Wallace has served as portfolio manager of each
Fund since its inception. Mr. Wallace has been a Senior Vice President and
Director of Fixed Income Investments for Heritage since January 1993. Mr.
Wallace is a Chartered Financial Analyst.
PERFORMANCE
The following table compares the average annual total returns of each Fund
and two market indices for periods ended December 31, 1998. The performance of
the Intermediate Fund does not take into account any sales charges applicable to
purchases of Intermediate Fund Shares.
AVERAGE ANNUAL TOTAL RETURNS:
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(FOR THE PERIODS ENDED 1 YEAR 5 YEARS SINCE INCEPTION^ INCEPTION DATE
DECEMBER 31, 1998) ------ ------- --------------- --------------
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Government Fund (at
market value) -0.20% 1.13% 1.43% 11/19/93
Government Fund (NAV) 8.20% 5.67% 5.69% 11/19/93
Intermediate Fund 6.97% 5.95% 7.02% 3/1/90
(Class A Shares)
Lehman Brothers
1 to 3 Year 6.97% 5.95% 7.02%
Government Index*
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Lehman Brothers
Intermediate 8.43% 6.60% 8.24%
Fund/Corporate Index**
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^ The first "Since Inception" figure is based on the period beginning 3/1/90,
which is the closest month-end to the date of completion of the Government
Fund's initial public offering. The second "Since Inception" figure is based
on the period beginning 3/1/90, which is the closest month-end to
Intermediate Fund's inception date.
* The Lehman Brothers 1 to 3 Year Government Index is an unmanaged index
comprised of U.S. government and agency securities rated investment grade or
higher with a maturity of one to three years and a minimum par value of $100
million for U.S. government issues. 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 Lehman Brothers Intermediate Fund/Corporate Index is comprised of the
Intermediate Fund Index, which includes the Intermediate Treasury and
Intermediate Agency indices, and the Intermediate Corporate Index, which
includes bonds issued by corporations and Yankee issues. 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.
FEES AND EXPENSES
The following tables compare shareholder fees and annual operating
expenses for Intermediate Fund Shares for the fiscal year ended September 30,
1998 and estimated pro forma fees and expenses for Intermediate Fund Shares
after the Reorganization.
COMBINED FUND
INTERMEDIATE FUND (CLASS A SHARES)
(CLASS A SHARES) PRO FORMA
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SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
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Maximum Sales Charge Imposed on 3.75%* 3.75%*
Purchases (AS A % OF OFFERING PRICE)
Maximum Deferred Sales Charge (AS A % None None
OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS, WHICHEVER IS
LOWER)
Wire Redemption Fee (PER TRANSACTION) $5.00 $5.00
- --------------------------------------------------------------------------------
* There will be no sales charge assessed to the Government Fund's
shareholders as a result of the Reorganization.
ANNUAL OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS):
- --------------------------------------------------------------------------------
Management Fees* 0.50% 0.50%
Distribution and Service (12b-1) Fees 0.32% 0.27%
Other Expenses* 1.18% 0.39%
----- -----
-7-
<PAGE>
Total Annual Operating Expenses 2.00% 1.16%
===== =====
Fee Waiver and/or Expense 1.08% 0.29%
Reimbursement*
Net Expenses 0.92% 0.87%
===== =====
- --------------------------------------------------------------------------------
* Heritage has agreed contractually to waive its investment advisory fees and,
if necessary, reimburse the Intermediate Fund to the extent that Intermediate
Fund Shares annual operating expenses exceed 0.95% for its 1999 fiscal year.
The following tables show shareholder transaction expenses and annual fund
expenses for shares of the Government Fund for the fiscal year ended October 31,
1998.
GOVERNMENT FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a % of offering price) 6.00%*
Dividend Reinvestment Plan Fees None
- --------------------------------------------------------------------------------
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES):
- --------------------------------------------------------------------------------
Investment Advisory Fees** 0.38%
Interest Payments on Borrowed Funds 0.07%
Administration Fee 0.15%
Other Expenses 0.47%
-----
Total Annual Expenses** 1.07%
=====
- --------------------------------------------------------------------------------
* This sales load was applicable at the time of the initial public offering of
shares.
** Heritage voluntarily has undertaken to reduce investment advisory and/or
administration fees and, if necessary reimburse the Government Fund to the
extent that annual expenses, excluding interest payments on borrowed funds
and taxes, exceed 1.00% for the Government Fund's 1999 fiscal year. But for
this expense waiver and/or reimbursement, the investment advisory fee and
total annual expenses would have been 0.56% and 1.18%, respectively.
EXPENSE EXAMPLE
The Example is intended to help you compare the cost of investing in
Intermediate Fund Shares, both before and after the Reorganization, with the
cost of investing in shares of the Government Fund. The Example assumes that you
invest $10,000 in each 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 each Fund's operating expenses
-8-
<PAGE>
remain the same in the first year. To the extent fees are waived, the expenses
will be lower. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
- -------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
- -------------------------------------------------------------------------
Intermediate Fund
(Class A shares).................. $465 $878 $1,316 $2,531
Combined Fund
(Class A shares) Pro Forma........ $460 $702 $962 $1,706
Government Fund................... $703 $920 $1,155 $1,827
- -------------------------------------------------------------------------
PURCHASE PROCEDURES
Intermediate Fund Shares may be purchased by mail, bank wire or through a
financial advisor for regular accounts, systematic investment programs and
retirement accounts. Intermediate Fund Shares are sold at their "offering price"
- -- a price equal to their net asset value ("NAV"), plus a maximum sales charge
of 3.75% imposed at the time of purchase. However, no sales charges will be
imposed in connection with the receipt of Intermediate Fund Shares by
shareholders of the Government Fund due to the Reorganization. The minimum
initial investment in the Intermediate Fund is $1,000; each additional
investment must be $50 or more. These minimums may be waived or reduced for
investments by employees of Heritage or its affiliates, certain retirement plans
and participants in the systematic investment program. Normally, you must
maintain a minimum account balance. If your account balance falls below $500 as
a result of selling shares (and not because of performance or sales charges),
the Intermediate Fund reserves the right to request that you buy more shares or
close your account. However, the minimum account balance restriction will be
waived for Intermediate Fund Shares distributed to the Government Fund's
shareholders as a result of the Reorganization.
Intermediate Fund Shares are subject to ongoing distribution and
service (Rule 12b-1) fees of up to 0.25% of their average daily net assets.
These fees permit the Intermediate Fund to pay distribution and services fees
for the sale of its shares and for services provided to shareholders. For a more
complete discussion of the purchase procedures for Intermediate Fund Shares, see
"Your Investment" in the Intermediate Fund's prospectus.
Shares of the Government Fund were issued initially in a public offering
on November 19, 1993. Unlike Intermediate Fund Shares, shares of the Government
Fund currently are listed and publicly traded on the NYSE under the symbol
"HGA." These shares may be purchased through your broker, financial advisor or
other investment professional, all of whom may charge a commission. The
Government Fund's shareholders also may accumulate additional shares through a
dividend reinvestment plan, as discussed below. While a commission may be
charged in connection with the purchase of the Government Fund's shares, the
Government Fund currently does not impose a front-end sales charge on purchases
-9-
<PAGE>
of shares and shares are not subject Rule 12b-1 fees. However, upon completion
of the Reorganization, Intermediate Fund Shares distributed to shareholders will
be subject to Rule 12b-1 fees. No sales charges will be imposed in connection
with this distribution. Upon completion of the Reorganization, shares of the
Government Fund will not be available for purchase.
EXCHANGE AND REDEMPTION PROCEDURES
Shareholders who have owned Intermediate Fund Shares for at least 30 days
may exchange those shares for shares of the same class of any other Heritage
mutual fund if the shareholder satisfies minimum investment requirements of that
fund. However, you may exchange Intermediate Fund Shares received in connection
with the Reorganization immediately. Exchanges, in most cases, may be completed
without paying any additional sales charges. Intermediate Fund Shares may be
sold by telephone, mail or through a financial advisor. Intermediate Fund Shares
will be redeemed at NAV per share next determined after a request in proper form
is received at the Intermediate Fund. For additional information, see "How to
Exchange Your Shares" and "How to Sell Your Investment" in the Intermediate
Fund's prospectus.
The Government Fund's shareholders do not have any exchange privileges
with any other Heritage mutual fund. However, upon completion of the
Reorganization, shareholders receiving Intermediate Fund Shares may exchange
those shares for any other Heritage mutual fund. Shares of the Government Fund
may be sold on the NYSE at current market value through a broker, financial
advisor or other investment professional, each of whom may charge a commission
for their services.
FEDERAL INCOME TAX CONSEQUENCES
The Income Trust and the Government Fund will receive an opinion from
their legal counsel, Kirkpatrick & Lockhart LLP, to the effect that the
Reorganization will constitute a tax-free reorganization within the meaning of
section 368(a)(1)(D) of the Internal Revenue Code 1986, as amended ("Code").
Accordingly, neither Fund will recognize any gain or loss as a result of the
Reorganization. See "Information About the Reorganization Federal Income Tax
Considerations" below. If the Government Fund sells securities before the
Reorganization, it may recognize net gains or losses. Any net recognized gains
would increase the amount of any distribution it makes to its shareholders
before the Reorganization.
COMPARISON OF PRINCIPAL RISK FACTORS
GENERALLY
An investment in each Fund is subject to substantially the same risks
arising out of investing in U.S. Treasury securities and mortgage-related
securities issued by U.S. government agencies. However, the Government Fund's
investment portfolio is subject to additional risks arising out of its focus on
engaging in reverse repurchase agreements, mortgage dollar rolls and delayed
-10-
<PAGE>
delivery transactions. Because each Fund primarily invests in debt or
mortgage-related securities, the market value of those securities may fluctuate
with changes in interest rates. When interest rates rise, the market value of
debt securities held by either Fund will decrease. The market value of
mortgage-related securities are subject to additional risks, including
prepayment and extension risk as discussed below. If any of these circumstances
occur, each Fund's NAV, and the Government Fund's market value may decline. Each
Fund is subject to the risk that its returns will fluctuate. Investors could
lose money by investing in either Fund.
PRINCIPAL DIFFERENCES
The Government Fund may invest in individual mortgages, asset-backed
securities and private placements. The use of these securities by the Government
Fund may increase its overall portfolio risk as compared to the Intermediate
Fund. In addition, the Government Fund may borrow a significantly larger
percentage than the Intermediate Fund, which as discussed below may result in
more risk.
o Mortgages, in addition to the risks associated with mortgage-
backed securities generally, involve additional risks. Typically,
mortgages are not insured or guaranteed by the U.S. government or any
of its agencies. This may present greater credit risk and sensitivity
to changes in market conditions or interest rates. Further, the
purchase and sale of mortgages may involve costs not associated with
mortgage-backed securities. Certain mortgages may lack liquidity making
the sale of such mortgages difficult. In the event of a foreclosure,
there is no assurance the Government Fund would receive sufficient
proceeds to cover its investment in the mortgage.
o Asset backed securities exhibit many of the risks of mortgages and
mortgage-backed securities. The underlying collateral is not insured or
guaranteed by the U.S. government or any of its agencies or otherwise
is unsecured.
o Private placements are securities that are not registered under the
Securities Act of 1933. These securities only may be sold to a limited
number of purchasers, which may restrict the Government Fund's ability
to readily sell the security. As a result of these potential delays,
the Government Fund may receive an unfavorable price at the time of
sale.
COMMON RISKS
DEBT SECURITIES. The value of debt securities may be affected by the
issuer's credit quality and interest rate conditions. Credit risk refers to an
issuer's ability to make timely payments of interest and principal. Interest
rate risk refers to the effect on the market value of a debt security from
interest rate changes. A change in interest rates usually has an opposite effect
on the market value. Further, the longer the maturity of a security, the more
sensitive it is to changes in interest rates.
-11-
<PAGE>
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities may be issued by
the U.S. government, government agencies, such as the Government National
Mortgage Association, or by private entities. These securities represent "pools"
of related mortgages having similar characteristics and may have fixed or
adjustable interest rates. In addition to the risks of debt securities as
discussed above, mortgage-backed securities are subject to prepayment and
extension risk. Prepayment risk may affect the market value of mortgage-backed
securities during periods of unanticipated or rapid changes in market conditions
or interest rates. For example, if interest rates dropped, prepayments may
increase causing the Government Fund to invest at lower rates. Further, the
volatility of mortgage-backed securities may increase during such changes in
market conditions or interest rates. Conversely, if interest rates rise,
prepayments may slow (extension risk), which may reduce the market value of
mortgage-backed securities.
BORROWING. The use of borrowing (or leverage) exposes a Fund to the
potential for greater loss. Further, borrowing may exaggerate changes in a
Fund's NAV. The greater the ability of a Fund to borrow, then the greater the
potential for changes in NAV and losses.
FUTURES CONTRACTS AND OPTIONS. The use of futures contracts and options
present risks different from and in addition to investment in general. When used
in hedging strategies, incorrect forecasts by the portfolio manager may place a
Fund in a worse position than if no hedging occurred. Further, hedging may
reduce the opportunity for gain. Additional risks of futures contracts and
options include possible lack of a liquid market for closing out positions and
the need for additional or unique portfolio management skills and techniques.
ILLIQUID SECURITIES. Each Fund may invest in securities deemed illiquid
due to the absence of a readily available market or other legal or contractual
restrictions on resale. These securities often trade at a discount relative to
comparable liquid investments. Further, the portfolio manger may be required to
sell these securities at prices unfavorable to a Fund. Transactions in illiquid
securities may involve more time and result in higher expenses for each Fund.
