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TRUST IN THE
CONSISTENCY OF TIME ...
FORTIS
BOND FUNDS
ANNUAL REPORT
July 31, 1997
<PAGE>
FORTIS BOND FUNDS ANNUAL REPORT
CONTENTS
LETTER TO SHAREHOLDERS 1
SCHEDULES OF INVESTMENTS 5
STATEMENTS OF ASSETS AND LIABILITIES 11
STATEMENTS OF OPERATIONS 12
STATEMENTS OF CHANGES IN NET ASSETS 13
NOTES TO FINANCIAL STATEMENTS 15
INDEPENDENT AUDITORS' REPORT 19
FEDERAL TAX INFORMATION 20
BOARD OF DIRECTORS AND OFFICERS 21
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- 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
<TABLE>
<CAPTION>
FORTIS U.S. GOVERNMENT SECURITIES FUND
FOR THE YEAR ENDED JULY 31, 1997 CLASS A CLASS B CLASS C CLASS E CLASS H
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 8.87 $ 8.86 $ 8.85 $ 8.87 $ 8.86
End of year................................ $ 9.16 $ 9.14 $ 9.13 $ 9.16 $ 9.14
DISTRIBUTIONS PER SHARE...................... $0.549 $0.489 $0.489 $0.573 $0.489
<CAPTION>
FORTIS HIGH YIELD PORTFOLIO
FOR THE YEAR ENDED JULY 31, 1997 CLASS A CLASS B CLASS C CLASS H
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE PER SHARE:
Beginning of year.......................... $ 7.56 $ 7.56 $ 7.55 $ 7.55
End of year................................ $ 7.83 $ 7.83 $ 7.82 $ 7.82
DISTRIBUTIONS PER SHARE...................... $0.772 $0.724 $0.724 $0.724
</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.
YIELDS BOUNCE UP AND DOWN
During the 12-month period ending July 31, 1997, the yield on 10-year U.S.
Treasuries fell from 6.8 to 6.0 percent. In addition, the yields of longer
maturity securities fell more than those of shorter maturity securities,
flattening the shape of the yield curve. (Two-year yields fell by 50 basis
points, while yields on 30-year securities fell by 67 basis points).
This drop in rates, however, doesn't tell the whole story. Ten-year yields have
gone from 7 percent to 6 percent and back twice during this time period. In the
third quarter of 1996, the market sold off due to concerns about tight labor
markets and their potential impact on inflation. It then rallied into December
as inflation remained low. The second time 10-year rates approached 7 percent
was in March of 1997, due to concerns about strong first quarter growth and the
Federal Reserve's decision on March 25th to raise short term rates by 0.25
percent. After the Federal Reserve raised rates, however, the economy slowed
from its 5.9 percent first quarter Gross Domestic Product (GDP) growth to a 2.2
percent growth in the second quarter. The market responded accordingly, and
10-year rates fell to 6.0 percent on July 31.
Believing that interest rates would remain within a broad trading range, we
continued a strategy to take advantage of the relatively range-bound interest
rate environment. Specifically, we shortened duration* as interest rates fell
toward the low end of the trading range and lengthened duration as rates rose
toward the high end of the trading range. These duration adjustments were
modest, however, and never exceeded 5 percent of the overall benchmark duration
(the benchmark is our proprietary market index against which we measure the
portfolio.) As of July 31, the portfolio's duration is currently 4.5 years,
equal to the benchmark. We also reduced exposure in mortgage-backed securities
as the sector moved to its lowest yields compared to Treasuries in more than two
and a half years. In addition, currently 16 percent of our holdings are in
agency notes. We believe the extra yield these securities offer over Treasuries
will enhance total return. These strategies contributed to improved fund
performance over the last year. For the 12 months ended July 31, the Fund earned
a 10.07 percent total rate of return for Class E before sales charge compared to
a 10.17 percent total return for the Lehman Brothers Government Index.
*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.
LONG-TERM OUTLOOK POSITIVE
Going forward, we anticipate that economic growth will pick up in the third and
fourth quarters. Job growth and consumer income should translate into stronger
retail sales, resulting in an extension of the current expansion well into 1998.
We expect quarterly growth numbers to be between 2.5 - 3 percent in the second
half of this year. Inflation, absent from the picture for now, could pick up
modestly as wage pressures begin to impact final prices. Although these
pressures will not be great, we believe it could be enough to prompt one more
.25 percent increase in short-term rates by the Federal Reserve sometime in late
1997 or early 1998.
1
<PAGE>
PORTFOLIO COMPOSITION BY SECTOR
AS OF 7/31/97
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Treasury Securities 39.0%
FNMAs 25.3%
GNMAs 14.9%
FHLMCs 6.7%
Other Direct Federal Obligations 8.2%
Cash Equivalent/Receivables 5.9%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/97
<TABLE>
<CAPTION>
Percent of
Bonds Net Assets
- -------------------------------------------------------------------
<C> <S> <C>
1. U.S. Treasury Note (6.375%) 2000 10.6%
2. Federal Home Loan Bank (7.31%) 2004 7.6%
3. U.S. Treasury Note (6.125%) 2001 5.8%
4. U.S. Treasury Bond (6.875%) 2006 5.3%
5. U.S. Treasury Bond (8.125%) 2021 4.9%
6. U.S. Treasury Bond (8.125%) 2019 3.7%
7. American Southwest Financial Services (6.675%)
2001 3.4%
8. GNMA (9.50%) 2019 3.2%
9. U.S. Treasury Note (6.50%) 2005 3.2%
10. FNMA Global Note (6.85%) 2000 3.0%
</TABLE>
CLASS A, B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- -------------------------------------------------------------
<S> <C> <C>
Class A shares Diamond 9.77% 9.09%
Class A shares Diamond Diamond 4.84% 7.25%
Class B shares Diamond 8.95% 8.27%
Class B shares Diamond Diamond 5.35% 7.39%
Class C shares Diamond 8.96% 8.23%
Class C shares Diamond Diamond 7.96% 8.23%
Class H shares Diamond 8.94% 8.26%
Class H shares Diamond Diamond 5.34% 7.39%
</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 has a maximum sales charge of 4.50%, Class B and H
have a CDSC of 4.00% if redeemed within two years of purchase, or 3.00% if
redeemed in year three or four (with a waiver of 10% of the amount invested).
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, 1997.
Diamond
+ Since November 14, 1994 -- Date shares were first offered to the public
Our long-term view on interest rates, however, is positive for a variety of
reasons. First, the market has become increasingly comfortable that a strong
growth, low inflation environment can exist long term. Second, the interest rate
advantage enjoyed by the U.S. market and strong dollar should continue to make
U.S. assets attractive to foreign investors. And third, increased tax receipts
(which lower the Treasury's borrowing needs) and further issuance of
inflation-protected securities will reduce the supply of nominal Treasury bonds
going forward. Taken together, these factors could result in a supply/demand
imbalance that may decrease rates going forward. Accordingly, we would view a
rise in interest rates in the second half of the year as an opportunity to
extend the portfolio's duration.
WE APPRECIATE YOUR SUPPORT AND CONFIDENCE
Today's economic and investment climates are challenging, and we appreciate you
selecting Fortis for your investments. If you have any questions or comments,
please call us or your investment professional.
<TABLE>
<S> <C>
/s/ Dean C. Kopperud /s/ Howard G. Hudson
Dean C. Kopperud Howard G. Hudson
President Vice President
August 12, 1997
</TABLE>
VALUE OF $10,000 INVESTED AUGUST 1, 1987
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FORTIS U.S.
GOVERNMENT
SECURITIES FUND
AVERAGE ANNUAL
TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C>
Class E* +5.12% +4.71% +7.35%
Class E** +10.07% +5.68% +7.85%
U.S. Government
Lehman Brothers Securities Fund
Gov't Index*** Class E
8/1/87 $ 10,000 $ 9,715
88 10,594 10,284
89 13,035 11,541
90 13,460 12,417
91 14,744 13,743
92 17,660 15,422
93 20,924 16,773
94 20,297 16,319
95 21,995 17,578
96 23,344 18,469
97 25,554 20,329
</TABLE>
Annual year 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 eight to
nine 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.
MARKET FAVORABLE IN CURRENT ECONOMY
The high yield bond market rewarded investors with good total return performance
relative to other fixed income investments for the fiscal year ended July 31st.
As measured by the Lehman Brothers High Yield Bond Index, this category of bonds
returned 16.1 percent during the period. The domestic economic and investment
environment has been especially favorable for high-yielding, lower-rated
securities for the last two and a half years. High yield bonds perform best when
the stock market is climbing, default rates are low, and the yields available in
the lower-rated bond sector are relatively attractive. All these conditions have
been present as a result of a U.S. economy that is exhibiting moderate growth
with low inflation.
During the last fiscal year, the Federal Reserve did push short-term interest
rates higher in a move to preempt future inflation. While rising interest rates
generally have a negative impact on the market for existing fixed income
securities, lower-rated bonds, due to their high coupons, are less sensitive to
interest rate moves than other bonds with similar maturity dates.
We continue to believe that the current environment will persist during the
coming fiscal year and that high yield bonds will compare favorably with other
bond investments. However, it is important to note that the high yields
available in the lower-rated bond sector do reflect higher credit risk. Should
the U.S. economy enter a recessionary phase or if an extended downturn hit the
U.S. stock market, high yield bonds would likely significantly underperform
other bond investments.
