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Fortis
[LOGO]
FORTIS
BOND FUNDS
Annual Report
July 31, 1996
[LOGO]
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FORTIS BOND FUNDS ANNUAL REPORT
CONTENTS
LETTER TO SHAREHOLDERS 1
SCHEDULES OF INVESTMENTS 5
STATEMENTS OF ASSETS AND LIABILITIES 12
STATEMENTS OF OPERATIONS 13
STATEMENTS OF CHANGES IN NET ASSETS 14
NOTES TO FINANCIAL STATEMENTS 16
INDEPENDENT AUDITORS' REPORT 20
BOARD OF DIRECTORS AND OFFICERS 22
PRODUCTS AND SERVICES 23
- - TOLL-FREE PERSONAL ASSISTANCE
- Shareholder Services
- (800) 800-2638, Ext. 3012
- 7:30 a.m. to 5:30 p.m. CST, M-Th
- 7:30 a.m. to 5:00 p.m. CST, F
- - TOLL-FREE INFORMATION LINE
- For daily account balances,
transaction activity or net asset
value information
- (800) 800-2638, 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) 800-2638.
TO ORDER PROSPECTUSES OR SALES LITERATURE FOR ANY FORTIS PRODUCT, CALL (800)
800-2638, EXT. 4579.
HOW TO USE THIS REPORT
For a quick overview of the funds' performance during the fiscal period, refer
to the Highlights box below. The letter from the portfolio manager and president
provides a more detailed analysis of the fund and financial markets.
The charts alongside the letter are useful because they provide more information
about your investments. The top holdings chart shows the types of securities in
which the fund invests, and the pie chart shows a breakdown of the funds' assets
by sector.
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 investment advisory fees and other fund expenses, whereas your fund does.
Individuals cannot buy an unmanaged index fund without incurring some charges
and expenses. Sales charges pay for your investment representative's advice.
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
FORTIS U.S. GOVERNMENT SECURITIES FUND
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS E CLASS H
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE:
Beginning of year..................... $ 9.02 $ 9.02 $ 9.01 $ 9.02 $ 9.02
End of year........................... $ 8.87 $ 8.86 $ 8.85 $ 8.87 $ 8.86
DISTRIBUTIONS PER SHARE:
From net investment income............ $ 0.579 $ 0.519 $ 0.519 $ 0.603 $ 0.519
FORTIS HIGH YIELD PORTFOLIO
FOR THE NINE MONTHS ENDED JULY 31,
1996:
NET ASSET VALUE PER SHARE:
Beginning of period................... $ 7.61 $ 7.60 $ 7.59 -- $ 7.60
End of period......................... $ 7.56 $ 7.56 $ 7.55 -- $ 7.55
DISTRIBUTIONS PER SHARE:
From net investment income............ $ 0.570 $ 0.534 $ 0.534 -- $ 0.534
</TABLE>
<PAGE>
Photo
A conservative investment alternative
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.
CHANGING ECONOMIC CONDITIONS WARRANT CLOSE ATTENTION
The past year managing this fund has been interesting to say the least. As we
moved through the autumn months and into 1996, we slightly extended the
portfolio's fourth quarter duration* to approximately 110 percent of its
benchmark. (A benchmark is a measure of reference against which the fund is
compared and evaluated.) We pursued this strategy to maximize the portfolio's
total return in what we were anticipating to be a lower interest rate
environment. In addition, we reduced the portfolio's exposure in mortgage backed
securities (MBS), which tend to underperform as interest rates decline. This
strategy was rewarded during last year's bond rally.
The unexpectedly strong employment statistics announced in March, however,
changed the interest rate outlook almost instantly. Recognizing the implications
for the economy and the level of interest rates, we immediately realigned the
portfolio and shortened the duration. We assumed this more defensive posture for
the short term as we awaited further evidence of an economic recovery. We also
reversed our earlier strategy and increased the portfolio's exposure to higher
yielding MBS. We believed these securities would provide a better total return
if interest rates continued to rise, as well as provide better coupon income in
a stable interest rate environment.
*An important concept in managing fixed income securities, duration is the
measure of a bond fund's sensitivity to interest rate changes. Traditionally
measured in years, higher durations mean potentially greater fluctuations in
bond values, just as lower durations typically mean less volatility.
"BARBELLED" STRUCTURE HELPED IMPROVE RETURNS
While we were caught by surprise in early March, our decision to immediately
assume a more defensive posture was the correct one. Interest rates have moved
higher since then, as the signs of strong economic growth have gradually
emerged. From March through July, we maintained the lower portfolio duration,
reflecting our slightly negative bias about the direction of interest rates. We
also continued to overweight the exposure to MBS, which has helped significantly
as this sector outperformed U.S. Treasuries. Finally, we positioned the
portfolio in a more "barbelled" structure, with holdings concentrated at both
ends of the interest rate spectrum and fewer intermediate holdings. This
strategy improved performance as the market anticipated a rise in short-term
interest rates by the Federal Reserve, flattening the yield curve (short rates
rose more than long rates). More recently, as the pace of economic growth has
slowed, we moved the portfolio's duration to 100 percent of its benchmark, which
is currently 4.6 years.
Most of these changes contributed to an improved fund return over the last year.
For the 12-month period ended July 31, the U.S. Government Securities Fund
earned a 5.08 percent total rate of return for Class E shares, which placed it
in the top quartile among its Morningstar peer group.
1
<PAGE>
PORTFOLIO COMPOSITION BY INDUSTRY
AS OF 7/31/96
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FNMAs 35.7%
U.S. Treasury Securities 31.2%
GNMAs 14.2%
FHLMCs 7.3%
Other Direct Federal Obligations 6.2%
Cash Equivalents/Receivables 5.0%
Other Government Agencies 0.4%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/96
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. Federal Home Loan Bank (7.31%) 2004 6.2%
2. U.S. Treasury Note (8.25%) 1998 4.4%
3. U.S. Treasury Bond (8.125%) 2021 4.0%
4. U.S. Treasury Note (6.25%) 2001 3.7%
5. FNMA Note (8.50%) 2005 3.3%
6. GNMA (9.50%) 2019 3.3%
7. U.S. Treasury Note (6.50%) 2005 3.1%
8. U.S. Treasury Note (5.75%) 2003 3.0%
9. U.S. Treasury Bond (8.125%) 2019 2.9%
10. U.S. Treasury Note (7.125%) 1999 2.7%
</TABLE>
CLASS A, B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- -------------------------------------------------------------
<S> <C> <C>
Class A sharesDiamond 4.78% 8.67%
Class A sharesDiamond Diamond 0.06% 5.79%
Class B sharesDiamond 4.00% 7.86%
Class B sharesDiamond Diamond 0.40% 5.85%
Class C sharesDiamond 4.00% 7.79%
Class C sharesDiamond Diamond 3.00% 7.79%
Class H sharesDiamond 4.00% 7.86%
Class H sharesDiamond Diamond 0.40% 5.85%
</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 A and E has a maximum sales charge of 4.50%, Class B
and H have a CDSC of 4.00% (with a waiver of 10% of the amount invested) if
redeemed within two years of purchase, and Class C has a CDSC of 1.00% if
redeemed within one year of purchase
Diamond Without sales charge.
Diamond With sales charge. Assumes redemption on July 31, 1996.
Diamond
+ Since November 14, 1994 -- Date shares were first offered to the public
EXPECT INFLATION CONCERNS TO DISSIPATE
Over the next three months, we believe that higher interest rates will slow the
pace of economic activity. As this occurs, we anticipate having a more positive
interest rate outlook as concerns about future inflation dissipate. Assuming
this scenario, we will likely increase the portfolio's duration and decrease our
holdings in mortgage backed securities to provide investors with a better
prospect of capital appreciation as rates decline.
WE APPRECIATE YOUR SUPPORT AND CONFIDENCE
Today's economic and investment climates remain ever-changing, and we gladly
accept the challenge. If you have any questions or comments, please call us or
your investment professional.
<TABLE>
<S> <C>
[SIGNATURE] [SIGNATURE]
Dean C. Kopperud Howard G. Hudson
President Vice President
August 12, 1996
</TABLE>
VALUE OF $10,000 INVESTED AUGUST 1, 1986
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FORTIS U.S. GOVERNMENT SECURITIES FUND AVERAGE ANNUAL TOTAL RETURN
1 YEAR
<S> <C> <C>
Class E* .35%
Class E** +5.08%
Lehman Brothers
Intermediate Gov't Index*** U.S. Government Securities Fund Class E
8/1/86 10,000 9,271
87 10,448 10,070
88 11,176 10,844
89 12,590 12,169
90 13,478 13,093
91 14,853 14,491
92 16,901 16,261
93 18,284 17,686
94 18,475 17,207
95 20,038 18,534
96 20,926 19,475
<CAPTION>
5 YEAR 10 YEAR
<S> <C> <C>
Class E* +5.12% +6.89%
Class E** +6.09% +7.39%
8/1/86
87
88
89
90
91
92
93
94
95
96
</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 portfolios 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 three to
four years.
2
<PAGE>
Photo
Opportunity for the
informed investor
YOUR FORTIS 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.
A YEAR OF ECONOMIC CHANGE
We have witnessed two substantial shifts in the pace of U.S. economic activity
within the past 12 months. A year ago, the U.S. economy appeared to be
softening. Retail sales were declining and unsold inventories were building in a
number of industry sectors, such as steel and pulp paper. Bond prices, which
move higher in response to slackening demand for credit, staged a strong rally
in the last half of 1995.
In March 1996, an unexpectedly strong employment report, indicating robust job
growth, dramatically altered the perception of a flagging economy. More data
arrived in the following months that appeared to confirm a resurgence in
domestic economic growth. In the second quarter, the U.S. Gross Domestic
Product, which is a common indicator of economic activity, has significantly
increased over 1995's second quarter. The bond market, startled by the surge in
growth and concerned by its inflationary potential, turned bearish. This was
clearly illustrated when the price of the "benchmark" 30-year treasury bond
issued in February declined over 10 percent, and the yield rose from 6 percent
to more than 7 percent by the end of July. Most market participants anticipated
that the Federal Reserve would need to raise short-term borrowing rates by
August.
As we reached the end of the 9-month period, however, market sentiment had
shifted once again. Recent economic data suggest that the economy's rapid pace
may already be slowing. Most bond investors now believe the Federal Reserve will
delay raising interest rates until the fourth quarter of this year.
