<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
HERITAGE INCOME TRUST
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
HERITAGE INCOME TRUST -- DIVERSIFIED PORTFOLIO
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
JANUARY 24, 1996
TO THE SHAREHOLDERS:
A Special Meeting of the holders of shares of beneficial interest of the
Diversified Portfolio (the "Fund") of Heritage Income Trust will be held on
January 24, 1996 at 8:30 a.m. eastern standard time, or any adjournment(s)
thereof, at 880 Carillon Parkway, Classroom A, St. Petersburg, FL 33716, for the
following purposes:
(1) To approve a modified investment objective of high current income
for the Fund;
(2) To approve an Investment Subadvisory Agreement between Heritage
Asset Management, Inc. and Salomon Brothers Asset Management Inc; and
(3) To transact such other business as may properly come before the
Special 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 Fund at the close of business on December 5, 1995. If
you attend the meeting, you may vote your shares in person. IF YOU DO NOT EXPECT
TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
By Order of the Board of Trustees,
CLIFFORD J. ALEXANDER
Secretary
December 14, 1995
880 Carillon Parkway
St. Petersburg, Florida 33716
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy form,
date and sign the form, and return the form in the envelope provided. If
you sign, date and return the proxy form but give no voting instructions,
your shares will be voted "FOR" the proposals noticed above. In order to
avoid the additional expense of further solicitation, we ask your
cooperation in mailing 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.
<PAGE> 3
HERITAGE INCOME TRUST -- DIVERSIFIED PORTFOLIO
880 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716
---------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 24, 1996
---------------------
INTRODUCTION
This is a proxy statement with respect to the Diversified Portfolio (the
"Fund") of Heritage Income Trust (the "Trust") in connection with the
solicitation of proxies made by, and on behalf of, the Trust's Board of Trustees
to be used at the Fund's special meeting of shareholders or any adjournment(s)
thereof ("Meeting"). This proxy statement first will be mailed to shareholders
on or about December 14, 1995.
A majority of the shares of the Fund outstanding on December 5, 1995
("Record Date"), represented in person or by proxy, must be present to
constitute a quorum for the transaction of business at the Meeting. Only holders
of securities as of this date are entitled to notice of and to vote at the
Meeting. In the absence of a quorum or in the event that a quorum is present at
the Meeting but votes sufficient to approve any one of the proposals 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 such proposal
in favor of an adjournment and will vote those proxies required to be voted
AGAINST such proposal against such adjournment. A shareholder vote may be taken
on one or more of the proposals described in this proxy statement prior to any
such adjournment if sufficient votes have been received and it is otherwise
appropriate.
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 and the broker does not have discretionary voting
authority. Abstentions and broker non-votes will be counted for purposes of
determining whether a quorum is present, but will not be voted for or against
any adjournment. Abstentions and broker non-votes will not be counted, as votes
cast for purposes of determining whether sufficient votes have been received to
approve a proposal. Accordingly, abstentions and broker non-votes effectively
will be a vote against adjournment or against the proposal when the required
vote is a percentage of the shares present.
The individuals named as proxies in the enclosed proxy card will vote in
accordance with your directions as indicated thereon if your proxy card is
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 proposals described in
this proxy statement. The duly appointed proxies may, in their discretion, vote
upon such other matters as may properly come before the Meeting. Your proxy card
may be revoked by giving another proxy, by letter or telegram revoking your
proxy if received by the Fund prior to the Meeting, or by appearing and voting
at the Meeting.
As of the Record Date, the Fund had 3,120,535 shares outstanding and no
person held of record or owned beneficially more than 5% of the Fund's issued
and outstanding shares. All costs associated with the Meeting, including the
solicitation of proxies, will be borne by the Fund. Solicitations will be made
primarily by mail but also may include telephone communications by regular
employees of Heritage Asset Management, Inc. ("Heritage"), the Fund's investment
adviser and administrator, who will not receive any compensation
<PAGE> 4
therefor from the Fund. Each full share of the Fund is entitled to one vote, and
each fractional share is entitled to a proportionate share of one vote. You may
obtain a copy of the Fund's most recent annual and semi-annual reports to
shareholders, free of charge, by writing to Heritage at 880 Carillon Parkway,
St. Petersburg, Florida 33716 or by calling 1-800-421-4184.
