<PAGE> 1
June 20, 1995
Dear Fellow Shareholders:
It is our pleasure to provide you with the semi-annual report for Heritage
U.S. Government Income Fund (NYSE: HGA) for the six-month period ended April 30,
1995. For this period, your Fund generated a total return of 5.72% based on net
asset value and a 9.57% return based on market value. Both figures assume the
reinvestment of monthly dividends in additional shares of the Fund. By
comparison, the Lehman Brothers Government/Corporate Index (the "Index")
generated a return of 6.96% for the same time period.
INTEREST RATES AND THE FIXED INCOME MARKETS
The fixed income markets exhibited a high level of volatility over the six
month period from October of 1994 to April of 1995. In October, the bond market
was concerned with exceptionally strong economic growth and the possibility of
higher rates of inflation. Bond yields reached a peak of 8.13% on November 13,
1994. In late November, economic growth appeared to be slowing as a result of
the Federal Reserve's relentless actions of raising short-term interest rates
and yields declined steadily to 7.34% at the end of April 1995. (Yields have
declined further to 6.56% at the time of this writing.) The Treasury yield curve
flattened dramatically as shorter-term rates remained relatively high and
longer-term rates fell, reflecting a reduced inflation premium in longer-term
yields.
The following chart shows the level and shape of the Treasury yield curve
at the beginning and end of the six-month period:
[C/R COPY TO COME]
Historical Yield Curve Chart
for 10/28/94 thru 4/30/95
FUND PERFORMANCE DISCUSSION
In October, your Fund was structured more defensively than the Index in
order to protect net asset value from erosion while still producing a high level
of income for distribution. The Fund's duration (or price sensitivity to changes
in yields) was approximately 91.5% as long as the Index. During the period, as
evidence of slowing economic data emerged, the Fund's duration was extended to
be approximately 122% of that of the Index.
Given the magnitude of the bond market rally, U.S. Treasury issues were the
best performing sector of the Fund's investment portfolio while mortgage
pass-through securities and higher-coupon collateralized
<PAGE> 2
mortgage obligations performed well, yet lagged the performance of U.S. Treasury
securities. This caused the Fund to slightly under-perform the Index on a net
asset value basis.
Mortgage securities are used by the Fund in part to generate income in
excess of that available on U.S. Treasury securities. Lower-priced and
lower-coupon collateralized mortgage obligations performed well for the Fund,
augmenting the returns from the U.S. Treasury position.
The Fund also uses some leverage through reverse repurchase agreements in
order to generate additional income. During late 1994 and early 1995 the Fund
hedged its reverse repurchase exposure (either fully or partially) with
financial futures contracts. This limited the performance of its leveraged U.S.
Treasury position but at the same time reduced the risk of loss on the position.
Mortgage derivative securities, used as a hedge against other mortgage
securities, represented a very small percentage of total assets and had little
impact on the Fund's performance over the period.
At the time of this writing, the Fund's calendar year-to-date returns are
in excess of the returns of the Lehman Brothers Government/Corporate index.
OUTLOOK AND CURRENT STRATEGY
Currently, we believe the Federal Reserve's actions have succeeded in
slowing both economic growth and inflation creating a more favorable near term
environment for fixed income investment. We also believe the longer-term
direction of interest rates is lower based on demographic changes and present
efforts of deficit reductions. We expect inflation to average about 3.25% to
3.5% for 1995 before declining in early 1996.
As we mentioned, your Fund's investment portfolio has been lengthened in
terms of its duration and average life to take advantage of expected lower
interest rates. In doing so we have increased our exposure to longer-term U.S.
Treasury securities in an effort to enhance principal returns and have continued
to concentrate on mortgage securities to attempt to generate relatively higher
levels of income.
We believe mortgage securities offer superior fundamental value as yields
have fallen less for this class of security than for comparable U.S. Treasury
bonds. In our view, significant opportunity and value may exist in these
securities.