STRIPPED SECURITIES AND INVERSE FLOATERS. Each Fund may invest in stripped
mortgage-backed securities and inverse floaters. the Intermediate Fund also may
invest in stripped U.S. government securities. Stripped securities are
securities where the interest portion and principal portion of a debt security
are traded separately. Stripped securities are especially sensitive to changes
in interest rates and thus may involve considerably more fluctuation than other
debt or mortgage-backed securities. Inverse floaters are securities where the
interest rate varies inversely with rates on similar securities or an index. The
market value of inverse floaters varies inversely with changes in interest rates
and may exhibit greater volatility. The Board of Trustees of Income Trust has
prohibited the use of these types of securities in the Intermediate Fund's
portfolio.
PORTFOLIO TURNOVER. Securities may be purchased and sold relatively
quickly due to changes in economic or market conditions. Consequently, each fund
may be subject to a high rate of portfolio turnover. A high rate of portfolio
turnover generally leads to higher transaction costs and higher short-term
capital gains.
-12-
<PAGE>
YEAR 2000. Each Fund could be affected adversely if the computer systems
used by Heritage, each Fund's other service providers or companies in which each
Fund invests 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 each Fund's service providers to address the Year 2000
issue. However, due to each Fund's reliance on various service providers to
perform essential functions, either Fund could have difficulty calculating its
NAV, 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.
INFORMATION ABOUT THE REORGANIZATION
SUMMARY OF THE REORGANIZATION PLAN
The terms and conditions under which the Reorganization will be
consummated are set forth in the Reorganization Plan, which may be found in its
entirety at Appendix A. The following summary provides a description of the
significant provisions of the Reorganization Plan. However, this summary is
qualified in its entirety by reference to the Reorganization Plan.
The Reorganization Plan contemplates (a) the Intermediate Fund acquiring
on the Closing Date all the assets of the Government Fund in exchange solely for
Intermediate Fund Shares and the Intermediate Fund's assumption of all the
Government Fund's liabilities and (b) the distribution of those Intermediate
Fund Shares to the Government Fund's shareholders. The Government Fund's assets
include all cash, cash equivalents, securities, receivables (including interest
and dividends receivable), claims and rights of action, rights to register
shares under applicable securities laws, books and records, deferred and prepaid
expenses shown as assets on its books, and other property owned by it as of the
close of business on the Closing Date ("Valuation Time") (collectively, the
"Assets"). The Intermediate Fund will assume from the Government Fund all its
liabilities, debts, obligations and duties of whatever kind or nature, whether
absolute, accrued, contingent or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Valuation Time,
and whether or not referred to in the Reorganization Plan (collectively, the
"Liabilities"); provided, however, that the Government Fund will use its best
efforts to discharge all of its known Liabilities prior to the Valuation Time.
the Intermediate Fund will deliver its Intermediate Fund Shares to the
Government Fund, which then will distribute them to its shareholders.
The value of the Assets to be acquired, and the amount of the Liabilities
to be assumed, by the Intermediate Fund and the NAV of a Intermediate Fund Share
will be determined as of the Valuation Time. Where market quotations are readily
available, securities will be valued based upon appraisals received from a
pricing service using a computerized matrix system or appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. The amortized cost method of valuation
generally will be used to value debt instruments with 60 days or less remaining
to maturity, unless a Fund's Board of Trustees determines that this method does
not represent fair value. All other securities and assets will be valued at fair
-13-
<PAGE>
value as determined in good faith by or under the direction of each Fund's Board
of Trustees.
On, or as soon as practicable after, the Closing Date, the Government Fund
will distribute to its shareholders of record Intermediate Fund Shares it
receives so that each shareholder of the Government Fund will receive a number
of full and fractional Intermediate Fund Shares equal in aggregate value to the
shareholder's shares in the Government Fund. That distribution will be
accomplished by opening accounts on the books of the Intermediate Fund in the
names of the Government Fund's shareholders and crediting those accounts with
Intermediate Fund Shares equal in aggregate value to the shareholder's shares in
the Government Fund. Fractional Intermediate Fund Shares will be rounded to the
third decimal place.
Because Intermediate Fund Shares will be issued at NAV in exchange for the
Government Fund's Assets, the aggregate value of those shares issued to the
Government Fund's shareholders will equal the aggregate value of the Government
Fund's shares. The NAV per Intermediate Fund Share will not be changed as a
result of the Reorganization. Thus, the Reorganization will not result in a
dilution of any shareholder interest.
REASONS FOR THE REORGANIZATION
The Board, including a majority of its Independent Trustees, has
determined that the Reorganization is in the best interests of the Government
Fund, that the terms of the Reorganization are fair and reasonable and that the
interests of the Government Fund's shareholders will not be diluted as a result
of the Reorganization.
At a Board meeting on May 17, 1999, Heritage proposed that the Board
approve the Reorganization. Heritage informed the Board that the investment
portfolios of the Government Fund and the Intermediate Fund were compatible and
that the Reorganization, if approved, offers a number of benefits to the
Government Fund's shareholders. The Board received from Heritage written
materials that described the structure and the anticipated benefits, costs and
tax consequences of the Reorganization. The Board also reviewed other
information, including a comparison between each Fund's performance records,
fees, current and PRO FORMA expenses, investment objectives, policies and risks.
The Board then made inquiry into a number of factors with respect to the
Reorganization, including: (1) the future prospects for growth and performance
of the Government Fund, whether or not it is reorganized; (2) the compatibility
of each Fund's investment objectives, policies and shareholder services; (3) the
current expense ratio of the Government Fund and the likely effect of the
Reorganization on the Government Fund's expense ratio; (4) the alternatives to
the Reorganization; (5) the costs to be incurred by each Fund as a result of the
Reorganization; (6) the potential benefits to the Government Fund's affiliates,
including Heritage; (7) the tax consequences of the Reorganization; and (8)
whether any cost savings can be achieved by combining the Government Fund and
the Intermediate Fund.
In considering whether to continue to operate the Government Fund as a
closed-end fund, the Board compared the benefits of operating as an open-end
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<PAGE>
fund to those of operating as a closed-end fund. The Board was advised that the
closed-end fund structure offered benefits in terms of portfolio management,
such as the greater flexibility to borrow against fund assets and to manage the
portfolio without concern to inflows and outflows of fund assets. However, the
Board also was advised that continuing to operate the Government Fund as a
closed-end fund would not address the discount to NAV at which its shares have
historically traded.
As compared to the available alternatives, the Board determined that
reorganizing the Government Fund to an open-end fund format by combining the
Funds was the most advantageous to the Government Fund and its shareholders. The
Board considered that the Reorganization would immediately eliminate the
discount and would provide the Government Fund's shareholders with the benefits
of the open-end fund form of organization, such as the option of redeeming their
shares at NAV on any business day and the ability to exchange their shares for
shares of other Heritage mutual funds. Finally, combining the Funds provides
them with the potential to realize economies of scale.
The Board considered the similarity of the two Funds. The Board was
advised that the investment objectives and policies of the Funds are
substantially similar. In addition, the Government Fund and the Intermediate
Fund share the same portfolio manager. The Board also considered the historic
performance of the Government Fund in relation to the performance of the
Intermediate Fund. Heritage advised the Board that, while past performance
provides no guarantee of future results, the Intermediate Fund had experienced
comparable investment performance to the Government Fund.
The Board also considered the impact the Reorganization would have on
expenses. As a closed-end fund, the Government Fund currently pays no Rule 12b-1
distribution or service fees. Intermediate Fund Shares that the Government Fund
shareholders would receive in the Reorganization are subject to an annual Rule
12b-1 fee of up to 0.25% of average net assets attributable to them. Open-end
funds such as the Intermediate Fund also normally pay higher transfer agency
fees than closed-end funds due to the continuous sale and redemption of their
shares. In addition, open-end funds such as the Intermediate Fund incur expenses
associated with maintaining continuous federal securities registration.
Closed-end funds such as the Government Fund typically do not incur these
expenses.
In analyzing these expenses, the Board considered that, overall, the
Reorganization will result in slightly lower total operating expenses for the
Government Fund shareholders, net of expense waivers and/or reimbursements. For
its fiscal year ended October 31, 1998, the Government Fund had total operating
expenses, excluding interest payments on borrowed funds and taxes, of 1.00% of
its average net assets, after waiver and/or reimbursement by Heritage. The
Government Fund's total operating expenses, including interest payments on
borrowed funds and taxes, was 1.07%. Had Heritage not agreed to waive its
investment advisory fees and, if necessary, reimburse the Government Fund to the
extent that annual operating expenses exceed 1.00%, the Government Fund's
operating expenses would have been 1.18%. For its fiscal year ended September
30, 1998, Intermediate Fund Shares had total operating expenses of 0.92% of its
average daily net assets, after waiver and/or reimbursement by Heritage. Had
Heritage not agreed to waive fees and/or reimburse expenses, Intermediate Fund
-15-
<PAGE>
Shares total operating expenses would have been 2.00%. Heritage has undertaken
to continue a fee waiver and/or reimbursement for Intermediate Fund Shares for
three years to the extent that annual operating expenses exceed 0.95%.
Accordingly, the Reorganization could result in a decrease in total annual
operating expenses for the Government Fund shareholders. The Board also was
advised that no initial sales charges would be imposed on Intermediate Fund
Shares issued to the Government Fund shareholders in connection with the
Reorganization.
The Board also considered the principal terms of the Reorganization Plan
and was advised that the Government Fund would be provided with an opinion of
counsel that the Reorganization would be tax-free to it and its shareholders.
Finally, the Board was advised that Heritage would undertake to pay for
the costs, including professional fees and the solicitation of proxies, in
connection with the Reorganization.
On the basis of the information provided to the Board and on its
evaluation of that information, the Board determined that the proposed
Reorganization will not dilute the interests of shareholders of the Government
Fund and is in the best interest of the Government Fund. Therefore, the Board
recommended the approval of the Reorganization Plan by the shareholders of the
Government Fund at the Meeting.
DESCRIPTION OF INTERMEDIATE FUND SHARES
Income Trust is registered with the SEC as an open-end management
investment company. Pursuant to its Declaration of Trust, Income Trust may issue
an unlimited number of shares with no par value. The Board of Trustees of Income
Trust has established the Intermediate Fund as a series and has authorized the
public offering of Class A, Class B and Class C shares of that Fund. The
Reorganization involves only Intermediate Fund Shares, which are normally
subject to an initial sales charge of 3.75%. However, this sales charge will be
waived in connection with the Reorganization.
Each share of the Intermediate Fund has equal earnings, assets and voting
privileges and is entitled to any dividends and other distributions out of
income earned on assets belonging to the Intermediate Fund as may be declared by
the Board of Trustees of Income Trust. Each share in a class of that Fund
represents an equal proportionate interest in the Intermediate Fund's assets
with each share in that class. Shares of the Intermediate Fund entitle their
holders to one vote per share and fractional votes for fractional shares held,
except that each class has exclusive voting rights on matters pertaining to its
plan of distribution. Shares of the Intermediate Fund, when issued, are fully
paid and nonassessable.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Intermediate Fund distributes to its shareholders dividends from its
net investment income monthly. Net investment income generally consists of
interest income and dividends received less expenses. The Intermediate Fund also
-16-
<PAGE>
distributes net capital gains to its shareholders normally once a year. These
distributions automatically are reinvested in Intermediate Fund Shares at their
NAV unless the shareholder opts to take distributions in cash, in the form of a
check, or to direct them for purchase of shares in another Heritage mutual fund.
The receipt of dividends and capital gain distributions are events for
shareholders that are not tax-exempt.
The Government Fund distributes to its shareholders dividends from its net
investment income monthly. The Government Fund distributes any capital gains
annually. Under the Government Fund's Dividend Reinvestment Plan ("Reinvestment
Plan"), a shareholder's dividends and other distributions may be reinvested
automatically in additional shares of the Government Fund or purchased in the
open market. A shareholder pays no fees or charges for reinvestment of dividends
and other distributions. However, a shareholder may opt out of the Reinvestment
Plan and elect to receive his or her dividends in the form of a check. The
receipt of dividends and capital gain distributions are events for the
shareholder that are not tax-exempt.
Each Fund may make additional distributions if necessary to avoid a 4%
excise tax on certain undistributed ordinary income and capital gains. On or
before the Closing Date, the Government Fund will declare as a distribution
substantially all of its net investment income and realized net capital gain, if
any, and distribute that amount plus any previously declared but unpaid
dividends to maintain its tax status as a regulated investment company.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of the Assets solely for Intermediate Fund Shares and the
Intermediate Fund's assumption of the Liabilities is intended to qualify for
federal income tax purposes as a tax-free reorganization under section
368(a)(1)(D) of the Code. The Government Fund and Income Trust will receive an
opinion from their legal counsel, Kirkpatrick & Lockhart LLP, substantially to
the effect that:
(1) the Intermediate Fund's acquisition of the Assets in exchange solely
for Intermediate Fund Shares and the Intermediate Fund's assumption of the
Liabilities, followed by the Government Fund's distribution of those
shares PRO RATA to its shareholders constructively in exchange for their
shares of the Government Fund, will qualify as a "reorganization" within
the meaning of section 368(a)(1)(D) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of section 368(b) of the
Code;
(2) the Government Fund will recognize no gain or loss on the transfer to
the Intermediate Fund of the Assets in exchange solely for Intermediate
Fund Shares and the Intermediate Fund's assumption of the Liabilities or
on the subsequent distribution of those shares to the Government Fund's
shareholders in constructive exchange for their the Government Fund
shares;
-17-
<PAGE>
(3) the Intermediate Fund will recognize no gain or loss on its receipt of
the Assets in exchange solely for Intermediate Fund Shares and the
Intermediate Fund's assumption of the Government Fund's Liabilities;
(4) the Intermediate Fund's basis for the Assets will be the same as the
Government Fund's basis therefor immediately before the Reorganization,
and the Intermediate Fund's holding period for the Assets will include the
Government Fund's holding period therefor;
(5) A Government Fund shareholder will recognize no gain or loss on the
constructive exchange of all its shares of the Government Fund solely for
Intermediate Fund Shares pursuant to the Reorganization; and
(6) A Government Fund shareholder's aggregate basis for the Intermediate
Fund Shares to be received by it in the Reorganization will be the same as
the aggregate basis for its shares of the Government Fund to be
constructively surrendered in exchange for those Intermediate Fund Shares,
and its holding period for those Intermediate Fund Shares will include its
holding period for those shares of the Government Fund, provided they are
held as capital assets by the shareholder on the Closing Date.
