<PAGE> 1
December 27, 1995
Dear Fellow Shareholders:
It is a pleasure to discuss the factors that influenced the performance of
Heritage U.S. Government Income Fund during the fiscal year ended October 31,
1995.
During the past fiscal year your Fund performed quite well, achieving a
total return of +15.78% based on net asset value, and +13.87% based on market
value. The Lehman Brothers Government-Corporate Index returned +16.16% over the
same period. We believe net asset value return is the best measure of your
manager's ability.
The major factor influencing the Fund's performance during the fiscal year
was the sharp drop in long-term interest rates. Long-term bond rates, as
measured by the yield of the thirty-year U.S. Treasury bond, fell from 7.97% to
6.33%, a decline of 164 basis points or 1.64%. This retraced most of the rise
experienced in 1994.
During the year, the Treasury yield curve became flatter as short-term
rates moved significantly higher due to the Federal Reserve Board's restrictive
monetary policy. The Federal Funds Rate, or the rate at which Banks lend one
another excess reserves, rose from 4.94% to 5.94% during the period. As a
result, the spread between short-and long-term rates narrowed significantly from
3.03% to 0.39%. Such a flattening made producing high levels of income
progressively more difficult by limiting the amount of additional income that
can be produced by the use of borrowing at short-term rates and investing in
higher-yielding, longer-term securities. Moreover, during the year fewer
Collateralized Mortgage Obligation issues were brought to market. This reduced
the attractiveness of mortgage dollar rolls, which are another source of
additional income to the Fund. These events have led us to recently announce a
reduction in the monthly dividend for the Fund to $0.087 per share per month.
This one cent per month reduction should allow the Fund to distribute less than
its monthly income and provide greater portfolio management flexibility.
The Fund's mortgage derivative position was quite small and consisted of
$356,464 remaining face value of an inverse floating rate bond, FNR G93-19 SG.
Over the course of the year, this issue improved significantly in price and
generated a total return of better than 66%.
From time to time during the year, the Fund hedged its borrowing exposure
by selling financial futures. This limited the risk of the market depreciation
on assets purchased with borrowed funds but also offset some of the beneficial
aspects of leverage as prices rose.
During the year, your Fund remained invested in a diversified portfolio of
Collateralized Mortgage Obligations, Mortgage Pass-Through Securities and U.S.
Treasury Notes and Bonds. During the bond market rally, which encompassed most
of the fiscal year, U.S. Treasury issues outperformed mortgage issues by a
fairly wide margin. Investors avoided mortgage securities due to principal
prepayment concerns. The yield levels of mortgage securities then become
relatively more attractive and your Fund purchased a number of premium mortgage
securities, some with very significant principal prepayment protection, which we
believe offer extraordinary value. At the same time we increased the duration
(price sensitivity to a change in interest rates) of the fixed rate U.S.
Treasury portion of the Fund to compensate for the lower duration of the
mortgage securities purchased.
<PAGE> 2
We continue to believe the outlook for the domestic economy is one of slow
growth and low inflation, which should translate into lower interest rates well
into 1996. We expect that the Federal Reserve Board will lower short-term rates
further in 1996 in order to stimulate economic activity and expect the yield
curve to become steeper, thereby allowing the Fund to continue to produce
attractive levels of current income. Your Fund is structured to benefit from
additional drops in interest rates.
On behalf of all of us at Heritage, thank you for your continued investment
with us. We hope you had a happy and healthy holiday season and wish you a
wonderful 1996!
