<PAGE> 1
[HERITAGE
INCOME
TRUST
LOGO]
[pictures of people working and playing]
From Our Family to Yours: The Intelligent Creation of Wealth.
Annual Report
and Investment Performance
Review for the Year Ended
September 30, 1997
[HERITAGE LOGO]
-----------------
INCOME TRUST(TM)
-----------------
<PAGE> 2
November 13, 1997
Dear Fellow Shareholders:
It is my pleasure to provide you with the annual report for the fiscal year
ended September 30, 1997 for the Intermediate Government Fund and the High Yield
Bond Fund, each a portfolio of Heritage Income Trust. With this report we are
continuing the process of combining shareholder reports and prospectuses for
these Funds. In doing this, those of you who are shareholders in both Funds will
see a reduction in the volume of mail you receive from us while still having
access to all of the information you previously received separately for each
Fund. We hope you will call us at 800-709-3863 to let us know how you like these
changes and to share any other comments you may have.
As shown in the chart below, your Funds delivered attractive total returns
for the most recent fiscal year. In each case, however, more aggressive
strategies were slightly better rewarded by the bond market for this period. We
will continue to manage your Fund's portfolios with a focus on total return
rather than simply maximizing current yield. This approach may mean that we will
give up some short-term appreciation where we believe the risks are not
appropriate.
<TABLE>
<CAPTION>
TOTAL RETURN
(10/01/96-9/30/97)
------------------
<S> <C>
INTERMEDIATE GOVERNMENT FUND
A Shares*................................................... + 7.28%
C Shares*................................................... + 7.02
Lehman Brothers 1-3 Year Government Index................... + 6.88
Lehman Brothers Intermediate Government/Corporate Index..... + 8.19
Lipper Intermediate U.S. Government Funds Average........... + 8.17
HIGH YIELD BOND FUND
A Shares*................................................... +14.00%
C Shares*................................................... +13.53
Merrill Lynch Domestic Master Index......................... + 9.77
Salomon Brothers High Yield Market Index.................... +14.88
Lipper High Current Yield Funds Average..................... +15.61
</TABLE>
In the pages that follow, you will find commentaries from Peter Wallace and
Peter Wilby, the managers for the Intermediate Government and High Yield Bond
Funds, respectively. I hope you find their comments helpful in better
understanding how your investment portfolios are managed. You may have read
recently of the merger agreement between Travelers Group and Salomon Inc, the
parent of Salomon Brothers Asset Management Inc, subadviser to the High Yield
Bond Fund. At their meeting on November 10, 1997, the Trustees of the High Yield
Bond Fund authorized a shareholder vote seeking approval to continue our
subadvisory agreement with Salomon Brothers Asset Management Inc in their new
corporate structure. We do not expect any material changes in the way your
portfolio will be managed under the new structure. You will receive more
information along with the proxy statement in the next several weeks.
Thank you for your continuing investment with us. We look forward to
helping serve your investment needs in the coming years.
Sincerely,
/s/ STEPHEN G. HILL
-------------------
Stephen G. Hill
President
- ---------------
* These returns are calculated without the imposition of front- or back-end
sales load.
<PAGE> 3
November 13, 1997
Dear Shareholders:
For investors in the Intermediate Government Fund (the "Fund"), the fiscal
year ended September 30, 1997 was rewarding. The Fund maintained a steady flow
of income and produced a respectable total return, despite the sometimes extreme
volatility in the bond market. After expenses, the Fund produced a total return
of 7.28%* in A shares and 7.02%* in C shares for the fiscal year, compared to
the Lehman Brothers Intermediate Government/Corporate Index return of 8.19% and
the Lehman Brothers 1 to 3 Year Government Index return of 6.88%.
Over the last year, the economy continued to expand without significant
inflationary pressures. The Consumer Price Index (CPI) fell from a 3.00%
year-over-year rate in September 1996 to only 2.20% by September 1997. Despite
this favorable inflationary environment, market fears of a reverse in the
inflationary trend have kept real interest rates relatively high. In our
opinion, this offers investors in bond funds a very attractive opportunity.
Should inflation continue to remain well-behaved, we would expect real interest
rates to return to more historical levels, benefiting fixed income investors.
There are several reasons why we believe this is a likely scenario.
The Federal Reserve Open Market Committee took action on interest rates
only once this year. They took a preemptive strike in March 1997, raising
short-term interest rates by 0.25%. Since then, it appears they have been
satisfied with their monetary policy relative to economic growth. Traditional
sources of inflation that were feared at the beginning of the year have not
presented a problem. Low unemployment rates have not led to higher wage
pressures, possibly due to increases in productivity. Increases in personal
incomes have not triggered substantially higher rates of consumption due to the
general reduction of consumer debt. Despite this recent moderation in consumer
debt levels, we believe they still remain high enough to act as a significant
drag on demand growth, and therefore, the economy. This should help prevent
higher rates of economic expansion that could trigger inflation and harm the
fixed income market. We believe that the Federal Reserve Board will continue to
remain inactive for the balance of 1997 and well into 1998 unless we experience
a significant spike in the growth rate of the economy and a corresponding
increase in the rate of inflation.
The market's ongoing uncertainty over inflation and the stance of the
Federal Reserve Board, has periodically helped push volatility to very high
levels. While the yield on the 10 Year Treasury Bond fell by 60 basis points
over the course of the fiscal year, it had a range of almost 100 basis points.
Through this volatility, we maintained an effective duration longer than our
index and benefited from the general downward trend in interest rates. Had we
maintained a portfolio with an even longer duration, our returns would, in
hindsight, have been even better. However, given the extreme volatility of the
market, we did not believe the risk-reward tradeoffs warranted a further
extension of our portfolio duration. Our outlook continues to be positive, our
portfolio remains slightly longer than our index and we look forward to another
rewarding year.
Thank you for your continued confidence in Heritage Income
Trust-Intermediate Government Fund. We look forward to reporting to you again at
the end of the Fund's semi-annual period next year.
Sincerely,
/s/ H. PETER WALLACE
-------------------------------
H. Peter Wallace, CFA
Senior Vice President
Heritage Asset Management, Inc.
Portfolio Manager, Intermediate
Government Fund
- ---------------
* These returns are calculated without the imposition of front- or back-end
sales load.
2
<PAGE> 4
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
CLASS A SHARES ON MARCH 1, 1990
CHART
The graph contained in the annual report compares the performance of the
Heritage Income Trust - Intermediate Government Fund Class A shares with the
Lehman Brothers 1 to 3 Year Government Index and the Lehman Brothers
Intermediate Government/Corporate Index from inception (March 1, 1990) through
September 30, 1997.
