<PAGE> 1
June 19, 1996
Dear Fellow Shareholders:
We are pleased to provide you with the semiannual report for Heritage U.S.
Government Income Fund for the six month period ended April 30, 1996. This
period showed relatively flat performance for the fixed income markets. The
Lehman Brothers Government-Corporate Bond Index (the "Index") produced a total
return of +0.04% over that period while your Fund returned +0.40% on a net asset
value basis and +3.61% on a market value basis. Interest rates since April 30
have moved higher by about 17 basis points (0.17%) to 7.08% on the long-term
U.S. Treasury bond. From the beginning of 1996 through the end of April, the
Index has had a total return of -3.01% while your Fund's total return was -3.03%
on net asset value and +8.81% on market value.
Interest rates generally rose over the six month period, especially as the
economy began to strengthen modestly in the first quarter of 1996. Employment
data showed sharp gains in February and March and ignited fears that a spurt in
economic growth might lead to higher levels of inflation and a potential for the
Federal Reserve to increase interest rates. At the same time, commodity prices,
specifically oil and wheat, jumped to the highest levels in the current economic
expansion. Crude oil surged due to low inventory levels that had deliberately
been held low in anticipation of a sale of crude oil by Iraq. The sales were
delayed as negotiations dragged on creating a short-term imbalance in supplies.
At the time of this writing, the negotiations have been completed and oil prices
have declined sharply from their highs. Wheat prices increased as markets
anticipated a poor planting season due to weather related problems, which have
since proved to be unwarranted. Wheat has also declined sharply in recent weeks.
Although these factors combined to increase both the Producer Price Index and
the Consumer Price Index in April, the "core" rate of inflation (inflation less
the volatile food and energy components) remains quite well-behaved and, we
believe, shows no signs of increasing significantly in the months ahead.
Auto sales and consumer spending during this period were particularly
robust, fueled by auto dealer incentives and increased consumer cash flow
generated by larger tax refunds and money freed up from mortgage refinancings of
late 1995.
In response to the upward movement in rates and the general level of
uncertainty in the fixed income markets, we reduced the duration (sensitivity to
changing interest rates) of the Fund to be less than that of the Index.
We continue to believe the economy during the second half of 1996 will be
weaker than it was during the first half of 1996. We believe the consumer has a
significantly higher burden of debt relative to historic levels. Moreover, real
incomes have not grown markedly and we expect to see the consumer reduce current
spending and begin to pay down debt. Since consumer spending accounts for
approximately two-thirds of Gross Domestic Product, we expect this to slow the
economy, allowing interest rates to fall from today's relatively lofty levels.
We continue to believe inflation will remain under control and average about 3%
for all of 1996. We believe interest rates at their current levels provide
significant "real yields" (bond yields minus inflation) and we believe long-term
bond holders should experience attractive returns over the next year.
From a strategic perspective, we anticipate re-establishing a longer
portfolio duration in the Fund as we begin to see signs of a slower economy and
a moderation of inflation expectations.
<PAGE> 2
Thank you for your continuing investment in Heritage U.S. Government Income
Fund. We look forward to helping serve your investment needs for years to come.
