<PAGE> 1
May 9, 1996
Dear Fellow Shareholders:
It is my pleasure to provide you with the semiannual report for Heritage
Income Trust-High Yield Bond Fund (the "Fund") for the six month period ended
March 31, 1996. For this period the "A" shares and "C" shares of your Fund had
positive total returns of 3.85% and 3.67%, respectively.* In January of this
year, shareholders of your Fund overwhelmingly approved the hiring of Salomon
Brothers Asset Management Inc as subadviser to your Fund. Concurrent with this
change, which was effective February 1, 1996, several investment policies were
amended to allow Salomon to invest up to 100% of your Fund's portfolio in high
yield corporate bonds. Prior to February 1, your Fund was only permitted to
invest up to 50% of its assets in high yield bonds, with the remainder invested
in U.S. Government securities. While we continue to believe that allocating your
fixed income assets between high yield bonds and U.S. Government bonds can
provide attractive returns with some reduction in volatility, we recognize that
the appropriate blend for each investor is different. Under your Fund's new
policies, we can focus on providing a purer approach to investing in high yield
bonds and leave the asset allocation decisions up to you and your financial
advisors. From February 1 through March 31, the "A" and "C" shares of your Fund
had total returns of +0.93% and +0.89%, respectively.* For the same period, the
Merrill Lynch High Yield Index had a return of -0.12% and the Salomon Brothers
High Yield Market Index returned +0.12%.
We are excited about your Fund's new subadvisory relationship with Salomon
Brothers Asset Management Inc. In the letter that follows, Peter Wilby, a
managing director of Salomon and the portfolio manager for your Fund, shares his
thoughts on the high yield bond market in general and your portfolio in
particular. I hope you find his comments helpful in understanding how your
portfolio is managed.
Thank you for continuing to make Heritage Income Trust-High Yield Bond Fund
a part of your investment portfolio. We look forward to helping serve your
investment needs for years to come.
Sincerely,
/s/ Stephen G. Hill
Stephen G. Hill
President
* Calculated without the imposition of front-end or contingent deferred sales
charges.
<PAGE> 2
May 9, 1996
Dear Shareholders:
During the six month period ended March 31, 1996, the Heritage Income
Trust-High Yield Bond Fund changed its investment policies from a hybrid U.S.
Government/high yield fund into a 100% high yield bond fund with an investment
objective of high current income.
Since February 1, the Trust has had a new management, which incorporates a
style focused on maximizing high current income. Although not a stated
objective, the management style also attempts to preserve shareholder capital.
Our style involves a careful analysis of the downside risk involved with each
purchase of high yield bonds, and is heavily diversified in order to minimize
the negative impact of any single investment.
We believe that the high yield market is still relatively inefficient, and
we endeavor to find these inefficiencies. For example, we believe that the
domination in the market of very large money managers makes the
mid-capitalization portion of the market the most attractive part of the market
at this time. The middle portion is more credit intensive and less researched,
and is underinvested in by the large mutual funds who are focused on the very
large issues. You accordingly will see the bulk of our holdings in these
mid-capitalization issues.
Our investment process combines both top down and bottom up approaches. We
place strong emphasis on positioning our portfolios according to our Investment
Policy Committee's expectations of economic growth, and on which industries and
sectors will perform best under this economic scenario. However, we also include
input from our analysts on a bottom up approach, in arriving at our final
portfolio positioning.
The first quarter of 1996 was a transitional quarter for the Fund, as its
composition was reconfigured to meet new investment policies. As of March 31,
1996, the net asset value was $9.96 for the Heritage Income Trust-High Yield
Fund's Class A shares and $9.93 for the Fund's Class C shares. During the past
six months, the Fund returned 3.85% on its "A" shares, and 3.67% on its "C"
shares.
A significant portion of the Fund's trading activity in the past quarter
was involved with meeting its new investment policies. The Fund sold the bulk of
its U.S. Treasury-related securities and higher quality high yield positions and
invested primarily in the middle tier quality sector of the high yield market.
This was to take advantage of what we believed to be the relatively more
attractive single-B rated portion of the high yield market.