BANKRUPTCY, SECTOR PERFORMANCE AFFECT RESULTS
The Fortis High Yield Bond Portfolio underperformed the market for the fiscal
year July 31, 1997, returning 14.51 percent in Class A. Although the portfolio's
yield remained among the highest among open-end mutual funds, our total returns
(income + price appreciation/depreciation) fell short of our competitive
universe. There are two primary reasons for this shortfall. First, the
bankruptcy of Marvel Holdings, the publisher of comic books and sports trading
cards, had a substantial negative impact on prices for the company's outstanding
bonds, including those held in the High Yield portfolio. Second, the
telecommunications sector, the portfolio's largest sector weighting,
underperformed the overall market for the fiscal year. Competitive issues,
zero-coupon structures, and an enormous appetite for capital put the bonds of
this industry group under sporadic pressure during the period. In June and July,
however, this sector has come into favor again. Not coincidentally, the
portfolio's relative performance has also begun to recover. "Portfolio activity
during the period was high, reflecting our active management style, adjustments
to the portfolio's exposure to several industry sectors, and a frothy new issue
market." We remain confident that the telecommunications sector, which
encompasses cellular telephones, pagers, and local telephone service providers,
will bear fruit in the form of good returns, as high revenue growth eventually
transitions to high cash flow growth.
3
<PAGE>
PORTFOLIO COMPOSITION BY SECTOR
AS OF 7/31/97
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Telecommunications 22.1%
Cash Equivalent/Receivables 2.3%
Housing 4.6%
Chemicals 9.1%
Broadcasting 3.0%
Steel and Iron 3.0%
Industrial 6.4%
Leisure Time-Amusements 8.0%
Other 30.3%
Cable Television 11.2%
</TABLE>
TOP 10 HOLDINGS AS OF 7/31/97
<TABLE>
<CAPTION>
Percent of
Net Assets
- ------------------------------------------------------------------
<C> <S> <C>
1. Australis Media Ltd. (14.00%) 2003 3.9%
2. MDC Holdings, Inc., (11.25%) 2003 3.3%
3. Mohegan Tribal Gaming, (13.50%) 2002 3.1%
4. PriCellular Wireless Corp. (10.29%) 2003 2.7%
5. Station Casinos, Inc. (10.125%) 2006 2.6%
6. LaRoche Industries, Inc. (13.00%) 2004 2.5%
7. Nextel Communications (11.84%) 2004 2.5%
8. Iridium LLC/Capital Corp. (13.00%) 2005 2.4%
9. Falcon Holdings Group (11.00%) 2003 2.3%
10. Collins & Aikman Products (11.50%) 2006 2.1%
</TABLE>
CLASS B, C AND H AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Since
1 Year Inception+
- -------------------------------------------------------------
<S> <C> <C>
Class B shares Diamond 13.80% 10.20%
Class B shares Diamond Diamond 10.20% 9.35%
Class C shares Diamond 13.59% 10.08%
Class C shares Diamond Diamond 12.59% 10.08%
Class H shares Diamond 13.82% 10.15%
Class H shares Diamond Diamond 10.22% 9.30%
</TABLE>
Past performance is not indicative of future performance. Total returns include
reinvestment of all dividend and capital gains distributions. The performance of
the separate classes (A, B, C, and H) will vary based on the differences in
sales loads and distribution fees paid by shareholders investing in the
different classes. Class A has a maximum sales charge of 4.50%, Class B and H
have a CDSC of 4.00% if redeemed within two years of purchase, or 3.00% if
redeemed in year three or four (with a waiver of 10% of the amount invested).
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, 1997.
Diamond
+ Since November 14, 1994 -- Date shares were first offered to the public
The Marvel bankruptcy illustrates an important lesson for portfolio managers
invested in the lower-rated bond universe. When conditions appear as ideal as
they have been recently for high yield bonds, it is tempting to reach for the
highest yields available in the market. However, this can be a risky strategy.
The investment objective of this portfolio is to provide the best total return
to our investors, not the highest yield. If we take our eye off researching the
fundamental credit-worthiness of a company and focus on yield, we may have more
instances like Marvel. We have renewed our efforts in the area of fundamental
credit research and are determined to continue our efforts to provide superior
total return performance for you, the fund's shareholders.
YOU ARE IMPORTANT TO US
Today's economic and investment climates remain ever-changing. Thank you for
your confidence and for selecting Fortis to help you meet your financial goals.
If you have any questions, please call us or your investment professional.
<TABLE>
<S> <C>
/s/ Dean C. Kopperud /s/ Howard G. Hudson
Dean C. Kopperud Howard G. Hudson
President Vice President
August 12, 1997
</TABLE>
VALUE OF $10,000 INVESTED JANUARY 4, 1988
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO SINCE
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR JANUARY 4, 1988@
<S> <C> <C> <C> <C>
Class A* +9.36% +9.24% +9.11%
Class A** +14.51% +10.25% +9.63%
Lehman Brothers High Yield
High Yield Index*** Portfolio Class A
1/4/1988 $ 10,000 $ 9,550
4/30/1989 11,786 10,913
4/30/1990 11,943 9,705
4/30/1991 13,721 11,561
4/30/1992 16,799 14,139
4/30/1993 19,376 16,565
4/30/1994 20,038 17,545
4/30/1995 22,902 19,069
4/30/1996 24,732 20,111
4/30/1997 28,693 23,030
</TABLE>
Annual year 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 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, 1997
U.S. GOVERNMENT SECURITIES-94.13%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Cost (a) Value (b)
------------ ------------- -------------
<C> <S> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION-6.71%
MORTGAGE BACKED SECURITIES:
$ 9,727,187 8.00% 2001-2002.............................. $ 9,970,367 $ 10,025,082
3,815,725 9.00% 2001-2022.............................. 4,040,839 4,050,174
234,433 10.50% 2015.................................. 252,089 258,023
272,786 11.25% 2013-2014............................. 293,746 305,605
940,557 11.50% 2015-2019............................. 1,017,509 1,059,890
859,745 11.75% 2010-2015............................. 941,136 972,989
178,768 12.50% 2019.................................. 192,209 204,690
------------- -------------
16,707,895 16,876,453
------------- -------------
NOTES:
8,000,000 6.75% 2006................................... 8,252,616 8,252,616
------------- -------------
REMIC-PAC'S:
1,369,489 9.00% Trust #136-D PAC 2020.................. 1,376,105 1,395,422
208,324 9.50% Trust #1001 F 2003..................... 211,159 208,796
------------- -------------
1,587,264 1,604,218
------------- -------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION................................ 26,547,775 26,733,287
------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-25.28%
MORTGAGE BACKED SECURITIES:
17,366,384 6.50% 2010-2012.............................. 17,104,010 17,268,698
18,890,640 7.00% 2003-2025.............................. 18,611,134 18,923,340
6,888,751 7.184% 2006.................................. 6,792,297 7,200,897
22,456,100 7.50% 2022-2026.............................. 22,278,105 22,835,092
1,238,362 8.00% 2025................................... 1,185,345 1,275,900
1,463,726 8.50% 2022................................... 1,539,571 1,523,647
129,345 9.00% 2020................................... 128,092 137,106
1,435,408 9.75% 2020................................... 1,548,447 1,552,932
871,240 10.00% 2023.................................. 950,469 950,197
1,188,700 10.50% 2012-2018............................. 1,269,459 1,308,313
230,154 10.75% 2013.................................. 237,058 254,751
2,674,294 11.00% 2015-2020............................. 2,882,063 2,976,824
402,253 11.25% 2013.................................. 422,366 450,397
198,157 11.50% 2015.................................. 213,794 223,174
453,338 12.00% 2011-2016............................. 485,195 515,246
611,633 12.50% 2015.................................. 685,984 700,129
------------- -------------
76,333,389 78,096,643
------------- -------------
NOTES:
12,000,000 6.85% 2000 (e)............................... 12,000,000 12,107,124
9,750,000 7.65% 2005 (e)............................... 9,886,867 10,594,106
------------- -------------
21,886,867 22,701,230
------------- -------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION................................ 98,220,256 100,797,873
------------- -------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-14.93%
MORTGAGE BACKED SECURITIES:
13,501,258 6.675% American Southwest Financial Services
1996-FHAI 2001 (GNMA Backed)............... 13,524,000 13,577,203
8,681,208 7.00% 2024................................... 8,557,016 8,694,785
3,007,194 8.00% 2017-2022.............................. 3,079,612 3,103,048
13,240,976 9.00% 2016-2022.............................. 13,921,513 14,061,780
17,961,804 9.50% 2016-2019.............................. 18,768,512 19,318,174
648,151 11.00% 2015-2018............................. 698,306 712,560
64,038 11.25% 2015.................................. 68,001 70,862
------------- -------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION................................ 58,616,960 59,538,412
------------- -------------
OTHER DIRECT FEDERAL OBLIGATIONS-7.64%
FEDERAL HOME LOAN BANK:
28,650,000 7.31% 2004 (e)............................... 28,571,185 30,476,667
------------- -------------
</TABLE>
5
<PAGE>
FORTIS BOND FUNDS
U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
Schedule of Investments
July 31, 1997
U.S. GOVERNMENT SECURITIES-CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Cost (a) Value (b)
------------ ------------- -------------
<C> <S> <C> <C>
OTHER GOVERNMENT AGENCIES-0.60%
RESOLUTION FUNDING CORPORATION:
$ 7,000,000 7.355% Zero Coupon Strip 2014 (c)............ $ 2,067,130 $ 2,373,623
------------- -------------
U.S. TREASURY SECURITIES-38.97%
BONDS:
28,270,000 8.125% 2019-2021 (e)......................... 31,616,478 34,183,581
6,750,000 8.875% 2019 (e).............................. 8,177,894 8,718,043
------------- -------------
39,794,372 42,901,624
------------- -------------
NOTES:
10,750,000 6.00% 1999 (e)............................... 10,743,557 10,803,750
22,990,000 6.125% 2001 (e).............................. 22,753,411 23,183,967
2,450,000 6.25% 2007 (e)............................... 2,417,712 2,485,219
41,500,000 6.375% 2000 (e).............................. 41,722,826 42,109,510
12,430,000 6.50% 2005................................... 12,781,536 12,787,362
20,000,000 6.875% 2006 (e).............................. 20,171,057 21,093,740
------------- -------------
110,590,099 112,463,548
------------- -------------
TOTAL U.S. TREASURY SECURITIES............... 150,384,471 155,365,172
------------- -------------
TOTAL U.S. GOVERNMENT SECURITIES............. $ 364,407,777 $ 375,285,034
------------- -------------
------------- -------------
</TABLE>
SHORT-TERM INVESTMENTS-2.62%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (b)
----------- -------------
<C> <S> <C>
INVESTMENT COMPANY-1.04%
$4,165,114 Federated Treasury Obligation Fund, Current
rate -- 5.14%.............................. $ 4,165,114
-------------
U.S. GOVERNMENT AGENCY-1.58%
6,300,000 Federal National Mortgage Assoc., 5.47%,
8-15-1997.................................. 6,285,891
-------------
TOTAL SHORT-TERM INVESTMENTS................. $ 10,451,005
-------------
-------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$374,858,782) (A).......................... $ 385,736,039
-------------
-------------
</TABLE>
(a) At July 31, 1997, the cost of securities for federal income tax
purposes was $376,317,784, and the aggregate gross unrealized
appreciation and depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 9,558,618
Unrealized depreciation........................... (140,363)
---------------------------------------------------------------
Net unrealized appreciation....................... $ 9,418,255
---------------------------------------------------------------
</TABLE>
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(c) The interest rates disclosed for these securities represent 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, 1997. See Note 1 of
accompanying Notes to Financial Statements.
