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Fortis Bond Funds
Annual Report
JULY 31, 1999
Fortis Financial Group
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FORTIS BOND FUNDS ANNUAL REPORT
CONTENTS
LETTER TO SHAREHOLDERS 2
SCHEDULES OF INVESTMENTS
U.S. GOVERNMENT SECURITIES FUND 6
STRATEGIC INCOME FUND 8
HIGH YIELD PORTFOLIO 12
STATEMENTS OF ASSETS AND LIABILITIES 17
STATEMENTS OF OPERATIONS 18
STATEMENTS OF CHANGES IN NET ASSETS
U.S. GOVERNMENT SECURITIES FUND 19
STRATEGIC INCOME FUND 20
HIGH YIELD PORTFOLIO 21
NOTES TO FINANCIAL STATEMENTS 22
INDEPENDENT AUDITORS' REPORT 30
FEDERAL INCOME TAX INFORMATION 31
BOARD OF DIRECTORS AND OFFICERS 32
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- - TOLL-FREE INFORMATION LINE
- For daily account balances,
transaction activity or net asset
value information
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FOR MORE INFORMATION ABOUT FORTIS FINANCIAL GROUP'S FAMILY OF PRODUCTS, CALL
YOUR INVESTMENT REPRESENTATIVE OR THE HOME OFFICE AT (800) 800-2000.
TO ORDER PROSPECTUSES OR SALES LITERATURE FOR ANY FORTIS PRODUCT, CALL (800)
800-2000, EXT. 4579.
HOW TO USE THIS REPORT
For a quick overview of the fund's performance during the past twelve months,
refer to the Highlights box below. The letter from the portfolio manager and
president provides a more detailed analysis of the fund and financial markets.
The charts alongside the letter are useful because they provide more information
about your investments. The top holdings chart shows the types of securities in
which the fund invests, and the pie chart shows a breakdown of the fund's assets
by sector or industry.
The performance chart graphically compares the fund's total return performance
with a selected investment index. Remember, however, that an index may reflect
the performance of securities the fund may not hold. Also, the index does not
deduct sales charges, investment advisory fees and other fund expenses, whereas
your fund does. Individuals cannot buy an unmanaged index fund without incurring
some charges and expenses.
This report is just one of several tools you can use to learn more about your
investment in the Fortis Family of Mutual Funds. Your investment representative,
who understands your personal financial situation, can best explain the features
of your investment and how it's designed to help you meet your financial goals.
HIGHLIGHTS
FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS E CLASS H
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
SECURITIES FUND
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 9.30 $ 9.28 $ 9.27 $ 9.30 $ 9.28
End of year................................ $ 8.96 $ 8.94 $ 8.93 $ 8.96 $ 8.94
DISTRIBUTIONS PER SHARE
From net investment income................. $ .469 $ .397 $ .397 $ .493 $ .397
STRATEGIC INCOME FUND
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 10.05 $ 10.05 $ 10.05 -- $ 10.05
End of year................................ $ 9.14 $ 9.14 $ 9.15 -- $ 9.14
DISTRIBUTIONS PER SHARE
From net investment income................. $ .619 $ .548 $ .547 -- $ .548
From net realized gains on investments..... $ .013 $ .013 $ .013 -- $ .013
HIGH YIELD PORTFOLIO
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 7.41 $ 7.41 $ 7.40 -- $ 7.40
End of year................................ $ 6.67 $ 6.67 $ 6.66 -- $ 6.66
DISTRIBUTIONS PER SHARE
From net investment income................. $ .606 $ .558 $ .558 -- $ .558
</TABLE>
1
<PAGE>
PORTFOLIO COMPOSITION BY SECTOR AS OF 7/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FNMA's 50.2%
Other Direct Federal
Obligations 19.1%
U.S. Treasury Securities 17.9%
GNMA's 6.2%
FHLMC's 4.7%
Cash Equivalents/Receivables 1.9%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/99
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. FNMA Note (6.375%) 2009 9.3%
2. Federal Home Loan Bank (7.31%) 2004 8.1%
3. U.S. Treasury Note (6.125%) 2001 5.0%
4. U.S. Treasury Bond (8.125%) 2019 4.7%
5. FNMA (6.00%) 2029 4.2%
6. FNMA Note (5.125%) 2004 3.2%
7. FHLMC Note (6.75%) 2006 2.5%
8. Federal Home Loan Bank (5.925%) 2000 2.3%
9. FNMA (7.50%) 2027 2.3%
10. U.S. Treasury Strip (6.09%) 2019 2.2%
</TABLE>
CLASS A, B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- -----------------------------------------------------------------------
<S> <C> <C>
Class A shares# +1.30% +6.98%
Class A shares## -3.26% +5.94%
Class B shares# +0.53% +6.18%
Class B shares## -2.92% +5.88%
Class C shares# +0.52% +6.16%
Class C shares## -0.44% +6.16%
Class H shares# +0.53% +6.18%
Class H shares## -2.92% +5.88%
</TABLE>
Past performance is not indicative of future performance. Total returns include
reinvestment of all dividend and capital gains distributions. The performance of
the separate classes ( A, B, C, E and H) will vary based on the differences in
sales loads and distribution fees paid by shareholders investing in the
different classes. Class E and A have a maximum sales charge of 4.50%, Class B
and H have a CDSC of 4.00% if redeemed within two years of purchase, 3.00% if
redeemed in year three or four, 2.00% if redeemed in year five and 1.00% if
redeemed in year six (with a waiver of 10% of the amount invested). Class C has
a CDSC of 1.00% if redeemed within one year of purchase.
# Without sales charge.
## With sales charge. Assumes redemption on July 31, 1999.
+ Since November 14, 1994 -- Date shares were first offered to the public
YOUR U.S. GOVERNMENT SECURITIES FUND
MANAGED WITH A DISCIPLINED, CONSISTENT INVESTMENT APPROACH, THIS FUND IS
DESIGNED TO SEEK A STRONG TOTAL RETURN, AS WELL AS A RELATIVELY HIGH LEVEL OF
CURRENT INCOME, BY FOCUSING ITS INVESTMENTS IN U.S. GOVERNMENT BONDS, TREASURIES
AND MORTGAGE-BACKED SECURITIES.
Despite the global crisis that occurred in the second half of 1998, the US
economy continued its brisk pace of growth for the twelve months ended July 31,
1999. Fueled by a rapidly expanding work force -- nearly 3.0 million more jobs
were created -- and strong consumer demand (retail sales are up 8 percent on the
year), real GDP grew at a 4.1 percent annualized rate.
As 1999 continues to unfold the global economy looks to be on better footing
than in 1998. This global setting, combined with the brisk pace of domestic
growth, has raised concerns at the Federal Reserve Bank about the potential for
inflation. In fact, on June 30th, the Federal Open Market Committee raised the
Federal Funds rate 0.25% to 5.0%. The net result of these events was that
interest rates were volatile and are higher than one year ago. For instance the
30 year U.S. Treasury was yielding 5.71% last July 31, fell to a low yield of
4.7% in early October as fears of weakness in the global economy held sway only
to move back up to above 6.10% on July 31, 1999.
Convinced (in early April) that the Federal Reserve planned to raise short term
rates, we shortened our portfolio duration from 107% to 100% of the benchmark.
Our spread sector allocations continue to be roughly 15% overweight relative to
our benchmark, as we continue to find the yield spreads attractive relative to
comparable Treasuries. Our 12 month total rate of return of 1.56% for Class E
before sales charge compares to a 1.54% return for the Morningstar Intermediate
Government Bond Fund and 4.05% return for the Lehman Brothers Intermediate
Government Index.
Going forward, we believe the rise in interest rates during the first half will
slow economic growth to a more sustainable 3-3.5% growth rate in the second half
of the year. We also expect that inflation will remain manageable, although
potentially higher than its current 2% level. We believe the Federal Reserve
will take the actions necessary to keep inflation low, such as raising the
Federal Funds rate target again if necessary to keep the inflationary forces
that could undermine economic growth in check. While the situation is volatile,
we believe that the market has substantially discounted most of the negatives
and will offer attractive investment opportunities during the upcoming months.
Sincerely,
/s/ Dean C. Kopperud /s/ Howard G. Hudson
- -------------------- --------------------
Dean C. Kopperud Howard G. Hudson
President Vice President
VALUE OF $10,000 INVESTED AUGUST 1, 1989
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
1 YEAR 5 YEAR 10 YEAR
CLASS E* -3.01% +5.35% +6.26%
CLASS E** +1.56% +6.33% +6.75%
Lehman Brothers Intermediate Government Index U.S. Government Securities Fund
8/1/89 10,000 9,550
90 10,705 10,274
91 11,797 11,372
92 13,424 12,701
93 14,523 13,879
94 14,656 13,503
95 15,885 14,545
96 16,711 15,283
97 18,146 16,822
98 19,384 18,070
99 20,169 18,352
</TABLE>
Past performance is not indicative of future performance. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
* SEC defined total returns, including reinvestment of all dividend and
capital gains distributions and the reduction due to the maximum sales
charge of 4.50%.
** These are the portfolio's total returns during the period, including
reinvestment of all dividend and capital gains distributions without
adjustment for sales charge.
*** An unmanaged index of government bonds with an average maturity of eight to
nine years.
2
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[PHOTO]
YOUR STRATEGIC INCOME FUND
THE FUND'S INVESTMENT OBJECTIVE IS TO MAXIMIZE TOTAL RETURN (FROM CURRENT INCOME
AND CAPITAL APPRECIATION) BY PRIMARILY INVESTING IN A DIVERSIFIED PORTFOLIO OF
U.S. GOVERNMENT SECURITIES, INVESTMENT AND NON-INVESTMENT GRADE BONDS ISSUED BY
FOREIGN GOVERNMENTS AND COMPANIES, AND NON-INVESTMENT GRADE BONDS ISSUED BY U.S.
COMPANIES.
Economic conditions improved worldwide during the first half of 1999. While this
circumstance was fortuitous for some foreign markets and the U.S. equity market,
the domestic bond market suffered and interest rates rose. Debt market concerns
focused on the likelihood that the Federal Reserve, anticipating upward pressure
on prices from tightening labor markets, would tighten monetary policy in order
to "preemptively" clamp the lid on inflation. Since year end the Treasury market
has risen over a full point in yield and the Federal Reserve has, at this
writing, only raised the federal funds target once, to the tune of 1/4 percent.
It is, therefore, apparent that the market has discounted more tightening by the
Fed and some increase in inflation.
Non-Treasury fixed income securities over the course of the past year have had
something of a roller coaster ride. During the fall of 1998 they dramatically
under-performed Treasury debt as the liquidity concerns following the Russian
default and the Long Term Capital Fund problems filtered through the bond
market. During this period, the broker-dealer community substantially abandoned
their traditional role as risk takers/ secondary market makers for all manner of
private debt. This situation, despite a few months' respite following the
Federal Reserves' 3/4 point ease in the fall, has continued and has manifested
itself recently in the reversal of the rally in corporate debt and other "spread
product" which followed on the heels of the Feds' accommodation. Accordingly,
although yield spreads narrowed in the October 1998 through April 1999 period, a
time frame during which resolution, or at least temporary deferral, of a number
of the markets earlier concerns occurred, markets remained thin and weakly
supported by the broker-dealers. Now that the central bank has begun to snug up
short term rates, the narrowing of rate spreads has been entirely erased and we
are back or through levels seen late last fall in some cases, though not yet to
the extremes seen at the worst of the liquidity squeeze. This is a circumstance
which, while not likely to be alleviated in the near future, nonetheless offers
a window of investment opportunity for selective, long term oriented investors.
During the early part of 1999, the Strategic Income Fund established positions
in a variety of high yield and emerging market debt as we anticipated
improvement in yield spreads for these markets. Accordingly, the geographic
breakdown for the portfolio reflected the international increase as the U.S.
portion of the portfolio declined from 64.2%, at year-end, to 55.9% at the
previous year end. In addition, BBB-rated bonds went from 17.2% to 30% and BB's
went from 14% to 19% in the same time period as we sought to benefit from
improving fundamentals, as well as greater income, in these credit categories.
The fund was down 2.86% for Class A shares before sales charge year ended July
31,1999, compared to the Lehman Brothers Aggregate Bond Index which was up
2.49%. The under performance of the fund included the effects of rising interest
rates ( the long term Treasury bond rate was up over 1 full point in yield over
this period ) which offset income produced by the funds holdings. Despite the
increase in lower rated and foreign securities in the recent time, the funds'
holdings of these securities were generally lighter than the preponderance of
competitors in the funds' category and therefore represented a drag on relative
performance. The reason we were below benchmark in the high yield and emerging
market sectors reflected two things; the funds' recent origin ( November 1997 )
and the coincident international economic difficulties which we interpreted to
call for a cautious entry to the emerging markets. While the underlying economic
and political circumstances still are tenuous in many regions, the financial
markets for those areas rallied strongly earlier this year -- prematurely, in
most cases, we believe -- rewarding funds with established positions. In recent
weeks these markets have under performed coincident to the above mentioned
concerns about liquidity and possible monetary policy change. Additionally, the
fund has had the disadvantage of starting to invest during a period when
interest rates are lower than those available during the time when most
competitors structured their portfolios, a situation which allows the other
funds to pay out a higher level of interest on their older, higher yielding
bonds. This situation is fast changing, however, as rates have risen and, with
some growth in fund size, the fund should provide a more competitive income
payout in the future.
Our investment strategy is consistent with the long term theme of the portfolio,
as expressed in its prospectus. We intend to provide superior risk-adjusted
performance through a diversified mix of investments in three primary segments
of the bond market. These three primary components of the portfolio include 1)
U. S. Government securities 2) foreign sovereign and corporate debt and 3)
domestic high yield securities. Not one of these three components can exceed 50%
of the portfolio by internal guidelines, insuring that the intended
diversification benefits are borne out in volatility (risk) reduction. In the
current environment, we see investment opportunity in a combination of higher
interest rates and wider yield spreads. We see this environment as being an
opportunity to take a more aggressive investment posture, selectively building
the high yield and foreign component of the portfolio, while increasing the
non-treasury portion of the government sector. We believe that the next few
months will be a superb time to add to investors' fixed income holdings and that
the Strategic Income Fund will offer an extremely favorable return to its
participants, as a result.