Sincerely, Sincerely,
/s/ Stephen G. Hill /s/ H. Peter Wallace
Stephen G. Hill H. Peter Wallace
President Portfolio Manager
2
<PAGE> 3
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
APRIL 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
- -------------------- --------- ------------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--122.9%(A)
U.S. TREASURIES
$ 400,000 U.S. Treasury Bills, 4.76%............................................ 5/16/96 $ 399,207
2,000,000 U.S. Treasury Notes, 7.125%........................................... 2/29/00 2,051,250
2,500,000 U.S. Treasury Notes, 5.625%........................................... 11/30/00 2,422,655
10,000,000 U.S. Treasury Bonds, 11.125%(c)....................................... 8/15/03 12,557,800
1,000,000 U.S. Treasury Notes, 5.625%........................................... 2/15/06 925,310
------------
Total U.S. Treasuries................................................. 18,356,222
------------
U.S. GOVERNMENT AGENCIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
3,000,000 REMIC, 8.5%, 1995-2 E................................................. 7/20/18 3,024,375
4,881,992 7.5%, Pool #415688.................................................... 11/15/25 4,824,776
3,001,902 7.0%, Pool #373553.................................................... 2/15/26 2,889,330
------------
10,738,481
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION:
1,000,000 REMIC, 8.00%, 1771 VE................................................. 7/15/10 1,001,140
1,391,392 REMIC, 9.05%, 6C...................................................... 6/15/19 1,457,483
147,619 REMIC, 10.0%, 41-E.................................................... 8/15/19 148,310
1,000,000 REMIC, 9.5%, 175-G.................................................... 5/15/20 1,019,375
1,550,000 REMIC, 9.0%, 60-H..................................................... 7/15/20 1,579,822
3,000,000 REMIC, 10.0%, 1378-H.................................................. 1/15/21 3,307,968
------------
8,514,098
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
3,000,000 REMIC, 8.0%, 1995-5 E................................................. 10/25/07 3,001,875
1,300,000 REMIC, 9.85%, 1989-34-E............................................... 8/25/14 1,355,393
1,012,741 REMIC, 9.67%, 1990-96-E............................................... 1/25/17 1,046,820
920,170 REMIC, 8.0%, 1991-28 H................................................ 2/25/20 931,828
2,000,000 REMIC, 8.5%, 92-65 K.................................................. 5/25/21 2,066,020
356,464 REMIC, G93-19 SG, LIBOR Inverse Floater, 6.33%........................ 4/25/23 237,049
------------
8,638,985
------------
Total U.S. Government Agencies........................................ 27,891,564
------------
Total U.S. Government and Agency Securities (cost $46,613,771)........ 46,247,786
------------
PRIVATE ISSUE MORTGAGE SECURITIES--2.7%(A)
1,000,000 Kidder Peabody Mortgage Asset Trust................................... 4/1/19 1,027,700
------------
Total Private Issue Mortgage Securities (cost $1,033,125)............. 1,027,700
------------
REPURCHASE AGREEMENT--6.8%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated April 30, 1996, @
5.22%, to be repurchased at $2,560,371 on May 1, 1996, collateralized by $2,565,984 United
States Treasury Notes, 5.625% due June 30, 1997, (market value $2,614,437 including
interest) (cost $2,560,000)................................................................. 2,560,000
------------
TOTAL INVESTMENT PORTFOLIO (COST $50,206,896)(B) 132.4%(A).................................. 49,835,486
------------
OTHER ASSETS AND LIABILITIES, NET (32.4%),(A)............................................... (12,216,991)
------------
NET ASSETS 100.0%........................................................................... $ 37,618,495
===========
</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 $371,410, which
consists of aggregate gross unrealized appreciation for all securities in
which there is an excess of market value over tax cost of $354,964 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value of $726,374.
(c) Collateral for reverse repurchase agreement.