2
<PAGE> 3
Once we assumed responsibility for advising the Fund, the portfolio was
reconstructed with an overweighting in non-cyclical industries, as we continued
to anticipate a slowly growing economy in which cyclical industries would be
relatively less attractive. Defensive industries represented roughly 57% of the
portfolio compared with 48% for the overall high yield market. Non-cyclical
industries with overweightings included consumer products, gaming and media.
Cyclical industries that were underweighted included steels, paper products, and
housing related issues. Retail stores, although a cyclical group, was
overweighted since we felt that the group had been significantly oversold as the
result of weak 1995 operating results. The retail bonds that were included in
the portfolio were issues of companies that we felt operated in relatively
strong niches and would benefit from a return to more normal pricing for the
group. To date, this has been a successful move, as the Salomon Brothers
High-Yield Industry Sectors Report showed that retail stores were one of the two
best performing sectors in the month of March. For the month of March, its first
full month after being fully invested in high yield bonds, the Heritage Income
Trust-High Yield Bond Fund showed a modestly positive return despite negative
returns posted by both by the Salomon Brothers High Yield Index and the Lipper
High Current Yield Index, which will be used for performance comparisons. In
April, the Fund continued to clearly outperform these indexes.
Sincerely,
/s/ Peter J. Wilby
Peter J. Wilby
Managing Director
Salomon Brothers Asset Management Inc
3
<PAGE> 4
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST -- HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ ---------- -----------
<C> <S> <C> <C>
DOMESTIC CORPORATE BONDS--84.9%(A)
BROADCASTING--10.2%
$500,000 Adelphia Communications Corporation, 12.5%............................. 05/15/02 $ 511,875
750,000 American Telecasting, 0% to 6/15/99, 14.5% to maturity................. 06/15/04 555,000
500,000 Century Communications Corporation, 9.5%............................... 03/01/05 508,750
500,000 Chancellor Broadcasting Company, 9.375%................................ 10/01/04 480,000
750,000 Marcus Cable Company, 0% to 6/15/00, 14.25% to maturity................ 12/15/05 476,250
500,000 People's Choice TV Corporation, 0% to 6/1/00, 13.125% to maturity...... 06/01/04 322,500
500,000 Storer Communications, 10.0%........................................... 05/15/03 498,125
-----------
3,352,500
-----------
BUILDING--0.9%
325,000 Inter-City Products Corporation, 9.75%................................. 03/01/00 287,625
-----------
CHEMICALS--3.3%
750,000 NL Industries, Inc., 0% to 10/15/98, 13.0% to maturity................. 10/15/05 561,563
500,000 Terra Industries, Inc., 10.5%.......................................... 06/15/05 542,500
-----------
1,104,063
-----------
CONGLOMERATES/DIVERSIFIED--2.9%
500,000 Jordan Industries, Inc., 10.375%....................................... 08/01/03 466,250
500,000 Valcor, Inc., 9.625%................................................... 11/01/03 471,250
-----------
937,500
-----------
CONTAINERS--1.8%
550,000 Owens-Illinois Inc., 10.5%............................................. 06/15/02 574,750
-----------
COSMETICS/TOILETRIES--1.8%
750,000 Revlon Worldwide Corporation, Series "B", Zero Coupon Bond............. 03/15/98 585,938
-----------
FINANCE--1.5%
500,000 Airplane Pass Through Trust, Class "D", 10.875%........................ 03/15/19 513,750
-----------
FOOD--1.4%
500,000 Specialty Foods Acquisition Corporation, 10.25%........................ 08/15/01 460,000
-----------
FOOD SERVING--1.4%
500,000 Flagstar Corporation, 10.75%........................................... 09/15/01 455,000
-----------
HEALTH CARE CENTERS--3.2%
250,000 OrNda HealthCorp, 11.375%.............................................. 08/15/04 281,250
250,000 OrNda HealthCorp, 12.25%............................................... 05/15/02 271,250
500,000 Paracelsus Healthcare, Inc., 9.875%.................................... 10/15/03 497,500
-----------
1,050,000
-----------
HOTELS/MOTELS/INNS--1.5%
500,000 HMH Properties, Inc., 9.5%............................................. 05/15/05 487,500
-----------
JEWELRY, SILVERWARE, TIME PIECES, CHINA--2.1%
1,000,000 Finlay Enterprises Inc., 0% to 5/1/98, 12% to maturity................. 05/01/05 690,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST -- HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1996
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ ---------- -----------
<C> <S> <C> <C>
LEISURE/AMUSEMENT--8.2%
$500,000 Bally's Grand Inc., 10.375%............................................ 12/15/03 $ 508,750
600,000 Empress River Casino Corporation, 10.75%............................... 04/01/02 615,000
500,000 Selmer Company, Inc., 11.0%............................................ 05/15/05 517,500
