<PAGE> 1
November 21, 1995
Dear Fellow Shareholders:
I am pleased to provide you with the annual report for the Diversified Portfolio
(the "Fund") of Heritage Income Trust for the fiscal year ended September 30,
1995. For this period, Class A Shares of your Fund had a total return (excluding
the imposition of a front-end sales load) of +11.23% as compared to the return
for the Merrill Lynch Domestic Master Index of +14.11%. From April 3, 1995, when
Class C Shares of your Fund were introduced, through the end of the fiscal year,
Class C Shares returned +6.18%.
The past year has provided a pleasant contrast to the preceeding year for
investors in the bond market as most sectors of the market delivered positive
returns. Lower interest rates in the intermediate to long sectors benefited the
U.S. Government securities in your Fund while an economy with slow but steady
growth also allowed most of the high yield bond issues in your Fund to deliver
attractive returns. In the letter that follows, H. Peter Wallace and David
Blount discuss in greater detail the factors that materially affected the
performance of your Fund over its most recent fiscal year. Peter, a senior vice
president of Heritage Asset Management, manages the U.S. Government sector of
your Fund while David, a vice president of Eagle Asset Management ("Eagle"),
manages the high yield sector of your Fund. I hope you will find their comments
helpful in understanding how your Fund performed last year.
At yesterday's Board of Trustees meeting for your Fund, the Board approved
several proposed changes that soon will be submitted to a shareholder vote. Most
significant among these is the proposed change in your Fund's investment
policies to allow up to 100% of your Fund's portfolio to be invested in high
yield debt securities. The Board also approved, subject to shareholder approval,
retaining Salomon Brothers Asset Management, Inc. to serve as your Fund's
investment subadviser, replacing Eagle, given Eagle's plans to exit the high
yield bond management area next year. While we and the Board continue to believe
that an asset allocation strategy in which high yield bonds and Government bonds
are combined may provide attractive returns with reduced volatility, we and the
Board recognize that the appropriate blend of these securities may be different
for each investor. Assuming the Board's proposed changes are approved, you and
your financial advisors can select the desired mix of high yield bonds and
Government bonds by investing in separate funds that specialize in each area.
You will be receiving more information on these proposals in the near future.
On behalf of all of us at Heritage, thank you for your continuing investment
with us. We wish you a happy and healthy holiday season and a wonderful 1996!
Sincerely,
/s/Stephen G. Hill
Stephen G. Hill
President
<PAGE> 2
Dear Shareholders:
It is a pleasure to report the factors that influenced the performance of your
Fund over the year ended September 30, 1995. The Government sector of the Fund
performed well in the past year, and a number of factors influenced the overall
performance of the Fund. The primary factor influencing Fund performance was the
decline in domestic interest rates. Interest rates, as measured by the yield on
the ten-year U.S. Treasury Note, declined sharply falling from approximately
7.60% in September of 1994 to 6.14% in September 1995, a drop of 146 basis
points or 1.46%.
The decline in rates was not smooth and volatility in the fixed income markets
was quite high. In the early part of the fiscal year, September 1994 to December
of 1994, the yield curve flattened dramatically, with the spread between
two-year and thirty-year U.S. Treasury issues narrowing from just over 100 basis
points to 64 basis points in late October, and then moving to 80 basis points at
year end. The yield of ten-year U.S. Treasury Notes rose from 7.60% to 7.82%
over the same period. At the time, the Government portion of your Fund was
structured defensively, using a combination of shorter-term Treasury securities,
mortgage related securities and collateralized mortgage obligation floating rate
issues.
At the end of 1994, the fixed income market began to improve significantly as
market expectations for slower economic growth and the potential for an ease in
monetary policy by the Federal Reserve grew. Interest rates, as measured by the
yield on the ten-year U.S. Treasury Note, declined to 7.20%.
During this period, the Government portion of your Fund eliminated its holding
in floating rate securities and began to emphasize longer maturity Treasury and
longer average life mortgage related issues to position its duration (price
sensitivity to interest rates) closer to that of the Merrill Lynch Government
Master Index.
