<PAGE> 1
(HERITAGE
INCOME
TRUST
LOGO)
[pictures of people working and playing]
From Our Family to Yours: The Intelligent Creation of Wealth.
Intermediate Government Fund
High Yield Bond Fund
Semiannual Report
(Unaudited) and Investment Performance
Review for the Six Month Period Ended
March 31, 1999
(HERITAGE LOGO)
-----------------
INCOME TRUST(TM)
-----------------
<PAGE> 2
May 18, 1999
Dear Fellow Shareholders:
I am pleased to provide you with the semiannual report for the Intermediate
Government Fund and the High Yield Bond Fund (the "Funds"), each a portfolio of
Heritage Income Trust for the six month period ended March 31, 1999. For this
period, the Intermediate Government Fund's performance was -1.32%, -1.57% and
- -1.46% for Class A, B and C shares, respectively.* The High Yield Bond Fund's
performance was +4.27%, +4.02%, and +4.02% for Class A, B and C shares,
respectively.*
Over the long-term, investors have been relatively well-rewarded for taking
the credit risk that is inherent in investing in high yield corporate bond
funds. However, over shorter periods such as during calendar 1998, returns have
shown significant volatility. Government bond fund investors also have earned
reasonably attractive real returns (gross returns less inflation) over the past
several years. The table below presents average annualized returns for your
Funds net of operating expenses and maximum front-end or contingent deferred
sales charges.
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND
- ----------------------------
ONE YEAR THREE YEARS FIVE YEARS LIFE OF CLASS
-------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Class A........................................ +1.99% +4.76% +4.86% +5.19%(1)
Class B........................................ +1.50 -- -- +1.30(2)
Class C........................................ +5.72 +5.85 -- +6.03(3)
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
- --------------------
ONE YEAR THREE YEARS FIVE YEARS LIFE OF CLASS
-------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Class A........................................ -4.25% +6.89% +6.74% +8.55%(1)
Class B........................................ -4.95 -- -- -3.19(2)
Class C........................................ -1.03 +7.73 -- +8.33(3)
</TABLE>
(1) Inception Date March 1, 1990
(2) Inception Date February 2, 1998
(3) Inception Date April 3, 1995
In the letters that follow, Peter Wallace and Peter Wilby, the portfolio
managers for the Intermediate Government and High Yield Bond Funds,
respectively, provide investment commentaries for their portfolios. I hope you
find their comments helpful in better understanding how your portfolios have
performed over the recent reporting period.
On behalf of all of us at Heritage, thank you for your continuing
investments in the portfolios of Heritage Income Trust. If there are ever any
ideas you would like to share with us about how we could better serve you,
please let us know by calling (800) 709-3863.
Sincerely,
/s/ STEPHEN G. HILL
Stephen G. Hill
President
* These returns are calculated without the imposition of either front-end or
contingent deferred sales charges.
<PAGE> 3
April 31, 1999
Dear Fellow Shareholders:
The six month period ended March 31, 1999 was a difficult period for the
U.S. Bond markets. The Heritage Income Trust-Intermediate Government Fund Class
A Shares produced a return of -1.32%*, compared to the Lehman Brothers
Intermediate Government/Corporate Index return of +0.11%. The Fund performed
slightly better than the -1.70% that would have been generated by an investment
in the generic five year Treasury bond.
Over the last twelve months, the Fund's Class A Shares produced a total
return of 5.97%** compared to the Lehman Brothers Intermediate
Government/Corporate Index return of 6.57%. Among its peer group the Fund ranked
29 of 128 Intermediate U.S. Government Income Funds measured by Lipper and
exceeded the objective average return of 5.44%.**
Over the last six months, yields on fixed income securities generally moved
sharply higher as fears of global recession and financial disruptions waned.
This is quite surprising since during this period the Federal Reserve eased
monetary policy by fifty basis points by twice lowering the Federal Funds Rate
and Discount Rate (three times if we count the twenty-five basis point reduction
of Fed Fund's on September 29, 1998).
In fact, many of the factors responsible for driving yields sharply lower
during the third quarter of 1998 were completely reversed during the period. The
global financial crisis appeared to ease as central banks injected liquidity to
calm distressed markets. A financial debacle was avoided as the Federal Reserve
engineered a rescue of a failing hedge fund, Long Term Capital Management, by
the funds creditors.
The Fed added significant liquidity to the financial system to offset
emerging market problems, and the International Monetary Fund was successful at
stemming defaults and near defaults from several developing nations. These
factors, coupled with a strengthening economy and surging stock markets, quickly
restored investor confidence in corporate and international bond markets and the
"flight to quality" of mid-summer was reversed. Investors sold high quality
Treasury and Agency bonds to once again invest in riskier types of securities.
This, along with fears of renewed inflation and a much stronger domestic economy
(fourth quarter 1998 GDP was +6.0%) all added to move interest rates sharply
higher.
The following Table shows the changes in Treasury yields over the last six
months and the returns that were generated by each maturity segment.
US TREASURY YIELDS AND RETURNS
<TABLE>
<CAPTION>
9/30/98 3/31/99 CHANGE RETURNS
------- ------- ------ -------
<S> <C> <C> <C> <C>
3 month................................................. 4.36% 4.47% 0.11% 2.25%
6 month................................................. 4.47 4.52 0.06 2.28
1 year.................................................. 4.39 4.71 0.31 2.00
5 year.................................................. 4.22 5.10 0.88 -1.70
10 year................................................. 4.41 5.23 0.82 -4.09
30 year................................................. 4.97 5.62 0.66 -8.33
</TABLE>
Source: Bloomberg; Lehman Bros.
Fearing a resumption of widening yield spreads on non-Treasury investments,
the Fund maintained a high exposure to Treasury securities and a very light
exposure to mortgage securities. This strategy, which had benefited the Fund in
the prior period, penalized relative performance in the current period as yield
spreads continued to narrow.
We feel the bond market still offers excellent relative value as yields have
moved sharply higher without a comparable rise in inflation. This increases the
"real yield", nominal yield less inflation, to better than its long term
average.
In the near term, we believe the bond market will continue to exhibit high
levels of volatility until we see some signs of a softening economy.
Strategically we plan to remain at or slightly below market sensitivity until we
see some evidence of a slowing in economic activity.
Thanks for your continued confidence in the Intermediate Government Fund.
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 either front-end or
contingent deferred sales charges.
**Lipper Analytical Services, Inc. performance rankings for the Heritage Income
Trust Intermediate Government Fund Class A Shares were 29 out of 128
Intermediate U.S. Government Funds, for the one year period ended March 31,
1999. The performance numbers used for the Fund did not take into account any
front- or back-end sales charges. See the previous letter by Steven G. Hill
for a full statement of returns since inception. Past performance is no
guarantee of future results.