Sincerely,
<TABLE>
<S> <C>
/s/ Dean C. Kopperud /s/ Howard G. Hudson
Dean C. Kopperud Howard G. Hudson
President Vice President
</TABLE>
3
<PAGE>
PORTFOLIO COMPOSITION BY SECTOR AS OF 7/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Foreign Bonds Investment Grade 30.9%
Corporate Bonds - Non-investment Grade 24.8%
Foreign Bonds - Non-investment Grade 13.3%
Corporate Bonds - Investment Grade 12.3%
Cash Equivalents/Receivables 8.6%
FNMAs 6.0%
Asset Backed Securities 4.1%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/99
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. News America Holdings (8.875%) 2023 2.2%
2. 360 Communications Co. (7.50%) 2006 2.1%
3. Poland (Republic of) (7.125%) 2004 2.1%
4. J.P. Morgan Commercial Mortgage Finance Corp.
(7.46%) 2028 2.1%
5. Lehman Brothers Holdings, Inc. (7.375%)2004 2.1%
6. Malaysia (8.75%) 2009 2.1%
7. Sony Corp. (6.125%) 2003 2.1%
8. Corp Andina de Fomento (7.10%) 2003 2.0%
9. YPF Sociedad Anonima (7.25%) 2003 2.0%
10. FNMA (6.54%) 2007 2.0%
</TABLE>
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
One Year Inception+
- -----------------------------------------------------------------
<S> <C> <C>
Class B shares# -3.58% +0.35%
Class B shares## -6.81% -1.60%
Class C shares# -3.49% +0.43%
Class C shares## -4.40% +0.43%
Class H shares# -3.58% +0.37%
Class H shares## -6.81% -1.58%
</TABLE>
Past performance is not indicative of future performance. Total returns include
reinvestment of all dividend and capital gains distributions. The performance of
the separate classes (A, B, C, and H) will vary based on the differences in
sales loads and distribution fees paid by shareholders investing in the
different classes. Class A has a maximum sales charge of 4.50%. Class B and H
have a CDSC of 4.00% if redeemed within two years of purchase, 3.00% if redeemed
in year three or four, 2.00% if redeemed in year five and 1.00% if redeemed in
year six (with a waiver of 10% of the amount invested). Class C has a CDSC of
1.00% if redeemed within one year of purchase.
# Without CDSC.
## With CDSC. Assumes redemption on July 31, 1999.
+ Since December 1, 1997 -- Date shares were first offered to the public
VALUE OF $10,000 INVESTED DECEMBER 1, 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
STRATEGIC INCOME FUND CLASS A
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
SINCE
1 YEAR DECEMBER 1, 1997@
CLASS A* -7.23% -1.69%
CLASS A** -2.86% +1.06%
Lehman Brothers Aggregate Bond Index*** Strategic Income Fund Class A Salomon Brothers World Index****
12/1/97 10,000 9,550 10,000
98 10,520 10,005 10,261
99 10,782 9,718 10,893
</TABLE>
Annual period ended July 31
Past performance is not indicative of future performance. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
* SEC defined total returns, including reinvestment of all dividend and
capital gains distributions and the reduction due to the maximum sales
charge of 4.50%.
** These are the portfolio's total returns during the period, including
reinvestment of all dividend and capital gains distributions without
adjustment for sales charge.
*** An unmanaged index of government, corporate and mortgage-backed securities
with an average maturity of approximately nine years.
**** An unmanaged index of world government bonds with maturities of at least
one year.
@ Date shares were first offered to the public.
4
<PAGE>
PORTFOLIO COMPOSITION BY INDUSTRY AS OF 7/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Other 31.9%
Telecommunications 20.2%
Cable Television 16.4%
Broadcasting 6.2%
Cash Equivalents/Receivables 4.8%
Printing 3.6%
Entertainment 3.3%
Chemicals 3.2%
Automobile and Motor Vehicle Parts 3.1%
Machinery 2.6%
Leisure Time-Amusement 2.5%
Waste Disposal 2.2%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/99
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. Rogers Cantel, Inc. (9.375%) 2008 2.3%
2. Isle of Capri Casinos (8.75%) 2009 2.1%
3. Nextel Communications, Inc. (9.98%) 2007 2.1%
4. ITC Deltacom, Inc. (11.00%) 2007 2.0%
5. Charter Communications Holdings LLC (9.92%) 2011 1.9%
6. Newport News Ship Building (9.25%) 2006 1.9%
7. Adelphia Communications, Inc. (9.25%) 2002 1.8%
8. Splitrock Services, Inc. (11.75%) 2008 1.8%
9. Clark Material Handling Co. (10.75%) 2006 1.8%
10. Olympus Communication L.P. (10.625%) 2006 1.7%
</TABLE>
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- ------------------------------------------------------------------
<S> <C> <C>
Class B shares# -2.44% +6.01%
Class B shares## -5.63% +5.70%
Class C shares # -2.44% +5.98%
Class C shares ## -3.34% +5.98%
Class H shares # -2.44% +5.98%
Class H shares ## -5.63% +5.67%
</TABLE>
Past performance is not indicative of future performance. Total returns include
reinvestment of all dividend and capital gains distributions. The performance of
the separate classes (A, B, C, and H) will vary based on the differences in
sales loads and distribution fees paid by shareholders investing in the
different classes. Class A has a maximum sales charge of 4.50%, Class B and H
have a CDSC of 4.00% if redeemed within two years of purchase, or 3.00% if
redeemed in year three or four, 2.00% if redeemed in year five and 1.00% if
redeemed in year six (with a waiver of 10% of the amount invested). Class C has
a CDSC of 1.00% if redeemed within one year of purchase.
# Without CDSC.
## With CDSC. Assumes redemption on July 31, 1999.
+ Since November 14, 1994 -- Date shares were first offered to the public
YOUR HIGH YIELD PORTFOLIO
LONG-TERM INVESTORS, WILLING TO ACCEPT GREATER PRICE FLUCTUATIONS, MAY CHOOSE TO
DIVERSIFY THEIR STOCK OR BOND INVESTMENTS WITH THIS PORTFOLIO OF HIGHER YIELDING
BONDS. ITS MONEY MANAGERS INVEST IN A WIDELY DIVERSIFIED PORTFOLIO OF
LOWER-RATED CORPORATE BONDS.
REVIEW
The twelve-month period ended July 31, 1999, was a period of unusually high
volatility for the high yield market. The year began on a high note last July
with the markets supported by the powerful combination of a strong U.S. economy
and contained inflation. By the fall, investors became increasingly concerned
that pockets of weakness in the global economy would threaten the prosperity
enjoyed in the U.S. domestic market. The ensuing flight to quality drained
liquidity from the financial markets prompting the Federal Reserve to lower
interest rates in an effort to restore investor confidence. The market staged a
rebound in early 1999 as capital began to flow back into high yield funds.
However, the new-year rally faded quickly as interest rates began to drift
higher.
For the 12 month period, the Fund's Class A shares before sales charge delivered
a total return of -1.76%, compared to -0.54% for the Lehman Brothers High Yield
Index. The Fund's performance during the year was enhanced by its relatively
conservative posture going into the market sell-off last fall. This same
strategy however, proved to be a drag on performance during the market rally
early in 1999 when many of the higher quality, interest rate sensitive bonds in
our portfolio came under selling pressure as interest rates moved higher.
During the last week of July, a new portfolio manager, Ken Peterson, was added
to the fund. Mr. Peterson brings extensive knowledge and experience managing
high yield portfolios accumulated during his 14-year investment career. The
strategy he employs is to couple a disciplined top down approach with intensive
bottom up analysis to deliver optimal investment returns.
For the coming year, we expect the U.S. economy to decelerate, in part due to
the drag on the economy caused by higher intermediate interest rates. While the
economy is strong and resilient, the labor markets are tight and wages are
creeping upward. This will likely cause the Federal Reserve to raise rates,
moderately slowing the economy but preventing excesses from building up in the
nation's economic and financial systems. Our Fund is well positioned for such an
environment with a high quality bias and a focus on industry sectors that tend
to generate stable cash flows. At today's valuation levels, we feel the high
yield market represents good fundamental value and offers investors the
potential for attractive returns.
Sincerely,
<TABLE>
<S> <C>
/s/ Dean C. Kopperud /s/ Howard G. Hudson
Dean C. Kopperud Howard G. Hudson
President Vice President
</TABLE>
VALUE OF $10,000 INVESTED AUGUST 1, 1989
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO CLASS A
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
1 YEAR 5 YEAR 10 YEAR
CLASS A* -6.18% +5.14% +7.52%
CLASS A** -1.76% +6.11% +8.02%
Lehman Brothers High Yield Index*** High Yield Portfolio Class A
8/1/89 10,000 9,550
90 10,133 8,494
91 11,642 10,118
92 14,253 12,373
93 16,439 14,497
94 17,002 15,354
95 19,433 16,688
96 21,147 17,800
97 24,631 20,154
98 26,648 21,024
99 26,702 20,652
</TABLE>
Annual period ended July 31
Past performance is not indicative of future performance. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
* SEC defined total returns, including reinvestment of all dividend and
capital gains distributions and the reduction due to the maximum sales
charge of 4.50%.
** These are the portfolio's total returns during the period, including
reinvestment of all dividend and capital gains distributions without
adjustment for sales charge.
*** An unmanaged index of lower quality, high yield corporate debt securities.
5
<PAGE>
FORTIS BOND FUNDS
U.S. GOVERNMENT SECURITIES FUND
Schedule of Investments
July 31, 1999
U.S. GOVERNMENT SECURITIES-98.09%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Cost (a) Value (b)
------------ ------------- -------------
<C> <S> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORP.-4.68%
MORTGAGE BACKED SECURITIES:
$ 1,186,475 5.50% 2001................................... $ 1,179,634 $ 1,136,313
2,702,813 8.00% 2001-2002.............................. 2,770,384 2,738,274
1,566,528 9.00% 2001-2022.............................. 1,661,169 1,655,044
88,864 10.50% 2015.................................. 95,557 96,546
175,400 11.25% 2013-2014............................. 187,474 192,388
465,442 11.50% 2015-2019............................. 503,522 514,517
494,562 11.75% 2010-2014............................. 544,802 548,162
103,001 12.50% 2019.................................. 110,039 116,377
------------- -------------
7,052,581 6,997,621
------------- -------------
NOTES:
8,000,000 6.75% 2006................................... 8,206,821 8,061,856
------------- -------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP........ 15,259,402 15,059,477
------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-50.23%
MORTGAGE BACKED SECURITIES:
9,327,253 5.50% 2014................................... 9,201,960 8,726,997
2,981,017 5.835% 2008.................................. 3,014,714 2,764,860
2,402,495 5.85% 2009................................... 2,402,937 2,227,656
28,123,903 6.00% 2013-2029.............................. 27,851,170 26,252,467
1,443,700 6.01% 2009................................... 1,471,731 1,353,285
2,944,379 6.36% 2008................................... 2,940,213 2,838,096
4,610,002 6.48% 2008................................... 4,650,906 4,476,745
26,360,027 6.50% 2013-2029.............................. 26,315,055 25,367,864
1,427,687 6.54% 2007................................... 1,451,202 1,391,293
1,925,953 6.63% 2005................................... 1,975,000 1,905,923
5,722,409 7.00% 2003-2029 (e).......................... 5,650,389 5,635,309
6,672,949 7.184% 2006.................................. 6,595,894 6,773,784
11,633,434 7.50% 2022-2027.............................. 11,861,014 11,636,483
421,864 8.00% 2025................................... 403,803 430,798
558,773 8.50% 2022................................... 585,357 580,972
125,845 9.00% 2020................................... 124,626 133,051
718,564 9.75% 2020................................... 775,151 769,821
539,257 10.00% 2020.................................. 588,296 581,469
487,945 10.50% 2012-2018............................. 531,874 528,762
158,147 10.75% 2013.................................. 162,891 171,790
1,498,007 11.00% 2015-2020............................. 1,623,784 1,643,765
248,497 11.25% 2013.................................. 260,922 274,299
108,856 11.50% 2015.................................. 116,488 120,275
203,591 12.00% 2011-2016............................. 217,089 228,786
376,872 12.50% 2015.................................. 421,657 427,490
------------- -------------
111,194,123 107,242,040
------------- -------------
NOTES:
10,884,000 5.125% 2004.................................. 9,916,751 10,321,548
6,000,000 5.42% 2001................................... 5,981,534 5,966,820
4,040,000 6.18% 2001................................... 4,069,763 4,058,079
30,828,000 6.375% 2009.................................. 31,113,472 30,044,969
3,750,000 6.80% 2003................................... 3,884,476 3,799,882
------------- -------------
54,965,996 54,191,298
------------- -------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION................................ 166,160,119 161,433,338
------------- -------------
</TABLE>
6
<PAGE>
U.S. GOVERNMENT SECURITIES-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
------------ ------------- -------------
<C> <S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION-6.19%
MORTGAGE BACKED SECURITIES:
$ 6,370,706 7.00% 2024................................... $ 6,286,453 $ 6,209,705
1,782,596 8.00% 2017-2022.............................. 1,819,689 1,820,547
1,469,221 9.00% 2022................................... 1,516,971 1,553,741
9,229,457 9.50% 2016-2019.............................. 9,659,343 9,880,164
379,276 11.00% 2015-2018............................. 408,672 422,044
------------- -------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION................................ 19,691,128 19,886,201
------------- -------------
OTHER DIRECT FEDERAL OBLIGATIONS-18.23%
FEDERAL FARM CREDIT BANK:
5,000,000 5.70% 2001................................... 5,012,528 4,987,175
------------- -------------
FEDERAL HOME LOAN BANK:
6,650,000 5.60% 2001................................... 6,634,831 6,610,725
6,000,000 5.75% 2001................................... 5,996,058 5,974,674
7,500,000 5.925% 2000.................................. 7,505,015 7,510,012
2,325,000 6.625% 2007.................................. 2,401,476 2,309,660
1,500,000 6.995% 2007.................................. 1,585,087 1,525,766
28,650,000 7.31% 2004................................... 28,568,672 29,660,857
------------- -------------
52,691,139 53,591,694
------------- -------------
TOTAL OTHER DIRECT FEDERAL OBLIGATIONS....... 57,703,667 58,578,869
------------- -------------
OTHER GOVERNMENT AGENCIES-0.83%
RESOLUTION FUNDING CORPORATION:
7,000,000 7.34% Zero Coupon Strip 2014 (d)............. 2,386,830 2,665,313
------------- -------------
U.S. TREASURY SECURITIES-17.93%
BONDS:
25,200,000 6.09% Zero Coupon Strip 2019 (d)............. 7,806,214 7,236,155
14,400,000 8.125% 2019-2021............................. 17,358,493 17,208,850
1,100,000 12.00% 2013.................................. 1,600,153 1,528,657
------------- -------------
26,764,860 25,973,662
------------- -------------
NOTES:
7,343,070 3.375% Inflation -- protection 2007 (f)...... 7,029,386 7,033,288
1,400,000 5.50% 2003................................... 1,398,114 1,382,063
23,090,000 6.125% 2001-2007............................. 23,058,460 23,243,225
------------- -------------
31,485,960 31,658,576
------------- -------------
TOTAL U.S. TREASURY SECURITIES............... 58,250,820 57,632,238
------------- -------------
TOTAL U.S. GOVERNMENT SECURITIES............. $ 319,451,966 $ 315,255,436
------------- -------------
------------- -------------
</TABLE>
SHORT-TERM INVESTMENTS-2.26%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (b)
----------- -------------
<C> <S> <C>
INVESTMENT COMPANY-2.26%
$7,274,655 First American Treasury Obligations Fund,
Current rate -- 4.59%...................... $ 7,274,655
-------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$326,726,621)(A)........................... $ 322,530,091
-------------
-------------
</TABLE>
(a) At July 31, 1999, the cost of securities for federal income tax purposes
was $326,996,286 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 3,198,471
Unrealized depreciation........................... (7,664,666)
---------------------------------------------------------------
Net unrealized depreciation....................... ($4,466,195)
---------------------------------------------------------------
</TABLE>
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(c) Note: Percentage of investments as shown is the ratio of the total market
value to total net assets.
(d) The interest rates disclosed for these securities represents the effective
yield on the date of acquisition.