In mid summer, the domestic economy began to show some signs of revival from a
fairly anemic second quarter growth rate. Interest rates moved higher, and the
government sector of your Fund's duration was shortened somewhat to become
slightly more defensive. In early August, yields again began to fall as signs of
weakness, particularly in retail sales, began to emerge. The government sector
of your Fund was again positioned to benefit from falling rates with the
addition of longer-term U.S. Treasury issues.
During the year, your Fund continued to hold two very small positions of
mortgage derivative securities. Specifically these are two very short average
life principal only securities, FNMA 92-167 A, which fully paid off during the
year, and FNMA 89-16 C. We plan to continue holding FNMA 89-16C as we expect the
issue to be fully paid down in early 1996. Overall, these positions were
beneficial to the Fund over the year.
Given the current low rate of inflation, and our belief that inflation will not
accelerate sharply for the remainder of 1995 and early 1996, we expect to
maintain our current duration and strategic posture of the Government portion of
your Fund for the near future.
In the high yield bond portion of the Fund, the last year was a dramatic
improvement over the performance in the October 1, 1993 to September 30, 1994
period. Several factors influenced the high yield market including interest
rates, technical factors, and fundamental considerations. In addition to these
factors, the performance of the high yield portion of your Fund was influenced
by industry concentrations and certain specific securities.
The decline in interest rates over the year, as discussed above, was the primary
driver of returns during the year. However, the high yield market did not fully
participate in the Treasury rally. Hence, the spread between the yield of the
Treasury market and the high yield market widened. Your Fund has had, and
continues to have, a relatively low duration. Therefore, interest rates have a
lessor effect on your Fund.
2
<PAGE> 3
Technical factors that affected the high yield market, and the high yield
portion of your Fund, are the demand for and supply of high yields bonds. Acting
to depress the market somewhat over the past year was a high supply of new issue
bonds. The level of new issuance in 1995 is running approximately 40% ahead of
1994. In addition, the amount of new deals on the "forward calendar" is large.
Offsetting this high supply has been healthy demand for high yield bonds, as
indicated by funds flow into high yield mutual funds. Fundamentally, the high
yield market performed relatively well. Even though the default rate doubled
from last year, defaults were still at a low level.
The high yield bond portion of your Fund was affected by several industry
factors as well as specific issues, the most relevant of which I will discuss.
Although the retail sector was a poor performer for the market, your holdings
did well. CompUSA, the nations largest computer superstore, had a financial
turnaround during the year. The beverage sector was a poor performer for the
market as well as for your Fund. Our holdings in G. Heileman Brewing were sold
at a loss during the latest quarter. Heileman, the brewer of brands such as Colt
45 malt liquor, Old Style, and Lone Star beer experienced tremendous pressure on
margins due to high raw material costs and poor sales. Healthcare was an
outstanding performer for the Fund and the market, with your holdings in OrNda
Healthcorp performing nicely. Home construction was a laggard industry. Your
position in Oriole Homes and Ryland Homes suffered due to soft home sales in
late 1994 and into 1995. Finally, your position in Comcast Cellular performed
extremely well due to continued growth in sales and cash flow, as well as the
equity kicker imbedded in this bond.
Sincerely, Sincerely,
/s/H. Peter Wallace /s/David Blount
H. Peter Wallace, CFA David Blount, CFA
Senior Vice-President Vice President
Heritage Asset Management, Inc. Eagle Asset Management, Inc.
3
<PAGE> 4
CHART
* AVERAGE ANNUAL TOTAL RETURNS FOR HIT-D CLASS A SHARES ARE CALCULATED IN
CONFORMANCE WITH ITEM 22 OF FORM N-1 A, WHICH ASSUMES THE MAXIMUM SALES LOAD
OF 3.75% AND REINVESTMENT OF DIVIDENDS.