The opinion may state that no opinion is expressed as to the effect of the
Reorganization on each Fund or any shareholder of the Government Fund with
respect to any asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
Utilization by the Intermediate Fund after the Reorganization of
pre-Reorganization capital losses realized by the Government Fund would be
subject to limitation in future years under the Code.
Shareholders of the Government Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
RIGHTS OF SHAREHOLDERS
There are no material differences between the rights of shareholders of
the Funds, except that shareholders of the Government Fund have a right to hold
annual meetings for the election of Trustees and for other proper business.
CAPITALIZATION
The following table shows the capitalization of each Fund as of May 31,
1999 and on a PRO FORMA combined basis (unaudited) as of that date, giving
effect to the Reorganization.
-18-
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
COMBINED FUND
GOVERNMENT FUND INTERMEDIATE FUND (CLASS A) PRO FORMA
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Assets $ 36,356,896 $ 11,715,033 $ 48,071,929
Shares Outstanding 3,115,471 1,272,101 5,219,988
NAV Per Share 11.67 9.21 9.21
- ------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS OF INTERMEDIATE FUND
The following table is intended to help you understand the performance of
Intermediate Fund Shares for the periods indicated. Certain information reflects
financial results for a single Intermediate Fund Share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in Intermediate Fund Shares (assuming reinvestment of all dividends
and distributions). The information in this table for the periods presented has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report along with the Intermediate Fund's financial statements, is included in
the statement of additional information, which is available upon request.
<TABLE>
<CAPTION>
INTERMEDIATE FUND SHARES (CLASS A)
For the Six Month
Period Ended FOR THE YEARS ENDED SEPTEMBER 30
March 31, 1999*
(unaudited) 1998* 1997* 1996* 1995 1994*
----------------- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of the year $9.70 $9.20 $9.08 $9.29 $9.10 $9.44
----- ----- ----- ----- ----- -----
Income from Investment Operations:
Net investment income (a)....... 0.20 0.48 0.51 0.50 0.62 0.43
Net realized and unrealized gain (0.33) 0.51 0.13 (0.21) 0.12 (0.40)
(loss) on investments ------ ---- ---- ----- ---- -----
Total from Investment Operations (0.13) 0.99 0.64 0.29 0.74 0.03
------ ---- ----- ----- ----- -----
Less Distributions:
Dividends from net investment income (0.21) (0.49) (0.52) (0.50) (0.55) (0.37)
----- ----- ----- ----- ----- -----
Total Distributions............. (0.21) (0.49) (0.52) (0.50) (0.55) (0.37)
----- ----- ----- ----- ----- -----
Net asset value, end of year...... $9.36 $9.70 $9.20 $9.08 $9.29 $9.10
===== ===== ===== ===== ===== =====
Total Return (%)(b)............... (1.32)(c) 11.18 7.28 3.24 8.47 0.36
Ratios (%)/Supplemental Data:
Operating expenses net, to average 0.92(d) 0.92 0.93 0.94 0.95 0.95
daily net assets (a)...........
Net investment income to average daily 4.30 (d) 5.18 5.65 5.42 5.50 4.60
net assets.....................
Portfolio turnover rate......... 100 (c) 188 69 135 162 214
Net assets, end of year ($ millions) 12 13 14 18 24 41
- --------------------------------------------------------------------------------
<FN>
* 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.
-19-
<PAGE>
(a) Excludes management fees waived and expenses reimbursed by Heritage in
the amount of $0.04, $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 1.84% (annualized), 2.00%, 1.67%, 1.61%, 1.47% and 1.18%
per Class A share, respectively.
(b) Does not reflect the imposition of a sales charge.
(c) Not annualized.
(d) Annualized.
</FN>
</TABLE>
SHARE PRICE DATA
The Government Fund's shares are traded on the NYSE and have historically
traded at a discount to its NAV as illustrated in the table below. The Board
recently approved the Reorganization Plan setting forth the combination of the
Government Fund into the Intermediate Fund.
The following table shows the NAV of the Government Fund, the sales price
of the shares on the NYSE and the premium or discount to NAV that these figures
represent for each quarter since November 1, 1996.
PREMIUM / DISCOUNT
NAV SHARE PRICE (%)
HIGH LOW HIGH LOW HIGH LOW
1999:
Feb. 1 to April 30 12.11 11.87 10.313 10.188 -15.36 -13.56
Nov. 1, 1998 to 12.36 12.12 10.750 10.313 -15.24 -12.24
Jan. 31
1998:
Aug. 1 to Oct. 31 12.62 12.03 11.125 10.563 -15.09 -9.04
May 1 to July 31 12.16 11.92 10.688 10.313 -13.99 -11.23
Feb. 1 to April 30 12.11 11.92 11.625 10.625 -11.24 -3.29
Nov. 1, 1997 to 12.23 12.03 11.500 11.125 -7.91 -4.88
Jan. 31
1997:
Aug. 1 to Oct. 1 12.06 11.80 11.188 11.000 -9.68 -5.19
May 1 to July 31 12.09 11.68 12.125 10.875 -7.05 +1.55
Feb. 1 to April 30 12.01 11.54 11.625 11.125 -6.33 -0.56
Nov. 1, 1996 to 12.27 11.89 11.750 11.000 -8.03 -3.92
Jan. 31
INVESTMENT ADVISER AND DISTRIBUTOR
Heritage Asset Management, Inc., organized as a Florida corporation in
1985, is located at 880 Carillon Parkway, St. Petersburg, Florida 33716.
Heritage serves as the investment adviser and administrator of both Funds. Under
separate Investment Advisory and Administration Agreements for Income Trust, on
behalf of the Intermediate Fund, and the Government Fund, respectively, Heritage
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<PAGE>
is responsible for reviewing and establishing investment policies and
administering noninvestment affairs. In addition to each Fund, Heritage manages,
supervises and conducts the business and administrative affairs of other
Heritage mutual funds with net assets totaling approximately $4.5 billion as of
May 31, 1999.
All of the capital stock of Heritage is owned by Raymond James Financial,
Inc. ("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.
Intermediate Fund Shares are offered continuously through its principal
underwriter, Raymond James & Associates, Inc. ("RJA"), and through other
participating dealers or banks that have agreements with RJA.
LEGAL MATTERS
Certain legal matters concerning the Government Fund and Income Trust and
their participation in the Reorganization, the issuance of Intermediate Fund
Shares in connection with the Reorganization and the tax consequences of the
Reorganization will be passed upon by Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, NW, Washington, D.C. 20036-1800, counsel to the Government
Fund and Income Trust.
EXPERTS
The audited financial statements of the Government Fund, for the fiscal
year ended October 31, 1998, have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon is included in the Government
Fund's Annual Report to Shareholders for the year ended October 31, 1998. The
financial statements audited by PricewaterhouseCoopers LLP have been
incorporated herein by reference in reliance on their reports given on their
authority as experts in auditing and accounting matters.
INFORMATION FILED WITH THE SEC AND NYSE
This Proxy Statement and the related SAI do not contain all the
information set forth in the registration statement and the exhibits relating
thereto and annual reports which the Government Fund has filed with the SEC
pursuant to the Securities Act of 1933 and the 1940 Act, to which reference is
hereby made. The SEC file number for the Government Fund's Annual Report to
Shareholders for the period ending October 31, 1998 is Registration No.
33-67960. Such Annual Report to Shareholders is incorporated herein by
reference. The SEC file number for Income Trust's registration statement
containing the Intermediate Fund's prospectus and statement of additional
information is Registration No. 33-30361. Such prospectus and statement of
additional information are incorporated herein be reference.
-21-
<PAGE>
The Government Fund and Income Trust are each subject to the information
requirements of the Securities Exchange Act of 1934 and the 1940 Act and in
accordance therewith files reports and other information with the SEC. Reports,
proxy statements, registration statements and other information filed by the
Government Fund and Income Trust (including the Registration Statement of Income
Trust relating to the Intermediate Fund and the Government Fund on Form N-14 of
which this Proxy Statement is a part and which is hereby incorporated reference)
may be inspected without charge and copied at the public reference facilities
maintained by the SEC at Room 1014, Judiciary Plaza, 450 Fifth Street, NW,
Washington, D.C. 20549, and at the following regional offices of the SEC: 1401
Brickell Avenue, Suite 200, Miami, Florida 33131. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at the prescribed rates. The SEC maintains an Internet web site at
http://www.sec.gov that contains information regarding each Fund and the Income
Trust.
The Government Fund's shares are listed and publicly traded on the NYSE.
Reports and other information relating to the Government Fund may be inspected
at the NYSE, 20 Broad Street, New York, NY 10005.
ADDITIONAL INFORMATION ABOUT EACH FUND
For more information with respect to the Intermediate Fund concerning the
following topics, please refer to the Intermediate Fund's Prospectus, dated
February 1, 1999 and attached as Appendix B to this Proxy Statement, as
indicated: (i) see "Intermediate Government Fund" for further information on its
objective, policies and risks; (ii) see discussion in "Intermediate Government
Fund" and "Management of the Funds" for further information regarding management
of the Intermediate Fund; (iii) see "Distribution of Fund Shares" and "Your
Investment" regarding the shares of the Intermediate Fund; and (iv) see "How to
Invest", "How to Sell Your Investment", "How to Exchange Your Shares" and
"Account and Transaction Policies" regarding the purchase, redemption and
exchange of shares.
For more information with respect to the Government Fund concerning the
following topics, please refer to the Government Fund's Annual Report to
Shareholders for the period ended October 31, 1998, as indicated: (i) see "Note
1" and "Note 6" to the financial statements for further information on the
Government Fund's investment objectives, policies and risks; (ii) see "Note 2"
to the financial statements for further information on the Government Fund's
manager; and (iii) see "Dividend Reinvestment Plan" for further information
regarding the reinvestment of dividends paid by the Government Fund.
-22-
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of _____ __, 1999, between Heritage Income Trust, a Massachusetts
business trust ("Trust"), on behalf of Intermediate Government Fund, a
segregated portfolio of assets ("series") thereof ("Acquiring Fund"), and
Heritage U.S. Government Income Fund, also a Massachusetts business trust
("Target"). (Acquiring Fund and Target are sometimes referred to herein
individually as a "Fund" and collectively as the "Funds," and Trust and Target
are sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies.") All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
Acquiring Fund are made and shall be taken or undertaken by Trust.
The Investment Companies wish to effect a reorganization described in
section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended ("Code").
The reorganization will involve the transfer of Target's assets to Acquiring
Fund in exchange solely for voting shares of beneficial interest ("shares") in
Acquiring Fund and the assumption by Acquiring Fund of Target's liabilities,
followed by the constructive distribution of those shares PRO RATA to the
holders of shares in Target ("Target Shares") in exchange therefor, all on the
terms and conditions set forth in this Agreement (which is intended to be, and
is adopted as, a "plan of reorganization" within the meaning of the regulations
under the Code). The foregoing transactions are referred to herein collectively
as the "Reorganization."
Acquiring Fund is an open-end management investment company. Its shares
are divided into three classes, designated Class A, Class B, and Class C shares;
only Acquiring Fund's Class A shares ("Acquiring Fund Shares") are involved in
the Reorganization. Target is a closed-end management investment company that
has only a single class of shares, which can be purchased and sold on the New
York Stock Exchange ("NYSE").
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional
(rounded to the third decimal place) Acquiring Fund Shares,
determined by dividing the net value of Target (computed as set
forth in paragraph 2.1) by the net asset value ("NAV") of an
Acquiring Fund Share (computed as set forth in paragraph 2.2),
and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time (as defined in paragraph 3.1).
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<PAGE>
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement.
Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all its known Liabilities before the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without regard
to any deduction for dividends paid) and substantially all of its realized net
capital gain, if any, for the current taxable year through the Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares received by it
pursuant to paragraph 1.1 to Target's shareholders of record, determined as of
the Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Trust's transfer agent's opening accounts on Acquiring Fund's
share transfer books in the Shareholders' names and transferring such Acquiring
Fund Shares thereto. Each Shareholder's account shall be credited with the
respective PRO RATA number of full and fractional (rounded to the third decimal
place) Acquiring Fund Shares due that Shareholder. All outstanding Target
Shares, including any represented by certificates, shall simultaneously be
canceled on Target's share transfer books. Acquiring Fund shall not issue
certificates representing the Acquiring Fund Shares issued in connection with
the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months after
the Effective Time, Target shall be terminated and any further actions shall be
taken in connection therewith as required by applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the NYSE on
the date of the Closing ("Valuation Time"), using the valuation procedures set
forth in Target's most recent annual report to its shareholders, less (b) the
amount of the Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures set
forth in Acquiring Fund's then-current prospectus and statement of additional
information ("SAI").
A-2
<PAGE>
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Heritage Asset Management, Inc. ("Heritage").
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office on
October 15, 1999, or at such other place and/or on such other date as to which
the parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of the close of business on the date thereof or at
such other time as to which the parties may agree ("Effective Time"). If,
immediately before the Valuation Time, (a) the NYSE is closed to trading or
trading thereon is restricted or (b) trading or the reporting of trading on the
NYSE or elsewhere is disrupted, so that accurate appraisal of the net value of
Target and the NAV of an Acquiring Fund Share is impracticable, the Effective
Time shall be postponed until the first business day after the day when such
trading shall have been fully resumed and such reporting shall have been
restored.