(e) The cost of securities purchased on a when-issued basis at July 31, 1999,
was $3,845,156.
(f) U.S. Treasury inflation-protection securities (TIPS) are securities in
which the principal amount is adjusted for inflation and the semiannual
interest payments equal a fixed percentage of the inflation-adjusted
principal amount.
7
<PAGE>
FORTIS BOND FUNDS
STRATEGIC INCOME FUND
Schedule of Investments
July 31, 1999
ASSET BACKED SECURITIES-4.06%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ------------- ------------ ------------
<C> <S> <C> <C> <C>
COMMERCIAL LOANS-4.06%
$500,000 GMAC Commercial Mortgage Securities, Inc.,
7.085% Ser 1997-C1 Class E 12-15-2010 --
UNITED STATES.............................. Baa2* $ 499,067 $ 471,145
500,000 J.P. Morgan Commercial Mortgage Finance
Corp., 7.46% Variable Rate Ser 1997-C4
Class B 12-26-2028 -- UNITED STATES........ AA 524,877 502,340
------------ ------------
TOTAL ASSET BACKED SECURITIES................ $ 1,023,944 $ 973,485
------------ ------------
------------ ------------
</TABLE>
CORPORATE BONDS-INVESTMENT GRADE-43.23%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ------------- ------------ ------------
<C> <S> <C> <C> <C>
BANKS-6.26%
$350,000 Banco Santiago S.A., 7.00% Yankee Sub Note
7-18-2007 -- CHILE......................... BBB $ 347,137 $ 303,646
500,000 Bank Austria AG, 7.25% Sub Note 2-15-2017 --
AUSTRIA (f)................................ AA+ 519,983 479,733
500,000 Dresdner Funding Trust I, 8.151% Note
6-30-2031 -- UNITED STATES (d)............. A+ 500,000 463,032
250,000 LB Baden-Wuerttemberg, 7.625% Yankee Sub Note
2-1-2023 -- GERMANY........................ AAA 282,130 256,276
------------ ------------
1,649,250 1,502,687
------------ ------------
BROKERAGE AND INVESTMENT-2.08%
500,000 Lehman Brothers Holdings, Inc., 7.375% Note
5-15-2004 -- UNITED STATES................. A 514,951 497,975
------------ ------------
CAPTIVE AUTO FINANCE-1.00%
250,000 Toyota Motor Credit, 5.625% Global Note
11-13-2003 -- UNITED STATES................ AAA 249,644 240,328
------------ ------------
ELECTRONIC-MISCELLANEOUS-2.05%
500,000 Sony Corp., 6.125% Global Bond 3-4-2003 --
JAPAN...................................... A+ 499,207 492,987
------------ ------------
FINANCIAL SERVICES-1.02%
250,000 Newcourt Credit Group, 7.125% 12-17-2003 --
CANADA (f)................................. BBB 249,417 244,417
------------ ------------
FOREIGN-GOVERNMENT AGENCIES-1.00%
250,000 Korea Development Bank, 7.125% Global Note
4-22-2004 -- SOUTH KOREA................... BBB- 248,260 239,918
------------ ------------
FOREIGN-GOVERNMENT-8.09%
250,000 British Columbia (Province of), 6.50% Yankee
Bond 1-15-2026 -- CANADA................... AA- 255,845 231,220
500,000 Generalitat de Catalunya, 6.25% Yankee Bond
12-15-2018 -- SPAIN........................ AA- 498,446 453,253
250,000 Korea (Republic of), 8.875% Global Bond
4-15-2008 -- SOUTH KOREA................... BBB- 263,330 256,037
500,000 Malaysia, 8.75% Global Bond 6-1-2009 --
MALAYSIA................................... BBB- 496,378 495,000
500,000 Poland (Republic of), 7.125% Yankee Note
7-1-2004 -- POLAND......................... BBB 500,897 505,000
------------ ------------
2,014,896 1,940,510
------------ ------------
INDUSTRIAL-0.93%
250,000 Tyco International Group S.A., 6.875% Yankee
Bond 1-15-2029 -- LUXEMBOURG............... A- 252,237 223,225
------------ ------------
MEDIA-3.27%
500,000 News America Holdings, 8.875% Deb 4-26-2023
-- UNITED STATES........................... BBB- 575,733 537,243
250,000 Westinghouse Electric Corp., 7.875% Deb
9-1-2023 -- UNITED STATES.................. BBB- 276,229 247,162
------------ ------------
851,962 784,405
------------ ------------
NATURAL GAS TRANSMISSIONS-1.97%
500,000 Trans-Canada Pipelines Ltd., 6.49% Yankee
Bond 1-21-2009 -- CANADA................... A- 503,458 473,595
------------ ------------
OIL-CRUDE PETROLEUM AND GAS-3.92%
500,000 Saga Petroleum ASA, 7.25% Yankee Bond
9-23-2027 -- NORWAY........................ BBB 508,392 454,649
500,000 YPF Sociedad Anonima, 7.25% Yankee Sr Note
3-15-2003 -- ARGENTINA (f)................. BBB- 499,394 485,445
------------ ------------
1,007,786 940,094
------------ ------------
OIL-EQUIPMENT WELLS AND SERVICES-1.87%
500,000 Petroleum Geo-Services ASA, 7.125% Yankee Sr
Note 3-30-2028 -- NORWAY................... BBB 498,570 448,559
------------ ------------
</TABLE>
8
<PAGE>
CORPORATE BONDS-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ------------- ------------ ------------
<C> <S> <C> <C> <C>
SUPRA-NATIONAL-2.03%
$500,000 Corp Andina de Fomento, 7.10% Yankee Bond
2-1-2003 -- VENEZUELA...................... A $ 501,866 $ 486,150
------------ ------------
TELECOMMUNICATIONS-4.86%
500,000 360 Communications Alltel Corp., 7.50% Sr
Note 3-1-2006 -- UNITED STATES............. A 518,288 511,944
250,000 Metronet Communications, 8.16% Sr Disc Note
6-15-2008 (Zero coupon through 6-15-2003,
thereafter 9.95%) -- CANADA (e)............ BBB 195,442 190,000
250,000 Telecom Argentina Stet -- FRANCE TELECOM
S.A., 9.75% NOTE 7-12-2001 -- ARGENTINA
(d)........................................ BBB- 249,695 246,875
250,000 US West Capital Funding, Inc., 6.50% Bond
11-15-2018 -- UNITED STATES................ A- 248,590 217,804
------------ ------------
1,212,015 1,166,623
------------ ------------
TELEPHONE SERVICES-1.01%
250,000 Telecommunicaciones de Puerto Rico, 6.65%
Note 5-15-2006 -- UNITED STATES (f)........ BBB 249,910 242,027
------------ ------------
UTILITIES-ELECTRIC-1.87%
500,000 Empresa Nacional de Electricidad, 7.325%
Yankee Bond 2-1-2037 -- CHILE.............. A- 497,124 448,432
------------ ------------
TOTAL CORPORATE BONDS - INVESTMENT GRADE..... $11,000,553 $10,371,932
------------ ------------
------------ ------------
</TABLE>
CORPORATE BOND-NON-INVESTMENT GRADE-38.09%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ------------- ------------ ------------
<C> <S> <C> <C> <C>
AUTOMOBILE AND MOTOR VEHICLE PARTS-0.98%
$250,000 Federal-Mogul Co., 7.375% Note 1-15-2006 --
UNITED STATES (f).......................... BB+ $ 249,020 $ 234,753
------------ ------------
BEVERAGE-1.02%
250,000 Coca-Cola Femsa SA, 8.95% Yankee Note
11-1-2006 -- MEXICO........................ BB+ 253,642 245,864
------------ ------------
BROADCASTING-2.93%
250,000 Chancellor Media Corp., 9.00% Sr Sub
10-1-2008 -- UNITED STATES................. B 275,352 254,375
250,000 Grupo Televisa S.A., 11.27% Sr Disc Note
5-15-2008 (Zero coupon through 5-15-2001,
thereafter 13.25%) -- MEXICO (e)........... BB 218,581 201,250
250,000 Sinclair Broadcast Group, Inc., 9.00% Sr Sub
Note 7-15-2007 -- UNITED STATES (d)........ B 251,029 247,500
------------ ------------
744,962 703,125
------------ ------------
BUSINESS SERVICES-1.07%
250,000 Avis Rent A Car, Inc., 11.00% Sr Sub Note
5-1-2009 -- UNITED STATES (f).............. BB- 250,186 256,250
------------ ------------
CABLE TELEVISION-6.30%
250,000 Adelphia Communications, Inc., 9.25% Sr Note
10-1-2002 -- UNITED STATES................. B+ 253,550 253,750
500,000 Charter Communications Holdings LLC, 9.92% Sr
Disc Note 4-1-2011 (Zero coupon through
4-1-2004, thereafter 9.92%) -- UNITED
STATES (e)(f).............................. B+ 318,238 305,000
250,000 CSC Holdings, Inc., 8.125% Sr Deb 8-15-2009
-- UNITED STATES........................... BB+ 256,512 251,562
250,000 Lenfest Communications, 8.25% Sr Sub Note
2-15-2008 -- UNITED STATES................. BB- 249,386 253,750
250,000 Telewest Communication plc, 8.62% Sr Disc
Note 4-15-2009 (Zero coupon until
4-15-2004, thereafter 9.25%) -- UNITED
KINGDOM (e)(f)............................. B+ 172,079 157,500
500,000 United International Holdings, 10.53% Sr Disc
Note 2-15-2008 (Zero coupon through
2-15-2003, thereafter 10.75%) -- UNITED
STATES (e)................................. B 350,281 290,000
------------ ------------
1,600,046 1,511,562
------------ ------------
CHEMICALS-1.05%
250,000 Lyondell Chemical Co., 9.875% Sr Secured
5-1-2007 -- UNITED STATES (d).............. BB 250,398 252,500
------------ ------------
DAIRY PRODUCTS-0.94%
250,000 Fage Dairy Industries S.A., 9.00% Yankee Sr
Note 2-1-2007 -- GREECE.................... BB 244,462 225,000
------------ ------------
ENTERTAINMENT-1.04%
250,000 Speedway Motorsports, Inc., 8.50% Sr Sub Deb
Ser D 8-15-2007 -- UNITED STATES........... B+ 253,286 250,000
------------ ------------
</TABLE>
9
<PAGE>
FORTIS BOND FUNDS
STRATEGIC INCOME FUND (CONTINUED)
Schedule of Investments
July 31, 1999
CORPORATE BOND-NON-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ------------- ------------ ------------
<C> <S> <C> <C> <C>
FOOD-MISCELLANEOUS-1.02%
$250,000 Luigino's, Inc., 10.00% Sr Sub Note 2-1-2006
-- UNITED STATES (f)....................... B- $ 251,266 $ 244,688
------------ ------------
FOREIGN-GOVERNMENT-6.93%
250,000 Argentina (Republic of), 11.375% Global Bond
1-30-2017 -- ARGENTINA..................... BB 282,571 210,000
250,000 Brazil (Republic of), 10.125% Global Bond
5-15-2027 -- BRAZIL........................ B+ 251,239 178,750
250,000 Brazil (Republic of), 11.625% Global Bond
4-15-2004 -- BRAZIL........................ B+ 247,765 227,500
250,000 Panama (Republic of), 8.875% Global Bond
9-30-2027 -- PANAMA........................ BB+ 247,528 201,875
250,000 Philippines (Republic of), 8.875% Global Bond
4-15-2008 -- PHILIPPINES................... BB+ 243,930 244,063
500,000 United Mexican States, 6.25% Secured Bond Ser
W-B 12-31-2019 -- MEXICO................... BB 378,613 353,125
250,000 United Mexican States, 9.875% Global Bond
1-15-2007 -- MEXICO........................ BB 262,006 247,500
------------ ------------
1,913,652 1,662,813
------------ ------------
MACHINERY-0.89%
250,000 Clark Material Handling Co., 10.75% Sr Note
11-15-2006 -- UNITED STATES................ B+ 263,681 213,750
------------ ------------
OIL-CRUDE PETROLEUM AND GAS-0.41%
100,000 Swift Energy Co., 10.25% Sr Sub Note 8-1-2009
-- UNITED STATES........................... B- 99,236 99,236
------------ ------------
PAPER-1.06%
250,000 Packaging Corp. of America, 9.625% Sr Sub
Note 4-1-2009 -- UNITED STATES (f)......... B 256,535 253,750
------------ ------------
RETAIL-GROCERY-1.07%
250,000 Big V Supermarkets, Inc., 11.00% Sr Sub Note
2-15-2004 -- UNITED STATES................. B- 258,448 256,250
------------ ------------
STEEL AND IRON-1.01%
250,000 Wheeling-Pittsburgh Corp., 9.25% Sr Note
11-15-2007 -- UNITED STATES................ B+ 255,097 241,250
------------ ------------
TELECOMMUNICATIONS-8.39%
250,000 Intermedia Communications, Inc., 8.50% Sr
Note 1-15-2008 -- UNITED STATES............ B 250,000 222,500
250,000 McleodUSA, Inc., 8.125% Sr Note 2-15-2009 --
UNITED STATES.............................. B+ 248,973 226,250
250,000 Microcell Telecommunications, Inc., 12.52% Sr
Disc Note 6-1-2006 (Zero coupon through
12-1-2001, thereafter 14.00%) -- CANADA
(e)........................................ B3* 198,567 203,750
500,000 Nextel Communications, Inc., 10.06% Sr Disc
Note 9-15-2007 (Zero coupon through
9-15-2002, thereafter 10.65%) -- UNITED
STATES (e)................................. B- 375,027 367,500
250,000 Orange plc, 9.00% Sr Sub Deb 6-1-2009 --
UNITED KINGDOM (d)......................... BB- 250,932 251,250
250,000 RCN Corp., 10.00% Sr Note 10-15-2007 --
UNITED STATES.............................. B3* 256,149 245,000
250,000 Rogers Cantel, Inc., 9.375% Sr Secured Deb
6-1-2008 -- CANADA......................... BB+ 264,213 260,938
250,000 Splitrock Services, Inc., 11.75% Sr Note
7-15-2008 -- UNITED STATES................. NR 251,840 235,000
------------ ------------
2,095,701 2,012,188
------------ ------------
TELEPHONE SERVICES-1.98%
250,000 Alaska Communications SY, 9.375% Sr Sub Note
5-15-2009 -- UNITED STATES (d)............. B+ 250,393 239,375
250,000 Level 3 Communications, Inc., 9.125% Sr Note
5-1-2008 -- UNITED STATES.................. B 249,384 236,875
------------ ------------
499,777 476,250
------------ ------------
TOTAL CORPORATE BONDS - NON-INVESTMENT
GRADE...................................... $ 9,739,395 $ 9,139,229
------------ ------------
------------ ------------
</TABLE>
10
<PAGE>
U.S. GOVERNMENT SECURITIES-6.01%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Cost (a) Value (b)
--------- ------------ ------------
<C> <S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.01%
MORTGAGE BACKED SECURITIES:
$490,427 6.30% 2008................................... $ 491,016 $ 471,061
260,758 6.48% 2008................................... 263,072 253,220
492,306 6.54% 2007................................... 500,414 479,756
240,744 6.63% 2005................................... 246,875 238,241
------------ ------------
TOTAL U.S. GOVERNMENT SECURITIES............. 1,501,377 1,442,278
------------ ------------
------------ ------------
TOTAL LONG-TERM INVESTMENTS.................. $23,265,269 $21,926,924
------------ ------------
------------ ------------
</TABLE>
SHORT-TERM INVESTMENTS-7.27%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (b)
----------- ------------
<C> <S> <C>
BANKS-5.18%
$1,243,401 U.S. Bank N.A. Money Market Variable Rate
Time Deposit, Current rate -- 4.91%........ $ 1,243,401
------------
U.S. GOVERNMENT AGENCY-2.09%
500,000 Federal National Mortgage Association, 5.11%,
8-3-1999................................... 499,791
------------
TOTAL SHORT-TERM INVESTMENTS................. 1,743,192
------------
------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$25,008,461) (A)........................... $23,670,116
------------
------------
</TABLE>
(a) At July 31, 1999, the cost of securities for federal income tax purposes
was $25,008,461 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 22,468
Unrealized depreciation........................... (1,360,813)
---------------------------------------------------------------
Net unrealized depreciation....................... $(1,338,345)
---------------------------------------------------------------
</TABLE>
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(c) Note: Percentage of investments as shown is the ratio of the total market
value to total net assets. Market value of investments in foreign
securities represents 30.90% of total net assets in investment grade
securities and 13.37% of total net assets in non-investment grade
securities.
