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FORTIS
Solid partners, flexible solutions-SM-
Invest for today's needs, tomorrow's dreams
Fortis Bond Funds
Annual Report
JULY 31, 2000
Fortis Financial Group
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FORTIS BOND FUNDS ANNUAL REPORT
CONTENTS
LETTERS 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 31
FEDERAL INCOME TAX INFORMATION 32
DIRECTORS AND OFFICERS 33
- TOLL-FREE PERSONAL ASSISTANCE
- Shareholder Services
- (800) 800-2000, Ext. 3012
- 7:30 a.m. to 7:00 p.m. CST, Monday thru Friday
- TOLL-FREE INFORMATION LINE
- For daily account balances,
transaction activity or net asset
value information
- (800) 800-2000, Ext. 4344
- 24 hours a day
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 letters from the portfolio manager and
president provides a more detailed analysis of the fund and financial markets.
The charts and 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, 2000
<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.......................... $ 8.96 $ 8.94 $ 8.93 $ 8.96 $ 8.94
End of year................................ $ 8.86 $ 8.83 $ 8.83 $ 8.86 $ 8.83
DISTRIBUTIONS PER SHARE
From net investment income................. $ .500 $ .438 $ .438 $ .524 $ .438
STRATEGIC INCOME FUND
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 9.14 $ 9.14 $ 9.15 -- $ 9.14
End of year................................ $ 8.82 $ 8.82 $ 8.83 -- $ 8.82
DISTRIBUTIONS PER SHARE
From net investment income................. $ .710 $ .640 $ .640 -- $ .640
HIGH YIELD PORTFOLIO
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 6.67 $ 6.67 $ 6.66 -- $ 6.66
End of year................................ $ 6.06 $ 6.06 $ 6.05 -- $ 6.06
DISTRIBUTIONS PER SHARE
From net investment income................. $ .574 $ .528 $ .528 -- $ .528
</TABLE>
1
<PAGE>
PORTFOLIO COMPOSITION BY SECTOR AS OF 7/31/2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FNMA's 38.4%
FHLMC's 17.7%
U.S. Treasury Securities 16.7%
Other Direct Federal
Obligations 12.0%
GNMA's 10.0%
Cash Equivalents/Receivables 5.2%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/2000
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
-------------------------------------------------------------------
<C> <S> <C>
1. Federal Home Loan Bank (7.31%) 2004 11.9%
2. FHLMC Gold (7.00%) 2030 6.7%
3. U.S. Treasury Bond (8.00%) 2021 4.8%
4. GNMA (7.00%) 2028 4.1%
5. U.S. Treasury Note (5.00%) 2001 4.1%
6. FHLMC (7.00%) 2010 4.0%
7. FNMA (7.00%) 2030 3.1%
8. FHLMC (5.00%) 2004 3.1%
9. U.S. Treasury Bond (8.75%) 2017 2.8%
10. FNMA (7.184%) 2006 2.7%
</TABLE>
CLASS A, B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception+
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A shares# +4.62% +5.49% +6.56%
Class A shares## -0.09% +4.52% +5.71%
Class B shares# +3.79% +4.69% +5.76%
Class B shares## +0.24% +4.40% +5.64%
Class C shares# +3.91% +4.72% +5.77%
Class C shares## +2.92% +4.72% +5.77%
Class H shares# +3.79% +4.69% +5.76%
Class H shares## +0.24% +4.40% +5.64%
</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, 2000.
+ 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.
The economy continued to expand over the last 12 months, as real Gross Domestic
Product (GDP) grew by 5.1%++, a record for the current ten-year expansion, and
the highest year-on-year rate since 1984. Although core inflation (ex-food and
energy) remained benign at 2.4%, a 50% rise in the price of oil pushed the
Consumer-Price Index (CPI) to 3.7%++. The Federal Reserve, concerned about
potential inflationary imbalances associated with tight labor markets and wealth
driven consumption, raised the Federal Funds Rate a total of 1.5% during that
time.
While the Federal Reserve was raising short-term rates in order to slow down the
economy, the Treasury began making significant changes to its debt management
schedule. Because of sizeable current and projected budget surpluses, the
Treasury reduced the size and frequency of a number of its auctions, and
implemented a debt buyback program aimed at outstanding bonds with ten or more
years left to maturity. Through July 31, 2000, the Treasury had repurchased
$17.5 billion Treasury Bonds maturing between 2015 and 2023. The combination of
the Fed raising short-term rates and the Treasury actively reducing the supply
of longer maturity bonds caused the yield curve to invert (shorter maturity
issues yielding more than longer maturity issues.) Over the year, two-year
Treasury yields rose 0.64%, while 30-year Treasury yields fell 0.33%.
With respect to Agency Debentures, in early February Congress held hearings
concerning the activities of the Government Sponsored Enterprises (GSEs -- FNMA,
FHLMC, and FHLB.) Specifically, Congress questioned whether the GSEs unfairly
benefit from the market's perception that their debt is U.S. Government
guaranteed. Subsequent concerns about the credit-worthiness of these Enterprises
caused their yield premiums to increase 0.4%-0.6% on average over the 12-month
period.
We felt that the buyback program might lead to an inverted yield curve.
Accordingly, we positioned the portfolio to benefit from the inversion,
increasing our exposure to the long term (10 + years) components of the Treasury
market while maintaining a 4.75 year duration. Unfortunately, we did not expect
the congressional inquiry into the practices of the GSEs, and our modest
overweight in this sector hurt the portfolio's performance. For the year ended
July 31, 2000, the portfolio returned 4.91% for Class E before sales charge
compared to 5.16% for the Lehman Intermediate Government Index.
Going forward, given the recent evidence that the economy has slowed, we
wouldn't be surprised if the Federal Reserve left short rates unchanged for the
balance of this year. We also expect the yield curve to remain inverted, as the
Treasury continues to retire long term debt as part of its buyback program.
Longer term, we believe that the economy will grow at a more moderate 3.5%-4.0%
pace and that long-term interest rates can stay below 6%. Finally, while we
don't expect significant short-term performance relative to Treasuries from MBS
and Agency Debentures, we think their yield premiums are attractive over the
long term.
Sincerely,
/s/ Dean C. Kopperud /s/ Howard G. Hudson
Dean C. Kopperud Howard G. Hudson
President Vice President
++12 Months ending 6/30/00 -- the latest data available
VALUE OF $10,000 INVESTED AUGUST 1, 1990
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C>
ClASS E * +0.19% +4.80% +5.99%
CLASS E ** +4.91% +5.77% +6.48%
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS
INTERMEDIATE GOVERNMENT U.S. GOVERNMENT
INDEX *** SECURITIES FUND CLASS E
<S> <C> <C>
8/1/90 $10,000 $9,550
91 $11,020 $10,570
92 $12,540 $11,861
93 $13,566 $12,901
94 $13,691 $12,551
95 $14,838 $13,519
96 $15,610 $14,205
97 $16,950 $15,635
98 $18,107 $16,796
99 $18,840 $17,058
00 $19,813 $17,895
</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 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.
The twelve-month period ended July 31, 2000 was a challenging one for most fixed
income markets around the world. Global economic growth gathered momentum,
exerting pressure on some central bankers to raise interest rates. The global
economic recovery that has taken place since the liquidity crisis in fourth
quarter of 1998 has not been uniform in nature or magnitude around the world. A
strong U.S. dollar helped export-driven economies, such as Mexico and South
Korea, while political and social turmoil has restrained growth in countries
such as Indonesia, Russia and parts of sub-Saharan Africa. Also, rising energy
prices helped lift oil-rich countries including the members of OPEC. In this
highly uncertain environment, the fund's strategy of diversification across
three primary sectors was put to the test and proved its value. The fund's
investments in U.S. government securities, U.S. high yield securities and
international fixed income securities each demonstrated a unique pattern of
performance and volatility, as typically occurs. The U.S. government market
posted positive returns, while the high yield market was essentially flat. In
the international sector, the Salomon Brothers World Government Bond Index
returned -1.01%. The fund's diversification across these asset classes helped
reduce its volatility and achieve a more balanced return.
For the fiscal year ended July 31, 2000, the fund returned 4.43% for Class A
before sales charge compared to the Lehman Brothers Aggregate Bond Index return
of 5.97%. The latter part of calendar year 1999 was dominated by investor
anxiety regarding the potential impact of the Y2K bug, concerns that the U.S.
economy was growing at an unsustainable rate and about possible interest rate
hikes by the Federal Reserve. The strong economy and hot stock market siphoned
investor funds away from the fixed income securities. As investors pulled money
out of fixed income mutual funds, managers were forced to liquidate holdings,
driving down corporate bond prices.
As the year progressed, the Federal Reserve Board became increasingly concerned
that the combination of 1) tight labor markets, 2) increased wealth generated by
stock returns, 3) rising wages, and 4) rising energy prices would serve to
rekindle inflation. Since price stability remains its primary objective, the Fed
decided to raise short-term interest rates, extending the current round of
interest rate hikes they began in mid-1999. Also significant was the bond
buy-back program announced by the U.S. Treasury. This announcement caused
intermediate and long-term interest rates to decline. By mid-year 2000, the
steady upward march by the equity markets had been stalled, the labor markets
began to stabilize and the economy showed early signs of cooling.
The fund's performance during the year was enhanced by our government bond
holdings in the U.S. and in Mexico. Mexico's sovereign bond rating was upgraded
to investment grade (Baa3) by Moody's Investors Services which caused the yield
on its bonds to decline driving prices higher. Our significant weighting in U.S.
corporate and government securities helped as the U.S. dollar strengthened and
the economy continued to expand at a rapid pace. On the other side of the
ledger, our interest rate-sensitive zero coupon bond holdings lagged when
interest rates climbed higher, and our credit sensitive corporate bond holding
came under pressure and credit spread premiums widened in most markets.
OUTLOOK: We expect economic growth in many of the world's larger economies to
moderate somewhat during the second half of 2000 primarily due to the drag
caused by high short-term interest rates and high energy prices. This slowdown
should relieve some of the pressure on the Federal Reserve to raise interest
rates in the U.S. To the extent this scenario unfolds, we plan to keep the fund
broadly diversified with its foreign investments generally targeting countries
with expanding economies. Also, we plan to focus our corporate bond investments
in companies and industries expected to produce stable and improving cash flow.
We feel the recent increases in interest rates has created an opportunity for
fixed income investors to capture high levels of current income and the
potential for attractive total returns should bond prices begin to rebound.
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 7/31/2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Corporate Bonds-Non-Investment Grade 30.8%
Foreign Bonds-Investment Grade 31.0%
Foreign Bonds-Non-Investment Grade 11.0%
Corporate Bonds-Investment Grade 11.2%
Cash Equivalents/Receivables 6.7%
FNMAs 3.9%
U.S. Treasury Securities 3.4%
Asset Backed Securities 2.0%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/2000
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
-------------------------------------------------------------------
<C> <S> <C>
1. Grupo Iusacell S.A. de C.V. (14.25%) 2006 2.2%
2. News America Holdings (8.875%) 2023 2.1%
3. PTC International Finance II S.A (11.25%) 2009 2.1%
4. Malaysia (8.75%) 2009 2.1%
5. FNMA (6.52%) 2008 2.1%
6. Kingdom of Spain (7.00%) 2005 2.0%
7. Telecorp PCS, Inc. (11.625%) 2009 2.0%
8. 360 Communications Co. (7.50%) 2006 2.0%
9. J.P. Morgan Commercial Mortgage Finance Corp.
(7.47%) 2028 2.0%
10. Poland (Republic of) (7.125%) 2004 2.0%
</TABLE>
HOLDINGS BY COUNTRY AS OF 7/31/2000
<TABLE>
<CAPTION>
Percent of
Country Net Assets
---------------------------------------------------------
<S> <C>
United States 58.0%
Argentina 4.9%
Spain 4.7%
Mexico 4.3%
Norway 3.5%
Canada 2.7%
Chile 2.7%
Malaysia 2.1%
Korea (Republic of) 2.0%
Poland 2.0%
Venezuela 2.0%
Austria 1.9%
Brazil 1.8%
Netherlands 1.7%
United Kingdom 1.0%
Germany 1.0%
Denmark 1.0%
Bermuda 0.9%
Luxembourg 0.9%
Panama 0.9%
</TABLE>
VALUE OF $10,000 INVESTED DECEMBER 1, 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
STRATEGIC INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
SINCE
1 YEAR DECEMBER 1, 1997@
CLASS A* -0.27% +0.56%
CLASS A** +4.43% +2.31%
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS STRATEGIC INCOME FUND SAL
AGGREGATE BOND INDEX*** CLASS A WORLD INDEX****
<S> <C> <C> <C>
12/1/97 $10,000 $9,550 $10,000
98 $10,520 $10,005 $10,261
99 $10,782 $9,719 $10,932
00 $11,425 $10,150 $10,849
</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.
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
-----------------------------------------------------------------
<S> <C> <C>
Class B shares# +3.63% +1.57%
Class B shares## +0.17% +0.71%
Class C shares # +3.63% +1.62%
Class C shares ## +2.66% +1.62%
Class H shares # +3.63% +1.58%
Class H shares ## +0.18% +0.73%
</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, 2000.
+ Since December 1, 1997 -- Date shares were first offered to the public.