LIBOR--London Interbank Offered Rate
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, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
- -----
Investments, at market value (identified cost $50,206,896) (Note 1)..................... $49,835,486
Cash.................................................................................... 3,075
Receivables:
Investments sold, delayed delivery (Note 1)........................................... 30,548,547
Interest.............................................................................. 550,954
Deferred organization expense........................................................... 18,916
-----------
Total assets.................................................................... 80,956,978
Liabilities
- --------
Payables (Note 4):
Investments purchased, delayed delivery (Note 1)...................................... $30,427,734
Borrowings under reverse repurchase agreement (Notes 1 and 5)......................... 12,820,637
Due to manager........................................................................ 27,370
Accrued administrative fee............................................................ 19,308
Other accrued expenses................................................................ 43,434
-----------
Total liabilities............................................................... 43,338,483
-----------
Net assets, at market value............................................................. $37,618,495
==========
Net Assets
- ---------
Net assets consist of:
Paid-in capital (Note 1).............................................................. $43,517,490
Accumulated distribution in excess of net investment income........................... (20,961)
Accumulated net realized loss on investments (Note 1)................................. (4,861,002)
Accumulated net realized loss on futures.............................................. (645,622)
Net unrealized depreciation on investments............................................ (371,410)
-----------
Net assets, at market value............................................................. $37,618,495
==========
Net asset value per share ($37,618,495 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, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
- -----------------
Income:
Interest (includes mortgage dollar roll income of $186,328)............................... $2,238,553
Expenses (Notes 1 and 4):
Management fee............................................................................ $122,719
Interest expense.......................................................................... 376,353
Administrative fee........................................................................ 29,195
Legal fees................................................................................ 23,482
Custodian/Fund accounting fees............................................................ 21,053
Auditing fees............................................................................. 12,500
Shareholder servicing..................................................................... 9,582
Reports to shareholders................................................................... 9,406
NYSE fees................................................................................. 8,085
Trustees' fees and expenses............................................................... 4,340
Amortization of organization costs........................................................ 3,661
Insurance................................................................................. 3,267
Other..................................................................................... 3,343
--------
Total expenses before waiver........................................................ 626,986
Fees waived by Manager (Note 4)..................................................... (55,993) 570,993
-------- ----------
Net investment income....................................................................... 1,667,560
----------
Realized and Unrealized Gain (Loss) on Investments
- --------------------------------------------------
Net realized loss from investment transactions.............................................. (227,455)
Net decrease in unrealized appreciation of investments during the period.................... (1,345,279)
----------
Net loss on investments............................................................. (1,572,734)
----------
Net increase in net assets resulting from operations........................................ $ 94,826
=========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTH
PERIOD ENDED FOR THE YEAR
APRIL 30, 1996 ENDED
(UNAUDITED) OCTOBER 31, 1995
----------------- -----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................ $ 1,667,560 $ 3,633,242
Net realized loss from investment transactions............... (227,455) (286,735)
Net realized loss from future transactions................... -- (753,250)
Net increase (decrease) in unrealized appreciation of
investments and futures during the period.................. (1,345,279) 2,878,365
----------------- ------------
Net increase in net assets resulting from operations......... 94,826 5,471,622
Distribution to shareholders from:
Net investment income ($0.54 and $1.15 per share)............ (1,688,521) (3,581,511)
Tax return of capital ($0.01)................................ -- (44,829)
----------------- ------------
Increase (decrease) in net assets.............................. (1,593,695) 1,845,282
Net assets, beginning of period................................ 39,212,190 37,366,908
----------------- ------------
Net assets, end of period (including accumulated distribution
in excess of net investment income of $20,961 at April 30,
1996)........................................................ $37,618,495 $39,212,190
================= =============================
</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, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Cash provided from Reverse Repurchase Transactions, net......................................... $ 6,189,387
Dividends and Distributions paid in cash........................................................ (1,688,521)
-------------
Cash provided by financing activities......................................................... 4,500,866
-------------
CASH PROVIDED (USED) BY OPERATIONS:
Net Investment Income........................................................................... $ 1,667,560
Decrease in accrued expenses.................................................................... (37,560)
Decrease in interest receivable................................................................. 223,913
Proceeds from disposition of portfolio securities............................................... 61,782,950