Sincerely, Sincerely,
/s/ Stephen G. Hill /s/ H. Peter Wallace
- --------------------------- -----------------------------------
Stephen G. Hill, President H. Peter Wallace, Portfolio Manager
On May 8, 1995 a special shareholders meeting 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................................... 2,955,097.933 21,863.833
David M. Phillips.................................. 2,955,097.933 21,863.833
Class II
James L. Pappas.................................... 2,955,620.933 21,340.833
Richard K. Riess................................... 2,955,620.933 21,340.833
Class III
Thomas A. James.................................... 2,955,620.933 21,340.833
C. Andrew Graham................................... 2,956,120.933 20,840.833
Eric Stattin....................................... 2,955,097.933 21,863.833
</TABLE>
<TABLE>
<CAPTION>
SHARES
----------------------------------------
FOR AGAINST ABSTAINING
------------- ---------- -----------
<S> <C> <C> <C>
Approval of The Investment Advisory Agreement between
the Fund and Heritage Asset Management, Inc........... 2,942,325.999 22,174.078 30,461.059
Ratification of the selection of Coopers & Lybrand
L.L.P. as independent accountants of the Fund for the
fiscal year ending October 31, 1995................... 2,942,788.789 15,358.708 18,814.268
</TABLE>
2
<PAGE> 3
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
------------
<S> <C>
REPURCHASE AGREEMENT--2.38%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated October 31, 1995 @ 5.82%, to be
repurchased at $933,151 on November 1, 1995, collateralized by $870,000 United States Treasury
Notes, 7.25%, due August 15, 2004 (market value $958,679 including accrued interest) (cost
$933,000)............................................................................................ $ 933,000
------------
</TABLE>
<TABLE>
PRINCIPAL MATURITY
AMOUNT DATE
- ------------------- --------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--166.54%(A)
U.S. TREASURIES
---------------
$ 400,000 U.S. Treasury Bills, 6.26%(c).......................................... 02/15/96 393,563
2,000,000 U.S. Treasury Notes, 7.125%(c)......................................... 02/29/00 2,098,125
10,000,000 U.S. Treasury Bonds, 11.125%(c)........................................ 08/15/03 13,140,625
2,000,000 U.S. Treasury Notes, 6.5%(c)........................................... 05/15/05 2,069,063
2,500,000 U.S. Treasury Notes, 6.875%(c)......................................... 08/15/25 2,680,078
------------
Total U.S. Treasuries.................................................. 20,381,454
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
----------------------------------------
3,000,000 REMIC, 8.5% 1995-2 E................................................... 07/20/18 3,071,250
2,735,342 8.5% Pool # 385895(c).................................................. 09/15/24 2,848,603
15,000,000 TBA, 30 year, 8%....................................................... 10/15/25 15,438,281
------------
Total Government National Mortgage Association......................... 21,358,134
------------
U.S. GOVERNMENT AGENCIES
------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION:
5,000,000 REMIC, 7%, 7-Year Gold Balloon Pool #M80393(c)......................... 10/01/02 5,059,375
1,000,000 REMIC, 8%, 1171 VE..................................................... 07/15/10 1,003,750
1,586,021 REMIC, 9.05%, 6 C...................................................... 06/15/19 1,665,322
301,395 REMIC, 10.0%, 41 E, PAC(c)............................................. 08/15/19 304,409
1,000,000 REMIC, 9.5%, 175 G..................................................... 05/15/20 1,032,813
1,550,000 REMIC, 9.0%, 60 H, PAC................................................. 07/15/20 1,582,938
3,000,000 REMIC, 10.0%, 1378 H................................................... 01/15/21 3,352,500
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
3,000,000 REMIC, 8%, 1995-5 E.................................................... 10/25/07 3,037,500
1,300,000 REMIC, 9.85%, 1989-34 E................................................ 08/25/14 1,378,812
1,182,148 REMIC, 9.67%, 1990-96 E................................................ 01/25/17 1,233,867
367,717 REMIC, 9%, 1990-119 H(c)............................................... 03/25/19 368,923
1,224,758 REMIC, 8%, 1991-28 H(c)................................................ 02/25/20 1,238,536
2,000,000 REMIC, 8.5%, 92-65 K................................................... 05/25/21 2,090,625
356,464 REMIC, G93-19SG, LIBOR Inverse Floater................................. 04/25/23 213,878
------------
Total U.S. Government Agencies......................................... 23,563,248
------------
Total U.S. Government and Agency Securities (cost $64,331,005)......... 65,302,836
------------
PRIVATE ISSUE MORTGAGE SECURITIES--2.87%(A)
-------------------------------------------
1,000,000 Kidder Peabody Mortgage Asset Trust, 8.94%*............................ 04/01/19 1,035,937
88,476 CMSC Mortgage Securities, 1991-9F 8.25%*............................... 06/20/18 88,199
------------
Total Private Issue Mortgage Securities (cost $1,122,098).............. 1,124,136
------------
TOTAL INVESTMENT PORTFOLIO (COST $66,386,103)(B), 171.78%(A)................................ 67,359,972
OTHER ASSETS AND LIABILITIES, NET, (71.78%)(A).............................................. (28,147,782)
------------
NET ASSETS, 100.0%.......................................................................... $ 39,212,190
===========
</TABLE>
- ------------------
* Yield to maturity (unaudited)