4
<PAGE>
PORTFOLIO COMPOSITION BY INDUSTRY AS OF 7/31/2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Other 25.6%
Cable and Other Program Distribution 13.8%
Telecommunications-Other 10.7%
Telecommunications-Wired 10.7%
Gambling Industries 9.4%
Telecommunications-Wireless 7.0%
Radio and Television Broadcasting 5.8%
Other Information Services 3.9%
Cash Equivalents/Receivable 3.4%
Cable and Other Subscription
Programming 3.3%
Manufacturing-Motor Vehicle Parts 3.3%
Support Activities for Mining 3.1%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/2000
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
-------------------------------------------------------------------
<C> <S> <C>
1. United Pan-Europe Communications (11.25%) 2009 2.7%
2. United International Holdings (12.31%) 2008 2.6%
3. Isle of Capri Casinos (8.75%) 2009 2.3%
4. Argosy Gaming Co. (10.75%) 2009 2.3%
5. Exodus Communications, Inc. (11.625%) 2010 2.2%
6. Young Broadcasting Corp. (11.75%) 2004 2.1%
7. Global Crossing Holdings Ltd. (9.50%) 2009 2.1%
8. Olympus Communication L.P. (10.625%) 2006 2.1%
9. Adelphia Communications Corp. (9.375%) 2009 2.0%
10. Telecorp PCS, Inc. (11.625%) 2009 1.9%
</TABLE>
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception+
------------------------------------------------------------------------------
<S> <C> <C> <C>
Class B shares# -1.29% +3.58% +4.69%
Class B shares## -4.51% +3.38% +4.61%
Class C shares # -1.29% +3.56% +4.68%
Class C shares ## -2.19% +3.56% +4.68%
Class H shares # -1.13% +3.59% +4.70%
Class H shares ## -4.36% +3.39% +4.62%
</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, 2000.
+ 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.
The twelve-month period ended July 31, 2000 was a difficult one for the U.S.
fixed income market. The latter part of 1999 was dominated by investor anxiety
regarding the potential impact of the Y2K bug, concerns that the economy was
growing at an unsustainable rate and about interest rate hikes by the Federal
Reserve. However, the equity markets shook off these concerns and came roaring
out of the gates in early 2000 as Y2K fears faded and the economy showed
persistent strength with Gross Domestic Product (GDP) growth in the 5% range.
The strong economy, a red-hot IPO market and, in particular, a frothy "tech
stock" market siphoned investor funds away from fixed income securities. The
high yield market was not immune to this trend as investors pulled money out of
fixed income mutual funds, forcing managers to liquidate holdings, driving down
corporate bond prices. The high yield market finished the second quarter of 2000
on a positive note, as June was the best month of the year for performance and
investment inflow into high yield mutual funds.
For the fiscal year ended July 31, 2000, the fund's net asset value total return
for the Class A shares before sales charge was -0.57%, slightly outperforming
the Lehman Bros. High Yield Index return of -0.67%. During the course of the
year, the Federal Reserve Board became increasingly concerned that the
combination of 1) tight labor markets, 2) increased wealth generated by stock
returns, 3) rising wages, and 4) rising energy prices would combine to rekindle
inflation. Since price stability remains its primary objective, the Fed decided
to raise short-term interest rates, extending the current round of interest rate
hikes they began in mid-1999. Also significant was the bond buy-back program
announced by the U.S. Treasury. This announcement caused intermediate and
long-term interest rates to decline and could provide stimulus to the economy
that otherwise would not be there. Despite the buy-back program, by mid-year
2000 the steady upward march by the equity markets had been halted, the labor
markets began to stabilize and the economy showed early signs of cooling. The
high yield market saw slow steady selling during this period, with declining
bond prices offsetting the high level of income earned by high yield investors.
Our fund's performance was enhanced in this down-market environment by our
underweighting in lower-quality high yield bonds, those rated CCC and below. The
Fund was also helped by its holdings in higher-quality BB-rated bonds and its
exposure to top performing sectors, such as the energy sector. On the other side
of the ledger, our interest rate-sensitive zero coupon bond holdings lagged as
interest rates climbed higher. We also chose to reduce our holdings in "home
builders" as we anticipated a slowdown in housing activity driven by higher
mortgage rates. This decision turned out to be a bit premature as housing sales
continued to be strong despite higher borrowing costs during the year.
OUTLOOK: We expect economic growth to slow during the second half of 2000
primarily due to the drag caused by high short-term interest rates and high
energy prices. This slowdown should relieve some of the pressure on the Federal
Reserve to raise interest rates. Our outlook is for economic growth to moderate
to a more sustainable rate. The gradual approach toward raising rates taken by
the Fed should provide corporate America with some time to adjust to the
changing business climate, making the downturn less painful to prudent managers.
To the extent this scenario unfolds, we plan to keep the fund broadly
diversified with an emphasis on companies expected to produce stable and
improving cash flow, and should underweight cyclical industries such as
industrial commodities. We feel the recent increases in interest rates has
created an opportunity for investors to capture higher levels of current income
and the potential for attractive total returns should bond prices begin to
recover.
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, 1990
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
1 YEAR 5 YEAR 10 YEAR
CLASS A* -5.05% +3.28% +8.73%
CLASS A** -0.57% +4.24% +9.23%
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS HIGH YIELD PORTFOLIO
HIGH YIELD INDEX*** CLASS A
<S> <C> <C>
8/1/1990 $10,000 $9,550
91 $11,489 $11,376
92 $14,066 $13,912
93 $16,223 $16,300
94 $16,778 $17,263
95 $19,178 $18,764
96 $20,868 $19,789
97 $24,307 $22,661
98 $26,494 $23,639
99 $26,351 $23,222
2000 $26,175 $23,089
</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, 2000
U.S. GOVERNMENT AND AGENCY SECURITIES-94.85%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
----------- ------------ ------------
<C> <S> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION-17.74%
MORTGAGE BACKED SECURITIES:
$16,800,000 7.00% Gold 2030 (e).......................... $ 16,251,375 $ 16,238,250
475,358 8.00% 2002................................... 487,242 477,586
1,157,123 9.00% 2001-2022.............................. 1,228,887 1,189,753
53,958 10.50% 2015.................................. 58,022 58,848
167,437 11.25% 2013-2014............................. 178,594 185,623
331,833 11.50% 2015-2019............................. 359,325 370,616
392,995 11.75% 2010-2014............................. 433,030 442,181
85,383 12.50% 2019.................................. 90,923 96,936
------------ ------------
19,087,398 19,059,793
------------ ------------
NOTES:
7,950,000 5.00% 2004................................... 7,457,856 7,474,598
3,000,000 6.75% 2029................................... 2,903,301 2,896,623
3,965,000 6.90% 2007................................... 3,873,193 3,939,592
9,700,000 7.00% 2010................................... 9,698,463 9,609,247
------------ ------------
23,932,813 23,920,060
------------ ------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION................................ 43,020,211 42,979,853
------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-38.40%
MORTGAGE BACKED SECURITIES:
2,376,047 5.85% 2009................................... 2,376,448 2,179,317
2,949,958 5.89% 2008................................... 2,607,946 2,716,224
1,427,836 6.01% 2009................................... 1,453,300 1,322,819
2,896,114 6.36% 2008................................... 2,892,381 2,755,649
30,121,725 6.50% 2013-2029.............................. 29,315,050 28,861,100
5,946,026 6.52% 2008................................... 5,638,827 5,707,311
1,902,332 6.63% 2005................................... 1,944,109 1,849,149
19,573,422 7.00% 2029-2030.............................. 18,707,607 18,914,585
6,551,813 7.184% 2006.................................. 6,485,131 6,509,134
9,919,246 7.50% 2027-2030.............................. 10,036,486 9,780,168
350,885 8.00% 2025................................... 335,863 352,223
412,422 8.50% 2022................................... 431,166 419,476
48,202 9.00% 2020................................... 47,735 49,509
499,751 9.75% 2020................................... 539,106 527,205
409,685 10.00% 2020.................................. 446,940 433,242
416,209 10.50% 2012-2018............................. 452,359 451,977
142,974 10.75% 2013.................................. 147,264 152,077
1,253,736 11.00% 2015-2020............................. 1,361,199 1,374,018
225,104 11.25% 2013.................................. 236,359 248,072
73,749 11.50% 2015.................................. 78,594 81,723
143,731 12.00% 2011-2016............................. 152,975 161,248
333,418 12.50% 2015.................................. 372,585 381,556
------------ ------------
86,059,430 85,227,782
------------ ------------
NOTES:
5,620,000 6.50% 2004................................... 5,519,467 5,524,123
2,400,000 6.625% 2009.................................. 2,320,272 2,316,370
------------ ------------
7,839,739 7,840,493
------------ ------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION................................ 93,899,169 93,068,275
------------ ------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION-10.03%
MORTGAGE BACKED SECURITIES:
14,900,000 7.00% 2028-2030 (e).......................... 14,443,859 14,472,251
1,363,515 8.00% 2017-2022.............................. 1,393,577 1,375,105
1,019,511 9.00% 2022................................... 1,052,645 1,050,649
6,955,764 9.50% 2016-2019.............................. 7,277,807 7,150,859
</TABLE>
6
<PAGE>
U.S. GOVERNMENT AND AGENCY SECURITIES-94.85%-CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
----------- ------------ ------------
<C> <S> <C> <C>
$ 247,234 11.00% 2015-2018............................. $ 266,061 $ 266,221
------------ ------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION................................ 24,433,949 24,315,085
------------ ------------
OTHER DIRECT FEDERAL OBLIGATIONS-11.95%
FEDERAL HOME LOAN BANK:
28,650,000 7.31% 2004................................... 28,567,413 28,955,180
------------ ------------
U.S. TREASURY SECURITIES-16.73%
BONDS:
8,000,000 6.09% 2021 Zero Coupon Strip (d)............. 2,232,902 2,244,632
3,250,000 6.125% 2029.................................. 3,250,514 3,344,455
3,500,000 6.99% 2019 Zero Coupon Strip (d)............. 979,259 1,146,842
9,600,000 8.00% 2021................................... 11,060,374 11,739,005
5,300,000 8.75% 2017................................... 6,686,002 6,732,659
1,500,000 10.375% 2012................................. 1,805,153 1,843,125
------------ ------------
26,014,204 27,050,718
------------ ------------
NOTES:
3,711,050 3.625% 2008 Inflation-protection (f)......... 3,540,746 3,611,316
10,000,000 5.00% 2001................................... 9,901,023 9,893,750
------------ ------------
13,441,769 13,505,066
------------ ------------
TOTAL U.S. TREASURY SECURITIES............... 39,455,973 40,555,784
------------ ------------
TOTAL U.S. GOVERNMENT SECURITIES............. $229,376,715 $229,874,177
============ ============
</TABLE>
SHORT-TERM INVESTMENTS-4.05%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value (b)
---------- ------------
<C> <S> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION-2.48%
$6,000,000 Federal Home Loan Mortgage Corp., 6.59%,
8-1-2000................................... $ 5,998,927
------------
OTHER INVESTMENT POOLS AND FUNDS-1.57%
3,807,716 First American Treasury Obligations Fund,
Current rate -- 5.99%...................... 3,807,716
------------
TOTAL SHORT-TERM INVESTMENTS................. 9,806,643
------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$239,183,358) (a).......................... $239,680,820
============
</TABLE>
(a) At July 31, 2000, the cost of securities for federal income tax purposes
was $239,183,358 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 2,396,227
Unrealized depreciation..................................... (1,898,765)
--------------------------------------------------------------------------
Net unrealized appreciation................................. $ 497,462
--------------------------------------------------------------------------
</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, 2000,
was $20,825,062.