(d) Securities issued within the terms of a private placement memorandum,
exempt from registration under Section 144A of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or to other
"accredited investors". These investments have been identified by portfolio
management as illiquid securities:
<TABLE>
<CAPTION>
Period Acquired Shares/Par Security Cost Basis
- --------------- ----------- ---------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1999 250,000 Alaska Communications SY due 2009 - 144A $ 250,393
1999 500,000 Dresdner Funding Trust due 2031 - 144A 500,000
1999 250,000 Lyondell Chemical Co. due 2007 - 144A 250,398
1999 250,000 Orange plc, due 2009 - 144A 250,932
1999 250,000 Sinclair Broadcasting Group , Inc. due 2007 - 144A 251,029
1999 250,000 Telecom Argentina Stet due 2001 - 144A 249,695
</TABLE>
The aggregate value of these securities at July 31, 1999, was $1,700,533,
which represents 7.09% of total net assets.
(e) The interest rate disclosed for these securities represents the effective
yield on the date of acquisition.
(f) Securities sold within the terms of a private placement memorandum, exempt
form registration under Section 144A of the Securities Act of 1933, as
amended, and may be sold only to dealers in that program or to other
"accredited investors". Pursuant to guidelines adopted by the Board of
Directors, these issues are determined to be liquid. The aggregate value of
these securities at July 31, 1999, was $2,903,562, which represents 12.10%
of total net assets.
* Moody's Rating
11
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO
Schedule of Investments
July 31, 1999
CORPORATE BONDS-INVESTMENT GRADE-1.27%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
FINANCIAL SERVICES-0.67%
$1,137,000 Homeside, Inc., 11.25% Second Priority Sr
Secured Note 5-15-2003..................... A+ $ 1,164,015 $ 1,289,074
------------- -------------
TELECOMMUNICATIONS-0.60%
1,500,000 Metronet Communications, 8.16% Sr Disc Note
6-15-2008 (Zero coupon through 6-15-2003,
thereafter 9.95%) (f)...................... BBB 1,172,649 1,140,000
------------- -------------
TOTAL CORPORATE BONDS - INVESTMENT GRADE..... $ 2,336,664 $ 2,429,074
------------- -------------
------------- -------------
</TABLE>
CORPORATE BONDS-NON-INVESTMENT GRADE-92.49%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
APPAREL-1.37%
$2,500,000 Hosiery Corp. of America, Inc., 13.75% Sr Sub
Note 8-1-2002.............................. B- $ 2,621,714 $ 2,637,500
------------- -------------
AUTOMOBILE AND MOTOR VEHICLE PARTS-3.11%
2,500,000 Diamond Triumph Auto, 9.25% Sr Note 4-1-2008
(g)........................................ B+ 2,547,704 2,425,000
1,500,000 Dura Operating Corp., 9.00% Sr Sub Note
5-1-2009 (g)............................... B 1,502,920 1,436,250
2,250,000 Hayes Lemmerz International, Inc., 8.25% Sr
Sub Note 12-15-2008........................ B 2,259,842 2,109,375
------------- -------------
6,310,466 5,970,625
------------- -------------
BROADCASTING-6.17%
750,000 Ackerley Group, Inc., 9.00% Sr Sub Note
1-15-2009.................................. B 750,000 735,000
2,500,000 Chancellor Media Corp., 8.00% Sr Note
11-1-2008.................................. B+ 2,479,811 2,443,750
2,000,000 Grupo Televisa S.A., 11.27% Sr Disc Note
5-15-2008 (Zero coupon through 5-15-2001,
thereafter
13.25%) (f)................................ BB 1,748,266 1,610,000
1,000,000 Shop at Home, Inc., 11.00% Sr Secured Note
4-1-2005................................... B 1,000,000 980,000
3,000,000 Sinclair Broadcasting Group, Inc., 10.00% Sr
Sub Note 9-30-2005......................... B 3,083,593 3,060,000
2,885,000 Young Broadcasting Corp., 11.75% Sr Sub Note
11-15-2004................................. B 3,107,449 3,036,462
------------- -------------
12,169,119 11,865,212
------------- -------------
BUSINESS SERVICES-1.07%
2,000,000 Avis Rent A Car, Inc., 11.00% Sr Sub Note
5-1-2009 (g)............................... BB- 2,001,484 2,050,000
------------- -------------
CABLE TELEVISION-16.41%
1,000,000 Adelphia Communications, Inc., 8.375% Sr Note
2-1-2008................................... B+ 1,006,780 961,250
3,500,000 Adelphia Communications, Inc., 9.25% Sr Note
10-1-2002.................................. B+ 3,551,229 3,552,500
10,117,492 Australis Media Ltd., 14.00% Sr Disc Note
5-15-2003 (Zero coupon through 5-15-2000,
thereafter 15.75%)(with warrants)(a)
(e)(f)..................................... D 7,594,969 101
2,500,000 Century Communications Corp., 8.875% Sr Note
1-15-2007.................................. BB- 2,572,036 2,475,000
6,000,000 Charter Communications Holdings LLC, 9.92% Sr
Disc Note 4-1-2011 (Zero coupon through
4-1-2004, thereafter 9.92%) (f)(g)......... B+ 3,818,858 3,660,000
1,000,000 CSC Holdings, Inc., 10.50% Sr Sub Deb
5-15-2016.................................. BB- 1,014,251 1,115,000
1,000,000 CSC Holdings, Inc., 8.125% Sr Deb
8-15-2009.................................. BB+ 1,052,879 1,006,250
2,000,000 CSC Holdings, Inc., 9.25% Sr Sub Note
11-1-2005.................................. BB- 2,089,969 2,055,000
2,000,000 Galaxy Telecom L.P., 12.375% Sr Sub Note
10-1-2005.................................. B- 2,161,582 2,160,000
1,500,000 Lenfest Communications, 7.625% Sr Note
2-15-2008.................................. BB+ 1,496,246 1,530,000
1,750,000 Lenfest Communications, 8.25% Sr Sub Note
2-15-2008.................................. BB- 1,745,699 1,776,250
500,000 Mediacom LLC/Capital Corp., 7.875% Sr Note
2-15-2011 (g).............................. B+ 446,168 452,500
2,000,000 Mediacom LLC/Capital Corp., 8.50% Sr Note
4-15-2008.................................. B+ 2,000,000 1,900,000
3,000,000 Olympus Communication L.P., 10.625% Sr Note
11-15-2006................................. B+ 3,000,000 3,225,000
2,000,000 Rifkin Acquisition Partners L.P., 11.125% Sr
Sub Note 1-15-2006......................... B- 2,187,241 2,170,000
3,500,000 Telewest Communication plc, 9.16% Sr Disc
Note 4-15-2009 (Zero coupon through
4-15-2004, thereafter 9.25%) (f)(g)........ B+ 2,304,644 2,205,000
</TABLE>
12
<PAGE>
CORPORATE BONDS-NON-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
$2,250,000 United International Holdings, 11.00% Sr Disc
Note 2-15-2008 (Zero coupon through
2-15-2003, thereafter 10.75%) (f).......... B $ 1,527,617 $ 1,305,000
------------- -------------
39,570,168 31,548,851
------------- -------------
CHEMICALS-3.24%
2,000,000 Agricultural Minerals & Chemicals, 10.75% Sr
Note 9-30-2003............................. BB- 2,072,228 1,660,000
2,500,000 NL Industries, Inc., 11.75% Sr Secured Note
10-15-2003................................. B 2,721,915 2,600,000
4,000,000 Trans-Resources, Inc., 11.93% Sr Disc Note
3-15-2008 (Zero coupon through 3-15-03,
thereafter
12.00%) (f)................................ B- 2,638,169 1,960,000
------------- -------------
7,432,312 6,220,000
------------- -------------
CONSUMER GOODS-1.02%
1,250,000 Chattem, Inc., 12.75% Sr Sub Note Ser B
6-15-2004.................................. B- 1,251,573 1,356,250
250,000 Scotts Co., 8.625% Sr Sub Note 1-15-2009
(g)........................................ B+ 250,000 245,625
375,000 Windmere-Durable Holdings, 10.00% Sr Sub Note
7-31-2008.................................. B- 375,000 361,875
------------- -------------
1,876,573 1,963,750
------------- -------------
DAIRY PRODUCTS-1.29%
2,750,000 Fage Dairy Industries S.A., 9.00% Yankee Sr
Note 2-1-2007.............................. BB 2,655,648 2,475,000
------------- -------------
ELECTRICAL-COMPONENTS AND PARTS-1.26%
2,500,000 Wesco Distribution, Inc., 9.125% Sr Sub Note
6-1-2008................................... B 2,492,496 2,425,000
------------- -------------
ENERGY-0.95%
2,000,000 Energy Corp. of America, 9.50% Sr Sub Note
5-15-2007.................................. B 2,008,866 1,820,000
------------- -------------
ENTERTAINMENT-3.31%
4,500,000 Isle of Capri Casinos, 8.75% Sr Sub Note
4-15-2009 (g).............................. B 4,500,000 4,117,500
2,250,000 Speedway Motorsports, Inc., 8.50% Sr Sub Deb
Ser D 8-15-2007............................ B+ 2,273,660 2,250,000
------------- -------------
6,773,660 6,367,500
------------- -------------
FOOD-MISCELLANEOUS-1.68%
750,000 Agrilink Foods, Inc., 11.875% Sr Sub Note
11-1-2008.................................. B 750,000 757,500
1,250,000 Fresh Foods, Inc., 10.75% Sr Note 6-1-2006... B 1,250,000 1,243,750
1,250,000 Luigino's, Inc., 10.00% Sr Sub Note 2-1-2006
(g)........................................ B- 1,256,332 1,223,437
------------- -------------
3,256,332 3,224,687
------------- -------------
FOREIGN-GOVERNMENT-0.37%
1,000,000 United Mexican States, 6.25% Secured Bond Ser
W-B 12-31-2019............................. BB 757,226 706,250
------------- -------------
FOREST PRODUCTS-1.72%
1,750,000 Domtar, Inc., 8.75% Note 8-1-2006............ BB+ 1,827,160 1,800,313
1,500,000 Stone Container Corp., 9.875% Sr Note
2-1-2001................................... B 1,517,225 1,507,500
------------- -------------
3,344,385 3,307,813
------------- -------------
HEALTH CARE SERVICES-2.02%
2,000,000 Quorum Health Group, Inc., 8.75% Sr Sub Note
11-1-2005.................................. B+ 2,061,242 1,925,000
2,000,000 Tenet Healthcare Corp., 8.625% Sr Sub Note
1-15-2007.................................. BB- 2,061,919 1,950,000
------------- -------------
4,123,161 3,875,000
------------- -------------
LEISURE TIME-AMUSEMENTS-2.50%
3,000,000 Argosy Gaming, 10.75% Sr Sub Note 6-1-2009
(g)........................................ B- 3,003,589 3,060,022
216,537 Capital Gaming International, Inc., 12.00% Sr
Note 5-28-2001 (e)......................... NR -- --
750,000 Florida Panthers Holdings, 9.875% Sr Sub Note
4-15-2009.................................. B- 751,693 720,000
1,000,000 Station Casinos, Inc., 10.125% Sr Sub Note
3-15-2006.................................. B+ 968,679 1,025,000
------------- -------------
4,723,961 4,805,022
------------- -------------
MACHINERY-2.56%
1,500,000 Anthony Crane Rentals, 10.375% Sr Note
8-1-2008................................... B 1,500,000 1,425,000
4,095,000 Clark Material Handling Co., 10.75% Sr Note
11-15-2006................................. B+ 4,220,772 3,501,225
------------- -------------
5,720,772 4,926,225
------------- -------------
</TABLE>
13
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1999
CORPORATE BONDS-NON-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
MACHINERY-TOOLS-1.65%
$3,295,000 Simonds Industries, 10.25% Sr Sub Note
7-1-2008................................... B- $ 3,179,959 $ 3,179,675
------------- -------------
MEDICAL SUPPLIES-1.10%
2,000,000 Maxxim Medical, 10.50% Sr Sub Note
8-1-2006................................... B 2,178,695 2,110,000
------------- -------------
MISCELLANEOUS-0.71%
1,500,000 La Petite Acad/LPA Holdings, 10.00% Sr Note
5-15-2008.................................. B- 1,500,000 1,372,500
------------- -------------
OFFICE EQUIPMENT AND SUPPLIES-0.73%
1,500,000 Iron Mountain, Inc., 8.25% Sr Sub Note
7-1-2011 (g)............................... B- 1,497,362 1,395,000
------------- -------------
OIL-CRUDE PETROLEUM AND GAS-0.52%
500,000 Ocean Energy, Inc., 8.875% Sr Sub Note
7-15-2007.................................. BB- 496,598 498,750
500,000 Swift Energy Co., 10.25% Sr Sub Note
8-1-2009................................... B- 496,180 496,180
------------- -------------
992,778 994,930
------------- -------------
OIL-OFFSHORE DRILLING-1.23%
2,250,000 RBF Finance Co., 11.375% Sr Secured Note
3-15-2009.................................. BB- 2,257,051 2,362,500
------------- -------------
PAPER-2.10%
2,000,000 Packaging Corp. of America, 9.625% Sr Sub
Note 4-1-2009 (g).......................... B 2,000,000 2,030,000
2,500,000 Plainwell, Inc., 11.00% Sr Sub Note
3-1-2008................................... B- 2,500,000 2,000,000
------------- -------------
4,500,000 4,030,000
------------- -------------
PRINTING-3.64%
1,500,000 Cadmus Communication Corp., 9.75% Sr Sub Note
6-1-2009 (g)............................... B 1,501,880 1,503,750
1,500,000 Day International Group, Inc., 11.125% Sr
Note 6-1-2005.............................. B+ 1,618,840 1,590,000
2,250,000 Mail-Well Corp., 8.75% Sr Sub Note
12-15-2008................................. B+ 2,260,186 2,154,375
750,000 Phoenix Color Corp., 10.375% Sr Sub Note
2-1-2009................................... B- 753,070 723,750
1,000,000 World Color Press, Inc., 8.375% Sr Sub Note
11-15-2008................................. BB- 1,000,000 1,015,000
------------- -------------
7,133,976 6,986,875
------------- -------------
PUBLISHING-1.49%
2,000,000 Garden State Newspapers, 8.75% Sr Sub Note
10-1-2009.................................. B+ 2,013,711 1,910,000
1,000,000 Primedia, Inc., 7.625% Sr Note 4-1-2008...... BB- 990,642 955,000
------------- -------------
3,004,353 2,865,000
------------- -------------
RESTAURANTS AND FRANCHISING-0.98%
2,000,000 Advantica Restaurant Group, Inc., 11.25% Sr
Note 1-15-2008............................. B 2,148,838 1,880,000
------------- -------------
SHIP BUILDING, SHIPPING-1.88%
3,500,000 Newport News Ship Building, 9.25% Sr Sub Note
12-1-2006.................................. B+ 3,698,329 3,613,750
------------- -------------
STEEL AND IRON-1.00%
2,000,000 Wheeling-Pittsburgh Corp., 9.25% Sr Note
11-15-2007................................. B+ 2,040,774 1,930,000
------------- -------------
TELECOMMUNICATIONS-18.99%
750,000 Centennial Cellular, 10.75% Sr Sub Note
12-15-2008 (g)............................. CCC+ 750,000 785,625
1,250,000 Emmis Communications Corp., 8.125% Sr Sub
Note 3-15-2009............................. B- 1,253,823 1,200,000