** FROM FUND INCEPTION ON 3/1/90.
4
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
-----------
<S> <C>
GOVERNMENT SECTOR--58.6%(A)
REPURCHASE AGREEMENT--8.0%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated September 29, 1995 @ 6.10%,
to be repurchased at $2,451,245 on October 2, 1995, (collateralized by $1,920,000 United States
Treasury Bonds, 10.375%, due November 15, 2009, with market value of $2,524,983, including
interest) (cost $2,450,000). ..................................................................... $ 2,450,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY
-------- DATE
--------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--50.6%(A)
- --------------------------------------------
U.S. TREASURIES--39.3%
--------------------
$1,000,000 U.S. Treasury Notes, 6.125%.............................................. 05/15/98 1,005,312
1,000,000 U.S. Treasury Notes, 7.75%............................................... 01/31/00 1,064,685
1,000,000 U.S. Treasury Notes, 6.125%.............................................. 09/30/00 1,002,500
3,750,000 U.S. Treasury Notes, 7.50%............................................... 02/15/05 4,082,813
3,250,000 U.S. Treasury Notes, 6.50%............................................... 05/15/05 3,322,108
1,500,000 U.S. Treasury Bonds, 6.875%.............................................. 08/25/25 1,576,406
-----------
Total U.S. Treasuries.................................................... 12,053,824
-----------
U.S. GOVERNMENT AGENCIES--11.2%
-----------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION:
-----------------------------------------
311,859 REMIC, 1259 J, 6.25%..................................................... 01/15/97 311,541
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
--------------------------------------
128,723 REMIC, 1989-16 C, Principal Only TAC, 5.6%*.............................. 03/25/19 126,763
1,000,000 REMIC, 1991-99 H, PAC, 7.5%.............................................. 12/25/20 1,006,250
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
------------------------------------------
1,000,000 REMIC, 1995-2 E, 8.5%.................................................... 07/20/18 1,025,313
934,309 Pool #385895, 8.5%....................................................... 09/15/24 972,755
-----------
Total U.S. Government Agencies........................................... 3,442,622
-----------
Total U.S. Government and Agency Securities (cost $15,121,443)........... 15,496,446
-----------
CORPORATE BONDS--43.1%(A)
- ------------------------
ADVERTISING/COMMUNICATIONS--1.4%
--------------------------------
400,000 Katz Corporation, 12.75%................................................. 11/15/02 438,000
-----------
AUTO PARTS/EQUIPMENT--0.6%
---------------------------
200,000 Venture Holdings Trust, 9.75%............................................ 04/01/04 172,000
-----------
BEVERAGES--1.6%
----------------
500,000 Royal Crown Corporation, 9.75%........................................... 08/01/00 485,000
-----------
BROADCASTING--1.6%
-------------------
500,000 Storer Communications, 10%............................................... 05/15/03 498,750
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
BUILDING--1.4%
---------------
$500,000 Oriole Homes Corporation, 12.5%.......................................... 01/15/03 $ 430,000
-----------
CONTAINERS--3.6%
-----------------
550,000 Owens-Illinois, Inc., 10.5%.............................................. 06/15/02 573,375
500,000 Riverwood International Corporation, 11.25%.............................. 06/15/02 541,875
-----------
1,115,250
-----------
ELECTRONICS/ELECTRIC--4.4%
-------------------------
700,000 Harman International Industries, Inc., 12%............................... 08/01/02 770,000
550,000 MagneTek, Inc., 10.75%................................................... 11/15/98 580,938
-----------
1,350,938