2
<PAGE> 4
May 3, 1999
Dear Shareholders:
During the six months ended March 31, 1999, the Heritage Income
Trust -- High Yield Bond Fund Class A, B and C shares rose 4.27%, 4.02%, and
4.02%, respectively.* This compares with the Salomon Smith Barney High Yield
Market Index, which rose 5.05%, and the Lipper High Current Yield Category,
which increased 5.74%, for the same period.
The U.S. high yield market has rebounded strongly from the global credit
crunch experienced last fall, which was brought on by fundamental problems in
Japan, Russia and Southeast Asia. This recovery began with the Federal Reserve
Board's surprise easing of the Funds Rate in mid-October and has continued as
strong U.S. economic growth continues. Except for a brief contraction in
February following Brazil's currency devaluation, the market has consistently
moved higher. This positive momentum has been fueled by a number of fundamental
and technical factors including:
1. A strong US economy;
2. Rumored and announced acquisitions;
3. Equity indices reaching historic highs;
4. Demand for high yield paper from both retail and institutional
investors;
5. A lighter-than-anticipated new issue calendar;
6. A rebound in energy prices; and,
7. More stability in global markets.
According to the Salomon Smith Barney High Yield Market Index, the average
market yield at March 31, 1999 was 10.28%, unchanged from year-end and down from
10.67% at September 30, 1998. The yield premium over Treasuries finished the
period at 5.11%, narrowing from 5.66% at year-end and 6.30% at September 30,
1998.
Both demand for and new supply of high yield products have picked up since
last fall given the market's stabilization and the return of investor appetite
for yield. However, new issue supply has been less than anticipated and investor
demand has been disciplined, with weaker deals being canceled. These trends have
been healthy for the market.
The worst performing industry by far during the six month period was
Healthcare, due to difficulties transitioning to the newly imposed PPS Medicare
reimbursement system. In addition, despite stellar performance during March on
news that OPEC had reached an agreement to cut oil supply, the Energy sector
landed as one of the worst performers on a quarterly basis. Textile/Apparel and
Transportation also under performed with cheaper imports hurting the former and
over capacity hurting the latter.
The Fund trailed the Index during the period. This was partially due to
underweightings in Telecommunications and Paper Products and an overweighting in
Transportation. In addition, several individual holdings in Energy, Healthcare,
and Electronics have dragged down the Fund's performance. The Fund did benefit
from its over-weighting in Broadcasting, Leisure/Amusement and Retail.
During the last six months, the Fund's industry allocations remained
relatively unchanged. The most substantial modifications were to decrease
weightings in Oil and Gas and Telecommunications. Oil and Gas was decreased by
selling bonds of the higher risk exploration & production and services
companies, as depressed oil and gas prices started to have an impact on the
liquidity of more levered companies.
In addition, Telecommunications was reduced as we believe the risks of these
new technologies and build outs exceed the potential fixed-income returns. In
contrast, exposure in the Broadcasting, Leisure/Amusement, and Consumer Products
sectors was increased during the period due to our attraction to stability in
earnings.
Our outlook for the high yield market remains positive given current
valuations. Our focus is to maintain a core portfolio of better quality, more
liquid credits while taking advantage of opportunities in selected companies
where fundamentals are solid but technicals have created compelling risk/return
situations.
Best regards,
/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 either front-end or
contingent deferred sales charges.
3
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
INTERMEDIATE GOVERNMENT FUND
INVESTMENT PORTFOLIO
MARCH 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- ---------- -----------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--93.5%(A)
- ---------------------------------------------------------------------------------
U.S. TREASURIES--80.3%(A)
$2,300,000 U.S. Treasury Notes, 4.5%................................... 09/30/00 $ 2,282,750
1,000,000 U.S. Treasury Notes, 6.25%.................................. 01/31/02 1,029,063
1,000,000 U.S. Treasury Notes, 5.875%................................. 09/30/02 1,022,188
1,000,000 U.S. Treasury Notes, 5.75%.................................. 11/30/02 1,018,438
1,000,000 U.S. Treasury Notes, 5.5%................................... 02/28/03 1,010,313
2,300,000 U.S. Treasury Notes, 5.25%.................................. 08/15/03 2,305,032
2,300,000 U.S. Treasury Notes, 4.75%.................................. 02/15/04 2,264,783
1,000,000 U.S. Treasury Notes, 5.625%................................. 05/15/08 1,018,125
-----------
Total U.S. Treasuries (cost $12,053,734).................... 11,950,692
-----------
U.S. GOVERNMENT AGENCIES--13.2%(A)
- ---------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--13.2%
987,771 Pool #481349, 30 year Pass-Through, 6.5%.................... 01/01/29 983,371
988,355 Pool #459881, 30 year Pass-Through, 6.5%.................... 01/01/29 983,952
-----------
Total U.S. Government Agencies (cost $1,961,838)............ 1,967,323
-----------
Total U.S. Government and Agency Securities (cost
$14,035,572)................................................ 13,918,015
-----------
REPURCHASE AGREEMENT--3.6%(A)
- ---------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company, dated March 31,
1999 @ 4.78% to be repurchased at $533,071 on April 1, 1999, collateralized by
$490,000 United States Treasury Bonds, 6.5% due November 15, 2026, (market value
$543,539 including interest) (cost $533,000)..................................... 533,000
-----------
TOTAL INVESTMENT PORTFOLIO (cost $14,568,572)(b), 97.1%(a)....................... 14,451,015
OTHER ASSETS AND LIABILITIES, net, 2.9%(a)....................................... 431,920
-----------
NET ASSETS, 100.0%............................................................... $14,882,935
===========
</TABLE>
- ---------------
(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized depreciation of
$117,557, which consists of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$89,815 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $207,372.
