<PAGE> 1
November 11, 1996
Dear Fellow Shareholders:
I am pleased to provide you with the annual report for Heritage Income
Trust-High Yield Bond Fund (the "Fund") for the fiscal year ended September 30,
1996. This annual report is the first for this Fund since shareholders voted to
change its investment objective and approve the subadvisory agreement with
Salomon Brothers Asset Management Inc. These changes were effective on February
1, 1996, at which time your Fund's name changed to the High Yield Bond Fund.
For the most recent fiscal year, your Fund's "A" and "C" shares returned 11.44%
and 10.93%, respectively.* For the period prior to the name change (October 1,
1995 to January 31, 1996), your Fund's "A" and "C" shares returned 2.89% and
2.76%, respectively,* compared to a return of 5.00% for the Merrill Lynch
Domestic Master Index. From February 1, 1996 to September 30, 1996, your Fund's
"A" and "C" shares returned 8.31% and 7.95%, respectively,* versus a gain of
5.55% for the Salomon Brothers High Yield Market Index. Thus, the relative
outperformance by your Fund is attributable to our strong showing since February
1 as compared to the high yield market in general. Also, as Peter Wilby, the
portfolio manager for your Fund, points out in the letter that follows, the
single-B rated sector of the corporate bond market outperformed the broad high
yield market by over 2% from February 1, 1996 through September 30, 1996. Our
investments in this area were among the most significant contributors to our
strong performance. Mr. Wilby is a managing director of Salomon Brothers Asset
Management Inc. I hope you find his comments helpful in understanding how your
portfolio is managed.
As we mentioned in our semiannual report, the changes you approved to allow us
to invest up to 100% of your Fund's portfolio in high yield bonds were requested
not because we believed our former strategy of blending high yield corporate
bonds and government bonds was unsound. Rather, the changes were requested in
order for us to provide investment choices that allow our investors to create
their own unique allocations among high yield and government bonds through the
use of separate funds within the Heritage Family of Funds, each focusing on
their respective sectors of the market. We encourage you to work with your
financial advisors to create an investment portfolio designed to meet your own
unique goals.
If there are ever any ways in which you believe we could serve you better,
please call us at 800-709-3863. On behalf of all of us at Heritage, thank you
for your continuing investment in Heritage Income Trust-High Yield Bond Fund.
Sincerely,
/s/ STEPHEN G. HILL
Stephen G. Hill
President
- ---------------
* Calculated without the imposition of front-end or contingent deferred sales
charges.
<PAGE> 2
November 11, 1996
Dear Shareholders:
During the fiscal year ended September 30, 1996, the Heritage Income Trust-High
Yield Bond Fund changed its investment policy from a hybrid U.S. Government/high
yield bond fund to a 100% high yield bond fund with an investment objective of
high current income. The investment policy change and new management was
instituted on February 1, 1996. Since that time, the portfolio has been
reconstructed and currently emphasizes investments in the middle-tier quality,
single-B rated portion of the high yield market.
From February 1, 1996 through the fiscal year ended September 30, 1996, the fund
returned 8.31%* on its "A" shares and 7.95% on its "C" shares. This compares
with the Salomon Brothers High Yield Market Index, which gained 5.55% during
that period. The high yield market performed very well, especially given the
volatility in both the U.S. Treasury and U.S. equity markets. High yield market
spreads to comparable U.S. Treasuries narrowed by roughly 100 basis points from
February 1 to September 30. The market's rally was fueled by strong cash flows
into high yield mutual funds and improving credit quality among issuers. Flows
into high yield mutual funds are currently on track to set a record this year,
barring major redemptions in the fourth quarter. Credit fundamentals have been
improving due to a stronger-than-expected economy, and default rates for
corporate bonds remain well below historical averages.
The Heritage Income Trust-High Yield Bond Fund benefited from its overweighting
in deferred interest bonds and single-B rated issues, both of which outperformed
the market index by roughly 235 basis points from February 1 to September 30. In
addition, performance was enhanced by a heavy allocation to the consumer sector,
with the consumer products, food/beverage/tobacco, retailing and gaming
industries all outperforming the overall market. Underweighting in the media and
financial industries also benefited the portfolio as these sectors lagged the
market.