(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 appreciation of $973,869 which consist
of aggregate gross unrealized appreciation for all securities in which there
is an excess of market value over tax cost of $1,208,156 and aggregate gross
unrealized depreciation for all securities in which there is an excess of
tax cost over market value of $234,287.
(c) Collateral for forward commitments and reverse repurchase agreement.
LIBOR -- London Interbank Offered Rate
PAC -- Planned Amortization Class
TBA -- To Be Announced
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
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
- -----
Investments, at market value (identified cost $65,453,103) (Note 1)..................... $66,426,972
Repurchase agreement (identified cost $933,000) (Note 1)................................ 933,000
Cash.................................................................................... 416
Receivables:
Investments sold, delayed delivery (Note 1)........................................... 61,799,595
Interest (includes mortgage dollar roll fee receivable of $135,938)................... 774,867
Prepaid insurance....................................................................... 2,610
Deferred organization expense........................................................... 22,577
-----------
Total assets.................................................................... 129,960,037
Liabilities
- --------
Payables (Note 4):
Investments purchased, delayed delivery (Note 1)...................................... $83,982,654
Borrowings under reverse repurchase agreement (Notes 1 and 5)......................... 6,631,250
Accrued management fee................................................................ 35,784
Accrued administrative fee............................................................ 15,060
Deferred mortgage dollar roll income (Note 1)......................................... 13,013
Other accrued expenses................................................................ 70,086
-----------
Total liabilities............................................................... 90,747,847
-----------
Net assets, at market value............................................................. $39,212,190
==========
Net Assets
- ---------
Net assets consist of:
Net unrealized appreciation on investments............................................ $ 973,869
Accumulated net realized loss on investments (Note 1)................................. (4,633,547)
Accumulated net realized loss on futures.............................................. (645,622)
Paid-in capital (Note 1).............................................................. 43,517,490
-----------
Net assets, at market value............................................................. $39,212,190
==========
Net asset value per share ($39,212,190 divided by 3,115,471 shares of beneficial
interest outstanding, no par value) (Note 2).......................................... $12.59
==========
</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 YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
Investment Income
- ----------------
<S> <C> <C>
Income:
Interest (includes mortgage dollar roll fee income of $744,368)........................ $ 4,072,587
Expenses (Notes 1 and 4):
Management fee......................................................................... $ 256,375
Interest............................................................................... 59,649
Administrative fee..................................................................... 56,972
Custodian fees......................................................................... 51,953
Auditing fees.......................................................................... 32,275
Legal fees............................................................................. 30,623
Reports to shareholders................................................................ 23,482
Shareholder servicing.................................................................. 18,622
NYSE fees.............................................................................. 16,170
Trustees' fees and expenses............................................................ 9,303
Amortization of organization costs..................................................... 7,322
Other.................................................................................. 6,886
Insurance.............................................................................. 5,935
----------
Total expenses before waiver..................................................... 575,567
Fees waived by Manager (Note 4).................................................. (136,222) 439,345
---------- -----------
Net investment income.................................................................... 3,633,242
-----------
Realized and Unrealized Gain (Loss) on Investments
- ---------------------------------------------
Net realized loss from investment transactions........................................... (286,735)
Net realized loss from futures transactions.............................................. (753,250)
Net increase in unrealized appreciation of investments during the year................... 2,878,365
-----------
Net gain on investments.......................................................... 1,838,380
-----------
Net increase in net assets resulting from operations..................................... $ 5,471,622
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR NOVEMBER 19, 1993
ENDED (COMMENCEMENT OF OPERATIONS)
OCTOBER 31, 1995 TO OCTOBER 31, 1994
---------------- ----------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income......................................... $ 3,633,242 $ 3,056,913