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
DOMESTIC CORPORATE BONDS -- 88.4%(A)
------------------------------------------
AEROSPACE -- 0.8%
------------------------------------------
$500,000 Stellex Industries, Inc.,
9.5%, 11/01/07............... $ 450,000
-----------
AUTO PARTS/EQUIPMENT -- 2.3%
------------------------------------------
500,000 American Axle & Manufacturing
Holdings, Inc., 9.75%,
03/01/09..................... 511,250
250,000 Hayes Lemmerz International,
Inc., 8.25%, 12/15/08........ 250,000
500,000 JH Heafner Company, 10.0%,
05/15/08..................... 511,250
-----------
1,272,500
-----------
AUTO RENTAL/SERVICE -- 0.9%
------------------------------------------
500,000 Apcoa Inc., 9.25%,
03/15/08..................... 470,000
-----------
BEVERAGES -- 1.4%
------------------------------------------
250,000 Delta Beverage Group, Inc.,
9.75%, 12/15/03.............. 260,000
500,000 Stroh Brewery Company, 11.1%,
07/01/06..................... 500,000
-----------
760,000
-----------
BROADCASTING -- 10.8%
------------------------------------------
250,000 Adelphia Communications
Corporation, 10.5%,
07/15/04..................... 277,500
250,000 Adelphia Communications
Corporation, 9.875%,
03/01/07..................... 272,500
500,000 Chancellor Media Corporation,
9.375%, 10/01/04............. 521,250
1,000,000 Charter Communications
Holdings, LLC, 0% to
04/01/04, 9.92% to
maturity(b), 04/01/11........ 645,000
500,000 CSC Holdings Inc., 10.5%,
05/15/16..................... 595,000
500,000 Falcon Holdings Group, L.P.,
8.375%, 04/15/10............. 502,500
500,000 Granite Broadcasting, 8.875%,
05/15/08..................... 500,000
500,000 Jacor Communications, Inc.,
9.75%, 12/15/06.............. 550,000
500,000 LIN Television Corporation,
8.375%, 03/01/08............. 499,375
500,000 Mediacom LLC Capital, 8.5%,
04/15/08..................... 508,750
329,000 SFX Broadcasting, Inc.,
10.75%, 05/15/06............. 363,545
1,100,000 United International
Holdings, 0% to 02/15/03,
10.75% to maturity(b),
02/15/08..................... 746,625
-----------
5,982,045
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
BUILDING -- 0.9%
------------------------------------------
500,000 Panolam Industries
International, 11.5%,
02/15/09..................... 512,500
-----------
CHEMICALS -- 1.8%
------------------------------------------
500,000 Equistar Chemicals, L.P.,
8.75%, 02/15/09.............. 508,934
500,000 Philipp Brothers Chemicals,
9.875%, 06/01/08............. 490,000
-----------
998,934
-----------
CONGLOMERATES/DIVERSIFIED -- 1.1%
------------------------------------------
1,000,000 Jordan Industries, 0% to
04/01/02, 11.75% to
maturity(b), 04/01/09........ 610,000
-----------
CONTAINERS -- 1.9%
------------------------------------------
500,000 Plastic Containers, Inc.,
10.0%, 12/15/06.............. 530,000
250,000 Radnor Holdings, Inc., 10.0%,
12/01/03..................... 261,250
250,000 Radnor Holdings, Inc., Series
"B", 10.0%, 12/01/03......... 261,250
-----------
1,052,500
-----------
COSMETICS/TOILETRIES -- 2.1%
------------------------------------------
350,000 French Fragrances, Inc.,
10.375%, 05/15/07............ 353,500
500,000 Jafra Cosmetics
International, Inc., 11.75%,
05/01/08..................... 446,250
600,000 Revlon Worldwide Corporation,
Zero Coupon Bond, 03/15/01... 360,000
-----------
1,159,750
-----------
ELECTRONICS/ELECTRIC -- 2.8%
------------------------------------------
500,000 Amphenol Corporation, 9.875%,
05/15/07..................... 520,000
500,000 Axiohm Transaction Solutions,
Inc., 9.75%, 10/01/07........ 453,750
250,000 DecisionOne Corporation,
9.75%, 08/01/07.............. 17,500
500,000 DecisionOne Holdings
Corporation, 0% to 8/1/02,
11.5% to maturity(b),
08/01/08..................... 15,000
500,000 L-3 Communications
Corporation, 10.375%,
05/01/07..................... 550,000
-----------
1,556,250
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
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HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1999
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
FINANCE--3.5%
-------------------------------------------------------
$500,000 Airplane Pass Through Trust,
Class "D", 10.875%,
03/15/19..................... $ 497,695
250,000 ContiFinancial Corporation,
7.50%, 03/15/02.............. 192,500
250,000 ContiFinancial Corporation,
8.125%, 04/01/08............. 181,250
125,000 ContiFinancial Corporation,
8.375%, 08/15/03............. 96,250
500,000 DVI, Inc., 9.875%,
02/01/04..................... 486,250
500,000 Morgan Stanley Aircraft
Finance, 8.7%, 03/15/23...... 451,335
-----------
1,905,280
-----------
FOOD--4.9%
------------------------------------------
250,000 B&G Foods, Inc., 9.625%,
08/01/07..................... 242,500
500,000 Carr-Gottstein Foods Company,
12.0%, 11/15/05.............. 575,625
500,000 CFP Holdings, Inc., 11.625%,
01/15/04..................... 417,500
500,000 Imperial Holly Corporation,
9.75%, 12/15/07.............. 503,750
700,000 Nebco Evans Holding
Corporation, 0% to 07/15/02,
12.375% to maturity(b),
07/15/07..................... 245,000
250,000 Purina Mills, Inc., 9.0%,
03/15/10..................... 203,750
500,000 SC International Services,
Inc., 9.25%, 09/01/07........ 540,000
-----------
2,728,125
-----------
GRAPHIC ARTS--0.9%
-------------------------------------------------------
250,000 Mail-Well Corporation, 8.75%,
12/15/08..................... 256,250
250,000 World Color Press, Inc.,
8.375%, 11/15/08............. 256,250
-----------
512,500
-----------
HEALTH CARE CENTERS--0.5%
-------------------------------------------------------
400,000 Graham-Field Health Products,
Inc., 9.75%, 08/15/07........ 228,000
375,000 Vencor, Inc., 9.875%,
05/01/05..................... 60,000
-----------
288,000
-----------
HOTELS/MOTELS/INNS--1.8%
-------------------------------------------------------
500,000 HMH Properties, Inc., Series
"B", 7.875%, 08/01/08........ 481,250
500,000 Prime Hospitality
Corporation, 9.75%,
04/01/07..................... 515,000
-----------
996,250
-----------
HOUSEHOLD PRODUCTS--1.9%
-------------------------------------------------------
500,000 Ekco Group, Inc., 9.25%,
04/01/06..................... 511,250
500,000 Shop Vac Corporation,
10.625%, 09/01/03............ 542,500
-----------
1,053,750
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
JEWELRY/SILVERWARE/TIME PIECES/CHINA--0.8%
-------------------------------------------------------
500,000 Finlay Enterprises, Inc.,
9.0%, 05/01/08............... 470,000
-----------
LEISURE/AMUSEMENT--3.7%
------------------------------------------
500,000 Empress Entertainment,
8.125%, 07/01/06............. 497,500
500,000 Hollywood Park Inc., 9.25%,
02/15/07..................... 513,750
500,000 Park Place Entertainment
Corporation, 7.875%,
12/15/05..................... 490,000
500,000 Waterford Gaming, LLC, 9.5%,
03/15/10..................... 511,875
-----------
2,013,125
-----------
MANUFACTURING/DISTRIBUTIONS--9.2%
------------------------------------------
350,000 Alvey Systems, Inc., 11.375%,
01/31/03..................... 353,500
500,000 Breed Technologies Inc.,
9.25%, 04/15/08.............. 215,000
500,000 Foamex, L.P., 9.875%,
06/15/07..................... 475,000
500,000 Furon Company, 8.125%,