The fund maintains its overweighting in non-cyclical industries as we continue
to anticipate a slower economic growth economy. Defensive industries represented
roughly 60% of the portfolio compared with 53% for the overall high yield
market. We currently have overweightings in the following non-cyclical
industries: consumer products, food/beverage/tobacco, supermarkets, publishing
and services. During the latest quarter we have reduced our exposure in the
gaming industry as disappointing financial results and increasing competition
are expected to lead to a widening of the relatively tight spreads in this
industry. In addition we have increased our allocation to the consumer products
industry as we expect these non-cyclical companies to perform well in a slowing
economy. Cyclical industries that we have underweighted include steel, housing,
transportation, textiles and restaurants.
Sincerely,
/s/ PETER J. WILBY
Peter J. Wilby
Managing Director
Salomon Brothers Asset Management Inc
- ---------------
* Calculated without the imposition of front-end or contingent deferred sales
charges.
2
<PAGE> 3
CHART
<TABLE>
<CAPTION>
-- ------ .....
A C Salomon
<S> <C> <C> <C>
"02/01/96" 9625 10000 10000
"02/29/96" 9677 10061 10062
"03/31/96" 9715 10089 10012
"04/30/96" 9825 10201 10009
"05/31/96" 9936 10313 10065
"06/30/96" 9941 10303 10142
"07/31/96" 10028 10401 10208
"08/31/96" 10156 10529 10313
"09/30/96" 10425 10795 10556
</TABLE>
THE GRAPH REPRESENTS PERFORMANCE FROM FEBRUARY 1, 1996 THROUGH SEPTEMBER
30, 1996. ON FEBRUARY 1ST SALOMON BROTHERS ASSET MANAGEMENT INC ASSUMED
PORTFOLIO MANAGEMENT RESPONSIBILITIES AS THE NEW SUBADVISER TO THE FUND.
AT THAT TIME THE INVESTMENT OBJECTIVE WAS CHANGED TO HIGH CURRENT INCOME
AND THE INVESTMENT POLICIES WERE MODIFIED TO ALLOW THE FUND TO PRIMARILY
INVEST IN LOWER AND MEDIUM-RATED HIGH YIELD FIXED INCOME SECURITIES.
*TOTAL RETURNS FOR HERITAGE INCOME TRUST -- HIGH YIELD BOND FUND ARE
CALCULATED IN CONFORMANCE WITH ITEM 22 OF FORM N-1A, WHICH ASSUMES THE
REINVESTMENT OF DIVIDENDS, A SALES LOAD OF 3.75% FOR CLASS "A" SHARES
AND A CONTINGENT DEFERRED SALES LOAD (CDSL) OF 1% FOR CLASS "C" SHARES
ON REDEMPTIONS MADE WITHIN 12 MONTHS OF PURCHASE. SINCE THE PERIOD
SHOWN IS LESS THAN ONE YEAR THE AGGREGATE TOTAL RETURN IN LIEU OF THE
ANNUALIZED TOTAL RETURN IS USED FOR CLASS "A" AND "C" SHARES.
