<PAGE> 1
[U.S. GOVERNMENT INCOME FUND LOGO]
[PHOTO]
From Our Family to Yours: The Intelligent Creation of Wealth
SEMIANNUAL REPORT
(Unaudited) and Investment Performance
Review for the Six Month Period Ended
April 30, 1997
[HERITAGE LOGO]
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U.S. GOVERNMENT INCOME FUND
<PAGE> 2
June 11, 1997
Dear Fellow Shareholders:
It is our pleasure to provide you with the semiannual report for Heritage
U.S. Government Income Fund (the "Fund") for the six month period ended April
30, 1997. During this period, the Fund maintained an average portfolio maturity
of between seven and ten years, as we believed inflationary expectations were
too high, and that this area of the curve appeared to offer good risk reward
trade-offs. On a market return basis, the shares of the Fund provided a total
return of +3.43% while on a net asset value basis the Fund returned +0.38%. By
comparison, the Lehman Brothers Government/Corporate Index returned +1.30% for
the same period. Over the semiannual reporting period ended April 30, 1997,
interest rates generally rose across the entire yield curve. The following yield
curve chart relates yield to maturity and shows the changes from October of 1996
to April of 1997:
CHART
The sharpest increase in yields was in the one to five year sector of the
market. The reason for this shift was concern that faster economic growth
experienced in the fourth quarter of 1996 and the first quarter of 1997 would
lead the Federal Reserve Board to raise short-term interest rates in an effort
to prevent a possible surge in inflation.
We believe bonds and mortgage backed securities continue to offer
attractive value in today's market as inflation remains quite low and "real
interest rates" (interest rates minus the current rate of inflation), are quite
high by historic standards. Currently, the portfolio remains invested in
intermediate-term mortgage backed securities and U.S. Treasury issues.
We believe the current economic expansion which began in 1991 should begin
to slow. The expansion is currently the third longest in post-war history, and
yet inflation has been well contained. We believe the economy may begin to slow
in the months ahead, thus allowing interest rates to resume their downward
course.
Thank you for your continued confidence in Heritage U.S. Government Income
Fund.
<TABLE>
<S> <C>
Sincerely, Sincerely,
/s/ Stephen G. Hill /s/ H. Peter Wallace
- ------------------- --------------------
Stephen G. Hill H. Peter Wallace
President Portfolio Manager
</TABLE>
<PAGE> 3
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HERITAGE U.S. GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
APRIL 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- -------- ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--137.0%(a)
U.S. TREASURIES--47.5%
$400,000 U.S. Treasury Bill, 4.98%(d)................................ 05/15/97 $ 399,225
2,000,000 U.S. Treasury Notes, 5.875%................................. 11/15/99 1,975,626
2,000,000 U.S. Treasury Notes, 6.625%................................. 06/30/01 2,004,376
2,000,000 U.S. Treasury Notes, 6.25%.................................. 10/31/01 1,975,000
3,000,000 U.S. Treasury Notes, 6.25%.................................. 01/31/02 2,959,689
5,000,000 U.S. Treasury Bonds, 11.125%(c)............................. 08/15/03 6,128,125
2,000,000 U.S. Treasury Bonds, 6.5%................................... 11/15/26 1,876,250
------------
Total U.S. Treasuries....................................... 17,318,291
------------
U.S. GOVERNMENT AGENCIES--89.5%
FEDERAL HOME LOAN MORTGAGE CORPORATION--19.5%
2,000,000 REMIC, 1858 L, SUP, 6.0%.................................... 06/15/11 1,785,600
456,066 REMIC, 175 G, PAC, 9.5%..................................... 05/15/20 459,897
1,550,000 REMIC, 60 H, PAC, 9%........................................ 07/15/20 1,549,039
3,000,000 REMIC, 1378 H, PAC, 10%(d).................................. 01/15/21 3,328,140
------------
7,122,676
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--51.5%
1,982,835 Pool #370552, 15 year Pass-Through, 7.5%.................... 04/01/12 1,998,817
1,120,807 REMIC, 1989-34 E, PAC, 9.85%(d)............................. 08/25/14 1,149,760
709,570 REMIC, 1990-96 E, SEQ, 9.67%................................ 01/25/17 730,417
458,918 REMIC, 1991-28 H, PAC 8%(d)................................. 02/25/20 462,892
2,000,000 REMIC, 1992-65 K, PAC 8.5%(d)............................... 05/25/21 2,085,000
356,464 REMIC, G93-19 SG, LIBOR, Inverse Floater, 5.84791%.......... 04/25/23 213,878
2,000,000 Pool # TBA, 30 year Pass-Through, 7.5%...................... 05/01/27 1,986,250
10,000,000 Pool # 442741, 30 year Pass-Through, 7.5%................... 05/01/27 10,137,500
------------
18,764,514
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--18.5%
4,760,558 Pool # 415688, 30 year Pass-Through, 7.5%(d)................ 11/15/25 4,727,758
2,018,511 Pool # 442741, 30 year Pass-Through, 7.5%................... 03/15/27 2,003,393
------------
6,731,151
------------
Total U.S. Government Agencies.............................. 32,618,341
------------
Total U.S. Government and Agency Securities (cost
$50,716,224)................................................ 49,936,632
------------
PRIVATE ISSUE MORTGAGE SECURITIES--2.1%(a)