PROPOSAL 1. APPROVAL OF A MODIFIED INVESTMENT
OBJECTIVE OF HIGH CURRENT INCOME FOR THE FUND
The Fund's current investment objective is high current income consistent
with the preservation of capital. The Fund seeks to achieve this objective by
investing at least 50% of its assets in securities issued by the U.S.
Government, its agencies and instrumentalities and related repurchase agreements
and forward commitments (the "Government Sector"). The Fund may invest its
remaining assets (up to 50%) in lower-rated U.S. corporate, fixed-income
securities, commonly referred to as "junk bonds" or "high yield securities."
These securities are rated below BBB by Standard & Poor's ("S&P") or Baa by
Moody's Investors Service, Inc. ("Moody's"), or are unrated securities deemed to
be of comparable quality by the Fund's investment subadviser ("lower-rated high
yield securities").
At the Trust's November 20, 1995 Board of Trustees (the "Board") meeting,
Heritage recommended that certain of the Fund's non-fundamental investment
policies be amended to allow for investment of up to 100% -- rather than up to
50% -- of the Fund's assets in lower-rated high yield securities and in
securities rated BBB by S&P or Baa by Moody's or deemed to be of comparable
quality by the Fund's investment subadviser ("medium-rated high yield
securities"). To be consistent with these new policies, Heritage further
proposed to modify the Fund's fundamental investment objective so that the Fund
would seek high current income as opposed to high current income consistent with
the preservation of capital. However, if Proposal 1 is approved by shareholders,
preservation of capital will continue to be a consideration in the Fund's
investment strategy, although the Fund no longer will be required to invest at
least 50% of its assets in the Government Sector. Heritage also proposed that
the Fund's name be changed to "High Yield Bond Fund". The Board concluded that
it would be in the best interests of the Fund and its shareholders to effect
these proposed changes. Accordingly, if shareholders approve the amendment to
the Fund's fundamental investment objective, the amendments to the Fund's
non-fundamental investment policies and its name also will be implemented. These
changes are expected to enable the Fund to seek that objective more effectively.
The Board's approval was based upon its belief that the increased emphasis
on high current income through investment in a portfolio of lower- and
medium-rated high yield securities may serve to benefit the Fund in several
ways. First, a significantly greater number of investment opportunities may be
available to the Fund. Second, the ability to invest a majority of the Fund's
assets in lower- and medium-rated high yield securities may afford the Fund's
investment subadviser the ability to increase the Fund's yield. If Proposal 1 is
adopted, the Fund's assets will be invested in securities of issuers who the
Fund's investment subadviser believes present opportunities for high current
income.
As required by the Investment Company Act of 1940, as amended ("1940 Act"),
shareholders need only approve the change in the Fund's fundamental investment
objective as approved by the Board. Changes in the Fund's non-fundamental
investment policies and any change in the Fund's name do not require shareholder
approval.
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RISKS RELATED TO INVESTMENT IN LOWER- AND MEDIUM-RATED HIGH YIELD SECURITIES
If the changes discussed above are implemented, shareholders should
reevaluate whether the Fund continues to be an appropriate investment in light
of their current financial position and long-term needs. The Fund is appropriate
for investors who can accept the various risks associated with investing in
lower- and medium-rated high yield securities. Medium-rated securities have
speculative characteristics and generally are subject to greater risks than
higher-rated securities. The market values of lower-rated high yield securities
tend to reflect individual developments of the issuer to a greater extent than
do higher quality securities, which primarily react to fluctuations in the
general level of interest rates. These securities also tend to be more sensitive
to economic conditions and generally have more volatile prices than do
higher-rated securities. Issuers of lower-rated high yield securities often are
highly leveraged and may not have traditional methods of financing available to
them. These risks are discussed in greater detail in the Appendix to this proxy
statement.
RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board recommends that the Fund's investment objective be modified to
high current income. If shareholders approve this Proposal, the Board expects to
implement the Proposal on February 1, 1996, or as soon thereafter as is
reasonably practicable. If this Proposal is not approved by shareholders, the
Fund's investment objective, non-fundamental policies and name will remain
unchanged. In addition, Heritage, who as the Fund's investment manager currently
makes investment decisions on behalf of the Government Sector of the Fund, will
continue to make those investment decisions, and the Board will consider what
other actions, if any, should be taken.
REQUIRED VOTE
The 1940 Act requires that the proposed change to the Fund's investment
objective be approved by a majority of the Fund's outstanding voting securities.