-----------
FINANCE--1.8%
--------------
550,000 Scotsman Group, Inc., 9.5%............................................... 12/15/00 539,000
-----------
FOODS--1.5%
-------------
500,000 Specialty Foods Acquisition Corporation, 10.25%.......................... 08/15/01 472,500
-----------
HEALTH CARE CENTERS--5.2%
-------------------------
250,000 OrNda HealthCorp, 11.375%................................................ 08/15/04 279,375
250,000 OrNda HealthCorp, 12.25%................................................. 05/15/02 277,500
500,000 Paracelsus Healthcare, Inc., 9.875%...................................... 10/15/03 503,750
500,000 Tenet Healthcare Corporation, 10.125%.................................... 03/01/05 529,375
-----------
1,590,000
-----------
HOTELS/MOTELS/INNS--2.0%
-------------------------
500,000 La Quinta Inns, Inc., 9.25%.............................................. 05/15/03 517,500
100,000 Prime Hospitality Corporation, 7%(c)..................................... 04/15/02 107,000
-----------
624,500
-----------
JEWELRY, SILVERWARE, TIMEPIECES, CHINA--2.2%
-----------------------------------------
1,000,000 Finlay Enterprises, Inc., 0% to 5/1/98, 12% to maturity.................. 05/01/05 675,000
-----------
LAND DEVELOPMENT/REAL ESTATE--0.7%
-----------------------------------
250,000 Alexander Haagen Properties, Inc., 7.5%(c)............................... 01/15/01 208,125
-----------
LEISURE/AMUSEMENT--1.6%
-------------------------
500,000 Selmer Company, Inc., 11.0%.............................................. 05/15/05 487,500
-----------
MEDICAL EQUIPMENT/SUPPLY--2.4%
-------------------------------
250,000 Amsco International Corporation, 4.5% to 10/15/95, 6.5% to maturity(c)... 10/15/02 237,500
500,000 Wright Medical Technology, 10.75%, Series "B"............................ 07/01/00 502,500
-----------
740,000
-----------
OIL & GAS--3.7%
----------------
600,000 Global Marine, Inc., 12.75%.............................................. 12/15/99 663,000
475,000 Tuboscope Vetco International, Inc., 10.75%.............................. 04/15/03 475,000
-----------
1,138,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1995
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
RETAIL--4.0%
-------------
$750,000 Big 5 Holdings Corporation, 13.625%...................................... 09/15/02 $ 735,000
500,000 Comp USA, Inc., 9.5%..................................................... 06/15/00 498,750
-----------
1,233,750
-----------
TELECOMMUNICATIONS--3.3%
-------------------------
250,000 Centennial Cellular Corporation, 10.125%................................. 05/15/05 252,188
1,000,000 Comcast Cellular Corporation, Series "A", Zero Coupon Bond, 11.7%*....... 03/05/00 761,250
-----------
1,013,438
-----------
Total corporate bonds (cost $12,997,741)................................. 13,211,751
-----------
WARRANTS--0.1%(A)
- --------------
UNITS
----
MEDICAL EQUIPMENT/SUPPLIES
---------------------------
206 Wright Medical Technology................................................ 33,970
-----------
Total Warrants (cost $40)................................................ 33,970
-----------
TOTAL INVESTMENT PORTFOLIO (cost $30,569,224)(b), 101.8%(a).................................. 31,192,167
OTHER ASSETS AND LIABILITIES, NET, (1.8%)(a)................................................. (545,500)
-----------
NET ASSETS, 100.0%........................................................................... $30,646,667
==========
</TABLE>
- ---------------
* Yield to Maturity (unaudited)
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
$30,571,490. Market value includes net unrealized appreciation of $620,677,
which consists of aggregate gross unrealized appreciation for all securities
in which there is an excess of market value over tax cost of $830,205 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value of $209,528.
(c) Convertible security.