================================================================================
GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT FUND
CLASS C SHARES ON APRIL 3, 1995
CHART
The graph contained in the annual report compares the performance of the
Heritage Income Trust - Intermediate Government Fund Class C shares with the
Lehman Brothers 1 to 3 Year Government Index and the Lehman Brothers
Intermediate Government/Corporate Index from inception of Class C Shares
(April 3, 1995) through September 30, 1997.
- --------------------------------------------------------------------------------
* Average annual total returns for Heritage Income Trust-Intermediate Government
Fund are calculated in conformance with Item 22 of Form N-1A, which assumes
the reinvestment of dividends and a sales load of 3.75% for Class A Shares.
3
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- ---------- -----------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--97.7%(A)
- ---------------------------------------------------------------------------------
U.S. Treasuries--43.8%(a)
- ---------------------------------------------------------------------------------
$1,500,000 U.S. Treasury Notes, 6.125%................................. 09/30/00 $ 1,509,375
1,000,000 U.S. Treasury Notes, 5.25%.................................. 01/31/01 980,625
1,000,000 U.S. Treasury Notes, 6.25%.................................. 04/30/01 1,009,375
1,000,000 U.S. Treasury Notes, 6.25%.................................. 01/31/02 1,009,375
2,000,000 U.S. Treasury Notes, 6.125%................................. 08/15/07 2,001,250
-----------
Total U.S. Treasuries (cost $6,487,109)..................... 6,510,000
-----------
U.S. GOVERNMENT AGENCIES--53.9%(A)
- ---------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--12.2%
- ---------------------------------------------------------------------------------
1,804,074 Pool #C80379, 30 year Pass-Through, 7.0%.................... 02/01/26 1,802,198
5,167 REMIC, 1164 F, PAC, 7.0%.................................... 03/15/05 5,157
-----------
1,807,355
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--22.9%
- ---------------------------------------------------------------------------------
903,796 Pool #335257, 15 year Pass-Through, 7.5%.................... 01/01/11 925,443
1,432,045 Pool #362688, 15 year Pass-Through, 7.0%.................... 10/01/11 1,446,752
1,000,000 REMIC, 1992-119E, Sequential Class, 8.0%.................... 07/25/20 1,026,675
-----------
3,398,870
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--18.8%
- ---------------------------------------------------------------------------------
1,771,115 Pool #351468, 30 year Pass-Through, 7.5%.................... 03/15/24 1,806,308
997,535 Pool #421756, 30 year Pass-Through, 7.0%.................... 08/01/26 997,224
-----------
2,803,532
-----------
Total U.S. Government Agencies (cost $7,977,846)............ 8,009,757
-----------
Total U.S. Government and Agency Securities (cost
$14,464,955)................................................ 14,519,757
REPURCHASE AGREEMENT--1.4%(A)
- ---------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated September
30, 1997, @ 5.85% to be repurchased at $215,035 on October 1, 1997,
collateralized by $210,000 United States Treasury Notes, 6.75%, due August 15,
2026 (market value $222,079 including interest) (cost $215,000).................. 215,000
-----------
TOTAL INVESTMENT PORTFOLIO (COST $14,679,955)(B) 99.1%(A)........................ 14,734,757
OTHER ASSETS AND LIABILITIES, NET, 0.9%(A)....................................... 135,238
-----------
NET ASSETS, 100.0%(A)............................................................ $14,869,995
===========
</TABLE>
- -------------------
(a) Percentages 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
$54,802 which consists of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$108,706 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $53,904.
PAC-Planned Amortization Class
REMIC-Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
October 28, 1997
Dear Shareholders:
The Heritage Income Trust-High Yield Bond Fund returned 14.00%* on its A
shares and 13.53%* on its C shares for the fiscal year-ended September 30, 1997.
By comparison, the Salomon Brothers High Yield Market Index rose 14.88% and the
Lipper High Current Yield Fund category gained 15.61%.
The High Yield Market recorded very strong returns for the latest
twelve-month period. Factors driving the market higher included a Treasury
market rally, demand for high yield debt from a variety of institutional and
retail investors, and improving fundamental credit quality of high yield
issuers.
During the last 12 months, the 10-year U.S. Treasury has rallied to a yield
of 6.10% from 6.70% as the combination of low inflation and moderate growth has
been ideal for the financial markets. A record of over $20 billion flowed into
high yield mutual funds, while a record number of collateralized bond
obligations were funded. Pension funds and other institutional investors also
continued to enter the market. In addition, robust economic conditions continued
to boost credit quality measures and keep default rates to lower-than-average
levels.
The high yield market has been focused almost entirely on new issues.
However, the record $116 billion of new issuance during the trailing twelve
months was not nearly enough to slow the positive momentum. The average market
yield has declined by .93% to 8.84% since September 30, 1996, while spreads to
Treasuries have declined by .39% to 2.85% according to the Salomon Brothers High
Yield Market Index.
Leading the market over the last twelve months has been deferred interest
securities and industries such as leisure/lodging, utilities, retail,
transportation and telecommunications. Groups that have lagged the market
include lower-rated securities, and industries such as publishing, supermarkets
and auto-related.
The Heritage Income Trust-High Yield Bond Fund increased its exposure to
cyclical industries and energy at the expense of non-cyclical companies over the
past year. The Fund is modestly overweighted in manufacturing, consumer
products, energy, retail and service companies. Some of the Fund's best
performing positions included several consumer products companies (Rayovac
Corporation, Revlon Worldwide Corporation and Twin Labs) and retailers (CSK
Auto, Inc., Specialty Retailers and Finlay Fine Jewelers). Other outperformers
included companies that were bought by investment grade companies (Alamo,
Central Transport, Smith Food & Drug and UNC, Inc.). The Fund's worst performing
positions included two supermarkets (Brunos and Penn Traffic), which were hurt
by extremely competitive local market conditions. The Fund's most underweighted
industry remains telecommunications due to the higher risk profile of a number
of these emerging technology companies.
Sincerely,
/s/ PETER J. WILBY
-------------------------------------
Peter J. Wilby
Managing Director
Salomon Brothers Asset Management Inc
Portfolio Manager, High Yield Bond
Fund
- ---------------
* These returns are calculated without the imposition of front- or back-end
sales load.
5
<PAGE> 7
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT SINCE THE APPROVAL OF
SALOMON AS SUBADVISER TO THE HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
ON FEBRUARY 1, 1996
CHART
The graph contained in the annual report compares the performance of the
Heritage Income Trust - High Yield Bond Fund Class A & C shares with the
Salomon Brothers High Yield Market Index from February 1, 1996 through
September 30, 1997.