(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, 2000
ASSET BACKED SECURITIES-1.99%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
CAPTIVE RETAIL FINANCE-1.99%
$500,000 J.P. Morgan Commercial Mortgage Finance
Corp., 7.47% Variable Rate Ser 1997-C4
Class B 12-26-2028 -- UNITED STATES........ AA $ 524,614 $ 495,611
----------- -----------
</TABLE>
CORPORATE BONDS-INVESTMENT GRADE-42.17%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
CAPTIVE AUTO FINANCE-0.96%
$250,000 Toyota Motor Credit Corp., 5.625% Global Note
11-13-2003 -- UNITED STATES................ AAA $ 249,720 $ 238,920
----------- -----------
DEPARTMENT STORES-1.02%
250,000 Federated Department Stores, Inc., 8.50% Sr
Note 6-15-2003 -- UNITED STATES............ BBB+ 255,926 253,433
----------- -----------
ELECTRIC GENERATION, TRANSMISSION AND
DISTRIBUTION-1.80%
500,000 Empresa Nacional de Electricidad S.A., 7.325%
Yankee Bond 2-1-2037 -- CHILE.............. A- 497,139 447,016
----------- -----------
FOREIGN GOVERNMENTS-12.23%
250,000 British Columbia (Province of), 6.50% Yankee
Bond 1-15-2026 -- CANADA................... AA- 255,755 224,523
500,000 Generalitat de Catalunya, 6.25% Yankee Bond
12-15-2018 -- SPAIN........................ AA- 498,488 436,190
500,000 Kingdom of Spain, 7.00% Global Note
7-19-2005 -- SPAIN......................... AA+ 499,073 499,751
250,000 Korea (Republic of), 8.875% Global Bond
4-15-2008 -- KOREA......................... BBB 262,220 259,375
500,000 Malaysia, 8.75% Global Bond 6-1-2009 --
MALAYSIA................................... BBB 496,622 519,660
250,000 United Mexican States, 9.875% Global Bond
1-15-2007 -- MEXICO........................ Baa3* 260,814 262,000
250,000 United Mexican States, 9.875% Note
2-1-2010 -- MEXICO......................... Baa3* 271,547 263,250
500,000 Poland (Republic of), 7.125% Yankee Note
7-1-2004 -- POLAND......................... BBB+ 500,739 491,875
----------- -----------
3,045,258 2,956,624
----------- -----------
FOREIGN GOVERNMENTS-AGENCIES-0.98%
250,000 Korea Development Bank, 7.125% Global Note
4-22-2004 -- KOREA......................... BBB 248,580 242,571
----------- -----------
FOREIGN GOVERNMENTS-SUPRA-NATIONAL-1.96%
500,000 Corp Andina de Fomento, 7.10% Yankee Bond
2-1-2003 -- VENEZUELA...................... A 501,378 488,751
----------- -----------
INTERNATIONAL TRADE FINANCING-7.54%
250,000 ABN Amro Bank N.V., 7.55% Global Note
6-28-2006 -- UNITED STATES................. AA- 251,494 249,841
250,000 Banco Santiago S.A., 7.00% Yankee Sub Note
7-18-2007 -- CHILE......................... BBB 248,154 225,135
500,000 Bank Austria AG, 7.25% Sub Note 2-15-2017 --
AUSTRIA (f)................................ AA+ 519,367 463,992
250,000 BSCH Issuance Ltd., 7.625% 11-3-2009 --
SPAIN...................................... A 243,616 247,591
500,000 Dresdner Funding Trust I, 8.151% Note
6-30-2031 -- UNITED STATES (d)............. A 500,000 443,974
250,000 LB Baden-Wuerttemberg, 7.625% Yankee Sub Note
2-1-2023 -- GERMANY........................ AAA 281,527 247,376
----------- -----------
2,044,158 1,877,909
----------- -----------
MANUFACTURING-SEMICONDUCTOR, ELECTRONIC
COMPONENT-0.88%
250,000 Tyco International Group S.A., 6.875% Yankee
Bond 1-15-2029 -- LUXEMBOURG............... A- 252,212 219,700
----------- -----------
MOTION PICTURE AND VIDEO INDUSTRIES-2.10%
500,000 News America Holdings, Inc., 8.875% Deb
4-26-2023 -- UNITED STATES................. BBB- 572,536 523,785
----------- -----------
OIL AND GAS EXTRACTION-3.76%
500,000 Norsk Hydro ASA, 7.25% Deb 9-23-2027 --
NORWAY..................................... A 508,292 451,815
500,000 YPF Sociedad Anonima, 7.25% Yankee Sr Note
3-15-2003 -- ARGENTINA..................... BBB- 499,546 485,000
----------- -----------
1,007,838 936,815
----------- -----------
PIPELINE TRANSPORTATION OF NATURAL GAS-0.92%
250,000 Trans-Canada Pipelines Ltd., 6.49% Yankee
Bond 1-21-2009 -- CANADA................... A- 251,591 228,871
----------- -----------
</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>
SCHEDULED AIR TRANSPORTATION-0.98%
$250,000 Delta Air Lines, Inc., 7.70% Note
12-15-2005 -- UNITED STATES................ BBB- $ 249,470 $ 242,660
----------- -----------
SUPPORT ACTIVITIES FOR MINING-1.70%
500,000 Petroleum Geo-Services ASA, 7.125% Yankee Sr
Note 3-30-2028 -- NORWAY................... BBB 498,586 424,167
----------- -----------
TELECOMMUNICATIONS-OTHER-1.96%
250,000 Telecom Argentina Stet-France Telecom S.A.,
9.75% Note 7-12-2001 -- ARGENTINA (d)...... BBB- 249,845 252,500
250,000 Telecomunicaciones de Puerto Rico, 6.65% Sr
Sub Note 5-15-2006 -- UNITED STATES........ BBB 249,921 236,205
----------- -----------
499,766 488,705
----------- -----------
TELECOMMUNICATIONS CARRIERS-WIRED-1.99%
500,000 360 Communications Co., 7.50% Sr Note
3-1-2006 -- UNITED STATES.................. A 516,002 495,965
----------- -----------
TELECOMMUNICATIONS CARRIERS-WIRELESS-1.00%
250,000 Vodafone Airtouch plc, 7.875% Deb
2-15-2030 -- UNITED KINGDOM (d)............ A- 246,753 248,212
----------- -----------
TIMBER TRACT OPERATIONS-0.39%
107,000 Weyerhaeuser Co., 6.95% Deb 8-1-2017 --
UNITED STATES.............................. A 99,011 96,392
----------- -----------
TOTAL CORPORATE BONDS-INVESTMENT GRADE....... $11,035,924 $10,410,496
=========== ===========
</TABLE>
CORPORATE BONDS-NON-INVESTMENT GRADE-41.84%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
CABLE AND OTHER PROGRAM DISTRIBUTION-5.03%
$250,000 Cablevision S.A., 13.75% Note 4-30-2007 --
ARGENTINA (d).............................. BB $ 247,250 $ 242,187
375,000 Charter Communications Holdings LLC, 9.92% Sr
Disc Note 4-1-2011 (Zero coupon through
4-1-2004, thereafter 9.92%) -- UNITED
STATES (e)................................. B+ 265,382 212,812
500,000 United International Holdings, Inc., 10.53%
Sr Disc Note Ser B 2-15-2008 (Zero coupon
through 2-15-2003, thereafter 10.75%) --
UNITED STATES (e).......................... B- 388,762 363,750
500,000 United Pan-Europe Communications N.V., 11.25%
Sr Note Ser B 11-1-2009 -- NETHERLANDS..... B 496,473 433,750
----------- -----------
1,397,867 1,252,499
----------- -----------
CABLE AND OTHER SUBSCRIPTION
PROGRAMMING-0.98%
250,000 Callahan Nordrhein-Westfalen, 14.00% Sr Note
7-15-2010 -- DENMARK (d)................... B- 250,000 244,375
----------- -----------
ELECTRIC GENERATION, TRANSMISSION AND
DISTRIBUTION-1.01%
250,000 AES Corp., 9.50% Sr Note 6-1-2009 -- UNITED
STATES..................................... BB 251,489 251,563
----------- -----------
FOREIGN GOVERNMENTS-3.25%
250,000 Argentina (Republic of), 11.375% Global Bond
1-30-2017 -- ARGENTINA..................... BB 281,817 227,625
250,000 Brazil (Republic of), 10.125% Global Bond
5-15-2027 -- BRAZIL........................ B+ 251,230 198,250
250,000 Brazil (Republic of), 11.625% Global Bond
4-15-2004 -- BRAZIL........................ B+ 248,144 254,000
250,000 Panama (Republic of), 8.875% Global Bond
9-30-2027 -- PANAMA........................ BB+ 247,549 216,250
----------- -----------
1,028,740 896,125
----------- -----------
GAMBLING INDUSTRIES-2.74%
250,000 Isle of Capri Casinos, Inc., 8.75% Sub Note
4-15-2009 -- UNITED STATES................. B 224,651 227,500
250,000 Mandalay Resort Group, 7.625% Sr Sub Deb
7-15-2013 -- UNITED STATES................. BB- 215,958 205,000
250,000 Station Casinos, Inc., 9.875% Sr Sub Note
7-1-2010 -- UNITED STATES (d).............. B+ 249,019 250,313
----------- -----------
689,628 682,813
----------- -----------
GROCERY STORES-0.78%
250,000 Big V Supermarkets, Inc., 11.00% Sr Sub Note
Ser B 2-15-2004 -- UNITED STATES........... B- 254,451 195,000
----------- -----------
INSURANCE CARRIERS-0.68%
250,000 Conseco, Inc., 8.75% Note 2-9-2004 -- UNITED
STATES..................................... BB- 249,879 170,000
----------- -----------
</TABLE>
9
<PAGE>
FORTIS BOND FUNDS
STRATEGIC INCOME FUND (CONTINUED)
Schedule of Investments
July 31, 2000
CORPORATE BONDS-NON-INVESTMENT GRADE-CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (a) Value (b)
--------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
MANUFACTURING-BASIC CHEMICAL-1.01%
$250,000 Lyondell Chemical Co., 9.875% Sr Secured Note
Ser B 5-1-2007 -- UNITED STATES............ BB $ 250,000 $ 250,000
----------- -----------
MANUFACTURING-MOTOR VEHICLE PARTS-1.52%
250,000 Holley Performance Products, 12.25% Sr Sub
Note Ser B 9-15-2007 -- UNITED STATES...... B+ 241,479 155,000
250,000 Tenneco Automotive, Inc., 11.625% Sr Sub Note
Ser B 10-15-2009 -- UNITED STATES.......... B+ 250,000 222,500
----------- -----------
491,479 377,500
----------- -----------
MEDICAL AND DIAGNOSTIC LABORATORIES-0.42%
100,000 Unilab Finance Corp., 12.75% Sr Sub Note
10-1-2009 -- UNITED STATES................. B- 97,390 105,250
----------- -----------
MILLS-PULP, PAPER AND PAPERBOARD-1.02%
250,000 Packaging Corp. of America, 9.625% Sr Sub
Note 4-1-2009 -- UNITED STATES............. B+ 256,041 254,375
----------- -----------
OIL AND GAS EXTRACTION-1.03%
250,000 Swift Energy Co., 10.25% Sr Sub Note
8-1-2009 -- UNITED STATES.................. B- 252,109 255,625
----------- -----------
OTHER INFORMATION SERVICES-2.62%
250,000 Exodus Communications, Inc., 11.625% Sr Note
7-15-2010 -- UNITED STATES (d)............. B 250,000 251,250
250,000 Globix Corp., 12.50% Sr Note 2-1-2010 --
UNITED STATES.............................. B- 251,806 197,500
250,000 PSINet, Inc., 11.00% Sr Note 8-1-2009 --
UNITED STATES.............................. B- 224,119 202,500
----------- -----------
725,925 651,250
----------- -----------
RADIO AND TELEVISION BROADCASTING-0.95%
250,000 Ackerley Group, Inc., 9.00% Sr Sub Note Ser B
1-15-2009 -- UNITED STATES................. B 232,809 235,625
----------- -----------
STEEL PRODUCT MANUFACTURING FROM PURCHASED
STEEL-0.99%
250,000 AK Steel Corp., 9.125% Sr Note 12-15-2006 --
UNITED STATES.............................. BB 249,422 247,500
----------- -----------
TELECOMMUNICATIONS-OTHER-5.71%
250,000 FLAG Telecom Holdings Ltd., 11.625% Sr Note
3-30-2010 -- BERMUDA....................... B 250,000 235,000
500,000 Global Crossing Holdings Ltd., 9.50% Sr Note
11-15-2009 -- UNITED STATES................ BB 489,120 485,000
125,000 IMPSAT Fiber Networks, Inc., 13.75% Sr Note
2-15-2005 -- UNITED STATES (d)............. B 125,000 113,750
250,000 Level 3 Communications, Inc., 12.875% Sr Disc
Note 3-15-2010 (Zero coupon through
3-15-2005, thereafter 12.875%) -- UNITED
STATES (e)................................. B 141,396 131,875
250,000 Level 3 Communications, Inc., 9.125% Sr Note
5-1-2008 -- UNITED STATES.................. B 249,433 216,875
250,000 Williams Communications Group, Inc., 10.875%
Sr Note 10-1-2009 -- UNITED STATES......... B+ 248,212 238,750
----------- -----------
1,503,161 1,421,250
----------- -----------
TELECOMMUNICATIONS CARRIERS-WIRED-4.12%
250,000 Alaska Communications SY, 9.375% Sr Sub Note
5-15-2009 -- UNITED STATES................. B+ 250,000 230,625
250,000 Focal Communications Corp., 11.875% Sr Note
1-15-2010 -- UNITED STATES................. B- 244,428 246,250
250,000 Intermedia Communications, Inc., 8.50% Sr
Note Ser B 1-15-2008 -- UNITED STATES...... B 250,000 206,250
250,000 NEXTLINK Communications, Inc., 12.125% Sr
Disc Note 12-1-2009 (Zero coupon through
12-1-2004, thereafter 12.125%)-- UNITED
STATES (e)................................. B 150,937 141,250
250,000 RCN Corp., 10.125% Sr Note 1-15-2010 --
UNITED STATES.............................. B- 250,000 201,250
----------- -----------
1,145,365 1,025,625
----------- -----------
TELECOMMUNICATIONS CARRIERS-WIRELESS-7.98%
500,000 Grupo Iusacell S.A. de C.V., 14.25% Sr Note
12-1-2006 -- MEXICO........................ B+ 506,578 537,500
250,000 Microcell Telecommunications, Inc., 12.52% Sr
Disc Note Ser B 6-1-2006 (Zero coupon
through 12-1-2001, thereafter 14.00%) --
CANADA (e)................................. B3* 232,308 233,750
250,000 Nextel Communications, Inc., 11.65% Sr Disc
Note 9-15-2007 (Zero coupon through
9-15-2002, thereafter 10.65%) -- UNITED
STATES (e)................................. B 190,190 195,625
500,000 PTC International Finance II S.A., 11.25% Sr
Sub Note 12-1-2009 -- UNITED STATES........ B+ 492,932 520,000
750,000 TeleCorp PCS, Inc., 11.45% Sr Sub Note
4-15-2009 (Zero coupon through 4-15-2004,
thereafter 11.625%) -- UNITED STATES (e)... B3* 501,487 498,750
----------- -----------
1,923,495 1,985,625
----------- -----------
TOTAL CORPORATE BONDS-NON-INVESTMENT GRADE... 11,249,250 10,502,000
=========== ===========
</TABLE>
10
<PAGE>
U.S. GOVERNMENT SECURITIES-7.32%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
--------- ----------- -----------
<C> <S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION-3.90%
MORTGAGE BACKED SECURITIES:
$482,140 6.30% 2008................................... $ 482,665 $ 457,276
536,117 6.52% 2008................................... 508,419 514,593
----------- -----------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION................................ 991,084 971,869
----------- -----------
U.S. TREASURY SECURITIES-3.42%
BONDS:
150,000 8.00% 2021................................... 175,204 183,422
----------- -----------
NOTES:
350,000 4.75% 2008................................... 306,534 318,719
350,000 6.125% 2007.................................. 349,776 348,797
----------- -----------
656,310 667,516
----------- -----------
TOTAL U.S. TREASURY SECURITIES............... 831,514 850,938
----------- -----------
TOTAL U.S. GOVERNMENT SECURITIES............. 1,822,598 1,822,807
=========== ===========
TOTAL LONG-TERM INVESTMENTS.................. $24,632,386 $23,230,914
=========== ===========
</TABLE>
SHORT-TERM INVESTMENTS-4.79%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value (b)
--------- -----------
<C> <S> <C>
CONSUMER LENDING-3.96%
$986,000 Associates Corp. Master Variable Rate Note,
Current rate--6.50%........................ $ 986,000
-----------
DEPOSITORY CREDIT-BANKING-0.83%
206,558 U.S. Bank N.A. Money Market Variable Rate
Time Deposit, Current rate--6.43%.......... 206,558
-----------
TOTAL SHORT-TERM INVESTMENTS................. 1,192,558
===========
TOTAL INVESTMENTS IN SECURITIES (COST:
$25,824,944) (a)........................... $24,423,472
===========
</TABLE>
(a) At July 31, 2000, the cost of securities for federal income tax purposes
was $25,824,944 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 152,800
Unrealized depreciation........................... (1,554,272)
------------------------------------------------------------------
Net unrealized depreciation....................... $ (1,401,472)
------------------------------------------------------------------
</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 41.99% of net assets as of July 31, 2000.