PAC-Planned Amortization Class
REMIC-Real Estate Mortgage Investment Conduit
TAC-Targeted Amortization Class
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $28,119,224) (Note 1)...................... $28,742,167
Repurchase agreement (identified cost $2,450,000) (Note 1)............................... 2,450,000
Cash..................................................................................... 774
Receivables:
Interest............................................................................... 527,494
Fund shares sold....................................................................... 30,710
Deferred state registration expenses (Note 1)............................................ 10,373
Prepaid insurance........................................................................ 2,434
-----------
Total assets..................................................................... 31,763,952
Liabilities
Payables (Note 4):
Investments purchased.................................................................. $1,002,500
Fund shares redeemed................................................................... 3,498
Accrued professional fees.............................................................. 25,533
Accrued management fee................................................................. 42,420
Accrued distribution fee............................................................... 8,949
Other accrued expenses................................................................. 34,385
----------
Total liabilities................................................................ 1,117,285
-----------
Net assets, at market value.............................................................. $30,646,667
==========
Net Assets
Net assets consist of:
Undistributed net investment income (Note 1)........................................... $ 93,090
Net unrealized appreciation on investments............................................. 622,943
Accumulated net realized loss (Note 1)................................................. (2,407,214)
Paid-in capital........................................................................ 32,337,848
-----------
Net assets, at market value.............................................................. $30,646,667
==========
Class A Shares
Net asset value and redemption price per share ($30,004,403 divided by 3,018,826 shares
of beneficial interest outstanding, no par value) (Note 2)............................. $ 9.94
=====
Maximum offering price per share (100/96.25 of $9.94).................................... $10.33
=====
Class C Shares
Net assets value, offering price and redemption price per share ($642,264 divided by
64,783 shares of beneficial interest outstanding, no par value) (Notes 1 and 2)........ $ 9.91
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Interest................................................................................... $ 2,783,575
Expenses (Notes 1 and 4):
Management fee........................................................................... $194,363
Distribution fee......................................................................... 113,666
Custodian/Fund accounting fees........................................................... 41,821
Professional fees........................................................................ 38,699
Shareholder servicing fees............................................................... 28,181
Amortization of state registration expenses.............................................. 30,176
Reports to shareholders.................................................................. 21,065
Amortization of organization expenses.................................................... 4,167
Trustees' fees and expenses.............................................................. 9,800
Insurance................................................................................ 4,971
Other.................................................................................... 1,966
--------
Total expenses before waiver........................................................... 488,875
Fees waived by Manager (Note 4)........................................................ (83,663) 405,212
-------- -----------
Net investment income...................................................................... 2,378,363
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investment transactions............................................. (1,106,214)
Net increase in unrealized appreciation of investments during the year..................... 2,100,137
-----------
Net gain on investments............................................................ 993,923
-----------
Net increase in net assets resulting from operations....................................... $ 3,372,286
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------ ------------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income.................................................. $ 2,378,363 $ 2,692,274
Net realized loss from investment transactions......................... (1,106,214) (1,014,329)
Net increase (decrease) in unrealized appreciation of investments
during the year...................................................... 2,100,137 (2,338,323)
------------------ ------------------
Net increase (decrease) in net assets resulting from operations........ 3,372,286 (660,378)
Distributions to shareholders from:
Net investment income, Class A Shares ($.74 and $.71 per share,
respectively)........................................................ (2,484,241) (2,770,014)
Net investment income, Class C Shares ($.30 per share)................. (10,482) --
Net realized gains, Class A Shares ($.07 per share).................... -- (270,959)
Distribution in excess of net realized gains, Class A Shares ($.07 per
share)............................................................... -- (277,151)
Decrease in net assets from Fund share transactions (Note 2)............. (6,054,028) (2,402,711)
------------------ ------------------
Decrease in net assets................................................... (5,176,465) (6,381,213)
Net assets, beginning of the year........................................ 35,823,132 42,204,345
------------------ ------------------
Net assets, end of the year (including undistributed net investment
income of $93,090 and $199,940, respectively).......................... $ 30,646,667 $ 35,823,132
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------
CLASS C
FOR THE YEARS ENDED SEPTEMBER 30, SHARES
------------------------------------------ -------
1995 1994 1993 1992 1991 1990+ 1995++
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD................ $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $9.60 $ 9.62
------ ------ ------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a).............................. 0.72 0.69 0.81 0.83 0.87 0.43 0.31
Net realized and unrealized gain (loss) on
investments......................................... 0.31 (0.84) 0.07 0.59 1.00 (0.34 ) 0.28
------ ------ ------ ------ ------ ------ -------
Total from Investment Operations...................... 1.03 (0.15) 0.88 1.42 1.87 0.09 0.59
------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income.................. (0.74) (0.71) (0.83) (0.85) (0.87) (0.36 ) (0.30 )
Distributions from net realized gains................. -- (0.07) (0.22) (0.04) -- (0.04 ) --
Distribution in excess of net realized gains.......... -- (0.07) -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total Distributions................................... (0.74) (0.85) (1.05) (0.89) (0.87) (0.40 ) (0.30 )
------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE PERIOD...................... $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $9.29 $ 9.91
====== ====== ====== ====== ====== ======= =========
TOTAL RETURN (%)(D)..................................... 11.23 (1.59) 8.57 14.35 21.19 0.91 (c) 6.18 (c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a)........................................... 1.25 1.25 1.19 0.96 1.31 1.35 (b) 1.70 (b)
Net investment income to average daily net assets..... 7.35 6.76 7.57 8.11 9.10 8.97 (b) 6.67 (b)
Portfolio turnover rate............................... 109 135 150 71 119 39 (b) 109
Net assets, end of the period ($ millions)............ 30 36 42 32 15 10 0.6
</TABLE>
- ---------------
+ For the period March 1, 1990 (commencement of operations) to September 30,
1990.
++ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.03, $.02, $.02, $.05, $.07 and $.08 per Class A Share,
respectively. The operating expense ratios including such items would be
1.51%, 1.42%, 1.43%, 1.60%, 2.17% and 3.00% (annualized) for Class A Shares,
respectively. Excludes management fees waived by the Manager in the amount
of $0.03 per Class C Share. The operating expense ratio including such items
would be 1.96% (annualized) for Class C Shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
10
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage Income Trust (the "Trust") is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company consisting of three separate investment
portfolios, the Diversified Portfolio (the "Fund"), the Limited Maturity
Government Portfolio and the Institutional Government Portfolio. The
Fund currently issues Class A and Class C Shares. Class A Shares are
sold subject to a maximum sales charge of 3.75% of the amount invested
payable at the time of purchase. Class C Shares, which were offered to
shareholders beginning April 3, 1995, are sold subject to a contingent
deferred sales charge of 1% of the lower of net asset value or purchase
price payable upon any redemptions within one year after purchase. The
policies described below are followed consistently by the Fund in the
preparation of financial statements for the Fund in conformity with
generally accepted accounting principles. Financial statements for the
Limited Maturity Government Portfolio and the Institutional Government
Portfolio are presented separately.
Security Valuation: The Fund values investment securities at market
value based on the last sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, market value is based on the most recent quoted bid price and
in the absence of a market quote, securities are valued using such
methods as the Board of Trustees believes would reflect fair market
value. Investments in certain debt instruments not traded in an
organized market, are valued on the basis of valuations furnished by
independent pricing services or broker/dealers that utilize information
with respect to market transactions in such securities or comparable
securities, quotations from dealers, yields, maturities, ratings and
various relationships between securities. Short term investments having
a maturity of 60 days or less are valued at cost, which when combined
with accrued interest included in the interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund is treated as a single corporate
taxpayer as provided for in The Tax Reform Act of 1986, as amended. The
Fund's policy is to comply with the requirements of the Internal Revenue
Code of 1986, as amended which are applicable to regulated investment
companies and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no provision has been made for federal
income and excise taxes. As of September 30, 1995, the Fund had a net
tax basis capital loss carryforward of $1,402,142, which may be applied
against any realized net taxable gains until its expiration date of
September 30, 2003. From November 1, 1994 to September 30, 1995, the
Fund incurred $1,002,808 of net realized capital losses, which will be
deferred and treated as arising on October 1, 1995, in accordance with
regulations under the Internal Revenue Code.
Distribution of Income and Gains: Distributions of net investment
income are made monthly. Net realized gains from investment transactions
for the Fund during any particular year in excess of available capital
loss carryforwards, which, if not distributed, would be taxable to the
Fund, will be distributed to shareholders in the following fiscal year.
The Fund uses the identified cost method for determining realized gain
or loss on investments for both financial and federal income tax
reporting purposes.
Expenses: The Fund is charged for those expenses that are directly
attributable to it, such as management fee, custodian/fund accounting
fees, distribution fee, etc., while other expenses such as professional
fees, insurance expense, etc., are allocated proportionately among the
Portfolios. Expenses of the Fund are allocated to each class of shares
based upon their relative percentage of current net assets. All expenses
that are directly attributable to a specific class of shares, such as
distribution fees, are allocated to that class.
State Registration Expenses: State registration fees are amortized
based either on the time period covered by the registration or as
related shares are sold, whichever is appropriate for each state.