6
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO
Schedule of Investments
July 31, 1997
COMMON STOCKS AND WARRANTS - 0.35%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Market
Shares Cost (b) Value (c)
-------- ------------- -------------
<C> <S> <C> <C>
APPAREL-0.04%
1,250 Hosiery Corp. of America, Class A (a)(f)..... $ 21,150 $ 87,500
------------- -------------
CABLE TELEVISION-0.00%
10,000 American Telecasting, Inc. (Warrants)
(a)(f)..................................... 20,000 1,000
8,000 Australis Media Ltd. (Warrants) (a)(f)....... 80 8
1,000 People's Choice T.V. Corp. (Warrants)
(a)(f)..................................... 617 10
------------- -------------
20,697 1,018
------------- -------------
CONSUMER GOODS-0.01%
1,800 Chattem, Inc. (Warrants) (a)(f).............. 18,424 19,800
------------- -------------
ELECTRONIC-CONTROLS AND EQUIPMENT-0.03%
1,750 Electronic Retailing Systems (Warrants)
(a)(f)..................................... 68,867 61,250
------------- -------------
LEISURE TIME-AMUSEMENTS-0.00%
1,000 Boomtown, Inc. (Warrants) (a)(f)............. 6,340 50
26,670 Capital Gaming International, Inc. (a)(f).... 133,350 800
22,750 Capital Gaming International, Inc. (Warrants)
(a)(f)..................................... 35,440 23
6,000 Hemmeter Enterprises, Inc. (Warrants)
(a)(f)..................................... 24,000 0
------------- -------------
199,130 873
------------- -------------
TELECOMMUNICATIONS-0.27%
4,500 American Communications Services, Inc.
(Warrants) (a)(f).......................... 205,650 225,000
6,600 Clearnet Communications, Inc. (Warrants)
(a)(f)..................................... 76,725 46,200
1,000 Hyperion Telecom (Warrants) (a)(f)........... 20,000 25,000
16,000 Microcell Telecommunications, Inc. (Warrants)
(a)(f)..................................... 226,000 212,000
16,000 Microcell Telecommunications, Inc. (Warrants)
(a)(f)..................................... 10,000 10,000
12,800 Powertel, Inc. (Warrants) (a)(f)............. 94,118 57,600
------------- -------------
632,493 575,800
------------- -------------
TOTAL COMMON STOCKS AND WARRANTS............. $ 960,761 $ 746,241
------------- -------------
------------- -------------
</TABLE>
CORPORATE BONDS-NON-INVESTMENT GRADE-97.45%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Cost (b) Value (c)
------------ ------------- ------------- -------------
<C> <S> <C> <C> <C>
AEROSPACE AND EQUIPMENT-0.52%
$ 1,050,000 K & F Industries, Inc., 11.875% Sr Secured
Note 12-1-2003............................. BB- $ 1,025,455 $ 1,105,125
------------- -------------
AUTOMOBILE AND MOTOR VEHICLE PARTS-2.13%
4,000,000 Collins & Aikman Products, 11.50% Sr Sub Note
4-15-2006.................................. B 4,401,643 4,570,000
------------- -------------
BANKS-0.69%
1,500,000 BankUnited Capital Trust, 10.25% Deb
12-31-2026................................. NR 1,477,519 1,485,000
------------- -------------
BROADCASTING-3.03%
1,750,000 Commodore Media, Inc., 7.50% Sr Sub Note
5-1-2003................................... NR 1,704,513 1,916,250
2,500,000 Sinclair Broadcasting Group, Inc., 10.00% Sr
Sub Note 9-30-2005......................... B 2,577,841 2,612,500
1,750,000 Spanish Broadcasting Systems, Inc., 12.50% Sr
Note 6-15-2002............................. B 1,822,780 1,975,312
------------- -------------
6,105,134 6,504,062
------------- -------------
CABLE TELEVISION-11.16%
10,043,750 Australis Media Ltd., 14.00% Sr Sub Disc Note
5-15-2003 (Zero coupon through 5-15-2000,
thereafter 15.75%) (e)..................... CCC- 6,720,018 8,336,313
1,000,000 Cablevision Systems Corp., 10.50% Sr Sub Deb
5-15-2016.................................. B 1,014,841 1,115,000
2,500,000 Diamond Cable Communications plc, 11.67% Sr
Disc Note 12-15-2005 (Zero coupon through
12-15-2000, thereafter 11.75%) (e)......... B- 1,712,767 1,737,500
5,000,000 Falcon Holding Group, L.P., 11.00% Sr Sub
Note Ser B 9-15-2003 (Interest is
Payable-in-Kind)........................... NR 4,853,214 4,968,719
3,000,000 Olympus Communication L.P., 10.625% Sr Note
11-15-2006................................. B 3,000,000 3,258,750
6,000,000 Wireless One, Inc., 13.00% Sr Note
10-15-2003................................. B- 4,939,877 3,720,000
</TABLE>
7
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1997
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>
$ 3,000,000 Wireless One, Inc., 13.463% Sr Disc Note
8-1-2006 (Zero coupon through 8-1-2001,
thereafter 13.50%) (and warrants) (e)...... B- $ 1,786,959 $ 780,000
------------- -------------
24,027,676 23,916,282
------------- -------------
CHEMICALS-9.13%
2,000,000 Agricultural Minerals & Chemicals, 10.75% Sr
Note 9-30-2003............................. BB- 2,098,035 2,165,000
4,800,000 LaRoche Industries, Inc., 13.00% Sr Sub Note
8-15-2004.................................. B 5,250,642 5,400,000
4,000,000 NL Industries, Inc., 11.75% Sr Secured Note
10-15-2003................................. B 4,402,723 4,410,000
1,000,000 Sovereign Specialty Chemical, 9.50% Sr Sub
Note 8-1-2007 (f).......................... B- 1,000,000 1,000,000
4,000,000 Sterling Chemicals, Inc., 11.75% Sr Sub Note
8-15-2006.................................. B+ 4,196,676 4,405,000
2,000,000 Terra Industries, 10.50% Sr Note 6-15-2005... BB- 2,116,725 2,182,500
------------- -------------
19,064,801 19,562,500
------------- -------------
COMPUTER-HARDWARE-2.06%
4,000,000 Unisys Corp., 11.75% Sr Note 10-15-2004...... B+ 4,340,439 4,410,000
------------- -------------
CONSUMER GOODS-1.88%
1,250,000 Chattem, Inc., 12.75% Sr Sub Note Ser B
6-15-2004.................................. B- 1,252,150 1,412,500
3,000,000 Remington Product Co. LLC, 11.00% Sr Sub Note
5-15-2006.................................. CCC+ 2,583,507 2,610,000
------------- -------------
3,835,657 4,022,500
------------- -------------
DAIRY PRODUCTS-1.83%
4,000,000 Fage Dairy Industries, Inc., 9.00% Sr Note
7-1-2007 (f)............................... BB 3,922,234 3,930,000
------------- -------------
ELECTRONIC-CONTROLS AND EQUIPMENT-0.52%
1,750,000 Electronic Retailing Systems, 13.25% Sr Disc
Note 2-1-2004 (Zero Coupon until 2-1-2000,
thereafter 13.25%) (e)(f).................. NR 1,229,539 1,120,000
------------- -------------
ENERGY-2.90%
4,000,000 Belden & Blake, 9.875% Sr Sub Note 6-15-2007
(f)........................................ NR 4,009,982 4,040,000
2,000,000 Benton Oil & Gas, 11.625% Sr Note 5-1-2003... B+ 2,171,839 2,170,000
------------- -------------
6,181,821 6,210,000
------------- -------------
FINANCE COMPANIES-0.62%
1,137,000 Homeside, Inc., 11.25% Sr Secured Second
Priority Note 5-15-2003.................... BB+ 1,174,613 1,330,290
------------- -------------
FOOD-MISCELLANEOUS-2.03%
4,000,000 Envirodyne Industries, Inc., 12.00% First
Priority Sr Secured Note 6-15-2000......... B+ 4,222,154 4,360,000
------------- -------------
FOREST PRODUCTS-1.96%
1,000,000 Crown Paper Co., 11.00% Sr Sub Note
9-1-2005................................... B 1,059,987 1,062,500
4,000,000 Ivex Holdings Corp., 11.29% Sr Disc Deb