Although we began the year believing that the economy was destined to soften,
the employment data that stirred the market in March forced us to reevaluate our
portfolio strategy. From March to July, believing that the economy was still
capable of significant growth, we maintained a bearish to neutral stance on the
bond market. Although the most recent data have delivered mixed signals
about the speed at which the U.S. economy is expanding, our outlook is that the
current bond market is still vulnerable to the risks of continued vigorous,
potentially inflationary business activity.
AN EFFECTIVE WAY TO DIVERSIFY
High yield bonds generally deliver their best relative performance when the
economy is strengthening and stock prices are moving higher. The prospect of an
acceleration in economic growth that sent treasury securities' prices lower from
mid-February through June had only a subdued effect on the high yield bond
market. For the seven months of 1996, high yield bond returns outperformed all
other fixed income categories. This relative insensitivity to rising and falling
interest rates has historically served to make high yield bonds good
diversifiers for fixed income portfolios, in addition to providing the high
level of current income many investors seek.
OVERALL PORTFOLIO HOLDINGS IMPROVED
For the 12 months ended July 31, 1996, the portfolio underperformed the total
return of the Lehman High Yield Bond Index. However, most of the portfolio's
shortfall relative to the Index occurred last autumn when the market price of
several bonds in the portfolio fell due to the poor financial performance of the
companies that had issued the securities. We took steps to improve the overall
credit quality and liquidity of the portfolio, primarily by selling securities
whose issuers fell into the highest risk category. We also reduced the
portfolio's focus on the retail and consumer goods sectors and increased its
commitment to the telecommunications and cable television sectors, reflecting
our belief that the latter two industries will display the best long-term growth
characteristics among businesses currently issuing high yield debt.
3
<PAGE>
PORTFOLIO COMPOSITION BY INDUSTRY
AS OF 7/31/96
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Telecommunications 20.5%
Airlines 2.6%
Cash Equivalents/Receivables 5.5%
Steel and Iron 3.5%
Health Care Services 2.2%
Containers and Packaging 2.1%
Metals-Minning and Miscellaneous 3.3%
Chemicals 5.1%
Forest Products 2.4%
Broadcasting 5.4%
Retail Grocery 4.4%
Leisure Time-Amusements 7.0%
Other 22.9%
Cable Television 13.1%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/96
<TABLE>
<CAPTION>
Percent of
Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. United International Holdings, Inc. (14.0%) 1999 2.4%
2. Paging Network, Inc., (10.125%) 2007 1.8%
3. Kash N Karry Corp., (11.5%) 2003 1.8%
4. Panamsat L.P., (8.79%) 2003 1.7%
5. Groupe Videotron, (10.625%) 2005 1.6%
6. IXC Communications, Inc. (12.50%) 2005 1.6%
7. Showboat, Inc., (9.25%) 2008 1.5%
8. A+ Network, Inc., (11.875%) 2005 1.5%
9. Trump Atlantic City Associates, (11.25%) 2006 1.5%
10. NextLink Communications, L.L.C., (12.50%) 2006 1.5%
</TABLE>
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- -------------------------------------------------------------
<S> <C> <C>
Class B sharesDiamond 4.93% 8.15%
Class B sharesDiamond Diamond 1.34% 6.14%
Class C sharesDiamond 4.80% 8.08%
Class C sharesDiamond Diamond 3.81% 8.08%
Class H sharesDiamond 4.93% 8.15%
Class H sharesDiamond Diamond 1.34% 6.14%
</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% (with a waiver of 10% of the amount invested) if redeemed
within two years of purchase, and Class C has a CDSC of 1.00% if redeemed within
one year of purchase.
Diamond Without CDSC.
Diamond With CDSC. Assumes redemption on July 31, 1996.
Diamond
+ Since November 14, 1994 -- Date shares were first offered to the public
Looking ahead to the remainder of the calendar year, we believe a still buoyant
domestic economy will continue to help high yield bonds perform well. However,
consistent with our overall view on interest rates over the longer term, we also
believe that higher rates will eventually slow the U.S. economy and moderate
returns from the high yield bond sector.
If we receive clear indications of a slowdown, from either widely followed
economic data or an increase in the number of struggling high yield bond
issuers, we will attempt to reposition the portfolio in a timely fashion by
making further upgrades to the credit quality of the portfolio.
YOU ARE IMPORTANT TO US
Today's economic and investment climates remain ever-changing, and we gladly
accept the challenge. Thank you for your investment. If you have any questions,
please call us or your investment professional.
<TABLE>
<S> <C>
[SIGNATURE] [SIGNATURE]
Dean C. Kopperud Howard G. Hudson
President Vice President
August 12, 1996
</TABLE>
VALUE OF $10,000 INVESTED JANUARY 4, 1988
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO CLASS A SINCE
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR JANUARY 4, 1988@
<S> <C> <C> <C> <C>
With Sales Charge* +72% +10.68% +8.49%
Without Sales Charge** +5.47% +11.71% +9.07%
Lehman Brothers High Yield
High Yield Index*** Portfolio Class A
01/04/88 10,000 9,550
04/30/89 12,938 10,913
04/30/90 13,110 9,705
04/30/91 15,062 11,561
04/30/92 18,440 14,139
04/30/93 21,269 16,565
04/30/94 21,996 14,545
04/30/95 25,140 19,069
04/30/96 27,149 20,111
</TABLE>
Past performance is not indicative of future performance. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.
* SEC defined total returns, including reinvestment of all dividend and
capital gains distributions and the reduction due to the maximum sales
charge of 4.50%.
** These are the portfolios 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.
@ Date shares were first offered to the public.
4
<PAGE>
FORTIS BOND FUNDS
U.S. GOVERNMENT SECURITIES FUND
Schedule of Investments
July 31, 1996
U.S. GOVERNMENT SECURITIES-94.96%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Cost (a) Value (b)
------------ ------------- ---------------
<C> <S> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION-7.28%
MORTGAGE BACKED SECURITIES:
$11,996,007 8.00% 2001-2002.............................. $ 12,295,907 $ 12,194,685
4,810,046 9.00% 2001-2022 (e).......................... 5,089,809 5,013,221
9,702,802 9.50% 2016 (e)............................... 10,428,916 10,330,447
337,973 10.50% 2015.................................. 363,426 368,496
282,461 11.25% 2013-2014............................. 304,610 313,664
1,110,512 11.50% 2015-2019............................. 1,201,892 1,240,996
1,118,499 11.75% 2010-2015............................. 1,225,610 1,254,815
213,403 12.50% 2019.................................. 230,180 241,679
------------- ---------------
31,140,350 30,958,003
------------- ---------------
REMIC-PAC'S:
2,250,019 9.00% Trust#136-D PAC 2020................... 2,261,037 2,309,890
857,807 9.50% Trust#1001F 2003....................... 871,361 874,525
------------- ---------------
3,132,398 3,184,415
------------- ---------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION................................ 34,272,748 34,142,418
------------- ---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-35.72%
MORTGAGE BACKED SECURITIES:
8,595,823 6.00% 2011................................... 8,419,764 8,109,575
23,707,066 6.50% 2010-2011.............................. 23,309,422 22,869,780
28,602,438 7.00% 2003-2026 (f).......................... 28,092,206 27,747,007
6,984,717 7.184% 2006.................................. 6,879,252 6,912,688
9,935,207 7.25% 2005................................... 10,263,612 9,784,986
29,510,197 7.50% 2022-2026 (f).......................... 29,256,618 29,030,658
1,355,274 8.00% 2025................................... 1,297,252 1,362,473
1,740,200 8.50% 2022................................... 1,834,061 1,779,889
223,999 9.00% 2020................................... 221,829 233,517
1,820,345 9.75% 2020................................... 1,963,697 1,953,172
1,412,267 10.00% 2023.................................. 1,540,695 1,524,806
1,559,395 10.50% 2012-2018............................. 1,662,331 1,707,049
313,869 10.75% 2013.................................. 323,285 345,648
3,564,891 11.00% 2015-2020............................. 3,836,540 3,949,229
452,337 11.25% 2013.................................. 474,954 504,285
269,220 11.50% 2015.................................. 291,651 302,031
539,037 12.00% 2011-2016............................. 578,352 609,112
794,177 12.50% 2015.................................. 891,799 902,880
------------- ---------------
121,137,320 119,628,785
------------- ---------------
NOTES:
12,000,000 6.85% 2000 (e)............................... 12,000,000 11,925,624
9,000,000 7.40% 2004 (e)............................... 9,456,912 9,193,158
9,750,000 7.65% 2005 (e)............................... 9,886,868 10,078,780
15,000,000 8.50% 2005 (e)............................... 15,523,948 15,615,870
------------- ---------------
46,867,728 46,813,432
------------- ---------------
REMIC-PAC:
1,145,463 7.50% Trust # 1991-136 G 2019................ 1,187,881 1,146,825
------------- ---------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION................................ 169,192,929 167,589,042
------------- ---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-14.18%
MORTGAGE BACKED SECURITIES:
14,429,244 7.00% 2024-2026.............................. 14,162,923 13,788,946
8,920,634 7.50% 2022................................... 8,937,235 8,761,731
3,486,607 8.00% 2017-2022.............................. 3,572,391 3,506,219
15,682,933 9.00% 2016-2022.............................. 16,487,001 16,376,643
21,731,273 9.50% 2016-2019.............................. 22,703,797 23,088,861
837,206 11.00% 2015-2018............................. 902,170 927,991
</TABLE>
5
<PAGE>
FORTIS BOND FUNDS
U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
Schedule of Investments
July 31, 1996
U.S. GOVERNMENT SECURITIES-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
------------ ------------- ---------------
<C> <S> <C> <C>
$ 65,239 11.25% 2015.................................. $ 69,278 $ 72,742
------------- ---------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION................................ 66,834,795 66,523,133
------------- ---------------
OTHER DIRECT FEDERAL OBLIGATIONS-6.18%
FEDERAL HOME LOAN BANK:
28,650,000 7.31% 2004 (e)............................... 28,572,441 29,024,742
------------- ---------------
OTHER GOVERNMENT AGENCIES-0.41%
RESOLUTION FUNDING CORPORATION:
7,000,000 7.355% Zero Coupon Strip 2014 (c)............ 1,921,577 1,950,193
------------- ---------------
U.S. TREASURY SECURITIES-31.19%
BOND:
28,930,000 8.125% 2019-2021 (e)......................... 33,776,476 32,359,713
------------- ---------------
NOTES:
14,910,000 5.75% 2003 (e)............................... 14,263,883 14,131,877
12,500,000 5.875% 2004 (e).............................. 11,809,023 11,875,000
17,705,000 6.25% 2001 (e)............................... 17,412,201 17,472,622
14,945,000 6.50% 2005 (e)............................... 15,096,669 14,677,090
12,500,000 7.125% 1999 (e).............................. 12,717,348 12,734,375
11,500,000 7.50% 2001 (e)............................... 12,182,679 11,952,812
2,000,000 7.875% 2004 (e).............................. 2,067,742 2,140,622
20,000,000 8.25% 1998 (e)............................... 22,813,281 20,725,000
8,000,000 8.75% 1997 (e)............................... 8,813,796 8,252,488
------------- ---------------
117,176,622 113,961,886
------------- ---------------
TOTAL U.S. TREASURY SECURITIES............... 150,953,098 146,321,599
------------- ---------------
TOTAL U.S. GOVERNMENT SECURITIES............. $ 451,747,588 $ 445,551,127
------------- ---------------
------------- ---------------
</TABLE>
SHORT-TERM INVESTMENTS-6.40%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (b)
------------ ---------------
<C> <S> <C>
INVESTMENT COMPANY-3.83%
$17,974,333 Federated Treasury Obligation Fund, Current
rate -- 4.91%.............................. $ 17,974,333
---------------
U.S. GOVERNMENT AGENCY-2.57%
12,100,000 Federal Home Loan Mortgage Corp., 5.31%,
8-13-1996.................................. 12,077,148
---------------
TOTAL SHORT-TERM INVESTMENTS................. 30,051,481
---------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$481,799,069) (A).......................... $ 475,602,608
---------------
---------------
</TABLE>
(a) At July 31, 1996, the cost of securities for federal income tax
purposes was $482,566,762 and the aggregate gross unrealized
appreciation and depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 2,407,214
Unrealized depreciation........................... (9,371,368)
---------------------------------------------------------------
Net unrealized depreciation....................... $(6,964,154)
---------------------------------------------------------------
</TABLE>
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(c) The interest rates disclosed for these securities represents the
effective yields on the date of acquisition.