766,872 Kidder Peabody Mortgage Asset Trust, 8.94%.................. 04/01/19 777,416
------------
Total Private Issue Mortgage Securities (cost $792,274)..... 777,416
------------
REPURCHASE AGREEMENT--9.9%(a)
Repurchase Agreement with State Street Bank and Trust Company, dated April 30,
1997, @ 5.3%, to be repurchased at $3,590,529 on May 1, 1997, collateralized by
$3,260,000 United States Treasury Bonds, 8.125%, due August 15, 2019, (market
value $3,698,946 including interest) (cost $3,590,000)............................ 3,590,000
------------
TOTAL INVESTMENT PORTFOLIO (COST $55,098,498)(b), 149.0%(a)....................... 54,304,048
OTHER ASSETS AND LIABILITIES, NET (49.0%), (a).................................... (17,855,339)
------------
NET ASSETS 100.0%................................................................. $ 36,448,709
============
</TABLE>
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(a) Percentages indicated are based on net assets.
(b) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized depreciation of
$794,450, which consists of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$97,286 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $891,736.
(c) Collateral for reverse repurchase agreement.
(d) Some or all of these securities are segregated in connection with the
reverse repurchase agreement and/or mortgage dollar rolls.
LIBOR--London Interbank Offered Rate
PAC--Planned Amortization Class
REMIC--Real Estate Mortgage Investment Conduit
SEQ--Sequential
TBA--To be announced
SUP--Support Class
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
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HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $55,098,498)
(Note 1).................................................. $54,304,048
Cash........................................................ 3,049
Receivables:
Interest.................................................. 477,835
Deferred organization expense............................... 11,594
-----------
Total assets........................................ 54,796,526
Liabilities
Payables (Note 4):
Investments purchased, delayed delivery, net (Note 1)..... $11,948,949
Borrowings under reverse repurchase agreement (Notes 1 and
6)...................................................... 6,266,868
Accrued management fee.................................... 61,145
Accrued administrative fee................................ 9,083
Other accrued expenses.................................... 61,772
-----------
Total liabilities................................... 18,347,817
-----------
Net assets, at market value................................. $36,448,709
===========
Net Assets
Net assets consist of:
Paid-in capital (Note 1).................................. $43,517,490
Accumulated net investment loss........................... (149,549)
Accumulated net realized loss on investments (Note 1)..... (5,308,504)
Accumulated net realized loss on futures.................. (816,278)
Net unrealized depreciation on investments................ (794,450)
-----------
Net assets, at market value................................. $36,448,709
===========
Net asset value per share ($36,448,709 divided by 3,115,471
shares of beneficial interest outstanding, no par value)
(Notes 1 and 2)........................................... $11.70
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
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HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED
APRIL 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Income:
Interest (includes mortgage dollar roll income of
$177,500)............................................... $ 1,924,082
Expenses (Notes 1 and 4):
Management fee............................................ $112,497
Interest expense.......................................... 264,862
Administrative fee........................................ 27,665
Legal fees................................................ 16,173
Custodian/Fund accounting fees............................ 21,166
Auditing fees............................................. 16,489
Shareholder servicing..................................... 10,586
Reports to shareholders................................... 9,398
NYSE fees................................................. 8,085
Trustees' fees and expenses............................... 4,211
Amortization of organization costs........................ 3,661
Insurance................................................. 2,539
Other..................................................... 3,323
--------
Total expenses before waiver........................ 500,655
Fees waived by Manager (Note 4)..................... (51,352) 449,303
-------- -----------
Net investment income....................................... 1,474,779
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investment transactions.............. (399,460)
Net increase in unrealized depreciation of investments
during the period......................................... (912,792)
-----------
Net loss on investments............................. (1,312,252)
-----------
Net increase in net assets resulting from operations........ $ 162,527
===========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTH PERIOD
ENDED FOR THE YEAR
APRIL 30, 1997 ENDED
(UNAUDITED) OCTOBER 31, 1996
-------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 1,474,779 $ 3,328,563