3.2. Target's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately following the Closing, does or
will conform to such information on Target's books immediately before the
Closing. Target's custodian shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Assets held by the custodian will be
transferred to Acquiring Fund at the Effective Time and (b) all necessary taxes
in conjunction with the delivery of the Assets, including all applicable federal
and state stock transfer stamps, if any, have been paid or provision for payment
has been made.
3.3. Target shall deliver to Trust at the Closing a list of the names and
addresses of the Shareholders and the number of outstanding Target Shares owned
by each Shareholder, all as of the Effective Time, certified by Target's
Secretary or Assistant Secretary. Trust's transfer agent shall deliver at the
Closing a certificate as to the opening on Acquiring Fund's share transfer books
of accounts in the Shareholders' names. Trust shall issue and deliver a
confirmation to Target evidencing the Acquiring Fund Shares to be credited to
Target at the Effective Time or provide evidence satisfactory to Target that
such Acquiring Fund Shares have been credited to Target's account on Acquiring
Fund's books. At the Closing, each party shall deliver to the other such bills
of sale, checks, assignments, stock certificates, receipts, or other documents
as the other party or its counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable shares
("Business Trust"), that is duly organized and validly existing under the
A-3
<PAGE>
laws of the Commonwealth of Massachusetts; and a copy of its Declaration of
Trust is on file with the Secretary of the Commonwealth of Massachusetts;
4.1.2. Target is duly registered as a closed-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"),
and such registration will be in full force and effect at the Effective
Time;
4.1.3. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances; and upon
delivery and payment for the Assets, Acquiring Fund will acquire good and
marketable title thereto;
4.1.4. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
its Declaration of Trust or By-laws or of any agreement, instrument, lease,
or other undertaking to which Target is a party or by which it is bound or
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as previously disclosed in writing to
and accepted by Trust;
4.1.5. Except as otherwise disclosed in writing to and accepted by
Trust, all material contracts and other commitments of Target (other than
this Agreement and investment contracts, including options, futures, and
forward contracts) will be terminated, or provision for discharge of any
liabilities of Target thereunder will be made, at or prior to the Effective
Time, without either Fund's incurring any liability or penalty with respect
thereto and without diminishing or releasing any rights Target may have had
with respect to actions taken or omitted or to be taken by any other party
thereto prior to the Closing;
4.1.6. Except as otherwise disclosed in writing to and accepted by
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Target's
knowledge) threatened against Target or any of its properties or assets
that, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business; and Target knows of no
facts that might form the basis for the institution of any such litigation,
proceeding, or investigation and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially or adversely affects its business or its ability to
consummate the transactions contemplated hereby;
4.1.7. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of Target's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and, subject to approval by
Target's shareholders, this Agreement constitutes a valid and legally
binding obligation of Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
4.1.8. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target's shareholders;
A-4
<PAGE>
4.1.9. No governmental consents, approvals, authorizations, or filings
are required under the Securities Act of 1933, as amended ("1933 Act"), the
Securities Exchange Act of 1934, as amended ("1934 Act"), or the 1940 Act
for the execution or performance of this Agreement by Target, except for
(a) the filing with the Securities and Exchange Commission ("SEC") of a
registration statement by Trust on Form N-14 relating to the Acquiring Fund
Shares issuable hereunder, and any supplement or amendment thereto
("Registration Statement"), including therein a prospectus/proxy statement
("Proxy Statement"), and (b) such consents, approvals, authorizations, and
filings as have been made or received or as may be required subsequent to
the Effective Time;
4.1.10. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in or
omissions from the Proxy Statement made in reliance on and in conformity
with information furnished by Trust for use therein;
4.1.11. The Liabilities were incurred by Target in the ordinary course
of its business; and there are no Liabilities other than liabilities
disclosed or provided for in its financial statements referred to in
paragraph 4.1.17 and liabilities incurred by Target in the ordinary course
of its business subsequent to October 31, 1998, or otherwise previously
disclosed to Trust, none of which has been materially adverse to the
business, assets, or results of Target operations;
4.1.12. Target qualified for treatment as a regulated investment
company under Subchapter M of the Code ("RIC") for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; it has no
earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it; and the Assets will be
invested at all times through the Effective Time in a manner that ensures
compliance with the foregoing;
4.1.13. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within
the meaning of section 368(a)(3)(A) of the Code;
4.1.14. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers;
4.1.15. Target will be terminated as soon as reasonably practicable
after the Effective Time, but in all events within six months thereafter;
4.1.16. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the
taxable year ended October 31, 1997, have been timely filed and all taxes
payable pursuant to such returns have been timely paid; and
A-5
<PAGE>
4.1.17. Target's financial statements for the year ended October 31,
1998, to be delivered to Trust, fairly represent Target's financial
position as of that date and the results of its operations and changes in
its net assets for the year then ended.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Trust is a Business Trust that is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts; and a copy of
its Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts;
4.2.2. Trust is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force and
effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued
and outstanding shares of Acquiring Fund, fully paid and non-assessable;
4.2.6. Acquiring Fund's current prospectus and SAI conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Massachusetts law or
any provision of Trust's Declaration of Trust or By-laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Acquiring Fund is a party or by
which it is bound, except as previously disclosed in writing to and
accepted by Target;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Target, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to Acquiring
Fund's knowledge) threatened against Trust with respect to Acquiring Fund
or any of its properties or assets that, if adversely determined, would
materially and adversely affect Acquiring Fund's financial condition or the
conduct of its business; and Acquiring Fund knows of no facts that might
form the basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to consummate
the transactions contemplated hereby;
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<PAGE>
4.2.9. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the
part of Trust's board of trustees (together with Target's board of
trustees, the "Boards"), which has made the determinations required by Rule
17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Trust, except for (a) the
filing with the SEC of the Registration Statement and (b) such consents,
approvals, authorizations, and filings as have been made or received or as
may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the shareholders' meeting referred to in paragraph 5.2, and at the
Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in or
omissions from the Proxy Statement made in reliance on and in conformity
with information furnished by Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a RIC for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; Acquiring
Fund intends to continue to meet all such requirements for the next taxable
year; and it has no earnings and profits accumulated in any taxable year in
which the provisions of Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, except to the extent it is
required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;
4.2.14. Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of section 1.368-1(d)(2)
of the Income Tax Regulations under the Code), (b) use a significant
portion of Target's historic business assets (within the meaning of section
1.368-1(d)(3) of those regulations) in a business, (c) has no plan or
intention to sell or otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business and dispositions
necessary to maintain its status as a RIC, and (d) expects to retain
substantially all the Assets in the same form as it receives them in the
Reorganization, unless and until subsequent investment circumstances
suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status;
A-7
<PAGE>
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another business trust or a corporation or any
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items, and
U.S. government securities) will be invested in the stock and securities of
any one issuer and (b) not more than 50% of the value of such assets will
be invested in the stock and securities of five or fewer issuers;
4.2.17. Acquiring Fund does not own, directly or indirectly, nor at
the Effective Time will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares
of Target;
4.2.18. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years through and
including the taxable year ended September 30, 1997, have been timely filed
and all taxes payable pursuant to such returns have been timely paid; and
4.2.19. Trust's financial statements for the year ended September 30,
1998, to be delivered to Target, fairly represent Acquiring Fund's
financial position as of that date and the results of its operations and
changes in its net assets for the year then ended.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of
its Target Shares constructively surrendered in exchange therefor;
4.3.2. Its management is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (a) any portion of
their Target Shares before the Reorganization to any person related (within
the meaning of section 1.368-1(e)(3) of the Income Tax Regulations under
the Code) to either Fund or (b) any portion of the Acquiring Fund Shares to
be received by them in the Reorganization to any person related (within
such meaning) to Acquiring Fund;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
4.3.4. The fair market value of the Assets on a going concern basis
will equal or exceed the Liabilities to be assumed by Acquiring Fund and
those to which the Assets are subject;
4.3.5. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.6. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair
market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Target immediately before the Reorganization.
For the purposes of this representation, any amounts used by Target to pay
its Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions not made as
part of the Reorganization and (b) distributions made to conform to its
A-8
<PAGE>
policy of distributing all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the excise tax under
section 4982 of the Code) will be included as assets held thereby
immediately before the Reorganization;
4.3.7. None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
4.3.8. Immediately after the Reorganization, the Shareholders will own
shares constituting "control" (within the meaning of section 304(c) of the
Code) of Acquiring Fund; and
4.3.9. Neither Fund will be reimbursed for any expenses incurred by it
or on its behalf in connection with the Reorganization unless those
expenses are solely and directly related to the Reorganization (determined
in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B.
187) ("Reorganization Expenses").
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that --
(a) such ordinary course will include declaring and paying customary
dividends and other distributions and changes in operations
contemplated by each Fund's normal business activities, and
(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that (1) Target shall not
dispose of more than an insignificant portion of its historic
business assets during such period without Acquiring Fund's prior
consent and (2) if Target's shareholders approve this Agreement
(and the transactions contemplated hereby), then between the date
of such approval and the Closing, the Funds shall coordinate
their respective portfolios so that the transfer of the Assets to
Acquiring Fund will not cause it to fail to be in compliance with
all of its investment policies and restrictions immediately after
the Closing.
5.2. Target covenants to call a shareholders' meeting to consider and act
on this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Trust in obtaining information
Trust reasonably requests concerning the beneficial ownership of Target Shares.
A-9
<PAGE>
5.5. Target covenants that its books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal and state securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate to continue its operations after
the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by the Boards and shall have been approved by
Target's shareholders in accordance with its Declaration of Trust and applicable
law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on either Fund's assets or properties, provided that either
Investment Company may for itself waive any of such conditions.
A-10
<PAGE>
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP
("Counsel") substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under its Declaration of Trust to
own all its properties and assets and, to the knowledge of Counsel, to
carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Target, is a
valid and legally binding obligation of Trust with respect to Acquiring
Fund, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights and
by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized, validly issued and
outstanding, and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Trust's Declaration of Trust or By-laws or any provision of any
agreement (known to Counsel, without any independent inquiry or
investigation) to which Trust (with respect to Acquiring Fund) is a party
or by which it is bound or (to the knowledge of Counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Trust (with respect to Acquiring Fund) is a
party or by which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Target;
6.4.5. To the knowledge of Counsel (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Trust on
behalf of Acquiring Fund of the transactions contemplated herein, except
those obtained under the 1933 Act, the 1934 Act, and the 1940 Act and those
that may be required under state securities laws;
6.4.6. Trust is registered with the SEC as an investment company, and
to the knowledge of Counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of Counsel (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Trust (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
Trust (with respect to Acquiring Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that materially and adversely affects Acquiring Fund's business,
A-11
<PAGE>
except as set forth in such opinion or as otherwise disclosed in writing to
and accepted by Target.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (2) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (3) limit such opinion to applicable federal
and state law, and (4) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with Counsel who have devoted substantive attention
to matters directly related to this Agreement and the Reorganization.
6.5. Trust shall have received an opinion of Counsel substantially to the
effect that:
6.5.1. Target is a Business Trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under its
Declaration of Trust to own all its properties and assets and, to the
knowledge of Counsel, to carry on its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and
delivery of this Agreement by Trust on behalf of Acquiring Fund, is a valid
and legally binding obligation of Target, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws relating
to or affecting creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Target's Declaration of Trust or By-laws or any provision of any
agreement (known to Counsel, without any independent inquiry or
investigation) to which Target is a party or by which it is bound or (to
the knowledge of Counsel, without any independent inquiry or investigation)
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Trust;
6.5.4. To the knowledge of Counsel (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Target of the
transactions contemplated herein, except those obtained under the 1933 Act,
the 1934 Act, and the 1940 Act and those that may be required under state
securities laws;
6.5.5. Target is registered with the SEC as an investment company, and
to the knowledge of Counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of Counsel (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Target or any of its properties or assets and (b) Target
is not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially and adversely
affects Target's business, except as set forth in such opinion or as
otherwise disclosed in writing to and accepted by Trust.
A-12
<PAGE>
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (2) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (3) limit such opinion to applicable federal
and state law, and (4) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with Counsel who have devoted substantive attention
to matters directly related to this Agreement and the Reorganization.
6.6. Each Investment Company shall have received an opinion of Counsel,
addressed to and in form and substance satisfactory to it, as to the federal
income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax
Opinion, Counsel may rely as to factual matters, exclusively and without
independent verification, on the representations made in this Agreement (or in
separate letters addressed to Counsel) and the certificates delivered pursuant
to paragraph 3.4. The Tax Opinion shall be substantially to the effect that,
based on the facts and assumptions stated therein and conditioned on
consummation of the Reorganization in accordance with this Agreement, for
federal income tax purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares PRO RATA to
the Shareholders constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1)(D) of
the Code, and each Fund will be "a party to a reorganization" within the
meaning of section 368(b) of the Code;
6.6.2. Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares and
Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. Acquiring Fund will recognize no gain or loss on its receipt of
the Assets in exchange solely for Acquiring Fund Shares and its assumption
of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6. A Shareholder's aggregate basis for the Acquiring Fund Shares
to be received by it in the Reorganization will be the same as the
aggregate basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares, and its holding period for those
Acquiring Fund Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the Shareholder at the
Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any asset as to which any unrealized gain or loss is
A-13
<PAGE>
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting.
At any time before the Closing, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Except as otherwise provided herein, the total Reorganization
Expenses will be borne entirely by Heritage.
8. ENTIRE AGREEMENT; NO SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, or (c) if the Closing has not occurred on or before December 31, 1999; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in any manner
mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
A-14
<PAGE>
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Each Fund agrees that, in asserting any rights or claims under this
Agreement, it shall look only to the other Fund's assets and property in
settlement of such rights or claims and not to such other Fund's shareholders or
trustees; and neither those shareholders nor those trustees, nor any of their
agents, whether past, present, or future, nor any other series (in the case of
Trust), shall be personally liable therefor.