3-15-2005 (Zero Coupon until 3-15-2000,
thereafter 13.25%) (e) B- 3,216,423 3,140,000
------------- -------------
4,276,410 4,202,500
------------- -------------
HEALTH CARE SERVICES-2.06%
4,000,000 Tenet Healthcare Corp., 10.125% Sr Sub Note
3-1-2005................................... B+ 4,325,513 4,415,000
------------- -------------
HOTEL AND MOTEL-1.72%
3,500,000 HMH Properties, Inc., 9.50% Sr Note
5-15-2005.................................. BB- 3,565,730 3,696,875
------------- -------------
HOUSING-4.60%
6,500,000 MDC Holdings, Inc., 11.125% Note
12-15-2003................................. B+ 6,618,486 7,133,750
2,500,000 NVR, Inc., 11.00% Sr Note 4-15-2003.......... B 2,578,621 2,725,000
------------- -------------
9,197,107 9,858,750
------------- -------------
INDUSTRIAL-6.41%
1,500,000 Amtrol, Inc., 10.625% Sr Sub Note
12-31-2006................................. B- 1,536,323 1,586,250
4,000,000 Exide Corp., 10.75% Sr Note 12-15-2002....... B+ 4,240,957 4,240,000
4,000,000 Inter-City Products Corp. USA, 9.75% Sr
Secured Note 3-1-2000...................... B- 4,071,589 4,110,000
4,000,000 Riverwood International, Inc., 10.875% Sr Sub
Note 4-1-2008.............................. CCC+ 3,810,025 3,805,000
------------- -------------
13,658,894 13,741,250
------------- -------------
LEISURE TIME-AMUSEMENTS-8.01%
500,000 Argosy Gaming Co., 13.25% First Mortgage Bond
6-1-2004................................... B+ 491,332 495,000
5,020,000 Mohegan Tribal Gaming, 13.50% Sr Note
11-15-2002................................. BB+ 6,128,952 6,601,300
</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>
$ 1,000,000 Showboat, Inc., 13.00% Sr Sub Note
8-1-2009................................... B $ 1,082,500 $ 1,150,000
5,500,000 Station Casinos, Inc., 10.125% Sr Sub Note
3-15-2006.................................. B+ 5,547,621 5,555,000
3,000,000 Waterford Gaming LLC, 12.75% Sr Note
11-15-03................................... NR 3,362,443 3,360,000
------------- -------------
16,612,848 17,161,300
------------- -------------
MACHINERY-1.97%
4,000,000 Clark Materials Handling, 10.75% Sr Note
11-15-2006................................. B+ 4,141,264 4,220,000
------------- -------------
PUBLISHING-2.22%
2,500,000 Marvel (Parent) Holdings, Inc., 12.69% Sr
Secured Zero Coupon Discount Note 4-15-1998
(a)(e)..................................... D 2,146,348 262,500
4,000,000 Petersen Publishing Co. LLC, 11.125% Sr Sub
Note 11-15-2006............................ B- 4,259,365 4,505,000
------------- -------------
6,405,713 4,767,500
------------- -------------
RETAIL-GROCERY-0.00%
350,000 Pay 'N' Pak Stores, Inc., 13.50% Sr Sub Deb
6-1-1998 (a)............................... NR 350,000 1,750
------------- -------------
RETAIL-MISCELLANEOUS-0.01%
1,000,000 Color Tile, Inc., 10.75% Sr Note 12-15-2001
(a)........................................ NR 590,000 30,000
------------- -------------
STEEL AND IRON-3.02%
2,500,000 WCI Steel, Inc., 10.00% Sr Note 12-1-2004.... B+ 2,599,195 2,675,000
3,500,000 Weirton Steel Corp., 11.375% Sr Note
7-1-2004................................... B 3,607,279 3,797,500
------------- -------------
6,206,474 6,472,500
------------- -------------
TELECOMMUNICATIONS-21.82%
2,500,000 Cellular Communications, Inc., 11.96% Zero
Coupon Note 8-15-2000 (e).................. CCC+ 1,815,883 1,918,750
1,500,000 Dobson Communications Corp., 11.75% Sr Note
4-15-2007.................................. NR 1,427,792 1,455,000
2,000,000 Fonorola, Inc., 12.50% Sr Secured Note
8-15-2002.................................. B+ 2,048,757 2,230,000
3,000,000 Hyperion Communications, Inc.,13.00% Sr Disc
Note 4-15-2003 (Zero coupon until
4-15-2001, thereafter 13.00%) (e).......... NR 1,808,623 1,830,000
4,000,000 Intercel, Inc., 10.935% Sr Disc Note 2-1-2006
(Zero coupon until 2-1-2001, thereafter
12.00%) (e)................................ B 2,792,950 2,640,000
3,000,000 Intermedia Communications, Inc., 11.25% Sr
Disc Note 7-15-2007 (Zero coupon until
7-15-2002, thereafter 11.25%) (e)(f)....... B 1,746,297 1,927,500
5,000,000 Iridium LLC/Capital Corp., 13.00% Sr Note
7-15-2005 (and warrants)(f)................ B- 4,893,397 5,050,000
1,360,000 Metrocall, Inc., 10.375% Sr Sub Note
10-1-2007.................................. CCC 1,177,353 1,292,000
4,000,000 Microcell Telecommunications, Inc., 13.92%
Disc Note 6-1-2006 (Zero coupon until
12-1-2001, thereafter 14.00%) (e).......... NR 2,241,524 2,480,000
6,500,000 Nextel Communications, 11.84% Sr Disc Note
8-15-2004 (Zero coupon through 2-15-1999,
thereafter 9.75%) (e)...................... CCC- 5,125,129 5,338,125
1,500,000 Omnipoint Corp., 11.625% Sr Note 8-15-2006... CCC+ 1,440,351 1,466,250
3,000,000 Phonetel Technologies, 12.00% Sr Note
12-15-2006................................. B- 3,007,409 3,015,000
6,000,000 PriCellular Wireless Corp., 10.29% Sr Disc
Note 10-1-2003 (Zero coupon until
10-1-1998, thereafter 12.25%) (e).......... CCC+ 5,712,538 5,805,000
4,000,000 Shared Technologies Fairchild, 10.969% Sr Sub
Note 3-1-2006 (Zero coupon until 3-1-1999,
thereafter 12.25%) (e)..................... NR 3,577,860 3,840,000
3,000,000 Teleport Communications, 9.21% Sr Disc Note
7-1-2007 (Zero coupon until 7-1-2001,
thereafter 11.125%) (e).................... B 2,292,093 2,280,000
1,000,000 Western Wireless Corp., 10.50% Sr Sub Note
6-1-2006................................... B- 1,046,154 1,050,000
3,000,000 Western Wireless, 10.50% Sr Sub Note
2-1-2007................................... B- 3,000,000 3,142,500
------------- -------------
45,154,110 46,760,125
------------- -------------
TEXTILE MANUFACTURING-2.02%
4,000,000 Pillowtex Corp., 10.00% Sr Sub Note
11-15-2006................................. B+ 4,210,093 4,320,000
------------- -------------
TRANSPORTATION-2.01%
4,000,000 Greyhound Lines, Inc., 11.50% Sr Note
4-15-2007 (f).............................. NR 4,123,490 4,310,000
------------- -------------
WASTE DISPOSAL-1.12%
2,125,000 Norcal Waste Systems, Inc., 13.00% Increasing
Rate Sr Note 11-15-2005 (e)................ BB- 2,106,486 2,395,938
------------- -------------
TOTAL CORPORATE BONDS - NON-INVESTMENT
GRADE...................................... 205,932,817 208,879,247
------------- -------------
------------- -------------
TOTAL LONG-TERM INVESTMENTS.................. $ 206,893,578 $ 209,625,488
------------- -------------
------------- -------------
</TABLE>
9
<PAGE>
FORTIS BOND FUNDS
HIGH YIELD PORTFOLIO (CONTINUED)
Schedule of Investments
July 31, 1997
SHORT-TERM INVESTMENTS-0.01%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value (c)
-------- -------------
<C> <S> <C>
BANKS-0.01%
$16,000 First Trust Money Market Variable Rate Time
Deposit, Current rate -- 5.47%............. $ 16,000
-------------
TOTAL INVESTMENTS IN SECURITIES (COST:
$206,909,578) (B).......................... $ 209,641,488
-------------
-------------
</TABLE>
(a) Presently non income producing. For long-term debt securities, items
identified are in default as to payment of interest and/or principal.