(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 Share/Par Security Cost Basis
--------------- --------- -------- ----------
<S> <C> <C> <C>
2000 250,000 Cablevision S.A. due 2007 - 144A $247,250
2000 250,000 Callahan Nordrhein-Westfalen due 2010 250,000
1999 500,000 Dresdner Funding Trust due 2031 - 144A 500,000
2000 250,000 Exodus Communications, Inc. due 2010 -
144A 250,000
2000 125,000 IMPSAT Fiber Networks, Inc. due 2005 -
144A 125,000
2000 250,000 Station Casinos, Inc. due 2010 - 144A 249,019
1999 250,000 Telecom Argentina Stet due 2001 - 144A 249,845
2000 250,000 Vodafone Airtouch plc due 2030 - 144A 246,753
</TABLE>
The aggregate value of these securities at July 31, 2000, was
$2,046,561, which represents 8.22% 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, 2000, was $463,992, which represents 1.86% of
total net assets.
* Moody's Rating
11
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO
Schedule of Investments
July 31, 2000
CORPORATE BONDS-NON-INVESTMENT GRADE-93.67%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
---------- ----------- ------------ ------------
<C> <S> <C> <C> <C>
AMUSEMENT PARKS AND ARCADES-1.56%
$3,250,000 Six Flags, Inc., 11.67% Sr Disc Note
4-1-2008 (Zero coupon through 4-1-2003,
thereafter 10.00%)(f)...................... B- $ 2,261,382 $ 2,145,000
------------ ------------
ANIMAL SLAUGHTERING AND PROCESSING-0.45%
1,250,000 Fresh Foods, Inc., 10.75% Sr Sub Note
6-1-2006................................... B 1,250,000 625,000
------------ ------------
CABLE AND OTHER PROGRAM DISTRIBUTION-13.83%
4,000,000 Charter Communications Holdings LLC, 9.92% Sr
Disc Note 4-1-2011 (Zero coupon through
4-1-2004, thereafter 9.92%) (f)............ B+ 2,830,741 2,270,000
2,000,000 Galaxy Telecom L.P., 12.375% Sr Sub Note
10-1-2005.................................. CC 2,141,820 1,700,000
500,000 Mediacom LLC/Capital Corp., 7.875% Sr Note
2-15-2011.................................. B+ 448,944 438,750
2,000,000 Mediacom LLC/Capital Corp., 8.50% Sr Note Ser
B 4-15-2008................................ B+ 2,000,000 1,855,000
1,750,000 NTL Communications Corp., 12.375% Sr Note Ser
B 10-1-2008 (Zero coupon through 10-1-2003,
thereafter 12.375%) (f).................... B 1,210,789 1,137,500
3,000,000 Olympus Communications L.P., 10.625% Sr Note
Ser B 11-15-2006........................... B+ 3,000,000 2,910,000
5,000,000 United International Holdings, Inc., 12.31%
Sr Disc Note Ser B 2-15-2008 (Zero coupon
through 2-15-2003, thereafter 10.75%)
(f)........................................ B- 3,556,742 3,637,500
4,250,000 United Pan-Europe Communications N.V., 11.25%
Sr Note Ser B 11-1-2009.................... B 4,220,021 3,686,875
3,250,000 United Pan-Europe Communications N.V., 13.75%
Sr Disc Note Ser B 2-1-2010 (Zero coupon
through 2-1-2005, thereafter 13.75%) (f)... B 1,794,228 1,446,250
------------ ------------
21,203,285 19,081,875
------------ ------------
CABLE AND OTHER SUBSCRIPTION
PROGRAMMING-3.28%
3,000,000 Adelphia Communications Corp., 9.375% Sr Note
11-15-2009................................. B+ 2,977,182 2,730,000
750,000 Callahan Nordrhein-Westfalen, 14.00% Sr Note
7-15-2010 (e).............................. B- 750,000 733,125
1,000,000 CSC Holdings, Inc., 10.50% Sr Sub Deb
5-15-2016.................................. BB- 1,013,909 1,063,750
------------ ------------
4,741,091 4,526,875
------------ ------------
ELECTRIC GENERATION, TRANSMISSION AND
DISTRIBUTION-1.46%
2,000,000 AES Corp., 9.50% Sr Note 6-1-2009............ BB 1,906,020 2,012,500
------------ ------------
ELECTRONIC SHOPPING AND MAIL-ORDER
HOUSES-0.71%
1,000,000 Shop at Home, Inc., 11.00% Sr Secured Note
4-1-2005................................... B 1,000,000 980,000
------------ ------------
GAMBLING INDUSTRIES-9.42%
3,000,000 Argosy Gaming Co., 10.75% Sr Sub Note
6-1-2009................................... B 3,000,000 3,112,500
3,500,000 Isle of Capri Casinos, Inc., 8.75% Sub Note
4-15-2009.................................. B 3,500,000 3,185,000
750,000 Mandalay Resort Group, 10.25% Sr Sub Note
8-1-2007 (e)............................... BB- 750,000 757,500
1,500,000 Mandalay Resort Group, 7.625% Sr Sub Deb
7-15-2013.................................. BB- 1,295,748 1,230,000
2,000,000 Park Place Entertainment Corp., 9.375% Sr Sub
Note 2-15-2007............................. BB+ 1,970,533 2,015,000
1,500,000 Station Casinos, Inc., 8.875% Sr Sub Note
12-1-2008.................................. B+ 1,409,418 1,440,000
1,250,000 Station Casinos, Inc., 9.875% Sr Sub Note
7-1-2010 (e)............................... B+ 1,245,095 1,251,562
------------ ------------
13,170,794 12,991,562
------------ ------------
GENERAL MEDICAL AND SURGICAL HOSPITALS-2.62%
1,750,000 Tenet Healthcare Corp., 9.25% Sr Note
9-1-2010 (e)............................... BB+ 1,767,425 1,796,812
1,750,000 Triad Hospitals Holdings, Inc., 11.00% Sr Sub
Note Ser B 5-15-2009....................... B- 1,760,041 1,820,000
------------ ------------
3,527,466 3,616,812
------------ ------------
LIMITED-SERVICE EATING PLACES-1.30%
1,750,000 Sbarro, Inc., 11.00% Sr Note 9-15-2009....... BB- 1,727,627 1,798,125
------------ ------------
MANUFACTURING-BASIC CHEMICAL-1.27%
1,750,000 Lyondell Chemical Co., 9.875% Sr Secured Note
Ser B 5-1-2007............................. BB 1,739,183 1,750,000
------------ ------------
MANUFACTURING-ENGINEERED WOOD PRODUCT-0.93%
1,250,000 Doman Industries Ltd., 12.00% Sr Secured Note
7-1-2004................................... B+ 1,294,367 1,281,250
------------ ------------
MANUFACTURING-INDUSTRIAL MACHINERY-0.53%
750,000 Better Minerals & Aggregates, 13.00% Sr Sub
Note 9-15-2009............................. B- 750,000 730,313
------------ ------------
</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>
MANUFACTURING-MOTOR VEHICLE PARTS-3.33%
$2,250,000 Hayes Lemmerz International, Inc., 8.25% Sr
Sub Note Ser B 12-15-2008.................. B $ 2,250,000 $ 1,946,250
1,750,000 Holley Performance Products, 12.25% Sr Sub
Note Ser B 9-15-2007....................... B+ 1,690,353 1,085,000
1,750,000 Tenneco Automotive, Inc., 11.625% Sr Sub Note
Ser B 10-15-2009........................... B+ 1,750,000 1,557,500
------------ ------------
5,690,353 4,588,750
------------ ------------
MANUFACTURING-SEMICONDUCTOR, ELECTRONIC
COMPONENT-2.40%
1,250,000 Amkor Technologies, Inc., 10.50% Sr Sub Note
5-1-2009................................... B 1,260,831 1,262,500
2,000,000 Fairchild Semiconductor Corp., 10.375% Sr Sub
Note 10-1-2007............................. B 2,033,628 2,052,500
------------ ------------
3,294,459 3,315,000
------------ ------------
MANUFACTURING-SOAP, CLEANING COMPOUND,
TOILET-0.91%
1,250,000 Chattem, Inc., 12.75% Sr Sub Note Ser B
6-15-2004.................................. B- 1,251,265 1,256,250
------------ ------------
MEDICAL AND DIAGNOSTIC LABORATORIES-1.14%
1,500,000 Unilab Finance Corp., 12.75% Sr Sub Note
10-1-2009.................................. B- 1,479,883 1,578,750
------------ ------------
MILLS-PULP, PAPER AND PAPERBOARD-1.48%
2,000,000 Packaging Corp. of America, 9.625% Sr Sub
Note 4-1-2009.............................. B+ 2,000,000 2,035,000
------------ ------------
OIL AND GAS EXTRACTION-1.85%
500,000 Ocean Energy, Inc., 8.875% Sr Sub Note Ser B
7-15-2007.................................. BB- 496,066 498,750
1,000,000 Pioneer Natural Resources Co., 9.625% Sr Note
4-1-2010................................... BB+ 996,536 1,033,282
1,000,000 Swift Energy Co., 10.25% Sr Sub Note
8-1-2009................................... B- 1,005,834 1,022,500
------------ ------------
2,498,436 2,554,532
------------ ------------
OTHER INFORMATION SERVICES-3.94%
3,000,000 Exodus Communications, Inc., 11.625% Sr Note
7-15-2010 (e).............................. B 3,012,940 3,015,000
500,000 Globix Corp., 12.50% Sr Note 2-1-2010........ B- 503,611 395,000
2,500,000 PSINet, Inc., 11.00% Sr Note 8-1-2009........ B- 2,442,313 2,025,000
------------ ------------
5,958,864 5,435,000
------------ ------------
PRINTING AND RELATED SUPPORT ACTIVITIES-2.46%
1,500,000 Cadmus Communications Corp., 9.75% Sr Sub
Note 6-1-2009.............................. B 1,500,000 1,455,000
2,250,000 Mail-Well I Corp., 8.75% Sr Sub Note Ser B
12-15-2008................................. B+ 2,250,000 1,935,000
------------ ------------
3,750,000 3,390,000
------------ ------------
RADIO AND TELEVISION BROADCASTING-5.81%
2,250,000 Ackerley Group, Inc., 9.00% Sr Sub Note Ser B
1-15-2009.................................. B 2,146,852 2,120,625
10,117,492 Australis Media Ltd., 14.00% Sr Disc Note
5-15-2003 (Zero coupon through 5-15-2001,
thereafter15.75%) (with
warrants) (a) (e) (f)...................... D 7,594,968 101
1,500,000 Sinclair Broadcast Group, Inc., 10.00% Sr Sub
Note 9-30-2005............................. B 1,541,272 1,458,750
1,500,000 Spanish Broadcasting System, Inc., 9.625% Sr
Sub Note 11-1-2009......................... B- 1,495,470 1,473,750
2,885,000 Young Broadcasting Corp., 11.75% Sr Sub Note
11-15-2004................................. B 3,073,528 2,959,289
------------ ------------
15,852,090 8,012,515
------------ ------------
STEEL PRODUCT MANUFACTURING FROM PURCHASED
STEEL-0.54%
750,000 AK Steel Corp., 9.125% Sr Note 12-15-2006.... BB 748,267 742,500
------------ ------------