03/01/08..................... 490,000
250,000 Hexcel Corporation, 9.75%,
01/15/09..................... 252,813
500,000 High Voltage Engineering
Group, 10.5%, 08/15/04....... 468,375
325,000 Hines Horticulture, Inc.,
11.75%, 10/15/05............. 351,000
500,000 Indesco International, Inc.,
9.75%, 04/15/08.............. 422,500
500,000 International Knife & Saw,
11.375%, 11/15/06............ 506,250
500,000 Polymer Group, Inc., 9.0%,
07/01/07..................... 506,250
500,000 Simmons Company 10.25%,
03/15/09..................... 517,500
500,000 True Temper Sports Inc.,
10.875%, 12/01/08............ 462,500
-----------
5,020,688
-----------
MEDICAL EQUIPMENT/SUPPLY--4.4%
------------------------------------------
500,000 Fresenius Medical Care, 9.0%
12/01/06..................... 515,000
350,000 Kinetic Concepts, Inc,
Series "B", 9.625%,
11/01/07..................... 337,750
500,000 Maxxim Medical, Inc., 10.5%,
08/01/06..................... 532,500
500,000 Packard Bioscience Company,
9.375%, 03/01/07............. 483,750
500,000 Prime Medical Services, Inc.,
8.75%, 04/01/08.............. 487,500
-----------
2,356,500
-----------
METAL--1.9%
------------------------------------------
500,000 Neenah Corporation, Series
"D", 11.125%, 05/01/07....... 526,250
500,000 Renco Metals Inc., 11.5%,
07/01/03..................... 520,000
-----------
1,046,250
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1999
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
MINING/DIVERSIFIED--0.9%
------------------------------------------
$500,000 P&L Coal Holdings
Corporation, 8.875%,
05/15/08..................... $ 521,875
-----------
OIL & GAS--2.1%
------------------------------------------
500,000 Benton Oil & Gas Company,
11.625%, 05/01/03............ 330,000
500,000 Clark R&M, Inc., 8.875%,
11/15/07..................... 420,000
250,000 Costilla Energy, Inc.,
10.25%, 10/01/06............. 171,250
500,000 Dailey International, Inc.,
9.5%, 02/15/08............... 160,000
375,000 Transamerican Energy
Corporation, 0% to 06/15/99,
13.0% to maturity(b),
06/15/02..................... 78,750
-----------
1,160,000
-----------
PLASTIC/PRODUCTS--1.0%
------------------------------------------
500,000 Berry Plastics Corporation,
12.25%, 04/15/04............. 527,500
-----------
POLLUTION CONTROL--2.4%
------------------------------------------
500,000 Allied Waste North America,
Inc., 7.875%, 01/01/09....... 489,375
375,000 Envirosource, Inc., 9.75%,
06/15/03..................... 300,000
500,000 Safety Kleen Services, 9.25%,
06/01/08..................... 522,500
-----------
1,311,875
-----------
PUBLISHING--3.8%
------------------------------------------
500,000 Advanstar Communications,
9.25%, 05/01/08.............. 517,500
500,000 American Media Operation,
Inc., 11.625%, 11/15/04...... 540,000
500,000 Big Flower Press Holdings,
Inc., 8.875%, 07/01/07....... 507,500
500,000 Hollinger International
Publishing, 9.25%,
03/15/07..................... 522,500
-----------
2,087,500
-----------
REAL ESTATE/LAND DEVELOPMENT--0.9%
------------------------------------------
500,000 Forest City Enterprises,
Inc., 8.5%, 03/15/08......... 502,500
-----------
RETAIL STORES--4.2%
------------------------------------------
500,000 Cole National Group, 9.875%,
12/31/06..................... 517,500
500,000 Jitney Jungle Stores, 12.0%,
03/01/06..................... 555,000
500,000 Leslie's Poolmart, 10.375%,
07/15/04..................... 521,250
500,000 Musicland Group, 9.0%,
06/15/03..................... 505,000
250,000 Pueblo Xtra International,
9.5%, 08/01/03............... 241,875
-----------
2,340,625
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
SERVICES--5.9%
------------------------------------------
500,000 Comforce Operating, Inc.,
12.0%, 12/01/07.............. 492,500
250,000 Federal Data Corporation,
10.125%, 08/01/05............ 245,312
250,000 Iron Mountain, Inc., 10.125%,
10/01/06..................... 268,750
500,000 Kindercare Learning Centers,
Inc., 9.5%, 02/15/04......... 502,500
500,000 Loomis Fargo & Company,
10.0%, 01/15/04.............. 495,000
250,000 Pierce Leahy Corporation,
11.125%, 07/15/09............ 278,125
500,000 Protection One Alarm
Monitoring, Inc., 8.125%,
07/15/09..................... 510,000
500,000 Sitel Corporation, 9.25%,
03/15/06..................... 475,000
-----------
3,267,187
-----------
TELECOMMUNICATIONS--4.7%
------------------------------------------
500,000 Facilicom International,
10.5%, 01/15/08.............. 395,000
250,000 GST Telecommunications, 0% to
10/31/02, 10.5% to
maturity(b) 05/01/08......... 131,250
250,000 Intermedia Communications,
Inc., 8.6%, 06/01/08......... 250,000
1,000,000 International CableTel, Inc.,
0% to 02/01/01, 11.5% to
maturity(b), 02/01/06,....... 870,000
500,000 Jordan Telecom Products, 0%
to 08/01/00, 11.75% to
maturity(b) 08/01/07......... 407,500
750,000 Nextel Communications, Inc.,
0% to 10/31/02, 9.75% to
maturity(b), 10/31/07........ 525,000
-----------
2,578,750
-----------
TOBACCO--0.9%
------------------------------------------
500,000 North Atlantic Trading
Company, 11.0%, 06/15/04..... 502,500
-----------
TRANSPORTATION--1.3%
------------------------------------------
375,000 Coach USA Inc., Series "B",
9.375%, 07/01/07............. 391,875
500,000 Holt Group, 9.75%,
01/15/06..................... 340,625
-----------
732,500
-----------
Total Domestic Corporate Bonds (cost
$51,985,703)............................ 48,747,759
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INVESTMENT PORTFOLIO
MARCH 31, 1999
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ------
<C> <S> <C>
FOREIGN CORPORATE BONDS -- 6.4%(A)(C)
-------------------------------------------------------
BROADCASTING -- 1.3%
------------------------------------------
$250,000 Diamond Cable Communications,
PLC, 0% to 12/15/00, 11.75%
to maturity(b), 12/15/05..... $ 220,938
500,000 Rogers Communications, Inc.,
8.875%, 07/15/07............. 521,250
-----------
742,188
-----------
HOTELS/MOTELS/INNS -- 0.9%
------------------------------------------
500,000 Sun International Hotels,
Ltd., 8.625%, 12/15/07....... 512,500
-----------
MANUFACTURING DISTRIBUTIONS -- 0.9%
------------------------------------------
500,000 International Utility
Structures, Inc., 10.75%,
02/01/08..................... 509,375
-----------
MINING/DIVERSIFIED -- 0.8%
------------------------------------------
500,000 Murrin Murrin Holdings
Property, 9.375%, 08/31/07... 455,000
-----------
PAPER/PRODUCTS -- 0.8%
------------------------------------------
500,000 Miller Western Forest,
9.875%, 05/15/08............. 445,000
-----------
SHIPPING/SHIPBUILDING -- 0.6%
------------------------------------------
500,000 Enterprises Shipholding,
8.875%, 05/01/08............. 320,000
-----------
TELECOMMUNICATIONS -- 0.6%
------------------------------------------
350,000 Telewest Communications PLC,
0% to 10/01/00, 11.0% to
maturity(b) 10/01/07......... 308,000
-----------
TRANSPORTATION -- 0.5%
------------------------------------------
250,000 Stena Line AB, 10.5%,
12/15/05 250,000
-----------
Total Foreign Corporate Bonds
(cost $3,817,693)....................... 3,542,063
-----------
52,289,822
Total investment portfolio excluding
repurchase agreement (cost
$55,803,396)(d), 94.8%(a)...............