(b) At July 31, 1997, the cost of securities for federal income tax
purposes was $206,931,194, and the aggregate gross unrealized
appreciation and depreciation based on that cost was:
<TABLE>
<S> <C>
Unrealized appreciation........................... $ 8,467,266
Unrealized depreciation........................... (5,756,972)
---------------------------------------------------------------
Net unrealized appreciation....................... $ 2,710,294
---------------------------------------------------------------
</TABLE>
(c) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(d) Note: Percentage of investments as shown is the ratio of the total
market value to total net assets. Market value of investments in
foreign securities represents 8.83% of net assets as of July 31, 1997.
(e) The interest rate disclosed for these securities represents the
effective yields on the date of acquisition.
(f) Securities issued 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 10, 1995 4,500 American Comm. Services, Inc. (Warrants) -- 144A $ 205,650
July 16, 1997 4,000,000 Belden & Blake due 2007 -- 144A 4,009,982
June 10, 1994 1,300 Chattem, Inc. (Warrants) -- 144A 16,549
April 25, 1995 500 Chattem, Inc. (Warrants) -- 144A 1,875
January 21, 1997 1,750,000 Electronic Retailing Systems due 2004 -- 144A 1,229,539
January 21, 1997 1,750 Electronic Retailing Systems (Warrants) -- 144A 68,867
February 6, 1997 4,000,000 Fage Dairy Industries, Inc. due 2007 -- 144A 3,922,234
April 23, 1997 2,000,000 Greyhound Lines, Inc. due 2007 -- 144A 2,009,855
May 14, 1997 2,000,000 Greyhound Lines, Inc. due 2007 -- 144A 2,113,635
October 7, 1994 1,250 Hosiery Corp. of America Class A (Warrants) -- 144A 21,150
February 6, 1997 1,000 Hyperion Telecom (Warrants) -- 144A 20,000
July 3, 1997 3,000,000 Intermedia Communications due 2007 -- 144A 1,746,297
July 11, 1997 2,500,000 Iridium LLC/Capital Corp. due 2005 -- 144A 2,440,136
July 14, 1997 2,500,000 Iridium LLC/Capital Corp. due 2005 -- 144A 2,453,262
July 9, 1997 16,000 Microcell Telecomm, Inc. (Warrants) -- 144A 226,000
September 6, 1996 1,000 People's Choice T.V. Corp. (Warrants) -- 144A 617
July 31, 1997 1,000,000 Sovereign Specialty Chemical due 2007 -- 144A 1,000,000
June 16, 1994 8,500 American Telecasting, Inc. (Warrants) 17,000
July 28, 1994 1,500 American Telecasting, Inc. (Warrants) 3,000
November 1, 1996 4,000 Australis Media Ltd (Warrants) 40
May 29, 1997 2,000 Australis Media Ltd (Warrants) 20
June 24, 1997 2,000 Australis Media Ltd (Warrants) 20
November 3, 1993 1,000 Boomtown, Inc. (Warrants) 6,340
January 10, 1994 26,670 Capital Gaming 133,350
September 21, 1994 22,750 Capital Gaming (Warrants) 35,440
August 5, 1996 1,650 Clearnet Communications, Inc. (Warrants) 24,750
October 1, 1996 4,950 Clearnet Communications, Inc. (Warrants) 51,975
July 11, 1994 6,000 Hemmeter Enterprises, Inc. (Warrants) 24,000
July 9, 1997 16,000 Microcell Telecommunications, Inc. (Unconditional Warrants) 10,000
July 21, 1997 12,800 Powertel, Inc. (Warrants) 94,118
</TABLE>
The value of these securities at July 31, 1997 is $22,123,741 which
represent 10.32% of net assets.
10
<PAGE>
FORTIS BOND FUNDS
Statements of Assets and Liabilities
July 31, 1997
<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 $374,858,782; and
$206,909,578; respectively) (Note
1).................................. $ 385,736,039 $ 209,641,488
Cash on deposit with custodian........ -- 377,654
Collateral for securities lending
transactions (Note 1)............... 186,889,625 --
Receivables:
Investment securities sold.......... 30,614,336 3,421,782
Interest and dividends.............. 4,305,939 4,921,355
Subscriptions of capital stock...... -- 159,335
Deferred registration costs (Note
1).................................. 25,550 29,760
Prepaid expenses...................... -- 64
-------------- --------------
TOTAL ASSETS............................ 607,571,489 218,551,438
-------------- --------------
LIABILITIES:
Cash portion of dividends payable..... 592,029 674,174
Payable upon return of securities
loaned (Note 1)..................... 186,889,625 --
Payable for investment securities
purchased........................... 21,034,152 3,290,833
Redemptions of capital stock.......... 82,239 76,162
Payable for investment advisory and
management fees (Note 2)............ 241,187 129,467
Payable for distribution fees (Note
2).................................. 1,619 7,310
Accounts payable and accrued
expenses............................ 52,519 43,751
-------------- --------------
TOTAL LIABILITIES....................... 208,893,370 4,221,697
-------------- --------------
NET ASSETS:
Net proceeds of capital stock, par
value $.01 per share-authorized
10,000,000,000 shares............... 461,113,348 223,140,980
Unrealized appreciation of
investments......................... 10,877,257 2,731,910
Undistributed net investment income... 207,588 636,131
Accumulated net realized (loss) from
sale of investments................. (73,520,074) (12,179,280)
-------------- --------------
TOTAL NET ASSETS........................ $ 398,678,119 $ 214,329,741
-------------- --------------
SHARES OUTSTANDING AND NET ASSET VALUE
PER SHARE:
Class A shares (based on net assets of
$59,127,644; and $123,115,140;
respectively and 6,456,243; and
15,725,710 shares outstanding;
respectively)......................... $9.16 $7.83
-------------- --------------
Class B shares (based on net assets of
$2,826,460; and $20,388,129;
respectively and 309,239; and
2,604,670 shares outstanding;
respectively)......................... $9.14 $7.83
-------------- --------------
Class C shares (based on net assets of
$1,444,353; and $7,037,072;
respectively and 158,205; and 899,995
shares outstanding; respectively)..... $9.13 $7.82
-------------- --------------
Class E shares (based on net assets of
$324,642,326; and $0; respectively and
35,453,992; and 0 shares outstanding;
respectively)......................... $9.16 $ --
-------------- --------------
Class H shares (based on net assets of
$10,637,336; and $63,789,400;
respectively and 1,164,372; and
8,153,853 shares outstanding;
respectively)......................... $9.14 $7.82
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FORTIS BOND FUNDS
Statements of Operations
For the Year Ended July 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
US GOVERNMENT
SECURITIES HIGH YIELD
FUND PORTFOLIO
------------- -------------
<S> <C> <C>
NET INVESTMENT INCOME:
Income:
Interest income..................... $ 29,566,950 $ 21,076,834
Dividend income..................... -- 15,997
Fee income (Note 1)................. 191,064 41,587
------------- -------------
Total income.......................... 29,758,014 21,134,418
------------- -------------
Expenses:
Investment advisory and management
fees (Note 2)...................... 3,071,143 1,388,154
Distribution fees (Class A)(Note
2)................................. 164,452 410,701
Distribution fees (Class B)(Note
2)................................. 26,293 164,156
Distribution fees (Class C)(Note
2)................................. 14,272 50,625
Distribution fees (Class H)(Note
2)................................. 104,719 523,505
Registration fees................... 96,441 65,142
Shareholders' notices and reports... 115,669 34,537
Legal and auditing fees (Note 2).... 45,449 40,000
Custodian fees...................... 86,106 40,000
Directors' fees and expenses........ 24,138 12,035
Other............................... 44,159 17,052
------------- -------------
Total expenses........................ 3,792,841 2,745,907
------------- -------------
NET INVESTMENT INCOME GAIN.............. 25,965,173 18,388,511
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1):
Net realized gain (loss) from security
transactions........................ (2,463,932) 4,488,160
Net change in unrealized appreciation
of investments...................... 17,073,718 2,658,089
------------- -------------
NET GAIN ON INVESTMENTS................. 14,609,786 7,146,249
------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... $ 40,574,959 $ 25,534,760
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<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, 1997 JULY 31, 1996
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income................. $ 25,965,173 $ 31,593,991
Net realized gain (loss) from security
transactions........................ (2,463,932) 2,510,562
Net change in unrealized appreciation
(depreciation) of investments in
securities.......................... 17,073,718 (11,044,725)
---------------- ----------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... 40,574,959 23,059,828
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A............................. (3,832,687) (2,116,221)
Class B............................. (134,130) (82,612)
Class C............................. (73,505) (37,715)
Class E............................. (21,361,127) (28,702,692)
Class H............................. (544,458) (448,743)
Excess distributions of net realized
gains
Class A............................. (190,527) (32,271)
Class B............................. (6,668) (1,260)
Class C............................. (3,654) (576)
Class E............................. (1,061,888) (437,700)
Class H............................. (27,066) (6,841)
---------------- ----------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS..... (27,235,710) (31,866,631)
---------------- ----------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (1,111,657 and 1,964,078
shares)............................ 9,952,631 17,801,708
Class B (142,993 and 210,461
shares)............................ 1,283,517 1,912,091
Class C (143,651 and 106,062
shares)............................ 1,279,587 955,478
Class E (1,979,573 and 2,660,444
shares)............................ 17,773,525 24,188,981
Class H (373,676 and 833,214