SUPPORT ACTIVITIES FOR MINING-1.77%
2,250,000 RBF Finance Co., 11.375% Sr Secured Note
3-15-2009.................................. BB- 2,250,000 2,441,250
------------ ------------
TELECOMMUNICATIONS-OTHER-10.00%
1,500,000 FLAG Telecom Holdings Ltd., 11.625% Sr Note
3-30-2010.................................. B 1,500,000 1,410,000
3,000,000 Global Crossing Holdings Ltd., 9.50% Sr Note
11-15-2009................................. BB 2,956,964 2,910,000
875,000 IMPSAT Fiber Networks, Inc., 13.75% Sr Note
2-15-2005 (e).............................. B 875,000 796,250
2,000,000 Level 3 Communications, Inc., 12.875% Sr Disc
Note 3-15-2010 (Zero coupon through
3-15-2005, thereafter 12.875%) (f)......... B 1,131,167 1,055,000
2,000,000 Level 3 Communications, Inc., 9.125% Sr Note
5-1-2008................................... B 1,850,716 1,735,000
1,000,000 Metromedia Fiber Network, Inc., 10.00% Sr
Note 12-15-2009............................ B+ 992,348 970,000
1,500,000 Metromedia Fiber Network, Inc., 10.00% Sr
Note Ser B 11-15-2008...................... B+ 1,500,000 1,462,500
</TABLE>
13
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 2000
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>
$1,500,000 Spectrasite Holdings, Inc., 12.93% Sr Disc
Note Ser B 3-15-2010 (Zero coupon through
3-15-2005, thereafter 12.875%) (f)......... B- $ 842,695 $ 835,125
2,750,000 Williams Communications Group, Inc., 10.875%
Sr Note 10-1-2009.......................... B+ 2,730,338 2,626,250
------------ ------------
14,379,228 13,800,125
------------ ------------
TELECOMMUNICATIONS CARRIERS-WIRED-10.68%
500,000 Allegiance Telecom, Inc., 12.875% Sr Note
5-15-2008.................................. B 544,606 543,750
1,500,000 Focal Communications Corp., 11.875% Sr Note
1-15-2010.................................. B- 1,489,534 1,477,500
2,500,000 Hyperion Telecommunications, 12.25% Sr Note
Ser B 9-1-2004............................. BB- 2,637,118 2,425,000
750,000 ICG Holdings, Inc., 13.63% Sr Disc Note
9-15-2005 (Zero Coupon until 9-15-2000,
thereafter 13.50%) (f)..................... B- 736,402 708,750
3,000,000 Intermedia Communications, Inc., 8.50% Sr
Note Ser B 1-15-2008....................... B 3,014,499 2,475,000
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 1,799,306 1,360,000
1,500,000 Madison River Communications, 13.25% Sr Note
3-1-2010 (g)............................... CCC+ 1,479,925 1,372,500
2,750,000 NEXTLINK Communications, Inc., 10.50% Sr Note
12-1-2009 (g).............................. B 2,750,000 2,640,000
2,000,000 NEXTLINK Communications, Inc., 12.125% Sr
Disc Note 12-1-2009 (Zero coupon through
12-1-2004, thereafter 12.125%) (f)(g)...... B 1,207,496 1,130,000
750,000 RCN Corp., 10.125% Sr Note 1-15-2010......... B- 750,000 603,750
------------ ------------
16,408,886 14,736,250
------------ ------------
TELECOMMUNICATIONS CARRIERS-WIRELESS-6.87%
1,250,000 Dobson Communications, 10.875% Sr Note
7-1-2010 (e)............................... NR 1,240,620 1,218,750
1,250,000 Grupo Iusacell S.A. de C.V., 14.25% Sr Note
12-1-2006.................................. B+ 1,286,249 1,343,750
1,250,000 Leap Wireless International, Inc., 14.50% Sr
Disc Note 4-15-2010 (Zero coupon through
4-15-2005, thereafter 14.50%) (e)(f)....... CCC 652,011 550,000
1,500,000 Nextel Communications, Inc., 11.65% Sr Disc
Note 9-15-2007 (Zero coupon through
9-15-2002, thereafter 10.65%) (f).......... B 1,141,140 1,173,750
1,000,000 Nextel Communications, Inc., 9.375% Sr Note
11-15-2009................................. B 958,941 955,000
1,400,000 Omnipoint Corp., 11.625% Sr Note Ser A
8-15-2006.................................. CCC+ 1,370,158 1,568,000
4,000,000 TeleCorp PCS, Inc., 11.625% Sr Sub Note
4-15-2009 ( Zero coupon through 4-15-2004,
thereafter 11.625%) (f).................... B3* 2,653,734 2,660,000
------------ ------------
9,302,853 9,469,250
------------ ------------
TRAVELER ACCOMMODATION-0.51%
750,000 Boca Resorts, Inc., 9.875% Sr Sub Note
4-15-2009.................................. B- 750,000 705,000
------------ ------------
WASTE TREATMENT AND DISPOSAL-1.61%
2,125,000 Norcal Waste Systems, Inc., 13.50% Sr Note
Ser B 11-15-2005........................... BB- 2,084,581 2,215,313
------------ ------------
WATER, SEWAGE AND OTHER SYSTEMS-1.01%
1,500,000 Azurix Corp., 10.75% Sr Note 2-15-2010 (g)... BB 1,504,512 1,395,000
------------ ------------
TOTAL CORPORATE BONDS - NON-INVESTMENT
GRADE...................................... $143,774,892 $129,209,797
============ ============
</TABLE>
PREFERRED STOCKS-1.36%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Cost (b) Value (c)
---------- ------------ ------------
<C> <S> <C> <C>
SUPPORT ACTIVITIES FOR MINING-1.36%
1,724,000 R&B Falcon Corp., 13.875% Cumm. Preferred
5-1-2009 (Dividend is payable in kind)..... $ 1,583,498 $ 1,880,349
------------ ------------
</TABLE>
14
<PAGE>
COMMON STOCKS AND WARRANTS-1.54%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Cost (b) Value (c)
---------- ------------ ------------
<C> <S> <C> <C>
COMPUTER SYSTEMS DESIGN AND RELATED
SERVICES-0.41%
3,750 Splitrock Service (Warrants) (a) (e)......... $ 46,195 $ 570,469
------------ ------------
MANUFACTURING-CUT AND SEW APPAREL-0.04%
1,250 Hosiery Corp. of America, Inc. Class A (a)
(e)........................................ 21,150 50,000
------------ ------------
NEWSPAPER, PERIODICAL, BOOK AND DATABASE
PUBLISHERS-0.01%
5,542 Marvel Enterprises, Inc.
Class A (Warrants) (a)..................... 380,278 3,491
9,387 Marvel Enterprises, Inc.
Class C (Warrants) (a)..................... 1,288,210 2,933
------------ ------------
1,668,488 6,424
------------ ------------
SUPPORT ACTIVITIES FOR MINING-0.22%
750 R & B Falcon Corp. (Warrants) (a) (g)........ 70,725 300,000
------------ ------------
TELECOMMUNICATIONS-OTHER-0.71%
750 @Track Communications. Inc. (Warrants) (a)
(e)........................................ 13,125 7,500
12,800 Powertel, Inc. (Warrants) (a) (e)............ 94,118 971,037
------------ ------------
107,243 978,537
------------ ------------
TELECOMMUNICATIONS CARRIERS-WIRELESS-0.15%
1,000 Adelphia Business Solutions,
Inc. (Warrants) (a) (e).................... 20,000 88,875
6,600 Clearnet Communications,
Inc. (Warrants) (a) (e).................... 76,725 122,447
1,250 Leap Wireless (Warrants) (a) (e)............. 362 313
------------ ------------
97,087 211,635
------------ ------------
TOTAL COMMON STOCKS AND WARRANTS............. 2,010,888 2,117,065
============ ============
TOTAL LONG-TERM INVESTMENTS.................. $147,369,278 $133,207,211
============ ============
</TABLE>
SHORT-TERM INVESTMENTS-1.68%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value (c)
---------- ------------
<C> <S> <C>
CONSUMER LENDING-1.68%
$2,316,000 Associates Corp. Master Variable Rate Note,
Current rate -- 6.50%...................... $ 2,316,000
------------
DEPOSITORY CREDIT-BANKING-0.00%
1,873 U.S. Bank N.A. Money Market Variable Rate
Time Deposit, Current rate -- 6.43%........ 1,873
------------
TOTAL SHORT-TERM INVESTMENTS................. 2,317,873
------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$149,687,151) (b).......................... $135,525,084
============
</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, 2000, the cost of securities for federal income tax purposes
was $149,687,151 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 3,617,765
Unrealized depreciation..................................... (17,779,832)
--------------------------------------------------------------------------
Net unrealized depreciation................................. $(14,162,067)
--------------------------------------------------------------------------
</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 7.18% of net assets as of July 31, 2000.
15
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 2000
--------------------------------------------------------------------------------
(e) 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>
1997 750 @Track Communications, Inc. (Warrants) - 144A $ 13,125
1997 1,000 Adelphia Business Solutions, Inc. (Warrants) - 144A 20,000
1996-1997 10,117,492 Australis Media Ltd. (with warrants) due 2003 7,594,968
2000 750,000 Callahan Nordrhein-Westfalen due 2010 750,000
1996 6,600 Clearnet Communications, Inc. (Warrants) - 144A 76,725
2000 1,250,000 Dobson Communications Corp. due 2010 - 144A 1,240,620
2000 3,000,000 Exodus Communications, Inc. due 2010 - 144A 3,012,940
1994 1,250 Hosiery Corp. of America, Inc. Class A - 144A 21,150
2000 875,000 IMPSAT Fiber Networks, Inc. due 2005 - 144A 875,000
2000 1,250,000 Leap Wireless International, Inc due 2010 - 144A 652,011
2000 1,250 Leap Wireless (Warrants) 362
2000 750,000 Mandalay Resort Group due 2007 - 144A 750,000
1997 12,800 Powertel, Inc. (Warrants) - 144A 94,118
1998 3,750 Splitrock Service (Warrants) - 144A 46,195
2000 1,250,000 Station Casinos, Inc. due 2010 - 144A 1,245,095
2000 1,750,000 Tenet Healthcare Corp. due 2010 - 144A 1,767,425
</TABLE>
The aggregate value of these securities at July 31, 2000, was
$11,929,741, which represents 8.65% 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
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, 2000, was $6,837,500, which represents 4.96%
of total net assets.