Thank you for your investment in Heritage U.S. Government Income Fund. We
look forward to helping to serve your investment needs for years to come.
Sincerely,
/s/ Stephen G. Hill
- ----------------------------------------
Stephen G. Hill, President
Sincerely,
/s/ H. Peter Wallace
- ----------------------------------------
H. Peter Wallace, Portfolio Manager
2
<PAGE> 3
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
APRIL 30, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C>
REPURCHASE AGREEMENT--3.7%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated April 28, 1995 at 5.87%, to be
repurchased at $1,373,672 on May 1, 1995, collateralized by $1,385,000 United States Treasury
Notes, 6.875% due March 31, 1997 (market value $1,400,500 including accrued interest)(cost
$1,373,000).......................................................................................... $ 1,373,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MATURITY
AMOUNT DATE
- -------------------- ---------
<C> <S> <C> <C>
U.S. GOVERNMENT SECURITIES--164.4%(A)
U.S. TREASURIES
$ 400,000 U.S. Treasury Bills, 6.26%(c)......................................... 08/17/95 392,679
4,500,000 U.S. Treasury Notes, 8%(c)............................................ 01/15/96 4,607,578
2,000,000 U.S. Treasury Notes, 7.25%(c)......................................... 02/15/98 2,027,812
2,000,000 U.S. Treasury Notes, 7.125%(c)........................................ 02/29/00 2,018,750
10,000,000 U.S. Treasury Bonds, 11.125%(c)....................................... 08/15/03 12,510,938
------------
Total U.S. Treasuries................................................. 21,557,757
------------
U.S. GOVERNMENT AGENCIES
FEDERAL HOME LOAN MORTGAGE CORPORATION:
2,000,000 REMIC, 8%, 1171 G PAC................................................. 11/15/06 2,014,375
1,768,398 REMIC, 9.05%, 6C PAC.................................................. 06/15/19 1,823,661
1,000,000 REMIC, 7.25%, 1279 PH PAC-1........................................... 06/15/20 958,750
1,931,511 REMIC, 8.0%, 1748 GA Support.......................................... 08/15/23 1,883,223
1,550,000 REMIC, 9.0%, 60 H PAC................................................. 07/15/20 1,596,500
3,100,000 Gold Pass-Through #D59861, 8.0%....................................... 04/01/25 3,095,156
15,000,000 Gold Pass-Through, 8.0%, 30 YR TBA.................................... 1/1/2099 14,976,563
473,455 REMIC, 10.0%, 41 E PAC................................................ 08/15/19 480,557
2,000,000 REMIC, 7.0%, 1228 H PAC............................................... 02/15/22 1,791,875
FEDERAL NATIONAL MORTGAGE ASSOCIATION
3,728,321 Pass-Through, 9%, Pool #124790........................................ 02/01/23 3,847,160
1,372,742 REMIC, 9.67%, 1990-96E Sequential..................................... 01/25/17 1,419,072
1,451,233 REMIC, 8%, 1991-28H PAC............................................... 02/25/20 1,460,304
2,000,000 REMIC, 7.50%, G-1992-35EB PAC......................................... 07/25/22 1,853,125
2,000,000 REMIC, 7.0%, 1992-125L PAC............................................ 08/25/22 1,722,500
546,091 REMIC, 1993-2F, COFI Floater.......................................... 01/25/23 529,708
356,464 REMIC, G-1993-19SG, LIBOR Inverse Floater............................. 04/25/23 121,198
1,969,875 REMIC, Interest Only Strips, Series 249, Class 2, (d)................. 04/01/23 682,685
------------
Total U.S. Government Agencies........................................ 40,256,412
------------
Total U.S. Government Securities (cost $62,263,465)................... 61,814,169
------------
PRIVATE ISSUE MORTGAGE SECURITIES--4.5%(A)
1,000,000 REMIC Kidder Peabody Mortgage Asset Trust, 24-E 8.94% PAC............. 04/01/19 1,033,750
651,056 REMIC CMSC Mortgage Securities, 1991-9 E, 8.25% Sequential............ 06/20/18 652,277
------------
Total Private Issue Mortgage Securities (cost $2,093,874)............. 1,686,027
------------
TOTAL INVESTMENT PORTFOLIO (COST $65,730,339)(B) 172.6%(A).................................. 64,873,196
OTHER ASSETS AND LIABILITIES, NET (72.6%)(A)................................................ (27,279,493)
------------
NET ASSETS, 100.0%.......................................................................... $ 37,593,703
===========
</TABLE>
- ---------------
(a) Percentages 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 $857,143 which consists
of aggregate gross unrealized appreciation for all securities in which there
is an excess of market value over tax cost of $197,345 and aggregate gross
unrealized depreciation for all securities in which there is an excess of
tax cost over market value of $1,054,488.