2,250,000 Hermes Europe Railtel B.V., 10.375% Sr Sub
Note 1-15-2009............................. B 2,250,000 2,227,500
2,500,000 Hyperion Telecommunications, 12.25% Sr Note
9-1-2004................................... BB- 2,662,784 2,637,500
2,500,000 Intermedia Communications, Inc., 8.50% Sr
Note 1-15-2008............................. B 2,583,864 2,225,000
2,000,000 Intermedia Communications, Inc., 9.03% Sr
Disc Note 7-15-2007 (Zero coupon through
7-15-2002, thereafter 11.25%) (f).......... B 1,623,535 1,400,000
3,625,000 ITC Deltacom, Inc., 11.00% Sr Note
6-1-2007................................... B 4,054,251 3,878,750
500,000 ITC Deltacom, Inc., 9.75% Sr Note
11-15-2008................................. B 500,000 510,000
750,000 McleodUSA, Inc., 8.125% Sr Note 2-15-2009.... B+ 752,332 678,750
2,500,000 McleodUSA, Inc., 9.25% Sr Note 7-15-2007..... B+ 2,677,089 2,425,000
250,000 McleodUSA, Inc., 9.50% Sr Note 11-1-2008..... B+ 250,000 249,375
1,500,000 Metromedia Fiber Network, Inc., 10.00% Sr
Note 11-15-2008............................ B 1,508,291 1,522,500
5,500,000 Nextel Communications, Inc. 9.98% Sr Disc
Note 9-15-2007 (Zero coupon through
9-15-2002, thereafter 10.65%) (f).......... B- 4,143,098 4,042,500
</TABLE>
14
<PAGE>
CORPORATE BONDS-NON-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
$1,750,000 NTL, Inc., 12.375% Sr Note 10-1-2008 (Zero
coupon through 10-1-2003, thereafter
12.375%) (f)............................... B- $ 1,062,996 $ 1,198,750
1,400,000 Omnipoint Corp., 11.625% Sr Note Ser A
8-15-2006.................................. CCC+ 1,366,958 1,442,000
1,750,000 Psinet, Inc., 11.00% Sr Note 8-1-2009 (with
rights) (g)................................ B- 1,772,149 1,736,875
500,000 Qwest Communications International, 8.29% Sr
Disc Note 2-1-2008 (Zero coupon through
2-1-2003, thereafter 8.29%) (f)............ BB+ 376,758 370,000
4,250,000 Rogers Cantel, Inc., 9.375% Sr Secured Deb
6-1-2008................................... BB+ 4,491,627 4,435,938
3,750,000 Splitrock Services, Inc., 11.75% Sr Note
7-15-2008.................................. NR 3,713,028 3,525,000
------------- -------------
37,792,583 36,491,063
------------- -------------
TELEPHONE SERVICES-1.15%
4,000,000 Telecorp PCS, Inc., 11.625% Sr Sub Note
4-15-2009 (Zero coupon through 4-15-2004,
thereafter 11.625%) (f)(g)................. NR 2,350,698 2,220,000
------------- -------------
TEXTILE MANUFACTURING-2.08%
2,250,000 Galey & Lord, Inc., 9.125% Sr Sub Note
3-1-2008................................... B 2,239,817 1,125,000
3,000,000 Pillowtex Corp., 10.00% Sr Sub Note
11-15-2006................................. B+ 3,174,192 2,880,000
------------- -------------
5,414,009 4,005,000
------------- -------------
UTILITIES-ELECTRIC-0.98%
2,000,000 AES Corp., 8.50% Sr Sub Note 11-1-2007....... B+ 2,048,894 1,890,000
------------- -------------
WASTE DISPOSAL-2.21%
2,000,000 IT Group, Inc., 11.25% Sr Sub Note 4-1-2009
(g)........................................ B+ 2,000,000 1,920,000
2,125,000 Norcal Waste Systems, Inc., 13.50% Increasing
Rate Sr Note 11-15-2005.................... BB- 2,125,000 2,332,188
------------- -------------
4,125,000 4,252,188
------------- -------------
TOTAL CORPORATE BONDS - NON-INVESTMENT
GRADE...................................... $ 193,701,642 $ 177,766,916
------------- -------------
------------- -------------
</TABLE>
PREFERRED STOCKS-0.69%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Market
Shares Cost (b) Value (c)
----------- ------------- -------------
<C> <S> <C> <C>
OIL-REFINING-0.69%
1,500,000 R&B Falcon Corp., 13.875% Cumm. Preferred
5-1-2009 (Dividend is payable in
kind)(e)................................... $ 1,358,550 $ 1,330,779
------------- -------------
</TABLE>
COMMON STOCKS AND WARRANTS-0.72%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Market
Shares Cost (b) Value (c)
-------- ------------- -------------
<C> <S> <C> <C>
APPAREL-0.03%
1,250 Hosiery Corp. of America, Inc. Class A
(a)(e)..................................... $ 21,150 $ 50,000
------------- -------------
AUTOMOBILE AND MOTOR VEHICLE PARTS-0.00%
750 Highwaymaster Communications, Inc. (Warrants)
(a)(e)..................................... 13,125 189
------------- -------------
CABLE TELEVISION-0.00%
7,500 People's Choice T.V. Corp. (Warrants)
(a)(e)..................................... 78 --
------------- -------------
CONSUMER GOODS-0.00%
3,000 Wireless One, Inc. (Warrants) (a)(e)......... 23,493 30
------------- -------------
LEISURE TIME-AMUSEMENTS-0.00%
15,750 Capital Gaming International, Inc. (a)....... -- 158
6,000 Hemmeter Enterprises, Inc. (Warrants)
(a)(e)..................................... 24,000 --
------------- -------------
24,000 158
------------- -------------
OIL-REFINING-0.08%
1,500 R & B Falcon Corp. (Warrants) (a)(g)......... 141,450 150,000
------------- -------------
</TABLE>
15
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1999
COMMON STOCKS AND WARRANTS-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Cost (b) Value (c)
-------- ------------- -------------
<C> <S> <C> <C>
PUBLISHING-0.00%
5,542 Marvel Enterprises, Inc. Class A (Warrants)
(a)........................................ $ 380,278 $ 5,542
9,387 Marvel Enterprises, Inc. Class C (Warrants)
(a)........................................ 1,288,210 2,640
------------- -------------
1,668,488 8,182
------------- -------------
TELECOMMUNICATIONS-0.61%
6,600 Clearnet Communications, Inc. (Warrants) (a)
(e)........................................ 76,725 111,700
63,759 e.spire Communications, Inc. (Warrants)
(a)........................................ 618,165 637,590
1,000 Hyperion Telecom (Warrants) (a) (e).......... 20,000 107,000
12,800 Powertel, Inc. (Warrants) (a) (e)............ 94,118 97,920
3,750 Splitrock Service (Warrants) (a)............. 46,195 225,000
------------- -------------
855,203 1,179,210
------------- -------------
TOTAL COMMON STOCKS AND WARRANTS............. 2,746,987 1,387,769
------------- -------------
------------- -------------
TOTAL LONG-TERM INVESTMENTS.................. $ 200,143,843 $ 182,914,538
------------- -------------
------------- -------------
</TABLE>
SHORT-TERM INVESTMENTS-3.34%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (c)
----------- -------------
<C> <S> <C>
BANKS-1.64%
$3,160,347 U.S. Bank N.A. Money Market Variable Rate
Time Deposit, Current rate -- 4.91%........ $ 3,160,347
-------------
DIVERSIFIED FINANCE-1.70%
3,263,000 Associates Corp. Master Variable Rate Note,
Current rate -- 5.01%...................... 3,263,000
-------------
TOTAL SHORT-TERM INVESTMENTS................. $ 6,423,347
-------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$206,567,190)(B)........................... $ 189,337,885
-------------
-------------
</TABLE>
(a) Presently non-income producing. For long-term debt securities, items
identified are in default as to payment of interest and/or principal.
(b) At July 31, 1999, the cost of securities for federal income tax purposes
was $206,572,753 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 1,988,226
Unrealized depreciation..................................... (19,223,094)
- --------------------------------------------------------------------------
Net unrealized depreciation................................. $(17,234,868)
- --------------------------------------------------------------------------
</TABLE>
(c) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(d) Note: Percentage of investments as shown is the ratio of the total market
value to total net assets. Market value of investments in foreign
securities represents 8.64% of net assets as of July 31, 1999.
(e) Securities issued with in the terms of a private placement memorandum,
exempt from registration under Section 144A of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or to other
"accredited investors". These investments have been identified by portfolio
management as illiquid securities:
<TABLE>
<CAPTION>
Period Acquired Shares/Par Security Cost Basis
- ------------------ ---------- ------------------------------------------------------------------------------ ----------
<S> <C> <C> <C>
1996-1997 10,117,492 Australis Media Ltd. (with warrants) due 2003 $7,594,969
1999 216,537 Capital Gaming International due 2001 - 144A --
1996 6,600 Clearnet Communications, Inc. (Warrants) - 144A 76,725
1994 6,000 Hemmeter Enterprises, Inc. (Warrants) - 144A 24,000
1997 750 Highwaymaster Communications, Inc. (Warrants) - 144A 13,125
1994 1,250 Hosiery Corp. of America, Inc. Class A - 144A 21,150
1997 1,000 Hyperion Telecom (Warrants) - 144A 20,000
1997 7,500 People's Choice T.V. Corp. (Warrants) 78
1997 12,800 Powertel, Inc. (Warrants) 94,118
1999 1,500,000 R&B Falcon Corp. - 144A 1,358,550
1996 3,000 Wireless One, Inc. (Warrants) 23,493
</TABLE>
The aggregate value of these securities at July 31, 1999, was $1,697,741,
which represents .88% of total net assets.
(f) The interest rate disclosed for these securities represents the effective
yield on the date of acquisition.
(g) Securities sold within the terms of a private placement memorandum, exempt
from registration under S ection 144A of the Securities Act of 1933, as
amended, and may be sold only to dealers in that program or to other
"accredited investors". Pursuant to guidelines adopted by the Board of
Directors, these issues are determined to be liquid. The aggregate value of
these securities at July 31, 1999, was $32,616,562, which represents 16.97%
of total net assets.
16
<PAGE>
FORTIS BOND FUNDS
Statements of Assets and Liabilities
July 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S.
GOVERNMENT STRATEGIC
SECURITIES INCOME HIGH YIELD
FUND FUND PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, as detailed in the accompanying
schedules, at market (cost $326,726,621; $25,008,461; and
$206,567,190; respectively) (Note 1)......................... $ 322,530,091 $ 23,670,116 $ 189,337,885
Cash on deposit with custodian................................. -- -- 18,750
Collateral for securities lending transactions (Note 1)........ 84,566,750 -- --
Receivables:
Investment securities sold................................... 89,653 -- 1,750
Interest and dividends....................................... 3,252,993 408,171 4,066,340
Subscriptions of capital stock............................... 7,601 2,458 6,041
Deferred registration costs (Note 1)........................... 22,869 12,666 21,829
Deferred organizational costs (Note 1)......................... -- 21,667 --
-------------- -------------- --------------
TOTAL ASSETS..................................................... 410,469,957 24,115,078 193,452,595
-------------- -------------- --------------
LIABILITIES:
Cash portion of dividends payable.............................. 332,693 5,222 494,987
Payable upon return of securities loaned (Note 1).............. 84,566,750 -- --
Payable for investment securities purchased.................... 3,845,156 99,236 496,180
Redemptions of capital stock................................... 60,330 -- 82,967
Payable for investment advisory and management fees (Note 2)... 198,793 2,437 121,196
Payable for distribution fees (Note 2)......................... 2,496 603 10,108
Accounts payable and accrued expenses.......................... 58,532 15,686 40,764
-------------- -------------- --------------
TOTAL LIABILITIES................................................ 89,064,750 123,184 1,246,202
-------------- -------------- --------------
NET ASSETS:
Net proceeds of capital stock, par value $.01 per
share-authorized 10,000,000,000, 10,000,000,000, and
10,000,000,000 shares, respectively.......................... 390,624,794 26,132,523 235,752,977
Unrealized depreciation of investments......................... (4,196,530) (1,338,345) (17,229,305)
Undistributed net investment income (excess of distributions
over)........................................................ 255,331 3,686 (340,774)
Accumulated net realized loss from sale of investments......... (65,278,388) (805,970) (25,976,505)
-------------- -------------- --------------
TOTAL NET ASSETS................................................. $ 321,405,207 $ 23,991,894 $ 192,206,393
-------------- -------------- --------------
-------------- -------------- --------------
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE:
Class A shares (based on net assets of $49,273,980; $22,207,363;
and $106,920,950; respectively and 5,497,787; 2,428,411; and
16,036,606 shares outstanding; respectively)................... $8.96 $9.14 $6.67
-------------- -------------- --------------
Class B shares (based on net assets of $4,702,686; $814,709; and
$22,814,492; respectively and 525,994; 89,098; and 3,421,053
shares outstanding; respectively).............................. $8.94 $9.14 $6.67
-------------- -------------- --------------
Class C shares (based on net assets of $3,070,901; $219,175; and
$6,050,748; respectively and 343,991; 23,959; and 908,869
shares outstanding; respectively).............................. $8.93 $9.15 $6.66
-------------- -------------- --------------
Class E shares (based on net assets of $254,095,859; $0; and $0;
respectively and 28,363,968; 0; and 0 shares outstanding;
respectively).................................................. $8.96 -- --
-------------- -------------- --------------
Class H shares (based on net assets of $10,261,781; $750,647; and
$56,420,203; respectively and 1,148,235; 82,116; and 8,466,437
shares outstanding; respectively).............................. $8.94 $9.14 $6.66
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FORTIS BOND FUNDS
Statements of Operations
For the Year Ended July 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S.