Under the 1940 Act, approval by a "majority of the Fund's outstanding voting
securities" means approval by the lesser of (1) more than 50% of the Fund's
outstanding shares, or (2) 67% of the shares of the Fund present at the meeting
in person or represented by proxy, if at least 50% of the outstanding shares of
the Fund are present or represented by proxy.
THE BOARD OF TRUSTEES
RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 1.
PROPOSAL 2. APPROVAL OF THE INVESTMENT SUBADVISORY AGREEMENT
The Board and Heritage propose that Salomon Brothers Asset Management Inc
("Salomon") be appointed as the investment subadviser of the Fund. If this
appointment is approved by shareholders, Salomon would replace Eagle Asset
Management, Inc. ("Eagle") as the Fund's investment subadviser. Eagle is an
affiliate of both Raymond James & Associates, Inc. ("RJA") and Heritage. Each of
RJA, Eagle and Heritage are wholly-owned subsidiaries of Raymond James
Financial, Inc. ("RJF"). Eagle has been the investment subadviser of the Fund
since the Fund's inception in 1990.
At the November 20, 1995 meeting, the Board determined that it would be in
the best interests of the Fund and its shareholders to retain Salomon as the
Fund's investment subadviser. In making this decision, the Board considered,
among other factors, the expertise that Salomon offers in providing portfolio
management services for other high yield bond funds. The Board also considered
the experience of the proposed portfolio manager for the Fund, Peter J. Wilby
(who is a Chartered Financial Analyst, a Certified Public Accountant,
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<PAGE> 6
and a member of the New York Society of Securities Analysts), Salomon's success
to date as an investment manager, the other key personnel employed by Salomon
who would assist in portfolio management activities, other portfolio management
alternatives available to the Fund, and facilities, financial strength, quality
of services and client communication capabilities offered by Salomon.
Accordingly, the Board unanimously voted that (1) subject to shareholder
approval, Salomon be appointed as the Fund's investment subadviser, and (2) the
proposed subadvisory agreement between Heritage and Salomon ("Salomon
Agreement") be submitted for shareholder approval. These decisions included the
unanimous approval of all Trustees who are not "interested persons" of the
Trust, Heritage or Salomon as that term is defined in the 1940 Act ("Independent
Trustees").
DESCRIPTION OF THE SUBADVISORY AGREEMENT
The Salomon Agreement will be substantially similar to the current
subadvisory agreement between Heritage and Eagle except for the fees to be paid
by Heritage thereunder. If shareholders approve Proposals 1 and 2, Salomon will
furnish continuously an investment program for the Fund, will make investment
decisions on behalf of the Fund, will place all orders for the purchase and sale
of portfolio securities and will receive a fee of 50% of the annual investment
advisory fee paid to Heritage, without regard to any reduction in the fees paid
to Heritage as a result of any statutory, regulatory or voluntary limitation on
the Fund's expenses. This fee will be paid by Heritage -- and not by the
Fund -- and is equivalent to .30% of the Fund's daily net assets up to $100
million and .25% of the Fund's average daily net assets in excess of $100
million. If shareholders do not approve Proposal 1, but do approve Proposal 2,
Salomon will furnish its services only with respect to assets of the Fund
invested in lower- and medium-rated high yield securities and will receive a fee
of 25% of the annual investment advisory fee paid by the Fund to Heritage.
Pursuant to its agreement with Heritage, Eagle currently receives a fee of 25%
of the advisory fee paid by the Fund to Heritage. The Salomon Agreement provides
that Salomon will not be liable for any act or omission in the course of, or
connected with, rendering services under the Agreement, except when such
services are rendered in bad faith, negligence or disregard of its obligations
and duties under the Agreement.
If approved by shareholders, the Salomon Agreement would be executed
promptly by Heritage and Salomon. Unless sooner terminated, it would remain in
effect continuously for two years following its effective date. Thereafter, it
would continue automatically for successive years, provided that it is
specifically approved at least annually (1) by a vote of a majority of the
Independent Trustees and (2) by all Trustees or by a vote of a majority of the
outstanding shares of the Fund. Heritage may at any time terminate the proposed
Salomon Agreement upon 60 days' written notice to Salomon. Salomon may at any
time terminate that agreement upon 90 days' written notice to Heritage. The
Salomon Agreement automatically will terminate without penalty in the event of
its assignment or termination.
INFORMATION ABOUT SALOMON
Salomon is a registered investment adviser that was incorporated in 1987.