(c) Collateral for forward commitments.
(d) Carries notional principal balance.
COFI--Cost of Funds Index
LIBOR--London Interbank Offered Rate
PAC--Planned Amortization Class
REMIC--Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $64,357,339) (Note 1)..................... $63,500,196
Repurchase agreement (identified cost $1,373,000) (Note 1).............................. 1,373,000
Cash.................................................................................... 368
Receivables:
Investments sold (Note 1)............................................................. 15,482,813
Interest (includes mortgage dollar roll fee receivable of $21,209).................... 785,982
Futures daily variation margin........................................................ 9,375
Deferred organization expense........................................................... 26,239
-----------
Total assets.................................................................... 81,177,973
Liabilities
Payables (Note 4):
Investments purchased (Note 1)........................................................ $43,285,863
Accrued management fee................................................................ 105,818
Accrued administrative fee............................................................ 32,337
Other accrued expenses................................................................ 105,404
Deferred mortgage dollar roll income (Note 1)........................................... 54,848
-----------
Total liabilities............................................................... 43,584,270
-----------
Net assets, at market value............................................................. $37,593,703
==========
Net Assets
Net assets consist of:
Accumulated distribution in excess of net investment income........................... $ (57,304)
Net unrealized depreciation on investments............................................ (857,143)
Net unrealized depreciation on futures................................................ (134,750)
Accumulated net realized loss on investments.......................................... (4,545,954)
Accumulated net realized loss on futures.............................................. (373,466)
Paid-in capital (Note 1).............................................................. 43,562,320
-----------
Net assets, at market value............................................................. $37,593,703
==========
Net asset value per share ($37,593,703 divided by 3,115,471 shares of beneficial
interest outstanding, no par value) (Note 2).......................................... $12.07
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED
APRIL 30, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Income:
Interest.................................................................................. $2,011,807
Expenses (Notes 1 and 4):
Management fee............................................................................ $127,258
Custodian fees............................................................................ 29,723
Administrative fee........................................................................ 27,546
Legal fees................................................................................ 19,523
Reports to shareholders................................................................... 13,327
Auditing fees............................................................................. 12,000
Shareholder servicing..................................................................... 9,476
NYSE fees................................................................................. 8,085
Trustees' fees and expenses............................................................... 5,216
Amortization of organization costs........................................................ 3,661
Insurance................................................................................. 3,502
Other..................................................................................... 3,655
--------
Total expenses before waiver........................................................ 262,972
Fees waived by Manager (Note 4)..................................................... (79,335) 183,637
-------- ----------
Net investment income....................................................................... 1,828,170
----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investment transactions.............................................. (219,713)
Net realized loss from futures transactions................................................. (481,094)
Net decrease in unrealized depreciation of investments during the period.................... 1,046,941
Net increase in unrealized depreciation of futures during the period........................ (134,338)
----------
Net gain on investments............................................................. 211,796
----------
Net increase in net assets resulting from operations........................................ $2,039,966
=========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTH FOR THE PERIOD
PERIOD ENDED NOVEMBER 19, 1993
APRIL 30, 1995 (COMMENCEMENT OF OPERATIONS)
(UNAUDITED) TO OCTOBER 31, 1994
----------------- -----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................ $ 1,828,170 $ 3,056,913
Net realized loss from investment transactions............... (219,713) (4,565,604)
Net realized gain (loss) from future transactions............ (481,094) 107,628
Net increase (decrease) in unrealized depreciation of
investments and futures during the period.................. 912,603 (1,904,496)
----------------- ------------
Net increase (decrease) in net assets resulting from