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
------
<C> <S> <C>
REPURCHASE AGREEMENT -- 3.1%(A)
-------------------------------------------------------
Repurchase Agreement with State Street
Bank and Trust Company, dated March 31,
1999 @ 4.78% to be repurchased at
$1,702,226 on April 1, 1999,
collateralized by $1,565,000 United States
Treasury Bonds, 6.5% due November 15, 2026
(market value $1,735,997 including
interest)(cost $1,702,000)................ 1,702,000
-----------
TOTAL INVESTMENT PORTFOLIO (cost
$57,505,396)(d), 97.9%(a)............... 53,991,822
OTHER ASSETS AND LIABILITIES, net,
2.1%(a)................................. 1,159,396
-----------
NET ASSETS, 100.0%........................ $55,151,218
===========
</TABLE>
- ---------------
(a) Percentages are based on net assets.
(b) Bonds reset to applicable coupon rate at a future date.
(c) Denominated in U.S. dollars.
(d) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized depreciation of
$3,513,574, which consists of aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost of
$864,789 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $4,378,363.
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- -----------
<S> <C> <C>
Assets
- ------------------------------------------------------------
Investments, at market value (identified cost $14,035,572
and $55,803,396, respectively) (Note 1)................... $13,918,015 $52,289,822
Repurchase agreement (identified cost $533,000 and
$1,702,000, respectively) (Note 1)........................ 533,000 1,702,000
Cash........................................................ 90 381
Receivables:
Investments sold.......................................... -- 55,550
Fund shares sold.......................................... 390,367 126,980
From Manager.............................................. 30,939 --
Dividends and interest.................................... 95,511 1,288,078
Deferred state qualification expenses (Note 1).............. 20,621 21,371
Prepaid insurance........................................... 1,953 3,249
----------- -----------
Total Assets........................................ $14,990,496 $55,487,431
----------- -----------
Liabilities
- ------------------------------------------------------------
Payables (Note 4):
Investments purchased..................................... $ -- $ 54,962
Fund shares redeemed...................................... 60,533 125,101
Accrued management fee.................................... -- 76,578
Accrued distribution fee.................................. 4,483 20,509
Other accrued expenses.................................... 42,545 59,063
----------- -----------
Total Liabilities................................... $ 107,561 $ 336,213
----------- -----------
Net assets, at market value................................. $14,882,935 $55,151,218
=========== ===========
Net Assets
- ------------------------------------------------------------
Net assets consist of:
Paid-in capital........................................... $21,247,840 $58,924,386
Undistributed net investment income (Note 1).............. 658,089 419,639
Accumulated net realized loss (Notes 1 and 5)............. (6,905,437) (679,233)
Net unrealized depreciation on investments................ (117,557) (3,513,574)
----------- -----------
Net assets, at market value................................. $14,882,935 $55,151,218
=========== ===========
Net assets, at market value
Class A Shares............................................ $12,414,756 $38,649,388
Class B Shares............................................ 339,211 2,825,550
Class C Shares............................................ 2,128,968 13,676,280
----------- -----------
Total............................................... $14,882,935 $55,151,218
=========== ===========
Shares of beneficial interest outstanding
Class A Shares............................................ 1,326,965 3,970,528
Class B Shares............................................ 36,379 291,654
Class C Shares............................................ 228,167 1,411,663
----------- -----------
Total............................................... 1,591,511 5,673,845
=========== ===========
Net Asset Value -- offering and redemption price per share
(Notes 1 and 2)
Class A Shares............................................ $9.36 $9.73
=========== ===========
Maximum offering price per share (100/96.25 of $9.36 and
$9.73, respectively)................................... $9.72 $10.11
=========== ===========
Class B Shares............................................ $9.32 $9.69
=========== ===========
Class C Shares............................................ $9.33 $9.69
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 11
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE HIGH YIELD
GOVERNMENT FUND BOND FUND
--------------- -----------
<S> <C> <C>
Investment Income
- ------------------------------------------------------------
Income:
Interest.................................................. $ 411,976 $ 2,789,195
Expenses (notes 1 and 4):
Management fee............................................ 39,454 163,010
Distribution fee (Class A Shares)......................... 20,229 55,237
Distribution fee (Class B Shares)......................... 699 8,932
Distribution fee (Class C Shares)......................... 7,987 53,257
Professional fees......................................... 22,093 23,570
Custodian/Fund accounting fees............................ 23,544 36,331
State qualification expenses.............................. 16,157 17,037
Reports to shareholders................................... 6,521 12,133
Shareholder servicing fees................................ 6,109 18,138
Trustees' fees and expenses............................... 5,194 4,905
Insurance................................................. 1,015 1,689
Other..................................................... 89 356
---------- -----------
Total expenses before waiver and reimbursement...... 149,091 394,595
Fees waived by Manager (Note 4)..................... (39,454) (32,617)
Reimbursement from Manager.......................... (32,989) --
---------- -----------
Total expenses after waiver and reimbursement....... 76,648 361,978
---------- -----------
Net investment income....................................... 335,328 2,427,217
---------- -----------
Realized and Unrealized Gain (Loss) on Investments
- ------------------------------------------------------------
Net realized gain (loss) from investment transactions....... 190,209 (679,709)
Net increase (decrease) in unrealized appreciation of
investments during the period............................. (758,057) 490,539
---------- -----------
Net loss on investments............................. (567,848) (189,170)
---------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ $ (232,520) $ 2,238,047
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 12
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTH PERIOD
ENDED FOR THE
MARCH 31, 1999 YEAR ENDED
INTERMEDIATE GOVERNMENT FUND (UNAUDITED) SEPTEMBER 30, 1998
- ---------------------------- -------------- ------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 335,328 $ 748,165
Net realized gain on investment transactions.............. 190,209 280,582
Net increase (decrease) in unrealized appreciation of