3
<PAGE> 4
CHART
<TABLE>
<CAPTION>
________________ _ _ _ _ _ _
Heritage Income Trust Domestic Master
<S> <C>
9625 10000
9665 10012
10057 10362
"1990"9712 10464
10051 11012
10731 11300
11168 11489
"1991"11770 12139
12351 12758
12700 12596
13031 13115
"1992"13460 13692
13641 13725
14246 14297
14563 14679
"1993"14610 15085
14917 15100
14640 14683
14313 14527
"1994"14378 14609
14325 14674
14973 15407
15750 16356
"1995"15992 16671
16405 17392
16608 17085
16994 17167
"1996"17822 17483
</TABLE>
CHART
<TABLE>
<CAPTION>
________ _ _ _ _ _ _
Heritage Income Trust Merrill Lynch
<S> <C> <C>
"04/03/95" 10000 1000
"06/30/95" 10464 10616
"09/30/95" 10618 10820
"12/31/95" 10889 11288
"03/31/96" 11008 11089
"06/30/96" 11241 11142
"09/30/96" 11778 11347
</TABLE>
*AVERAGE ANNUAL TOTAL RETURNS FOR HERITAGE INCOME TRUST -- HIGH YIELD
BOND FUND ARE CALCULATED IN CONFORMANCE WITH ITEM 22 OF FORM
N-1A, WHICH ASSUMES THE REINVESTMENT OF DIVIDENDS, A SALES LOAD OF
3.75% FOR CLASS "A" SHARES AND A CONTINGENT DEFERRED SALES LOAD (CDSL)
OF 1% FOR CLASS "C" SHARES ON REDEMPTIONS MADE WITHIN 12 MONTHS OF
PURCHASE.
4
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
DOMESTIC CORPORATE BONDS--86.5%(A)
- ---------------------------------
BANKING--1.3%
-------------
$500,000 First Nationwide Escrow, 10.625%......................................... 10/01/03 $ 523,125
-----------
BROADCASTING--10.7%
------------------
375,000 Adelphia Communications Corporation, 12.5%............................... 05/15/02 394,687
750,000 American Telecasting, 0% to 6/15/99, 14.5% to maturity................... 06/15/04 560,625
500,000 Cablevision Systems Corporation, 10.50%.................................. 05/15/16 510,000
500,000 Century Communications Corporation, 9.5%................................. 03/01/05 495,000
500,000 Chancellor Broadcasting Company, 9.375%.................................. 10/01/04 497,500
750,000 Marcus Cable Company, 0% to 6/15/00, 14.25% to maturity.................. 12/15/05 507,188
500,000 Peoples Choice TV Corporation, 0% to 6/1/00, 13.125% to maturity......... 06/01/04 307,500
500,000 SFX Broadcasting, Inc., 10.75%........................................... 05/15/06 521,875
500,000 Storer Communications, 10%............................................... 05/15/03 495,000
-----------
4,289,375
-----------
CHEMICALS--4.2%
--------------
500,000 Harris Chemical, Inc., 10.25%............................................ 07/15/01 511,250
750,000 NL Industries, Inc., 0% to 10/15/98, 13.0% to maturity................... 10/15/05 633,750
500,000 Terra Industries, Inc., 10.5%............................................ 06/15/05 530,000
-----------
1,675,000
-----------
CONGLOMERATES/DIVERSIFIED--2.4%
----------------------------
500,000 Jordan Industries, Inc., 10.375%......................................... 08/01/03 485,000
500,000 Valcor, Inc., 9.625%..................................................... 11/01/03 471,250
-----------
956,250
-----------
CONTAINERS--1.4%
---------------
550,000 Owens-Illinois Inc., 10.5%............................................... 06/15/02 573,375
-----------
COSMETICS/TOILETRIES/DRUGS--3.8%
------------------------------
500,000 Remington Products, 11.0%................................................ 05/15/06 505,000
500,000 Revlon Consumer Products, 10.5%.......................................... 02/15/03 516,875
500,000 Twin Laboratories, Inc., 10.25%.......................................... 05/15/06 502,500
-----------
1,524,375
-----------
ELECTRONICS/ELECTRIC--1.3%
-----------------------
500,000 Exide Electronics Group, Inc., 11.5%..................................... 03/15/06 527,500
-----------
FINANCE--1.4%
------------
500,000 Airplane Pass Through Trust, Class "D", 10.875%.......................... 03/15/19 537,503
-----------
FOOD--1.2%
----------
500,000 Specialty Foods Acquisition Corporation, 10.25%.......................... 08/15/01 457,500
-----------
FOOD SERVING--1.3%
-----------------
500,000 Americold Corporation, 12.875%........................................... 05/01/08 517,500
-----------
HEALTH CARE CENTERS--1.3%
-----------------------
500,000 Paracelsus Healthcare, Inc., 10%......................................... 08/15/06 513,750