Net realized loss from investment transactions................ (286,735) (4,565,604)
Net realized gain (loss) from future transactions............. (753,250) 107,628
Net increase (decrease) in unrealized appreciation of
investments and futures during the period................... 2,878,365 (1,904,496)
---------------- ------------
Net increase (decrease) in net assets resulting from
operations.................................................. 5,471,622 (3,305,559)
Distributions to shareholders from:
Net investment income ($1.15 and $0.91, respectively)......... (3,581,511) (2,823,138)
Distribution in excess of net investment income ($0.02)....... -- (72,303)
Tax return of capital ($0.01 and $0.04, respectively)......... (44,829) (125,887)
Increase in net assets from Fund share transactions (Note 2).... -- 43,593,795
---------------- ------------
Increase in net assets.......................................... 1,845,282 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 $72,303 at October 31,
1994)......................................................... $ 39,212,190 $ 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 YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Decrease in cash
- --------------
Cash flows from operating activities:
Interest received............................................................................... $ 3,830,411
Operating expenses paid......................................................................... (337,813)
Proceeds from disposition of portfolio securities and futures contracts......................... 605,848,211
Maturities of short-term securities, net........................................................ 3,599,451
Purchase of portfolio securities and futures contracts.......................................... (615,945,431)
-------------
Net cash used by operating activities......................................................... (3,005,171)
-------------
Cash flows from financing activities:
Proceeds from reverse repurchase agreement...................................................... 6,631,250
Cash dividends paid............................................................................. (3,626,340)
-------------
Net cash provided by financing activities..................................................... 3,004,910
-------------
Net decrease in cash.............................................................................. (261)
Cash at beginning of year......................................................................... 677
-------------
Cash at end of year............................................................................... $ 416
============
Reconciliation of net increase in net assets resulting from operations to
cash provided by operating activities
- ------------------------------------------------------------
Net increase in net assets resulting from operations.............................................. $ 5,471,622
-------------
Increase in investments and repurchase agreements................................................. (1,142,944)
Net decrease in depreciation of investments during the year....................................... (2,877,953)
Increase in interest receivable................................................................... (182,527)
Increase in investments receivable, delayed delivery.............................................. (51,577,720)
Increase in investments payable, delayed delivery................................................. 47,262,468
Increase in accrued expenses...................................................................... 41,883
-------------
Total adjustments............................................................................. (8,476,793)
-------------
Net cash used by operating activities....................................................... $ (3,005,171)
============
</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 YEAR ENDED
OCTOBER 31,
PER SHARE OPERATING PERFORMANCE 1995 1994+
------------------ -------
<S> <C> <C>
Net asset value, beginning of the period................................................ $11.99 $ 14.02*
------ -------
Income from Investment Operations:
Net investment income(a).............................................................. 1.17 0.98
Net realized and unrealized gain (loss) on investments................................ .59 (2.04)
------ -------
Total from investment operations...................................................... 1.76 (1.06)
------ -------
Less Distributions:
Dividends from net investment income.................................................. (1.15) (0.91)
Distributions in excess of net investment income...................................... -- (0.02)
Tax return of capital................................................................. (.01) (0.04)
------ -------
Total distributions................................................................... (1.16) (0.97)
------ -------
Net asset value, end of the period...................................................... $12.59 $ 11.99
================ =======
Market value, end of period............................................................. $11.75 $11.375
================ =======
TOTAL RETURN:
Per share market value................................................................ 13.87%(d) -18.20%(c)
Per share net asset value............................................................. 15.78%(d) -7.75%(c)
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average daily net assets (excluding interest 1.00% 1.00%(e)
and taxes)(a).......................................................................