Purchase of short term securities, net.......................................................... (1,632,644)
Purchase of portfolio securities................................................................ (66,502,426)
-------------
Cash used by operations....................................................................... (4,498,207)
-------------
NET INCREASE IN CASH.............................................................................. 2,659
CASH AT BEGINNING OF PERIOD....................................................................... 416
============
CASH AT END OF PERIOD............................................................................. $ 3,075
============
</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 the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
FOR THE SIX
MONTH PERIOD
ENDED FOR THE YEAR
APRIL 30, 1996 ENDED
(UNAUDITED) OCTOBER 31, 1995 1994+
-------------- ---------------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of the period................................... $ 12.59 $11.99 $ 14.02*
------- ------ -------
Income from Investment Operations:
Net investment income(a)................................................. .53 1.17 0.98
Net realized and unrealized gain (loss) on investments................... (.51) .59 (2.04)
------- ------ -------
Total from investment operations......................................... .02 1.76 (1.06)
------- ------ -------
Less Distributions:
Dividends from net investment income..................................... (.54) (1.15) (0.91)
Distributions in excess of net investment income......................... -- -- (0.02)
Tax return of capital.................................................... -- (.01) (0.04)
------- ------ -------
Total distributions...................................................... (.54) (1.16) (0.97)
------- ------ -------
Net asset value, end of the period......................................... $ 12.07 $12.59 $ 11.99
============ =============== =======
Market value, end of period................................................ $ 11.625 $11.75 $11.375
============ =============== =======
TOTAL RETURN:
Per share market value................................................... 3.61%(d) 13.87%(d) -18.20%(c)
Per share net asset value................................................ 0.40%(d) 15.78%(d) -7.75%(c)
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average daily net assets (excluding
interest
and taxes)(a).......................................................... 1.00% 1.00% 1.00%(e)
Ratio of net investment income to average daily net assets............... 2.57% 9.57% 7.99%(e)
Portfolio turnover rate(b)............................................... 30% 150% 163%(e)
Net assets, end of period ($ millions)................................... 38 39 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 $0.02, $.04 and $.02 per
share, respectively. The operating expense ratio (excluding interest
expense) including such items would be 1.29% (annualized), 1.36% and 1.21%
(annualized), respectively.
(b) The portfolio turnover rates, including reverse repurchase agreements and
mortgage dollar roll transactions, aggregated 359%, 990% and 439%,
respectively.
(c) Return since inception, does not include offering costs, not annualized.
(d) 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.
(e) Annualized.
(f) Fund's net assets, excluding borrowings outstanding, divided by shares of
beneficial interest outstanding.
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 Fund's
primary investment objective is to provide a high level of current
income and its secondary investment objective is capital appreciation.
The Fund will seek to achieve these objectives through the active
management of a portfolio composed primarily of mortgage-related
securities and mortgages. The Fund normally will invest a minimum of 65%
of its total assets in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, including
mortgage-related securities. 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: The Fund values investment securities at market
value based on the last sales price as reported by the principal
securities exchange on which the security is traded. If no sale is
reported, market value is based on the most recent quoted bid price and
in the absence of a market quote, securities are valued using such
methods as the Board of Trustees believes would reflect fair market
value. Investments in certain debt instruments not traded in an
organized market, are valued on the basis of valuations furnished by
independent pricing services or broker/dealers who utilize information
with respect to market transactions in such securities or comparable
securities, quotations from dealers, yields, maturities, ratings and
various relationships between securities. Short term investments having
a maturity of 60 days or less are valued at cost, which when combined
with accrued interest included in 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.
Mortgage Dollar Rolls: The Fund may enter into mortgage dollar rolls
principally in when issued securities, (TBA's) in which the Fund sells
mortgage securities for delivery in the current month and simultaneously
contracts to repurchase similar, but not identical, securities at the
same price on a fixed date. The Fund accounts for such dollar rolls as
financings and receives compensation as consideration for entering into
the commitment to repurchase.
The compensation is recorded as deferred income and amortized to income
over the roll period. The counterparty receives all principal and
interest payments, including prepayments, made in respect of the
security while it is the holder. Mortgage dollar rolls may be renewed
with a new purchase and repurchase price fixed and a cash settlement
made at cash renewal without physical delivery of the securities subject
to the contract. The Fund engages in dollar rolls for the purpose of
enhancing the Fund's yield, principally by earning a negotiated fee.
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
contract. 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 Income 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.
Accordingly, no provision has been made for federal income taxes.
Distribution of Income and Gains: Distributions of net investment income
are made monthly. Net realized gains from investment transactions for
the Fund during any particular year in excess of available capital loss
carryforwards, which, if not distributed, would be taxable to the Fund,
will be distributed to shareholders in the following fiscal year. The
Fund uses the identified cost method for determining realized gain or
loss on investments for both financial and federal income tax reporting
purposes.
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.