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
HOTELS/MOTELS/INNS--2.6%
-----------------------
$500,000 HMH Properties, Inc., 9.50%.............................................. 05/15/05 $ 500,000
500,000 Wyndham Hotel Corporation, 10.5%......................................... 05/15/06 518,125
-----------
1,018,125
-----------
HOUSEHOLD PRODUCTS--1.2%
-----------------------
500,000 EKCO Group Inc., 9.25%................................................... 04/01/06 482,500
-----------
JEWELRY, SILVERWARE, TIME PIECES, CHINA--1.5%
----------------------------------------
550,000 Herff Jones, Inc., 11.0%................................................. 08/15/05 580,250
-----------
LEISURE/AMUSEMENT--3.4%
-----------------------
500,000 Majestic Star, 12.75%.................................................... 05/15/03 547,500
500,000 Selmer Company, Inc., 11.0%.............................................. 05/15/05 532,500
250,000 Trump Atlantic City, 11.25%.............................................. 05/01/06 247,500
-----------
1,327,500
-----------
MANUFACTURING/DISTRIBUTIONS--6.6%
-------------------------------
500,000 Foamex, L.P., 11.875%.................................................... 10/01/04 530,000
500,000 Samsonite Corporation, 11.125%........................................... 07/15/05 530,000
500,000 Specialty Equipment Companies, Inc., 11.375%............................. 12/01/03 530,000
500,000 Talley Manufacturing & Technology, Inc., 10.75%.......................... 10/15/03 510,000
500,000 Terex Corporation, 13.75%................................................ 05/15/02 526,250
-----------
2,626,250
-----------
MEDICAL EQUIPMENT/SUPPLY--1.3%
-----------------------------
500,000 Maxxim Medical, Inc., 10.5%.............................................. 08/01/06 517,500
-----------
METAL--1.3%
-----------
500,000 Renco Metals Inc., 11.5%................................................. 07/01/03 523,750
-----------
OIL & GAS--3.9%
--------------
500,000 Chesapeake Energy Corporation, 9.125%.................................... 04/15/06 493,750
500,000 Forest Oil Corporation, 11.25%........................................... 09/01/03 533,750
475,000 Tuboscope Vetco International, Inc., 10.75%.............................. 04/15/03 504,094
-----------
1,531,594
-----------
PAPER/PRODUCTS--2.5%
---------------------
500,000 Crown Paper Company, 11.0%............................................... 09/01/05 496,250
500,000 Repap Wisconsin, Inc., 9.875%............................................ 05/01/06 487,500
-----------
983,750
-----------
PLASTIC/PRODUCTS--2.7%
----------------------
500,000 Berry Plastics Corporation, 12.25%....................................... 04/15/04 542,500
500,000 Plastic Specialties and Technologies, Inc., 11.25%....................... 12/01/03 507,500
-----------
1,050,000
-----------
PUBLISHING--1.3%
-----------------
500,000 American Media Operation, Inc., 11.625%.................................. 11/15/04 525,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
RETAIL STORES--10.6%
--------------------
$500,000 Big V Supermarkets, Inc., 11.0%.......................................... 02/15/04 $ 482,500
500,000 Carr-Gottstein Foods Company, 12.0%...................................... 11/15/05 522,500
1,000,000 Finlay Enterprises, Inc., 0% to 5/1/98, 12% to maturity.................. 05/01/05 827,580
500,000 Hills Stores Company, 12.5%.............................................. 07/01/03 455,000
500,000 Jitney Jungle Stores, 12.0%.............................................. 03/01/06 532,500
500,000 Penn Traffic Company, 9.625%............................................. 04/15/05 337,500
500,000 Smiths Food & Drug, Inc., 11.25%......................................... 05/15/07 531,250
500,000 Specialty Retail, 11.00%................................................. 08/15/03 505,000
-----------
4,193,830
-----------
SERVICES--5.9%
--------------
500,000 Alamo Rent-A-Car, 11.75%................................................. 01/31/06 542,500
500,000 Borg-Warner Security Corporation, 9.125%................................. 05/01/03 480,000
500,000 Iron Mountain, Inc., 10.125%(c).......................................... 10/01/06 508,750