(d) Note: Percentage of investments as shown is the ratio of the total
market value to total net assets.
(e) Security is fully or partially on loan at July 31, 1996. See Note 1 of
accompanying Notes to Financial Statements.
(f) Includes securities purchased on a when-issued basis at July 31, 1996,
with a cost aggregating $12,749,816.
6
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO
Schedule of Investments
July 31, 1996
COMMON STOCK AND WARRANTS-0.42%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Market
Shares Cost (b) Value (c)
-------- --------- -------------
<C> <S> <C> <C>
APPAREL-0.00%
1,250 Hosiery Corp. of America, Class A (a)(f)..... $ 21,150 $ 6,250
--------- -------------
BROADCASTING-0.08%
1,000 Commodore Media, Inc. (Warrants) (a)(f)...... 26,500 130,000
--------- -------------
CABLE TELEVISION-0.04%
10,000 American Telecasting, Inc. (Warrants) (a).... 20,000 55,000
2,500 People's Choice T.V. Corp. (Warrants)
(a)(f)..................................... 28,300 7,500
--------- -------------
48,300 62,500
--------- -------------
CONSUMER GOODS-0.00%
1,800 Chattem, Inc. (Warrants) (a)(f).............. 18,424 4,050
17,400 Drypers Corp. (Warrants) (a)(f).............. 52,200 174
--------- -------------
70,624 4,224
--------- -------------
LEISURE TIME-AMUSEMENTS-0.00%
1,000 Boomtown, Inc. (Warrants) (a)................ 6,340 150
26,670 Capital Gaming International, Inc. (a)....... 133,350 3,200
22,750 Capital Gaming International, Inc. (Warrants)
(a)........................................ 35,440 1,138
6,000 Casino Magic Finance Corp. (Warrants) (a).... 9,000 60
6,000 Hemmeter Enterprises, Inc. (Warrants) (a).... 24,000 60
--------- -------------
208,130 4,608
--------- -------------
MACHINERY-0.03%
1,250 MVE, Inc. (Warrants) (a)..................... 8,594 43,750
7,500 Terex Corp. (Rights) (a)..................... 18,750 750
--------- -------------
27,344 44,500
--------- -------------
RETAIL-GROCERY-0.03%
8,197 Grand Union Co. (a).......................... 158,268 50,207
--------- -------------
RETAIL-MISCELLANEOUS-0.10%
1,000 Petro PSC Properties, L.P. (Warrants) (a).... 36,570 36,000
8,550 Thrifty Payless Holdings, Inc. Class B (a)... 160,500 119,700
--------- -------------
197,070 155,700
--------- -------------
TELECOMMUNICATIONS-0.14%
4,500 American Communications Services, Inc.
(Warrants) (a)(f).......................... 205,650 236,250
--------- -------------
TOTAL COMMON STOCK AND WARRANTS.............. $963,036 $ 694,239
--------- -------------
--------- -------------
</TABLE>
CORPORATE BONDS-NON-INVESTMENT GRADE-94.07%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
AEROSPACE AND EQUIPMENT-0.99%
$1,500,000 K & F Industries, Inc., 11.875% Sr Secured
Note 12-1-2003............................. B+ $ 1,454,884 $ 1,612,500
------------- -------------
AIRLINES-2.64%
1,500,000 U.S. Air, Inc., 10.00% Sr Note 7-1-2003...... CCC+ 1,406,299 1,398,750
2,000,000 U.S. Air, Inc., 10.375% Pass Thru Certificate
3-1-2013................................... B+ 1,866,793 1,950,000
1,000,000 U.S. Air, Inc., 9.82% Pass Thru Certificate
1-1-2013................................... B+ 953,892 975,000
------------- -------------
4,226,984 4,323,750
------------- -------------
BEVERAGE-1.47%
2,500,000 Strohs, 11.10% Sr Sub Note 7-1-2006 (g)...... NR 2,400,000 2,400,000
------------- -------------
BROADCASTING-5.33%
2,000,000 Argyle Television, Inc., 9.75% Sr Sub Note
11-1-2005.................................. B- 1,921,578 1,920,000
1,750,000 Commodore Media, Inc., 13.14% Sr Sub Note
5-1-2003 (7.50% coupon through 5-1-1998,
thereafter 13.25%) (e)..................... B3* 1,638,499 1,802,500
1,250,000 EZ Communications, Inc., 9.75% Sr Sub Note
12-1-2005.................................. B- 1,244,395 1,229,687
</TABLE>
7
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1996
CORPORATE BONDS-NON-INVESTMENT GRADE-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
----------- ------------- ------------- -------------
<C> <S> <C> <C> <C>
$2,000,000 SFX Broadcasting, 10.75% Sr Sub Note
5-15-2006 (f).............................. B- $ 2,000,000 $ 2,010,000
1,750,000 Spanish Broadcasting Systems, Inc., 11.52% Sr
Note 6-15-2002 (7.50% coupon through
6-15-1997, 12.50% thereafter) (e).......... B 1,753,820 1,771,875
------------- -------------
8,558,292 8,734,062
------------- -------------
CABLE TELEVISION-13.09%
1,500,000 Adelphia Communications Corp., 12.50% Sr Note
5-15-2002.................................. B 1,555,001 1,541,250
2,500,000 Bell Cablemedia plc, 12.07% Sr Disc Note
9-15-2005 (Zero coupon until 9-15-2000,
thereafter 11.875%) (e).................... BB- 1,558,062 1,550,000
2,500,000 Cablevision Systems Corp., 9.875% Sr Sub Note
5-15-2006.................................. B 2,420,995 2,393,750
1,750,000 Century Communications, Inc., 9.50% Sr Note
3-1-2005................................... BB- 1,822,060 1,715,000
2,003,118 Falcon Holding Group, L.P., 11.00% Sr Sub
Note Ser B 9-15-2003 (Interest is
Payable-in-Kind)........................... NR 1,964,262 1,807,322
2,500,000 Groupe Videotron, 10.625% Sr Note
2-15-2005.................................. BB+ 2,630,275 2,637,500
2,500,000 Marcus Cable Operating Co., 11.27% Sr Disc
Note 8-1-2004 (Zero coupon until 8-1-1999,
thereafter 13.50%) (e)..................... B 1,874,566 1,784,375
2,500,000 People's Choice T.V. Corp., 13.33% Sr Disc
Note 6-1-2004 (Zero coupon until 6-1-2000,
thereafter 13.125%) (e).................... CCC+ 1,495,020 1,406,250
2,750,000 Telewest plc, 11.63% Sr Disc Deb 10-1-2007
(Zero coupon until 10-1-2000, thereafter
11.00%) (e)................................ BB 1,670,032 1,601,875
6,000,000 United International Holdings, Inc., 14.00%
Sr Sec Zero Coupon Note Ser B 11-15-1999
(e)........................................ B- 3,971,178 3,960,000
1,625,000 Videotron Holdings plc, 11.55% Sr Disc Note
8-15-2005 (Zero coupon until 8-15-2000,
thereafter 11.00%) (e)..................... B+ 1,010,172 1,056,250
------------- -------------
21,971,623 21,453,572
------------- -------------
CHEMICALS-5.05%
2,000,000 Agricultural Minerals & Chemicals, 10.75% Sr
Note 9-30-2003............................. B+ 2,109,220 2,085,000
2,000,000 Arcadian Partners L.P., 10.75% Sr Note Ser B
5-1-2005................................... BB- 2,086,610 2,155,000
2,000,000 Indspec Chemical Corp., 11.50% Sr Sub Disc
Note Ser B 12-1-2003 (Zero coupon until
12-1-1998, thereafter 11.50%) (e).......... BB- 1,531,371 1,710,000
1,000,000 LaRoche Industries, Inc., 13.00% Sr Sub Note
8-15-2004.................................. B 1,046,250 1,062,500
1,250,000 NL Industries, Inc., 11.75% Sr Secured Note
10-15-2003................................. B 1,288,574 1,271,875
------------- -------------
8,062,025 8,284,375
------------- -------------
CONSUMER GOODS-0.66%
750,000 Chattem, Inc., 12.75% Sr Sub Note Ser B
6-15-2004.................................. B- 734,374 772,500
550,000 International Semitech, Inc., 12.83% Sr
Secured Note 8-15-2003 (Zero coupon until
8-15-2000, thereafter 11.50%) (e).......... B+ 322,597 310,750
------------- -------------
1,056,971 1,083,250
------------- -------------
CONTAINERS AND PACKAGING-2.11%
1,750,000 Silgan Corp., 11.75% Sr Sub Note 6-15-2002... B- 1,846,250 1,789,375
1,666,000 Silgan Holdings Corp., 13.25% Sr Disc Deb
12-15-2002................................. B- 1,681,163 1,674,330
------------- -------------
3,527,413 3,463,705
------------- -------------
COSMETICS AND SUNDRIES-1.08%
1,750,000 Revlon Consumer Products, 10.50% Sr Sub Note
2-15-2003.................................. B- 1,767,346 1,763,125
------------- -------------
ENERGY-1.73%
750,000 Benton Oil & Gas Co., 11.625% Sr Note
5-1-2003 (f)............................... B 750,000 787,500
2,000,000 Mesa Operating Co., 10.625% Sr Note
7-1-2006................................... B 2,000,000 2,050,000
------------- -------------
2,750,000 2,837,500
------------- -------------
FINANCE COMPANIES-1.12%
1,750,000 Homeside, Inc., 11.25% Sr Secured Second
Priority Notes 5-15-2003 (f)............... B+ 1,792,230 1,828,750
------------- -------------
FOOD-MISCELLANEOUS-0.79%
1,250,000 Envirodyne Industries, Inc., 12.00% Sr
Secured First Priority Notes 6-15-2000..... B+ 1,240,625 1,300,000
------------- -------------
FOREST PRODUCTS-2.40%
2,000,000 Repap New Brunswick, Inc., 10.625% Sr Secured
Second Priority Note 4-15-2005............. B+ 1,898,574 1,910,000
1,000,000 Stone Container Corp., 10.75% First Mtg Note
10-1-2002.................................. B+ 1,017,500 1,017,500
1,000,000 Stone Container Corp., 11.875% Sr Note
8-1-2016 (f)............................... B+ 1,000,000 1,013,750
------------- -------------
3,916,074 3,941,250
------------- -------------
</TABLE>
8
<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>
FURNITURE-1.07%
$1,750,000 Lifestyle, 10.875% Sr Sub Note 8-1-2006
(f)........................................ B $ 1,750,000 $ 1,750,000
------------- -------------
HEALTH CARE SERVICES-2.22%
2,000,000 Abbey Healthcare Group, Inc., 9.50% Sr Sub
Note 11-1-2002............................. BB+ 2,096,611 2,047,500
1,500,000 Tenet Healthcare Corp., 10.125% Sr Sub Note