500,000 Showboat Inc., 13.5%................................................... 03/15/03 510,000
500,000 Trump Taj Mahal, 11.35%,*.............................................. 11/15/99 525,000
-----------
2,676,250
-----------
MANUFACTURING/DISTRIBUTIONS--7.6%
500,000 RBX Corporation, 11.25%................................................ 10/15/05 485,000
500,000 Samsonite Corporation, 11.125%......................................... 07/15/05 495,000
500,000 Specialty Equipment Companies Inc., 11.375%............................ 12/01/03 521,250
500,000 Talley Manufacturing & Technology, Inc., 10.75%........................ 10/15/03 502,500
500,000 Terex Corporation, 13.75%.............................................. 05/15/02 495,000
-----------
2,498,750
-----------
OIL & GAS--4.6%
500,000 Forest Oil Corporation, 11.25%......................................... 09/01/03 507,500
500,000 KCS Energy, Inc., 11.0%................................................ 01/15/03 508,750
475,000 Tuboscope Vetco International Inc., 10.75%............................. 04/15/03 495,187
-----------
1,511,437
-----------
PAPER/PRODUCTS--1.4%
500,000 Repap Wisconsin, Inc., 9.875%.......................................... 05/01/06 470,000
-----------
PET AND SUPPLIES--1.6%
500,000 Doane Products Company, 10.625%........................................ 03/01/06 508,750
-----------
PLASTIC/PRODUCTS--3.2%
500,000 Berry Plastics Corporation, 12.25%..................................... 04/15/04 552,500
500,000 Plastic Specialties and Technologies, Inc., 11.25%..................... 12/01/03 482,500
-----------
1,035,000
-----------
PUBLISHING--3.0%
500,000 American Media Operation, Inc., 11.625%................................ 11/15/04 505,000
1,500,000 Hollinger, Inc., Zero Coupon Bond...................................... 10/05/13 476,250
-----------
981,250
-----------
RETAIL STORES--10.4%
750,000 Big 5 Holdings Corporation, 13.625%.................................... 09/15/02 555,000
500,000 Big V Supermarkets, Inc., 11.0%........................................ 02/15/04 445,000
500,000 Cole National Group, 11.25%............................................ 10/01/01 510,000
500,000 Hills Stores Company, 10.75%........................................... 09/30/03 500,000
500,000 Jitney Jungle Stores, 12.0%............................................ 03/01/06 497,500
500,000 Penn Traffic Company, 9.625%........................................... 04/15/05 425,000
500,000 Specialty Retail, 11.0%................................................ 08/15/03 490,000
-----------
3,422,500
-----------
SERVICES--4.5%
500,000 Alamo Rent-A-Car, 11.75%............................................... 01/31/06 502,500
500,000 Borg-Warner Security Corporation, 9.125%............................... 05/01/03 470,000
500,000 Norcal Waste Systems, Inc., 12.5%...................................... 11/15/05 517,500
-----------
1,490,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST -- HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1996
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- ------------------ ---------- -----------
<C> <S> <C> <C>
TELECOMMUNICATIONS--5.4%
$ 500,000 A+ Network, Inc., 11.875%.............................................. 11/01/05 $ 515,000
900,000 Arch Communications Group Inc., 0% to 3/15/01, 10.875% to maturity..... 03/15/08 515,250
1,000,000 Comcast Cellular Corporation, Series "A", Zero Coupon Bond............. 03/05/00 740,000
-----------
1,770,250
-----------
TRANSPORTATION--1.5%
500,000 Petro PSC Properties, L.P., 12.5%...................................... 06/01/02 480,000
-----------
UTILITIES-ELECTRIC--1.5%
500,000 El Paso Electric Company, 9.4%......................................... 05/01/11 505,000
-----------
Total corporate bonds (cost $28,080,894)
27,847,813
-----------
FOREIGN BONDS--6.8%(A)
BROADCASTING--1.8%
1,000,000 Diamond Cable Communications PLC, 0% to 12/15/00, 11.75% to maturity... 12/15/05 582,500
-----------
MANUFACTURING/DISTRIBUTIONS--1.8%
1,000,000 Semi-Tech Corporation, 0% to 8/15/00, 11.5% to maturity................ 08/15/03 600,000
-----------
STEEL/IRON--1.5%
500,000 Algoma Steel, Inc., 12.375%............................................ 07/15/05 488,750
-----------
TELECOMMUNICATIONS--1.7%
1,000,000 International CableTel, Inc., 0% to 2/01/01 11.5% to maturity.......... 02/01/06 570,000
-----------
Total foreign bonds (cost $2,321,345)........................................................ 2,241,250
-----------
U.S. GOVERNMENT AGENCIES--0.6%(A)
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.6%
191,939 REMIC, 1259J, 6.25%.................................................... 01/15/97 191,872
-----------
Total U.S. Government Securities (cost $194,498)............................................. 191,872
-----------
WARRANTS--0.1%(A)
UNITS
MEDICAL EQUIPMENT/SUPPLY--0.1%
2,059 Wright Medical Technology, Inc......................................... 33,970