250,000 Muzak Capital Corporation, 10.0%......................................... 10/01/03 251,250
500,000 Norcal Waste Systems, Inc., 12.5%........................................ 11/15/05 542,500
-----------
2,325,000
-----------
TELECOMMUNICATIONS--8.8%
-------------------------
900,000 Arch Communications Group, Inc., 0% to 3/15/01, 10.875% to maturity...... 03/15/08 510,750
1,000,000 Comcast Cellular Corporation, Series "A", Zero Coupon Bond............... 03/05/00 707,500
1,000,000 Intermedia Communications of Florida, 0% to 5/15/01, 12.5% to maturity... 05/15/06 622,500
1,000,000 International CableTel, Inc., 0% to 2/1/01, 11.5% to maturity............ 02/01/06 600,000
500,000 Nextlink Communications, 12.5%........................................... 04/15/06 517,500
500,000 Western Wireless Corporation, 10.5%...................................... 06/01/06 510,000
-----------
3,468,250
-----------
TRANSPORTATION--1.3%
--------------------
500,000 Petro PSC Properties, L.P., 12.5%........................................ 06/01/02 500,000
-----------
UTILITIES-ELECTRIC--1.3%
----------------------
500,000 El Paso Electric Company, 9.4%........................................... 05/01/11 501,420
-----------
Total Domestic Corporate Bonds (cost $33,702,380)........................ 34,249,972
-----------
FOREIGN BONDS--8.1%(A)
- ---------------------
AUTO PARTS/EQUIPMENT--1.3%
----------------------------
500,000 Speedy Muffler King, Inc., 10.875%....................................... 10/01/06 513,750
-----------
BROADCASTING--1.6%
- -----------------
1,000,000 Diamond Cable, 0% to 12/15/00, 11.75% to maturity........................ 12/15/05 640,000
-----------
MANUFACTURING/DISTRIBUTIONS--1.5%
---------------------------------
1,000,000 Semi-Tech Corporation, 0% to 8/15/00, 11.5% to maturity.................. 08/15/03 605,000
-----------
PAPER/PRODUCTS--1.2%
---------------------
500,000 Doman Industries, Ltd., 8.75%............................................ 03/15/04 465,000
-----------
PUBLISHING--1.2%
-----------------
1,500,000 Hollinger, Inc., Zero Coupon Bond(c)..................................... 10/05/13 500,625
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY MARKET
-------- DATE VALUE
-------- -----------
<C> <S> <C> <C>
STEEL/IRON--1.3%
----------------
$500,000 Algoma Steel, Inc., 12.375%.............................................. 07/15/05 $ 521,250
-----------
Total Foreign Bonds (cost $3,254,702).................................... 3,245,625
-----------
U.S. GOVERNMENT AGENCIES--0.2%(A)
- -------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.2%
---------------------------------------------
67,142 REMIC, 1259J, 6.25%...................................................... 01/15/97 67,005
-----------
Total U.S. Government Securities (cost $68,037).......................... 67,005
-----------
UNITS
----
WARRANTS--0.1%(A)
- -----------------
MEDICAL EQUIPMENT/SUPPLY--0.1%
-------------------------------
205 Wright Medical Technology, Inc.* ........................................ 26,765
-----------
Total Warrants (cost $40)................................................ 26,765
-----------
REPURCHASE AGREEMENT--3.5%(A)
- ----------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated September 30, 1996, at
5.35%, to be repurchased at $1,400,208 on October 1, 1996, collateralized by $1,406,598
United States Treasury Notes, 5.375%, due November 30, 1997, (market value $1,432,158
including interest) (cost $1,400,000)........................................................ 1,400,000
-----------
TOTAL INVESTMENT PORTFOLIO (COST $38,425,159)(B) 98.4%(A).................................... 38,989,367
OTHER ASSETS & LIABILITIES, NET, 1.6%(A)..................................................... 617,436
-----------
NET ASSETS, 100.0%........................................................................... $39,606,803
==========
</TABLE>
- ---------------
* Non-income producing
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized appreciation of
$564,208, which consists of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$1,011,778 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $447,570.