investments during the period........................... (758,057) 585,698
----------- -----------
Net increase (decrease) in net assets resulting from
operations.............................................. (232,520) 1,614,445
Distributions to shareholders from:
Net investment income Class A Shares, ($0.21 and $0.49 per
share, respectively).................................... (291,077) (694,550)
Net investment income Class B Shares, ($0.20 and $0.26*
per share, respectively)................................ (4,535) (1,541)
Net investment income Class C Shares, ($0.20 and $0.47 per
share, respectively).................................... (64,678) (72,672)
Increase (decrease) in net assets from Fund share
transactions (Note 2)..................................... (2,301,833) 2,061,901
----------- -----------
Increase (decrease) in net assets........................... (2,894,643) 2,907,583
Net assets, beginning of period............................. 17,777,578 14,869,995
----------- -----------
Net assets, end of period (including undistributed net
investment income of $658,089 and $683,051,
respectively)............................................. $14,882,935 $17,777,578
=========== ===========
FOR THE SIX
MONTH PERIOD
ENDED FOR THE
MARCH 31, 1999 YEAR ENDED
High Yield Bond Fund (UNAUDITED) SEPTEMBER 30, 1998
- ------------------------------------------------------------ ----------- -----------
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 2,427,217 $ 4,818,000
Net realized gain (loss) on investment transactions....... (679,709) 761,512
Net increase (decrease) in unrealized appreciation of
investments during the period........................... 490,539 (5,944,103)
----------- -----------
Net increase (decrease) in net assets resulting from
operations.............................................. 2,238,047 (364,591)
Distributions to shareholders from:
Net investment income Class A Shares, ($0.45 and $0.89 per
share, respectively).................................... (1,787,403) (3,625,981)
Net investment income Class B Shares, ($0.42 and $0.48*
per share, respectively)................................ (93,516) (55,927)
Net investment income Class C Shares, ($0.42 and $0.84 per
share, respectively).................................... (578,465) (1,143,752)
Increase in net assets from Fund share transactions (Note
2)........................................................ 611,434 5,333,666
----------- -----------
Increase in net assets...................................... 390,097 143,415
Net assets, beginning of period............................. 54,761,121 54,617,706
----------- -----------
Net assets, end of period (including undistributed net
investment income of $419,639 and $451,806,
respectively)............................................. $55,151,218 $54,761,121
=========== ===========
</TABLE>
- ---------------
* For the period February 2, 1998 (commencement of Class B Shares) to September
30, 1998.
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 13
- --------------------------------------------------------------------------------
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 B SHARES
------------------------------------------------------------ --------------------------------
FOR THE SIX FOR THE SIX
MONTH PERIOD MONTH PERIOD
ENDED FOR THE YEARS ENDED SEPTEMBER 30, ENDED
MARCH 31, 1999* ------------------------------------------ MARCH 31, 1999*
(UNAUDITED) 1998* 1997* 1996* 1995 1994* (UNAUDITED) 1998++*
--------------- ------ ------ ------ ------ ------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD......................... $ 9.70 $ 9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.44 $ 9.67 $ 9.28
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a)....... 0.20 0.48 0.51 0.50 0.62 0.43 0.17 0.33
Net realized and unrealized
gain (loss) on investments... (0.33) 0.51 0.13 (0.21) 0.12 (0.40) (0.32) 0.32
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations................... (0.13) 0.99 0.64 0.29 0.74 0.03 (0.15) 0.65
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (0.21) (0.49) (0.52) (0.50) (0.55) (0.37) (0.20) (0.26)
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions............ (0.21) (0.49) (0.52) (0.50) (0.55) (0.37) (0.20) (0.26)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD... $ 9.36 $ 9.70 $ 9.20 $ 9.08 $ 9.29 $ 9.10 $ 9.32 $ 9.67
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(B).............. (1.32)(c) 11.18 7.28 3.24 8.47 0.36 (1.57)(c) 7.16(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a).................... 0.92(d) 0.92 0.93 0.94 0.95 0.95 1.20(d) 1.20(d)
Net investment income to
average daily net assets..... 4.30(d) 5.18 5.65 5.42 5.50 4.60 4.04(d) 4.59(d)
Portfolio turnover rate........ 100(c) 188 69 135 162 214 100(c) 188(c)
Net assets, end of period ($
millions).................... 12 13 14 18 24 41 0.34 0.13
<CAPTION>
CLASS C SHARES
---------------------------------------------------
FOR THE SIX
MONTH PERIOD
ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31, 1999* ---------------------------------
(UNAUDITED) 1998* 1997* 1996* 1995+
--------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD......................... $ 9.67 $ 9.18 $ 9.06 $ 9.27 $ 9.05
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a)....... 0.17 0.41 0.49 0.49 0.21
Net realized and unrealized
gain (loss) on investments... (0.31) 0.55 0.13 (0.21) 0.23
------ ------ ------ ------ ------
Total from Investment
Operations................... (0.14) 0.96 0.62 0.28 0.44
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (0.20) (0.47) (0.50) (0.49) (0.22)
------ ------ ------ ------ ------
Total Distributions............ (0.20) (0.47) (0.50) (0.49) (0.22)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD... $ 9.33 $ 9.67 $ 9.18 $ 9.06 $ 9.27
====== ====== ====== ====== ======
TOTAL RETURN (%)(B).............. (1.46)(c) 10.85 7.02 3.04 4.90(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a).................... 1.20(d) 1.20 1.20 1.20 1.20(d)
Net investment income to
average daily net assets..... 4.02(d) 4.74 5.38 5.22 5.19(d)
Portfolio turnover rate........ 100(c) 188 69 135 162(c)
Net assets, end of period ($
millions).................... 2 5 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 period
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.
++ For the period February 2, 1998 (commencement of Class B Shares) to
September 30, 1998.
(a) Excludes management fees waived and expenses reimbursed by the Manager in
the amount of $.04, $.10, $.07, $.06, $.06 and $.03 per Class A Share,
respectively. The operating expense ratios including such items would have
been 1.84% (annualized), 2.00%, 1.67%, 1.61%, 1.47% and 1.18% per Class A
Share, respectively. Excludes management fees waived and expenses
reimbursed by the Manager in the amount of $.04 and $.06 per Class B Share,
respectively. The operating expense ratio including such items would have
been 2.12% (annualized) and 2.28% (annualized) per Class B Share,
respectively. Excludes management fees waived and expenses reimbursed by
the Manager in the amount of $.04, $.10, $.07, $.06 and $.06 per Class C
Share, respectively. The operating expense ratios including such items
would have been 2.12% (annualized), 2.28%, 1.94%, 1.87% and 1.72%
(annualized) per Class C Share, respectively.
(b) Does not reflect the imposition of a sales charge.
(c) Not annualized.
(d) Annualized.