* Moody's Rating
16
<PAGE>
FORTIS BOND FUNDS
Statements of Assets and Liabilities
July 31, 2000
--------------------------------------------------------------------------------
<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 $239,183,358; $25,824,944; and
$149,687,151; respectively) (Note 1)......................... $239,680,820 $24,423,472 $135,525,084
Collateral for securities lending transactions (Note 1)........ 59,346,882 -- --
Receivables:
Investment securities sold................................... 21,743,381 -- 1,750
Interest and dividends....................................... 2,283,824 476,706 3,051,598
Subscriptions of capital stock............................... 2,901 -- 32,372
Deferred registration costs (Note 1)........................... 21,347 12,472 17,274
Deferred organizational costs (Note 1)......................... -- 15,163 --
------------ ----------- ------------
TOTAL ASSETS..................................................... 323,079,155 24,927,813 138,628,078
------------ ----------- ------------
LIABILITIES:
Cash portion of dividends payable.............................. 303,983 6,446 396,486
Payable upon return of securities loaned (Note 1).............. 59,346,882 -- --
Payable for investment securities purchased.................... 20,825,062 -- --
Redemptions of capital stock................................... 46,693 -- 156,577
Payable for investment advisory and management fees (Note 2)... 148,234 12,475 87,503
Payable for distribution fees (Note 2)......................... 2,055 618 6,929
Accounts payable and accrued expenses.......................... 50,777 15,428 37,824
------------ ----------- ------------
TOTAL LIABILITIES................................................ 80,723,686 34,967 685,319
------------ ----------- ------------
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.......................... 315,240,245 27,865,381 196,812,218
Unrealized appreciation (depreciation) of investments.......... 497,462 (1,401,472) (14,162,067)
Undistributed net investment income............................ 390,270 149 316,830
Accumulated net realized loss from sale of investments......... (73,772,508) (1,571,212) (45,024,222)
------------ ----------- ------------
TOTAL NET ASSETS................................................. $242,355,469 $24,892,846 $137,942,759
============ =========== ============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE:
Class A shares (based on net assets of $43,620,123; $23,087,320;
and $82,278,801; respectively and 4,924,126; 2,617,107; and
13,582,916 shares outstanding; respectively)................... $8.86 $8.82 $6.06
------------ ----------- ------------
Class B shares (based on net assets of $4,264,156; $806,022; and
$15,278,915; respectively and 482,654; 91,354; and 2,520,398
shares outstanding; respectively).............................. $8.83 $8.82 $6.06
------------ ----------- ------------
Class C shares (based on net assets of $1,605,533; $189,599; and
$4,224,114; respectively and 181,765; 21,476; and 698,014
shares outstanding; respectively).............................. $8.83 $8.83 $6.05
------------ ----------- ------------
Class E shares (based on net assets of $184,520,283; $0; and $0;
respectively and 20,837,610; 0; and 0 shares outstanding;
respectively).................................................. $8.86 -- --
------------ ----------- ------------
Class H shares (based on net assets of $8,345,374; $809,905; and
$36,160,929; respectively and 944,907; 91,827; and 5,969,673
shares outstanding; respectively).............................. $8.83 $8.82 $6.06
------------ ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FORTIS BOND FUNDS
Statements of Operations
For the Year Ended July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT STRATEGIC
SECURITIES INCOME HIGH YIELD
FUND FUND PORTFOLIO
--------------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME:
Income:
Interest income.............................................. $17,787,286 $2,148,915 $ 16,889,595
Dividend income.............................................. -- -- 227,379
Fee income (Note 1).......................................... 96,219 -- --
----------- ---------- ------------
Total income................................................... 17,883,505 2,148,915 17,116,974
----------- ---------- ------------
Expenses:
Investment advisory and management fees (Note 2)............. 1,909,619 195,426 1,194,590
Distribution fees (Class A) (Note 2)......................... 113,453 56,576 328,378
Distribution fees (Class B) (Note 2)......................... 43,551 8,023 189,959
Distribution fees (Class C) (Note 2)......................... 25,799 2,048 51,466
Distribution fees (Class H) (Note 2)......................... 95,094 7,906 455,392
Registration fees............................................ 51,093 36,036 44,452
Shareholders' notices and reports............................ 53,700 4,000 37,225
Legal and auditing fees (Note 2)............................. 37,475 18,250 32,380
Custodian fees............................................... 11,000 2,000 12,700
Directors' fees and expenses................................. 15,860 1,485 5,250
Amortization of organization costs........................... -- 6,504 --
Other........................................................ 17,315 1,336 10,218
----------- ---------- ------------
Total expenses................................................. 2,373,959 339,590 2,362,010
Less reimbursable expenses (Note 2).......................... -- (57,704) --
----------- ---------- ------------
Net Expenses................................................... 2,373,959 281,886 2,362,010
----------- ---------- ------------
NET INVESTMENT INCOME............................................ 15,509,546 1,867,029 14,754,964
----------- ---------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1):
Net realized loss from security transactions................... (8,494,120) (765,242) (19,047,717)
Net change in unrealized appreciation (depreciation) of
investments.................................................. 4,693,992 (63,127) 3,067,238
----------- ---------- ------------
NET LOSS ON INVESTMENTS.......................................... (3,800,128) (828,369) (15,980,479)
----------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS..................................................... $11,709,418 $1,038,660 $ (1,225,515)
=========== ========== ============
</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, 2000 JULY 31, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 15,509,546 $ 18,144,211
Net realized loss from security transactions................... (8,494,120) (105,226)
Net change in unrealized appreciation (depreciation) on
investments.................................................. 4,693,992 (12,599,430)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. 11,709,418 5,439,555
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (2,557,139) (2,622,563)
Class B...................................................... (215,280) (171,776)
Class C...................................................... (124,720) (88,599)
Class E...................................................... (12,008,659) (14,630,693)
Class H...................................................... (468,809) (470,692)
------------ ------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (15,374,607) (17,984,323)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (1,110,496 and 1,796,539 shares)..................... 9,847,313 16,844,144
Class B (122,246 and 289,195 shares)......................... 1,080,047 2,689,827
Class C (57,680 and 364,482 shares).......................... 507,372 3,400,685
Class E (776,447 and 3,851,023 shares)....................... 6,846,258 36,198,004
Class H (265,462 and 466,452 shares)......................... 2,351,553 4,370,480
Proceeds from shares issued as a result of reinvested dividends
Class A (218,565 and 208,031 shares)......................... 1,932,441 1,941,525
Class B (20,958 and 16,315 shares)........................... 184,777 151,529
Class C (9,640 and 7,080 shares)............................. 84,905 65,640
Class E (987,089 and 1,176,290 shares)....................... 8,724,268 10,973,982
Class H (40,598 and 37,302 shares)........................... 357,814 347,038
Less cost of repurchase of shares
Class A (1,902,722 and 2,142,693 shares)..................... (16,855,020) (20,065,742)
Class B (186,544 and 120,086 shares)......................... (1,646,906) (1,113,932)
Class C (229,546 and 164,225 shares)......................... (2,010,287) (1,540,025)
Class E (9,289,894 and 7,313,196 shares)..................... (82,306,339) (68,212,077)
Class H (509,388 and 521,603 shares)......................... (4,482,745) (4,842,822)
------------ ------------
NET DECREASE IN NET ASSETS FROM SHARE TRANSACTIONS............... (75,384,549) (18,791,744)
------------ ------------
TOTAL DECREASE IN NET ASSETS..................................... (79,049,738) (31,336,512)
NET ASSETS:
Beginning of year.............................................. 321,405,207 352,741,719
------------ ------------
End of year (includes undistributed net investment income of
$390,270 and $255,331, respectively)......................... $242,355,469 $321,405,207
============ ============
</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 FOR THE
YEAR ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 1,867,029 $ 1,503,583
Net realized loss from security transactions................... (765,242) (805,970)
Net change in unrealized depreciation of investments........... (63,127) (1,391,995)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS..................................................... 1,038,660 (694,382)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (1,785,876) (1,444,077)
Class B...................................................... (57,026) (32,866)
Class C...................................................... (14,523) (14,830)
Class H...................................................... (56,278) (28,844)
From net realized gains on investments
Class A...................................................... -- (29,418)
Class B...................................................... -- (685)
Class C...................................................... -- (384)
Class H...................................................... -- (497)
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (1,913,703) (1,551,601)
----------- -----------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (86,532 and 114,975 shares).......................... 775,496 1,112,155
Class B (19,785 and 56,479 shares)........................... 177,599 540,543
Class C (5,895 and 27,407 shares)............................ 53,196 265,968
Class H (38,704 and 65,798 shares)........................... 345,855 628,078
Proceeds from shares issued as a result of reinvested dividends
Class A (196,209 and 151,302 shares)......................... 1,756,547 1,446,534
Class B (5,164 and 2,681 shares)............................. 46,249 25,499
Class C (1,148 and 1,153 shares)............................. 10,297 11,040
Class H (3,045 and 1,975 shares)............................. 27,272 18,736
Less cost of repurchase of shares
Class A (94,045 and 68,638 shares)........................... (840,367) (657,349)
Class B (22,693 and 9,643 shares)............................ (203,545) (91,804)
Class C (9,526 and 23,895 shares)............................ (85,695) (229,098)
Class H (32,038 and 20,959 shares)........................... (286,909) (201,297)
----------- -----------
NET INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS............... 1,775,995 2,869,005
----------- -----------
TOTAL INCREASE IN NET ASSETS..................................... 900,952 623,022
NET ASSETS:
Beginning of year.............................................. 23,991,894 23,368,872
----------- -----------
End of year (includes undistributed net investment income of
$149 and $3,686, respectively)............................... $24,892,846 $23,991,894
=========== ===========
</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, 2000 JULY 31, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 14,754,964 $ 16,580,611
Net realized loss from security transactions................... (19,047,717) (15,531,738)
Net change in unrealized appreciation (depreciation) of
investments.................................................. 3,067,238 (6,387,800)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............. (1,225,515) (5,338,927)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A...................................................... (8,382,825) (9,110,376)
Class B...................................................... (1,557,448) (2,074,725)
Class C...................................................... (422,659) (553,768)
Class H...................................................... (3,734,428) (5,185,872)
------------ ------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS.............................. (14,097,360) (16,924,741)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (2,013,364 and 4,788,487 shares)..................... 12,910,014 33,406,189
Class B (283,547 and 462,119 shares)......................... 1,811,572 3,230,762
Class C (74,804 and 179,698 shares).......................... 481,045 1,249,109
Class H (763,153 and 1,317,353 shares)....................... 4,885,686 9,207,091
Proceeds from shares issued as a result of reinvested dividends
Class A (936,073 and 845,799 shares)......................... 5,941,152 5,832,807
Class B (108,828 and 138,016 shares)......................... 691,570 952,967
Class C (57,988 and 65,909 shares)........................... 367,777 454,338
Class H (275,130 and 354,183 shares)......................... 1,748,051 2,444,094
Less cost of repurchase of shares
Class A (5,403,127 and 4,924,969 shares)..................... (34,622,273) (34,161,183)
Class B (1,293,030 and 1,085,786 shares)..................... (8,277,560) (7,512,789)
Class C (343,647 and 505,027 shares)......................... (2,200,198) (3,489,086)
Class H (3,535,047 and 2,988,963 shares)..................... (22,677,595) (20,684,500)
------------ ------------
NET DECREASE IN NET ASSETS FROM SHARE TRANSACTIONS............... (38,940,759) (9,070,201)
------------ ------------
TOTAL DECREASE IN NET ASSETS..................................... (54,263,634) (31,333,869)
NET ASSETS:
Beginning of year.............................................. 192,206,393 223,540,262
------------ ------------
End of year (includes undistributed (excess of distributions
over) net investment income of $316,830 and ($340,774),
respectively)................................................ $137,942,759 $192,206,393
============ ============
</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 Fortis 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 Fortis 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 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, 2000, U.S. Government Fund had entered into outstanding when-issued
or forward commitments of $20,825,062.
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, 2000, 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.............. $453,677,991 $535,259,122
Strategic Income Fund........................ 16,998,944 14,866,585
High Yield Portfolio......................... 105,844,508 139,571,356
</TABLE>
LENDING OF PORTFOLIO SECURITIES: At July 31, 2000, securities valued at
$57,483,389 were on loan to brokers from U.S. Government. For collateral, the
Fund's custodian received $59,346,882 in cash which is maintained in a
separate account and invested by the custodian
22
<PAGE>
--------------------------------------------------------------------------------
in short term investment vehicles. Fee income from securities lending
amounted to $96,219 for U.S. Government for the year ended July 31, 2000. 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 are
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. On a calendar year basis, the portfolios intend to distribute
substantially all of their net investment income and realized gains, if any,
to avoid the payment of federal excise taxes.
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, if any, of certain current year permanent book-to-tax
differences is reflected as "excess distributions" 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 $43,137 resulting in a reclassification to paid-in-capital by
the same amount.
For federal income tax purposes U.S. Government had a capital loss carryover
of $73,772,508, Strategic Income had $1,571,212 and High Yield had
$45,024,222 at July 31, 2000, which, if not offset by subsequent capital
gains, will expire in 2002 through 2009. 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 paid
in cash.
ILLIQUID SECURITIES: At July 31, 2000, 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, 2000, was $2,046,561 for Strategic Income and
$11,929,741 for High Yield which represents 8.22% and 8.65% 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 93.67% and 44.30% 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
accounting principles generally accepted in the United States of America
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 Wells Fargo 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 Wells Fargo 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, 2000.
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 average daily net assets in
23
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
excess of $50 million for U.S. Government, Strategic Income, and High 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 1.00% of average daily net assets for 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 H Class E
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund.............. $118,380 $ 2,749 $ 913 $ 48,401 $52,504
Strategic Income Fund........................ 11,123 1,772 55 1,689 --
High Yield Portfolio......................... 108,084 108,801 1,068 288,561 --
</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, 2000, Advisers waived $57,704 of its advisory fee.