-----------
Total warrants (cost $40).................................................................... 33,970
-----------
REPURCHASE AGREEMENT--4.1%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated March 29, 1996 at 5.10%
to be repurchased at $1,360,578 on April 1, 1996, collateralized by $1,370,000 U.S. Treasury
Notes, 5.625%, due June 30, 1997, (market value $1,390,120 including interest) (cost
$1,360,000)................................................................................. 1,360,000
-----------
TOTAL INVESTMENT PORTFOLIO (COST $31,956,777)(B) 96.5%(A).................................... 31,674,905
OTHER ASSETS & LIABILITIES, NET, 3.5%(A)..................................................... 1,150,829
-----------
NET ASSETS, 100%............................................................................. $32,825,734
===========
</TABLE>
- ---------------
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is the same.
Market value includes net unrealized depreciation of $281,872, which
consists of aggregate gross unrealized appreciation for all securities in
which there is an excess of market value over tax cost of $500,214 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value of $782,086.
* PIK (Payment In Kind) Bond
REMIC-Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments, at market value (identified cost $31,956,777) (Note 1)...................... $31,674,905
Cash..................................................................................... 1,383
Receivables:
Interest............................................................................... 705,992
Fund shares sold....................................................................... 569,709
Deferred state registration expenses (Note 1)............................................ 10,284
-----------
Total assets..................................................................... 32,962,273
Liabilities
Payables (Note 4):
Fund shares redeemed................................................................... $ 13,139
Accrued management fee................................................................. 28,292
Accrued distribution fee............................................................... 10,111
Other accrued expenses................................................................. 84,997
----------
Total liabilities................................................................ 136,539
-----------
Net assets, at market value.............................................................. $32,825,734
==========
Net Assets
Net assets consist of:
Paid-in capital........................................................................ $34,451,426
Undistributed net investment income (Note 1)........................................... 176,904
Accumulated net realized loss (Notes 1 and 5).......................................... (1,520,724)
Net unrealized depreciation on investments............................................. (281,872)
-----------
Net assets, at market value.............................................................. $32,825,734
==========
Class A Shares
Net asset value and redemption price per share ($29,502,955 divided by 2,962,603 shares
of beneficial interest outstanding, no par value) (Note 2)............................. $ 9.96
=====
Maximum offering price per share (100/96.25 of $9.96).................................... $10.35
=====
Class C Shares
Net asset value, offering price and redemption price per share ($3,322,779 divided by
334,676 shares of beneficial interest outstanding, no par value) (Notes 1 and 2)....... $ 9.93
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income
Interest................................................................................... $ 1,376,112
Expenses (Notes 1 and 4):
Management fee........................................................................... $ 92,646
Distribution fee (Class A Shares)........................................................ 50,003
Distribution fee (Class C Shares)........................................................ 5,502
Professional fees........................................................................ 40,062
Custodian/Fund accounting fees........................................................... 21,697
Amortization of state registration expenses.............................................. 15,139
Reports to shareholders.................................................................. 11,000
Shareholder servicing fees............................................................... 9,794
Trustees' fees and expenses.............................................................. 4,275
Insurance................................................................................ 2,676
Other.................................................................................... 6,286
--------
Total expenses before waiver........................................................... 259,080