operations................................................. 2,039,966 (3,305,559)
Distribution to shareholders from:
Net investment income ($0.58 and $0.91 per share)............ (1,813,171) (2,823,138)
Distribution in excess of net investment income ($0.02)...... -- (72,303)
Tax return of capital ($0.04)................................ -- (125,887)
Increase in net assets from Fund share transactions (Note 2)... -- 43,593,795
----------------- ------------
Increase in net assets......................................... 226,795 37,266,908
Net assets, beginning of period................................ 37,366,908 100,000
----------------- ------------
Net assets, end of period (including accumulated distribution
in excess of net investment income of ($57,304) and
($72,303), respectively...................................... $37,593,703 $37,366,908
================= =============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD
ENDED
APRIL 30, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Interest received............................................................................... $ 1,863,638
Operating expenses paid......................................................................... (33,190)
Proceeds from disposition of portfolio securities and of future contracts....................... 234,727,738
Sale of short term securities, net.............................................................. 3,159,000
Purchase of portfolio securities and future contracts........................................... (237,904,324)
-------------
Net cash provided by operating activities..................................................... 1,812,862
-------------
Cash flow used for financing activities:
Cash dividends paid............................................................................. (1,813,171)
-------------
Net cash used for financing activities........................................................ (1,813,171)
-------------
Net decrease in cash.............................................................................. (309)
Cash at beginning of period....................................................................... 677
-------------
Cash at end of period............................................................................. $ 368
============
Reconciliation of net increase in net assets resulting from operations to net cash used by
operating activities
Net increase in net assets resulting from operations.............................................. $ 2,039,966
-------------
Increase in investments and repurchase agreements................................................. (487,180)
Net decrease in depreciation of investments during the period..................................... (1,046,941)
Increase in interest receivable................................................................... (148,169)
Increase in investments receivable................................................................ (5,260,938)
Increase in investments payable................................................................... 6,565,677
Increase in accrued expenses...................................................................... 150,447
-------------
Total adjustments............................................................................. (227,104)
-------------
Net cash used by operating activities....................................................... $ 1,812,862
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME 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>
FOR THE
SIX MONTH PERIOD ENDED
APRIL 30, 1995
PER SHARE OPERATING PERFORMANCE (UNAUDITED) 1994+
---------------------- -------
<S> <C> <C>
Net asset value, beginning of the period.............................................. $11.99 $14.02*
------- -------
Income from Investment Operations:
Net investment income(a)............................................................ .59 0.98
Net realized and unrealized gain (loss) on investments.............................. .07 (2.04)
------- -------
Net increase (decrease) in net asset value from investment operations............... .66 (1.06)
------- -------
Less Distributions:
Dividends from net investment income................................................ (.58) (0.91)
Distributions in excess of net investment income.................................... -- (0.02)
Tax return of capital............................................................... -- (0.04)
------- -------
Total Distributions................................................................. (.58) (0.97)
------- -------
Net asset value, end of the period.................................................... $12.07 $11.99
======= =======
Market value, end of period........................................................... $11.875 $11.375
======= =======
TOTAL RETURN:(C)
Per share market value.............................................................. 9.57% -18.20%
Per share net asset value........................................................... 5.72% -7.75%
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average daily net assets (net of interest and 1.00%
taxes)(a)(b)...................................................................... 1.00%
Ratio of net investment income to average daily net assets(b)....................... 9.96% 7.99%
Portfolio turnover rate(b).......................................................... 48.70% 162.71%
Net assets, end of period (millions)................................................ $38 $37
</TABLE>
- ---------------
* Beginning per share amount reflects $15.00, initial public offering price,
net of underwriting discounts and offering costs ($.98).