(c) Convertible security.
REMIC-Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $38,425,159) (Note 1)...................... $38,989,367
Cash..................................................................................... 2,078
Receivables:
Investments sold....................................................................... 366,000
Interest............................................................................... 943,673
Fund shares sold....................................................................... 326,688
Deferred state registration expenses (Note 1)............................................ 9,807
Prepaid insurance........................................................................ 1,830
-----------
Total assets..................................................................... 40,639,443
Liabilities
Payables (Note 4):
Investments purchased.................................................................. $ 756,250
Fund shares redeemed................................................................... 173,529
Accrued management fee................................................................. 43,832
Accrued distribution fee............................................................... 12,375
Other accrued expenses................................................................. 46,654
----------
Total liabilities................................................................ 1,032,640
-----------
Net assets, at market value.............................................................. $39,606,803
==========
Net Assets
Net assets consist of:
Paid-in capital........................................................................ $40,247,423
Undistributed net investment income (Note 1)........................................... 245,567
Accumulated net realized loss (Notes 1 and 5).......................................... (1,450,395)
Net unrealized appreciation on investments............................................. 564,208
-----------
Net assets, at market value.............................................................. $39,606,803
==========
Class A Shares
Net asset value and redemption price per share ($33,130,513 divided by 3,243,152 shares
of beneficial interest outstanding, no par value) (Notes 1 and 2)...................... $10.22
=====
Maximum offering price per share (100/96.25 of $10.22)................................... $10.62
=====
Class C Shares
Net asset value, offering price and redemption price per share ($6,476,290 divided by
636,155 shares of beneficial interest outstanding, no par value) (Notes 1 and 2)....... $10.18
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Interest................................................................................... $ 3,227,942
Expenses (Notes 1 and 4):
Management fee........................................................................... $200,042
Distribution fee (Class A Shares)........................................................ 100,300
Distribution fee (Class C Shares)........................................................ 23,630
Professional fees........................................................................ 55,824
Custodian/Fund accounting fees........................................................... 44,852
Amortization of state registration expenses.............................................. 27,362
Reports to shareholders.................................................................. 20,631
Shareholder servicing fees............................................................... 18,691
Trustees' fees and expenses.............................................................. 7,547
Insurance................................................................................ 4,993
Other.................................................................................... 14,604
--------
Total expenses before waiver........................................................... 518,476
Fees waived by Manager (Note 4)........................................................ (94,308) 424,168
-------- -----------
Net investment income...................................................................... 2,803,774
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain from investment transactions............................................. 970,631
Net decrease in unrealized appreciation of investments during the year..................... (58,735)
-----------
Net gain on investments............................................................ 911,896
-----------
Net increase in net assets resulting from operations....................................... $ 3,715,670
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................................................. $ 2,803,774 $ 2,378,363
Net realized gain (loss) from investment transactions.................. 970,631 (1,106,214)
Net increase (decrease) in unrealized appreciation of investments
during the year...................................................... (58,735) 2,100,137
------------------ ------------------
Net increase in net assets resulting from operations................... 3,715,670 3,372,286
Distributions to shareholders from:
Net investment income, Class A Shares ($.80 and $.74 per share,