Salomon is a wholly-owned subsidiary of Salomon Inc. Salomon in New York, and
its affiliates in London, Frankfurt, Tokyo and Hong Kong, together provide a
full range of fixed income and equity investment management services for
individual and institutional clients throughout the world, and serve as
investment adviser to various investment companies. As of October 31, 1995,
Salomon and its affiliates had approximately $13.1 billion of assets under
management. Salomon provides advisory services to a variety of types of
investment accounts including both proprietary and nonproprietary mutual funds,
offshore funds, institutional accounts, wrap fee products and private clients.
4
<PAGE> 7
Berkshire Hathaway Inc., a Delaware corporation that may be deemed to be
controlled by Warren E. Buffet, owned beneficially as of November 30, 1995,
6,633,600 shares of Capital Stock and 560,000 shares of Preferred Stock, Series
A, of Salomon Inc, constituting approximately 17.6% of the votes entitled to be
cast by the holders of the outstanding voting securities of Salomon Inc.
The principal address of Salomon and each of its directors and principal
executive officer is 7 World Trade Center, 38th Floor, New York, New York 10048.
The directors and principal executive officer of Salomon are: Thomas Wise Brock,
Chairman of the Board and Chief Executive Officer; Michael Stephen Hyland,
President and Director; Rodney B. Berens, Director; James Joseph Lee, Director;
and Vilas Gadkari, Director.
Salomon currently serves as investment adviser or subadviser for the
following investment companies that have an investment objective similar to the
Fund's.
<TABLE>
<CAPTION>
RATE OF FEES WAIVED PURSUANT
FUND SALOMON'S COMPENSATION TO ADVISORY AGREEMENT
- - --------------------------------- --------------------------------- ---------------------
<S> <C> <C>
Salomon Brothers High Yield Bond Annual rate of .75% of the Fund's .24% (through
Fund average daily net assets December 31, 1995)
Salomon Brothers High Income Fund Annual rate of .70% of the Fund's None
average weekly net assets
</TABLE>
RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board recommends that Salomon be retained as investment subadviser to
the Fund. If Proposal 2 is not approved by shareholders, Eagle will continue as
the Fund's investment subadviser with respect to assets invested in lower- and
medium-rated high yield securities. The Trustees would then consider whether any
other arrangements for the provision of investment subadvisory services are
appropriate and in the best interests of the Fund's shareholders.
VOTE REQUIRED
Approval of Proposal 2 under the 1940 Act requires the affirmative vote of
the holders of the lesser of (1) more than 50% of the Fund's outstanding shares,
or (2) 67% of the shares of the Fund present at the meeting in person or
represented by proxy, if at least 50% of the outstanding shares of the Fund are
present or represented by proxy.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE "FOR" PROPOSAL 2.
INFORMATION ABOUT THE FUND
CURRENT ADVISORY ARRANGEMENTS
Heritage is a Florida corporation organized in 1985 and registered as an
investment adviser under the Investment Advisers Act of 1940, as amended.
Heritage serves as investment adviser and administrator to the Fund pursuant to
an Investment Advisory and Administration Agreement between Heritage and the
Trust on behalf of the Fund, dated January 19, 1990 ("Advisory Agreement"). All
of the capital stock of Heritage is owned by RJF. Thomas A. James, a Trustee of
the Trust, by virtue of his direct or indirect ownership of RJF, owns
beneficially more than 10% of Heritage. RJF, through its subsidiaries, is
engaged primarily in providing
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<PAGE> 8
customers with a wide variety of financial services in connection with
securities, limited partnerships, options, investment banking and related
fields. Heritage also serves as investment adviser and manager to five other
investment companies with aggregate assets of approximately $2.0 billion as of
October 31, 1995.
The principal address of Heritage, RJF, Thomas A. James and each of
Heritage's directors and principal executive officer is at 880 Carillon Parkway,
St. Petersburg, Florida 33716. The directors and principal executive officer of
Heritage are: Jeffrey P. Julien, Director; Richard K. Riess, Director; and
Stephen G. Hill, Director, President and Chief Executive Officer. The officers
of the Fund who also are employed by Heritage are: Stephen G. Hill; Donald H.
Glassman; and Patricia Schneider. The Trustees and the officers of the Fund do
not own in the aggregate more than 1% of the shares of beneficial interest in
the Fund.