Ratio of net investment income to average daily net assets............................ 9.57% 7.99%(e)
Portfolio turnover rate(b)............................................................ 150% 163%(e)
Amount of borrowings outstanding at end of period (000s omitted)...................... $6,631 --
Per-share amount of borrowings outstanding at end of period........................... $ 2.13 --
Per-share asset coverage of borrowings outstanding at end of period(f)................ $14.71 --
Net assets, end of period ($ millions)................................................ 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 $.04 and $.02 per share,
respectively. The operating expense ratio (excluding interest expense)
including such items would be 1.36% and 1.21% (annualized), respectively.
(b) The Portfolio turnover rates including reverse repurchase agreements and
mortgage dollar roll transactions aggregated 990% and 439% (annualized),
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 year.
(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
- --------------------------------------------------------------------------------
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 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 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. 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).
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.
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 October 31, 1995.
8
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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 October 31, 1995, there were an unlimited number of
shares of beneficial interest of no par value authorized. There was no
Fund share activity for the fiscal year ended October 31, 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 year ended October 31, 1995,
purchases, sales and paydowns of investment securities (excluding
short-term investments, reverse repurchase agreements and mortgage
dollar roll transactions) aggregated $91,333,981, $84,654,572 and
$3,047,233, respectively. Purchases and sales of securities involved in
reverse repurchase agreements aggregated $69,133,222 and $63,408,394,
respectively. Purchases and sales included in mortgage dollar roll
transactions aggregated $509,068,281 and $513,649,141, respectively. The
aggregate amounts for future transactions sold and closed during the
year were $42,672,032 and $52,268,908, respectively. The following is a
summary of futures contracts activity during the year:
<TABLE>
<CAPTION>
SALES OF FUTURES CONTRACTS
----------------------------------
NUMBER OF AGGREGATE FACE
U.S. TREASURY NOTE/BOND FUTURES: CONTRACTS VALUE OF CONTRACTS
------------------------------------------------------------------------- --------- ------------------
<S> <C> <C>
Outstanding November 1, 1994............................................. 90 $ 9,000,000
Contracts sold......................................................... 415 41,500,000
Contracts closed....................................................... (505) (50,500,000)
--------- ------------------
Outstanding at October 31, 1995.......................................... 0 $ 0
========== =================
</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 year ended October 31, 1995 amounted to
$136,222 ($.04 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 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 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 mutual funds attended. Trustees' fees
and expenses are paid equally by each of the Heritage mutual funds.
9
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Note 5: LEVERAGE. Forward sale commitments, dollar rolls, reverse repurchase
agreements and other transactions may involve leverage. In order to
limit leverage, the Fund segregated $30,201,300 in high credit quality,
liquid investments against outstanding obligations, resulting in a net
leverage percentage of 14.5% at October 31, 1995.