Organization Expenses: Expenses incurred in connection with the
formation of the Trust were deferred equally between the Portfolios and
amortized on a straight-line basis over 60 months from the date of
commencement of operations.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of Class A or Class C Shares of the Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. All premiums/original issue discounts are
amortized/accreted for both federal income tax and financial reporting
purposes.
11
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At September 30, 1995, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A Shares of the Fund during the years ended September
30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------------- -------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold.............................................. 189,017 $ 1,831,973 601,368 $ 6,198,262
Shares issued on reinvestment of distributions........... 194,940 1,881,075 250,301 2,562,687
Shares redeemed.......................................... (1,079,005) (10,410,508) (1,099,200) (11,163,660)
---------- ------------ ---------- ------------
Net decrease............................................. (695,048) $ (6,697,460) (247,531) $ (2,402,711)
=========== ===========
Shares outstanding:
Beginning of the year.................................. 3,713,874 3,961,405
---------- ----------
End of the year........................................ 3,018,826 3,713,874
========= =========
</TABLE>
Transactions for Class C Shares of the Fund from April 3, 1995 (commencement
of Class C Shares) to September 30, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS C SHARES SHARES AMOUNT
---------------------------------------------------------------- ------ --------
<S> <C> <C> <C> <C>
Shares sold..................................................... 64,725 $642,880
Shares issued on reinvestment of distributions.................. 582 5,752
Shares redeemed................................................. (524) (5,200)
----- -------
Net increase.................................................... 64,783 $643,432
-------
-------
Shares outstanding:
Beginning of period........................................... --
-----
End of period................................................. 64,783
-----
-----
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the year ended September 30,
1995, purchases, sales and paydowns of investment securities (excluding
repurchase agreements and short-term obligations) were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
- --------------------------------------------------- -------------------------------
PURCHASES SALES PAYDOWNS PURCHASES SALES
- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$27,900,236 $30,074,393 $ 713,931 $ 4,763,905 $ 8,175,225
</TABLE>
Note 4: MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND
TRUSTEES' FEES. Under the Fund's Investment Advisory and Administration
Agreement with Heritage Asset Management, Inc. (the "Manager"), the Fund
agrees to pay to the Manager a fee equal to an annualized rate of 0.60%
of the first $100,000,000 of the Fund's average daily net assets, and
0.50% of any excess over $100,000,000 of such net assets, computed daily
and payable monthly. The agreement also provides for a reduction in such
fees in any year to the extent that operating expenses of the Fund
exceed applicable state expense limitations. From inception of the Fund,
the Manager has reduced its investment advisory fees and reimbursed the
Fund to the extent that operating expenses have exceeded amounts ranging
from .85% to 1.35% of average daily net assets. Effective April 1, 1993,
the Manager voluntarily agreed to waive its fee and, if necessary,
reimburse the Fund to the extent that the Fund operating expenses exceed
1.25% for Class A Shares (1.70% for Class C Shares effective April 3,
1995), on an annual basis, of the Fund's average daily net assets
attributable to each class of shares. This agreement is more restrictive
than any state expense limitation. Under the agreement, management fees
of $83,663 ($0.03 per share for each class) were waived in the year
ended September 30, 1995. If total Fund expenses fall below the expense
limitation agreed to by the Manager before the end of the year ending
September 30, 1997, the Fund may be required to pay the Manager a
portion or all of the waived management fee. In addition, the Fund may
be required to pay the Manager a portion or all of the management fee
waived ($66,556) in the prior year ended September 30, 1994, if total
Fund expenses fall below the annual expense limitation before the end of
the year ending September 30, 1996.
12
<PAGE> 13
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-DIVERSIFIED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
The Manager has entered into an agreement with Eagle Asset Management,
Inc. (the "Subadviser") for the Subadviser to provide to the Fund
investment advice, portfolio management services (including the
placement of brokerage orders) and certain compliance and other services
for a fee payable by the Manager equal to 25% of the fees payable by the
Fund to the Manager without regard to any reduction due to the
imposition of expense limitations.