For the year ended July 31, 2000, 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.............. $5,400
Strategic Income Fund........................ 650
Fortis High Yield Portfolio.................. 5,300
</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 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 8.96 $ 9.30 $ 9.16 $ 8.87 $ 9.02
-------- -------- -------- -------- --------
Operations:
Investment income - net............... .52 .49 .52 .54 .60
Net realized and unrealized gain
(loss) on investments............... (.10) (.34) .14 .32 (.15)
-------- -------- -------- -------- --------
Total from operations................... .42 .15 .66 .86 .45
-------- -------- -------- -------- --------
Distributions to shareholders:
From investment income - net.......... (.52) (.49) (.52) (.54) (.60)
Excess distributions of net realized
gains............................... -- -- -- (.03) --
-------- -------- -------- -------- --------
Total distributions to shareholders..... (.52) (.49) (.52) (.57) (.60)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 8.86 $ 8.96 $ 9.30 $ 9.16 $ 8.87
-------- -------- -------- -------- --------
Total Return @.......................... 4.91% 1.56% 7.42% 10.07% 5.08%
Net assets end of year (000s omitted)... $184,520 $254,096 $285,060 $324,643 $388,006
Ratio of expenses to average daily net
assets................................ .79% .78% .79% .81% .81%
Ratio of net investment income to
average daily net assets.............. 5.96% 5.32% 5.62% 6.08% 6.59%
Portfolio turnover rate................. 181% 75% 118% 161% 75%
</TABLE>
@ 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>
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class A
-----------------------------------------------
Year Ended July 31,
-----------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 8.96 $ 9.30 $ 9.16 $ 8.87 $ 9.02
------- ------- ------- ------- -------
Operations:
Investment income - net............... .50 .47 .50 .52 .58
Net realized and unrealized gain
(loss) on investments............... (.10) (.34) .14 .32 (.15)
------- ------- ------- ------- -------
Total from operations................... .40 .13 .64 .84 .43
------- ------- ------- ------- -------
Distributions to shareholders:
From investment income - net.......... (.50) (.47) (.50) (.52) (.58)
Excess distributions of net realized
gains............................... -- -- -- (.03) --
------- ------- ------- ------- -------
Total distributions to shareholders..... (.50) (.47) (.50) (.55) (.58)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 8.86 $ 8.96 $ 9.30 $ 9.16 $ 8.87
------- ------- ------- ------- -------
Total Return @.......................... 4.62% 1.30% 7.14% 9.77% 4.78%
Net assets end of year (000s omitted)... $43,620 $49,274 $52,439 $59,128 $67,707
Ratio of expenses to average daily net
assets................................ 1.04% 1.03% 1.04% 1.06% 1.06%
Ratio of net investment income to
average daily net assets.............. 5.71% 5.07% 5.37% 5.83% 6.34%
Portfolio turnover rate................. 181% 75% 118% 161% 75%
</TABLE>
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions, without
adjustments for sales charge.
<TABLE>
<CAPTION>
Class B
------------------------------------------
Year Ended July 31,
------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 8.94 $ 9.28 $ 9.14 $ 8.86 $ 9.02
------ ------ ------ ------ ------
Operations:
Investment income - net............... .43 .40 .43 .46 .51
Net realized and unrealized gain
(loss) on investments............... (.10) (.34) .14 .31 (.15)
------ ------ ------ ------ ------
Total from operations................... .33 .06 .57 .77 .36
------ ------ ------ ------ ------
Distributions to shareholders:
From investment income - net.......... (.44) (.40) (.43) (.47) (.52)
Excess distributions of net realized
gains............................... -- -- -- (.02) --
------ ------ ------ ------ ------
Total distributions to shareholders..... (.44) (.40) (.43) (.49) (.52)
------ ------ ------ ------ ------
Net asset value, end of year............ $ 8.83 $ 8.94 $ 9.28 $ 9.14 $ 8.86
------ ------ ------ ------ ------
Total Return @.......................... 3.79% .53% 6.40% 8.95% 4.00%
Net assets end of year (000s omitted)... $4,264 $4,703 $3,161 $2,826 $2,314
Ratio of expenses to average daily net
assets................................ 1.79% 1.78% 1.79% 1.81% 1.81%
Ratio of net investment income to
average daily net assets.............. 4.96% 4.32% 4.62% 5.08% 5.45%
Portfolio turnover rate................. 181% 75% 118% 161% 75%
</TABLE>
@ 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)
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class C
------------------------------------------
Year Ended July 31,
------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 8.93 $ 9.27 $ 9.13 $ 8.85 $ 9.01
------ ------ ------ ------ ------
Operations:
Investment income - net............... .44 .40 .43 .46 .51
Net realized and unrealized gain
(loss) on investments............... (.10) (.34) .14 .31 (.15)
------ ------ ------ ------ ------
Total from operations................... .34 .06 .57 .77 .36
------ ------ ------ ------ ------
Distributions to shareholders:
From investment income - net.......... (.44) (.40) (.43) (.47) (.52)
Excess distributions of net realized
gains............................... -- -- -- (.02) --
------ ------ ------ ------ ------
Total distributions to shareholders..... (.44) (.40) (.43) (.49) (.52)
------ ------ ------ ------ ------
Net asset value, end of year............ $ 8.83 $ 8.93 $ 9.27 $ 9.13 $ 8.85
------ ------ ------ ------ ------
Total Return @.......................... 3.91% .52% 6.41% 8.96% 4.00%
Net assets end of year (000s omitted)... $1,606 $3,071 $1,267 $1,444 $1,057
Ratio of expenses to average daily net
assets................................ 1.79% 1.78% 1.79% 1.81% 1.81%
Ratio of net investment income to
average daily net assets.............. 4.93% 4.32% 4.62% 5.07% 5.59%
Portfolio turnover rate................. 181% 75% 118% 161% 75%
</TABLE>
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions, without
adjustments for sales charge.
<TABLE>
<CAPTION>
Class H
----------------------------------------------
Year Ended July 31,
----------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 8.94 $ 9.28 $ 9.14 $ 8.86 $ 9.02
------ ------- ------- ------- -------
Operations:
Investment income - net............... .43 .40 .43 .46 .51
Net realized and unrealized gain
(loss) on investments............... (.10) (.34) .14 .31 (.15)
------ ------- ------- ------- -------
Total from operations................... .33 .06 .57 .77 .36
------ ------- ------- ------- -------
Distributions to shareholders:
From investment income - net.......... (.44) (.40) (.43) (.47) (.52)
Excess distributions of net realized
gains............................... -- -- -- (.02) --
------ ------- ------- ------- -------
Total distributions to shareholders..... (.44) (.40) (.43) (.49) (.52)
------ ------- ------- ------- -------
Net asset value, end of year............ $ 8.83 $ 8.94 $ 9.28 $ 9.14 $ 8.86
------ ------- ------- ------- -------
Total Return @.......................... 3.79% .53% 6.40% 8.94% 4.00%
Net assets end of year (000s omitted)... $8,345 $10,262 $10,816 $10,637 $10,120
Ratio of expenses to average daily net
assets................................ 1.79% 1.78% 1.79% 1.80% 1.81%
Ratio of net investment income to
average daily net assets.............. 4.96% 4.32% 4.62% 5.08% 5.52%
Portfolio turnover rate................. 181% 75% 118% 161% 75%
</TABLE>
@ 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>
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class A
---------------------------
Year Ended July 31,
---------------------------
STRATEGIC INCOME FUND 2000 1999 1998+
<S> <C> <C> <C>
----------------------------------------------------------------------
Net asset value, beginning of year...... $ 9.14 $ 10.05 $ 10.00
------- ------- -------
Operations:
Investment income - net............... .69 .61 .42
Net realized and unrealized gain
(loss) on investments............... (.30) (.89) .05
------- ------- -------
Total from operations................... .39 (.28) .47
------- ------- -------
Distributions to shareholders:
From investment income - net.......... (.71) (.62) (.42)
From net realized gains on
investments......................... -- (.01) --
------- ------- -------
Total distributions to shareholders..... (.71) (.63) (.42)
------- ------- -------
Net asset value, end of year............ $ 8.82 $ 9.14 $ 10.05
------- ------- -------
Total Return @.......................... 4.43% (2.86%) 4.77%
Net assets end of year (000s omitted)... $23,087 $22,207 $22,422
Ratio of expenses to average daily net
assets (a)............................ 1.10% 1.10% 1.10%*
Ratio of net investment income to
average daily net assets (a).......... 7.71% 6.38% 6.22%*
Portfolio turnover rate................. 67% 79% 136%
</TABLE>
* Annualized.
+ For the period December 1, 1997 (commencement of operations) to
July 31, 1998.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions, without
adjustments for sales charge.
(a) Advisers has voluntarily undertaken to limit annual expenses for
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. For the year ended
July 31, 2000, 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 1.34% and 7.47% for Class A. For the
year ended July 31, 1999, 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. For the period December 1, 1997 to July 31, 1998, 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 1.39% and 5.93% for Class A.
<TABLE>
<CAPTION>
Class B
-----------------------
Year Ended July 31,
-----------------------
STRATEGIC INCOME FUND 2000 1999 1998+
<S> <C> <C> <C>
------------------------------------------------------------------
Net asset value, beginning of year...... $9.14 $10.05 $10.00
----- ------ ------
Operations:
Investment income - net............... .62 .54 .38
Net realized and unrealized gain
(loss) on investments............... (.30) (.89) .05
----- ------ ------
Total from operations................... .32 (.35) .43
----- ------ ------
Distributions to shareholders:
From investment income - net.......... (.64) (.55) (.38)
From net realized gains............... -- (.01) --
----- ------ ------
Total distributions to shareholders..... (.64) (.56) (.38)
----- ------ ------
Net asset value, end of year............ $8.82 $ 9.14 $10.05
----- ------ ------
Total Return @.......................... 3.63% (3.58%) 4.31%
Net assets end of year (000s omitted)... $ 806 $ 815 $ 398
Ratio of expenses to average daily net
assets (a)............................ 1.85% 1.85% 1.85%*
Ratio of net investment income to
average daily net assets (a).......... 6.96% 5.63% 5.73%*
Portfolio turnover rate................. 67% 79% 136%
</TABLE>
* Annualized.
+ For the period December 1, 1997 (commencement of operations) to July
31, 1998.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions, without
adjustments for sales charge.
(a) Advisers has voluntarily undertaken to limit annual expenses for
strategic Income Fund (exclusive of interest, taxes, brokerage
commission and non-recurring extraordinary charges and expenses) to
1.85% of average daily net assets for Class B. For the year ended
July 31, 2000, 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 2.09% and 6.72% for Class B. For the
year ended July 31, 1999, 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 2.19% and 5.29% for
Class B. For the period December 1, 1997 to July 31, 1998, 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 2.14% and 5.44% for Class B.
27
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class C
-----------------------
Year Ended July 31,
-----------------------
STRATEGIC INCOME FUND 2000 1999 1998+
<S> <C> <C> <C>
------------------------------------------------------------------
Net asset value, beginning of year...... $9.15 $10.05 $10.00
----- ------ ------
Operations:
Investment income - net............... .62 .55 .38
Net realized and unrealized gain
(loss) on investments............... (.30) (.89) .05
----- ------ ------
Total from operations................... .32 (.34) .43
----- ------ ------
Distributions to shareholders:
From investment income - net.......... (.64) (.55) (.38)
From net realized gains on
investments......................... -- (.01) --
----- ------ ------
Total distributions to shareholders..... (.64) (.56) (.38)
----- ------ ------
Net asset value, end of year............ $8.83 $ 9.15 $10.05
----- ------ ------
Total Return @.......................... 3.63% (3.49%) 4.35%
Net assets end of year (000s omitted)... $ 190 $ 219 $ 194
Ratio of expenses to average daily net
assets (a)............................ 1.85% 1.85% 1.85%*
Ratio of net investment income to
average daily net assets (a).......... 6.96% 5.63% 5.73%*
Portfolio turnover rate................. 67% 79% 136%
</TABLE>
* Annualized.
+ For the period December 1, 1997 (commencement of operations) to
July 31, 1998.
@ These are the fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions, without
adjustments for sales charge.
(a) Advisers has voluntarily undertaken to limit annual expenses for
strategic Income Fund (exclusive of interest, taxes, brokerage
commission and non-recurring extraordinary charges and expenses) to
1.85% of the average daily net assets for Class C. For the year ended
July 31, 2000, 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 2.09% and 6.72% for Class C. For the
year ended July 31, 1999, 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 2.19% and 5.29% for
Class C. For the period December 1, 1997 to July 31, 1998, 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 2.14% and 5.44% for Class C.
<TABLE>
<CAPTION>
Class H
-----------------------
Year Ended July 31,
-----------------------
STRATEGIC INCOME FUND 2000 1999 1998+
<S> <C> <C> <C>
------------------------------------------------------------------
Net asset value, beginning of year...... $9.14 $10.05 $10.00
----- ------ ------
Operations:
Investment income - net............... .62 .54 .38
Net realized and unrealized gain
(loss) on investments............... (.30) (.89) .05
----- ------ ------
Total from operations................... .32 (.35) .43
----- ------ ------
Distributions to shareholders:
From investment income - net.......... (.64) (.55) (.38)
From net realized gains on
investments......................... -- (.01) --
----- ------ ------
Total distributions to shareholders..... (.64) (.56) (.38)
----- ------ ------
Net asset value, end of year............ $8.82 $ 9.14 $10.05
----- ------ ------
Total Return @.......................... 3.63% (3.58%) 4.35%
Net assets end of year (000s omitted)... $ 810 $ 751 $ 355
Ratio of expenses to average daily net
assets (a)............................ 1.85% 1.85% 1.85%*
Ratio of net investment income to
average daily net assets (a).......... 6.96% 5.63% 5.73%*
Portfolio turnover rate................. 67% 79% 136%
</TABLE>
* Annualized.
+ For the period December 1, 1997 (commencement of operations) to
July 31, 1998.
@ These are the fund's 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
strategic Income Fund (exclusive of interest, taxes, brokerage
commission and non-recurring extraordinary charges and expenses) to
1.85% of the average daily net assets for Class H. For the year ended
July 31, 2000, 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 2.09% and 6.72% for Class H. For the
year ended July 31, 1999, 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 2.19% and 5.29% for
Class H. For the period December 1, 1997 to July 31, 1998, 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 2.14% and 5.44% for Class H.