3-1-2005................................... B+ 1,665,269 1,599,375
------------- -------------
3,761,880 3,646,875
------------- -------------
HOTEL AND MOTEL-1.47%
2,500,000 Host Marriott Properties, Inc., 9.50% Sr Note
5-15-2005.................................. BB- 2,488,035 2,406,250
------------- -------------
HOUSING-1.79%
1,500,000 MDC Holdings, Inc., 11.125% Note
12-15-2003................................. B 1,416,424 1,447,500
1,500,000 NVR Inc., 11.00% Sr Note 4-15-2003........... B 1,502,628 1,492,500
------------- -------------
2,919,052 2,940,000
------------- -------------
INDUSTRIAL-1.28%
2,000,000 IMC Fertilizer, Inc., 9.45% Sr Deb
12-15-2011................................. BB- 2,053,849 2,100,000
------------- -------------
LEISURE TIME-AMUSEMENTS-6.98%
850,000 Boomtown, Inc., 11.50% First Mtg Bond
11-1-2003.................................. B 839,690 828,750
1,250,000 Capital Gaming International, Inc., 11.50%
Secured Note 2-1-2001 (a).................. Caa* 868,640 575,000
2,000,000 Players International, Inc., 10.875% Sr Note
4-15-2005.................................. BB 2,028,104 2,020,000
1,000,000 Showboat, Inc., 13.00% Sr Sub Note
8-1-2009................................... B 1,082,500 1,125,000
2,500,000 Showboat, Inc., 9.25% First Mtg Bond
5-1-2008................................... BB- 2,561,770 2,475,000
2,500,000 Trump Atlantic City Associates, 11.25% First
Mtg Bond 5-1-2006.......................... BB- 2,504,972 2,437,500
2,000,000 Trump Castle Funding, Inc., 11.75% First Mtg
Bond 11-15-2003............................ Caa* 1,329,419 1,990,000
------------- -------------
11,215,095 11,451,250
------------- -------------
MACHINERY-0.79%
1,250,000 MVE, Inc., 12.50% Sr Secured Note
2-15-2002.................................. B+ 1,242,656 1,300,000
------------- -------------
METALS-MINING AND MISCELLANEOUS-3.30%
1,550,000 Haynes International, Inc., 11.25% Sr Secured
Note Ser A 6-15-1998....................... CCC+ 1,511,250 1,612,000
1,750,000 Haynes International, Inc., 13.50% Sr Sub Deb
8-15-1999.................................. Ca* 1,115,000 1,767,500
2,000,000 Renco Metals, Inc., 11.50% Sr Note
7-1-2003................................... B 2,000,000 2,035,000
------------- -------------
4,626,250 5,414,500
------------- -------------
PUBLISHING-1.19%
2,500,000 Marvel (Parent) Holdings, Inc., 12.69% Sr
Secured Zero Coupon Disc Note 4-15-1998
(e)........................................ B- 2,032,978 1,956,250
------------- -------------
RETAIL-DEPARTMENT STORES-1.31%
2,175,000 Specialty Retailers, Inc., 10.00% Sr Note
8-15-2000.................................. B+ 2,169,932 2,153,250
------------- -------------
RETAIL-GROCERY-4.35%
1,224,000 Cumberland Farms, Inc., 10.50% Sr Note
10-1-2003.................................. NR 1,170,408 1,162,800
2,458,682 Farm Fresh Holdings Corp.,14.25% Sr Note
10-1-2002 (Interest is Payable-in-Kind thru
10-1-1997) (f)............................. CCC+ 903,554 717,902
1,000,000 Jitney-Jungle Stores, Inc., 12.00% Sr Note
3-1-2006................................... B 1,000,000 1,032,500
2,945,400 Kash N Karry Corp., 11.50% Sr Note
2-1-2003................................... B- 2,799,149 2,945,400
350,000 Pay 'N' Pak Stores, Inc., 13.50% Sr Sub Deb
6-1-1998 (a)............................... NR 350,000 1,750
1,250,000 Smith's Food & Drug Centers, Inc., 11.25% Sr
Sub Note 5-15-2007......................... B- 1,250,000 1,279,688
------------- -------------
7,473,111 7,140,040
------------- -------------
RETAIL-LEISURE TIME-0.46%
750,000 Guitar Centers, Inc., 11.00% Sr Note 7-1-2006
(f)........................................ B 750,000 753,750
------------- -------------
RETAIL-MISCELLANEOUS-0.91%
1,000,000 Color Tile, Inc., 10.75% Sr Note 12-15-2001
(a)........................................ D 590,000 67,500
1,300,000 Thrifty Payless, Inc., 12.25% Sr Sub Note
4-15-2004.................................. B- 1,222,837 1,430,000
------------- -------------
1,812,837 1,497,500
------------- -------------
</TABLE>
9
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1996
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>
SHIP BUILDING, SHIPPING-1.07%
$1,750,000 OMI Corp., 10.25% Sr Note 11-1-2003.......... B- $ 1,719,655 $ 1,750,000
------------- -------------
STEEL AND IRON-3.46%
2,000,000 AK Steel Corp., 10.75% Sr Note 4-1-2004...... BB 2,174,677 2,162,500
2,000,000 Bar Technologies, Inc., 13.50% Sr Sec Note
4-1-2001(and warrants) (f)................. NR 1,966,543 2,040,000
1,500,000 NS Group, Inc., 13.50% Sr Secured Note
7-15-2003.................................. NR 1,448,197 1,470,000
------------- -------------
5,589,417 5,672,500
------------- -------------
TECHNOLOGY-1.25%
2,000,000 Computervision Corp., 11.375% Sr Sub Note
8-15-1999.................................. B- 1,724,688 2,055,000
------------- -------------
TELECOMMUNICATIONS-20.37%
2,500,000 A+ Network, Inc., 11.875% Sr Sub Note
11-1-2005.................................. CCC+ 2,515,504 2,462,500
3,750,000 American Communications Services, Inc.,
13.00% Sr Disc Note 11-1-2005 (Zero coupon
until 11-1-2000, thereafter 13.00%) (e).... NR 2,036,914 2,025,000
870,000 Arch Communications Group, Inc., 10.61% Sr
Disc Note 3-15-2008 (Zero coupon until
3-15-2001, thereafter 10.875%) (e)......... B- 543,387 441,525
2,500,000 Call-Net Enterprises, Inc., 10.74% Sr Disc
Note 12-1-2004 (Zero coupon until
12-1-1999, thereafter 13.25%) (e).......... B+ 1,875,621 1,856,250
2,500,000 Cellular Communications, Inc., 11.96% Zero
Coupon Note 8-15-2000 (e).................. CCC+ 1,569,902 1,525,000
2,500,000 Echostar Communications, Inc., 11.30% Sr Disc
Note 6-1-2004 (Zero coupon until 6-1-1999,
thereafter 12.875%) (e).................... B- 1,917,025 1,825,000
2,000,000 Fonorola, Inc., 12.50% Sr Secured Note
8-15-2002.................................. B+ 2,055,722 2,170,000
440,000 GST Telecommunications, Inc., 13.875% Sr
Conv. Disc Note 12-15-2005 (Zero coupon
until 12-15-2000, thereafter 13.875%)
(e)(f)..................................... NR 332,210 462,000
3,520,000 GST Telecommunications, Inc., 13.875% Sr Disc
Note 12-15-2005 (Zero coupon until
12-15-2000, thereafter 13.875%) (e)........ NR 1,893,521 1,980,000
3,000,000 Hyperion Communications, Inc., 13.00% Sr Disc
Note 4-15-2003 (Zero coupon until
4-15-2001, thereafter 13.00%) (and
warrants) (e)(f)........................... NR 1,658,675 1,642,500
2,500,000 IXC Communications, Inc., 12.50% Sr Note
10-1-2005 (f).............................. B3* 2,654,481 2,550,000
3,500,000 MFS Communications, Inc., 8.96% Sr Disc Note
1-15-2006 (Zero coupon until 1-15-2001,
thereafter 8.875%) (e)..................... B 2,356,202 2,065,000
4,500,000 Microcell Telecommunications, Inc., 14.00%
Disc Note 6-1-2006 (Zero coupon until
12-1-2001, thereafter 14.00%) (and
warrants) (e)(f)........................... NR 2,186,941 2,115,000
2,500,000 NextLink Communications, L.L.C., 12.50% Sr
Note 4-15-2006 (f)......................... NR 2,500,000 2,434,375
3,000,000 Paging Network, Inc., 10.125% Sr Sub Note
8-1-2007................................... B 3,103,449 2,985,000
3,250,000 Panamsat L.P., 8.79% Sr Sub Disc Note
8-1-2003 (Zero coupon until 8-1-1998)
(e)........................................ B 2,912,576 2,835,625
3,000,000 Teleport Communications, 11.125% Sr Disc Deb
7-1-2007 (Zero coupon until 7-1-2001,
thereafter 11.125%) (e).................... B 1,764,248 1,635,000
400,000 Western Wireless Corp., 10.50% Sr Sub Note
6-1-2006................................... B- 400,000 394,000
------------- -------------
34,276,378 33,403,775
------------- -------------
TOBACCO-0.98%
2,000,000 Liggett Group, Inc., 11.50% Secured Note Ser
B 2-1-1999................................. NR 1,492,110 1,600,000
------------- -------------
WASTE DISPOSAL-1.36%
2,125,000 Norcal Waste Systems, Inc., 13.00% Increasing
Rate Sr Note 11-15-2005 (f)................ BB- 2,083,021 2,231,250
------------- -------------
TOTAL CORPORATE BONDS - NON-INVESTMENT
GRADE...................................... 153,905,411 154,248,029
------------- -------------
TOTAL LONG-TERM INVESTMENTS.................. $ 154,868,447 $ 154,942,268
------------- -------------
------------- -------------
</TABLE>
10
<PAGE>
SHORT-TERM INVESTMENTS-6.20%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (c)
----------- -------------
<C> <S> <C>
BANKS-1.94%
$3,184,000 First Trust Money Market Variable Rate Time
Deposit, Current rate -- 5.21%............. $ 3,184,000
-------------
DIVERSIFIED FINANCE-2.50%
4,092,000 Associates Corp. Master Variable Rate Note,
Current rate -- 5.41%...................... 4,092,000
-------------
U.S. GOVERNMENT AGENCY-1.76%
2,900,000 Federal Home Loan Mortgage Corp., 5.00%,
8-19-1996.................................. 2,891,995
-------------
TOTAL SHORT-TERM INVESTMENTS................. 10,167,995
-------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$165,036,442) (B).......................... $ 165,110,263
-------------
-------------
</TABLE>
* Moody's Rating
(a) Presently non income producing. For corporate debt securities, items
identified are in default as to payment of interest and/or principal.
