-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BslBGHk8BeDsejk9kyuXP3+l082slNfVIDBqjDejrGmSWLaW+RIEn+bDkEBzHVV8 S2z1XK+C05ApYP7Em11+AQ== 0000930413-97-000161.txt : 19970318 0000930413-97-000161.hdr.sgml : 19970318 ACCESSION NUMBER: 0000930413-97-000161 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUNDAMENTAL FUNDS INC CENTRAL INDEX KEY: 0000315811 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133076279 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03032 FILM NUMBER: 97557356 BUSINESS ADDRESS: STREET 1: 90 WASHINGTON ST - 19TH FL CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2126353005 MAIL ADDRESS: STREET 1: 90 WASHINGTON ST CITY: NEW YORK STATE: NY ZIP: 10006 FORMER COMPANY: FORMER CONFORMED NAME: NEW YORK MUNI FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 ANNUAL REPORT - -------------------------------------------------------------------------------- NEW YORK MUNI FUND(R) Annual Report December 31, 1996 NEW YORK [Logo] MUNI FUND Triple Tax-Free Investing [Logo] FUNDAMENTAL Fundamental Family of Funds - -------------------------------------------------------------------------------- NEW YORK MUNI FUND(R) 90 Washington Street New York, NY 10006 1-800-322-6864 Independent Auditors McGladrey & Pullen, LLP New York, NY 10017 Legal Counsel Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, NY 10022 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. NEW YORK MUNI FUND Dear Fellow Shareholder: The Net Asset Value of the New York Muni Fund ended 1996 at 87 cents per share, and the Fund posted a dismal -7.73% total return. This placed the Fund at the bottom of all municipal funds as measured by Morningstar Inc., and it partially offset the high return achieved in 1995. 1996 was a disappointing year for the entire municipal bond market. Bond prices began the year at a peak and yields were at a low amidst high hopes for a balanced budget agreement between the Clinton Administration and Congress. Additionally the Federal Reserve actually lowered interest rates early in the year. But as the election season progressed, a budget agreement became elusive, the possibility of a decline in income tax rates reemerged--reducing the allure of tax free municipals, and economic activity rebounded. These combined to send shudders through the bond market. New York Muni Fund's portfolio was positioned wrongly for this circumstance. A large portion of the Fund's assets, relative to other funds with similar investment objectives, were in municipal bonds having a high degree of sensitivity to interest rates. Moreover, the Fund used leverage in the period with the result that the Net Asset Value fell sharply. Nevertheless, inflation remained subdued and expectations of tax rate reductions gradually faded. So with economic growth moderating in the year's second half, bond prices recovered. Even so, municipals lagged in the face of investor apathy, so New York Muni's recovery was subdued. It was eventually snuffed out toward year end upon Federal Reserve Chairman Greenspan's warning that irrational exuberance may be gripping financial markets. In our view if indeed such euphoria was infecting financial markets it was concentrated in the equity area. After all, while bond prices wobbled during 1996, the equity market posted a 26% rise as measured by the Dow Jones Industrial Average. On balance investors reduced holdings of Treasury and Municipal bonds and increased exposure to the equity market all year. Heading into 1997 we expect continued moderate economic growth and low inflation. Once again hopes are high for a balanced budget agreement, and in this environment we would expect a steady policy by the Federal Reserve. By most measures equity values are high relative to fixed income security prices, so moderate growth, low inflation, and a balanced budget deal should favorably affect the municipal market in 1997. In the coming year our goal is to reduce the Fund's exposure to market swings by undertaking less leverage than in the past, and by increasing holdings of bonds that are less sensitive to market fluctuations and interest rate changes. The Fund's largest holdings are in New York City credits which are priced considerably cheaper than similar quality triple tax exempt credits. This is despite the evident improvement in the City's fiscal condition. This underperformance has been due to capacity constraints of both mutual