Net realized loss from investment transactions............ (399,460) (287,482)
Net realized loss from futures transactions............... -- (170,656)
Net increase in unrealized depreciation of investments and
futures during the period............................... (912,792) (855,527)
----------- -----------
Net increase in net assets resulting from operations...... 162,527 2,014,898
Distribution to shareholders from:
Net investment income ($.52 and $1.06 per share,
respectively)........................................... (1,626,183) (3,314,723)
----------- -----------
Decrease in net assets...................................... (1,463,656) (1,299,825)
Net assets, beginning of period............................. 37,912,365 39,212,190
----------- -----------
Net assets, end of period (including accumulated net
investment loss of $149,549 and undistributed net
investment income of $1,855, respectively)................ $36,448,709 $37,912,365
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
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HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED APRIL 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH USED BY FINANCING ACTIVITIES:
Cash used from Reverse Repurchase Transactions, net....... $ (6,675,654)
Dividends and Distributions paid in cash.................. (1,626,183)
Proceeds from disposition of mortgage rolls, net.......... (10,398,913)
------------
Cash used by financing activities....................... (18,700,750)
------------
CASH PROVIDED (USED) BY OPERATIONS:
Net investment income..................................... 1,474,779
Increase in accrued expenses.............................. 38,894
Decrease in interest receivable........................... 131,709
Increase in investments payable/receivable, net........... 12,146,685
Proceeds from disposition of portfolio securities......... 33,325,286
Purchase of short term securities, net.................... (3,104,951)
Purchase of portfolio securities.......................... (25,312,438)
------------
Cash provided by operations............................. 18,699,964
------------
NET DECREASE IN CASH........................................ (786)
CASH AT BEGINNING OF PERIOD................................. 3,835
------------
CASH AT END OF PERIOD....................................... $ 3,049
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
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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 FOR THE YEARS ENDED
ENDED OCTOBER 31,
APRIL 30, 1997 ----------------------------------
(UNAUDITED) 1996 1995 1994+
-------------- ------- ------ -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD.................... $12.17 $ 12.59 $11.99 $ 14.02*
------ ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a).................................. .47 1.07 1.17 .98
Net realized and unrealized gain (loss) on investments.... (.42) (.43) .59 (2.04)
------ ------- ------ -------
Total from investment operations.......................... .05 .64 1.76 (1.06)
------ ------- ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income...................... (.52) (1.06) (1.15) (0.91)
Distributions in excess of net investment income.......... -- -- -- (0.02)
Tax return of capital..................................... -- -- (.01) (0.04)
------ ------- ------ -------
Total distributions....................................... (.52) (1.06) (1.16) (0.97)
------ ------- ------ -------
NET ASSET VALUE, END OF PERIOD.............................. $11.70 $ 12.17 $12.59 $ 11.99
====== ======= ====== =======
MARKET VALUE, END OF PERIOD................................. $11.00 $11.125 $11.75 $11.375
====== ======= ====== =======
TOTAL RETURN:
Per share market value(c)................................. 3.43% 3.94% 13.87% (18.20%)(b)
Per share net asset value(c).............................. .38% 5.41% 15.78% (7.75%)(b)
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average daily net
assets (excluding interest and taxes)(a)................ 1.00%(d) 1.00% 1.00% 1.00%(d)
Ratio of net investment income to average daily net
assets.................................................. 8.00%(d) 8.70% 9.57% 7.99%(d)
Portfolio turnover rate................................... 53% 47% 150% 163%(d)
Net assets, end of period ($ millions).................... 36 38 39 37
</TABLE>
- ---------------
+ For the period November 19, 1993 (commencement of operations) to October 31,
1994.
* Beginning per share amount reflects $15.00, initial public offering price,
net of underwriting discounts and offering costs ($.98).
(a) Excludes management fees waived by the Manager of $.02, $.03, $.04 and $.02
per share, respectively. The operating expense ratio (excluding interest
expense) including such items would be 1.28% (annualized), 1.27%, 1.36% and
1.21% (annualized), respectively.
(b) Return since inception, does not include offering costs, not annualized.
(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.
(d) Annualized.
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
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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 to be announced (TBA) securities, 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 a
financing transaction and receives compensation as consideration for
entering into the commitment to repurchase.