+ For the period November 19, 1993 (commencement of operations) to October 31,
1994.
(a) Excludes management fees waived by the Manager of $.03 and $.02 per share,
respectively. The annualized operating expense ratios including such items
would be 1.43% and 1.21%, respectively.
(b) Annualized. The annualized Portfolio turnover rates including reverse
repurchase agreements, drop trades and mortgage dollar roll transactions
aggregated 833.05% and 438.65%, respectively.
(c) Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during the period
and assumes dividend distributions were reinvested. Per share net asset
value return percentage is not an indication of the performance of a
shareholder's investment in the Fund due to differences between the market
price of the stock and the net asset value of the Fund during the period.
7
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Note 1: SIGNIFICANT ACCOUNTING POLICIES. Heritage U.S. Government Income Fund
(the "Fund") is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The policies
described below are followed consistently by the Fund in the preparation
of its financial statements in conformity with generally accepted
accounting principles.
Security Valuation: The Fund values investment securities based on
market quotations when readily available. Certain debt securities may be
valued by pricing services approved by the officers of the Fund, which
quotations reflect broker/dealer-supplied valuations by using either a
computerized matrix system or appraisals derived from dealer-supplied
quotations based on similar securities. When market quotations are not
readily available, securities are valued using such methods as the Board
of Trustees believes would reflect fair market value. Short term
investments having a maturity of 60 days or less are valued at cost
which, when combined with accrued interest included in 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.
Reverse Repurchase Agreements: The Fund may borrow by entering into
reverse repurchase agreements whereby the Fund sells securities and
agrees to repurchase them at a mutually agreed price. Reverse repurchase
agreements may be used for leverage purposes as permitted by the
prospectus. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an
approved custodian containing liquid high grade securities, marked to
market daily, having a value no less than the repurchase price
(including accrued interest).
Forward Commitments and When-Issued Securities: Delivery and payment for
securities that have been purchased by the Fund on a forward commitment
or when-issued basis can take place a month or more after the
transaction date. During this period, such securities are subject to
market fluctuations and the Fund maintains, in a segregated account with
its custodian, assets with a market value equal to the amount of its
purchase commitments.
Futures Contracts: Upon entering into futures contracts, the Fund is
required to deposit with a broker an amount ("initial margin") equal to
a certain percentage of the purchase price indicated in the futures
contact. Subsequent payments ("variation margin") are made or received
by the Fund each Day, dependent on the daily fluctuations in the value
of the underlying security, and are recorded for financial reporting
purposes as unrealized gains or losses by the Fund. If the Fund enters
into closing transactions, the Fund will realize for financial reporting
purposes, a gain or loss equal to the difference between the value of
the futures contract to buy and the futures contract to sell. The Fund
may be subject to certain risks upon entering into futures contracts
resulting from the imperfect correlation of prices between the futures
and securities markets.
Federal Taxes: 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. If the Fund, because of its
policy of maintaining a level rate of monthly dividends, fails to
distribute all of its investment company taxable income for any taxable
year, it will be required to pay federal income tax on the undistributed
amount -- which in no event will be more than 10% of that income -- and
may have to pay a 4% federal excise tax on a portion thereof. As of
October 31, 1994, the Fund has a net tax basis capital loss carryforward
of $4,218,352 which may be applied against any realized net taxable
gains until its expiration date of October 31, 2002.
Distribution of Income and Net Realized Gains: Distributions from net
investment income are made monthly. Net realized gains from investment
transactions 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.
Organization Expenses: Expenses incurred in connection with the
formation of the Fund were deferred and are being amortized on a
straight-line basis over 60 months from the date of commencement of
operations.
