<PAGE> 1
[U.S.
GOVERNMENT
INCOME FUND LOGO]
[PHOTO]
From Our Family to Yours: The Intelligent Creation of Wealth.
SEMI ANNUAL REPORT
(Unaudited) and Investment Performance
Review for the Six Month Period Ended
April 30, 1999
[HERITAGE LOGO]
---------------
U.S. GOVERNMENT
INCOME FUND(TM)
---------------
[HERITAGE LOGO and ADDRESS]
HERITAGE FAMILY OF FUNDS (TM)
From Our Family to Yours:
The Intelligent Creation of Wealth.
HERITAGE MONEY MARKET FUNDS
Cash Trust Money Market
Cash Trust Municipal Money Market
HERITAGE BOND FUNDS
High Yield
Intermediate Government
HERITAGE STOCK FUNDS
Aggressive Growth
Capital Appreciation
Eagle International
Growth Equity
Income-Growth
Mid Cap
Small Cap
Value Equity
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.
5M 4/99 (Recycle Logo) Printed on recycled paper
AR5314-HG
<PAGE> 2
June 17, 1999
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, 1999.
Over this period, the Fund produced a total return of 10.43% based on
market value and 20.91% on net asset value ("NAV"). By comparison, the Lehman
Government/Corporate Index returned 20.12% and the Lehman Intermediate
Government/Corporate Index returned 10.51%. For the last twelve months, the Fund
returned 24.29% on a market value and 15.67% on NAV basis. This compares to the
return of 16.28% on the Lehman Government/Corporate Index and 16.37% on the
Lehman Intermediate Government/Corporate Index.
MARKET COMMENTARY
The six month period was characterized by rising interest rates and a
steepening yield curve. The following table shows the changes along the yield
curve and the total returns of these Treasury benchmarks according to Lehman
Brothers:
<TABLE>
<CAPTION>
10/31/99 04/30/99 CHANGE TOTAL RETURN
-------- -------- ------ ------------
<S> <C> <C> <C> <C>
3 mo...................................... 4.323% 4.530% 0.207% 2.220%
6 mo...................................... 4.349% 4.637% 0.288% 2.180%
1 yr...................................... 4.176% 4.768% 0.592% 1.840%
2 yr...................................... 4.107% 5.058% 0.951% 0.610%
5 yr...................................... 4.233% 5.211% 0.978% -2.050%
10 yr..................................... 4.603% 5.344% 0.741% -3.510%
30 yr..................................... 5.150% 5.661% 0.511% -6.605%
</TABLE>
Bond yields reached their cyclical lows, with the long term Treasury bond
at 4.176% in early October of 1998 triggered by the flight to quality following
the global economic crisis and the near failure of Long Term Capital Management.
Between September 29, 1998 and November 17, 1998 the Federal Reserve eased
monetary policy by reducing the Fed funds rate from 5.50% to 4.75% in three
separate moves. The effect of the easings was, perhaps, counter-intuitive in
that market interest rates began to rise following the Federal Reserve's
actions.
The easing of interest rates restored liquidity and confidence to both the
domestic markets and the global markets. This increasing confidence of investors
swiftly reversed the flight to quality as Treasury issues were sold and the
proceeds invested in "spread" securities (those issues other than Treasuries,
such as corporate bonds, high yield bonds, agency and mortgage securities),
which had earlier been sold in favor of the stability of U.S. Treasury issues.
Along with the Federal Reserve's actions, the International Monetary Fund
provided liquidity to near-failing "emerging market" nations, restoring
confidence in foreign debt instruments.
Confidence also spread to the stock markets and the consumer sector and
touched off a strong wave of consumption and economic growth. The fourth quarter
1998 Gross Domestic Product rose by 16.0% and the first quarter of 1999
preliminary GDP rose by 14.1%. This unexpected growth and continuing tight labor
markets sparked inflation fears, which continue to persist.