Fees waived by Manager (Note 4)........................................................ (64,354) 194,726
-------- -----------
Net investment income...................................................................... 1,181,386
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain from investment transactions............................................. 886,490
Net decrease in unrealized appreciation of investments during the period................... (904,815)
-----------
Net loss on investments............................................................ (18,325)
-----------
Net increase in net assets resulting from operations....................................... $ 1,163,061
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTH
PERIOD ENDED FOR THE YEAR
MARCH 31, 1996 ENDED
(UNAUDITED) SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................................................. $ 1,181,386 $ 2,378,363
Net realized gain (loss) from investment transactions.................. 886,490 (1,106,214)
Net increase (decrease) in unrealized appreciation of investments
during the period.................................................... (904,815) 2,100,137
------------------ ------------------
Net increase in net assets resulting from operations................... 1,163,061 3,372,286
Distributions to shareholders from:
Net investment income, Class A Shares ($.37 and $.74 per share,
respectively)........................................................ (1,056,937) (2,484,241)
Net investment income, Class C Shares ($.35 and $.30 per share,
respectively)........................................................ (40,635) (10,482)
Increase (decrease) in net assets from Fund share transactions (Note
2)..................................................................... 2,113,578 (6,054,028)
------------------ ------------------
Increase (decrease) in net assets........................................ 2,179,067 (5,176,465)
Net assets, beginning of the period...................................... 30,646,667 35,823,132
------------------ ------------------
Net assets, end of the period (including undistributed net investment
income of $176,904 and $93,090, respectively).......................... $ 32,825,734 $ 30,646,667
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 9
- --------------------------------------------------------------------------------
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 FOR THE
SIX MONTH SIX MONTH
PERIOD PERIOD
ENDED FOR THE YEARS ENDED SEPTEMBER 30, ENDED
MARCH 31, 1996 ------------------------------------------ MARCH 31, 1996
(UNAUDITED) 1995 1994 1993 1992 1991 (UNAUDITED) 1995+
-------------- ------ ------ ------ ------ ------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD........................... $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.29 $ 9.91 $ 9.62
------ ------ ------ ------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)......... 0.40 0.72 0.69 0.81 0.83 0.87 0.38 0.31
Net realized and unrealized gain
(loss) on investments.......... (0.01) 0.31 (0.84) 0.07 0.59 1.00 (0.01) 0.28
------ ------ ------ ------ ------ ------ ------ -------
Total from Investment
Operations..................... 0.39 1.03 (0.15) 0.88 1.42 1.87 0.37 0.59
------ ------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment
income......................... (0.37) (0.74) (0.71) (0.83) (0.85) (0.87) (0.35) (0.30 )
Distributions from net realized
gains.......................... -- -- (0.07) (0.22) (0.04) -- -- --
Distribution in excess of net
realized gains................. -- -- (0.07) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ -------
Total Distributions.............. (0.37) (0.74) (0.85) (1.05) (0.89) (0.87) (0.35) (0.30 )
------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE
PERIOD........................... $ 9.96 $ 9.94 $ 9.65 $10.65 $10.82 $10.29 $ 9.93 $ 9.91
============== ====== ====== ====== ====== ====== ============== =========
TOTAL RETURN (%)(D)................ 3.85(c) 11.23 (1.59) 8.57 14.35 21.19 3.67(c) 6.18 (c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net assets(a).... 1.24(b) 1.25 1.25 1.19 0.96 1.31 1.70(b) 1.70 (b)
Net investment income to average
daily net assets............... 7.65(b) 7.35 6.76 7.57 8.11 9.10 7.59(b) 6.67 (b)
Portfolio turnover rate.......... 107(c) 109 135 150 71 119 107(c) 109
Net assets, end of the period
($ millions)................... 30 30 36 42 32 15 3 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 $.02, $.02, $.02, $.05, $.07 and $.08 per Class A Share,
respectively. The operating expense ratios including such items would be
1.66% (annualized), 1.42%, 1.43%, 1.60%, 2.17% and 3.00% (annualized) for
Class A Shares, respectively. Excludes management fees waived by the Manager
in the amount of $0.02 and $0.03 per Class C Share. The operating expense
ratio including such items would be 2.12% (annualized) and 1.96%
(annualized) for Class C Shares.