funds and bond insurance companies. The newly proposed Infrastructure Financing Authority will enable New York City to issue bonds backed by income tax receipts, thus freeing capacity for additional institutional ownership. We are looking forward to improved performance in 1997. We thank you for your continued support and for your investment in New York's first triple tax free municipal fund. Sincerely, /s/ Dr. Vincent J. Malanga ------------------------------- Dr. Vincent J. Malanga President New York Muni Fund Portfolio Composition December 31, 1996 BY TYPE The following table represents a pie chart in the original document: FCLT 45.4% INLT 27.9% FCSI 14.5% LRIB 12.2% BY RATING+ The following table represents a pie chart in the original document: AAA 39.1% A 32.9% BBB 14.7% AA 7.0% NR 6.3% FIXED COUPON BONDS FCLT -- Long (maturity (greater than) 15 years) (includes long zero coupons) FCSI -- Short or Intermediate (maturity (less than) 15 years) (includes zero coupon bonds) VARIABLE RATE BONDS RIB(Residual Interest Bond) type inverse floaters. These are leveraged bonds whose coupon varies inversely with rates on short term companion issues. The inverse floater's price will be more volatile than that of a fixed coupon bond. LRIB -- Long Term (maturity (greater than) 15 years) SRIB -- Short or Intermediate Term ((less than) 15 year maturity) IN(Index) based inverse floaters are bonds whose interest coupons vary inversely with an index of short term interest rates and then revert to a fixed rate mode. The inverse floater's price will be more volatile than that of a fixed coupon bond. INLT -- Long Term (maturity (greater than) 15 years) INSI -- Short or Intermediate Term (maturity (less than) 15 years) +If a security has a split rating, the highest applicable rating is used, including published ratings on identical credits for individual securities not individually rated. 2 - --------------------------- New York Muni Fund - --------------------------- Average Annual Total Return - --------------------------- Ended on 12/31/96 - --------------------------- 1 Year 5 Year 10 Year - --------------------------- (7.73)% 1.34% 3.29% - --------------------------- $46,889 Lehman Brothers Municipal Bond Index * $28,662 Fundamental New York Muni Fund, Inc. $17,736 Consumer Price Index [CHART] Past performance is not predictive of future performance. The above illustration compares a $10,000 investment made in the New York Muni Fund on 4/27/81 (Inception Date) to a $10,000 investment made in the Lehman Brothers Municipal Bond Index on that date. For comparative purposes the value of the Index on 4/30/81 is used as the beginning value on 4/27/81. All dividends and capital gain distributions are reinvested. The Fund invests primarily in New York municipal securities and its performance takes into account fees and expenses. Unlike the Fund, the Lehman Brothers Municipal Bond Index is an unmanaged total return performance benchmark for the long-term, investment-grade tax exempt bond market, calculated by using municipal bonds selected to be representative of the market. The Index does not take into account fees and expenses. Further information relating to Fund performance, including expense reimbursements, if applicable, is contained in the Fund's Prospectus and elsewhere in this report. *Source:Lehman Brothers. The Consumer Price Index is a commonly used measure of inflation; it does not represent an investment return. 3 NEW YORK MUNI FUND STATEMENT OF ASSETS AND LIABILITIES December 31, 1996 - -------------------------------------------------------------------------------- ASSETS Investment in securities at value (Note 4) (cost $215,662,677) ...................... $205,380,685 Receivables: Interest .......................................... 3,808,422 Investment securities sold ........................ 16,494,369 ------------- Total assets .......................... 225,683,476 ------------- LIABILITIES Notes payable (Note 6) ............................... 1,200,000 Payables: Investment securities purchased ................... 26,425,838 Bank overdraft payable ............................ 131,343 Dividend declared ................................. 396,856 Accrued expenses .................................. 783,646 ------------- Total liabilities ..................... 28,937,683 ------------- NET ASSETS consisting of: Accumulated net realized loss ............ $(21,892,882) Unrealized depreciation of securities ............................ (10,281,992) Paid-in-capital applicable to 225,957,736 shares of $.01 par value capital stock ............... 228,920,667 ------------- $196,745,793 ============= NET ASSET VALUE PER SHARE ............................... $.87 ==== STATEMENT OF OPERATIONS Year ended December 31, 1996 - -------------------------------------------------------------------------------- INVESTMENT INCOME Interest income ...................................... $12,274,611 EXPENSES (Notes 2 and 3) Management fee ........................... $787,962 Custodian and accounting fees ............ 119,035 Transfer agent fees ...................... 360,306 Professional fees ........................ 299,015 Directors' fees .......................... 52,370 Printing and postage ..................... 11,194 Interest ................................. 3,366,228 Distribution expenses .................... 719,350 Operating expenses on defaulted bonds ........................ 240,629 Other .................................... 89,055 ------------ Total expenses ................................. 6,045,144 ------------ Net investment income .......................... 6,229,467 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on: Investments ............................. (2,404,362) Net unrealized depreciation of investments ............................ (4,292,643) ------------ Net loss on investments .............................. (6,697,005) ------------ NET DECREASE IN NET ASSETS FROM OPERATIONS ....................................... $(467,538) ============
STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 1996 1995 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income .................................................... $6,229,467 $6,873,684 ------------- Net realized (loss) gain on investments and futures contracts ......... (2,404,362) 2,451,958 Net realized (loss) on option contracts written ....................... -- (73,794) Unrealized (depreciation) appreciation on investments ................. (4,292,643) 25,287,298 ------------- ------------- Net (decrease) increase in net assets from operations .......... (467,538) 34,539,146 DIVIDENDS PAID TO SHAREHOLDERS FROM: Investment income ..................................................... (6,229,467) (6,873,684) Net realized gain from investments .................................... -- (112,509) CAPITAL SHARE TRANSACTIONS (Note 5) ................................... (23,248,833) (13,526,231) ------------- ------------- Total (decrease) increase ...................................... (29,945,838) 14,026,722 NET ASSETS: Beginning of year ..................................................... 226,691,631 212,664,909 ------------- ------------- End of year ........................................................... $196,745,793 $226,691,631 ============= =============
See Notes to Financial Statements. 4
NEW YORK MUNI FUND STATEMENT OF CASH FLOWS Year Ended December 31, 1996 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash Cash Flows From Operating Activities Net decrease to net assets from operations ........................ $(467,538) Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Purchase of investment securities .............................. (957,246,583) Proceeds on sale of securities ................................. 963,017,568 Decrease in interest receivable ................................ 200,589 Decrease in accrued expenses ................................... (38,111) Net accretion of discount on securities ........................ (174,768) Net realized gain: Investments ................................................. 2,404,362 Unrealized depreciation on securities .......................... 4,292,643 --------------- Net cash provided by operating activities ................... 11,988,162 --------------- Cash Flows From Financing Activities:* Net payments on notes payable .................................. (63,375,000) Net borrowings of note payable ................................. 131,343 Proceeds on shares sold ........................................ 3,394,647,202 Payment on shares repurchased .................................. (3,342,817,867) Cash dividends paid ............................................ (982,880) --------------- Net cash used in financing activities ....................... (12,397,202) --------------- Net decrease in cash ........................................ (409,040) Cash at beginning of year ............................................ 409,040 --------------- Cash at end of year .................................................. $0 ===============