11.4. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Investment Company and
delivered to the other party hereto. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
HERITAGE U.S. GOVERNMENT INCOME FUND
By:_____________________
President
HERITAGE INCOME TRUST,
on behalf of its series,
Intermediate Government Fund
By:_____________________
President
A-15
<PAGE>
APPENDIX B
<PAGE> 1
HERITAGE
INCOME
TRUST
(Assorted black and white photos of people working and playing.)
From Our Family to Yours: The Intelligent Creation of Wealth.
High Yield Bond Fund
Intermediate Government Fund
Prospectus
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 INCOME TRUST LOGO)
880 Carillon Parkway
St. Petersburg, Florida 33716
(800) 421-4184
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
HERITAGE INCOME TRUST
High Yield Bond Fund...................................... 1
Intermediate Government Fund.............................. 4
MANAGEMENT OF THE FUNDS
Who Manages Your Fund..................................... 7
Distribution of Fund Shares............................... 7
Year 2000................................................. 8
YOUR INVESTMENT
Before You Invest......................................... 8
Choosing a Class of Shares................................ 8
Sales Charge Reductions and Waivers....................... 10
How to Invest............................................. 11
How to Sell Your Investment............................... 13
How to Exchange Your Shares............................... 14
Account and Transaction Policies.......................... 15
Dividends, Capital Gains and Taxes........................ 15
FINANCIAL HIGHLIGHTS
High Yield Bond Fund...................................... 17
Intermediate Government Fund.............................. 18
</TABLE>
<PAGE> 3
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 at least 65% of its total
assets in lower- and medium-rated corporate bonds and other fixed income
securities. These lower-rated securities are 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 Ba1 or lower by Moody's Investors Service, Inc. (Moody's)
or BB+ or lower by Standard & Poor's Ratings Services (S&P). Certain of the
securities purchased by the fund may be rated as low as C by Moody's or D by
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 values 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.
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. Peter J. Wilby, a Managing Director of
Salomon Brothers Asset Management Inc, is responsible for the day-to-day
management.
B-1
<PAGE> 4
HOW THE HIGH YIELD BOND FUND HAS PERFORMED. The bar 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 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.
(BAR CHART)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
22.88% 10.44% 9.35% -3.97% 14.52% 12.44% 11.66% 0.63%
</TABLE>
From its inception on March 1, 1990 through December 31, 1998, the Class A
shares' highest quarterly return was 6.77% for the quarter ended March 31, 1991
and the lowest quarterly return was -5.57% for the quarter ended September 30,
1998. These returns do not reflect sales charges. If the sales charges were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 1998):[ ]
<TABLE>
<CAPTION>
CLASS C SALOMON SMITH BARNEY MERRILL LYNCH DOMESTIC
PERIOD CLASS A SHARES SHARES < > HIGH YIELD MARKET INDEX ** MASTER INDEX ***
------ -------------- ---------- -------------------------- ----------------------
<S> <C> <C> <C> <C>
1 Year............. -3.14% 0.13% 3.61% 8.87%
5 Years............ 5.98% N/A 9.06% 7.33%
Life of Fund....... 8.59% 8.54% 12.65% 9.21%
</TABLE>
[ ] The High Yield Bond Fund's returns are after deduction of sales charges
and expenses. No average return is shown above for Class B shares because
they were not offered before February 2, 1998.
< > Class C shares were first offered on April 3, 1995.
** The Salomon Smith Barney High Yield Market Index captures the performance of
below investment-grade corporate bonds issued to the United States. This
Index excludes defaulted debt securities. 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 Merrill Lynch Domestic Master Index is an indicator of the performance
of the investment grade U.S. Domestic bond market. The index currently
captures close to $5 trillion of the outstanding debt of the U.S. Treasury
Note and Bond, U.S. Agency, Mortgage Pass-through and U.S. Investment Grade
Corporate Bond markets. 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.
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.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
<TABLE>
<CAPTION>
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 redemption proceeds, whichever is lower)...... None 5%* 1%**
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.
B-2
<PAGE> 5
ANNUAL OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
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 Expenses.............................................. 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. Any reduction in Heritage's management fees is subject to
reimbursement by the fund within the following two years if overall expenses
fall below these percentage limitations.
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:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
A shares.................................................. $492 $772 $1,061 $1,884
B shares
Assuming redemption at end of period................... $673 $870 $1,180 $1,926
Assuming no redemption................................. $173 $570 $ 980 $1,926
C shares.................................................. $173 $570 $ 980 $2,127
</TABLE>
B-3
<PAGE> 6
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, and related repurchase agreements and forward
commitments. These securities include U.S. Treasuries (including repurchase
agreements and when-issued and forward commitment securities involving such
obligations), mortgage-backed securities, real estate mortgage investment
conduits (REMICs) and stripped securities among others. The fund invests at
least 80% of its assets in these debt securities. 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 values 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 is the possibility that falling interest rates
may cause prepayment to occur at a faster than expected rate and 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 is the possibility that rising interest rates may cause prepayments to
occur at a slower than expected rate and 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. H. Peter Wallace, a Senior Vice President
and Director of Fixed Income Investments for Heritage Asset Management, Inc., is
responsible for the day-to-day management of the fund's investment portfolio.
HOW THE INTERMEDIATE GOVERNMENT FUND HAS PERFORMED. The bar 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.
(BAR CHART OF INTERMEDIATE GOVERNMENT FUND'S CLASS A SHARE PERFORMANCE)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7.62% 10.36% 3.38% 1.77% -.125% 11.43% 2.67% 7.47% 8.19%
</TABLE>
B-4
<PAGE> 7
From its inception on March 1, 1990 through December 31, 1998, the Class A
shares' highest quarterly return was 5.64% for the quarter ended September 30,
1998 and the lowest quarterly return was -1.09% for the quarter ended March 31,
1992. These returns do not reflect sales charges. If the sales charges were
reflected, the returns would be lower than those shown.
AVERAGE ANNUAL RETURNS (FOR THE PERIODS ENDED DECEMBER 31, 1998)*
<TABLE>
<CAPTION>
LEHMAN BROTHERS 1 TO 3 LEHMAN BROTHERS INTERMEDIATE
PERIOD CLASS A SHARES CLASS C SHARES <> YEAR GOVERNMENT INDEX** GOVERNMENT/CORPORATE INDEX***
------ -------------- ------------------ ----------------------- -----------------------------
<S> <C> <C> <C> <C>
1 Year........... 6.97% 8.43% 6.97% 8.43%
5 Years.......... 5.95% 6.60% 5.95% 6.60%
Life of Fund..... 7.02% 8.24% 7.02% 8.24%
</TABLE>
* The Intermediate Government Fund's returns are after deduction of sales
charges and expenses. No average annual return is shown above for Class B
shares because they were not offered before February 2, 1998.
< > Class C shares were first offered on April 3, 1995.
** The Lehman Brothers 1 to 3 Year Government Index is an unmanaged index
comprised of U.S. Government and agency securities rated investment grade or
higher with a maturity of one to three years and a minimum par value of $100
million for U.S. Government issues. 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 Lehman Brothers Intermediate Government/Corporate Index is comprised of
the Intermediate Government Index, which includes the Intermediate Treasury
and Intermediate Agency indices, and the Intermediate Corporate Index, which
includes bonds issued by corporations and Yankee issues. 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.
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.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT):
<TABLE>
<CAPTION>
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 redemption proceeds,
whichever is lower)............................. None 5%* 1%**
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):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <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 Expenses......................................... 0.92% 1.20% 1.20%
==== ==== ====
</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 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. Any reduction in Heritage's management fees is subject to
reimbursement by the fund within the following two years if overall expenses
fall below these percentage limitations.
B-5
<PAGE> 8
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:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
<S> <C> <C> <C> <C>
A shares.................................................. $465 $ 979 $1,412 $2,615
B shares
Assuming redemption at end of period................... $622 $1,012 $1,420 $2,501
Assuming no redemption................................. $122 $ 712 $1,220 $2,501
C shares.................................................. $122 $ 712 $1,220 $2,615
</TABLE>
B-6
<PAGE> 9
MANAGEMENT OF THE FUNDS
WHO MANAGES YOUR FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGER. Heritage Asset Management, Inc., 880 Carillion Parkway, St.
Petersburg, Florida 33716, serves as the investment adviser and administrator
for each fund. 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 $3.9 billion as of
December 31, 1998.
The table below indicates what Heritage charged each fund for investment
advisory and administration fees during the fund's last fiscal year and
Heritage's contractual fee rates:
<TABLE>
<CAPTION>
FEES CHARGED* CONTRACTUAL FEES
------------- ----------------
<S> <C> <C>
- - High Yield Bond Fund 0.49% 0.60%
- - Intermediate Government Fund 0.00% 0.50%
</TABLE>
- ----------------------------------
* After fee waiver.
SUBADVISERS. 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. Heritage has
selected Salomon Brothers Asset Management Inc, 7 World Trade Center, 38th
floor, New York, New York 10048, to serve as the subadviser to manage the High
Yield Bond Fund's portfolio. As of December 31, 1998, the Subadviser had
approximately $29 billion of assets under management.
PORTFOLIO MANAGERS. The following portfolio managers are responsible for
the day-to-day management of each fund:
- HIGH YIELD BOND FUND -- Peter J. Wilby, assisted by a team of other
investment professionals, is responsible for the day-to-day
management. Mr. Wilby is a Managing Director of the Subadviser and
has been affiliated with the Subadviser as a portfolio manager since
1989. Mr. Wilby is a Chartered Financial Analyst, Certified Public
Accountant and a member of the New York Society of Securities
Analysts.
- INTERMEDIATE GOVERNMENT FUND -- 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.
DISTRIBUTION OF FUND SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Raymond James & Associates, Inc. currently serves as distributor of the
funds. Subject to regulatory approvals, the funds' Board of Trustees have
approved a proposed distribution agreement with Heritage Fund Distributors, Inc.
B-7
<PAGE> 10
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 it 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.
YOUR INVESTMENT
BEFORE YOU INVEST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Before you invest in a fund, please
- Read this prospectus carefully.
- Then, decide which fund or funds best suits your needs and your goals.
- Next, decide which class of shares is best for you.
- 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:
- the amount you wish to invest,
- the different sales charges that apply to each share class,
- whether you qualify for any reduction or waiver of sales charges,
- the length of time you plan to keep the investment, and
- 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 0.35% of their average daily
net assets. These fees are lower than the ongoing Rule 12b-1 fees for Class B
and Class C shares.
B-8
<PAGE> 11
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%
$100,000-$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.
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% of the average daily net assets of the High Yield Bond Fund and
0.60% of the average daily net assets of the Intermediate Government Fund. 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.
<TABLE>
<CAPTION>
CLASS B DEFERRED CHARGES
------------------------
REDEMPTION DURING: CDSC ON SHARES BEING SOLD:
- ------------------ --------------------------
<S> <C>
1st year....................... 5%
2nd year....................... 4%
3rd year....................... 3%
4th year....................... 3%
5th year....................... 2%
6th year....................... 1%
After 6 years.................. 0%
</TABLE>
B-9
<PAGE> 12
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.
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% of the average daily net
assets of the High Yield Bank Fund and 0.60% of the average daily net assets of
the Intermediate Government Fund. 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 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.
- 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.
- 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.
- 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.
B-10
<PAGE> 13
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:
- You purchase Class A shares of a Heritage mutual fund between
February 1, 1999 and March 31, 1999,
- You provide a copy of your account statement showing the sale of
your other mutual fund shares, and
- 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
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:
- to make certain distributions from retirement plans,
- because of shareholder death or disability (including shareholders who
own shares in joint tenancy with a spouse),
- 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
- 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:
<TABLE>
<CAPTION>
MINIMUM INITIAL SUBSEQUENT
TYPE OF ACCOUNT INVESTMENT INVESTMENT
- --------------- --------------- -----------------------
<S> <C> <C>
Regular Account................ $1,000 No minimum
Systematic Investment
Program...................... $ 50 $50 on a monthly basis
Retirement Account............. $1,000 No minimum
</TABLE>
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.
B-11
<PAGE> 14
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.
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.
- 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.
- 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.
- 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.
- 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.
B-12
<PAGE> 15
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
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:
- Sales from any account that has had an address change in the past 30
days
- Sales of greater than $50,000
- Sales in which payment is to be sent to an address other than the
address of record
- Sales in which payment is to be made to payees other than the exact
registration of the account or
- 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.
B-13
<PAGE> 16
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:
- Make sure you have a sufficient amount of shares in your account.
- Determine how much you wish to withdraw. You must withdraw a minimum
of $50 for each transaction.
- 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).
- Determine the schedule: monthly, quarterly, semiannual or annual
basis.
- Determine which day of the month you would like the withdrawal to
occur. Available dates are the 1(st), 5(th), 10(th) or 20(th) day of
the month. If such a date falls on the weekend, the withdrawal will
take place on the next business day.
- 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:
- 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.
- 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.
- 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.
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.
B-14
<PAGE> 17
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 received in good order. 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.
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
B-15
<PAGE> 18
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:
<TABLE>
<CAPTION>
TYPE OF TRANSACTION TAX STATUS
------------------- ----------
<S> <C>
Income dividends........................................ Ordinary income rate
Short-term capital gain distributions................... Ordinary income rate
Long-term capital gain distributions.................... Capital gains rate
Sales or exchanges of shares owned for more than one
year.................................................. Capital gains or losses
Sales or exchanges of shares owned for one year or
less.................................................. Gains are treated as ordinary income;
losses are subject to special rules
</TABLE>
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.
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.