- --------------------------------------------------------------------------------
The graph represents performance from February 1, 1996 through September 30,
1997. 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 and a sales load of 3.75% for Class A Shares.
6
<PAGE> 8
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
CLASS A SHARES ON MARCH 1, 1990
CHART
The graph contained in the annual report compares the performance of the
Heritage Income Trust - High Yield Bond Fund Class A shares with the Merrill
Lynch Domestic Master Index from inception (March 1, 1990) through September
30, 1997.
================================================================================
GROWTH OF A $10,000 INVESTMENT SINCE
INCEPTION OF HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
CLASS C SHARES ON APRIL 3, 1995
CHART
The graph contained in the annual report compares the performance of the
Heritage Income Trust - High Yield Bond Fund Class C shares with the Merrill
Lynch Domestic Master Index from inception (April 3, 1995) through September
30, 1997.
- --------------------------------------------------------------------------------
* 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 and a sales load of 3.75% for Class A Shares.
7
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ -------- ------
<C> <S> <C> <C>
DOMESTIC CORPORATE BONDS--87.7%(A)
- -------------------------------------------------------------------------------------------
AEROSPACE--1.0%
- -------------------------------------------------------------------------------------------
$500,000 L-3 Communications Corporation, 10.375%..................... 05/01/07 $ 537,500
-----------
AUTO PARTS/EQUIPMENT--0.6%
- -------------------------------------------------------------------------------------------
350,000 Venture Holdings Trust, 9.75%............................... 04/01/04 336,000
-----------
BEVERAGES--1.0%
- -------------------------------------------------------------------------------------------
500,000 Stroh Brewery Company, 11.1%................................ 07/01/06 520,000
-----------
BROADCASTING--7.3%
- -------------------------------------------------------------------------------------------
250,000 Adelphia Communications Corporation, 9.875%................. 03/01/07 258,125
500,000 Cablevision Systems Corporation, 10.50%..................... 05/15/16 567,500
500,000 Chancellor Media Corporation, 9.375%........................ 10/01/04 521,250
500,000 Jacor Communications, Inc., 9.75%........................... 12/15/06 536,250
Marcus Cable Company, 0% to 6/15/00, 14.25% to
750,000 maturity(d)................................................. 12/15/05 624,375
500,000 Rogers Communications, Inc., 8.875%......................... 07/15/07 502,500
500,000 SFX Broadcasting, Inc., 10.75%.............................. 05/15/06 548,125
500,000 United International Holdings, Zero Coupon Bond............. 11/15/99 408,125
-----------
3,966,250
-----------
BUILDING--1.8%
- -------------------------------------------------------------------------------------------
250,000 Nortek, Inc., 9.125%........................................ 09/01/07 252,812
Waxman Industries, Inc., 0% to 6/1/99, 12.75% to
850,000 maturity(d)................................................. 06/01/04 748,000
-----------
1,000,812
-----------
CHEMICALS--2.0%
- -------------------------------------------------------------------------------------------
500,000 Freedom Chemical Company, 10.625%........................... 10/15/06 535,000
500,000 Texas Petrochemicals, 11.125%............................... 07/01/06 543,750
-----------
1,078,750
-----------
CONGLOMERATES/DIVERSIFIED--1.0%
- -------------------------------------------------------------------------------------------
Jordan Industries, Inc., 0% to 4/1/02, 11.75% to
1,000,000 maturity(d)................................................. 04/01/09 550,000
-----------
CONTAINERS--1.4%
- -------------------------------------------------------------------------------------------
250,000 Radnor Holdings, Inc., 10.0%................................ 12/01/03 259,062
500,000 Stone Container Corporation, 12.25%......................... 04/01/02 516,250
-----------
775,312
-----------
COSMETICS/TOILETRIES--1.8%
- -------------------------------------------------------------------------------------------
400,000 Anchor Advanced Products, Inc., 11.75%...................... 04/01/04 426,000
750,000 Revlon Worldwide Corporation, Zero Coupon Bond.............. 03/15/01 541,875
-----------
967,875
-----------
DATA PROCESSING--1.5%
- -------------------------------------------------------------------------------------------
250,000 Alvey Systems, Inc., 11.375%................................ 01/31/03 262,500
500,000 Unisys Corporation, 11.75%.................................. 10/15/04 562,500
-----------
825,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ -------- ------
<C> <S> <C> <C>
ELECTRONICS/ELECTRIC--3.4%
- -------------------------------------------------------------------------------------------
$200,000 Amphenol Corporation, 9.875%................................ 05/15/07 $ 212,000
500,000 Axiohm Transaction Solutions, Inc., 9.75%................... 10/01/07 505,000
DecisionOne Holdings Corporation, 0% to 8/1/02, 11.5% to
500,000 maturity(d)................................................. 08/01/08 332,500
250,000 Exide Electronics Group, Inc., 11.5%........................ 03/15/06 286,563
500,000 Rayovac Corporation, 10.25%................................. 11/01/06 540,000
-----------
1,876,063
-----------
FILMED ENTERTAINMENT--1.0%
- -------------------------------------------------------------------------------------------
500,000 Cinemark USA, Inc., 9.625%.................................. 08/01/08 512,500
-----------
FINANCE--2.5%
- -------------------------------------------------------------------------------------------
500,000 Airplane Pass Through Trust, Class "D", 10.875%............. 03/15/19 579,665
250,000 Dollar Financial Group, Inc., 10.875%....................... 11/15/06 268,750
500,000 DVI, Inc., 9.875%........................................... 02/01/04 513,750
-----------
1,362,165
-----------
FOOD--4.6%
- -------------------------------------------------------------------------------------------
250,000 B&G Foods, Inc., 9.625%..................................... 08/01/07 249,688
500,000 CFP Holdings, Inc., 11.625%................................. 01/15/04 502,500