Other: Investment security transactions are accounted for on a trade
date basis. Distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
Capital Accounts: The Fund reports the undistributed net investment
income (accumulated net investment loss) 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 reclasses among certain capital accounts without
impacting the net asset value of the Fund.
Statement of Cash Flows: Information on financial transactions which
have been settled through the receipt and disbursement of cash is
presented in the Statement of Cash Flows. The cash amount shown in the
Statement of Cash Flows is the amount reported as cash in the Fund's
Statement of Assets and Liabilities and represents the cash position in
its custodian bank account at April 30, 1995.
8
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 2: FUND SHARES. At April 30, 1995, there was an unlimited number of shares
of beneficial interest of no par value authorized. There was no Fund
share activity for the six month period ended April 30, 1995.
Transactions in shares of the Fund during the period November 19, 1993
(commencement of operations) to October 31, 1994 were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Shares and proceeds in connection with the Fund's initial public offering and
subsequent offering sold, net of underwriting commissions of $2,794,500 and of
offering expenses of $233,812.................................................. 3,105,000 $43,546,688
Shares issued on reinvestment of distributions................................... 3,379 47,107
--------- -----------
Net increase..................................................................... 3,108,379 $43,593,795
==========
Shares outstanding:
Beginning of period............................................................ 7,092
---------
End of period.................................................................. 3,115,471
========
</TABLE>
On November 19, 1993, the Fund completed its initial public offering
issuing 2,700,000 shares of beneficial interest. Gross proceeds of the
shares amounted to $40,500,000. On December 23, 1993, the Fund issued an
additional 405,000 shares of beneficial interest upon exercising the
underwriter's option of over allotment amounting to $6,075,000.
Note 3: PURCHASES AND SALES OF SECURITIES. For the six month period ended April
30, 1995, purchases, sales and paydowns of investment securities
(excluding short-term investments, reverse repurchase agreements and
mortgage dollar roll transactions) aggregated $35,390,744, $12,949,349
and $1,125,354, respectively. Purchases and sales of securities involved
in drop trades agreements aggregated $30,292,538 and $24,452,344,
respectively. Purchase and sales of mortgage dollar roll transactions
aggregated $178,786,719 and $202,251,545, respectively. The aggregate
amounts for futures transactions sold and closed during the period was
$29,140,000 and $33,336,094, respectively. The following is a summary of
futures contracts activity during the period:
<TABLE>
<CAPTION>
SALES OF FUTURES CONTRACTS
----------------------------------
NUMBER OF AGGREGATE FACE UNREALIZED
CONTRACTS VALUE OF CONTRACTS LOSS
--------- ------------------ ----------
<S> <C> <C> <C>
Outstanding November 1, 1994.............................. 90 $ 9,000,000
U.S. Treasury Note/Bond Futures:
Contracts sold......................................... 290 29,000,000
Contracts closed....................................... 330 33,000,000
--- ------------------
Outstanding at April 30, 1995............................. 50 $ 5,000,000 $(134,750 )
========== ================= ==========
</TABLE>
Note 4: MANAGEMENT, ADMINISTRATIVE, 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 monthly fee of 0.01667% of average weekly net assets for the preceding
period (approximately .20% per annum) plus a fee equal to 4.5% of gross
weekly income, computed daily and payable monthly. As compensation for
its services as administrator, the Fund will pay the Adviser a monthly
fee of 0.0125% of average weekly net assets for the preceding period
(approximately .15% per annum). The agreement also provides for a
reduction in such fees in any year to the extent that operating expenses
(excluding interest and taxes) of the Fund exceed 1.00% on an annual
basis of the Fund's average daily net assets. Under the agreement, fees
waived by the Manager for the six month period ended April 30, 1995
amounted to $79,335 (less than $.03 per share). If total Fund expenses
fall below the expense limitation agreed to by the Manager before the
end of the year ending October 31, 1997, the Fund may be required to pay
the Manager a portion or all of the waived management and advisory fees.