respectively)........................................................ (2,445,168) (2,484,241)
Net investment income, Class C Shares ($.76 and $.30 per share,
respectively)........................................................ (222,208) (10,482)
Increase (decrease) in net assets from Fund share transactions (Note
2)..................................................................... 7,911,842 (6,054,028)
------------------ ------------------
Increase (decrease) in net assets........................................ 8,960,136 (5,176,465)
Net assets, beginning of the year........................................ 30,646,667 35,823,132
------------------ ------------------
Net assets, end of the year (including undistributed net investment
income of $245,567 and $93,090, respectively).......................... $ 39,606,803 $ 30,646,667
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
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 C SHARES
FOR THE PERIODS
CLASS A SHARES ENDED SEPTEMBER
FOR THE YEARS ENDED SEPTEMBER 30, 30,
-------------------------------------------- ------------------
1996 1995 1994 1993 1992 1996 1995+
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................................... $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)............................. 0.84(e) 0.72 0.69 0.81 0.83 0.79(e) 0.31
Net realized and unrealized gain (loss) on
investments........................................ 0.24 0.31 (0.84) 0.07 0.59 0.24 0.28
------ ------ ------ ------ ------ ------ -------
Total from Investment Operations..................... 1.08 1.03 (0.15) 0.88 1.42 1.03 0.59
------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income................. (0.80) (0.74) (0.71) (0.83) (0.85) (0.76) (0.30)
Distributions from net realized
gains.............................................. -- -- (0.07) (0.22) (0.04) -- --
Distribution in excess of net realized gains......... -- -- (0.07) -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total Distributions.................................. (0.80) (0.74) (0.85) (1.05) (0.89) (0.76) (0.30)
------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE PERIOD..................... $10.22 $ 9.94 $ 9.65 $10.65 $10.82 $10.18 $ 9.91
====== ====== ====== ====== ====== ====== =========
TOTAL RETURN (%)(D).................................... 11.44 11.23 (1.59) 8.57 14.35 10.93 6.18 (c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a).......................................... 1.23 1.25 1.25 1.19 0.96 1.70 1.70 (b)
Net investment income to average daily net assets.... 8.41 7.35 6.76 7.57 8.11 8.39 6.67 (b)
Portfolio turnover rate.............................. 143 109 135 150 71 143 109
Net assets, end of the period
($ millions)....................................... 33 30 36 42 32 6 0.6
</TABLE>
- ---------------
+ 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, $.03, $.02, $.02 and $.05 per Class A Share for the five
years ended September 30, 1996, respectively. The operating expense ratios
including such items would have been 1.51%, 1.51%, 1.42%, 1.43% and 1.60%
for Class A Shares for the five years ended September 30, 1996,
respectively. Excludes management fees waived by the Manager in the amount
of $0.03 and $0.03 per Class C Share for the two periods ended September 30,
1996, respectively. The operating expense ratio including such items would
have been 1.98% and 1.96% (annualized) for Class C Shares for the two
periods ended September 30, 1996, 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 as described in Note
5. The effect of such reclassification would have resulted in an increase in
net investment income of $.01 for Class A Shares and $0.01 for Class C
shares.
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
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 two separate investment
portfolios, the High Yield Bond Fund (the "Fund") (formerly known as the
Diversified Portfolio) and the Intermediate Government Fund (formerly
known as the Limited Maturity Government Portfolio). The Fund has an
investment objective of high current income. 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 preparation of financial
statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts and disclosures. Actual results could differ from those
estimates. Financial statements for the Intermediate Government Fund are
presented separately. The following is a summary of significant account
policies.
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.
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
Fund and Intermediate Government Fund. 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.
Capital Accounts: Distributions from net investment income and net
realized gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting
principles. To the extent these "book/tax" differences are permanent in
nature (i.e., that they result from other than timing of
recognition -- "temporary"), such accounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification.
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 except when income is not expected. All original issue
discounts are accreted for both federal income tax and financial
reporting purposes.