shares)............................ 3,342,720 7,542,489
Proceeds from shares issued as a
result of reinvested dividends
Class A (317,250 and 167,122
shares)............................ 2,846,964 1,497,610
Class B (13,420 and 7,469 shares)... 120,151 67,217
Class C (7,146 and 3,078 shares).... 64,011 27,707
Class E (1,753,810 and 2,168,387
shares)............................ 15,738,566 19,681,299
Class H (43,546 and 35,275
shares)............................ 390,143 319,043
Less cost of repurchase of shares
Class A (2,602,273 and 1,248,050
shares)............................ (23,352,025) (11,152,321)
Class B (108,504 and 30,332
shares)............................ (970,650) (271,568)
Class C (112,053 and 31,951
shares)............................ (1,004,606) (289,065)
Class E (12,000,074 and 13,258,065
shares)............................ (107,796,096) (120,107,341)
Class H (395,058 and 314,193
shares)............................ (3,534,460) (2,833,320)
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.......................... (83,866,022) (3,125,095)
---------------- ----------------
TOTAL DECREASE IN NET ASSETS............ (70,526,773) (11,931,898)
NET ASSETS:
Beginning of year..................... 469,204,892 481,136,790
---------------- ----------------
End of year (includes undistributed
net investment income of $207,588
and $188,322, respectively)......... $ 398,678,119 $ 469,204,892
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<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
JULY 31, 1997 JULY 31, 1996
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income................. $ 18,388,511 $ 11,429,502
Net realized gain (loss) from security
transacations....................... 4,488,160 (739,362)
Net change in unrealized appreciation
(depreciation) of investments in
securities.......................... 2,658,089 (353,588)
-------------- --------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... 25,534,760 10,336,552
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Class A............................. (11,482,883) (7,994,179)
Class B............................. (1,494,310) (704,230)
Class C............................. (458,567) (193,776)
Class H............................. (4,774,094) (2,179,529)
Excess distributions of net realized
gains
Class A............................. (377,686) (329,567)
Class B............................. (49,150) (29,033)
Class C............................. (15,083) (7,989)
Class H............................. (157,026) (89,853)
-------------- --------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS..... (18,808,799) (11,528,156)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares
Class A (4,315,013 and 2,575,765
shares)............................ 33,019,998 19,742,519
Class B (1,260,144 and 758,895
shares)............................ 9,632,833 5,820,848
Class C (646,824 and 245,695
shares)............................ 4,958,258 1,880,964
Class H (4,233,141 and 2,624,489
shares)............................ 32,395,020 20,121,276
Proceeds from shares issued as a
result of reinvested dividends
Class A (947,140 and 680,383
shares)............................ 7,248,340 5,216,993
Class B (102,566 and 45,688
shares)............................ 784,569 350,128
Class C (42,294 and 15,147
shares)............................ 322,788 115,856
Class H (319,110 and 144,327
shares)............................ 2,439,287 1,105,206
Less cost of repurchase of shares
Class A (4,007,745 and 3,674,251
shares)............................ (30,608,979) (28,172,079)
Class B (354,941 and 197,976
shares)............................ (2,713,555) (1,514,841)
Class C (236,864 and 100,249
shares)............................ (1,797,762) (764,968)
Class H (1,579,066 and 727,568
shares)............................ (12,056,442) (5,569,818)
-------------- --------------
NET INCREASE IN NET ASSETS FROM SHARE
TRANSACTIONS.......................... 43,624,355 18,332,084
-------------- --------------
TOTAL INCREASE IN NET ASSETS............ 50,350,316 17,140,480
NET ASSETS:
Beginning of year..................... 163,979,425 146,838,945
-------------- --------------
End of year (includes undistributed
net investment income of $635,033
and $456,376, respectively)......... $ 214,329,741 $ 163,979,425
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<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 total return with a focus on high 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.
An outside pricing service may be utilized to provide such valuations. The
pricing service may employ electronic data processing techniques and/or a
matrix system to determine valuations using methods which include
consideration of yields or prices of bonds of comparable quality, type of
issue, coupon, maturity and rating indications as to value from dealers, and
general market conditions. Securities for which quotations are not readily
available are valued at fair value as determined in good faith by management
under supervision of the Board of Directors. Short-term investments, with
maturities of less than 60 days when acquired, or which subsequently are
within 60 days of maturity, are valued at amortized cost.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS: Delivery and payment for
securities that have been purchased by the funds on a forward commitment or
when-issued basis can take place a month or more after the transaction date.
During this period, such securities are subject to market fluctuation and the
portfolio maintains, in a segregated account with its custodian, assets with
a market value equal to the amount of its purchase commitments. As of July
31, 1997 none of the portfolios had outstanding when-issued or forward
commitments.
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 ended July 31, 1997, the cost of purchases and proceeds
from sales of securities (other than short-term securities) for U.S.
Government were $651,003,925 and $735,879,804, respectively, and for High
Yield were $648,377,682 and $600,840,711 respectively.
LENDING OF PORTFOLIO SECURITIES: At July 31, 1997, securities valued at
$181,933,482 were on loan to brokers from U.S. Government. For collateral,
the Fund's custodian received $186,889,625 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 $191,064 for U.S.
Government and $41,587 for High Yield for the year ended ended July 31, 1997.
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, due to permanent book-to-tax
differences, U.S. Government's accumulated net realized loss has been
decreased $1,184,744 and High Yield's undistributed net investment income has
been increased $1,098; resulting in reclassifications to paid-in-capital by
the same amounts.
For federal income tax purposes U.S. Government had a capital loss carryover
of $72,061,071 and High Yield had $12,157,664 at July 31, 1997, which, if not
offset by subsequent capital gains, will expire:
<TABLE>
<CAPTION>
U.S.
Government High Yield
<S> <C> <C>
- ----------------------------------------------------------------------------
1998 791,696 --
1999 1,509,566 --
2001 5,431,584 --
2002 28,044,864 --
2003 12,006,674 12,157,664
2004 19,258,547 --
</TABLE>
15
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Government High Yield
- ----------------------------------------------------------------------------
<S> <C> <C>
2005 4,391,799 --
2006 626,341 --
</TABLE>
It is unlikely the Board of Directors will authorize a distribution of any
net realized gains until the available capital loss carryover has been offset
or expired.
INCOME AND CAPITAL GAINS DISTRIBUTIONS: Distributions from net investment
income are declared daily and paid monthly. The funds will generally make
annual distributions of any realized capital gains as required by law. These
income and capital gains distributions may be reinvested in additional shares
of the fund at net asset value without any charge to the shareholder or
payable in cash.
ILLIQUID SECURITIES: At July 31, 1997, 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,
1997, was $22,123,741 which represents 10.32% of net assets.
HIGH-YIELD DEBT SECURITIES: Although High Yield has a diversified portfolio,
the fund has 97.45% of total net assets invested in non-investment grade
(high-yield) and comparable quality unrated high-yield securities.
Participation in high-yielding securities transactions generally involves
greater returns in the form of higher average yields. However, participation
in such transactions involves greater risks, often related to sensitivity to
interest rates, economic changes, solvency, and relative liquidity in the
secondary trading market. Lower ratings may reflect a greater possibility
that the financial condition of the issuer, or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of interest and principal. The prices and yields of lower rated
securities generally fluctuate more than higher quality securities, and such
prices may decline significantly in periods of general economic difficulty or
rising interest rates.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of increase and decrease
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
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 U.S. Government and High
Yield. In addition to the investment advisory and management fee, Classes A,
B, C and H pay Fortis Investors, Inc., (the principal underwriter)
distribution fees equal to .25% U.S. Government (Class A), .35% High Yield
(Class A) and 1.00% U.S. Government and High Yield (Class 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 or redeemers of the
fund's shares) aggregating $168,223 for Class A, $11,156 for Class B, $5,454
for Class C, $47,489 for Class H, and $141,525 for Class E and for High Yield
aggregating $559,853 for Class A, $52,775 for Class B, $7,676 for Class C,
and $259,406 for Class H, for the year ended July 31, 1997.