B-16
<PAGE> 19
FINANCIAL HIGHLIGHTS
HIGH YIELD BOND FUND 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). The information in this table for the periods
presented 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.
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------------------- ------------- -----------------------------------
FOR THE
YEAR ENDED FOR THE YEARS ENDED
FOR THE YEARS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- ------------- -----------------------------------
1998 1997 1996 1995 1994 1998++ 1998 1997 1996 1995+
------ ------ ------ ----- ------ ------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <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 $10.65 $10.18 $ 9.91 $ 9.62
------ ------ ------ ----- ------ -------- ------ ------ ------- -------
Income from Investment
Operations:
Net investment income(a)...... 0.88 0.90 0.84(e) 0.72 0.69 0.51 0.83 0.85 0.79(e) 0.31
Net realized and unrealized
gain (loss) on
investments................. (0.91) 0.46 0.24 0.31 (0.84) (0.87) (0.91) 0.46 0.24 0.28
------ ------ ------ ----- ------ -------- ------ ------ ------- -------
Total from Investment
Operations............ (0.03) 1.36 1.08 1.03 (0.15) (0.36) (0.08) 1.31 1.03 0.59
------ ------ ------ ----- ------ -------- ------ ------ ------- -------
Less Distributions:
Dividends from net investment
income...................... (0.89) (0.89) (0.80) (0.74) (0.71) (0.48) (0.84) (0.84) (0.76) (0.30)
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) (0.84) (0.84) (0.76) (0.30)
------ ------ ------ ----- ------ -------- ------ ------ ------- -------
Net asset value, end of year.... $ 9.77 $10.69 $10.22 $9.94 $ 9.65 $ 9.73 $ 9.73 $10.65 $ 10.18 $ 9.91
====== ====== ====== ===== ====== ======== ====== ====== ======= =======
Total Return (%)(d)............. (0.52) 14.00 11.44 11.23 (1.59) (3.58)(c) (1.02) 13.53 10.93 6.18(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) 1.70 1.70 1.70 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) 7.93 8.26 8.39 6.67(b)
Portfolio turnover rate....... 87 101 143 109 135 87 87 101 143 109
Net assets, end of year
(millions) ($).............. 40 42 33 30 36 2 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.
B-17
<PAGE> 20
INTERMEDIATE GOVERNMENT FUND 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). The information in this table for the periods
presented 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.
INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------- ---------- -------------------------------
FOR THE
YEARS
FOR THE YEARS ENDED ENDED FOR THE YEARS ENDED
SEPTEMBER 30, SEPT. 30, SEPTEMBER 30,
------------------------------------- ---------- -------------------------------
1998* 1997* 1996* 1995 1994* 1998++* 1998* 1997* 1996* 1995+
----- ----- ----- ----- ----- ---------- ----- ----- ----- -------
<S> <C> <C> <C> <C> <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 $9.18 $9.06 $9.27 $ 9.05
----- ----- ----- ----- ----- ------- ----- ----- ----- -------
Income from Investment Operations:
Net investment income(a)............ 0.48 0.51 0.50 0.62 0.43 0.33 0.41 0.49 0.49 0.21
Net realized and unrealized gain
(loss) on investments............. 0.51 0.13 (0.21) 0.12 (0.40) 0.32 0.55 0.13 (0.21) 0.23
----- ----- ----- ----- ----- ------- ----- ----- ---- -------
Total from Investment
Operations.................. 0.99 0.64 0.29 0.74 0.03 0.65 0.96 0.62 0.28 0.44
----- ----- ----- ----- ----- ------- ----- ----- ----- -------
Less Distributions:
Dividends from net investment
income............................ (0.49) (0.52) (0.50) (0.55) (0.37) (0.26) (0.47) (0.50) (0.49) (0.22)
----- ----- ----- ----- ----- ------- ----- ----- ----- -------
Total Distributions........... (0.49) (0.52) (0.50) (0.55) (0.37) (0.26) (0.47) (0.50) (0.49) (0.22)
----- ----- ----- ----- ----- ------- ----- ----- ----- -------
Net asset value, end of year.......... $9.70 $9.20 $9.08 $9.29 $9.10 $ 9.67 $9.67 $9.18 $9.06 $ 9.27
===== ===== ===== ===== ===== ======= ===== ===== ===== =======
Total Return (%)(c)................... 11.18 7.28 3.24 8.47 0.36 7.16(c) 10.85 7.02 3.04 4.90(c)
Ratios (%)/Supplemental Data:
Operating expenses net, to average
daily net assets(a)............... 0.92 0.93 0.94 0.95 0.95 1.20(b) 1.20 1.20 1.20 1.20(b)
Net investment income to average
daily net assets.................. 5.18 5.65 5.42 5.50 4.60 4.59(b) 4.74 5.38 5.22 5.19(b)
Portfolio turnover rate............. 188 69 135 162 214 188 188 69 135 162
Net assets, end of year ($
millions)......................... 13 14 18 24 41 0.13 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.
B-18
<PAGE> 21
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
(Assorted black and white photos of people working and playing.)
Text-only versions of these documents and this prospectus are available,
upon payment of a duplicating fee, by writing from the Public Reference Room
of the Securities and Exchange Commission in Washington, D.C. 20549-6009 or
by calling the Commission at 880-SEC-0330. Reports and other information
about the funds 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:
High Yield Bond Fund 811-5853 33-30361
Intermediate Government Fund 811-5853 33-30361
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.
(HERITAGE INCOME TRUST LOGO) Raymond James & Associates, Inc.
Distributor
Member New York Stock Exchange/81PC
P.O. Box 33022, St. Petersburg, FL 33733
727-573-8143 - 800-421-4184
- --------------------------------------------------------------------------------
Address Change Requested
<PAGE>
APPENDIX C
ANNUAL REPORT/PRESIDENT'S LETTER
November 19, 1998
Dear Fellow Shareholders:
I am pleased to provide you with the annual report for the fiscal year
ended September 30, 1998, for the Intermediate Government Fund and the High
Yield Bond Fund (the "Funds"), each a portfolio of Heritage Income Trust. During
the past year, bonds with higher credit quality generally outperformed those
with lower credit quality as investors demanded higher yields to accept any
credit risk.
The chart below presents total return data for the most recent fiscal
year. As you can see, unlike recent years past, investors were not rewarded for
taking more aggressive strategies during the past year. Both portfolios did
outperform their respective peer group averages for this period while the
Intermediate Government Fund also outperformed the unmanaged Lehman
Brothers-Intermediate and 1-3 Year Index returns.
TOTAL RETURN
(10/01/97-9/30/98)
INTERMEDIATE GOVERNMENT FUND
A Shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . +11.18
C Shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . +10.85
Lehman Brothers 1-3 Year Government Index . . . . . . . . . . . . + 7.93
Lehman Brothers Intermediate Government/Corporate Index . . . . +10.43
Lipper Intermediate U.S. Government Funds Average . . . . . . . . +10.53
HIGH YIELD BOND FUND
A Shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 0.52
C Shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.02
Salomon Brothers High Yield Market Index . . . . . . . . . . . . +2.48
Lipper High Current Yield Funds Average . . . . . . . . . . . . . - 1.77
On February 1, 1998, your Funds introduced Class B shares. From their
inception through September 30, 1998, the Class B shares returned +7.16% and
- -3.58%, for the Intermediate Government Fund and High Yield Bond Fund,
respectively.*
During the past year, the parent company of Salomon Brothers Asset
Management Inc., the subadviser for the High Yield Bond, was involved in two
major corporate combinations resulting in the ultimate parent of Salomon
Brothers Asset Management Inc. now being Citigroup, Inc. We have not
experienced, and do not expect, any material change in the way your portfolio is
managed as a result of this new corporate structure.
C-1
<PAGE>
In the pages that follow, you will find commentaries from Peter Wallace of
Heritage Asset Management, Inc. and Peter Wilby of Salomon Brothers Asset
Management Inc., the portfolio managers for your funds. I hope you find their
comments helpful in understanding the recent performance of your Funds. We
continue to believe that fixed income investments can play an important part in
a well-diversified portfolio. We encourage you to meet with your financial
advisor to discuss how these or other Heritage funds may fit into your own
unique asset allocation strategies.
Thank you for your continuing investment with us. Please call us at (800)
709-3863 if there are ever ways in which you believe we can better serve you. On
behalf of all of us at Heritage, best wishes for a happy and healthy holiday
season.
Sincerely,
/s/ Stephen G. Hill
Stephen G. Hill
President
- -----------------
* These returns are calculated without the imposition of either front- or
back-end sales charges.
C-2
<PAGE>
ANNUAL REPORT/PORTFOLIO MANAGER'S LETTER
November 19, 1998
Dear Fellow Shareholders:
For investors in the Intermediate Government Fund (the "Fund"), the fiscal
year ended September 30, 1998 was quite rewarding. The Fund provided a steady
source of income and produced very attractive total returns even though market
volatility remained quite high. After expenses, the Fund returned +11.18%* in A
shares for the fiscal year which compares to the Lehman Intermediate
Government/Corporate Index return of +10.43% and the Lehman 1 to 3 year
Government Index return of +7.93%.
During the year, a number of factors came together that were very positive
for the U.S. Treasury sector of the bond market producing one of the sharpest
drops in bond yields in recent history. The primary factor influencing the move
lower in yields was the lack of inflationary pressure in our economy. After more
than eight years of expansion, the U.S. economy continued to grow at a moderate
rate. Inflation, which traditionally rises during the later stages of an
economic expansion, continued to decline with the Consumer Price Index showing
only a 1.5% year-over-year rate through September. The Producer Price Index
actually declined by 0.9% over the same period. Increased productivity and
companies' lack of ability to increase prices were the main reasons for this
beneficial trend in inflation.
As the year progressed, it became more evident that the problems in Asia,
notably Japan, were mounting. These pressures spread through the developing
nations of the world causing currencies to fall against the dollar. The
strengthening dollar reduced the prices of goods imported into the United States
and also helped contain domestic inflation. The weakening of foreign economies
also aided in the fall of commodity prices such as oil and agricultural
products. These factors also led investors to flee foreign markets, both equity
and debt, and to seek the safety of U.S. Treasury bonds. The "flight to quality"
brought the yield of the benchmark thirty year Treasury bond to below 5.00%
allowing the Treasury market to perform better than other bond market sectors.
In September, just prior to year-end, the Federal Reserve Open Market
Committee reduced the Federal Funds rate from 5.50% to 5.25%. The Federal
Reserve moved rates lower in order to avert a slowdown in the U.S. economy and
to ease credit conditions. This was followed by further 25 basis point
reductions in mid October and early November to add additional liquidity and to
reduce the risk of a "credit crunch."
During the year we reduced our exposure to the mortgage sector of the
markets and concentrated primarily on U.S. Treasuries. This benefited the Fund's
performance. We have maintained one mortgage position to add additional income
over and above that available from comparable Treasury securities. In hindsight,
which we find nearly always perfect, we could have improved our results even
more by selling all of our mortgage positions and investing in the ten year
sector of the yield curve.
C-3
<PAGE>
We envision the Fed continuing to lower rates in 1999 as the economy
continues to weaken as the result of the worldwide economic slowdown and
financial pressures domestically. Currently we remain bullish on the Treasury
market over the balance of 1998 and into 1999, but we expect the markets to
continue to display unparalleled volatility of yields and prices. Strategically,
we plan to maintain a higher than normal exposure to the Treasury sector for the
foreseeable future.
Thanks for your continued confidence in the Heritage Income
Trust-Intermediate Government Fund.
Sincerely,
/s/ H. Peter Wallace
H. Peter Wallace, CFA
Senior Vice President
Heritage Asset Management, Inc.
Portfolio Manager, Intermediate Government Fund
- ----------------
* This return is calculated without the imposition of either front- or back-end
sales charges.
C-4
<PAGE>
ANNUAL REPORT/PERFORMANCE HISTORY
Growth of a $10,000 investment since
inception of Heritage Income Trust-Intermediate Government Fund
Class A Shares on March 1, 1990
$21,000
$20,000 | Average Annual Total Returns* |
$19,000 | 1 Year: 7.01% 5 Year: 5.22% |
$18,000 | Life of Class A Shares: 5.66% |
$17,000
$16,000 The graph depicts the performance of Class A Shares
$15,000 of the Fund relative to two market indices since
$14,000 the Fund's inception.
$13,000
$12,000
$11,000
$10,000 Past performance is not predictive of future performance
$ 9,000
1990 1991 1992 1993 1994 1995 1996 1997 1998
Yearly periods ended September 30
Return Since Inception
Heritage Income Trust-Intermediate Government Fund $16,047
Lehman Brothers 1 to 3 Year Government Index $18,079
Lehman Brothers Intermediate Government/Corporate Index $20,074
__________
* Total returns for the Intermediate Government Fund Class A, Class B and
Class C Shares are calculated in conformance with item 21 of Form N-1A,
which assumes reinvestment of dividends and a sales load of 3.75% for Class
A Shares. Performance presented represents historical data. 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. The Fund's past performance is not indicative of future
performance and should be considered in light of the Fund's investment
policy and objectives, the characteristics and quality of its portfolio
securities, and the periods selected. Since the period shown is less than
one year the aggregate total return in lieu of the annualized total return
is used for Class B Shares.
C-5
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ACQUISITION OF ASSETS OF
HERITAGE U.S. GOVERNMENT INCOME FUND
BY
HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
880 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716
TOLL FREE: (800) 421-4184
July __, 1999
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets to, and the assumption of all the
liabilities, if any, of Heritage U.S. Government Income Fund by, Heritage Income
Trust - Intermediate Government Fund consists of this cover page and the
following described documents, each of which is incorporated herein by
reference:
1. Pro Forma Financial Statements as of and at March 31, 1999.
2. Statement of Additional Information of Heritage Income Trust dated
February 1, 1999 as it relates to the Intermediate Government Fund.