500,000 Fleming Companies, Inc., 10.5%.............................. 12/01/04 522,500
250,000 North Atlantic, 11.0%....................................... 06/15/04 261,250
500,000 SC International Services, Inc., 9.25%...................... 09/01/07 506,250
500,000 Specialty Foods Acquisition Corporation, 10.25%............. 08/15/01 492,500
-----------
2,534,688
-----------
HEALTH CARE CENTERS--1.5%
- -------------------------------------------------------------------------------------------
400,000 Graham-Field Health Products, Inc., 9.75%................... 08/15/07 416,000
400,000 Integrated Health Services, Inc., 9.25%..................... 01/15/08 406,000
-----------
822,000
-----------
HOTELS/MOTELS/INNS--1.9%
- -------------------------------------------------------------------------------------------
150,000 HMH Properties, Inc., 8.875%................................ 07/15/07 153,937
300,000 HMH Properties, Inc., 9.50%................................. 05/15/05 315,750
500,000 Wyndham Hotel Corporation, 10.5%............................ 05/15/06 567,500
-----------
1,037,187
-----------
HOUSEHOLD PRODUCTS--1.0%
- -------------------------------------------------------------------------------------------
500,000 Shop Vac Corporation, 10.625%............................... 09/01/03 536,250
-----------
JEWELRY/SILVERWARE/TIME PIECES/CHINA--1.1%
- -------------------------------------------------------------------------------------------
550,000 Herff Jones, Inc., 11.0%.................................... 08/15/05 599,500
-----------
LEISURE/AMUSEMENT--3.1%
- -------------------------------------------------------------------------------------------
750,000 Coleman Escrow Corporation, Zero Coupon Bond................ 05/15/01 510,000
500,000 Selmer Company, Inc., 11.0%................................. 05/15/05 550,000
125,000 Sun International Hotels, Ltd., 9.0%........................ 03/15/07 128,750
500,000 Trump Atlantic City, 11.25%................................. 05/01/06 484,375
-----------
1,673,125
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ -------- ------
<C> <S> <C> <C>
MANUFACTURING/DISTRIBUTIONS--8.2%
- -------------------------------------------------------------------------------------------
$500,000 Clark-Schwebel, Inc., 10.5%................................. 04/15/06 $ 541,250
250,000 High Voltage Engineering Group, 10.5%....................... 08/15/04 262,500
500,000 Hines Horticulture, Inc., 11.75%............................ 10/15/05 545,000
500,000 Insilco Corporation, 10.25%................................. 08/15/07 516,250
500,000 International Knife & Saw, 11.375%.......................... 11/15/06 543,750
250,000 Polymer Group, Inc., 9.0%................................... 07/01/07 252,500
333,000 Samsonite Corporation, 11.125%.............................. 07/15/05 381,285
500,000 Specialty Equipment Companies, Inc., 11.375%................ 12/01/03 543,750
500,000 Talley Manufacturing & Technology, Inc., 10.75%............. 10/15/03 526,250
333,000 Terex Corporation, 13.25%................................... 05/15/02 381,285
-----------
4,493,820
-----------
MEDICAL EQUIPMENT/SUPPLY--3.3%
- -------------------------------------------------------------------------------------------
500,000 Fresenius Medical Care, 9.0%................................ 12/01/06 518,750
500,000 Maxxim Medical, Inc., 10.5%................................. 08/01/06 542,500
500,000 Packard Bioscience, 9.375%.................................. 03/01/07 510,625
250,000 UROHEALTH Systems, Inc., Class "A", 12.5%................... 04/01/04 248,125
-----------
1,820,000
-----------
METAL--1.9%
- -------------------------------------------------------------------------------------------
500,000 Envirosource, Inc., 9.75%................................... 06/15/03 500,000
500,000 Renco Metals Inc., 11.5%.................................... 07/01/03 540,000
-----------
1,040,000
-----------
MINING/DIVERSIFIED--0.9%
- -------------------------------------------------------------------------------------------
500,000 Anker Coal Group, Inc., 9.75%............................... 10/01/07 507,500
-----------
OIL & GAS--8.9%
- -------------------------------------------------------------------------------------------
500,000 Benton Oil & Gas Company, 11.625%........................... 05/01/03 550,000
500,000 Cliffs Drilling Company, 10.25%............................. 05/15/03 543,750
500,000 Costilla Energy, Inc., 10.25%............................... 10/01/06 520,000
500,000 Dawson Production Services, Inc., 9.375%.................... 02/01/07 521,250
1,000,000 DI Industries, Inc., 8.875%................................. 07/01/07 1,030,000
500,000 National Energy Group, Inc., 10.75%......................... 11/01/06 522,500
250,000 Parker Drilling Company, 9.75%.............................. 11/15/06 267,500
500,000 Snyder Oil Corporation, 8.75%............................... 06/15/07 496,250
500,000 Transamerican Energy, 0% to 6/15/99, 13.0% to maturity(d)... 06/15/02 396,875
-----------
4,848,125
-----------
PAPER/PRODUCTS--0.5%
- -------------------------------------------------------------------------------------------
250,000 Crown Paper Company, 11.0%.................................. 09/01/05 270,000
-----------
PET & SUPPLIES--1.0%
- -------------------------------------------------------------------------------------------
500,000 Doane Products Company, 10.625%............................. 03/01/06 535,000
-----------
PLASTIC/PRODUCTS--2.0%
- -------------------------------------------------------------------------------------------
500,000 Berry Plastics Corporation, 12.25%.......................... 04/15/04 548,125
500,000 Plastic Specialties and Technologies, Inc., 11.25%.......... 12/01/03 541,250
-----------
1,089,375
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ -------- ------
<C> <S> <C> <C>
PUBLISHING--1.0%
- -------------------------------------------------------------------------------------------
$500,000 American Media Operation, Inc., 11.625%..................... 11/15/04 $ 548,125
-----------
RETAIL STORES--8.2%
- -------------------------------------------------------------------------------------------
250,000 Bruno's, Inc., 10.5%........................................ 08/01/05 148,750
500,000 Carr-Gottstein Foods Company, 12.0%......................... 11/15/05 553,750
500,000 Cole National Group, 9.875%................................. 12/31/06 533,125
250,000 CSK Auto, Inc., 11.0%....................................... 11/01/06 267,500