The Manager is also the Dividend Paying and Shareholder Servicing Agent
for the Fund. The amount payable to the Manager for such expenses as of
September 30, 1995 was $7,050. In addition, the Manager performs Fund
accounting services and charged $28,242 during the current year of which
$6,900 was payable as of September 30, 1995.
Pursuant to the Class A Distribution Plan adopted in accordance with
Rule 12b-1 of the Investment Company Act of 1940, as amended, the Fund
is authorized to pay Raymond James & Associates, Inc. (the
"Distributor") a fee equal to .35% of the average daily net assets for
Class A Shares purchased on or before March 31, 1995. The Fund paid the
Distributor a fee equal to .25% for Class A Shares purchased after March
31, 1995. Under the Class C Distribution Plan, the Fund paid the
Distributor a fee equal to .80% of the average daily net assets for
Class C Shares. The Distributor, on Class C Shares, may retain the first
12 months distribution fee for reimbursement of amounts paid to the
broker/dealer at the time of purchase. Such fees are accrued daily and
payable monthly. During the period $112,311 and $1,355 were paid for
distribution fees for Class A Shares and Class C Shares, respectively.
The Manager, Distributor, Fund Accountant and Shareholder Servicing
Agent are all wholly-owned subsidiaries of Raymond James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Income-Growth Trust, Heritage Capital Appreciation Trust,
Heritage Series Trust and Heritage U.S. Government Income Fund, mutual
funds which are also advised by the Manager of the Fund (collectively
referred to as the Heritage mutual funds). Each Trustee of the Heritage
mutual funds who is not an interested person of the Manager receives an
annual fee of $8,000 and an additional fee of $2,000 for each combined
quarterly meeting of the Heritage mutual funds attended. Trustees' fees
and expenses are shared equally by each of the Heritage mutual funds.
13
<PAGE> 14
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Income Trust - Diversified Portfolio:
We have audited the accompanying statement of assets and liabilities of
Heritage Income Trust-Diversified Portfolio, including the investment portfolio,
as of September 30, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage Income Trust-Diversified Portfolio as of September 30, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods indicated therein, in conformity with generally accepted
accounting principles.
/s/Coopers & Lybrand
Boston, Massachusetts
November 27, 1995
14
<PAGE> 15
HERITAGE INCOME TRUST DIVERSIFIED PORTFOLIO is a member of the Heritage family
of mutual funds. Other investment alternatives managed by Heritage include:
HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
HERITAGE CAPITAL APPRECIATION TRUST
HERITAGE INCOME-GROWTH TRUST
HERITAGE INCOME TRUST
LIMITED MATURITY GOVERNMENT PORTFOLIO
HERITAGE SERIES TRUST
GROWTH EQUITY FUND
SMALL CAP STOCK FUND
VALUE EQUITY FUND
HERITAGE U.S. GOVERNMENT INCOME FUND
(A CLOSED-END FUND THAT TRADES ON THE
NEW YORK STOCK EXCHANGE)
We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these funds, please contact your account
executive. Read the prospectus carefully before you invest in any of the funds.
15
<PAGE> 16
Heritage Income Trust
Diversified Portfolio
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------------------
Address Change Requested
Annual Report
INVESTMENT ADVISOR/
SHAREHOLDER SERVICES AGENT/
FUND ACCOUNTANT
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
(800) 421-4184
DISTRIBUTOR
Raymond James & Associates, Inc.
P.O. Box 12749
St. Petersburg, FL 33733
(813) 573-3800
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
INDEPENDENT ACCOUNTANT
Coopers & Lybrand L.L.P.
This report is for the information of shareholders of
Heritage Income Trust-Diversified Portfolio. It may also
be used as sales literature when preceded or accompanied
by a prospectus.
LOGO
DIVERSIFIED PORTFOLIO
A MUTUAL FUND SEEKING
HIGH CURRENT INCOME CONSISTENT
WITH THE PRESERVATION OF CAPITAL
ANNUAL REPORT
and Investment Performance
Review for the Year Ended
SEPTEMBER 30, 1995
A member of the
Heritage Family of Mutual Funds(TM)