Under the Advisory Agreement, and subject to the supervision of the
Trustees, Heritage has agreed, among other duties, to provide a continuous
investment program for the Fund's portfolio, supervise all aspects of the Fund's
operation and hold itself available to respond to shareholder inquiries. The
Advisory Agreement expressly permits advisory services to be delegated to and
performed by a subadviser. Under the Advisory Agreement, the Fund bears all of
its expenses not specifically assumed by Heritage incurred in its operation and
the offering of shares. For services provided under the Advisory Agreement, the
Fund pays Heritage an annualized advisory fee, computed daily and paid monthly,
of .60% of the Fund's average daily net assets up to $100 million and .50% of
daily net assets over $100 million. As required by state regulations, Heritage
will reimburse the Fund if and to the extent that the aggregate operating
expenses of the Fund in any fiscal year exceed applicable limits. To date, no
such reimbursements have been required. Heritage voluntarily has agreed to limit
the expenses of each of the Fund's classes of shares. During any period that
Class A expenses exceed 1.25% of average daily net assets or Class C expenses
exceed 1.70%, Heritage will waive its advisory fee or reimburse each class of
the Fund as necessary to limit expenses to these levels. During the fiscal year
ended September 30, 1995, the Fund paid (or accrued) to Heritage fees of
$194,363 and Heritage waived fees of $83,663.
Heritage also is the fund accountant and transfer and dividend disbursing
agent for the Fund. For the fiscal year ended September 30, 1995, the Fund paid
Heritage $28,181 for its services as transfer and dividend disbursing agent. For
the fiscal year ended September 30, 1995, the Fund paid Heritage $28,242 for its
services as fund accountant. Heritage will continue to provide these services to
the Fund if the Salomon Agreement is approved.
In addition, an affiliate of Heritage, RJA, serves as the Trust's principal
underwriter. As compensation for certain distribution and shareholder servicing
activities, RJA was paid $113,666 pursuant to the Trust's Rule 12b-1
distribution plan. RJA will continue to serve as principal underwriter to the
Trust if the Salomon Agreement is approved. The Fund currently does not execute
any securities transactions through RJA or any other affiliated broker-dealer.
The Advisory Agreement provides that Heritage will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matter to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on their part
in the performance of their duties or from reckless disregard by them of their
obligations and duties thereunder.
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<PAGE> 9
SHAREHOLDER PROPOSALS
As a general matter, the Fund does not hold regular annual or other
meetings of shareholders. Any shareholder who wishes to submit proposals to be
considered at a special meeting of the Fund's shareholders should send such
proposals to the Fund at 880 Carillon Parkway, St. Petersburg, Florida 33716, so
as to be received a reasonable time before the proxy solicitation for that
meeting is made.
Shareholder proposals that are submitted in a timely manner will not
necessarily be included in the Fund's proxy materials. Inclusion of such
proposals is subject to limitations under the federal securities laws.
OTHER BUSINESS
Management knows of no other business to be presented at the Meeting other
than the matter set forth in this proxy statement, but should any other matter
requiring a vote of shareholders arise, the proxies will vote thereon according
to their best judgment in the interests of the Fund.
By Order of the Board of Trustees,
CLIFFORD J. ALEXANDER
Secretary
December 14, 1995
IT IS IMPORTANT THAT YOU VOTE AND RETURN YOUR PROXY PROMPTLY.
7
<PAGE> 10
APPENDIX
RISKS RELATED TO INVESTMENT IN LOWER-RATED HIGH YIELD SECURITIES
Lower-rated securities are subject to certain risks that may not be present
with investments in higher-grade securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The lower rating of certain
lower-rated high yield securities reflects a greater possibility that the
financial condition of the issuer or adverse changes in general economic
conditions may impair the ability of the issuer to pay income and principal.
Changes by rating agencies in their ratings of a fixed income security also may
affect the value of these investments. However, allocating investments in the
Fund among securities of different issuers should reduce the risks of owning any
such securities separately.
The prices of lower-rated high yield securities tend to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. During economic
downturns or periods of rising interest rates, highly leveraged issuers may
experience financial stress that adversely affects their ability to service
principal and interest payment obligations, to meet projected business goals, or
to obtain additional financing, and the markets for their securities may be more
volatile. If an issuer defaults, the Fund may incur additional expenses to seek
recovery. Furthermore, the market value of zero coupon and pay-in-kind
securities in which the Fund may invest is more greatly affected by interest
rate changes and is more volatile than that of similar securities that pay
interest periodically in cash. Accrued discount and "interest" on zero coupon
and pay-in-kind securities are reported as income by the Fund even though no
cash actually is received by the Fund until the securities' maturity or payment
date.