Note 6: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NET INCREASE (DECREASE)
NET GAIN (LOSS) ON IN NET ASSETS
NET INVESTMENTS RESULTING FROM
FISCAL QUARTER ENDED INVESTMENT INCOME TRANSACTIONS OPERATIONS
---------------------------------- ---------------------- ----------------------- -----------------------
1995 TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
---------------------------------- ---------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1995 $ 978,385 $0.31 $ 325,028 $ 0.10 $ 1,303,413 $ 0.41
July 31, 1995 826,687 0.27 1,301,556 0.42 2,128,243 0.69
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 $3,633,242 $1.17 $ 1,838,380 $ 0.59 $ 5,471,622 $ 1.76
========= ========= ========== ========= ========== =========
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
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Heritage U.S. Government Income Fund:
We have audited the accompanying statement of assets and liabilities of
Heritage U.S. Government Income Fund, including the investment portfolio, as of
October 31, 1995, and the related statement of operations and cash flows for the
year then ended, the statements of changes in net assets, and the financial
highlights for the year then ended and for the period November 19, 1993
(commencement of operations) to October 31, 1994. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Heritage U.S. Government Income Fund, as of October 31, 1995, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets, and the financial highlights for the year then ended and for the period
November 19, 1993 (commencement of operations) to October 31, 1994, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
December 29, 1995
COOPERS & LYBRAND LLP
11
<PAGE> 12
HERITAGE U.S. GOVERNMENT
INCOME FUND
DIVIDEND REINVESTMENT PLAN
1. State Street Bank and Trust Company (the "Plan Agent") will act as
agent for each shareholder of Heritage U.S. Government Income Fund (the "Fund")
who has not elected in writing to receive dividends and distributions in cash
(each a "Participant"), will open an account for each Participant under the
Dividend Reinvestment Plan (the "Plan") in the same name in which such
Participant's shares of beneficial interest in the Fund (the "Shares") are
registered, and, beginning with the second distribution, will put into effect
for such Participant the dividend reinvestment option of the Plan as of the
record date for such dividend or capital gains distribution.
2. Whenever the Fund declares an income dividend or a capital gains
distribution with respect to the Shares, each Participant will receive such
dividends and distributions in additional shares, including fractional shares
acquired by the Plan Agent and credited to each Participant's account. The Plan
Agent, as agent for each Participant, will receive the dividend or distribution
on each Participant's Shares and apply the same (net of pro rata brokerage
commissions, if applicable) to each participant's account. Commencing not more
than five business days before the dividend payment date, purchases of the
Shares will be made by the Plan Agent for the Plan to satisfy reinvestments
under the Plan, provided that such purchases on or before the dividend payment
date may be made on the New York Stock Exchange ("NYSE") or elsewhere only at
times when the price of the Shares on the NYSE plus commissions is less than a
5% premium over the Fund's most recently calculated net asset value per Share.
If, at the close of business on the dividend payment date, the Shares purchased
in the open market are insufficient to satisfy the dividend reinvestment
requirement, the Plan Agent, on behalf of the participants in the Plan, will
accept payment in the dividend, or the remaining portion thereof, in authorized
but unissued Shares of the Fund. Such Shares will be issued at a per share price
equal to the higher of (a) the net asset value per Share as of the close of
business on the payment date or (b) 95% of the closing market price per Share on
the payment date. All dividends, distributions and other payments (whether made
in cash or in Shares) shall be made net of any applicable withholding tax.
3. Open market purchases provided for above may be made on any securities
exchange where the Fund's Shares are traded, in the over-the-counter market or
in negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Participants' Funds held by the
Plan Agent uninvested will not bear interest, and it is understood that the Plan
Agent shall have no liability in connection with the timing of any purchases
effected. The Plan Agent shall have no responsibility as to the value of the
Shares acquired for a Participant's account. For the purposes of cash
investments, the Plan Agent may commingle Participants' funds, and the average
price (including brokerage commissions) of all Shares purchased by the Plan
Agent as agent shall be the price per share allocable to each Participant in
connection therewith.
4. The Plan Agent may hold Shares acquired pursuant to the Plan in
non-certificated form in the Plan Agent's name or that of the Plan Agent's
nominee. The Plan Agent will forward to each Participant any proxy solicitation
material and will vote any Shares so held for such Participant only in
accordance with the proxy returned by such Participant to the Fund. Upon a
Participant's written request, the Plan Agent will deliver to such Participant,
without charge, a certificate or certificates for some or all of the whole
Shares held in the Participant's account under the Plan.