(b) At July 31, 1996, the cost of securities for federal income tax
purposes was $165,224,674 and the aggregate gross unrealized
appreciation and depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 4,364,408
Unrealized depreciation........................... (4,478,819)
---------------------------------------------------------------
Net unrealized depreciation....................... $ (114,411)
---------------------------------------------------------------
</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 9.27% of net assets as of July 31, 1996.
(e) The interest rate disclosed for these securities represents the
effective yields on the date of acquisition.
(f) Securities sold within 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>
Date Acquired Shares/Par Security Cost Basis
- ------------------ ----------- ------------------------------------------------------------------------------ ----------
<S> <C> <C> <C>
November 3, 1992 11,600 Drypers Corp. (Warrants) $ 34,800
April 29, 1993 5,800 Drypers Corp. (Warrants) 17,400
June 10, 1994 1,300 Chattem, Inc. (Warrants) 16,549
October 7, 1994 1,250 Hosiery Corp. of America, Class A 21,150
January 24, 1995 1,000,000 Farm Fresh Holdings Corp. due 2002 350,082
February 3, 1995 1,000,000 Farm Fresh Holdings Corp. due 2002 378,774
March 14, 1995 142,500 Farm Fresh Holdings Corp. due 2002 53,016
April 13, 1995 1,000 Commodore Media, Inc. (Warrants) 26,500
April 25, 1995 500 Chattem, Inc. (Warrants) 1,875
September 13, 1995 152,653 Farm Fresh Holdings Corp. due 2002 56,630
November 10, 1995 4,500 American Communications Services, Inc. (Warrants) 205,650
November 15, 1995 2,125,000 Norcal Waste Systems, Inc. due 2005 2,083,021
December 14, 1995 440,000 GST Telecommunications, Inc. due 2005 332,210
March 12, 1996 163,529 Farm Fresh Holdings Corp. due 2002 65,052
March 28, 1996 2,000,000 Bar Technologies, Inc. due 2001 1,966,543
April 11, 1996 3,000,000 Hyperion Communications, Inc. due 2003 1,658,675
April 18, 1996 2,500,000 NextLink Communications due 2006 2,500,000
April 29, 1996 750,000 Benton Oil & Gas due 2003 750,000
May 8, 1996 750,000 Homeside, Inc. due 2003 750,000
May 20, 1996 2,500 People's Choice T.V. Corp. (Warrants) 28,300
May 21, 1996 2,500,000 IXC Communications, Inc. due 2005 2,654,481
May 23, 1996 2,000,000 SFX Broadcasting due 2006 2,000,000
June 13, 1996 4,500,000 Microcell Telecommunications, Inc. due 2006 2,186,941
June 26, 1996 750,000 Guitar Centers, Inc. due 2006 750,000
July 3, 1996 1,000,000 Homeside, Inc. due 2003 1,042,230
July 17, 1996 1,000,000 Stone Container Corp. due 2016 1,000,000
July 31, 1996 1,750,000 Lifestyle due 2006 1,750,000
</TABLE>
The value of these securities at July 31, 1996 is $23,058,501 which
represent 14.06% of net assets.
(g) The cost of securities purchased on a when-issued basis at July 31,
1996 is $2,400,000.
11
<PAGE>
FORTIS BOND FUNDS
Statements of Assets and Liabilities
July 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
US GOVERNMENT
SECURITIES HIGH YIELD
FUND PORTFOLIO
--------------- ------------
<S> <C> <C>
ASSETS:
Investments in securities, as detailed in the accompanying
schedules, at market (cost $481,799,069; and
$165,036,442; respectively)(Note 1)..................... $ 475,602,608 $165,110,263
Cash on deposit with custodian............................ -- 26,291
Collateral for securities lending transactions (Note 1)... 190,856,194 --
Receivables:
Investment securities sold.............................. 7,572,198 1,013,750
Interest and dividends.................................. 5,554,993 3,599,933
Subscriptions of capital stock.......................... 9,966 111,651
Deferred registration costs (Note 1)...................... 55,332 28,953
Prepaid expenses.......................................... 10,000 9,261
--------------- ------------
TOTAL ASSETS................................................ 679,661,291 169,900,102
--------------- ------------
LIABILITIES:
Cash portion of dividends payable......................... 747,637 570,581
Payable upon return of securities loaned (Note 1)......... 190,856,194 --
Payable for investment securities purchased............... 18,260,272 5,167,500
Redemptions of capital stock.............................. 270,236 48,720
Payable for investment advisory and management fees (Note
2)...................................................... 283,833 101,290
Payable for distribution fees (Note 2).................... 1,650 5,045
Accounts payable and accrued expenses..................... 36,577 27,541
--------------- ------------
TOTAL LIABILITIES........................................... 210,456,399 5,920,677
--------------- ------------
NET ASSETS:
Net proceeds of capital stock, par value $.01 per
share-authorized 10,000,000,000 and 10,000,000,000
shares, respectively.................................... 546,164,114 179,517,723
Unrealized appreciation (depreciation) of investments..... (6,196,461) 73,821
Undistributed (excess of distributions over) net
investment income....................................... 188,322 456,376
Accumulated net realized loss from sale of investments.... (70,951,083) (16,068,495)
--------------- ------------
TOTAL NET ASSETS............................................ $ 469,204,892 $163,979,425
--------------- ------------
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE:
Class A shares (based on net assets of $67,706,530; and
$109,401,010; respectively and 7,629,609; and 14,471,302
shares outstanding; respectively)......................... $8.87 $7.56
--------------- ------------
Class B shares (based on net assets of $2,314,488; and
$12,067,326; respectively and 261,330; and 1,596,901
shares outstanding; respectively)......................... $8.86 $7.56
--------------- ------------
Class C shares (based on net assets of $1,057,159; and
$3,378,482; respectively and 119,461; and 447,741 shares
outstanding; respectively)................................ $8.85 $7.55
--------------- ------------
Class E shares (based on net assets of $388,006,241; and $0;
respectively and 43,720,683; and 0 shares outstanding;
respectively)............................................. $8.87 $ --
--------------- ------------
Class H shares (based on net assets of $10,120,474; and
$39,132,607; respectively and 1,142,208; and 5,180,668
shares outstanding; respectively)......................... $8.86 $7.55
--------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FORTIS BOND FUNDS
Statements of Operations
For the Year Ended July 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
US GOVERNMENT
SECURITIES HIGH YIELD
FUND PORTFOLIO*
--------------- ------------
<S> <C> <C>
Income:
Interest income......................................... $ 35,505,727 $13,062,248
Fee income (Note 1)..................................... 186,449 23,168
--------------- ------------
Total income.............................................. 35,692,176 13,085,416
--------------- ------------
Expenses:
Investment advisory and management fees (Note 2)........ 3,431,396 866,285
Distribution fees (Class A)(Note 2)..................... 85,795 293,612
Distribution fees (Class B)(Note 2)..................... 14,660 79,029
Distribution fees (Class C)(Note 2)..................... 6,620 21,749
Distribution fees (Class H)(Note 2)..................... 79,716 244,369
Registration fees....................................... 89,500 41,981
Shareholders' notices and reports....................... 107,400 34,803
Legal and auditing fees (Note 2)........................ 91,700 26,539
Custodian fees.......................................... 79,000 28,650
Directors' fees and expenses............................ 49,700 7,775
Other................................................... 62,698 11,122
--------------- ------------
Total expenses............................................ 4,098,185 1,655,914
--------------- ------------
NET INVESTMENT INCOME....................................... 31,593,991 11,429,502
--------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1):
Net realized gain (loss) from security transactions....... 2,510,562 (739,362 )
Net change in unrealized appreciation(depreciation) of
investments............................................. (11,044,725) (353,588 )
--------------- ------------
NET LOSS ON INVESTMENTS..................................... (8,534,163) (1,092,950 )
--------------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 23,059,828 $10,336,552
--------------- ------------
* For the Nine-Month Period Ended July 31, 1996.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<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, 1996 JULY 31, 1995
----------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income................................. $ 31,593,991 $ 37,790,314
Net realized gain (loss) from security
transacations....................................... 2,510,562 (33,680,898)
Net change in unrealized appreciation (depreciation)
of investments in securities........................ (11,044,725) 31,855,826
----------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... 23,059,828 35,965,242
----------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A............................................. (2,116,221) (123,171)
Class B............................................. (82,612) (11,070)
Class C............................................. (37,715) (6,511)
Class E............................................. (28,702,692) (37,768,650)
Class H............................................. (448,743) (101,319)
Excess distributions of net realized gains
Class A............................................. (32,271) --
Class B............................................. (1,260) --
Class C............................................. (576) --
Class E............................................. (437,700) (56,382)
Class H............................................. (6,841) --
----------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS..................... (31,866,631) (38,067,103)
----------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (1,964,078 and 656,757 shares).............. 17,801,708 5,829,103
Class B (210,461 and 55,065 shares)................. 1,912,091 487,212
Class C (106,062 and 36,045 shares)................. 955,478 318,057
Class E (2,660,444 and 3,223,444 shares)............ 24,188,981 28,470,321
Class H (833,214 and 588,648 shares)................ 7,542,489 5,220,767
Proceeds from shares issued as a result of reinvested
dividends
Class A (167,122 and 10,355 shares)................. 1,497,610 92,733
Class B (7,469 and 701 shares)...................... 67,217 6,291
Class C (3,078 and 507 shares)...................... 27,707 4,548