3. Semi-Annual Report to Shareholders of Heritage Income Trust for the
period ended March 31, 1999 as it relates to the Intermediate
Government Fund.
4. Annual Report to Shareholders of Heritage U.S. Government Income Fund
for the fiscal year ended October 31, 1998.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus and Proxy Statement dated July __, 1999
relating to the above referenced matter. A copy of the Prospectus and Proxy
Statement may be obtained from Intermediate Government Fund without charge by
writing or calling Heritage Asset Management, Inc. at the address or telephone
number above.
<PAGE>
<TABLE>
HERITAGE INCOME TRUST - INTERMEDIATE GOVERNMENT FUND
PRO FORMA FINANCIAL STATEMENT
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<CAPTION>
Heritage Income Trust- Heritage U. S.
Intermediate Government Government Proforma Proforma
Fund Income Fund AJEs Combined
----------------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Investments $ 13,918,015 $ 43,715,410 $ 57,633,425
Repo 533,000 3,071,000 3,604,000
Cash 90 379 469
Receivables
Investments sold - 25,586 25,586
Fund shares sold 390,367 - 390,367
Dividends and interest 95,511 288,198 383,709
From Manager 30,939 - 30,939
Prepaid Insurance 1,953 6,981 8,934
Prepaid NYSE Filing Fee - 9,433 9,433
Deferred state qualification expenses 20,621 - 20,621
----------------------- ----------------- -----------------
Total Assets $ 14,990,496 $ 47,116,986 $ 62,107,482
----------------------- ----------------- =================
LIABILITIES
- -----------
Payables
Investments purchased $ - $ 9,787,500 $ 9,787,500
Fund shares redeemed 60,533 - 60,533
Accrued distribution fee 4,483 - 4,483
Other accrued expenses 42,545 143,095 185,640
----------------------- ----------------- -----------------
Total Liabilities $ 107,561 $ 9,930,595 $ 10,038,156
----------------------- ----------------- -----------------
Net assets, at market value $ 14,882,935 $ 37,186,391 $ 52,069,326
======================= ================= =================
NET ASSETS
- ----------
Paid in capital $ 21,247,840 $ 43,452,222 $ 64,700,062
Undistributed net investment income 658,089 (58,165) 599,924
Accumulated net realized loss (6,905,437) (6,044,102) (12,949,539)
Net unrealized depreciation on investments (117,557) (163,564) (281,121)
----------------------- ----------------- -----------------
Net assets, at market value $ 14,882,935 $ 37,186,391 $ 52,069,326
======================= ================= =================
Net assets, at market value
Class A Shares $ 12,414,756 $ 37,186,391 $ 49,601,147
Class B Shares 339,211 - 339,211
Class C Shares 2,128,968 - 2,128,968
----------------------- ----------------- -----------------
Total $ 14,882,935 $ 37,186,391 $ 52,069,326
======================= ================= =================
Shares of beneficial Interest outstanding
Class A Shares 1,326,965 3,115,471 859,238 (1) 5,301,674
Class B Shares 36,379 - 36,379
Class C Shares 228,167 - 228,167
----------------------- ----------------- -----------------
Total 1,591,511 3,115,471 4,706,982
======================= ================= =================
Net Asset Value ---
--- offering and redemption price
per share
Class A Shares $ 9.36 $ 11.94 $ 9.36
======================= ================= =================
Maximum offering price $ 9.72 $ 9.72
(100/96.25 of $9.36) ======================= =================
Class B Shares $ 9.32 $ 9.32
======================= =================
Class C Shares $ 9.33 $ 9.33
======================= =================
(1) Represents the difference between total additional shares to be issued (See Note 2) and current Heritage U. S.
Government Income Fund shares outstanding.
See Notes To Pro Forma Financial Statements
</TABLE>
<PAGE>
<TABLE>
Heritage Income Trust - Intermediate Government Fund
Pro Forma Financial Statement
Statement of Operations
For the 12 months ended March 31, 1999 (unaudited)
<CAPTION>
Heritage Income Trust- Heritage U. S.
Intermediate Government Government Proforma Proforma
Fund Income Fund AJEs Combined
----------------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 836,803 $ 2,753,744 $ 3,590,547
EXPENSES
Management fee 75,733 199,503 (10,213) (1) 265,023
Administrative fee - 56,787 (56,787) (2) (0)
Distribution fee (Class A Shares) 40,264 - 94,645 (3) 134,909
Distribution fee (Class B Shares) 915 - 915
Distribution fee (Class C Shares) 13,995 - 13,995
Professional fees 44,182 47,508 (47,508) (4) 44,182
Custodian/Fund acct fees 43,188 43,773 (33,751) (4) 53,210
Shareholder servicing fees 11,108 22,075 33,183
State qualification fees 33,175 - 33,175
Reports to shareholders 16,645 21,962 (17,462) (4) 21,145
Trustees' fees and expenses 9,954 9,696 (9,696) (4) 9,954
Insurance expense 1,983 3,827 5,810
NYSE Fees - 16,170 (16,170) (5) -
Organization expense - 4,881 4,881
Other (435) 1,325 890
----------------------- --------------- -------- -----------
Total expenses before waiver and reimbursement 290,707 427,506 (96,942) 621,272
Fees waived by Manager (75,733) (49,107) (28,585) (6) (153,425)
Reimbursement from Manager (68,964) - 68,964 (6) -
----------------------- --------------- -------- ----------
Total expenses after waiver and reimbursement 146,010 378,399 (56,563) 467,847
----------------------- --------------- -------- -----------
Net investment income 690,793 2,375,345 56,563 3,122,700
----------------------- --------------- -------- -----------
Realized and Unrealized Gain (Loss) on Investments
- --------------------------------------------------
Net realized gain from investment transactions 343,121 110,459 - 453,580
Net (decrease) in unrealized appreciation of (164,697) (176,599) - (341,296)
investments during the period ----------------------- --------------- -------- -----------
Net loss on investments 178,424 (66,139) - 112,285
----------------------- --------------- -------- -----------
- -
======================= =============== ======== ===========
Net increase (decrease) in net assets $ 869,217 $ 2,309,205 $ 56,563 $ 3,234,985
resulting from operations ======================= =============== ======== ===========
<FN>
(1) Adjustment to reflect reduction in management fees
(2) Adjustment to reflect elimination of the administrative fee
(3) Adjustment to reflect the addition of a 12b-1 fee
(4) Adjustment to reflect the elimination of duplicate fees
(5) Adjustment to reflect the elimination of the NYSE fee
(6) Adjustment to reflect the expense cap of 60 basis points on all non-12b-1 expenses
</FN>
</TABLE>
See Notes To Pro Forma Financial Statements
<PAGE>
<TABLE>
Heritage Income Trust - Intermediate Government Fund
Pro Forma Financial Statement
Investment Portfolio
March 31, 1999 (unaudited)
<CAPTION>
Heritage Income Trust Heritage U. S.
Intermediate Government Government Combined
Fund Income Fund
-------------------- -------------------- --------------------
Principal Market Value Principal Market Value Principal Market Value
Amount MV Amount MV Amount MV
------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
U. S. GOVERNMENT AND AGENCY
SECURITIES--110.69%
U. S. TREASURIES--59.1% (a)
USTN 4.50 09/30/00 $ 2,300,000 $2,282,750 $ 1,000,000 $ 992,500 $ 3,300,000 $3,275,250
USTN 5.375% 2/15/01 1,000,000 1,006,250 1,000,000 1,006,250
USTN 5% 02/28/01 2,000,000 1,999,376 2,000,000 1,999,376
USTN 5.625% 5/15/01 1,000,000 1,011,875 1,000,000 1,011,875
USTN 6.25% 1/31/02 1,000,000 1,029,063 1,000,000 1,029,063
USTN 5.875% 9/30/02 1,000,000 1,022,188 1,000,000 1,022,188
USTN 5.75% 11/30/02 1,000,000 1,018,438 1,000,000 1,018,438
USTN 5.5% 02/28/03 1,000,000 1,010,313 2,000,000 2,020,626 3,000,000 3,030,939
USTN 5.25% 08/15/03 2,300,000 2,305,032 1,000,000 1,002,188 3,300,000 3,307,220
USTN 5.375% 6/30/03 2,000,000 2,011,876 2,000,000 2,011,876
USTN 4.25% 11/15/03 2,000,000 1,925,626 2,000,000 1,925,626
USTN 4.75% 2/15/04 2,300,000 2,264,782 3,000,000 2,954,064 5,300,000 5,218,846
USTN 5.625% 5/15/08 1,000,000 1,018,125 1,000,000 1,018,125
USTN 5.5% 02/15/08 1,000,000 1,010,313 1,000,000 1,010,313
USTN 4.75% 11/15/08 3,000,000 2,889,375 3,000,000 2,889,375
--------- ---------
Total U. S. Treasuries
(cost $12,053,734, $18,929,609, ----------
$30,983,343) 11,950,692 18,824,069 30,774,761
---------- ---------- ----------
U. S. GOVERNMENT AGENCIES--51.6% (a)
Federal National Mortgage Association
- -------------------------------------
FNMA #459881 6.5% 1/1/29 988,355 983,952 988,355 983,952
FNMA #481349 6.5% 1/1/29 987,771 983,371 987,771 983,371
FNMA 1990-96-E SEQUENTIAL 150,836 151,842 150,836 151,842
FNMA 92-65 K, 8.5% 5/25/21 (b) 2,000,000 2,044,623 2,000,000 2,044,623
FNMA POOL #394212 7.50% 7/1/27 (b) 1,027,598 1,055,879 1,027,598 1,055,879
FNMA #481635 6.5% 1/1/29 2,016,112 2,007,130 2,016,112 2,007,130
FNMA 6% 30YR TBA ---------- 5,000,000 4,857,810 5,000,000 4,857,810
--------- ---------
Total Federal National Mortgage Association 1,967,323 10,117,284 12,084,607
--------- ---------- ----------
Federal Home Loan Mortgage Association
- --------------------------------------
FHLMC 1378-H 10% 1/15/21 (b) 3,000,000 3,177,766 3,000,000 3,177,766
FHLMC GOLD 6.5% 30 YR TBA 5,000,000 4,979,690 5,000,000 4,979,690
--------- ---------
Total Federal Home Loan Mortgage Association 8,157,456 8,157,456
---------- ---------
Government National Mortgage Association
- ----------------------------------------
GNMA 7.50% 11/15/25 POOL #415688 (b) 3,409,602 3,512,728 3,409,602 3,512,728
GNMA 7.50% 3/15/27 POOL #442741 (b) 1,045,682 1,076,668 1,045,682 1,076,668
GNMA 1996-16-G 7% 4/16/22 2,000,000 2,027,205 2,000,000 2,027,205
--------- ---------
Total Government National Mortgage Association 6,616,601 6,616,601
--------- ---------
Total U. S. Government Agencies
(cost $1,961,838, $24,969,365, ---------- ---------- ----------
$26,931,203) 1,967,323 24,891,341 26,858,664
--------- ---------- ----------
Total U. S. Government and Agency Securities
( cost $14,035,572, $43,878,974, $57,914,546) 13,918,015 43,715,410 57,633,425
---------- ---------------------
<PAGE>
REPURCHASE AGREEMENTS--6.9% (a)
Repurchase Agreement with State Street Bank and
Trust Company Dated 3/31/99 @ 4.78% to be
repurchased at $533,071 on April 1, 1999,
collateralized by $490,000 U.S. Treasury Bonds,
6.5% due 11/15/26 (cost $533,000) 533,000 533,000
------- -------
Repurchase Agreement with State Street Bank and
Trust Company Dated 3/31/99 @ 4.78% to be
repurchased at $3,071,408 on April 1, 1999,
collateralized by $2,825,000 U.S. Treasury Bonds,
6.5% due 11/15/26 (market value $3,133,670
including interest) (cost $3,071,000) 3,071,000 3,071,000
---------- ---------
---------- ---------- ---------
Total Investment Portfolio 14,451,015 46,786,410 61,237,425
(cost $14,568,572, $46,949,974, $61,518,546)(c),
117.6%(a)
Other Assets and Liabilities, net, -17.6% (a) 431,920 (9,600,019) (9,168,099)
----------- ---------- ----------
Net Assets $ 14,882,935 $ 37,186,391 $ 52,069,326
=========== ========== ==========
<FN>
(a) Percentages are based on net assets.
(b) Some or all of these securities are segregated in connection with the reverse
repurchase agreement and / or mortgage dollar rolls.
(c) The aggregate identified cost for federal income tax purposes for both Funds is
substantially the same. Market value for the Intermediate Government Fund includes net
unrealized depreciation of $117,557, which consist of aggregate gross unrealized
appreciation for all securities in which there is an excess of market value over tax cost
of $89,815 and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over market value of $207,372. Market value for the U.S.
Government Income Fund includes net unrealized depreciation of $163,564, which consist of
aggregate gross unrealized appreciation for all securities in which there is an excess of
market value over tax cost of $282,578 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value of $446,142.
</FN>
</TABLE>
See Notes To Pro Forma Financial Statements
<PAGE>
Heritage Income Trust - Intermediate Government Fund
Notes to Pro Forma Financial Statements
(unaudited)
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities,
including the Portfolio of Investments, at March 31, 1999 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
March 31, 1999, reflect the accounts of Heritage Income Trust - Intermediate
Government Fund and Heritage U.S. Government Income Fund.
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of the Heritage U.S. Government Income Fund in exchange for shares
in the Heritage Income Trust - Intermediate Government Fund. The Pro Forma
Statements should be read in conjunction with the historical financial
statements of each Fund included in its Statement of Additional Information.
2. Shares of beneficial Interest - The pro forma net asset value per share
assumes the issuance of additional shares of the Heritage Income Trust -
Intermediate Government Fund which would have been issued on March 31, 1999 in
connection with the proposed reorganization. Shareholders of the Heritage U.S.