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 14
- --------------------------------------------------------------------------------
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 B SHARES
----------------------------------------------------------- -------------------------------
FOR THE SIX FOR THE SIX
MONTH PERIOD MONTH PERIOD
ENDED FOR THE YEARS ENDED SEPTEMBER 30, ENDED
MARCH 31, 1999 ------------------------------------------ MARCH 31, 1999
(UNAUDITED) 1998 1997 1996 1995 1994 (UNAUDITED) 1998++
-------------- ------ ------ ------ ------ ------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 9.77 $10.69 $10.22 $ 9.94 $ 9.65 $10.65 $ 9.73 $10.57
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a).... 0.44 0.88 0.90 0.84(e) 0.72 0.69 0.42 0.51
Net realized and unrealized
gain (loss) on
investments............... (0.03) (0.91) 0.46 0.24 0.31 (0.84) (0.04) (0.87)
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations................ 0.41 (0.03) 1.36 1.08 1.03 (0.15) 0.38 (0.36)
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income......... (0.45) (0.89) (0.89) (0.80) (0.74) (0.71) (0.42) (0.48)
Distributions from net
realized gains............ -- -- -- -- -- (0.07) -- --
Distribution in excess of
net realized gains........ -- -- -- -- -- (0.07) -- --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions......... (0.45) (0.89) (0.89) (0.80) (0.74) (0.85) (0.42) (0.48)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD...................... $ 9.73 $ 9.77 $10.69 $10.22 $ 9.94 $ 9.65 $ 9.69 $ 9.73
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)(B)........... 4.27(c) (0.52) 14.00 11.44 11.23 (1.59) 4.02(c) (3.58)(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a)................. 1.19(d) 1.19 1.21 1.23 1.25 1.25 1.70(d) 1.70(d)
Net investment income to
average daily net
assets.................... 9.08(d) 8.44 8.76 8.41 7.35 6.76 8.60(d) 7.90(d)
Portfolio turnover rate..... 24(c) 87 101 143 109 135 24(c) 87(c)
Net assets, end of period($
millions)................. 38 40 42 33 30 36 3 2
<CAPTION>
CLASS C SHARES
---------------------------------------------------
FOR THE SIX
MONTH PERIOD
ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31, 1999 ----------------------------------
(UNAUDITED) 1998 1997 1996 1995+
-------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 9.73 $10.65 $10.18 $ 9.91 $ 9.62
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income(a).... 0.41 0.83 0.85 0.79(e) 0.31
Net realized and unrealized
gain (loss) on
investments............... (0.03) (0.91) 0.46 0.24 0.28
------ ------ ------ ------ ------
Total from Investment
Operations................ 0.38 (0.08) 1.31 1.03 0.59
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income......... (0.42) (0.84) (0.84) (0.76) (0.30)
Distributions from net
realized gains............ -- -- -- -- --
Distribution in excess of
net realized gains........ -- -- -- -- --
------ ------ ------ ------ ------
Total Distributions......... $(0.42) (0.84) (0.84) (0.76) (0.30)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD...................... $ 9.69 $ 9.73 $10.65 $10.18 $ 9.91
====== ====== ====== ====== ======
TOTAL RETURN (%)(B)........... 4.02(c) (1.02) 13.53 10.93 6.18(c)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to
average daily net
assets(a)................. 1.70(d) 1.70 1.70 1.70 1.70(d)
Net investment income to
average daily net
assets.................... 8.57(d) 7.93 8.26 8.39 6.67(d)
Portfolio turnover rate..... 24(c) 87 101 143 109(c)
Net assets, end of period($
millions)................. 14 13 13 6 0.6
</TABLE>
- ---------------
+ For the period April 3, 1995 (commencement of Class C Shares) to September
30, 1995.
++ For the period February 2, 1998 (commencement of Class B Shares) to
September 30, 1998.
(a) Excludes management fees waived by the Manager in the amount of $.01, $.01,
$.01, $.03, $.03 and $.02 per Class A Share, respectively. The operating
expense ratios including such items would have been 1.31% (annualized),
1.30%, 1.30%, 1.51%, 1.51% and 1.42% per Class A Share, respectively.
Excludes management fees waived by the manager in the amount of $.01 and
$.01 per Class B Share. The operating expense ratio including such items
would have been 1.82% (annualized) and 1.80% (annualized) per Class B Share,
respectively. Excludes management fees waived by the Manager in the amount
of $.01, $.01, $.01, $0.03 and $0.03 per Class C Share, respectively. The
operating expense ratios including such items would have been 1.82%
(annualized), 1.80%, 1.79%, 1.98% and 1.96% (annualized) per Class C Share,
respectively.
(b) Does not reflect the imposition of a sales charge.
(c) Not annualized.
(d) Annualized.
(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.
13
<PAGE> 15
- --------------------------------------------------------------------------------
HERITAGE INCOME TRUST
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 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 Intermediate Government Fund has an
investment objective of high current income consistent with the
preservation of capital. The High Yield Bond Fund has an investment
objective of high current income. The Funds currently issue Class A, Class
B 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 B Shares, which were offered to shareholders beginning February 2,
1998, are sold subject to a 5% maximum contingent deferred sales load
(based on the lower of purchase price or redemption price) declining to 0%
over a six-year period. 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 made in less than one year of 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 amortized cost, which 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 all
Heritage funds. 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 Qualification Expenses: State qualification fees are amortized based
either on the time period covered by the qualification or as related
shares are sold, whichever is appropriate for each state.
Capital Accounts: The Funds report 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 Funds may periodically make reclassifications among
certain capital accounts without impacting the net asset value of the
Fund.
Other: For purposes of these financial statements, investment security
transactions are accounted for on a trade date 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.
14
<PAGE> 16
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HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
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Note 2:
FUND SHARES: At March 31, 1999, there was an unlimited number of shares
of beneficial interest of no par value authorized.