(b) Annualized.
(c) Not annualized.
(d) Does not reflect the imposition of a sales charge.
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
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 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. The following is a summary of significant account
policies. Financial statements for the Intermediate Government Fund are
presented separately.
Security Valuation: The Fund values investment securities at market
value based on the last sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, market value is based on the most recent quoted bid price and
in the absence of a market quote, securities are valued using such
methods as the Board of Trustees believes would reflect fair market
value. Investments in certain debt instruments not traded in an
organized market, are valued on the basis of valuations furnished by
independent pricing services or broker/dealers that utilize information
with respect to market transactions in such securities or comparable
securities, quotations from dealers, yields, maturities, ratings and
various relationships between securities. Short term investments having
a maturity of 60 days or less are valued at cost, which when combined
with accrued interest included in the interest receivable or discount
earned, approximates market.
Repurchase Agreements: The Fund enters into repurchase agreements
whereby the Fund, through its custodian, receives delivery of the
underlying securities, the market value of which at the time of purchase
is required to be in an amount equal to at least 100% of the resale
price.
Federal Income Taxes: The Fund is treated as a single corporate
taxpayer as provided for in The Tax Reform Act of 1986, as amended. The
Fund's policy is to comply with the requirements of the Internal Revenue
Code of 1986, as amended which are applicable to regulated investment
companies and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no provision has been made for federal
income and excise taxes.
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: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of Class A or Class C Shares of the Fund.
Other: Investment security transactions are accounted for on a trade
date plus one basis. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis except when income is not expected. All original issue
discounts are accreted for both federal income tax and financial
reporting purposes.
10
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At March 31, 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 six month period ended
March 31, 1996 and fiscal year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTH
PERIOD ENDED MARCH 31, FOR THE YEAR ENDED
1996 (UNAUDITED) SEPTEMBER 30, 1995
----------------------- -------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Shares sold................................................ 403,465 $ 4,012,543 189,017 $ 1,831,973
Shares issued on reinvestment of distributions............. 79,096 785,263 194,940 1,881,075
Shares redeemed............................................ (538,784) (5,361,161) (1,079,005) (10,410,508)
--------- ----------- ---------- ------------
Net decrease............................................... (56,223) $ (563,355) (695,048) $ (6,697,460)
========== ===========
Shares outstanding:
Beginning of the period.................................. 3,018,826 3,713,874
--------- ----------
End of the period........................................ 2,962,603 3,018,826
======== =========
</TABLE>
Transactions in Class C Shares of the Fund during the six month period ended
March 31, 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
FOR THE SIX MONTH (COMMENCEMENT OF
PERIOD ENDED MARCH CLASS C SHARES) TO
31, 1996 (UNAUDITED) SEPTEMBER 30, 1995
--------------------- -------------------------
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------- ------- ----------- ------ ------------
<S> <C> <C> <C> <C>
Shares sold............................................... 274,863 $ 2,726,488 64,725 $ 642,880
Shares issued on reinvestment of distributions............ 2,940 29,137 582 5,752
Shares redeemed........................................... (7,910) (78,692) (524) (5,200)
------ ---------- ----- -----------
Net increase.............................................. 269,893 $ 2,676,933 64,783 $ 643,432
========== ===========
Shares outstanding:
Beginning of period..................................... 64,783 --
------ -----
End of period........................................... 334,676 64,783
====== =====
</TABLE>
Note 3: PURCHASES AND SALES OF SECURITIES. For the six months ended March 31,
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 $21,925,184 $ 359,848 $26,248,159 $ 9,094,890
</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
11
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
this agreement, management fees of $64,354 were waived for the period
ended March 31, 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 Manager a portion or all of the management fees
waived of $66,556 and $83,663 for the years ended September 30, 1994 and
September 30, 1995, respectively, if total Fund expenses fall below the
annual expense limitations before the end of the years ending September
30, 1996 and September 30, 1997, respectively.