GOVERNMENT STRATEGIC
SECURITIES INCOME HIGH YIELD
FUND FUND PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
NET INVESTMENT INCOME:
Income:
Interest income.............................................. $ 21,059,796 $ 1,774,766 $ 19,493,159
Dividend income.............................................. -- -- 56,721
Fee income (Note 1).......................................... 98,923 -- --
-------------- -------------- --------------
Total income................................................... 21,158,719 1,774,766 19,549,880
-------------- -------------- --------------
Expenses:
Investment advisory and management fees (Note 2)............. 2,477,465 189,762 1,459,592
Distribution fees (Class A) (Note 2)......................... 130,559 55,971 365,642
Distribution fees (Class B) (Note 2)......................... 40,420 5,702 257,573
Distribution fees (Class C) (Note 2)......................... 20,678 2,623 68,432
Distribution fees (Class H) (Note 2)......................... 111,023 4,993 643,002
Registration fees............................................ 56,394 49,912 56,725
Shareholders' notices and reports............................ 66,851 7,994 47,700
Legal and auditing fees (Note 2)............................. 46,910 21,150 26,900
Custodian fees............................................... 14,856 2,600 11,100
Directors' fees and expenses................................. 24,143 1,853 16,550
Amortization of organization costs........................... -- 6,504 --
Other........................................................ 25,209 1,622 16,053
-------------- -------------- --------------
Total expenses................................................. 3,014,508 350,686 2,969,269
Less reimbursable expenses (Note 2).......................... -- (79,503) --
-------------- -------------- --------------
Net Expenses................................................... 3,014,508 271,183 2,969,269
-------------- -------------- --------------
NET INVESTMENT INCOME............................................ 18,144,211 1,503,583 16,580,611
-------------- -------------- --------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 1):
Net realized loss from security transactions................... (105,226) (805,970) (15,531,738)
Net change in unrealized depreciation of investments........... (12,599,430) (1,391,995) (6,387,800)
-------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS................................... (12,704,656) (2,197,965) (21,919,538)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS..................................................... $ 5,439,555 $ (694,382) $ (5,338,927)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
FORTIS BOND FUNDS
Statements of Changes in Net Assets
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JULY 31, 1999 JULY 31, 1998
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 18,144,211 $ 20,795,990
Net realized gain (loss) from security transactions............ (105,226) 8,346,912
Net change in unrealized (depreciation) of investments......... (12,599,430) (2,474,357)
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. 5,439,555 26,668,545
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (2,622,563) (3,017,377)
Class B...................................................... (171,776) (140,663)
Class C...................................................... (88,599) (60,964)
Class E...................................................... (14,630,693) (17,164,484)
Class H...................................................... (470,692) (524,647)
-------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (17,984,323) (20,908,135)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (1,796,539 and 822,757 shares)....................... 16,844,144 7,604,563
Class B (289,195 and 120,670 shares)......................... 2,689,827 1,110,644
Class C (364,482 and 83,034 shares).......................... 3,400,685 767,893
Class E (3,851,023 and 2,495,810 shares)..................... 36,198,004 23,021,542
Class H (466,452 and 451,004 shares)......................... 4,370,480 4,150,901
Proceeds from shares issued as a result of reinvested dividends
Class A (208,031 and 232,525 shares)......................... 1,941,525 2,145,251
Class B (16,315 and 13,455 shares)........................... 151,529 123,897
Class C (7,080 and 5,419 shares)............................. 65,640 49,809
Class E (1,176,290 and 1,337,763 shares)..................... 10,973,982 12,339,811
Class H (37,302 and 39,802 shares)........................... 347,038 366,333
Less cost of repurchase of shares
Class A (2,142,693 and 1,875,615 shares)..................... (20,065,742) (17,300,337)
Class B (120,086 and 102,794 shares)......................... (1,113,932) (946,133)
Class C (164,225 and 110,004 shares)......................... (1,540,025) (1,016,334)
Class E (7,313,196 and 8,637,714 shares)..................... (68,212,077) (79,603,597)
Class H (521,603 and 489,094 shares)......................... (4,842,822) (4,511,053)
-------------- --------------
NET DECREASE IN NET ASSETS FROM SHARE TRANSACTIONS............... (18,791,744) (51,696,810)
-------------- --------------
TOTAL DECREASE IN NET ASSETS..................................... (31,336,512) (45,936,400)
NET ASSETS:
Beginning of year.............................................. 352,741,719 398,678,119
-------------- --------------
End of year (includes undistributed net investment income of
$255,331 and $95,443, respectively).......................... $ 321,405,207 $ 352,741,719
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
FORTIS BOND FUNDS
Statements of Changes in Net Assets
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE PERIOD
FROM
NOVEMBER 10,
FOR THE 1997
YEAR ENDED (INCEPTION) TO
JULY 31, 1999 JULY 31, 1998
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 1,503,583 $ 941,985
Net realized gain (loss) from security transactions............ (805,970) 30,984
Net change in unrealized appreciation (depreciation) of
investments in securities.................................... (1,391,995) 53,650
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS..................................................... (694,382) 1,026,619
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (1,444,077) (921,146)
Class B...................................................... (32,866) (9,798)
Class C...................................................... (14,830) (4,082)
Class H...................................................... (28,844) (6,959)
From net realized gains on investments
Class A...................................................... (29,418) --
Class B...................................................... (685) --
Class C...................................................... (384) --
Class H...................................................... (497) --
-------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (1,551,601) (941,985)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (114,975 and 2,153,816 shares)....................... 1,112,155 21,553,816
Class B (56,479 and 39,571 shares)........................... 540,543 401,612
Class C (27,407 and 21,527 shares)........................... 265,968 218,059
Class H (65,798 and 35,910 shares)........................... 628,078 363,277
Proceeds from shares issued as a result of reinvested dividends
Class A (151,302 and 90,745 shares).......................... 1,446,534 915,639
Class B (2,681 and 500 shares)............................... 25,499 5,042
Class C (1,153 and 327 shares)............................... 11,040 3,298
Class H (1,975 and 466 shares)............................... 18,736 4,700
Less cost of repurchase of shares
Class A (68,638 and 13,789 shares)........................... (657,349) (139,504)
Class B (9,643 and 490 shares)............................... (91,804) (4,965)
Class C (23,895 and 2,560 shares)............................ (229,098) (25,900)
Class H (20,959 and 1,074 shares)............................ (201,297) (10,836)
-------------- --------------
NET INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS............... 2,869,005 23,284,238
-------------- --------------
TOTAL INCREASE IN NET ASSETS..................................... 623,022 23,368,872
NET ASSETS:
Beginning of period............................................ 23,368,872 --
-------------- --------------
End of period (includes undistributed net investment income of
$3,686 and $0, respectively)................................. $ 23,991,894 $ 23,368,872
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
FORTIS BOND FUNDS
Statements of Changes in Net Assets
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JULY 31, 1999 JULY 31, 1998
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 16,580,611 $ 20,443,789
Net realized gain (loss) from security transactions............ (15,531,738) 1,734,513
Net change in unrealized depreciation of investments in
securities................................................... (6,387,800) (13,573,415)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS..................................................... (5,338,927) 8,604,887
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (9,110,376) (11,659,978)
Class B...................................................... (2,074,725) (2,254,300)
Class C...................................................... (553,768) (756,254)
Class H...................................................... (5,185,872) (6,409,279)
-------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (16,924,741) (21,079,811)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (4,788,487 and 3,124,540 shares)..................... 33,406,189 24,024,367
Class B (462,119 and 1,886,435 shares)....................... 3,230,762 14,502,208
Class C (179,698 and 461,879 shares)......................... 1,249,109 3,563,413
Class H (1,317,353 and 3,355,803 shares)..................... 9,207,091 25,831,216
Proceeds from shares issued as a result of reinvested dividends
Class A (845,799 and 926,975 shares)......................... 5,832,807 7,101,158
Class B (138,016 and 145,568 shares)......................... 952,967 1,112,838
Class C (65,909 and 77,721 shares)........................... 454,338 593,732
Class H (354,183 and 410,889 shares)......................... 2,444,094 3,141,131
Less cost of repurchase of shares
Class A (4,924,969 and 4,449,936 shares)..................... (34,161,183) (34,149,757)
Class B (1,085,786 and 729,969 shares)....................... (7,512,789) (5,594,388)
Class C (505,027 and 271,306 shares)......................... (3,489,086) (2,079,590)
Class H (2,988,963 and 2,136,681 shares)..................... (20,684,500) (16,360,883)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS.... (9,070,201) 21,685,445
-------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.......................... (31,333,869) 9,210,521
NET ASSETS:
Beginning of year.............................................. 223,540,262 214,329,741
-------------- --------------
End of year (includes undistributed (excess of distributions
over) net investment income of ($340,774) and $3,356,
respectively)................................................ $ 192,206,393 $ 223,540,262
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The funds are open-end,
diversified management investment companies, each of which has different
investment objectives and their own investment portfolios and net asset
values. U.S. Government Securities Fund ("U.S. Government") and Strategic
Income Fund are series of Fortis Income Portfolios, Inc. ("Fortis Income")
and High Yield Portfolio ("High Yield") is an investment portfolio in Fortis
Advantage Portfolios, Inc. ("Fortis Advantage"). The investment objectives of
each portfolio are as follows:
- The objective of the U.S. Government Securities Fund is to maximize total
return (from current income and capital appreciation), while providing
shareholders with a level of current income consistent with prudent
investment risk.
- The objective of the Strategic Income Fund is to maximize total return
(from current income and capital appreciation) by primarily investing in
(a) U.S. Government securities, (b) investment and non-investment grade
fixed income securities issued by foreign governments and companies, and
(c) investment and non-investment grade fixed income securities issued by
U.S. issuers, which, in the opinion of the portfolio's investment adviser,
do not subject the fund to unreasonable investment risk.
- The objective of the High Yield Portfolio is to maximize total return (from
current income and capital appreciation) with a focus on high current
income by investing primarily in a diversified portfolio of high yielding,
fixed income securities which, in the opinion of the portfolio's investment
adviser, do not subject the portfolio to unreasonable investment risk.
The Articles of Incorporation of Fortis Income and Fortis Advantage permit
the Board of Directors to create additional portfolios in the future.
The funds offer Class A, Class B, Class C, Class E (for U.S. Government only)
and Class H shares.
The U.S. Government Fund and High Yield Portfolio began to issue multiple
class shares effective November 14, 1994. The inception of Strategic Income
Fund was November 10, 1997, and the commencement of operations was December
1, 1997. Class A and E shares are sold with a front-end sales charge. For
U.S. Government Fund, Class E shares are only available to existing
shareholders on November 14, 1994. Class B and H shares are sold without a
front-end sales charge and may be subject to a contingent deferred sales
charge for six years, and such shares automatically convert to Class A after
eight years. Class C shares are sold without a front-end sales charge and may
be subject to a contingent deferred sales charge for one year. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that the level of distribution fees charged
differs between classes. Income, expenses (other than expenses incurred under
each class's distribution agreement) and realized and unrealized gains or
losses on investments are allocated to each class of shares based on its
relative net assets.
The significant accounting policies followed by the Funds are summarized as
follows:
SECURITY VALUATION: Investments in securities traded on a national securities
exchange or on the NASDAQ National Market System are valued at the last
reported sales price. Securities for which over-the-counter market quotations
are readily available are valued on the basis of the last current bid price.
An outside pricing service may be utilized to provide such valuations. For
fixed income securities, the pricing service may employ electronic data
processing techniques and/or a matrix system to determine valuations using
methods which include consideration of yields or prices of bonds of
comparable quality, type of issue, coupon, maturity and rating indications as
to value from dealers, and general market conditions. Securities for which
quotations are not readily available are valued at fair value as determined
in good faith by management under supervision of the Board of Directors.
Short-term investments, with maturities of less than 60 days when acquired,
or which subsequently are within 60 days of maturity, are valued at amortized
cost.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS: Delivery and payment for
securities that have been purchased by the funds 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 fluctuation and the
portfolio maintains, in a segregated account with its custodian, assets with
a market value equal to the amount of its purchase commitments. As of July
31, 1999, U.S. Government Fund had entered into an outstanding when-issued or
forward commitments of $3,845,156.
Consistent with its ability to purchase securities on a when-issued basis,
the U.S. Government Fund and the Strategic Income Fund have entered into
transactions to defer settlement of its purchase commitments. As an
inducement to defer settlement, the portfolio repurchases a similar security
for settlement at a later date at a lower purchase price relative to the
current market. This transaction is referred to as a "dollar roll".
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions
are accounted for on the trade date. Interest income is recorded on the
accrual basis. Realized security gains and losses are determined using the
identified cost method. Each fund amortizes original issue discount, long
term bond premium, and market discount.
For the year ended July 31, 1999, the cost of purchases and proceeds from
sales of securities (other than short-term securities) were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
<S> <C> <C>
- --------------------------------------------------------------------------------
U.S. Government Securities Fund.............. $ 257,003,856 $ 261,470,992
Strategic Income Fund........................ 20,186,547 17,706,696
Fortis High Yield Portfolio.................. 89,341,872 95,461,597
</TABLE>
LENDING OF PORTFOLIO SECURITIES: At July 31, 1999, securities valued at
$81,443,077 were on loan to brokers from the U.S. Government Fund. For
collateral, the Fund's custodian received $84,566,750 in
22
<PAGE>
- --------------------------------------------------------------------------------
cash which is maintained in a separate account and invested by the custodian
in short term investment vehicles. Fee income from securities lending
amounted to $98,923 for the U.S. Government Fund for the year ended July 31,
1999. The risks to the funds in security lending transactions are that the
borrower may not provide additional collateral when required or return the
securities when due and that the proceeds from the sale of investments made
with cash collateral received will be less than amounts required to be
returned to the borrowers.
DEFERRED COSTS: Registration costs are deferred and charged to income over
the registration period. Organizational costs were incurred with the
commencement of operations of the Strategic Income Fund. These costs will be
amortized over 60 months on a straight line basis, beginning December 1,
1997.
FEDERAL TAXES: The portfolios intend to qualify, under the Internal Revenue
Code, as regulated investment companies and if so qualified, will not have to
pay federal income taxes to the extent their taxable net income is
distributed.
Net investment income and net realized gains may differ for financial
statement and tax purposes. The character of distributions made during the
year from net investment income or net realized gains may, therefore, differ
from their ultimate characterization for federal income tax purposes. Also,
due to the timing of dividend distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized gains
(losses) were recorded by the portfolios. The effect on dividend
distributions of certain current year permanent book-to-tax differences is
reflected as excess distributions of net realized gains in the statements of
changes in net assets and the financial highlights.
On the Statement of Assets and Liabilities, due to permanent book-to-tax
differences, Strategic Income Fund's undistributed net investment income has
been increased $20,720 resulting in reclassifications to decrease
paid-in-capital by the same amount.
For federal income tax purposes U.S. Government had a capital loss carryover
of $64,894,291, Strategic Income had 805,970 and High Yield had $25,970,943
at July 31, 1999, which, if not offset by subsequent capital gains, will
expire in 2002 through 2008. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available
capital loss carryover has been offset or expired.