Government Income Fund would become shareholders of the Heritage Income Trust -
Intermediate Government Fund by receiving Class A Shares of the Heritage Income
Trust - Intermediate Government Fund equal to the value of their holdings in the
Heritage U.S. Government Income Fund. The amount of additional shares assumed to
be issued was calculated based on the March 31, 1999 net assets of the Heritage
U.S. Government Income Fund and the net asset value per share of the Heritage
Income Trust - Intermediate Government Fund as follows:
<TABLE>
<CAPTION>
CLASS CLASS A CLASS B CLASS C
- ----- ------- ------- -------
<S> <C> <C> <C>
Additional Shares Issued 3,974,709 - -
Net Assets 03/31/99
Heritage U.S. Government Income Fund $37,186,391 $ - $ -
Net Asset Value Per Share
Heritage Income Trust - Intermediate
Government Fund $ 9.36 $ 9.32 $ 9.33
</TABLE>
3. Pro Forma Operations - The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund. Accordingly,
the combined gross investment income is equal to the sum of each Funds gross
investment income. Certain expenses have been adjusted to reflect the expected
expenses of the combined entity- The, pro-forma investment management fees of
the combined Fund are based on the fee schedule in effect for Heritage Income
Trust - Intermediate Government Fund at the combined level of average net assets
for the twelve months ended March 31, 1999. The Pro Forma Statement of
Operations does not include the effect of any realized gains or losses, or
transaction fees incurred in connection with the realignment of the portfolio.
In addition, fees in connection with the reorganization are being borne by
Heritage Asset Management, Inc. and are not included in these pro forma
financial statements.
<PAGE>
HERITAGE INCOME TRUST - INTERMEDIATE GOVERNMENT FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of the Heritage Income Trust -
Intermediate Government Fund and the Heritage U.S. Government Income Fund as of
May 31, 1999 and on a pro forma combined basis as if the reorganization occurred
on that date:
<TABLE>
<CAPTION>
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
---------- ----------- ---------
<S> <C> <C> <C>
CLASS A SHARES
Heritage Income Trust - Intermediate Government Fund $11,715,033 1,272,101 $ 9.21
Heritage U.S. Government Income Fund $36,356,896 3,115,471 $11.67
Combined Fund (pro-forma) $48,071,929 5,219,988 $ 9.21
CLASS B SHARES
Heritage Income Trust - Intermediate Government Fund $ 404,468 44,071 $ 9.18
Heritage U.S. Government Income Fund -- -- $ --
Combined Fund (pro-forma) $ 404,468 44,071 $ 9.18
CLASS C SHARES
Heritage Income Trust - Intermediate Government Fund $ 2,046,532 222,826 $ 9.18
Heritage U.S. Government Income Fund -- -- --
Combined Fund (pro-forma) $ 2,046,532 222,826 $ 9.18
</TABLE>
<PAGE>
HERITAGE INCOME TRUST
PART C
OTHER INFORMATION
Item 15. INDEMNIFICATION
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the Trust
(hereinafter referred to as "Covered Person") shall be indemnified by the Trust
to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office or (B) not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(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
C-1
<PAGE>
may, by appropriate legal proceedings, challenge any such determination by the
Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for such
undertaking,
(ii) the Trust is insured against losses arising out of any such advance
payments or
(iii) either a majority of the Trustees who are neither interested persons
of the Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of readily available
facts (as opposed to a trial-type inquiry or full investigation), that there is
reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust is a
trust, not a partnership. Trustees are not liable personally to any person
extending credit to, contracting with or having any claim against the Trust, a
particular Portfolio or the Trustees.
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
C-2
<PAGE>
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 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 16. EXHIBITS
Exhibit
Number Description
- ------ -----------
(1) Declaration of Trust, 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.
(2) (a) Bylaws, 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.
C-3
<PAGE>
Exhibit
Number Description
- ------ -----------
(b) Amended and Restated Bylaws, 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.
(3) Voting trust agreement -- none
(4) Agreement and Plan of Reorganization and Termination is attached
as Appendix A to the Prospectus contained in the Registration
Statement.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII,
VIII, X, and XI of the Declaration of Trust, as amended, which
were filed as part of an Exhibit to Post-Effective Amendment No.
11 on December 1, 1995 and are hereby incorporated by reference,
and Article III of the Amended and Restated Bylaws which were
filed as a part of an Exhibit to Post-Effective Amendment No. 11
on December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., 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.
(b) Subadvisory Agreement between Heritage Asset Management, Inc.
and Eagle Asset Management, Inc., 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.
(c) Subadvisory Agreement between Heritage Asset Management, Inc.
and Salomon Brothers Asset Management Inc., 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.
(7) Distribution Agreement, 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
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement 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.
C-4
<PAGE>
Exhibit
Number Description
- ------ -----------
(10) (a) Class A Plan pursuant to Rule 12b-1, 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.
(b) Class C Plan pursuant to Rule 12b-1, 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.
(c) Class B Plan pursuant to Rule 12b-1, 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.
(d) Plan pursuant to Rule 18f-3 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.
(e) Amended Plan pursuant to Rule 18f-3, 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
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 16 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on February 1, 1999
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP - to be filed
as an amendment
(13) (a) Transfer Agency and Service Agreement, 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.
(b) Fund Accounting and Pricing Service Agreement, 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.
(14) Consent of Independent Auditors - filed herewith
(15) Omitted Financial Statements - None.
(16) Powers of Attorney - None.
(17) Form of Proxy - filed herewith.
C-5
<PAGE>
Exhibit
Number Description
- ------ -----------
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public re-offering of
the securities registered through the use of the prospectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offering by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the Registration
Statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new Registration Statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement on Form N-14
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of St. Petersburg and State of Florida on the 17th day of June 1999.
HERITAGE INCOME TRUST
By: /s/ Stephen G. Hill
------------------------
Stephen G. Hill
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on form N-14 has been signed below by the following
persons in the capacities indicated on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen G. Hill President June 17, 1999
- ------------------------------
Stephen G. Hill
Thomas A. James* Trustee June 17, 1999
- ------------------------------
Thomas A. James
Richard K. Riess* Trustee June 17, 1999
- ------------------------------
Richard K. Riess
Trustee June 17, 1999
- ------------------------------
C. Andrew Graham
Trustee June 17, 1999
- ------------------------------
David M. Phillips
Trustee June 17, 1999
- ------------------------------
James L. Pappas
Donald W. Burton* Trustee June 17, 1999
- ------------------------------
Donald W. Burton
Eric Stattin* Trustee June 17, 1999
- ------------------------------
Eric Stattin
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Donald H. Glassman Treasurer June 17, 1999
- ------------------------------
Donald H. Glassman
*By /s/ Donald H. Glassman
-------------------------
Donald H. Glassman,
Attorney-in-Fact
2
<PAGE>
POWER OF ATTORNEY
The undersigned trustee of the Heritage Income Trust, a Massachusetts
business trust (the "Trust"), does hereby constitute and appoint Richard K.
Riess, Stephen G. Hill, Donald H. Glassman, Clifford J. Alexander and Robert J.
Zutz, or any of them, the true and lawful attorneys and agents of the
undersigned, with full power of substitution, to do any and all acts and things
and execute any and all instruments that said attorneys or agents, or any of
them, may deem necessary or advisable or which may be required to enable the
Trust to comply with the Securities Act of 1933, as amended, the Investment
Company Act of 1940, as amended, the laws of the jurisdictions in which
securities of the Trust may be offered and sold, and any rules, regulations, or
requirements of the Securities and Exchange Commission ("SEC"), or of the
securities commission or other agency of any such jurisdiction in respect
thereof, in connection with the registration for sale of its securities under
the Securities Act of 1933, as amended, and the registration and qualification,
under the securities laws of any such jurisdiction, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned trustee, the Trust's
Registration Statement on Form N-1A and Notification of Registration on Form
N-8A, any registration statement on any other form adopted by the SEC, any
amendments or post-effective amendments of any of the foregoing and the
applicable form of any such jurisdiction, with respect to the Trust and its
Shares of Beneficial Interest to be filed with the SEC and the securities
commission or other agency of any such jurisdiction under said Acts, any and all
amendments and supplements to said amendments or post-effective amendments and
any other instruments or documents filed as part of or in connection with said
Registration Statements, amendments, or supplements; and the undersigned does
hereby ratify and confirm all that said attorneys and agents, or any of them,
shall do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents as of
this 17th day of June, 1999.
/s/ Thomas A. James /s/ Richard K. Reiss
- ----------------------------- -----------------------------
Thomas A. James Richard K. Riess
- ----------------------------- -----------------------------
C. Andrew Graham David M. Phillips
/s/ Donald W. Burton
- ----------------------------- -----------------------------
James L. Pappas Donald W. Burton
/s/ Eric Stattin
- -----------------------------
Eric Stattin
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
(1) Declaration of Trust, 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.
(2) (a) Bylaws, 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.
(b) Amended and Restated Bylaws, 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.
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination is attached
as Appendix A to the Prospectus contained in the Registration
Statement.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII,
VIII, X, and XI of the Declaration of Trust, as amended, which
were filed as part of an Exhibit to Post-Effective Amendment No.
11 on December 1, 1995 and are hereby incorporated by reference,
and Article III of the Amended and Restated Bylaws which were
filed as a part of an Exhibit to Post-Effective Amendment No. 11
on December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., 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.
(b) Subadvisory Agreement between Heritage Asset Management, Inc.
and Eagle Asset Management, Inc., 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.
(c) Subadvisory Agreement between Heritage Asset Management, Inc.
and Salomon Brothers Asset Management Inc., 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.
(7) Distribution Agreement, 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.
1
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement 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.
(10) (a) Class A Plan pursuant to Rule 12b-1, 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.
(b) Class C Plan pursuant to Rule 12b-1, 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.
(c) Class B Plan pursuant to Rule 12b-1, 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.
(d) Plan pursuant to Rule 18f-3 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.
(e) Amended Plan pursuant to Rule 18f-3, 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.
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 16 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on February 1, 1999
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP - to be filed
as an amendment
(13) (a) Transfer Agency and Service Agreement, 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.
(b) Fund Accounting and Pricing Service Agreement, 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.
(14) Consent of Independent Auditors - filed herewith
2
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
(15) Omitted Financial Statements - None.
(16) Powers of Attorney - None.
(17) Form of Proxy - filed herewith.
3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Combined Proxy
Statement and Prospectus and the Statement of Additional Information
constituting parts of this registration statement on Form N-14 (the
"Registration Statement") of our report dated December 17, 1998 relating to the
October 31, 1998 financial statements and financial highlights of Heritage U.S.
Government Income Fund, appearing in the October 31, 1998 Annual Report to
Shareholders of Heritage U.S. Government Income Fund, which is also incorporated
by reference into the Registration Statement. We also consent to the reference
to us under the headings "Financial Highlights" and "Experts" in such Combined
Proxy Statement and Prospectus. We also consent to the reference to us under the
heading "Independent Accountants" in the Statement of Additional Information of
Heritage Income Trust dated February 1, 1999, which is incorporated by reference
into the Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
June 10, 1999
PROXY
HERITAGE U.S. GOVERNMENT INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS - SEPTEMBER 27, 1999
The undersigned hereby appoints as proxies Stephen G. Hill, K.C. Clark and
Donald H. Glassman, each with the power of substitution, to vote for the
undersigned all shares of beneficial interest of the undersigned at the
aforementioned meeting and any adjournment thereof with all the power the
undersigned would have if personally present. The shares represented by this
proxy will be voted as instructed. Unless indicated to the contrary, this proxy
shall be deemed to indicate authority to vote "FOR" all proposals.
Date________________________________________
Signature___________________________________
Signature___________________________________
If shares are held jointly, each shareholder
named should sign; if only one signs, his
signature will be binding. If the
shareholder is a corporation, the President
or Vice President should sign in her own
name, indicating title. If the shareholder
is a partnership, a partner should sign in
his own name, indicating that he is a
"Partner."
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
VOTING INSTRUCTIONS - PLEASE SELECT ONE OF THESE VOTING METHODS:
VOTE BY INTERNET: Please read your proxy statement and read the following
proposal. Go to our website: HTTP://WWW.PROXYVOTING.COM where you will use this
ballot and the control number listed below to vote on the proposal. Follow the
on screen directions. Do NOT mail your voting instruction when you vote online.
VOTE BY TELEPHONE: Please read your proxy statement and read the following
proposal. Dial our toll free number 1-800-579-7863 using a touch tone phone
where you will use this ballot and the control number listed below to vote on
the proposal. Do NOT mail your voting instruction when you vote by phone.
VOTE BY PAPER BALLOT: Please read your proxy statement and read the following
proposal. Vote by filling in on the ballot the appropriate box representing your
vote on the proposal. Sign and mail the card in the enclosed return envelope.
<PAGE>
PLEASE VOTE VIA INTERNET OR BY PHONE OR SIGN, DATE AND PROMPTLY RETURN YOUR
VOTING INSTRUCTION IN THE ENCLOSED ENVELOPE TODAY!
PLEASE INDICATE YOUR VOTE BY PLACING AN "X" IN THE APPROPRIATE BOX
BELOW.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR"
1. Approval of the proposed Agreement and Plan of Reorganization and Termination
providing for the reorganization of Heritage U.S. Government Income Fund by
combining it with Intermediate Government Fund, a series of Heritage Income
Trust.
FOR _______ AGAINST _______ ABSTAIN ______
This proxy will not be voted unless it is dated and signed exactly as instructed
below.
PLEASE VOTE, SIGN AND DATE THIS PROXY AND RETURN IT IN THE ENCLOSED POSTAGE PAID
ENVELOPE TO: 880 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716.