In addition, the Fund may be required to pay the Manager a portion or
all of the management fee waived ($76,728) in the prior period ended
October 31, 1994, if total Fund expenses fall below the annual expense
limitation before the end of the year ending October 31, 1996.
Trustees of the Trust also serve as Trustees for Heritage Cash Trust,
Heritage Capital Appreciation Trust, Heritage Income-Growth Trust,
Heritage Income Trust and Heritage Series Trust, open-end investment
companies which are also advised by the Manager (collectively referred
to as the Heritage funds). Each Trustee of the Heritage funds who is not
an interested person of the Manager received an annual fee of $8,000 and
an additional fee of $2,000 for each combined quarterly meeting of the
Heritage funds attended. Trustees' fees and expenses are paid equally by
each of the Heritage funds.
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 5: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NET INCREASE (DECREASE)
NET GAIN (LOSS) ON IN NET ASSETS
INVESTMENTS RESULTING FROM
QUARTER ENDED INVESTMENT INCOME TRANSACTIONS OPERATIONS
---------------------------------- ---------------------- ----------------------- -----------------------
FISCAL 1995 TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
---------------------------------- ---------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1995 $ 872,864 $0.28 $ 768,649 $ 0.25 $ 1,641,513 $ 0.53
January 31, 1995 955,306 0.31 (556,853) (0.18) 398,453 0.13
---------- --------- ----------- --------- ----------- ---------
Totals $1,828,170 $0.59 $ 211,796 $ 0.07 $ 2,039,966 $ 0.66
========= ========= ========== ========= ========== =========
FISCAL 1994
----------------------------------
October 31, 1994 $1,019,313 $0.33 $(2,333,553) $ (0.75) $(1,314,240) $ (0.42)
July 31, 1994 809,722 0.26 (318,547) (0.10) 491,175 0.16
April 30, 1994 853,291 0.27 (4,097,450) (1.32) (3,244,159) (1.05)
January 31, 1994 374,587 0.12 387,078 0.13 761,665 0.25
---------- --------- ----------- --------- ----------- ---------
Totals $3,056,913 $0.98 $(6,362,472) $ (2.04) $(3,305,559) $ (1.06)
========= ========= ========== ========= ========== =========
</TABLE>
10
<PAGE> 11
HERITAGE U.S. GOVERNMENT INCOME FUND is a member of the Heritage family of
mutual funds. Other investment alternatives managed by Heritage include:
- HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
- HERITAGE CAPITAL APPRECIATION TRUST
- HERITAGE INCOME-GROWTH TRUST
- HERITAGE INCOME TRUST
DIVERSIFIED PORTFOLIO
LIMITED MATURITY GOVERNMENT PORTFOLIO
INSTITUTIONAL GOVERNMENT PORTFOLIO
- HERITAGE SERIES TRUST
SMALL CAP STOCK FUND
VALUE EQUITY FUND
We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these funds, please contact your account
executive. Read the prospectus carefully before you invest in any of the funds.
11
<PAGE> 12
SEMIANNUAL REPORT
(Unaudited) and Investment
Performance Review for the
Six Month Period Ended
APRIL 30, 1995
A member of the
Heritage Family of Mutual Funds(TM)
<TABLE>
<S> <C>
Heritage U.S. Government Income Fund ----------------
P.O. Box 33022
St. Petersburg, FL 33733
- --------------------------------- BULK RATE
U.S. POSTAGE
Address Change Requested PAID
PERMIT NO. 39
Semiannual Report ATLANTA, GA
INVESTMENT ADVISOR ----------------
Heritage Asset Management, Inc.
P.O. Box 33022
St. Petersburg, FL 33733
(800) 421-4184
SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266
(800) 426-5523
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
NEW YORK STOCK EXCHANGE SYMBOL
HGA
This report is for the information of shareholders of
Heritage U.S. Government Income Fund. It is not a prospectus, circular
or representation intended for use in the purchase or sale of shares of the
Fund or of any securities mentioned in the report.
4500 6/95 HAM007
</TABLE>