Class E (2,168,387 and 2,842,973 shares)............ 19,681,299 25,132,842
Class H (35,275 and 8,959 shares)................... 319,043 80,178
Less cost of repurchase of shares
Class A (1,248,050 and 123,015 shares).............. (11,152,321) (1,099,885)
Class B (30,332 and 2,236 shares)................... (271,568) (20,025)
Class C (31,951 and 358 shares)..................... (289,065) (3,216)
Class E (13,258,065 and 15,398,667 shares).......... (120,107,341) (135,996,432)
Class H (314,193 and 62,931 shares)................. (2,833,320) (558,515)
Issuance of shares in connection with fund merger
(Note 4)
Class A (6,202,362 shares).......................... 56,802,533 --
Class B (20,202 shares)............................. 186,146 --
Class C (6,078 shares).............................. 55,394 --
Class H (53,236 shares)............................. 490,824 --
----------------- --------------
NET DECREASE IN NET ASSETS FROM SHARE TRANSACTIONS...... (3,125,095) (72,036,021)
----------------- --------------
TOTAL DECREASE IN NET ASSETS............................ (11,931,898) (74,137,882)
NET ASSETS:
Beginning of year..................................... 481,136,790 555,274,672
----------------- --------------
End of year (includes undistributed (excess of
distribution over) net investment income of $188,322
and $(17,686), respectively)........................ $ 469,204,892 $ 481,136,790
----------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
FORTIS BOND FUNDS
Statements of Changes in Net Assets
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE FOR THE
NINE-MONTH YEAR ENDED
PERIOD ENDED OCTOBER 31,
JULY 31, 1996 1995
----------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income................................. $ 11,429,502 $ 12,733,808
Net realized loss from security transactions.......... (739,362) (13,580,003)
Net change in unrealized appreciation (depreciation)
of investments in securities........................ (353,588) 9,314,020
----------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... 10,336,552 8,467,825
----------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A............................................. (7,994,179) (11,554,220)
Class B............................................. (704,230) (234,800)
Class C............................................. (193,776) (90,925)
Class H............................................. (2,179,529) (955,294)
Excess distributions of net realized gains
Class A............................................. (329,567) (528,575)
Class B............................................. (29,033) (10,742)
Class C............................................. (7,989) (4,160)
Class H............................................. (89,853) (43,702)
----------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS..................... (11,528,156) (13,422,418)
----------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (2,575,765 and 4,938,047 shares)............ 19,742,519 38,455,673
Class B (758,895 and 1,018,845 shares).............. 5,820,848 7,922,888
Class C (245,695 and 289,026 shares)................ 1,880,964 2,255,501
Class H (2,624,489 and 3,315,347 shares)............ 20,121,276 25,836,255
Proceeds from shares issued as a result of reinvested
dividends
Class A (680,383 and 991,834 shares)................ 5,216,993 7,704,696
Class B (45,688 and 15,217 shares).................. 350,128 117,480
Class C (15,147 and 8,061 shares)................... 115,856 62,290
Class H (144,327 and 64,902 shares)................. 1,105,206 502,965
Less cost of repurchase of shares
Class A (3,674,251 and 3,522,187 shares)............ (28,172,079) (27,386,262)
Class B (197,976 and 43,768 shares)................. (1,514,841) (337,347)
Class C (100,249 and 9,939 shares).................. (764,968) (77,278)
Class H (727,568 and 240,829 shares)................ (5,569,818) (1,874,246)
----------------- --------------
NET INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS...... 18,332,084 53,182,615
----------------- --------------
TOTAL INCREASE IN NET ASSETS............................ 17,140,480 48,228,022
NET ASSETS:
Beginning of period................................... 146,838,945 98,610,923
----------------- --------------
End of year (includes undistributed net investment
income of $456,376 and $98,588, respectively)....... $ 163,979,425 $ 146,838,945
----------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: U.S. Government Securities Fund
("U.S. Government"), is a diversified series of Fortis Income Portfolios,
Inc.("Fortis Income"), an open-end management investment company. The
investment objective of the fund is to maximize total return (from current
income and capital appreciation), while providing shareholders with a high
level of current income consistent with prudent investment risk. Fortis High
Yield Portfolio ("High Yield") is an investment portfolio in Fortis Advantage
Portfolios, Inc. ("Fortis Advantage") which is a diversified, open-end
management investment company. The investment objective of High Yield is
maximum current income by investing primarily in 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. Class E shares are only available to existing
shareholders on November 14, 1994. Class A and E shares are sold with a
front-end sales charge. 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.
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.
When market quotations are not readily available, or when restricted or
illiquid securities or other assets are being valued, such securities or
other assets are valued at fair value as determined in good faith by
management under supervision of the Board of Directors. However, debt
securities may be valued on the basis of valuations furnished by a pricing
service which utilizes electronic data processing techniques to determine
valuations for normal institutional-size trading units of debt securities
when such valuations are believed to more accurately reflect the fair market
value of such securities. Short-term investments in debt securities 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 fluctuations and
the portfolio maintains, in a segregated account with its custodian, assets
with a market value equal to the amount of its purchase commitments. At July
31, 1996, U.S. Government had entered into outstanding when-issued or forward
commitments of $12,749,816 and High Yield $2,400,000.
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.
For the year ended July 31, 1996, the cost of purchases and proceeds from
sales of securities (other than short-term securities) for U.S. Government
were $397,248,790 and $423,142,910, respectively.The amount included in cost
of purchases that were associated with the fund merger as described in Note 4
is $53,491,675. For the nine-month period ended July 31, 1996, the cost of
purchases and proceeds from sales of securities (other than short-term
securities) for High Yield were $243,477,955 and $222,764,620 respectively.
LENDING OF PORTFOLIO SECURITIES: At July 31, 1996, securities valued at
$184,465,797 were on loan to brokers from U.S. Government. At July 13, 1996
there were no securities on loan for High Yield. For collateral, the Fund's
custodian received $190,856,194 in cash which is maintained in a separate
account and invested by the custodian in short term investment vehicles. Fee
income from securities lending amounted to $186,449 for U.S. Government and
$23,168 for High Yield for the fiscal year ended July 31, 1996. 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.
FEDERAL TAXES: The funds intend to qualify, under the Internal Revenue Code,
as a 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 funds 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 differ for financial statement
and tax purposes primarily because of bond premium and market discount
recognition policies and wash sale transactions. 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 funds. The effect
on dividend distributions of certain current year permanent book-to-tax
differences is reflected as excess distributions of net realized gains in the
statements of changes in net assets and the financial highlights.
On the Statement of Assets and Liabilities for U.S. Government, due to
permanent book-to-tax differences, accumulated net realized loss has been
decreased $449,094; 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 $70,183,389 and High Yield had $15,880,263 at July 31, 1996, which, if not
offset by subsequent capital gains, will expire in 1997 through 2005. The
capital loss carryover of U.S. Government includes $12,679,000 in connection
with the Government Total Return Portfolio merger (Note 4), of which the
ability to utilize is limited to approximately
16
<PAGE>
- --------------------------------------------------------------------------------
$3,054,000 per year. 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 fund will generally make
annual distributions of any realized capital gains as required by law. These
income and capital gains distributions may be reinvested in additional shares
of the fund at net asset value without any charge to the shareholder or
payable in cash.
ILLIQUID SECURITIES: At July 31, 1996, investments in securities for the High
Yield Portfolio included issues that are illiquid. The fund currently limits
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,
1996, was $23,058,501 for the High Yield Portfolio which represents 14.06% of
net assets. 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.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of increase and decrease
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
2. PAYMENTS TO RELATED PARTIES: Fortis Advisers, Inc., is the investment adviser
for the fund. Investment advisory and management fees are computed at an
annual rate of .8% of the first $50 million of average daily net assets and
.7% of net assets in excess of $50 million for both High Yield and U.S.
Government. In addition to the investment advisory and management fee,
Classes A, B, C and H pay Fortis Investors, Inc. (the fund's principal
underwriter) distribution fees equal to .25% U.S. Government (Class A), .35%
High Yield (Class A) and 1.00% U.S. Government and High Yield (Classes B, C
and H) of average daily net assets (of the respective classes) 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 for U.S. Government (paid by purchasers of the fund's
shares) aggregating $359,054 for Class A, $3,784 for Class B, $1,683 for
Class C, $36,831 for Class H, $229,854 for Class E and for High Yield
aggregating $374,979 for Class A, $23,117 for Class B, $4,080 for Class C,
and $114,704 for Class H, for the year ended July 31, 1996.