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
March 31, 1996 was $5,400. In addition, the Manager performs Fund
accounting services and charged $16,145 during the current period of
which $7,200 was payable as of March 31, 1996.
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 period $50,003 and $5,502 were paid for distribution fees for
Class A Shares and Class C Shares, respectively. The Manager,
Distributor, Fund Accountant and Shareholder Servicing Agent are all
wholly-owned subsidiaries of Raymond James Financial, Inc.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Income-Growth Trust, Heritage Capital Appreciation Trust,
Heritage Series Trust and Heritage U.S. Government Income Fund, mutual
funds which are also advised by the Manager (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. As of September 30, 1995, the Fund had a net tax
basis capital loss carryforward of $1,402,142, which may be applied
against any realized net taxable gains until its expiration date of
September 30, 2003. From November 1, 1994 to September 30, 1995, the
Fund incurred $1,002,808 of net realized capital losses, which will be
deferred and treated as arising on October 1, 1995, in accordance with
regulations under the Internal Revenue Code.
Note 6: SHAREHOLDERS MEETING. On January 26, 1996, a Special Meeting of
Shareholders was held for the following purposes:
(1) To approve a modified investment objective of high current income
for the Fund;
(2) To approve an Investment Subadvisory Agreement between Heritage
Asset Management, Inc. and Salomon Brothers Asset Management Inc; and
(3) To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
The Proxy Voting results were as follows:
<TABLE>
<CAPTION>
SHARES
----------------------------------------
FOR AGAINST ABSTAINING
------------- ----------- ----------
<S> <C> <C> <C>
To approve a modified investment objective of high current income for
the Fund............................................................. 1,505,288.656 155,119.345 61,374.963
To approve the Investment Subadvisory Agreement between Heritage Asset
Management, Inc. and Salomon Brothers Asset Management Inc .......... 1,532,052.681 103,511.454 86,218.829
</TABLE>
12
<PAGE> 13
HERITAGE INCOME TRUST-HIGH YIELD BOND FUND is a member of the Heritage family of
mutual funds. Other investment alternatives available from Heritage include:
- HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
- HERITAGE CAPITAL APPRECIATION TRUST
- HERITAGE INCOME-GROWTH TRUST
- HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
- HERITAGE SERIES TRUST
EAGLE INTERNATIONAL EQUITY PORTFOLIO
GROWTH EQUITY FUND
SMALL CAP STOCK FUND
VALUE EQUITY FUND
- HERITAGE U.S. GOVERNMENT INCOME FUND
(A CLOSED-END FUND THAT TRADES ON THE
NEW YORK STOCK EXCHANGE)
We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these mutual funds, please contact your
account executive. Read the prospectus carefully before you invest in any of the
funds.
<PAGE> 14
[HERITAGE LOGO]
HIGH YIELD
BOND FUND
A mutual fund seeking
high current income
SEMIANNUAL REPORT
(Unaudited) and Investment
Performance Review for the
Six Month Period Ended
MARCH 31, 1996
A member of the
Heritage Family of Mutual Funds(TM)
Heritage Income Trust
High Yield Bond Fund
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------------------
Address Change Requested
Semiannual Report
INVESTMENT ADVISOR/
SHAREHOLDER SERVICING AGENT/
FUND ACCOUNTANT
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
(800) 421-4184
DISTRIBUTOR
Raymond James & Associates, Inc.
P.O. Box 12749
St. Petersburg, FL 33733
(813) 573-3800
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
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.