Legal fees and expenses aggregating $6,849 for U.S. Government and $4,000 for
High Yield for the year ended ended July 31, 1997, 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 Government Total
Total Return on Return Shares U.S. Government
March 1, 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>
16
<PAGE>
- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS: Selected per share historical data for each of the
Portfolios was as follows:
<TABLE>
<CAPTION>
Class E
-------------------------------------------------------------------
Year Ended July 31, 1997
-------------------------------------------------------------------
FORTIS U.S. GOVERNMENT SECURITIES FUND 1997 1996 1995 1994** 1993***
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 8.87 $ 9.02 $ 9.03 $ 9.87 $ 9.86
--------- --------- --------- ------------ ------------
Operations:
Investment income - net............... .54 .60 .67 .42 .75
Net realized and unrealized gain
(loss) on investments............... .32 (.15) (.01) (.84) .05
--------- --------- --------- ------------ ------------
Total from operations................... .86 .45 .66 (.42) .80
--------- --------- --------- ------------ ------------
Distributions to shareholders:
From investment income - net.......... (.54) (.60) (.67) (.42) (.75)
Excess distributions of net realized
gains............................... (.03) -- -- -- --
From net realized gains............... -- -- -- -- (.04)
--------- --------- --------- ------------ ------------
Total distributions to shareholders..... (.57) (.60) (.67) (.42) (.79)
--------- --------- --------- ------------ ------------
Net asset value, end of period.......... $ 9.16 $ 8.87 $ 9.02 $ 9.03 $ 9.87
--------- --------- --------- ------------ ------------
Total return @.......................... 10.07% 5.08% 7.71% (4.29%) 8.31%
Net assets end of period (000s
omitted).............................. $ 324,643 $ 388,006 $ 470,597 $ 555,275 $ 641,977
Ratio of expenses to average daily net
assets................................ 0.81% 0.81% 0.77% 0.77% 0.76%
Ratio of net investment income to
average daily net assets.............. 6.08% 6.59% 7.51% 7.72% 7.43%
Portfolio turnover rate................. 161% 75% 76% 85% 157%
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
-------------------------------- -------------------------------
Year Ended July 31, 1997
-------------------------------------------------------------------
FORTIS U.S. GOVERNMENT SECURITIES FUND 1997 1996 1995+ 1997 1996 1995+
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 8.87 $ 9.02 $ 8.63 $ 8.86 $ 9.02 $ 8.63
-------- -------- -------- -------- -------- -------
Operations:
Investment income - net............... .52 .58 .46 .46 .51 .41
Net realized and unrealized gain
(loss) on investments............... .32 (.15) .39 .31 (.15) .39
-------- -------- -------- -------- -------- -------
Total from operations................... .84 .43 .85 .77 .36 .80
-------- -------- -------- -------- -------- -------
Distributions to shareholders:
From investment income - net.......... (.52) (.58) (.46) (.47) (.52) (.41)
Excess distributions of net realized
gains............................... (.03) -- -- (.02) -- --
From net realized gains............... -- -- -- -- -- --
-------- -------- -------- -------- -------- -------
Total distributions to shareholders..... (.55) (.58) (.46) (.49) (.52) (.41)
-------- -------- -------- -------- -------- -------
Net asset value, end of period.......... $ 9.16 $ 8.87 $ 9.02 $ 9.14 $ 8.86 $ 9.02
-------- -------- -------- -------- -------- -------
Total return @.......................... 9.77% 4.78% 10.07% 8.95% 4.00% 9.74%
Net assets end of period (000s
omitted).............................. $ 59,128 $ 67,707 $ 4,909 $ 2,826 $ 2,314 $ 483
Ratio of expenses to average daily net
assets................................ 1.06% 1.06% 1.02%* 1.81% 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 5.83% 6.34% 7.00%* 5.08% 5.45% 6.24%*
Portfolio turnover rate................. 161% 75% 76% 161% 75% 76%
<CAPTION>
Class C Class H
------------------------------ -----------------------------------
FORTIS U.S. GOVERNMENT SECURITIES FUND 1997 1996 1995+ 1997 1996 1995+
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 8.85 $ 9.01 $8.63 $ 8.86 $ 9.02 $ 8.63
-------- -------- ------ --------- --------- ---------
Operations:
Investment income - net............... .46 .51 .41 .46 .51 .41
Net realized and unrealized gain
(loss) on investments............... .31 (.15) .38 .31 (.15) .39
-------- -------- ------ --------- --------- ---------
Total from operations................... .77 (.36) .79 .77 .36 .80
-------- -------- ------ --------- --------- ---------
Distributions to shareholders:
From investment income - net.......... (.47) (.52) (.41) (.47) (.52) (.41)
Excess distributions of net realized
gains............................... (.02) -- -- (.02) -- --
From net realized gains............... -- -- -- -- -- --
-------- -------- ------ --------- --------- ---------
Total distributions to shareholders..... (.49) (.52) (.41) (.49) (.52) (.41)
-------- -------- ------ --------- --------- ---------
Net asset value, end of period.......... $ 9.13 $ 8.85 $9.01 $ 9.14 $ 8.86 $ 9.02
-------- -------- ------ --------- --------- ---------
Total return @.......................... 8.96% 4.00% 9.35% 8.94% 4.00% 9.47%
Net assets end of period (000s
omitted).............................. $ 1,444 $ 1,057 $ 326 $ 10,637 $ 10,120 $ 4,823
Ratio of expenses to average daily net
assets................................ 1.81% 1.81% 1.77%* 1.80% 1.81% 1.77%*
Ratio of net investment income to
average daily net assets.............. 5.07% 5.59% 6.24%* 5.08% 5.52% 6.24%*
Portfolio turnover rate................. 161% 75% 76% 161% 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 seven-month period ended July 31, 1994.
+ For the period from November 14, 1994 (commencement of operations) to
July 31, 1995.
*** For the period from December 31, 1992 to December 31, 1993.
17
<PAGE>
FORTIS BOND FUNDS
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. FINANCIAL HIGHLIGHTS (continued):
Class A
------------------------------------------------------------------
Year Ended July 31
------------------------------------------------------------------
HIGH YIELD PORTFOLIO 1997 1996** 1995*** 1994*** 1993***
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period.... $ 7.56 $ 7.61 $ 7.90 $ 8.65 $ 8.00
---------- ---------- ---------- ---------- ----------
Operations:
Investment Income - net............... .76 .56 .86 .86 .87
Net realized and unrealized gain
(loss) on investments............... .28 (.04) (.25) (.72) .68
---------- ---------- ---------- ---------- ----------
Total from operations................... 1.04 .52 .61 .14 1.55
---------- ---------- ---------- ---------- ----------
Distributions to shareholders:
From investment income - net.......... (.75) (.55) (.86) (.89) (.89)
Excess distributions of net realized
gains............................... (.02) (.02) (.04) -- (.01)
---------- ---------- ---------- ---------- ----------
Total Distributions to Shareholders..... (.77) (.57) (.90) (.89) (.90)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.......... $ 7.83 $ 7.56 $ 7.61 $ 7.90 $ 8.65
---------- ---------- ---------- ---------- ----------
Total Return @.......................... 14.51% 6.98% 8.07% 1.48% 20.33%
Net assets end of period (000s
omitted).............................. $ 123,115 $ 109,401 $ 113,268 $ 98,611 $ 73,395
Ratio of expenses to average daily net
assets................................ 1.19% 1.21% 1.25% 1.23% 1.29%
Ratio of net investment income to
average daily net assets.............. 9.84% 9.87% 10.61% 10.18% 10.43%
Portfolio turnover rate................. 331% 146% 101% 63% 95%
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
---------------------------------- --------------------------------
Year Ended July 31
----------------------------------------------------------------------
HIGH YIELD PORTFOLIO 1997 1996** 1995+ 1997 1996** 1995+
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period.............................. $ 7.56 $ 7.60 $ 7.87 $ 7.55 $ 7.59 $ 7.87
--------- --------- -------- -------- -------- --------
Operations:
Investment Income - net............. .71 .53 .78 .71 .53 .78
Net realized and unrealized gain
(loss) on investments............. .28 (.04) (.23) .28 (.04) (.24)
--------- --------- -------- -------- -------- --------
Total from operations................. .99 .49 .55 .99 .49 .54
--------- --------- -------- -------- -------- --------
Distributions to shareholders:
From investment income - net........ (.70) (.51) (.78) (.70) (.51) (.78)
Excess distributions of net realized
gains............................. (.02) (.02) (.04) (.02) (.02) (.04)
--------- --------- -------- -------- -------- --------
Total Distributions to Shareholders... (.72) (.53) (.82) (.72) (.53) (.82)
--------- --------- -------- -------- -------- --------
Net asset value, end of period........ $ 7.83 $ 7.56 $ 7.60 $ 7.82 $ 7.55 $ 7.59
--------- --------- -------- -------- -------- --------
Total Return @........................ 13.80% 6.62% 7.25% 13.82% 6.63% 7.12%
Net assets end of period (000s
omitted)............................ $ 20,388 $ 12,067 $ 7,530 $ 7,037 $ 3,378 $ 2,180
Ratio of expenses to average daily net
assets.............................. 1.83% 1.86%* 1.90%* 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets............ 9.24% 9.20%* 9.66%* 9.26% 9.21%* 9.83%*
Portfolio turnover rate............... 331% 146% 101% 331% 146% 101%
<CAPTION>
Class H
-----------------------------------
HIGH YIELD PORTFOLIO 1997 1996** 1995+
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period.............................. $ 7.55 $ 7.60 $ 7.87
--------- --------- ---------
Operations:
Investment Income - net............. .71 .52 .78
Net realized and unrealized gain
(loss) on investments............. .28 (.04) (.23)
--------- --------- ---------
Total from operations................. .99 .48 .55
--------- --------- ---------
Distributions to shareholders:
From investment income - net........ (.70) (.51) (.78)
Excess distributions of net realized
gains............................. (.02) (.02) (.04)
--------- --------- ---------
Total Distributions to Shareholders... (.72) (.53) (.82)
--------- --------- ---------
Net asset value, end of period........ $ 7.82 $ 7.55 $ 7.60
--------- --------- ---------
Total Return @........................ 13.82% 6.48% 7.25%
Net assets end of period (000s
omitted)............................ $ 63,789 $ 39,133 $ 23,862
Ratio of expenses to average daily net
assets.............................. 1.83% 1.86%* 1.90%*
Ratio of net investment income to
average daily net assets............ 9.23% 9.21%* 9.81%*
Portfolio turnover rate............... 331% 146% 101%
</TABLE>
* Annualized
@ These are the Fund's total returns during the periods, including
reinvestment of all dividend and capital gains distributions without
adjustments for sales charge.