500,000 Eye Care Centers, 12.0%..................................... 10/01/03 552,500
Finlay Enterprises, Inc., 0% to 5/1/98, 12% to
1,000,000 maturity(d)................................................. 05/01/05 968,750
500,000 Hills Stores Company, 12.5%................................. 07/01/03 410,000
500,000 Jitney Jungle Stores, 12.0%................................. 03/01/06 562,500
500,000 Pueblo Xtra International, 9.5%............................. 08/01/03 497,500
-----------
4,494,375
-----------
SERVICES--5.3%
- -------------------------------------------------------------------------------------------
Allied Waste Industries, Inc., 0% to 6/1/02, 11.3% to
350,000 maturity(d)................................................. 06/01/07 235,813
500,000 Borg-Warner Security Corporation, 9.125%.................... 05/01/03 508,750
250,000 Federal Data Corporation, 10.125%........................... 08/01/05 253,750
500,000 Iron Mountain, Inc., 10.125%................................ 10/01/06 540,000
400,000 Loomis Fargo & Co., 10.0%................................... 01/15/04 408,000
Norcal Waste Systems, Inc., 13.25% to 11/16/97, 13.5% to
500,000 maturity(d)................................................. 11/15/05 575,000
325,000 Pierce Leahy Corporation, 11.125%........................... 07/15/06 365,625
-----------
2,886,938
-----------
TELECOMMUNICATIONS--4.3%
- -------------------------------------------------------------------------------------------
Intermedia Communications of Florida, 0% to 05/15/01, 12.5%
1,000,000 to maturity(d).............................................. 05/15/06 785,000
International CableTel, Inc., 0% to 02/01/01, 11.5% to
1,000,000 maturity(d)................................................. 02/01/06 745,000
500,000 Nextlink Communications, 12.5%.............................. 04/15/06 575,000
250,000 Western Wireless Corporation, 10.5%......................... 06/01/06 261,875
-----------
2,366,875
-----------
TEXTILES--1.8%
- -------------------------------------------------------------------------------------------
500,000 Dyersburg Corporation, 9.75%................................ 09/01/07 511,875
500,000 Polysindo International Company, 9.375%..................... 07/30/07 491,875
-----------
1,003,750
-----------
TRANSPORTATION--0.9%
- -------------------------------------------------------------------------------------------
500,000 Ryder TRS, Inc., 10.0%...................................... 12/01/06 507,500
-----------
Total Domestic Corporate Bonds (cost $46,105,575)........... 47,922,360
-----------
FOREIGN CONVERTIBLE BONDS--1.0%(A)(C)
- -------------------------------------------------------------------------------------------
PUBLISHING--1.0%
- -------------------------------------------------------------------------------------------
1,500,000 Hollinger, Inc., Zero Coupon Bond........................... 10/05/13 570,000
-----------
Total Foreign Convertible Bonds (cost $531,630)............. 570,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 13
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1997
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ -------- ------
<C> <S> <C> <C>
FOREIGN CORPORATE BONDS--4.4%(A)(C)
- -------------------------------------------------------------------------------------------
AUTO PARTS/EQUIPMENT--0.7%
- -------------------------------------------------------------------------------------------
$500,000 Speedy Muffler King, Inc., 10.875%.......................... 10/01/06 $ 415,000
-----------
BROADCASTING--1.4%
- -------------------------------------------------------------------------------------------
1,000,000 Diamond Cable, 0% to 12/15/00, 11.75% to maturity(d)........ 12/15/05 750,000
-----------
MANUFACTURING/DISTRIBUTIONS--0.3%
- -------------------------------------------------------------------------------------------
International Semi-Tech Corporation, 0% to 08/15/03, 11.5%
250,000 to maturity(d).............................................. 08/15/03 158,750
-----------
PAPER/PRODUCTS--0.9%
- -------------------------------------------------------------------------------------------
500,000 Doman Industries, Ltd., 8.75%............................... 03/15/04 495,000
-----------
STEEL/IRON--1.1%
- -------------------------------------------------------------------------------------------
500,000 Algoma Steel, Inc., 12.375%................................. 07/15/05 583,750
-----------
Total Foreign Corporate Bonds (cost $2,364,215)............. 2,402,500
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<C> <S> <C> <C>
WARRANTS--0.2%(A)
- -------------------------------------------------------------------------------------------
MANUFACTURING/DISTRIBUTIONS--0.1%
- -------------------------------------------------------------------------------------------
2,000 Terex Corporation*.......................................... 30,000
-----------
MEDICAL EQUIPMENT/SUPPLY--0.1%
- -------------------------------------------------------------------------------------------
206 Wright Medical Technology, Inc.*............................ 20,588
-----------
Total Warrants (cost $4,040)................................ 50,588
-----------
Total investment portfolio excluding repurchase agreement (cost $49,005,460)(b),
93.3%(a)....................................................................... 50,945,448
REPURCHASE AGREEMENT--2.6%(A)
- -------------------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated September
30, 1997, @ 5.85%, to be repurchased at $1,450,236 on October 1, 1997,
collateralized by $1,410,000 United States Treasury Notes, 6.75%, due August 15,
2026 (market value $1,477,675 including interest)
(cost $1,450,000)................................................................ 1,450,000
-----------
TOTAL INVESTMENT PORTFOLIO (COST $50,455,460)(B), 95.9%(A)....................... 52,395,448
OTHER ASSETS AND LIABILITIES, NET, 4.1%(A)....................................... 2,222,258
-----------
NET ASSETS, 100.0%............................................................... $54,617,706
===========
</TABLE>
- -------------------
* Non-income producing.
(a) Percentages 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
$1,939,988, which consists of aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost of
$2,244,239 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $304,251.
(c) Denominated in US dollars.
(d) Bonds reset to applicable coupon rate at a future date.