Capital Accounts: The Fund reports the undistributed net investment
income and accumulated net realized gain (loss) accounts on a basis
approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, the Fund may periodically make
reclassifications among certain capital accounts without impacting the
net asset value of the Fund.
8
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
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, 1996.
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. All
original issue discounts are accreted for both tax and financial
reporting purposes.
Note 2: FUND SHARES. At April 30, 1996, there were 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, 1996.
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, 1996, purchases, sales and paydowns of investment securities
(excluding short-term investments and mortgage dollar roll transactions)
aggregated $19,136,892, $20,435,960 and $1,571,251, respectively.
Purchases and sales included in mortgage dollar roll transactions
aggregated $249,255,640 and $265,268,786.
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 Manager, 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 this agreement,
management fees of $55,993 were waived for the period ended April 30,
1996. If total Fund expenses fall below the expense limitation agreed to
by the Manager before the end of the year ending October 31, 1998, the
Fund may be required to pay the Manager a portion or all of the waived
management fee. In addition, the Fund may be required to pay the Manager
a portion or all of the management fees waived of $76,728 and $136,222
for the years ended October 31, 1994 and October 31, 1995, respectively,
if total Fund expenses fall below the annual expense limitations before
the end of the years ending October 31, 1996 and October 31, 1997,
respectively.
Trustees of the Fund 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 mutual funds). Each Trustee of the Heritage mutual
funds that is not an interested person of the Manager receives an annual
fee of $8,000, an additional fee of $2,000 for each combined quarterly
meeting of the Heritage mutual funds attended and $1,000 for each
special Trustees meeting attended. Trustees' fees and expenses are paid
equally by each of the Heritage mutual funds.
Note 5: FEDERAL INCOME TAXES. As of October 31, 1995, the Fund has net tax
basis capital loss carryforwards of $5,279,169, which may be applied
against any realized net taxable gains until the expiration dates of
October 31, 2002 ($4,218,352) and October 31, 2003 ($1,060,817).
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
Note 6: SHAREHOLDERS MEETING. On January 24, 1996, the Annual Meeting of
Shareholders was held. The results of that meeting on the following
items were as follows:
<TABLE>
<CAPTION>
SHARES
-------------------------
WITHHELD
FOR AUTHORITY
------------- ---------
<S> <C> <C>
Election of Trustees
Class I
Donald W. Burton 2,900,110.421 9,356.874
David M. Phillips 2,900,110.421 9,356.874
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------------------------------------
WITHHELD
FOR AGAINST AUTHORITY
------------- --------- ---------
<S> <C> <C> <C>
Ratification of the selection of Coopers & Lybrand L.L.P. as
independent accountants of the Fund for the fiscal year ending
October 31, 1996. 2,905,052.607 3,002.607 1,412.081
</TABLE>
10
<PAGE> 11
HERITAGE U.S. GOVERNMENT INCOME FUND is a member of the Heritage family of
mutual funds. Other investment alternatives available to you from Heritage
include:
- HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
- HERITAGE CAPITAL APPRECIATION TRUST
- HERITAGE INCOME-GROWTH TRUST
- HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
- HERITAGE SERIES TRUST
EAGLE INTERNATIONAL EQUITY PORTFOLIO
GROWTH EQUITY FUND
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 mutual funds, please contact your
account executive. Read the prospectus carefully before you invest in any of the
funds.
<PAGE> 12
Heritage U.S. Government Income Fund
P.O. Box 33022
St. Petersburg, FL 33733
- ---------------------------------------
Address Change Requested
Annual Report
INVESTMENT ADVISOR/FUND ACCOUNTANT
<PAGE> 13
HERITAGE
U.S. GOVERNMENT
INCOME FUND
SEMIANNUAL REPORT
(Unaudited) and Investment
Performance Review for the
Six Month Period Ended
April 30, 1996
A member of the
Heritage Family of Mutual Funds(TM)
Heritage U.S. Government Income Fund
P.O. Box 33022
St. Petersburg, FL 33733
-------------------------------------
Address change Requested
Annual Report
INVESTMENT ADVISOR/FUND ASSOCIATED
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.