5. The Plan Agent will confirm to each Participant each acquisition made
for such Participant's account as soon as practicable but not later than 60 days
after the date thereof. Although Participants may from time to time have
undivided fractional interests (computed to three decimal places) in a Share, no
certificates for a
12
<PAGE> 13
fractional Share shall be issued. However, dividends and distributions on
fractional Shares will be credited to a Participant's account. In the event of
termination of a Participant's account under the Plan, the Plan Agent will
adjust for any such undivided fractional interest in cash at the market value
per share of the Shares at the time of termination, less the pro rata expense of
any sale required to make such an adjustment.
6. Any stock dividends or split shares distributed by the Fund on Shares
held by the Plan Agent for a Participant will be credited to such Participant's
account. In the event that the Fund makes available to its Shareholders rights
to purchase additional Shares or other securities, the Shares held for a
participant under the Plan will be added to other such Shares held by such
Participant in calculating the number of rights to be issued to such
Participant.
7. The Plan Agent's service fee for handling capital gains distributions
or income dividends will be paid by the Fund. Participants will be charged a pro
rata share of brokerage commissions on all open market purchases.
8. Participants may terminate their accounts under the Plan by notifying
the Plan Agent in writing. Such termination will be effective immediately if
such Participant's notice is received by the Plan Agent not less than 10 days
prior to any dividend or distribution payment date; otherwise such termination
will be effective on the first trading day after the payment date for such
dividend or distribution with respect to any subsequent dividend or
distribution. The Plan may be terminated by the Plan Agent or the Fund upon
notice in writing mailed to participants at least 30 days prior to any record
date for the payment of any dividend or distribution by the Fund. Upon any
termination, the Plan Agent will cause a certificate or certificates for the
number of Shares held for each Participant under the Plan to be delivered to
such Participant (or if the Shares are not then in certificated form, will cause
such shares to be transferred to Participant) without charge.
9. The terms and conditions of the Plan may be amended or supplemented by
the Plan Agent or the Fund at any time or times but, except when necessary or
appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to Participants appropriate written notice at least 30 days prior to the
effective date thereof. The amendment or supplement shall be deemed to be
accepted by a Participant unless, prior to the effective date thereof, the Plan
Agent receives written notice of the termination of such Participant's account
under the Plan. Any such amendment may include an appointment by the Plan Agent
in its place and stead of a successor agent under these terms and conditions,
with full power and authority to perform all or any of the acts to be performed
by the Plan Agent under these terms and conditions. Upon any such appointment of
a successor agent for the purpose of receiving dividends and distributions, the
Fund will be authorized to pay to such successor agent, for each Participant's
account, all dividends and distributions payable on the Common Stock held in
such Participant's name or under the Plan for retention or application by such
successor agent as provided in these terms and conditions.
10. The Plan Agent shall at all times act in good faith and agree to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under the Agreement and to comply with applicable law, but it assumes
no responsibility and shall not be liable for loss or damage due to errors
unless such error is caused by the Plan Agent's negligence, bad faith or willful
misconduct or that of the Plan Agent's employees.
11. The terms and conditions of the Plan shall be governed by the laws of
the State of Massachusetts.
13
<PAGE> 14
(This page intentionally left blank)
14
<PAGE> 15
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
- 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 funds, please contact your account
executive. Read the prospectus carefully before you invest in any of the funds.
15
<PAGE> 16
HERITAGE
U.S. GOVERNMENT
INCOME FUND
Heritage U.S. Government Income Fund
P.O. Box 33022
St. Petersburg, FL 33733
--------------------------------------------
Address Change Requested
Annual Report
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
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
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.
ANNUAL REPORT
and Investment Performance
Review for the Year Ended
October 31, 1995
A member of the
Heritage Family of Mutual Funds(TM)