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 14
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- -----------
<S> <C> <C>
Assets
- ------------------------------------------------------------
Investments, at market value (identified cost $14,679,955
and $50,455,460, respectively) (Note 1)................... $14,734,757 $52,395,448
Cash........................................................ 4,000 556,083
Receivables:
Investments sold.......................................... -- 1,900,990
Fund shares sold.......................................... 20,504 76,122
From Manager.............................................. 39,456 --
Dividends and interest.................................... 109,574 1,202,910
Deferred state/federal registration expenses (Note 1)....... 9,847 8,627
Prepaid insurance........................................... 1,423 2,214
----------- -----------
Total Assets........................................ $14,919,561 $56,142,394
----------- -----------
Liabilities
- ------------------------------------------------------------
Payables (Note 4):
Investments purchased..................................... $ -- $ 1,253,633
Fund shares redeemed...................................... 5,000 173,372
Accrued management fee.................................... -- 33,546
Accrued distribution fee.................................. 4,218 18,378
Other accrued expenses.................................... 40,348 45,759
----------- -----------
Total Liabilities................................... 49,566 1,524,688
----------- -----------
Net assets, at market value................................. $14,869,995 $54,617,706
=========== ===========
Net Assets
- ------------------------------------------------------------
Net assets consist of:
Paid-in capital........................................... $21,487,772 $52,979,288
Undistributed net investment income (Note 1).............. 703,649 414,731
Accumulated net realized loss (Notes 1 and 5)............. (7,376,228) (716,301)
Net unrealized appreciation on investments................ 54,802 1,939,988
----------- -----------
Net assets, at market value................................. $14,869,995 $54,617,706
=========== ===========
Net assets, at market value
Class A Shares............................................ $14,060,430 $41,836,688
Class C Shares............................................ 809,565 12,781,018
----------- -----------
Total............................................... $14,869,995 $54,617,706
=========== ===========
Shares of beneficial interest outstanding
Class A Shares............................................ 1,527,676 3,912,752
Class C Shares............................................ 88,198 1,200,287
----------- -----------
Total............................................... 1,615,874 5,113,039
=========== ===========
Net Asset Value -- offering and redemption price per share
(Notes 1 and 2)
Class A Shares............................................ $9.20 $10.69
====== =====
Maximum offering price per share (100/96.25 of $9.20 and
$10.69, respectively).................................. $9.56 $11.11
====== =====
Class C Shares............................................ $9.18 $10.65
====== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 15
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- ----------
<S> <C> <C>
Investment Income
- ------------------------------------------------------------
Income:
Interest.................................................. $1,076,911 $4,767,908
Expenses (Notes 1 and 4):
Management fee............................................ 81,847 287,069
Distribution fee (Class A Shares)......................... 51,820 112,342
Distribution fee (Class C Shares)......................... 4,586 88,981
Professional fees......................................... 40,357 42,385
Custodian/Fund accounting fees............................ 37,817 51,366
State/Federal registration expenses....................... 23,008 21,788
Reports to shareholders................................... 11,314 19,279
Shareholder servicing fees................................ 10,688 24,851
Trustees' fees and expenses............................... 8,525 7,741
Insurance expense......................................... 3,536 4,484
Other..................................................... 2,614 17,660
---------- ----------
Total expenses before waiver and reimbursement.......... 276,112 677,946
Fees waived by Manager (Note 4)......................... (81,847) (45,839)
Reimbursement from Manager.............................. (39,456) --
---------- ----------
Total expenses after waiver and reimbursement........... 154,809 632,107
Net investment income....................................... $ 922,102 $4,135,801
---------- ----------
Realized and Unrealized Gain (Loss) on Investments
- ------------------------------------------------------------
Net realized gain (loss) from investment transactions....... (136,028) 778,438
Net increase in unrealized appreciation of investments
during the year........................................... 354,485 1,375,780
---------- ----------
Net gain on investments............................. 218,457 2,154,218
---------- ----------
Net increase in net assets resulting from operations........ $1,140,559 $6,290,019
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 16
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Intermediate Government Fund
- ------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 922,102 $ 1,143,431
Net realized gain (loss) investment transactions.......... (136,028) 109,860
Net increase (decrease) in unrealized appreciation of
investments during the year............................. 354,485 (549,553)
----------- -----------
Net increase in net assets resulting from operations...... 1,140,559 703,738
Dividends to shareholders from:
Net investment income Class A Shares, ($0.52 and $0.50 per
share, respectively).................................... (897,448) (1,148,575)
Net investment income Class C Shares, ($0.50 and $0.49 per
share, respectively).................................... (41,089) (18,913)
Decrease in net assets from Fund share transactions (Note
2)........................................................ (3,448,028) (5,986,251)
----------- -----------
Decrease in net assets...................................... (3,246,006) (6,450,001)
Net assets, beginning of year............................... 18,116,001 24,566,002
----------- -----------
Net assets, end of year (including undistributed net
investment income of $703,649 and $726,228,
respectively)............................................. $14,869,995 $18,116,001
=========== ===========
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
High Yield Bond Fund
- ------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 4,135,801 $ 2,803,774
Net realized gain on investment transactions.............. 778,438 970,631
Net increase (decrease) in unrealized appreciation of
investments during the year............................. 1,375,780 (58,735)
----------- -----------
Net increase in net assets resulting from operations...... 6,290,019 3,715,670
Dividends to shareholders from:
Net investment income Class A Shares, ($0.89 and $0.80 per
share, respectively).................................... (3,120,267) (2,445,168)
Net investment income Class C Shares, ($0.84 and $0.76 per
share, respectively).................................... (890,714) (222,208)
Increase in net assets from Fund share transactions (Note
2)........................................................ 12,731,865 7,911,842
----------- -----------
Increase in net assets...................................... 15,010,903 8,960,136
Net assets, beginning of year............................... 39,606,803 30,646,667
----------- -----------
Net assets, end of year (including undistributed net
investment income of $414,731 and $245,567
respectively)............................................. $54,617,706 $39,606,803
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 17
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-INTERMEDIATE GOVERNMENT 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 A SHARES CLASS C SHARES
------------------------------------------ ------------------------
FOR THE YEARS ENDED
FOR THE YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------ ------------------------
1997* 1996* 1995 1994* 1993 1997* 1996* 1995+
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.84 $ 9.06 $ 9.27 $ 9.05
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)............................ 0.51 0.50 0.62 0.43 0.59 0.49 0.49 0.21
Net realized and unrealized gain (loss) on
investments....................................... 0.13 (0.21) 0.12 (0.40) (0.44) 0.13 (0.21) 0.23
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations.................... 0.64 0.29 0.74 0.03 0.15 0.62 0.28 0.44
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income................ (0.52) (0.50) (0.55) (0.37) (0.52) (0.50) (0.49) (0.22)
Distributions from net realized gains............... -- -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions................................. (0.52) (0.50) (0.55) (0.37) (0.55) (0.50) (0.49) (0.22)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR.......................... $ 9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.18 $ 9.06 $ 9.27
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(D)................................... 7.28 3.24 8.47 0.36 1.58 7.02 3.04 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a)......................................... 0.93 0.94 0.95 0.95 0.91 1.20 1.20 1.20(b)
Net investment income to average daily net assets... 5.65 5.42 5.50 4.60 5.99 5.38 5.22 5.19(b)
Portfolio turnover rate............................. 69 135 162 214 150 69 135 162
Net assets, end of year ($ millions)................ 14 18 24 41 102 1 0.6 0.07
</TABLE>
- ---------------
* Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the year since
use of the undistributed income method does not correspond with results of
operations.
+ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.07, $.06, $.06, $.03 and $.01 per Class A Shares for the
five years ended September 30, 1997, respectively. The operating expense
ratios including such items would have been 1.67%, 1.61%, 1.47%, 1.18% and
1.03% for Class A Shares for the five years ended September 30, 1997,
respectively. Excludes management fees waived and expenses reimbursed by
the Manager in the amount of $.07, $.06 and $.06 per Class C Shares for the
three periods ended September 30, 1997, respectively. The operating expense
ratio including such items would have been 1.94%, 1.87% and 1.72%
(annualized) for Class C Shares for the three periods ended September 30,
1997, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 18
- --------------------------------------------------------------------------------
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 A SHARES CLASS C SHARES
------------------------------------------ ------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------ ------------------------
1997 1996 1995 1994 1993 1997 1996 1995+
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............. $10.22 $ 9.94 $ 9.65 $10.65 $10.82 $10.18 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)...................... 0.90 0.84(e) 0.72 0.69 0.81 0.85 0.79(e) 0.31
Net realized and unrealized gain (loss) on
investments................................. 0.46 0.24 0.31 (0.84) 0.07 0.46 0.24 0.28
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations.............. 1.36 1.08 1.03 (0.15) 0.88 1.31 1.03 0.59
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income.......... (0.89) (0.80) (0.74) (0.71) (0.83) (0.84) (0.76) (0.30)
Distributions from net realized gains......... -- -- -- (0.07) (0.22) -- -- --
Distribution in excess of net realized
gains....................................... -- -- -- (0.07) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........................... (0.89) (0.80) (0.74) (0.85) (1.05) (0.84) (0.76) (0.30)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR.................... $10.69 $10.22 $ 9.94 $ 9.65 $10.65 $10.65 $10.18 $ 9.91
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(D)............................. 14.00 11.44 11.23 (1.59) 8.57 13.53 10.93 6.18(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets(a)................................... 1.21 1.23 1.25 1.25 1.19 1.70 1.70 1.70(b)
Net investment income to average daily net
assets...................................... 8.76 8.41 7.35 6.76 7.57 8.26 8.39 6.67(b)
Portfolio turnover rate....................... 101 143 109 135 150 101 143 109
Net assets, end of year
($ millions)................................ 42 33 30 36 42 13 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 $.01, $.03, $.03, $.02 and $.02 per Class A Shares for the
five years ended September 30, 1997, respectively. The operating expense
ratios including such items would have been 1.30%, 1.51%, 1.51%, 1.42% and
1.43% for Class A Shares for the five years ended September 30, 1997,
respectively. Excludes management fees waived by the Manager in the amount
of $.01, $0.03 and $0.03 per Class C Shares for the three periods ended
September 30, 1997, respectively. The operating expense ratio including such
items would have been 1.79%, 1.98% and 1.96% (annualized) for Class C Shares
for the three periods ended September 30, 1997, respectively.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales load.
(e) Amounts calculated prior to reclassification of $16,079. 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.
17
<PAGE> 19
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
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 Intermediate Government Fund (formerly known as the
Limited Maturity Government Portfolio) and the High Yield Bond Fund
(formerly known as the Diversified Portfolio) (each, a "Fund" and
collectively, the "Funds"). The High Yield Bond Fund has an investment
objective of high current income. The Intermediate Government Fund has an
investment objective of high current income consistent with the
preservation of capital. The Funds currently issue 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 less than 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. The
following is a summary of significant accounting policies.
Security Valuation: Each 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: Each Fund enters into repurchase agreements whereby
a 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: Each Fund is treated as a single corporate taxpayer
as provided for in The Tax Reform Act of 1986, as amended. Each 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 each
Fund during any particular year in excess of available capital loss
carryforwards, which, if not distributed, would be taxable to each Fund,
will be distributed to shareholders in the following fiscal year. Each
Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting
purposes.
Expenses: Each 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
Trust. Expenses of each 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 charged directly 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: 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 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 except when income is not expected. All original issue
discounts are accreted for both federal income tax and financial reporting
purposes.
18
<PAGE> 20
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2:
FUND SHARES: At September 30, 1997, there was an unlimited number of
shares of beneficial interest of no par value authorized.
Transactions in Class A Shares of the Intermediate Government Fund during
the year ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
FOR THE YEARS ENDED
----------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class A Shares
---------------------------------------------------------
Shares sold.............................................. 29,039 $ 263,983 116,103 $ 1,074,406
Shares issued on reinvestment of distributions........... 86,848 790,115 107,141 986,398
Shares redeemed.......................................... (518,637) (4,719,949) (929,766) (8,580,559)
--------- ----------- --------- -----------
Net decrease............................................. (402,750) $(3,665,851) (706,522) $(6,519,755)
=========== ===========
Shares outstanding:
Beginning of year...................................... 1,930,426 2,636,948
--------- ---------
End of year............................................ 1,527,676 1,930,426
========= =========
</TABLE>
Transactions in Class C Shares of the Intermediate Government Fund during
the year ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
FOR THE YEARS ENDED
----------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class C Shares
---------------------------------------------------------
Shares sold.............................................. 45,681 $ 417,167 60,267 $ 559,648
Shares issued on reinvestment of distributions........... 4,462 40,481 2,016 18,326
Shares redeemed.......................................... (26,520) (239,825) (4,889) (44,470)
--------- ----------- --------- -----------
Net increase............................................. 23,623 $ 217,823 57,394 $ 533,504
=========== ===========
Shares outstanding:
Beginning of year...................................... 64,575 7,181
--------- ---------
End of year............................................ 88,198 64,575
========= =========
</TABLE>
Transactions in Class A Shares of the High Yield Bond Fund during the year
ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
FOR THE YEARS ENDED
----------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Class A Shares
---------------------------------------------------------
Shares sold.............................................. 1,150,318 $11,941,684 941,230 $ 9,377,232
Shares issued on reinvestment of distributions........... 217,347 2,240,553 182,955 1,816,780
Shares redeemed.......................................... (698,065) (7,227,798) (899,859) (8,961,434)
--------- ----------- --------- -----------
Net increase............................................. 669,600 $ 6,954,439 224,326 $ 2,232,578
=========== ===========
Shares outstanding:
Beginning of year...................................... 3,243,152 3,018,826
--------- ---------
End of year............................................ 3,912,752 3,243,152
========= =========
</TABLE>
19
<PAGE> 21
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HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Transactions in Class C Shares of the High Yield Bond Fund during the year
ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
FOR THE YEARS ENDED
------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Class C Shares
------------------------------------------------------------
Shares sold................................................. 947,310 $ 9,722,280 583,520 $5,800,648
Shares issued on reinvestment of distributions.............. 73,430 753,853 18,399 182,291
Shares redeemed............................................. (456,608) (4,698,707) (30,547) (303,675)
--------- ----------- ------- ----------
Net increase................................................ 564,132 $ 5,777,426 571,372 $5,679,264
=========== ==========
Shares outstanding:
Beginning of year......................................... 636,155 64,783
--------- -------
End of year............................................... 1,200,287 636,155
========= =======
</TABLE>
Note 3:
PURCHASES AND SALES OF SECURITIES. For the year ended September 30, 1997,
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> <C>
Intermediate Government Fund.............. $10,620,310 $12,086,172 $1,327,226 -- --
High Yield Bond Fund...................... -- -- $ 67,142 $55,361,707 $44,836,901
</TABLE>
Note 4:
MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT AND
TRUSTEES' FEES. Under the Fund's Investment Advisory and Administrative
Agreement with Heritage Asset Management, Inc. (the "Manager"), the
Intermediate Government Fund agrees to pay to the Manager a fee equal to
an annual rate of 0.50% of the Fund's average daily net assets, computed
daily and payable monthly. For the High Yield Bond Fund the management fee
is 0.60% on the first $100,000,000 and 0.50% of any excess over
$100,000,000 of net assets. From inception of the Funds, the Manager has
reduced its investment advisory fees and reimbursed the Funds to the
extent that total operating expenses have exceeded amounts ranging from
0.60% to 1.15% on the Intermediate Government Fund and .85% to 1.35% on
the High Yield Bond Fund of net assets. Effective March 1, 1993, the
Manager agreed to waive its fee and if necessary reimburse the Funds to
the extent that the Fund operating expenses exceed .95% for Class A Shares
of the Intermediate Government Fund (1.20% for Class C Shares effective
April 3, 1995) on an annual basis and 1.25% for Class A Shares of the High
Yield Bond Fund (1.70% for Class C Shares effective April 3, 1995). Under
this agreement, management fees of $81,847 were waived and $39,456 of
expenses were reimbursed for the Intermediate Government Fund and
management fees of $45,839 were waived in the High Yield Bond Fund for the
year ended September 30, 1997. If total Fund expenses fall below the
expense limitation agreed to by the Manager before the end of the year
ended September 30, 1999, the Funds may be required to pay the Manager a
portion or all of the waived management fees. In addition, the Funds may
be required to pay the Manager a portion or all of the management fees
waived in fiscal 1996 if total Fund expenses fall below the annual expense
limitations before the end of the year ending September 30, 1998.