INCOME AND CAPITAL GAINS DISTRIBUTIONS: Distributions from net investment
income are declared daily and paid monthly. The funds will generally make
annual distributions of any realized capital gains as required by law. These
income and capital gains distributions may be reinvested in additional shares
of the fund at net asset value without any charge to the shareholder or
payable in cash.
ILLIQUID SECURITIES: At July 31, 1999, investments in securities for the
Strategic Income Fund and High Yield Portfolio included issues that are
illiquid. The funds currently limit investments in illiquid securities to 15%
of net assets, at market value, at the date of purchase. The aggregate value
of such securities at July 31, 1999, was $1,700,533 for Strategic Income and
$1,697,741 for High Yield which represents 7.09% and .88% of net assets
respectively. Pursuant to guidelines adopted by the Board of Directors,
certain unregistered securities are determined to be liquid and are not
included within the 15% limitation specified above.
HIGH-YIELD DEBT SECURITIES: Although High Yield and Strategic Income have
diversified portfolios, the funds have 92.49% and 38.09%, respectively, of
total net assets invested in non-investment grade (high-yield) and comparable
quality unrated high-yield securities. Participation in high-yielding
securities transactions generally involves greater returns in the form of
higher average yields. However, participation in such transactions involves
greater risks, often related to sensitivity to interest rates, economic
changes, solvency, and relative liquidity in the secondary trading market.
Lower ratings may reflect a greater possibility that the financial condition
of the issuer, or adverse changes in general economic conditions, or both,
may impair the ability of the issuer to make payments of interest and
principal. The prices and yields of lower rated securities generally
fluctuate more than higher quality securities, and such prices may decline
significantly in periods of general economic difficulty of rising interest
rates.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of increase and decrease
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
BANK BORROWINGS: Several Fortis Funds including the High Yield Portfolio have
a revolving credit agreement with Norwest Bank Minnesota N.A., whereby the
portfolio is permitted to have a bank borrowing for temporary and emergency
purposes to meet large redemption requests by shareholders; and cover
securities purchased when matched or when earlier trades have failed. The
agreement , which enables the portfolio to participate with other Fortis
Funds, permits borrowings up to $25 million, collectively. Interest is
expensed to each participating fund based on its borrowings and will be
calculated at the borrowers' option of: 1) the Prime Index; 2) the Federal
Funds rate plus a "Margin" of 37.5 basis points, or; 3) the Libor rate plus a
"Margin" of 37.5 basis points. The Prime index is defined as the higher of:
A) the rate that Norwest Bank Minnesota N.A. announces from time to time as
its prime rate or B) the Federal Funds rate plus 50 basis points. Each
portfolio pays a commitment fee equal to its pro rata share of the amount of
the credit facility at a rate of 0.08% per annum. The High Yield Portfolio
had no borrowings outstanding during the year ended July 31, 1999.
2. PAYMENTS TO RELATED PARTIES: Fortis Advisers, Inc., is the investment adviser
for the funds. Investment advisory and management fees are computed at an
annual rate of .8% of the first $ 50 million of average daily net assets and
.7% of net assets in excess of $50 million for U.S. Government, Strategic
Income, and High
23
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Yield. In addition to the investment advisory and management fee, Classes A,
B, C and H pay Fortis Investors, Inc., (the principal underwriter)
distribution fees equal to .25% of average daily net assets for Class A for
U.S. Government and Strategic Income and .35% of average daily net assets for
Class A of High Yield and 1% of average daily net assets of U.S. Government,
Strategic Income, and High Yield Classes B, C and H for each fund on an
annual basis, to be used to compensate those who sell shares of the fund and
to pay certain other expenses of selling fund shares. Fortis Investors, Inc.,
also received sales charges (paid by purchasers or redeemers of the fund's
shares) as follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class E Class H
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund.............. $ 202,245 $ 7,837 $1,204 $ 101,081 $ 54,541
Strategic Income Fund........................ 14,235 501 387 -- 3,266
High Yield Portfolio......................... 376,413 104,944 2,983 -- 327,332
</TABLE>
Advisers has voluntarily undertaken to limit annual expenses for Strategic
Income (exclusive of interest, taxes, brokerage commissions and non-recurring
extraordinary charges and expenses) commencing December 1, 1997 to 1.10% of
average daily net assets for Class A, and 1.85% for Classes B, C, and H.
During the year ended July 31, 1999, Advisers waived $79,503 of its advisory
fee.
For the year ended July 31, 1999, legal fees and expenses were paid to a law
firm of which the secretary of the fund is a partner.
<TABLE>
<CAPTION>
Amount
<S> <C>
- ---------------------------------------------------------
U.S. Government Securities Fund.............. $ 17,310
Strategic Income Fund........................ 1,087
High Yield Portfolio......................... 8,000
</TABLE>
3. FINANCIAL HIGHLIGHTS: Selected per share historical data for each of the
Funds was as follows:
<TABLE>
<CAPTION>
Class E
-------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.30 $ 9.16 $ 8.87 $ 9.02 $ 9.03
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .49 .52 .54 .60 .67
Net realized and unrealized gains
(losses) on
investments......................... (.34) .14 .32 (.15) (.01)
--------- --------- --------- --------- ---------
Total from operations................... .15 .66 .86 .45 .66
--------- --------- --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.49) (.52) (.54) (.60) (.67)
From net realized gains............... -- -- -- -- --
Excess distributions of net realized
gains............................... -- -- (.03) -- --
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.49) (.52) (.57) (.60) (.67)
--------- --------- --------- --------- ---------
Net asset value, end of year............ $ 8.96 $ 9.30 $ 9.16 $ 8.87 $ 9.02
--------- --------- --------- --------- ---------
Total Return @.......................... 1.56% 7.42% 10.07% 5.08% 7.71%
Net assets end of year (000s omitted)... $254,096 $285,060 $324,643 $388,006 $470,597
Ratio of expenses to average daily net
assets................................ .78% .79% .81% .81% .77%
Ratio of net investment income to
average daily net assets.............. 5.32% 5.62% 6.08% 6.59% 7.51%
Portfolio turnover rate................. 75% 118% 161% 75% 76%
</TABLE>
* Annualized.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions without
adjustments for sales charge.
24
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. FINANCIAL HIGHLIGHTS (continued):
Class A
-------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995+
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.30 $ 9.16 $ 8.87 $ 9.02 $ 8.63
-------- -------- -------- -------- -------
Operations:
Investment income - net............... .47 .50 .52 .58 .46
Net realized and unrealized gains
(losses) on
investments......................... (.34) .14 .32 (.15) .39
-------- -------- -------- -------- -------
Total from operations................... .13 .64 .84 .43 .85
-------- -------- -------- -------- -------
Distributions to shareholders:
From investment income - net.......... (.47) (.50) (.52) (.58) (.46)
From net realized gains............... -- -- -- -- --
Excess distributions of net realized
gains............................... -- -- (.03) -- --
-------- -------- -------- -------- -------
Total distributions to shareholders..... (.47) (.50) (.55) (.58) (.46)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 8.96 $ 9.30 $ 9.16 $ 8.87 $ 9.02
-------- -------- -------- -------- -------
Total Return @.......................... 1.30% 7.14% 9.77% 4.78% 10.07%
Net assets end of year (000s omitted)... $ 49,274 $ 52,439 $ 59,128 $ 67,707 $ 4,909
Ratio of expenses to average daily net
assets................................ 1.03% 1.04% 1.06% 1.06% 1.02%*
Ratio of net investment income to
average daily net assets.............. 5.07% 5.37% 5.83% 6.34% 7.00%*
Portfolio turnover rate................. 75% 118% 161% 75% 76%
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------
Year Ended July 31,
--------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995+
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.28 $ 9.14 $ 8.86 $ 9.02 $8.63
------- ------- ------- ------- ------
Operations:
Investment income - net............... .40 .43 .46 .51 .41
Net realized and unrealized gains
(losses) on
investments......................... (.34) .14 .31 (.15) .39
------- ------- ------- ------- ------
Total from operations................... .06 .57 .77 .36 .80
------- ------- ------- ------- ------
Distributions to shareholders:
From investment income - net.......... (.40) (.43) (.47) (.52) (.41)
From net realized gains............... -- -- -- -- --
Excess distributions of net realized
gains............................... -- -- (.02) -- --
------- ------- ------- ------- ------
Total distributions to shareholders..... (.40) (.43) (.49) (.52) (.41)
------- ------- ------- ------- ------
Net asset value, end of year............ $ 8.94 $ 9.28 $ 9.14 $ 8.86 $9.02
------- ------- ------- ------- ------
Total Return @.......................... .53% 6.40% 8.95% 4.00% 9.47%
Net assets end of year (000s omitted)... $ 4,703 $ 3,161 $ 2,826 $ 2,314 $ 483
Ratio of expenses to average daily net
assets................................ 1.78% 1.79% 1.81% 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 4.32% 4.62% 5.07% 5.59% 6.24%*
Portfolio turnover rate................. 75% 118% 161% 75% 76%
</TABLE>
* Annualized.
+ For the period from November 14, 1994 (commencement of operations) to
July 31, 1995.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions without
adjustments for sales charge.
25
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. FINANCIAL HIGHLIGHTS (continued):
Class C
--------------------------------------------------
Year Ended July 31,
--------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995+
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.27 $ 9.13 $ 8.85 $ 9.01 $8.63
------- ------- ------- ------- ------
Operations:
Investment income - net............... .40 .43 .46 .51 .41
Net realized and unrealized gains
(losses) on
investments......................... (.34) .14 .31 (.15) .38
------- ------- ------- ------- ------
Total from operations................... .06 .57 .77 .36 .79
------- ------- ------- ------- ------
Distributions to shareholders:
From investment income - net.......... (.40) (.43) (.47) (.52) (.41)
From net realized gains............... -- -- -- -- --
Excess distributions of net realized
gains............................... -- -- (.02) -- --
------- ------- ------- ------- ------
Total distributions to shareholders..... (.40) (.43) (.49) (.52) (.41)
------- ------- ------- ------- ------
Net asset value, end of year............ $ 8.93 $ 9.27 $ 9.13 $ 8.85 $9.01
------- ------- ------- ------- ------
Total Return @.......................... .52% 6.41% 8.96% 4.00% 9.35%
Net assets end of year (000s omitted)... $ 3,071 $ 1,267 $ 1,444 $ 1,057 $ 326
Ratio of expenses to average daily net
assets................................ 1.78% 1.79% 1.81% 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 4.32% 4.62% 5.07% 5.59% 6.24%*
Portfolio turnover rate................. 75% 118% 161% 75% 76%
</TABLE>
<TABLE>
<CAPTION>
Class H
-------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995+
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.28 $ 9.14 $ 8.86 $ 9.02 $ 8.63
-------- -------- -------- -------- -------
Operations:
Investment income - net............... .40 .43 .46 .51 .41
Net realized and unrealized gains
(losses) on
investments......................... (.34) .14 .31 (.15) .39
-------- -------- -------- -------- -------
Total from operations................... .06 .57 .77 .36 .80
-------- -------- -------- -------- -------
Distributions to shareholders:
From investment income - net.......... (.40) (.43) (.47) (.52) (.41)
From net realized gains............... -- -- -- -- --
Excess distributions of net realized
gains............................... -- -- (.02) -- --
-------- -------- -------- -------- -------
Total distributions to shareholders..... (.40) (.43) (.49) (.52) (.41)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 8.94 $ 9.28 $ 9.14 $ 8.86 $ 9.02
-------- -------- -------- -------- -------
Total Return @.......................... .53% 6.40% 8.94% 4.00% 9.47%
Net assets end of year (000s omitted)... $ 10,262 $ 10,816 $ 10,637 $ 10,120 $ 4,823
Ratio of expenses to average daily net
assets................................ 1.78% 1.79% 1.80% 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 4.32% 4.62% 5.06% 5.45% 6.24%*
Portfolio turnover rate................. 75% 118% 161% 75% 76%
</TABLE>
* Annualized.
+ For the period from November 14, 1994 (commencement of operations) to
July 31, 1995.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions without
adjustments for sales charge.
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. FINANCIAL HIGHLIGHTS (continued):
Class A Class B
-------------------- --------------------
Year Ended July 31,
--------------------------------------------
STRATEGIC INCOME FUND 1999 1998+ 1999 1998+
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 10.05 $ 9.98 $ 10.05 $ 9.98
-------- -------- -------- --------
Operations:
Investment income - net............... .61 .42 .54 .38
Net realized and unrealized gain
(loss) on
investments......................... (.89) .07 (.89) .07
-------- -------- -------- --------
Total from operations................... (.28) .49 (.35) .45
-------- -------- -------- --------
Distributions to shareholders:
From investment income - net.......... (.62) (.42) (.55) (.38)
From net realized gains on
investments......................... (.01) -- (.01) --
-------- -------- -------- --------
Total distributions to shareholders..... (.63) (.42) (.56) (.38)
-------- -------- -------- --------
Net asset value, end of year............ $ 9.14 $ 10.05 $ 9.14 $ 10.05
-------- -------- -------- --------
Total Return @.......................... (2.86%) 4.77% (3.58%) 4.31%
Net assets end of year (000s omitted)... $ 22,207 $ 22,422 $ 815 $ 398
Ratio of expenses to average daily net
assets (a)............................ 1.10% 1.10%* 1.85% 1.85%*
Ratio of net investment income to
average daily net assets (a).......... 6.38% 6.22%* 5.63% 5.73%*
Portfolio turnover rate................. 79% 136% 79% 136%
</TABLE>
<TABLE>
<CAPTION>
Class C Class H
-------------------- --------------------
Year Ended July 31,
--------------------------------------------
STRATEGIC INCOME FUND 1999 1998+ 1999 1998+
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 10.05 $ 9.98 $ 10.05 $ 9.98
-------- -------- -------- --------
Operations:
Investment income - net............... .55 .38 .54 .38
Net realized and unrealized gain
(loss) on
investments......................... (.89) .07 (.89) .07
-------- -------- -------- --------
Total from operations................... (.34) .45 (.35) .45
-------- -------- -------- --------
Distributions to shareholders:
From investment income - net.......... (.55) (.38) (.55) (.38)
From net realized gains on
investments......................... (.01) -- (.01) --
-------- -------- -------- --------
Total distributions to shareholders..... (.56) (.38) (.56) (.38)
-------- -------- -------- --------
Net asset value, end of year............ $ 9.15 $ 10.05 $ 9.14 $ 10.05
-------- -------- -------- --------
Total Return @.......................... (3.49%) 4.35% (3.58%) 4.35%
Net assets end of year (000s omitted)... $ 219 $ 194 $ 751 $ 355
Ratio of expenses to average daily net
assets (a)............................ 1.85% 1.85%* 1.85% 1.85%*
Ratio of net investment income to
average daily net assets (a).......... 5.63% 5.73%* 5.63% 5.73%*
Portfolio turnover rate................. 79% 136% 79% 136%
</TABLE>
* Annualized.
+ For the period December 1, 1997 (commencement of operations) to July
31, 1998.
@ These are the funds total returns during the periods, including
reinvestment of all dividend and capital gains distributions without
adjustment for sales charge.