During the period, we maintained a high percentage in U.S. Treasury
securities and a relatively low exposure to mortgage-related securities. This
approach had benefited performance during the summer of 1998, but penalized
results during the most recent semi-annual period. We had believed that an
easing monetary
<PAGE> 3
policy would favor traditional Treasury securities, but this was not the case.
In hindsight, the Fund would have benefitted from a higher allocation to
mortgage-related securities.
Even in light of the recent high levels of volatility, we continue to feel
the bond market still offers excellent relative value as yields have moved
sharply higher without a comparable rise in inflation.
In the near term, we believe the bond market will continue to exhibit high
levels of volatility until we see some signs of a softening economy.
Strategically, we plan to remain at or slightly below market sensitivity until
we see some evidence of a slowing in economic activity.
RECENT BOARD OF TRUSTEES ACTION
In order to permanently eliminate the discount to net asset value at which
shares of the Fund generally have traded, the Board of Trustees of the Fund, at
its May 17, 1999 meeting, approved a combination of Heritage U.S. Government
Income Fund into Heritage Income Trust - Intermediate Government Fund, an
open-end mutual fund. This combination is subject to approval of a majority of
the outstanding shares of the Fund's shareholders at a meeting tentatively
scheduled for late September 1999. If approved, the combination would provide
shareholders of the Fund with Class A shares of the Intermediate Government Fund
on a NAV basis. These shares could then be held, redeemed or exchanged at NAV
into any of the other Heritage open end funds. Following the combination, shares
of the Fund would no longer trade and the Fund's operations would end.
Shareholders of the Fund will receive further information on this proposal
within the next few weeks.
Thank you for your continued confidence in the Heritage U.S. Government
Income Fund. We look forward to reporting to you again in the fall, either as
new shareholders of the Intermediate Government Fund or, if the combination is
not approved, as continuing shareholders of the Fund.
<TABLE>
<S> <C>
Sincerely, Sincerely,
/s/ STEPHEN G. HILL /s/ H. PETER WALLACE
Stephen G. Hill H. Peter Wallace, CFA
President Senior Vice President
Heritage Asset Management, Inc.
Portfolio Manager, Intermediate Government
Fund
</TABLE>
2
<PAGE> 4
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HERITAGE U.S. GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
APRIL 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- -------- ------------
<C> <S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES--136.5%(A)
U.S. TREASURIES--55.8%(A)
$1,000,000 U.S. Treasury Notes, 4.5%................................... 09/30/00 $ 992,500
1,000,000 U.S. Treasury Notes, 5.375%................................. 02/15/01 1,005,313
2,000,000 U.S. Treasury Notes, 5.0%................................... 02/28/01 1,997,500
1,000,000 U.S. Treasury Notes, 5.625%................................. 05/15/01 1,010,313
2,000,000 U.S. Treasury Notes, 5.5%................................... 02/28/03 2,016,250
2,000,000 U.S. Treasury Notes, 5.375%................................. 06/30/03 2,007,500
1,000,000 U.S. Treasury Notes, 5.25%.................................. 08/15/03 998,750
2,000,000 U.S. Treasury Notes, 4.25%.................................. 11/15/03 1,920,000
3,000,000 U.S. Treasury Notes, 4.75%.................................. 02/15/04 2,940,000
1,000,000 U.S. Treasury Notes, 5.5%................................... 02/15/08 1,006,563
5,000,000 U.S. Treasury Notes, 4.75%.................................. 11/15/08 4,775,000
------------
Total U.S. Treasuries (cost $20,887,422).................... 20,669,689
------------
U.S. GOVERNMENT AGENCIES--80.7%(A)
FEDERAL HOME LOAN MORTGAGE CORPORATION--36.0%
3,000,000 REMIC, 1378-H, PAC, 10.0%(b)................................ 01/15/21 3,187,500
10,000,000 Gold TBA, 30 year Pass-Through, 7.0%(c)..................... 05/01/29 10,143,750
------------
13,331,250
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--14.0%
119,795 REMIC, 1990-96 E, SEQ, 9.67%................................ 01/25/17 120,506
2,000,000 REMIC, 1992-65 K, PAC, 8.5%................................. 05/25/21 2,038,325
980,787 Pool #394212, 30 year Pass-Through, 7.5%.................... 07/01/27 1,008,987
2,009,266 Pool #481635, 30 year Pass-Through, 6.5%.................... 01/01/29 1,997,980
------------
5,165,798
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--30.7%
2,000,000 REMIC, 1996-16G, SEQ, 7.0%.................................. 04/16/22 2,024,718
3,275,332 Pool #415688, 30 year Pass-Through, 7.5%.................... 11/15/25 3,380,447
972,828 Pool #442741, 30 year Pass-Through, 7.5%.................... 03/15/27 1,003,522
5,000,000 TBA, 30 year Pass-Through, 6.5%(c).......................... 05/01/29 4,968,750