INTERMEDIATE GOVERNMENT FUND
Transactions in Class A, B and C Shares of the Fund during the six month
period ended March 31, 1999, were as follows:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ------------------------ ------------------------
FOR THE PERIOD ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
MARCH 31, 1999 (UNAUDITED) --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 208,703 $ 2,000,087 37,474 $ 355,103 74,197 $ 702,791
Shares issued on reinvestment of
distributions.................. 27,106 258,017 323 3,050 6,673 63,644
Shares redeemed.................. (212,033) (2,010,866) (14,506) (137,311) (371,287) (3,536,348)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease).......... 23,776 $ 247,238 23,291 $ 220,842 (290,417) $(2,769,913)
=========== =========== ===========
Shares outstanding:
Beginning of period............ 1,303,189 13,088 518,584
--------- --------- ---------
End of period.................. 1,326,965 36,379 228,167
========= ========= =========
</TABLE>
Transactions in Class A and Class C Shares of the Fund during the year
ended September 30, 1998 and Class B Shares from February 2, 1998
(commencement of Class B Shares) to September 30, 1998, were as follows:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1998 --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 185,461 $ 1,724,681 13,028 $ 121,126 474,667 $ 4,432,949
Shares issued on reinvestment of
distributions.................. 67,011 619,953 60 561 7,594 70,281
Shares redeemed.................. (476,959) (4,427,313) -- -- (51,875) (480,337)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease).......... (224,487) $(2,082,679) 13,088 $ 121,687 430,386 $ 4,022,893
=========== =========== ===========
Shares outstanding:
Beginning of year.............. 1,527,676 -- 88,198
--------- --------- ---------
End of year.................... 1,303,189 13,088 518,584
========= ========= =========
</TABLE>
HIGH YIELD BOND FUND
Transactions in Class A, B and C Shares of the Fund during the six month
period ended March 31, 1999, were as follows:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ----------------------- ------------------------
FOR THE PERIOD ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
MARCH 31, 1999 (UNAUDITED) --------- ----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold....................... 288,580 $ 2,790,643 134,042 $1,297,239 207,418 $ 2,005,427
Shares issued on reinvestment of
distributions................... 119,200 1,151,107 3,945 37,969 45,557 438,140
Shares redeemed................... (517,776) (5,006,201) (29,839) (286,540) (187,736) (1,816,350)
--------- ----------- --------- ---------- --------- -----------
Net increase (decrease)........... (109,996) $(1,064,451) 108,148 $1,048,668 65,239 $ 627,217
=========== ========== ===========
Shares outstanding:
Beginning of period............. 4,080,524 183,506 1,346,424
--------- --------- ---------
End of period................... 3,970,528 291,654 1,411,663
========= ========= =========
</TABLE>
Transactions in Class A and Class C Shares of the Fund during the year
ended September 30, 1998 and Class B Shares from February 2, 1998
(commencement of Class B Shares) to September 30, 1998, were as follows:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
------------------------ ------------------------ ------------------------
FOR THE YEAR ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
SEPTEMBER 30, 1998 --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold...................... 787,959 $ 8,314,882 196,020 $ 2,056,707 607,408 $ 6,390,589
Shares issued on reinvestment of
distributions.................. 234,628 2,462,134 2,626 27,135 86,303 901,721
Shares redeemed.................. (854,815) (8,945,724) (15,140) (157,348) (547,574) (5,716,430)
--------- ----------- --------- ----------- --------- -----------
Net increase..................... 167,772 $ 1,831,292 183,506 $ 1,926,494 146,137 $ 1,575,880
=========== =========== ===========
Shares outstanding:
Beginning of year.............. 3,912,752 -- 1,200,287
--------- --------- ---------
End of year.................... 4,080,524 183,506 1,346,424
========= ========= =========
</TABLE>
15
<PAGE> 17
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HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
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Note 3:
PURCHASES AND SALES OF SECURITIES. For the six month period ended March
31, 1999, 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.............. $14,844,017 $16,340,922 $1,013,873 -- --
High Yield Bond Fund...................... -- -- -- $12,893,255 $12,451,243
</TABLE>
Note 4:
MANAGEMENT, SUBADVISORY, DISTRIBUTION, SHAREHOLDER SERVICING AGENT, FUND
ACCOUNTING 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. Pursuant to the current
registration statement, the Manager will waive its investment advisory
fees and, if necessary, reimburse each Fund to the extent that Class A,
Class B and Class C annual operating expenses exceed that Fund's average
daily net assets attributable to that class for the 1999 fiscal year as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B AND CLASS C
------- -------------------
<S> <C> <C>
Intermediate Government Fund................................ 0.95% 1.20%
High Yield Bond Fund........................................ 1.25% 1.70%
</TABLE>
Under this agreement, management fees of $39,454 were waived and $32,989
of expenses were reimbursed for the Intermediate Government Fund and
management fees of $32,617 were waived in the High Yield Bond Fund for the
six month period ended March 31, 1999. If total Fund expenses fall below
the expense limitation agreed to by the Manager before the end of the year
ended September 30, 2001, 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 1997 and 1998 if total Fund expenses fall below the
annual expense limitations before the end of the year ending September 30,
1999 and 2000, respectively.
Effective February 1, 1996 and reaffirmed on February 23, 1998, 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 High Yield
Bond Fund to the Manager without regard to any reduction due to the
imposition of expense limitations. For the six month period ended March
31, 1999 the Manager paid $80,897 for subadviser fees.
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 March 31, 1999 was $3,150
and $10,200, respectively. In addition, the Manager performs Fund
accounting services and charged $18,150 and $25,790 during the current
period of which $8,400 and $12,645 was payable as of March 31, 1999,
respectively.
Raymond James & Associates, Inc. (the "Distributor") has advised the Trust
that the Intermediate Government Fund received $9,117 in front-end sales
charges for Class A Shares and $519 in contingent deferred sales charges
for Class C Shares for the six month period ended March 31, 1999. The High
Yield Bond Fund received $29,270 in front-end sales charges for Class A
Shares, $789 in contingent deferred sales charges for Class B Shares and
$1,244 in contingent deferred sales charges for Class C Shares for the six
month period ended March 31, 1999. From these fees, the Distributor paid
sales commissions to salespersons and incurred other distribution costs.
Pursuant to the Class A Distribution Plan adopted in accordance with Rule
12b-1 of the Investment Company Act of 1940, as amended, the 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 B and Class C Distribution
Plan, the Trust may pay the Distributor a fee of up to .60% for the
Intermediate Government Fund and up to .80% for the High Yield Bond Fund
of the average daily net assets for Class B and Class C Shares. Such fees
are accrued daily and payable monthly. Class B Shares will convert to
Class A Shares eight years after the end of the calendar month in which
the shareholder's order to purchase was accepted. 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 employee of the Manager or employee of an
affiliate of the Manager receives an annual fee of $8,666 and an
additional fee of $3,250 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.
16
<PAGE> 18
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HERITAGE INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
Note 5:
FEDERAL INCOME TAXES. For the year ended September 30, 1998, 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
For the year ended September 30, 1998, the Fund had a net tax basis
capital loss carryforwards of $7,095,646, which may be applied against
any realized net taxable gains until their expiration dates of
September 30, 2001 ($237,373), September 30, 2002 ($3,838,721),
September 30, 2003 ($2,492,779) and September 30, 2004 ($526,773). The
Fund utilized $150,698 of net tax basis capital losses during the year
against net realized gains from investment transactions.
HIGH YIELD BOND FUND
The Fund credited undistributed net investment income and charged
accumulated net realized gain $44,735 in the year ended 1998. The Fund
utilized $716,301 of net tax basis capital losses during the year
against net realized gains from investment transactions.
17
<PAGE> 19
HERITAGE FAMILY OF FUNDS (TM)
From Our Family to Yours: The Intelligent Creation of Wealth.
HERITAGE GROWTH FUNDS
Aggressive Growth
Capital Appreciation
Growth Equity
Income-Growth
International
Mid Cap
Small Cap
Value Equity
HERITAGE BOND FUNDS
High Yield
Intermediate Government
HERITAGE MONEY MARKET FUNDS
Money Market
Municipal Money Market
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)1999 Heritage Asset Management, Inc.
5M AR5321 SINL 3/99 [RECYCLE LOGO]
[HERITAGE LOGO] Heritage Income Trust
P.O. Box 33022
St. Petersburg, FL 33733
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Address Change Requested