The compensation is recorded 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. If
the Fund enters into closing transactions before the end of the fee roll
period, the Fund will accelerate the unamortized portion of the fee.
Futures Contracts: A futures contract is an agreement between two
parties to buy and sell financial instruments at a set price on a future
date. 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. Upon closing of the contract,
the Fund will realize for financial reporting purposes, a gain or loss
equal to the difference between the value of the futures contract opened
and the futures contract closed. 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
7
<PAGE> 9
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
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 April 30, 1997.
Other: Investment security transactions are accounted for on a trade
date plus one 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. There was no Fund share activity for the years ended
October 31, 1995 and 1996 and the six month period ended April 30, 1997.
Shares outstanding remains at 3,115,471.
Note 3: PURCHASES AND SALES OF SECURITIES. For the six month period ended April
30, 1997, purchases, sales and paydowns of U.S. Government securities
(excluding short-term investments and mortgage dollar roll transactions)
aggregated $25,312,438, $31,914,715 and $1,410,468, respectively.
Purchases and sales included in mortgage dollar roll transactions
aggregated $157,458,998 and $147,060,084, respectively.
Note 4: MANAGEMENT, ADMINISTRATIVE, AND TRUSTEES' FEES. Under the Fund's
Investment Advisory 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. Under the Fund's
Administration Agreement, the Fund will pay the Manager a monthly fee of
0.0125% of average weekly net assets for the preceding period
(approximately .15% per annum). The Manager currently voluntarily
reduces 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 $51,352 were waived for the period ended April 30,
1997. If total Fund expenses fall below the expense limitation agreed to
by the Manager before the end of the year ending October 31, 1999, 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 $136,222 and $101,447
for the years ended October 31, 1995 and October 31, 1996, respectively,
if total Fund expenses fall below the annual expense limitations before
the end of the years ending October 31, 1997 and October 31, 1998,
respectively.
The Manager also performs Fund Accounting services and charged $15,377
during the period of which $10,400 was payable as of April 30, 1997.
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 that are also advised by the Manager (collectively referred to
as the Heritage funds). Each Trustee of the Heritage 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 funds.
Note 5: FEDERAL INCOME TAXES. For the year ended October 31, 1996, to reflect
reclassifications arising from permanent book/tax differences primarily
attributable to paydown income, the Fund credited accumulated net
realized loss on investments and debited undistributed net investment
income $11,985. As of October 31, 1996, the Fund has net tax basis
capital loss carryforwards of $5,725,322 that may be applied against any
realized net taxable gains until the expiration dates of October 31,
2002 ($4,068,100), October 31, 2003 ($1,211,069) and October 31, 2004
($446,153).
8
<PAGE> 10
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
Note 6: PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS. The
Fund may enter into reverse repurchase agreements to raise cash without
liquidating any portfolio securities. Reverse repurchase agreements
involve the risk that the market value of securities retained in lieu of
sale by the Fund may decline below the price of the securities the Fund
has sold but is obliged to repurchase.
The Fund may enter into mortgage dollar roll agreements in order to
hedge against anticipated changes in interest rates and prices and to
enhance the Fund's yield. When such transactions are negotiated, the
price is fixed at the time the commitment is made, but delivery and
payment for the securities takes place on a later date. There is always
a risk that securities may not be delivered and that the Fund may incur
a loss or will have lost the opportunity to invest the amount set aside
for such transaction in the segregated asset account.
In the event the buyer of securities under a reverse repurchase
agreement or dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of proceeds may be restricted pending a determination by the
other party, its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.
Reverse repurchase agreements are collateralized by Fund securities with
a market value including accrued interest, in excess of the Fund's
obligation under the contract at the time the parties enter into the
agreement. If the market value of the collateral falls below the Fund's
obligation, the holder may require additional collateral. Securities
valued at $6,128,125 were pledged as collateral.
At April 30, 1997, the reverse repurchase agreements outstanding were
$6,237,500 with an interest rate of 5.65% maturing in 30 days. The
maximum and average daily amounts outstanding during the period were
$13,087,500 and $9,656,630, respectively. The weighted average interest
rate during the period was 5.46%.*
---------------------
* Computation is based on those days when such agreements were
outstanding.
9
<PAGE> 11
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
10
<PAGE> 12
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.
11
<PAGE> 13
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From Our Family to Yours:
The Intelligent Creation of Wealth.
HERITAGE MONEY MARKET FUNDS
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HERITAGE STOCK FUNDS
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This report is for the information of shareholders of Heritage U.S. Government
Income Fund. New York Stock Exchange Symbol: HGA. 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.