28
<PAGE>
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Year Ended July 31,
--------------------------------------------------------------
HIGH YIELD PORTFOLIO 2000 1999 1998 1997 1996+ 1995++
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.61 $ 7.90
------- -------- -------- -------- -------- --------
Operations:
Investment income - net............... .60 .59 .73 .76 .56 .86
Net realized and unrealized gain
(loss) on investments............... (.64) (.72) (.40) .28 (.04) (.25)
------- -------- -------- -------- -------- --------
Total from operations................... (.04) (.13) .33 1.04 .52 .61
------- -------- -------- -------- -------- --------
Distributions to shareholders:
From investment income - net.......... (.57) (.61) (.75) (.75) (.55) (.86)
Excess distributions of net realized
gains............................... -- -- -- (.02) (.02) (.04)
------- -------- -------- -------- -------- --------
Total distributions to shareholders..... (.57) (.61) (.75) (.77) (.57) (.90)
------- -------- -------- -------- -------- --------
Net asset value, end of year............ $ 6.06 $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.61
------- -------- -------- -------- -------- --------
Total Return @.......................... (.57%) (1.76%) 4.31% 14.51% 6.98% 8.07%
Net assets end of year (000s omitted)... $82,279 $106,921 $113,549 $123,115 $109,401 $113,268
Ratio of expenses to average daily net
assets................................ 1.17% 1.16% 1.17% 1.19% 1.21%* 1.25%*
Ratio of net investment income to
average daily net assets.............. 9.32% 8.54% 9.46% 9.84% 9.87%* 10.61%*
Portfolio turnover rate................. 67% 46% 214% 331% 146% 101%
</TABLE>
* Annualized.
+ For the nine-month period ended July 31, 1996.
++ For the period from November 14, 1994 (commencement of operations) to
October 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.
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
Year Ended July 31,
--------------------------------------------------------
HIGH YIELD PORTFOLIO 2000 1999 1998 1997 1996+ 1995++
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.60 $ 7.87
------- ------- ------- ------- ------- ------
Operations:
Investment income - net............... .56 .54 .68 .71 .53 .78
Net realized and unrealized gain
(loss) on investments............... (.64) (.72) (.40) .28 (.04) (.23)
------- ------- ------- ------- ------- ------
Total from operations................... (.08) (.18) .28 .99 .49 .55
------- ------- ------- ------- ------- ------
Distributions to shareholders:
From investment income - net.......... (.53) (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- -- (.02) (.02) (.04)
------- ------- ------- ------- ------- ------
Total distributions to shareholders..... (.53) (.56) (.70) (.72) (.53) (.82)
------- ------- ------- ------- ------- ------
Net asset value, end of year............ $ 6.06 $ 6.67 $ 7.41 $ 7.83 $ 7.56 $ 7.60
------- ------- ------- ------- ------- ------
Total Return @.......................... (1.29%) (2.44%) 3.67% 13.80% 6.62% 7.25%
Net assets end of year (000s omitted)... $15,279 $22,814 $28,935 $20,388 $12,067 $7,530
Ratio of expenses to average daily net
assets................................ 1.82% 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 8.66% 7.90% 8.81% 9.24% 9.20%* 9.66%*
Portfolio turnover rate................. 67% 46% 214% 331% 146% 101%
</TABLE>
* Annualized.
+ For the nine-month period ended July 31, 1996.
++ For the period from November 14, 1994 (commencement of operations) to
October 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.
29
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
3. FINANCIAL HIGHLIGHTS (continued):
<TABLE>
<CAPTION>
Class C
---------------------------------------------------------
Year Ended July 31,
---------------------------------------------------------
HIGH YIELD PORTFOLIO 2000 1999 1998 1997 1996+ 1995++
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.59 $ 7.87
------- ------- ------- ------- ------- -------
Operations:
Investment income - net............... .56 .54 .68 .71 .53 .78
Net realized and unrealized gain
(loss) on investments............... (.64) (.72) (.40) .28 (.04) (.24)
------- ------- ------- ------- ------- -------
Total from operations................... (.08) (.18) .28 .99 .49 .54
------- ------- ------- ------- ------- -------
Distributions to shareholders:
From investment income - net.......... (.53) (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- -- (.02) (.02) (.04)
------- ------- ------- ------- ------- -------
Total distributions to shareholders..... (.53) (.56) (.70) (.72) (.53) (.82)
------- ------- ------- ------- ------- -------
Net asset value, end of year............ $ 6.05 $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.59
------- ------- ------- ------- ------- -------
Total Return @.......................... (1.29%) (2.44%) 3.67% 13.82% 6.63% 7.12%
Net assets end of year (000s omitted)... $ 4,224 $ 6,051 $ 8,641 $ 7,037 $ 3,378 $ 2,180
Ratio of expenses to average daily net
assets................................ 1.82% 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 8.66% 7.90% 8.81% 9.26% 9.21%* 9.83%*
Portfolio turnover rate................. 67% 46% 214% 331% 146% 101%
</TABLE>
* Annualized.
+ For the nine-month period ended July 31, 1996.
++ For the period from November 14, 1994 (commencement of operations) to
October 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.
<TABLE>
<CAPTION>
Class H
---------------------------------------------------------
Year Ended July 31,
---------------------------------------------------------
HIGH YIELD PORTFOLIO 2000 1999 1998 1997 1996+ 1995++
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Net asset value, beginning of year...... $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.60 $ 7.87
------- ------- ------- ------- ------- -------
Operations:
Investment income - net............... .57 .54 .68 .71 .52 .78
Net realized and unrealized gain
(loss) on investments............... (.64) (.72) (.40) .28 (.04) (.23)
------- ------- ------- ------- ------- -------
Total from operations................... (.07) (.18) .28 .99 .48 .55
------- ------- ------- ------- ------- -------
Distributions to shareholders:
From investment income - net.......... (.53) (.56) (.70) (.70) (.51) (.78)
Excess distributions of net realized
gains............................... -- -- -- (.02) (.02) (.04)
------- ------- ------- ------- ------- -------
Total distributions to shareholders..... (.53) (.56) (.70) (.72) (.53) (.82)
------- ------- ------- ------- ------- -------
Net asset value, end of year............ $ 6.06 $ 6.66 $ 7.40 $ 7.82 $ 7.55 $ 7.60
------- ------- ------- ------- ------- -------
Total Return @.......................... (1.13%) (2.44%) 3.67% 13.82% 6.48% 7.25%
Net assets end of year (000s omitted)... $36,161 $56,420 $72,415 $63,789 $39,133 $23,862
Ratio of expenses to average daily net
assets................................ 1.82% 1.81% 1.82% 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 8.66% 7.90% 8.81% 9.23% 9.21%* 9.81%*
Portfolio turnover rate................. 67% 46% 214% 331% 146% 101%
</TABLE>
* Annualized.
+ For the nine-month period ended July 31, 1996
++ For the period from November 14, 1994 (commencement of operations) to
October 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.
30
<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, 2000 and the related statements of operations for the year
then ended, and the statements of changes in net assets for the each of the
years in the two-year period ended July 31, 2000 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 auditing standards generally accepted
in the United States of America. 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, and securities on loan, 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 Fortis
U.S. Government Securities Fund, Fortis Strategic Income Fund and Fortis High
Yield Portfolio as of July 31, 2000 and the results of their operations, changes
in their net assets and the financial highlights for the periods presented, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Minneapolis, Minnesota
September 1, 2000
31
<PAGE>
FORTIS BOND FUNDS
FEDERAL INCOME TAX INFORMATION
<TABLE>
<S> <C>
U.S. GOVERNMENT SECURITIES FUND
DIRECT FEDERAL OBLIGATIONS:
Total Direct Federal Obligations............. 10.98%
Other Securities............................. 89.02%
-------
100.00%
-------
</TABLE>
U.S. GOVERNMENT SECURITIES FUND - FEDERAL TAX INFORMATION
Ordinary Income Per Share
<TABLE>
<CAPTION>
RECORD DATES CLASS A CLASS B CLASS C CLASS E CLASS H
<S> <C> <C> <C> <C> <C>
---------------------------------------------------
Net Investment Income Per Share
08/31/1999................................... $0.039 $0.033 $0.033 $0.041 $0.033
09/30/1999................................... 0.039 0.033 0.033 0.041 0.033
10/29/1999................................... 0.040 0.035 0.035 0.042 0.035
11/30/1999................................... 0.041 0.036 0.036 0.043 0.036
12/31/1999................................... 0.041 0.036 0.036 0.043 0.036
01/31/2000................................... 0.042 0.037 0.037 0.044 0.037
02/29/2000................................... 0.043 0.038 0.038 0.045 0.038
03/31/2000................................... 0.043 0.038 0.038 0.045 0.038
04/30/2000................................... 0.043 0.038 0.038 0.045 0.038
05/31/2000................................... 0.043 0.038 0.038 0.045 0.038
06/30/2000................................... 0.043 0.038 0.038 0.045 0.038
07/31/2000................................... 0.043 0.038 0.038 0.045 0.038
------ ------ ------ ------ ------
Total Distributions.......................... $0.500 $0.438 $0.438 $0.524 $0.438
------ ------ ------ ------ ------
</TABLE>
STRATEGIC INCOME FUND - FEDERAL TAX INFORMATION
Ordinary Income Per Share
<TABLE>
<CAPTION>
RECORD DATES CLASS A CLASS B CLASS C CLASS H
<S> <C> <C> <C> <C>
----------------------------------------
Net Investment Income Per Share
08/31/1999................................... $0.057 $0.051 $0.051 $0.051
09/30/1999................................... 0.054 0.048 0.049 0.048
10/29/1999................................... 0.055 0.049 0.049 0.049
11/30/1999................................... 0.062 0.055 0.055 0.055
12/31/1999................................... 0.059 0.053 0.053 0.054
01/31/2000................................... 0.060 0.055 0.055 0.055
02/29/2000................................... 0.056 0.051 0.050 0.050
03/31/2000................................... 0.060 0.054 0.054 0.054
04/28/2000................................... 0.055 0.049 0.049 0.049
05/31/2000................................... 0.066 0.060 0.060 0.061
06/30/2000................................... 0.062 0.057 0.057 0.056
07/31/2000................................... 0.064 0.058 0.058 0.058
------ ------ ------ ------
Total Distributions.......................... $0.710 $0.640 $0.640 $0.640
------ ------ ------ ------
</TABLE>
HIGH YIELD - FEDERAL TAX INFORMATION
Ordinary Income Per Share
<TABLE>
<CAPTION>
RECORD DATES CLASS A CLASS B CLASS C CLASS H
<S> <C> <C> <C> <C>
----------------------------------------
Net Investment Income Per Share
08/31/1999................................... $0.046 $0.042 $0.042 $0.042
09/30/1999................................... 0.046 0.042 0.042 0.042
10/29/1999................................... 0.046 0.042 0.042 0.042
11/30/1999................................... 0.047 0.043 0.043 0.043
12/31/1999................................... 0.047 0.043 0.043 0.043
01/31/2000................................... 0.048 0.044 0.044 0.044
02/29/2000................................... 0.048 0.044 0.044 0.044
03/31/2000................................... 0.048 0.044 0.044 0.044
04/28/2000................................... 0.049 0.046 0.046 0.046
05/31/2000................................... 0.049 0.045 0.045 0.045
06/30/2000................................... 0.050 0.047 0.047 0.047
07/31/2000................................... 0.050 0.046 0.046 0.046
------ ------ ------ ------
Total Distributions.......................... $0.574 $0.528 $0.528 $0.528
------ ------ ------ ------
</TABLE>
32
<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
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
Phillip O. Peterson MUTUAL FUND INDUSTRY CONSULTANT;
PARTNER OF KPMG LLP, THROUGH JUNE
1999
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 F. Schenker MARKETING CONSULTANT. PRIOR TO MAY
1996, SENIOR VICE PRESIDENT OF
MARKETING & STRATEGIC PLANNING,
ROLLERBLADE, INC.
Dr. Lemma W. Senbet CONSULTANT, INTERNATIONAL FINANCIAL
INSTITUTIONS, THE WILLIAM E. MAYER
PROFESSOR OF FINANCE AND CHAIR,
FINANCE DEPARTMENT, UNIVERSITY OF
MARYLAND, COLLEGE PARK, MD
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.
33
<PAGE>
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Fortis Financial Group provides a wide selection of investment products
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We're part of Fortis, Inc., a financial services company that provides
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Fortis, Inc. is part of the international Fortis group, which operates in the
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Fortis: steadfast for YOU!
FORTIS FINANCIAL GROUP
Fund management offered through
Fortis Advisers, Inc. since 1949
Securities offered through Fortis
Investors, Inc., member NASD, SIPC
Insurance products issued by
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& Fortis Insurance Company
P.O. Box 64284, St. Paul, MN 55164-0284
Telephone (800) 800-2000
http://www.ffg.us.fortis.com
FORTIS FINANCIAL GROUP ----------------------
P.O. Box 64284 Bulk Rate
St. Paul, MN 55164-0284 U.S. Postage
PAID
Fortis Bond Funds Permit No. 3794
Minneapolis, MN
----------------------
The Fortis brandmark and Fortis-Registered Trademark- are
servicemarks of Fortis (B) and Fortis (NL).
98561 -C- Fortis, Inc. 9/00