Legal fees and expenses aggregating $59,000 for U.S. Government and $4,176
for High Yield for the fiscal year ended July 31, 1996, were paid to a law
firm of which the secretary of the fund is a partner.
3. CHANGE IN ACCOUNTING PERIOD: Effective July 31, 1996, Fortis High Yield
Portfolio changed its Fiscal accounting and tax year-end to July 31
(previously October 31).
4. FUND MERGER: Effective with the close of business on March 1, 1996, the
Fortis Advantage Portfolios, Inc. -- Government Total Return Portfolio
("Government Total Return") was merged into U.S. Government. The merger was
approved by the shareholders of Government Total Return on February 9, 1996.
U.S. Government is the surviving entity for financial reporting and income
tax purposes. The merger was accomplished by a tax-free exchange as detailed
below:
<TABLE>
<CAPTION>
Net Assets of
Government
Total Return Government Total
on March 1, Return Shares U.S. Government
1996 Exchanged Shares Issued
<S> <C> <C> <C>
- ---------------------------------------------------------------
Class A $ 56,802,533 6,993,916 6,202,362
Class B 186,146 22,874 20,202
Class C 55,394 6,857 6,078
Class H 490,824 60,285 53,236
</TABLE>
Government Total Return's net assets at March 1, 1996 included unrealized
appreciation of $980,635, accumulated net realized losses of ($13,675,129)
and capital stock of $70,229,391.
The net assets of U.S. Government's classes immediately before the merger
were as follows:
<TABLE>
<CAPTION>
U.S. Government Net Assets
<S> <C>
- -------------------------------
Class A $ 14,603,701
Class B 1,560,356
Class C 697,595
Class E 437,242,318
Class H 8,357,112
</TABLE>
17
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS: Selected per share historical data was as follows:
<TABLE>
<CAPTION>
Class E
-------------------------------------------------------------
Year Ended December
Year Ended July 31, 31,
----------------------------------- ----------------------
U.S. GOVERNMENT SECURITIES FUND 1996 1995 1994++ 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 9.02 $ 9.03 $ 9.87 $ 9.86 $ 10.16
--------- --------- --------- --------- ---------
Operations:
Investment income - net............... .60 .67 .42 .75 .84
Net realized and unrealized gains
(losses) on investments............. (.15) (.01) (.84) .05 (.30)
--------- --------- --------- --------- ---------
Total from operations................... .45 .66 (.42) .80 .54
--------- --------- --------- --------- ---------
Distribution to shareholders:
From investment income - net.......... (.60) (.67) (.42) (.75) (.84)
From realized gains................... -- -- -- (.04) --
--------- --------- --------- --------- ---------
Total distributions to shareholders..... (.60) (.67) (.42) (.79) (.84)
--------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 8.87 $ 9.02 $ 9.03 $ 9.87 $ 9.86
--------- --------- --------- --------- ---------
Total Return @.......................... 5.08% 7.71% (4.29%) 8.31% 5.60%
Net assets end of period (000s
omitted).............................. $ 388,006 $ 470,597 $ 555,275 $ 641,977 $ 587,996
Ratio of expenses to average daily net
assets................................ .81% .77% .77%* .76% .72%
Ratio of net investment income to
average daily net assets.............. 6.59% 7.51% 7.72%* 7.43% 8.48%
Portfolio turnover rate................. 75% 76% 85% 157% 128%
</TABLE>
<TABLE>
<CAPTION>
Class A Class B Class C Class H
------------------- ----------------- ----------------- -------------------
Year Ended July 31,
------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1996 1995+ 1996 1995+ 1996 1995+ 1996 1995+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 9.02 $ 8.63 $ 9.02 $8.63 $ 9.01 $8.63 $ 9.02 $ 8.63
-------- ------- ------- ------ ------- ------ -------- -------
Operations:
Investment income - net............... .58 .46 .51 .41 .51 .41 .51 .41
Net realized and unrealized gains
(losses) on investments............. (.15) .39 (.15) .39 (.15) .38 (.15) .39
-------- ------- ------- ------ ------- ------ -------- -------
Total from operations................... .43 .85 .36 .80 .36 .79 .36 .80
-------- ------- ------- ------ ------- ------ -------- -------
Distribution to shareholders:
From investment income - net.......... (.58) (.46) (.52) (.41) (.52) (.41) (.52) (.41)
From realized gains................... -- -- -- -- -- -- -- --
-------- ------- ------- ------ ------- ------ -------- -------
Total distributions to shareholders..... (.58) (.46) (.52) (.41) (.52) (.41) (.52) (.41)
-------- ------- ------- ------ ------- ------ -------- -------
Net asset value, end of period.......... $ 8.87 $ 9.02 $ 8.86 $9.02 $ 8.85 $9.01 $ 8.86 $ 9.02
-------- ------- ------- ------ ------- ------ -------- -------
Total Return @.......................... 4.78% 10.07% 4.00% 9.47% 4.00% 9.35% 4.00% 9.47%
Net assets end of period (000s
omitted).............................. $ 67,707 $ 4,909 $ 2,314 $ 483 $ 1,057 $ 326 $ 10,120 $ 4,823
Ratio of expenses to average daily net
assets................................ 1.06% 1.02%* 1.81% 1.77%* 1.81% 1.77%* 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 6.34% 7.00%* 5.45% 6.24%* 5.59% 6.24%* 5.52% 6.24%*
Portfolio turnover rate................. 75% 76% 75% 76% 75% 76% 75% 76%
</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.
* Annualized.
+ For the period from November 14, 1994 (commencement of operations) to
July 31, 1995.
++ For the seven-month period ended July 31, 1994.
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. FINANCIAL HIGHLIGHTS (continued):
Class A
----------------------------------------------------------
YEAR Year Ended October 31,
ENDED ---------------------------------------------
JULY 31,
HIGH YIELD PORTFOLIO 1996** 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 7.61 $ 7.90 $ 8.65 $ 8.00 $ 7.82
--------- --------- -------- -------- --------
Operations:
Investment income - net............... .56 .86 .86 .87 .85
Net realized and unrealized gains
(losses) on investments............. (.04) (.25) (.72) .68 .22
--------- --------- -------- -------- --------
Total from operations................... .52 .61 .14 1.55 1.07
--------- --------- -------- -------- --------
Distribution to shareholders:
From investment income - net.......... (.55) (.86) (.89) (.89) (.85)
Excess distributions of net realized
gains............................... (.02) (.04) -- (.01) (.04)
--------- --------- -------- -------- --------
Total distributions to shareholders..... (.57) (.90) (.89) (.90) (.89)
--------- --------- -------- -------- --------
Net asset value, end of period.......... $ 7.56 $ 7.61 $ 7.90 $ 8.65 $ 8.00
--------- --------- -------- -------- --------
Total return @.......................... 6.98% 8.07% 1.48% 20.33% 14.20%
Net assets at end of period (000s
omitted).............................. $ 109,401 $ 113,268 $ 98,611 $ 73,395 $ 45,628
Ratio of expenses to average daily net
assets................................ 1.21%* 1.25% 1.23% 1.29% 1.33%
Ratio of net investment income to
average daily net assets.............. 9.87%* 10.61% 10.18% 10.43% 10.34%
Portfolio turnover rate................. 146% 101% 63% 95% 80%
</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.
* Annualized.
** For the nine-month period ended July 31, 1996.
+ For the period from November 14, 1994 (commencement of operations) to
October 31, 1995.
<TABLE>
<CAPTION>
Class B Class C Class H
------------------- ------------------ --------------------
Year Ended July 31,
-----------------------------------------------------------------
HIGH YIELD PORTFOLIO 1996** 1995+ 1996** 1995+ 1996** 1995+
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 7.60 $ 7.87 $ 7.59 $ 7.87 $ 7.60 $ 7.87
-------- ------- ------- ------- -------- --------
Operations:
Investment income - net............... .53 .78 .53 .78 .52 .78
Net realized and unrealized gains
(losses) on investments............. (.04) (.23) (.04) (.24) (.04) (.23)
-------- ------- ------- ------- -------- --------
Total from operations................... .49 .55 .49 .54 .48 .55
-------- ------- ------- ------- -------- --------
Distribution to shareholders:
From investment income - net.......... (.51) (.78) (.51) (.78) (.51) (.78)
Excess distributions of net realized
gains............................... (.02) (.04) (.02) (.04) (.02) (.04)
-------- ------- ------- ------- -------- --------
Total distributions to shareholders..... (.53) (.82) (.53) (.82) (.53) (.82)
-------- ------- ------- ------- -------- --------
Net asset value, end of period.......... $ 7.56 $ 7.60 $ 7.55 $ 7.59 $ 7.55 $ 7.60
-------- ------- ------- ------- -------- --------
Total return @.......................... 6.62% 7.25% 6.63% 7.12% 6.48% 7.25%
Net assets at end of period (000s
omitted).............................. $ 12,067 $ 7,530 $3,378 $ 2,180 $ 39,133 $ 23,862
Ratio of expenses to average daily net
assets................................ 1.86%* 1.90%* 1.86%* 1.90%* 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets.............. 9.20%* 9.66%* 9.21* 9.83%* 9.21* 9.81%*
Portfolio turnover rate................. 146% 101% 146% 101% 146% 101%
</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.
* Annualized.
** For the nine-month period ended July 31, 1996.
+ For the period from November 14, 1994 (commencement of operations) to
October 31, 1995.