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 High Yield Bond 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 High Yield Bond 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 High
Yield Bond Fund. For the year ended September 30, 1997, the Subadviser
earned $143,535 for Subadviser fees, which were paid by the Manager.
The Manager also is the Dividend Paying and Shareholder Servicing Agent
for the Intermediate Government Fund and High Yield Bond Fund. The amount
payable to the Manager for such expenses as of September 30, 1997 was
$3,000 and $4,800, respectively. In addition, the Manager performs Fund
accounting services and charged $28,200 and $32,320 during the current
period of which $6,900 and $8,100 was payable as of September 30, 1997,
respectively.
Raymond James & Associates, Inc. (the "Distributor") has advised the Trust
that it received $8,937 in front-end sales charges and $1,057 in
contingent deferred sales charges for the Intermediate Government Fund and
$216,612 in front-end sales charges
20
<PAGE> 22
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
and $4,491 in contingent deferred sales charges for the High Yield Bond
Fund for the year ended September 30, 1997. The Distributor paid sales
commissions to salespersons and from these fees, 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 Trust
is authorized to pay the Distributor a fee up to .35% of the average
daily net assets for Class A Shares. Under the Class C Distribution
Plan, the Trust may pay the Distributor a fee equal to .60% for the
Intermediate Government Fund and .80% for the High Yield Bond Fund of
the average daily net assets for Class C Shares. Such fees are accrued
daily and payable monthly. During the year ended September 30, 1997,
$51,820 and $4,586 were paid for distribution fees for Class A and Class
C Shares, respectively, for the Intermediate Government Fund and
$112,342 and $88,981 were paid for distribution fees for Class A and
Class C Shares, respectively, for the High Yield Bond Fund. 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 that also are advised by the Manager of the Trust
(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, 1997, to reflect reclassifications
arising from permanent book/tax differences primarily due to paydown
losses and market discount, respectively, the Funds made the following
adjustments:
INTERMEDIATE GOVERNMENT FUND
-----------------------------------
The Fund charged accumulated net realized loss and credited
undistributed net investment income $6,144. As of September 30,
1997, the Fund has a net tax basis capital loss carryforwards of
$7,246,344, which may be applied against any realized net taxable
gains until their expiration dates of September 30, 2001
($388,071), September 30, 2002 ($3,838,721), September 30, 2003
($2,492,779) and September 30, 2004 ($526,773). In addition, from
November 1, 1996 to September 30, 1997, the Fund incurred $129,884
of net realized capital losses which will be deferred and treated
as arising on October 1, 1997 in accordance with regulations under
the Internal Revenue Code.
HIGH YIELD BOND FUND
----------------------------
The Fund credited undistributed net investment income and charged
accumulated net realized loss $44,344. As of September 30, 1997,
the Fund had a net tax basis capital loss carryforward of
$716,301, which may be applied against any realized net taxable
gains until their expiration dates of September 30, 2003
($706,795) and September 30, 2004 ($48,256). The Fund utilized
$695,344 of net tax basis capital losses during the current year
against net realized gains from investment transactions.
21
<PAGE> 23
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage Income Trust
In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios, 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-Intermediate
Government Fund and the Heritage Income Trust-High Yield Bond Fund (constituting
the Heritage Income Trust, hereafter referred to as the "Trust") at September
30, 1997, the results of each of their operations for the year then ended, the
changes in each of their net assets and the financial highlights for each of the
two years in the period 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
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits 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 audits, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodian and brokers and the application of alternative procedures where
confirmations from brokers were not received, provide a reasonable basis for the
opinion expressed above. The financial statements of the Trust for the year
ended September 30, 1995, including the financial highlights for each of the
periods indicated, were audited by other independent accountants whose reports
dated November 27, 1995 expressed an unqualified opinion on those statements.
/s/ Price Waterhouse
Price Waterhouse LLP
Tampa, Florida
November 12, 1997
22
<PAGE> 24
HERITAGE FAMILY OF FUNDS (TM)
From Our Family to Yours: The Intelligent Creation of Wealth.
HERITAGE MONEY MARKET FUNDS
Cash Trust Money Market
Cash Trust Municipal Money Market
HERITAGE BOND FUNDS
Intermediate Government
High Yield
HERITAGE STOCK FUNDS
Income-Growth
Value Equity
Growth Equity
Capital Appreciation
Mid Cap
Small Cap
International
We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these mutual funds, please contact your
financial advisor. Please read the prospectus carefully before you invest in
any of the funds.
This report is for the information of shareholders of Heritage Income-Trust
Intermediate Government Fund and Heritage Income Trust-High Yield Bond
Fund. It may also be used as sales literature when preceded or accompanied by a
prospectus.
(C)1997 Heritage Asset Management, Inc.
5M 9/97 [RECYCLE LOGO] Printed on recycled paper
[HERITAGE LOGO] Heritage Income-Trust
P.O. Box 33022
St. Petersburg, FL 33733
- ----------------------------------------------------------------
Address Change Requested