------------
11,377,437
------------
Total U.S. Government Agencies (cost $30,080,125)........... 29,874,485
------------
Total U.S. Government and Agency Securities (cost
$50,967,547)................................................ 50,544,174
------------
REPURCHASE AGREEMENT--3.8%(A)
Repurchase Agreement with State Street Bank and Trust Company, dated April 30,
1999 @ 4.78% to be repurchased at $1,397,556 on May 3, 1999, collateralized by
$935,000 United States Treasury Bonds, 10.625% due August 15, 2015, (market value
$1,416,818 including interest) (cost $1,397,000).................................. 1,397,000
------------
TOTAL INVESTMENT PORTFOLIO, (cost $52,364,547)(d), 140.3%(a)...................... 51,941,174
OTHER ASSETS AND LIABILITIES, net (40.3%)(a)...................................... (14,908,144)
------------
NET ASSETS, 100.0%................................................................ $ 37,033,030
============
</TABLE>
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(a) Percentages are based on net assets.
(b) Some or all of these securities are segregated in connection with the
reverse repurchase agreement and/or mortgage dollar rolls.
(c) Collateral for reverse repurchase agreement.
(d) The aggregate identified cost for federal income tax purposes is
substantially the same. Market value includes net unrealized depreciation of
$423,373, which consist of aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost of
$199,563 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value of $622,936.
<TABLE>
<S> <C> <C>
PAC -- Planned Amortization Class
REMIC -- Real Estate Mortgage Investment Conduit
SEQ -- Sequential Pay Class
TBA -- To Be Announced
</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 ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments, at market value (identified cost $50,967,547)
(Note 1).................................................. $50,544,174
Repurchase agreement (Identified cost $1,397,000) (Note
1)........................................................ 1,397,000
Cash........................................................ 382
Receivables:
Interest.................................................. 408,332
Prepaid insurance........................................... 3,124
-----------
Total assets........................................ 52,353,012
Liabilities
Payables (Note 4):
Investments purchased, delayed delivery, net (Note 1)..... $15,182,031
Accrued management fee.................................... 95,168
Accrued administrative fee................................ 4,588
Other accrued expenses.................................... 38,195
-----------
Total liabilities................................... 15,319,982
-----------
Net assets, at market value................................. $37,033,030
===========
Net Assets
Net assets consist of:
Paid-in capital (Note 1).................................. $43,452,222
Accumulated distribution in excess of net investment
income.................................................. (44,443)
Accumulated net realized loss on investments (Note 1)..... (5,951,376)
Net unrealized depreciation on investments................ (423,373)
-----------
Net assets, at market value................................. $37,033,030
===========
Net asset value per share ($37,033,030 divided by 3,115,471
shares of beneficial interest outstanding, no par value)
(Notes 1 and 2)........................................... $11.89
======
</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 OPERATIONS
FOR THE SIX MONTH PERIOD ENDED
APRIL 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income
Income:
Interest.................................................. $1,264,170
Expenses (Notes 1 and 4):
Management fee............................................ $ 94,320
Administrative fee........................................ 28,100
Custodian/Fund accounting fees............................ 22,981
Legal fees................................................ 17,834
Shareholder servicing..................................... 10,638
Reports of shareholders................................... 10,592
NYSE fees................................................. 8,085
Auditing fees............................................. 7,658
Trustees' fees and expenses............................... 5,294
Insurance expense......................................... 1,768
Organization costs........................................ 610
Other..................................................... 162
--------
Total expenses before waiver........................ 208,042
Fees waived by Manager (Note 4)..................... (20,886) 187,156
-------- ----------
Net investment income....................................... 1,077,014
----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss from investments transactions............. (244,600)
Net decrease in unrealized appreciation of investments
during the period......................................... (1,189,703)
----------