12
<PAGE> 13
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At September 30, 1996, 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- -------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Shares sold................................................ 941,230 $ 9,377,232 189,017 $ 1,831,973
Shares issued on reinvestment of distributions............. 182,955 1,816,780 194,940 1,881,075
Shares redeemed............................................ (899,859) (8,961,434) (1,079,005) (10,410,508)
--------- ----------- ---------- ------------
Net increase (decrease).................................... 224,326 $ 2,232,578 (695,048) $ (6,697,460)
========== ===========
Shares outstanding:
Beginning of the year.................................... 3,018,826 3,713,874
--------- ----------
End of the year.......................................... 3,243,152 3,018,826
======== =========
</TABLE>
Transactions in Class C Shares of the Fund during the year ended September
30, 1996 and from April 3, 1995 (commencement of Class C Shares) to September
30, 1995 were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 3, 1995
(COMMENCEMENT OF
FOR THE YEAR ENDED CLASS C SHARES) TO
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------- -------------------------
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------- ------- ----------- ------ ------------
<S> <C> <C> <C> <C>
Shares sold............................................... 583,520 $ 5,800,648 64,725 $ 642,880
Shares issued on reinvestment of distributions............ 18,399 182,291 582 5,752
Shares redeemed........................................... (30,547) (303,675) (524) (5,200)
------ ---------- ----- -----------
Net increase.............................................. 571,372 $ 5,679,264 64,783 $ 643,432
========== ===========
Shares outstanding:
Beginning of period..................................... 64,783 --
------ -----
End of period........................................... 636,155 64,783
====== =====
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the year ended September 30,
1996, 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>
$6,577,422 $21,925,189 $484,640 $45,358,826 $22,073,695
</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 this agreement, management fees of $94,308 were
waived for the period ended September 30, 1996. If total Fund expenses
fall below the expense limitation agreed to by the Manager before the end
of the year ending September 30, 1998, 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
13
<PAGE> 14
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Manager a portion or all of the management fee waived of $83,663 for the
year ended September 30, 1995, if total Fund expenses fall below the
annual expense limitations before the end of the year ending September
30, 1997.
Effective February 1, 1996 the Manager entered into an agreement with
Salomon Brothers 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
50% of the fees payable by the Fund to the Manager without regard to any
reduction due to the imposition of expense limitations. From March 1,
1990 (commencement of operations) through January 31, 1996, Eagle Asset
Management, Inc., a wholly owned subsidiary of Raymond James Financial,
Inc. was subadviser to the Fund.
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, 1996 was $3,600. In addition, the Manager performs Fund
accounting services and charged $31,311 during the current period of
which $7,500 was payable as of September 30, 1996.
Raymond James & Associates, Inc. (the "Distributor") has advised the Fund
that it received $159,740 in front end sales charges and $1,011 in
contingent deferred sales charges for the twelve months ended September
30, 1996. From these fees, the Distributor paid commissions to
salespersons and incurred other distribution costs.
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 of up to .35% of the average daily net assets for Class A Shares.
Under the Class C Distribution Plan, the Fund may pay 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 year $100,300 and $23,630 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,
investment companies which are also advised by the Manager (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.
Note 5: FEDERAL INCOME TAXES. For the year ended September 30, 1996, to reflect
reclassifications arising from permanent book/tax differences primarily
attributable to market discount, the Fund credited undistributed net
investment income $16,079, and debited paid in capital $2,267 and
accumulated net realized loss $13,812. As of September 30, 1996, the
Fund had a net tax basis capital loss carryforward of $1,450,395, which
may be applied against any realized net taxable gains until its
expiration dates of September 30, 2003, ($1,402,139) and September 30,
2004, ($48,256).
14
<PAGE> 15
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Income Trust-High Yield Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Heritage Income Trust-High Yield
Bond Fund (the "Fund") at September 30, 1996, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at
September 30, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The financial statements of
the Fund for the year ended September 30, 1995, including the financial
highlights for each of the periods indicated, were audited by other independent
accountants whose report dated November 27, 1995 expressed an unqualified
opinion on those statements.
/s/ Price Waterhouse
PRICE WATERHOUSE LLP
Tampa, Florida
November 12, 1996
15
<PAGE> 16
Heritage Income Trust
High Yield Bond Fund
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------------------
Address Change Requested
This report is for the information of shareholders of
Heritage Income Trust-High Yield Bond Fund. It may also
be used as sales literature when preceded or accompanied
by a prospectus.
5M 11/96 (LOGO) Printed on recycled paper
[HERITAGE LOGO]
HIGH YIELD
BOND FUND
A MUTUAL FUND SEEKING
HIGH CURRENT INCOME
ANNUAL REPORT
and Investment Performance
Review for the Year Ended
SEPTEMBER 30, 1996
A member of the
Heritage Family of Mutual Funds(TM)