19
<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 U.S. Government Securities Fund
(a fund within Fortis Income Portfolios, Inc.) and High Yield Portfolio (a fund
within Fortis Advantage Portfolios, Inc.) as of July 31, 1996 and the related
statements of operations for the year then ended (period from November 1, 1995
to July 31, 1996 for High Yield Fund), the statements of changes in net assets
for each of the years in the two-year period then ended (period from November 1,
1995 to July 31, 1996, and the year ended October 31, 1995 for the High Yield
Portfolio), and the financial highlights presented in footnote 5 to the
financial statements. 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 the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out 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 the financial highlights referred
to above present fairly, in all material respects, the financial position of
U.S. Government Securities Fund and High Yield Portfolio as of July 31, 1996 and
the results of their operations, changes in their net assets and the financial
highlights for the periods stated in the first paragraph above, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 6, 1996
20
<PAGE>
FEDERAL INCOME TAX INFORMATION
For the fiscal year ended July 31, 1996:
INCOME DISTRIBUTIONS -- taxable as income, 0% qualifying for deduction by
corporations. Distributions from net investment income were paid monthly through
July, 1996, see totals below. Under certain state laws, dividends paid by a
regulated investment company, which are derived from interest on federal
obligations, may not be taxable to residents of that state. Please consult your
tax advisor for the reporting of these amounts. The source of dividends paid by
the fund through July, 1996, was as follows:
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<S> <C>
Direct Federal Obligations:
U.S. Treasury............... 0.49 %
Other....................... 5.82 %
-------
Total Direct Federal
Obligations.............. 6.31 %
Other Securities........ 93.69 %
-------
100.00 %
-------
</TABLE>
Detailed below are the per share distributions made for the fiscal year ended
July 31, 1996.
<TABLE>
<CAPTION>
U.S. Government Securities
Fund
----------------------------
Per Share
----------------------------
Class B,
PAYABLE DATE Class E Class A C and H
<S> <C> <C> <C>
----------------------------
August 31, 1995............... $0.054 $ 0.052 $ 0.047
September 29, 1995............ 0.051 0.049 0.044
October 31, 1995.............. 0.051 0.049 0.044
November 30, 1995............. 0.051 0.049 0.044
December 29, 1995............. 0.051 0.049 0.044
January 31, 1996.............. 0.051 0.049 0.044
February 29, 1996............. 0.051 0.049 0.044
March 29, 1996................ 0.051 0.049 0.044
April 30, 1996................ 0.050 0.048 0.043
May 31, 1996.................. 0.048 0.046 0.041
June 28, 1996................. 0.047 0.045 0.040
July 31, 1996................. 0.047 0.045 0.040
------- -------- --------
$0.603 $ 0.579 $ 0.519
------- -------- --------
</TABLE>
Detailed below are the per share distributions made for the nine months ended
July 31, 1996.
<TABLE>
<CAPTION>
Fortis High Yield
Portfolio
-------------------
Per Share
-------------------
Class B,
PAYABLE DATE Class A C and H
<S> <C> <C> <C>
-------------------
November 30, 1995............. $ 0.063 $ 0.059
December 29, 1995............. 0.063 0.059
January 31, 1996.............. 0.063 0.059
February 29, 1996............. 0.063 0.059
March 29, 1996................ 0.063 0.059
April 30, 1996................ 0.063 0.059
May 31, 1996.................. 0.063 0.059
June 28, 1996................. 0.063 0.059
July 31, 1996................. 0.066 0.062
-------- --------
$ 0.570 $ 0.534
-------- --------
</TABLE>
21
<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, HAVERFORD COLLEGE. PRIOR TO
JULY 1996, PRESIDENT MACALESTER
COLLEGE
Benjamin S. Jaffray CHAIRMAN, SHEFFIELD GROUP, LTD.
Jean L. King PRESIDENT, COMMUNI-KING
Dean C. Kopperud CHIEF EXECUTIVE OFFICER AND DIRECTOR,
FORTIS ADVISERS, INC. PRESIDENT AND
DIRECTOR, FORTIS INVESTORS, INC.
SENIOR VICE PRESIDENT AND DIRECTOR,
FORTIS BENEFITS INSURANCE COMPANY,
TIME INSURANCE COMPANY
Edward M. Mahoney PRIOR TO JANUARY, 1995, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, FORTIS
ADVISERS, INC., FORTIS INVESTORS,
INC.
Robb L. Prince FINANCIAL AND EMPLOYEE BENEFIT
CONSULTANT PRIOR TO JULY, 1995, VICE
PRESIDENT AND TREASURER, JOSTENS,
INC.
Leonard J. Santow PRINCIPAL, GRIGGS & SANTOW, INC.
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
Charles J. Dudley
VICE PRESIDENT
Thomas D. Gualdoni
VICE PRESIDENT
Maroun M. Hayek
VICE PRESIDENT
Howard G. Hudson
VICE PRESIDENT
Robert C. Lindberg
VICE PRESIDENT
Charles L. Mehlhouse
VICE PRESIDENT
Kevin J. Michels
VICE PRESIDENT
Jon H. Nicholson
VICE PRESIDENT
Fred Obser
VICE PRESIDENT
Dennis M. Ott
VICE PRESIDENT
David A. Peterson
VICE PRESIDENT
Nicholas L. M. de Peyster
VICE PRESIDENT
Stephen M. Poling
VICE PRESIDENT
Stephen M. Rickert
VICE PRESIDENT
Richard P. Roche
VICE PRESIDENT
Rhonda J. Schwartz
VICE PRESIDENT
Keith R. Thomson
VICE PRESIDENT
Christopher J. Woods
VICE PRESIDENT
Gary N. Yalen
VICE PRESIDENT
Michael J. Radmer
SECRETARY
Tamara L. Fagely
TREASURER
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 First Bank National Association
MINNEAPOLIS, MINNESOTA
GENERAL COUNSEL Dorsey & Whitney P.L.L.P.
MINNEAPOLIS, MINNESOTA
INDEPENDENT AUDITORS KPMG Peat Marwick LLP
MINNEAPOLIS, MINNESOTA
The use of this material is authorized only when preceded or accompanied by a
prospectus.
22
<PAGE>
FORTIS FINANCIAL GROUP'S OTHER PRODUCTS AND SERVICES
MUTUAL Fortis Bond Funds MONEY FUND
FUNDS/PORTFOLIOS U.S. GOVERNMENT
CONVENIENT ACCESS TO SECURITIES FUND
A BROAD RANGE OF TAX-FREE MINNESOTA
SECURITIES PORTFOLIO
TAX-FREE NATIONAL
PORTFOLIO
TAX-FREE NEW YORK
PORTFOLIO
HIGH YIELD PORTFOLIO
Fortis Stock Funds ASSET ALLOCATION
PORTFOLIO
VALUE FUND
GROWTH & INCOME FUND
CAPITAL FUND
FIDUCIARY FUND
GLOBAL GROWTH PORTFOLIO
GROWTH FUND
CAPITAL APPRECIATION
PORTFOLIO
FIXED AND VARIABLE Fortis Opportunity Fixed FIXED ACCOUNT
ANNUITIES & Variable Annuity MONEY MARKET SUBACCOUNT
TAX-DEFERRED Masters Variable Annuity U.S. GOVERNMENT
INVESTING SECURITIES SUBACCOUNT
DIVERSIFIED INCOME
SUBACCOUNT
GLOBAL BOND SUBACCOUNT
HIGH YIELD SUBACCOUNT
ASSET ALLOCATION
SUBACCOUNT
GLOBAL ASSET ALLOCATION
SUBACCOUNT
VALUE SUBACCOUNT
GROWTH & INCOME
SUBACCOUNT
S&P 500 INDEX SUBACCOUNT
BLUE CHIP STOCK
SUBACCOUNT
GLOBAL GROWTH SUBACCOUNT
GROWTH STOCK SUBACCOUNT
INTERNATIONAL STOCK
SUBACCOUNT
AGGRESSIVE GROWTH
SUBACCOUNT
Fortune Fixed Annuities SINGLE PREMIUM ANNUITY
FLEXIBLE PREMIUM ANNUITY
Income Annuities GUARANTEED FOR LIFE
GUARANTEED FOR A
SPECIFIED PERIOD
LIFE Wall Street Series FIXED ACCOUNT
INSURANCE PROTECTION Variable Universal Life MONEY MARKET SUBACCOUNT
AND TAX-DEFERRED Insurance U.S. GOVERNMENT
INVESTMENT SECURITIES SUBACCOUNT
OPPORTUNITY DIVERSIFIED INCOME
SUBACCOUNT
GLOBAL BOND SUBACCOUNT
HIGH YIELD SUBACCOUNT
ASSET ALLOCATION
SUBACCOUNT
GLOBAL ASSET ALLOCATION
SUBACCOUNT
VALUE SUBACCOUNT
GROWTH & INCOME
SUBACCOUNT
S&P 500 INDEX SUBACCOUNT
BLUE CHIP STOCK
SUBACCOUNT
GLOBAL GROWTH SUBACCOUNT
GROWTH STOCK SUBACCOUNT
INTERNATIONAL STOCK
SUBACCOUNT
AGGRESSIVE GROWTH
SUBACCOUNT
Adaptable Life
Universal Life
FORTIS FINANCIAL GROUP manages and distributes mutual funds, annuities and life
insurance products. The mutual funds, variable life and variable annuity
products are distributed through FORTIS INVESTORS, INC. and managed by FORTIS
ADVISERS, INC. The insurance products are issued by FORTIS BENEFITS INSURANCE
COMPANY, FIRST FORTIS LIFE INSURANCE COMPANY and TIME INSURANCE COMPANY.
FOR MORE COMPLETE INFORMATION, INCLUDING CHARGES AND EXPENSES, SEND FOR A
PROSPECTUS. WRITE TO: FORTIS INVESTORS, INC., P.O. BOX 64284, ST. PAUL, MN
55164. READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY.
23
<PAGE>
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24
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
Fortis Financial Group
Fortis Financial Group (FFG) is a premier provider of insurance and
investment portfolios whose fund manager, Fortis Advisers, Inc. has established
a nationwide reputation for money management. Through Fortis Investors, Inc.,
FFG offers mutual funds, annuities and life insurance. Life insurance products
are issued and underwritten by Fortis Benefits Insurance Company and Time
Insurance Company.
Fortis, Inc. is part of Fortis, a
wordwide group of
[GRAPHIC]
companies active in the fields of insurance, banking and investments. Fortis is
jointly owned by Fortis AMEV of The Netherlands and Fortis AG of Belgium.
Like the Fortis name, which comes from the Latin for steadfast, our focus
is on the long-term in all we do: the relationships we build, the performance we
seek, the service we provide and the products we offer.
-----------------
FORTIS Bulk Rate
Fortis Financial Group US Postage
P.O. Box 64284 PAID
St. Paul, MN 55164 Permit No. 3794
Minneapolis, MN
-----------------
Fortis
Bond Funds
PRINTED ON RECYCLED PAPER WITH
40% PRECONSUMER WASTE AND
[LOGO] 10% POST CONSUMER WASTE.
PLEASE RECYCLE.
98561 (Ed. 9/96)