Net loss on investments............................. (1,434,303)
----------
Net decrease in net assets resulting from operations........ $ (357,289)
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE
APRIL 30, 1999 YEAR ENDED
(UNAUDITED) OCTOBER 31, 1998
-------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 1,077,014 $ 2,603,939
Net realized gain (loss) from investment transactions..... (244,600) 393,538
Net increase (decrease) in unrealized appreciation of
investments during the period........................... (1,189,703) 382,990
----------- -----------
Net increase (decrease) in net assets resulting from
operations.............................................. (357,289) 3,380,467
Distribution to shareholders from:
Net investment income ($0.36 and $0.84 per share,
respectively)........................................... (1,121,457) (2,616,783)
----------- -----------
Increase (decrease) in net assets........................... (1,478,746) 763,684
Net assets, beginning of period............................. 38,511,776 37,748,092
----------- -----------
Net assets, end of period (including accumulated
distribution in excess of net investment loss of $44,443
at April 30, 1999)........................................ $37,033,030 $38,511,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED APRIL 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Dividends and distributions paid in cash.................. $ (1,121,455)
Proceeds from disposition of mortgage rolls, net.......... (15,267,051)
------------
Cash provided by financing activities................... (16,388,506)
------------
CASH PROVIDED (USED) BY OPERATIONS:
Net investment income..................................... 1,077,014
Increase in accrued expenses.............................. 53,896
Decrease in interest receivable........................... 18,158
Increase in investments payable/receivable, net........... 14,932,812
Proceeds from disposition of portfolio securities......... 30,345,601
Purchase of short term securities, net.................... (753,000)
Purchase of portfolio securities.......................... (29,286,009)
------------
Cash used by operations................................. 16,388,472
------------
NET DECREASE IN CASH........................................ (34)
CASH AT BEGINNING OF PERIOD................................. 416
------------
CASH AT END OF PERIOD....................................... $ 382
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
- --------------------------------------------------------------------------------
HERITAGE U.S. GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED FOR THE YEARS ENDED OCTOBER 31,
APRIL 30, 1999 --------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994+
-------------- ------ -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD...... $ 12.36 $12.12 $ 12.17 $ 12.59 $11.99 $ 14.02*
-------- ------ -------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a).................... 0.35 0.84 0.99 1.07 1.17 0.98
Net realized and unrealized gain (loss) on
investments............................... (0.46) 0.24 (0.03) (0.43) 0.59 (2.04)
-------- ------ -------- ------- ------ -------
Total income (loss) from investment
operations................................ (0.11) 1.08 0.96 0.64 1.76 (1.06)
-------- ------ -------- ------- ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income........ (0.36) (0.84) (.99) (1.06) (1.15) (0.91)
Distributions in excess of net investment
income.................................... -- -- -- -- -- (0.02)
Tax return of capital....................... -- -- (0.02) -- (0.01) (0.04)
-------- ------ -------- ------- ------ -------
Total distributions......................... (0.36) (0.84) (1.01) (1.06) (1.16) (0.97)
-------- ------ -------- ------- ------ -------
NET ASSET VALUE, END OF PERIOD................ $ 11.89 $12.36 $ 12.12 $ 12.17 $12.59 $ 11.99
======== ====== ======== ======= ====== =======
MARKET VALUE, END OF PERIOD................... $10.1875 $10.50 $11.0625 $11.125 $11.75 $11.375
======== ====== ======== ======= ====== =======
TOTAL RETURN:
Per share market value...................... .43%(c) 2.37% 8.61% 3.94% 13.87% (18.20%)(d)
Per share net asset value(b)................ (0.91)%(c) 9.39% 8.44% 5.41% 15.78% (7.75%)(d)
RATIOS AND SUPPLEMENTAL DATA:
Ratio of operating expenses, net, to average
daily net assets (excluding
interest)(a).............................. 1.00%(e) 1.00% 1.00% 1.00% 1.00% 1.00%(e)
Ratio of net investment income to average
daily net assets.......................... 5.75%(e) 6.90% 8.37% 8.70% 9.57% 7.99%(e)
Portfolio turnover rate..................... 66%(c) 161% 62% 47% 150% 163%(e)
Net assets, end of period ($ millions)...... 37 39 38 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 $.01, $.02, $.03, $.03,
$.04 and $.02 per share, respectively. The operating expense ratio
(excluding interest expense) including such items would be 1.11%
(annualized), 1.18%, 1.28%, 1.27%, 1.36% and 1.21% (annualized),
respectively.