(a) Advisers has voluntarily undertaken to limit annual expenses for the
Strategic Income Fund (exclusive of interest, taxes, brokerage
commission and non-recurring extraordinary charges and expenses) to
1.10% of average daily net assets for Class A and 1.85% for Classes B,
C and H. For the periods presented , had the waiver and reimbursement
of expenses not been in effect, the ratios of expenses and net
investment income to average daily net assets would have been 1.44%
and 6.04% for Class A, 2.19% and 5.29% for Class B, 2.19% and 5.29%
for Class C, and 2.19% and 5.29% for Class H, respectively.
27
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. FINANCIAL HIGHLIGHTS (continued):
Class A
-------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------
HIGH YIELD PORTFOLIO 1999 1998 1997 1996+++ 1995+
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 7.41 $ 7.83 $ 7.56 $ 7.61 $ 7.90
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .59 .73 .76 .56 .86
Net realized and unrealized gain
(loss) on investments............... (.72) (.40) .28 (.04) (.25)
--------- --------- --------- --------- ---------
Total from operations................... (.13) .33 1.04 .52 .61
--------- --------- --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.61) (.75) (.75) (.55) (.86)
Excess distributions of net realized
gains............................... -- -- (.02) (.02) (.04)
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.61) (.75) (.77) (.57) (.90)
--------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.61
--------- --------- --------- --------- ---------
Total Return @.......................... (1.76%) 4.31% 14.51% 6.98% 8.07%
Net assets end of period (000s
omitted).............................. $ 106,921 $ 113,549 $ 123,115 $ 109,401 $ 113,268
Ratio of expenses to average daily net
assets................................ 1.16% 1.17% 1.19% 1.21%* 1.25%
Ratio of net investment income to
average daily net assets.............. 8.54% 9.46% 9.84% 9.87%* 10.61%
Portfolio turnover rate................. 46% 214% 331% 146% 101%
</TABLE>
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------
HIGH YIELD PORTFOLIO 1999 1998 1997 1996+++ 1995++
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 7.41 $ 7.83 $ 7.56 $ 7.60 $ 7.87
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .54 .68 .71 .53 .78
Net realized and unrealized gain
(loss) on investments............... (.72) (.40) .28 (.04) (.23)
--------- --------- --------- --------- ---------
Total from operations................... (.18) .28 .99 .49 .55
--------- --------- --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- (.02) (.02) (.04)
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.56) (.70) (.72) (.53) (.82)
--------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.60
--------- --------- --------- --------- ---------
Total Return @.......................... (2.44%) 3.67% 13.80% 6.62% 7.25%
Net assets end of period (000s
omitted).............................. $ 22,814 $ 28,935 $ 20,388 $ 12,067 $ 7,530
Ratio of expenses to average daily net
assets................................ 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 7.90% 8.81% 9.24% 9.20%* 9.66%*
Portfolio turnover rate................. 46% 214% 331% 146% 101%
</TABLE>
* Annualized
++ For the period from November 14, 1994 (commencement of operations) to
October 31, 1995.
+++ For the nine-month period ended July 31, 1996.
@ These are the fund's total returns during the periods, including
reinvestment of all dividends and capital gains distributions without
adjustments for sales charge.
28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. FINANCIAL HIGHLIGHTS (continued):
Class C
-------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------
HIGH YIELD PORTFOLIO 1999 1998 1997 1996+++ 1995++
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 7.40 $ 7.82 $ 7.55 $ 7.59 $ 7.87
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .54 .68 .71 .53 .78
Net realized and unrealized gain
(loss) on investments............... (.72) (.40) .28 (.04) (.24)
--------- --------- --------- --------- ---------
Total from operations................... (.18) .28 .99 .49 .54
--------- --------- --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- (.02) (.02) (.04)
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.56) (.70) (.72) (.53) (.82)
--------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.59
--------- --------- --------- --------- ---------
Total Return @.......................... (2.44%) 3.67% 13.82% 6.63% 7.12%
Net assets end of period (000s
omitted).............................. $ 6,051 $ 8,641 $ 7,037 $ 3,378 $ 2,180
Ratio of expenses to average daily net
assets................................ 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 7.90% 8.81% 9.26% 9.21%* 9.83%*
Portfolio turnover rate................. 46% 214% 331% 146% 101%
</TABLE>
<TABLE>
<CAPTION>
Class H
-------------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------------
HIGH YIELD PORTFOLIO 1999 1998 1997 1996+++ 1995++
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 7.40 $ 7.82 $ 7.55 $ 7.60 $ 7.87
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .54 .68 .71 .52 .78
Net realized and unrealized gain
(loss) on investments............... (.72) (.40) .28 (.04) (.23)
--------- --------- --------- --------- ---------
Total from operations................... (.18) .28 .99 .48 .55
--------- --------- --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- (.02) (.02) (.04)
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.56) (.70) (.72) (.53) (.82)
--------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.60
--------- --------- --------- --------- ---------
Total Return @.......................... (2.44%) 3.67% 13.82% 6.48% 7.25%
Net assets end of period (000s
omitted).............................. $ 56,420 $ 72,415 $ 63,789 $ 39,133 $ 23,862
Ratio of expenses to average daily net
assets................................ 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 7.90% 8.81% 9.23% 9.21%* 9.81%*
Portfolio turnover rate................. 46% 214% 331% 146% 101%
</TABLE>
* Annualized
++ For the period from November 14, 1994 (commencement of operations) to
October 31, 1995.
+++ For the nine-month period ended July 31, 1996.
@ These are the fund's total returns during the periods, including
reinvestment of all dividends and capital gains distributions without
adjustments for sales charge.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Fortis Income Portfolios, Inc.
Fortis Advantage Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of Fortis U.S. Government Securities
Fund, Fortis Strategic Income Fund (funds within Fortis Income Portfolios, Inc.)
and Fortis High Yield Portfolio (a portfolio within Fortis Advantage Portfolios,
Inc.) as of July 31, 1999 and the related statements of operations for the
period then ended, statements of changes in net assets and the financial
highlights for the periods presented. These financial statements and the
financial highlights are the responsibility of fund 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 the 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. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
performed other appropriate auditing procedures. 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 U.S.
Government Securities, Fortis Strategic Income Fund and High Yield Portfolio as
of July 31, 1999 and the results of their operations, changes in their net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
September 3, 1999
30
<PAGE>
FEDERAL INCOME TAX INFORMATION
U.S. Government Securities Fund
<TABLE>
<S> <C>
DIRECT FEDERAL OBLIGATIONS:
U.S. Treasury.............................. 21.84%
Other...................................... 18.64%
--------
Total Direct Federal Obligations......... 40.48%
Other Securities......................... 59.52%
--------
100.00%
--------
</TABLE>
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
RECORD DATE Class A Class B Class C Class E Class H
<S> <C> <C> <C> <C> <C>
----------------------------------------------------
Net Investment Income Per Share
08/31/1998................................... $ 0.040 $ 0.034 $ 0.034 $ 0.042 $ 0.034
09/30/1998................................... 0.040 0.034 0.034 0.042 0.034
10/31/1998................................... 0.040 0.034 0.034 0.042 0.034
11/30/1998................................... 0.040 0.034 0.034 0.042 0.034
12/31/1998................................... 0.040 0.034 0.034 0.042 0.034
01/31/1999................................... 0.038 0.032 0.032 0.040 0.032
02/28/1999................................... 0.038 0.032 0.032 0.040 0.032
03/31/1999................................... 0.038 0.032 0.032 0.040 0.032
04/30/1999................................... 0.038 0.032 0.032 0.040 0.032
05/31/1999................................... 0.039 0.033 0.033 0.041 0.033
06/30/1999................................... 0.039 0.033 0.033 0.041 0.033
07/31/1999................................... 0.039 0.033 0.033 0.041 0.033
-------- -------- -------- -------- --------
Total Distributions.......................... $ 0.469 $ 0.397 $ 0.397 $ 0.493 $ 0.397
-------- -------- -------- -------- --------
STRATEGIC INCOME FUND
RECORD DATE
Net Investment Income Per Share
08/31/1998................................... $ 0.053 $ 0.047 $ 0.046 -- $ 0.047
09/30/1998................................... 0.050 0.044 0.046 -- 0.044
10/31/1998................................... 0.050 0.044 0.044 -- 0.045
11/30/1998................................... 0.051 0.045 0.045 -- 0.045
12/31/1998................................... 0.051 0.045 0.045 -- 0.045
01/31/1999................................... 0.048 0.042 0.042 -- 0.042
02/28/1999................................... 0.048 0.043 0.042 -- 0.042
03/31/1999................................... 0.056 0.050 0.050 -- 0.050
04/30/1999................................... 0.051 0.045 0.044 -- 0.045
05/31/1999................................... 0.049 0.044 0.044 -- 0.044
06/30/1999................................... 0.059 0.052 0.052 -- 0.052
07/31/1999................................... 0.053 0.047 0.047 -- 0.047
-------- -------- -------- -------- --------
Total Distributions.......................... $ 0.619 $ 0.548 $ 0.547 -- $ 0.548
-------- -------- -------- -------- --------
Short-Term Capital Gain Per Share
12/31/1998................................... $ 0.013 $ 0.013 $ 0.013 -- $ 0.013
-------- -------- -------- -------- --------
HIGHYIELD PORTFOLIO
RECORD DATE
Net Investment Income Per Share
08/31/1998................................... $ 0.053 $ 0.049 $ 0.049 -- $ 0.049
09/30/1998................................... 0.053 0.049 0.049 -- 0.049
10/31/1998................................... 0.053 0.049 0.049 -- 0.049
11/30/1998................................... 0.053 0.049 0.049 -- 0.049
12/31/1998................................... 0.053 0.049 0.049 -- 0.049
01/31/1999................................... 0.053 0.049 0.049 -- 0.049
02/28/1999................................... 0.050 0.046 0.046 -- 0.046
03/31/1999................................... 0.050 0.046 0.046 -- 0.046
04/30/1999................................... 0.050 0.046 0.046 -- 0.046
05/31/1999................................... 0.046 0.042 0.042 -- 0.042
06/30/1999................................... 0.046 0.042 0.042 -- 0.042
07/31/1999................................... 0.046 0.042 0.042 -- 0.042
-------- -------- -------- -------- --------
Total Distributions.......................... $ 0.606 $ 0.558 $ 0.558 -- $ 0.558
-------- -------- -------- -------- --------
</TABLE>
31
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS Richard W. Cutting CPA AND FINANCIAL CONSULTANT
Allen R. Freedman CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
FORTIS, INC. MANAGING DIRECTOR OF
FORTIS INTERNATIONAL, N.V.
Dr. Robert M. Gavin PRESIDENT, CRANBROOK EDUCATION
COMMUNITY. PRIOR TO JULY 1996,
PRESIDENT MACALESTER COLLEGE
Benjamin S. Jaffray CHAIRMAN, SHEFFIELD GROUP, LTD.
Jean L. King PRESIDENT, COMMUNI-KING
Dean C. Kopperud CHIEF EXECUTIVE OFFICER AND DIRECTOR,
FORTIS ADVISERS, INC. PRESIDENT AND
DIRECTOR, FORTIS INVESTORS, INC.
PRESIDENT - FORTIS FINANCIAL GROUP,
FORTIS BENEFITS INSURANCE COMPANY AND
SENIOR VICE PRESIDENT, FORTIS
INSURANCE COMPANY
Edward M. Mahoney PRIOR TO JANUARY 1995, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, FORTIS
ADVISERS, INC., FORTIS INVESTORS,
INC.
Robb L. Prince FINANCIAL AND EMPLOYEE BENEFIT
CONSULTANT. PRIOR TO JULY 1995, VICE
PRESIDENT AND TREASURER, JOSTENS,
INC.
Leonard J. Santow PRINCIPAL, GRIGGS & SANTOW, INC.
Noel Shadko MARKETING CONSULTANT. PRIOR TO MAY
1996, SENIOR VICE PRESIDENT OF
MARKETING & STRATEGIC PLANNING,
ROLLERBLADE, INC.
Joseph M. Wikler INVESTMENT CONSULTANT AND PRIVATE
INVESTOR. PRIOR TO JANUARY 1994,
DIRECTOR OF RESEARCH, CHIEF
INVESTMENT OFFICER, PRINCIPAL, AND
DIRECTOR, THE ROTHSCHILD CO.
OFFICERS
Dean C. Kopperud
PRESIDENT AND DIRECTOR
Robert W. Beltz, Jr.
VICE PRESIDENT
James S. Byrd
VICE PRESIDENT
Peggy L. Ettestad
VICE PRESIDENT
Tamara L. Fagely
VICE PRESIDENT AND TREASURER
Howard G. Hudson
VICE PRESIDENT
Dickson W. Lewis
VICE PRESIDENT
Lucinda S. Mezey
VICE PRESIDENT
David A. Peterson
VICE PRESIDENT
Scott R. Plummer
VICE PRESIDENT
Rhonda J. Schwartz
VICE PRESIDENT
Melinda S. Urion
VICE PRESIDENT
Gary N. Yalen
VICE PRESIDENT
Michael J. Radmer
SECRETARY
INVESTMENT MANAGER, REGISTRAR Fortis Advisers, Inc.
AND TRANSFER AGENT BOX 64284, ST. PAUL, MINNESOTA 55164
PRINCIPAL UNDERWRITER Fortis Investors, Inc.
BOX 64284, ST. PAUL, MINNESOTA 55164
CUSTODIAN U.S. Bank National Association
MINNEAPOLIS, MINNESOTA
GENERAL COUNSEL Dorsey & Whitney LLP
MINNEAPOLIS, MINNESOTA
INDEPENDENT AUDITORS KPMG LLP
MINNEAPOLIS, MINNESOTA
The use of this material is authorized only when preceded or accompanied by a
prospectus.
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[LOGO]
FORTIS
Solid partners, flexible solutions-SM-
FORTIS MEANS STEADFAST
Fortis means "steadfast" in Latin. The worldwide Fortis family of companies
lives up to the name, and has each day since the 1800s, with flexible
solutions tailored to our customers' individual needs. We deliver the
stability you require today ... and tomorrow. You can count on it.
Fortis Financial Group offers mutual funds, annuities and life insurance
through its broker/dealer Fortis Investors, Inc.
We're part of Fortis, Inc., a financial services company that provides
specialty insurance and investment products to individuals, businesses,
associations and other financial services organizations throughout the United
States.
Fortis, Inc. is part of Fortis, a worldwide group of companies active in the
fields of insurance, banking and investments. Fortis is jointly owned by
Fortis AMEV of The Netherlands and Fortis AG of Belgium.
Fortis: steadfast for YOU!
FORTIS FINANCIAL GROUP
Fortis Advisers, Inc.
(fund management since 1949)
Fortis Investors, Inc.
(principal underwriter;
member NASD, SIPC)
Fortis Benefits Insurance Company
& Fortis Insurance Company
(issuers of FFG's insurance products)
P.O. Box 64284, St. Paul, MN 55164
(800) 800-2000
http://www.ffg.us.fortis.com
FORTIS FINANCIAL GROUP ----------------------
P.O. Box 64284 Bulk Rate
St. Paul, MN 55164 U.S. Postage
PAID
Fortis Bond Funds Permit No. 3794
Minneapolis, MN
----------------------
[RECYCLE LOGO] Printed on recycled paper with
40% preconsumer waste and 10%
post consumer waste. Please recycle.
The Fortis logo and Fortis-Registered Trademark- are registered
servicemarks of Fortis AMEV and Fortis AG.
98561 -C- Fortis 9/99