Frequently, the higher yields of lower-rated high yield securities may not
reflect the value of the income stream that holders of such securities may
expect, but rather the risk that such securities may lose a substantial portion
of their value as a result of their issuer's financial restructuring or default.
Additionally, an economic downturn or an increase in interest rates could have a
negative effect on the high yield securities market and on the market value of
the lower-rated high yield securities held by the Fund, as well as on the
ability of the issuers of such securities to repay principal and interest on
their borrowings.
LIQUIDITY AND VALUATION. Lower-rated high yield securities may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, the Fund would have to replace the security with
a lower yielding security. To the extent that there is no established retail
secondary market, there may be thin trading of lower-rated high yield
securities. This may lessen the Fund's ability to accurately value these
securities and its ability to dispose of these securities. Additionally, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yielding securities,
especially in a thinly traded market. Certain lower-rated high yield securities
may involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties; thus, the responsibilities of the Board of
Trustees to value these securities in the portfolio become more difficult with
judgment playing a greater role.
SECURITIES RATINGS. Securities ratings are based largely on the issuer's
historical financial information and the rating agencies' investment analysis at
the time of rating. Credit ratings evaluate the safety of principal and interest
payments, not market value risk of high yield bonds. Also, credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate. Although the Fund's
investment subadviser will consider security ratings when
A-1
<PAGE> 11
making investment decisions, it primarily relies upon its own investment
analysis. This analysis may include consideration of the issuer's experience and
managerial strength, changing financial condition, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest rates. It also considers relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects. Because of the greater number of investment considerations
involved in investing in lower-rated securities, the achievement of the Fund's
objective depends more on the Fund's investment subadviser's analytical
abilities than would be the case if it were investing only in securities in the
higher rating categories. The Fund, at the discretion of the Fund's investment
subadviser, may retain a security that has been downgraded below the initial
investment criteria. The descriptions of S&P and Moody's lower- and medium-grade
corporate bond rating categories are as follows:
STANDARD & POOR'S
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC -- Debt rated "BB," "B" and "CCC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by larger uncertainties or
major risk exposures to adverse conditions.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-2
<PAGE> 12
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the company ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the company ranks in the lower end of its generic rating
category.
A-3
<PAGE> 13
- - ---------------------------------------------------------
- - ---------------------------------------------------------
NOTICE OF
SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON JANUARY 24, 1996
AND
PROXY STATEMENT
HERITAGE INCOME TRUST
DIVERSIFIED PORTFOLIO
- - ---------------------------------------------------------
- - ---------------------------------------------------------
<PAGE> 14
<TABLE>
<S> <C>
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
With- For All
For hold Except
1. Election of Trustees: [ ] [ ] [ ]
HERITAGE U.S. GOVERNMENT CLASS I: Donald W. Burton and David M. Phillips
INCOME FUND
Instructions: To withhold authority to vote for any individual
nominee, mark "For All Except" box and strike a line through
the nominee(s) name in the list above.
For Against Abstain
2. Ratification of the selection of Coopers [ ] [ ] [ ]
& Lybrand L.L.P. as independent
accountants of the Fund for the fiscal
year ending October 31, 1996.
The Board of Trustees recommends a vote "FOR"
Please be sure to sign and date this Proxy. Date Mark box at right if comments or address changes have [ ]
______________________________________________________ been noted on the reverse side.
Shareholder sign here Co-owner sign here RECORD DATE SHARES:
______________________________________________________
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
With- For All
For hold Except
1. Election of Trustees: [ ] [ ] [ ]
HERITAGE U.S. GOVERNMENT CLASS I: Donald W. Burton and David M. Phillips
INCOME FUND
Instructions: To withhold authority to vote for any individual
nominee, mark "For All Except" box and strike a line through
the nominee(s) name in the list above.
For Against Abstain
2. Ratification of the selection of Coopers [ ] [ ] [ ]
& Lybrand L.L.P. as independent
accountants of the Fund for the fiscal
year ending October 31, 1996.
The Board of Trustees recommends a vote "FOR"
Please be sure to sign and date this Proxy. Date Mark box at right if comments or address changes have [ ]
______________________________________________________ been noted on the reverse side.
Shareholder sign here Co-owner sign here RECORD DATE SHARES:
______________________________________________________
HERCM - HERITAGE US GOV INCOME FUND
</TABLE>