(b) 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.
(c) Not annualized.
(d) Return since inception does not include offering costs and is not
annualized.
(e) Annualized.
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
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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
8
<PAGE> 10
- --------------------------------------------------------------------------------
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.
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, 1999.
Other: For the purpose of these financial statements, investment
security transactions are accounted for on a trade date basis (date the
order to buy or sell is executed). 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 six month period
ended April 30, 1999. Shares outstanding remain at 3,115,471.
Note 3: PURCHASES AND SALES OF SECURITIES. For the six month period ended April
30, 1999, purchases, sales and paydowns of U.S. Government securities
(excluding short-term investments and mortgage dollar roll transactions)
aggregated $29,286,009, $28,636,500 and $1,709,102, respectively.
Purchases and sales including mortgage dollar roll transactions
aggregated $179,319,994 and $163,389,429, 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 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 $20,886 were waived for the six month period ended April 30, 1999. If
total Fund expenses fall below the expense limitation agreed to by the
Manager before the end of the year ending October 31, 2001, 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 $65,892 for the year ended
October 31, 1998, if total Fund expenses fall below the annual expense
limitations before the end of the year ending October 31, 2000.
The Manager also performs Fund Accounting services and charged the Fund
$17,721 during the period of which $12,027 was payable as of April 30,
1999.
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 who is not an
employee of the Manager or employee of an affiliate of the Manager
receives an annual fee of $8,666, an additional fee of $3,250 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, 1998, to reflect
reclassifications arising from permanent book/tax differences primarily
attributable to paydown income and market discount, the Fund credited
accumulated net realized loss on investments $12,843 and undistributed
net investment loss $3,126 and debited paid-in capital $15,969. As of
October 31, 1998, the fund has net tax basis capital loss carryforwards
of $5,632,684 that may be applied against any realized net taxable gains
until the expiration dates of October 31, 2002 ($3,600,470), October 31,
2003 ($1,211,069), October 31, 2004 ($446,153) and October 31, 2005
($374,992). The Fund utilized $467,630 of capital loss carryforwards
during the current year against net realized gains from investment
transactions.
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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.
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HERITAGE U.S. GOVERNMENT INCOME FUND is a member of the Heritage family of
funds. Other investment alternatives available to you from Heritage include:
- HERITAGE CASH TRUST
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
- HERITAGE CAPITAL APPRECIATION TRUST
- HERITAGE INCOME-GROWTH TRUST
- HERITAGE INCOME TRUST
HIGH YIELD BOND FUND
INTERMEDIATE GOVERNMENT FUND
- HERITAGE SERIES TRUST
AGGRESSIVE GROWTH FUND
EAGLE INTERNATIONAL EQUITY PORTFOLIO
GROWTH EQUITY FUND
MID CAP GROWTH FUND
SMALL CAP STOCK FUND
VALUE EQUITY FUND
We are pleased that many of you are also investors in these funds. For
information and a prospectus for any of these mutual funds, please contact your
financial advisor. Please read the prospectus carefully before you invest in any
of the funds.