+ For the period from November 14, 1994 (commencement of operations) to
October 31, 1995.
** For the nine-month period ended July 31, 1996.
*** For the year ended October 31.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Fortis Income Portfolios, Inc.
Fortis Advantage Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of Fortis U.S. Government Securities
Fund (a fund within Fortis Income Portfolios, Inc.) and Fortis High Yield
Portfolio (a fund within Fortis Advantage Portfolios, Inc.), as of July 31,
1997, and the related statements of operations for the year then ended and the
statements of changes in net assets and the financial highlights for the periods
presented. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered and
securities on loan, we request confirmations from brokers, and the custodian
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 evaluation the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Fortis
U.S. Government Securities Fund and Fortis High Yield Portfolio as of July 31,
1997, and the results of their operations for the year then ended, and the
changes in their net assets and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 5, 1997
19
<PAGE>
FORTIS BOND FUNDS
FEDERAL INCOME TAX INFORMATION
FOR THE FISCAL YEAR ENDED JULY 31,1997:
INCOME DISTRIBUTIONS -- taxable as income, 0% qualifying for deduction by
corporations. Distributions from net investment income were paid monthly through
July, 1997, 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, 1997, was as follows:
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<S> <C>
Direct Federal Obligations:
U.S. Treasury............... 39.00 %
Other....................... 15.30 %
-------
Total Direct Federal
Obligations.............. 54.30 %
Other Securities........ 45.70 %
-------
100.00 %
-------
</TABLE>
Detailed below are the per share distributions made for the fiscal year ended
July 31, 1997.
<TABLE>
<CAPTION>
U.S. Government Securities Fund
--------------------------------------------------
Ordinary Income Per Share
--------------------------------------------------
RECORD DATE Class A Class B Class C Class E Class H
<S> <C> <C> <C> <C> <C>
--------------------------------------------------
August 31, 1996............... $0.045 $ 0.040 $ 0.040 $ 0.047 $ 0.040
September 30, 1996............ 0.045 0.040 0.040 0.047 0.040
October 31, 1996.............. 0.045 0.040 0.040 0.047 0.040
November 30, 1996............. 0.046 0.041 0.041 0.048 0.041
December 31, 1996............. 0.046 0.041 0.041 0.048 0.041
January 31, 1997.............. 0.046 0.041 0.041 0.048 0.041
February 28, 1997............. 0.046 0.041 0.041 0.048 0.041
March 31, 1997................ 0.046 0.041 0.041 0.048 0.041
April 30, 1997................ 0.046 0.041 0.041 0.048 0.041
May 31, 1997.................. 0.046 0.041 0.041 0.048 0.041
June 30, 1997................. 0.046 0.041 0.041 0.048 0.041
July 31, 1997................. 0.046 0.041 0.041 0.048 0.041
------- -------- -------- -------- --------
Total Distributions........... $0.549 $ 0.489 $ 0.489 $ 0.573 $ 0.489
------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
High Yield Portfolio
---------------------------------------
Ordinary Income Per Share
---------------------------------------
RECORD DATE Class A Class B Class C Class H
<S> <C> <C> <C> <C>
---------------------------------------
August 31, 1996............... $0.066 $ 0.062 $ 0.062 $ 0.062
September 30, 1996............ 0.066 0.062 0.062 0.062
October 31, 1996.............. 0.066 0.062 0.062 0.062
November 30, 1996............. 0.066 0.062 0.062 0.062
December 31, 1996............. 0.070 0.066 0.066 0.066
January 31, 1997.............. 0.066 0.062 0.062 0.062
February 28, 1997............. 0.066 0.062 0.062 0.062
March 31, 1997................ 0.066 0.062 0.062 0.062
April 30, 1997................ 0.060 0.056 0.056 0.056
May 31, 1997.................. 0.060 0.056 0.056 0.056
June 30, 1997................. 0.060 0.056 0.056 0.056
July 31, 1997................. 0.060 0.056 0.056 0.056
------- -------- -------- --------
Total Distributions........... $0.772 $ 0.724 $ 0.724 $ 0.724
------- -------- -------- --------
</TABLE>
20
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS Richard W. Cutting CPA AND FINANCIAL CONSULTANT
Allen R. Freedman CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
FORTIS, INC. MANAGING DIRECTOR OF
FORTIS INTERNATIONAL, N.V.
Dr. Robert M. Gavin PRESIDENT, CRANBROOK EDUCATION
COMMUNITY. PRIOR TO JULY 1996,
PRESIDENT MACALESTER COLLEGE
Benjamin S. Jaffray CHAIRMAN, SHEFFIELD GROUP, LTD.
Jean L. King PRESIDENT, COMMUNI-KING
Dean C. Kopperud CHIEF EXECUTIVE OFFICER AND DIRECTOR,
FORTIS ADVISERS, INC. PRESIDENT AND
DIRECTOR, FORTIS INVESTORS, INC.
SENIOR VICE PRESIDENT AND DIRECTOR,
FORTIS BENEFITS INSURANCE COMPANY AND
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.
Noel Shadko MARKETING CONSULTANT. PRIOR TO MAY,
1996, SENIOR VICE PRESIDENT OF
MARKETING & STRATEGIC PLANNING,
ROLLERBLADE, INC.
Joseph M. Wikler INVESTMENT CONSULTANT AND PRIVATE
INVESTOR. PRIOR TO JANUARY, 1994,
DIRECTOR OF RESEARCH, CHIEF
INVESTMENT OFFICER, PRINCIPAL, AND
DIRECTOR, THE ROTHSCHILD CO.
OFFICERS
Dean C. Kopperud
PRESIDENT AND DIRECTOR
Robert W. Beltz, Jr.
VICE PRESIDENT
James S. Byrd
VICE PRESIDENT
Tamara L. Fagely
VICE PRESIDENT AND TREASURER
Howard G. Hudson
VICE PRESIDENT
David A. Peterson
VICE PRESIDENT
Scott R. Plummer
VICE PRESIDENT
Rhonda J. Schwartz
VICE PRESIDENT
Gary N. Yalen
VICE PRESIDENT
Michael J. Radmer
SECRETARY
INVESTMENT MANAGER, REGISTRAR Fortis Advisers, Inc.
AND TRANSFER AGENT BOX 64284, ST. PAUL, MINNESOTA 55164
PRINCIPAL UNDERWRITER Fortis Investors, Inc.
BOX 64284, ST. PAUL, MINNESOTA 55164
CUSTODIAN First Bank National Association
MINNEAPOLIS, MINNESOTA
GENERAL COUNSEL Dorsey & Whitney LLP
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.
21
<PAGE>
- -------------------------------------------------------------------------------
FORTIS FINANCIAL GROUP
Fortis Financial Group (FFG) provides solutions for customers' financial
needs using mutual funds, annuities and life insurance. Besides our own array
of quality products, we create and deliver customized products for other
financial service providers. Like the Fortis name, which comes from the Latin
for strong and steadfast, we concentrate on the customer relationships we
build, the services we provide, the solutions we offer and the performance we
seek.
FFG includes Fortis Advisers, Inc., an established money manager, as well as
Fortis Investors, Inc., a broker dealer with nationwide sales and marketing
influence. The guarantees in our insurance products are underwritten by Fortis
Benefits Insurance Company and Time Insurance Company.
[PHOTO]
Fortis Financial Group is part of Fortis, Inc., a financial services company
that provides specialty insurance and investment products to individuals,
businesses, associations and other financial services organizations in the
United States. Fortis, Inc. is part of Fortis, a worldwide group of companies
active in the fields of insurance, banking and investments. Fortis is jointly
owned by Fortis AMEV of The Netherlands and Fortis AG of Belgium.
- - FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR FORTIS AT
(800) 800-2638.
- -------------------------------------------------------------------------------
---------------
[LOGO] Bulk Rate
U.S. Postage
FORTIS FINANCIAL GROUP PAID
P.O. BOX 64284 Permit No. 3794
ST. PAUL, MN 55164 Minneapolis, MN
---------------
FORTIS BOND FUNDS
- - Printed on recycled paper with
40% preconsumer waste and 10%
post consumer waste. Please recycle.
FORTIS-Registered Trademark- and Fortis-Registered Trademark- are registered
servicemarks of Fortis AMEV and Fortis AG.
98561 (9/97)