- -------------- *Non-cash financing activities not included herein consist of reinvestment of dividends of $4,939,206. Cash payments for interest expense totaled $3,394,366. See Notes to Financial Statements. 5 NEW YORK MUNI FUND STATEMENT OF INVESTMENTS December 31, 1996 - --------------------------------------------------------------------------------
Principal Amount Issue ooo Type o Rating oo Value ------ --------- ------ --------- ----- $ 1,980,000++ Cayuga County, HIC, COP, Auburn Memorial Hospital, Asset Guaranty Insured, 6.00%, 1/1/21 ................................................................... FCLT AAA $ 2,008,849 2,050,000++ Franklin County, SWMA, Solid Waste System Project, RB, 6.25%, 6/1/15 .............. FCLT BBB- 2,057,831 1,080,000++ Glen Cove, IDA, CFR, The Regency at Glen Cove Project, AMBAC Insured, ETM, CAB, 10/15/19 ................................................................... FCLT AAA 280,757 1,880,000++ Lyons, MCF, Initiatives Corporation Project, RB, 6.80%, 9/1/24 .................... FCLT BAA+ 1,997,406 2,000,000 Municipal Assistance Corporation for the City of Troy, General Resolution Bonds, MBIA Insured, CAB, 1/15/21 ...................................................... FCLT AAA 517,940 11,870,000++x New York City, GO, IFRN*, 7.50%, 8/15/10 .......................................... INLT A 11,870,000 18,330,000++x New York City, GO, IFRN*, 5.21%, 8/1/12 ........................................... INLT A- 17,124,253 13,640,000++ New York City, GO, IFRN*, 5.21%, 8/1/14 ........................................... INLT A- 13,640,000 14,600,000++x New York City, GO, IFRN*, 4.15%, 8/15/17 .......................................... INLT A- 14,618,250 5,290,000++x New York City, ECF, MBIA Insured, STEP** 5.50%, 4/1/08 ............................ FCSI AAA 5,304,706 5,925,000++x New York City, ECF, MBIA Insured, STEP** 5.50%, 10/1/08 ........................... FCSI AAA 5,941,471 9,520,000++ New York City, Health & Hospital Corp, RB, Series A, 6.30%, 2/15/20 ............... FCLT BBB 9,542,182 2,975,000++ New York City, Health & Hospital Corp, RB, Series A, AMBAC Insured, 5.75%, 2/15/22 .................................................................. FCLT AAA 2,978,600 2,200,000++x New York City, IDA, Imclone Systems Inc Project, AMT, 11.25%, 5/1/04 .............. FCSI NR 2,345,112 6,025,000++ New York City, Transportation Authority, RB, Livingston Plaza Project, FSA Insured, 5.25%, 1/1/20 ...................................................... FCLT AAA 5,716,881 2,113,000++x New York City, IDA, Imclone Systems Inc Project, AMT, 10.75%, 2/15/97 ............. FCSI NR 2,113,824 7,000,000++ New York State, DAR, NHRB, LOC Chemical Bank, 5.75%, 7/1/17 ....................... FCLT AA- 7,049,350 1,125,000 New York State, DAR, German Masonic Home Corporation, FHA Insured, 6.00%, 8/1/36 ................................................................... FCLT AA 1,128,330 1,050,000 New York State, DAR, Amsterdam Memorial Hospital, FHA Insured, Mortgage RB, 6.00%, 8/1/25 ...................................................... FCLT AAA 1,070,139 2,770,000 New York State, DAR, WK Nursing Home Corporation, FHA Insured, Mortgage RB, 6.05%, 2/1/26 ...................................................... FCLT AAA 2,827,671 3,600,000 New York State, DAR, WK Nursing Home Corporation, FHA Insured, Mortgage RB, 6.13%, 2/1/36 ...................................................... FCLT AA 3,674,664 1,000,000 New York State, DAR, Hospital for Special Surgery, FHA Insured, Mortgage RB, Series 1996, 6.00%, 8/1/26 ...................................................... FCLT AA 1,017,480 425,000++ New York State, DAR, Hospital for Special Surgery, FHA Insured, Mortgage RB, Series 1996, 6.05%, 8/1/36 ...................................................... FCLT AA 432,412 200,000++ New York State, DAR, City University System, Third General Resolution Bond, 6.20%, 7/1/22 ................................................................... FCLT A- 204,624 7,230,000++ New York State, DAR, Methodist Hospital, AMBAC Insured, FHA Insured, Mortgage RB, 6.05%, 2/1/34 ...................................................... FCLT AAA 7,392,747 2,250,000++ New York State, DAR, Department of Health Veterans Home, 5.50%, 7/1/21 ............ FCLT A 2,134,170 6,000,000 New York State, DAR, Montefiore Medical Center, AMBAC Insured, FHA Insured, 5.25%, 2/1/15 ...................................................... FCLT AAA 5,802,540 3,950,000 New York State, DAR, State University, Trust Custodial Receipts Connie Lee Insured, 5.40%, 5/15/23 .................................................................. FCLT AAA 3,753,013 4,755,000 New York State, DAR, Mental Health Services, Series 96-E, AMBAC Insured, 5.37%, 2/15/12 .................................................................. FCSI AAA 4,711,016 280,000++ New York State, EFC, State Water Pollution Control, RB, Pooled Loan Issue, 5.20%, 6/15/17 .................................................................. FCLT AAA 271,760 360,000++ New York State, EFC, State Water Pollution Control, RB, Pooled Loan Issue, 5.20%, 12/15/17 ................................................................. FCLT AAA 349,265 1,975,000++ New York State, HFA, RB, Fulton Manor, FHA Insured, 6.10%, 11/15/25 ............... FCLT AAA 1,999,806 2,500,000++ New York State, HFA, RB, Service Contract Obligation, Series 93-C, 5.88%, 9/15/14 . FCLT BBB 2,467,275 2,250,000++ New York State, HFA, RB, Service Contract Obligation, Series 93-D, 5.38%, 3/15/23 . FCLT BBB 2,052,675 650,000++ New York State, HFA, RB, Service Contract Obligation, Series 96-A, 6.00%, 3/15/26 . FCLT BBB 647,263 1,000,000++ New York State, MCFFA, Mental Health Services Facilities, 5.25%, 2/15/07 .......... FCSI BBB+ 989,890 1,000,000++ New York State, MCFFA, Mercy Medical Center, LOC Natwest Bank, 5.88%, 11/11/15 ................................................................. FCLT AA- 1,018,520 4,785,000 New York State, MCFFA, Mental Health Services Facilities, Trust Custodial Receipts Connie Lee Insured, 5.25%, 8/15/23 .............................................. FCLT AAA 4,429,953 25,000,000++/x/ New York State Thruway Authority, FGIC Insured, IFRN*, 4.62%, 1/1/24 .............. LRIB AAA 25,000,000
6 NEW YORK MUNI FUND STATEMENT OF INVESTMENTS (continued) December 31, 1996 - --------------------------------------------------------------------------------
Principal Amount Issue ooo Type o Rating oo Value ------ --------- ------ --------- ----- 4,000,000 New York State, UDC, RB, Correctional Capital Facilities, 5.70%, 1/1/27 ........... FCLT A $ 3,839,320 19,695,000+++x Niagara County IDA Bonds and Niagara Falls URABond; Falls Street Faire Project, Falls Street Station Project, AMT10.00% 9/1/06, Old Falls Street Improvement Project, 11.00% 5/1/09 (See Note 4 to financial statements) ..................... FCSI NR 8,397,267 3,400,000++ Onondaga County, IDA, Series A, Crouse Irving Project, LOC Fleet Bank, 7.90%, 1/1/17 ................................................................... FCLT A 3,851,826 4,170,000++ Onondaga County, IDA, Community General Hospital Project, 6.63%, 1/1/18 ........... FCLT BBB 4,289,721 325,000 Puerto Rico, Public Buildings Authority Guaranteed, Public Education & Health Facilities, Step Coupon, 3.75%, 7/1/16 .......................................... FCLT A 300,349 1,595,000++ Puerto Rico, ITEMECF Financing Authority, Polytechnic University of Puerto Rico Project, 5.70%, 8/1/13 .......................................................... FCLT BBB- 1,535,363 5,145,000++ Puerto Rico, ITEMCF Financing Authority, Polytechnic University of Puerto Rico Project, 5.50%, 8/1/24 .......................................................... FCLT BBB- 4,684,214 ------------ Total Investments (Cost $215,662,677@) ................................ $205,380,685 ============
* Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. Rates shown are at December 31, 1996. ** Step Bonds (STEP) are instruments whose interest rate is fixed at an initial rate and then increases ("steps up") to another fixed rate until maturity. @ Cost for Federal income tax purposes is $215,671,028. + The value of these non-income producing securities has been estimated by persons designated by the Fund's Board of Directors using methods the Director's believe reflect fair value. See Note 4 to the financial statements. /x/The value of this security has been estimated by persons designated by the Fund's Board of Directors using methods the Director's believe reflect fair value. See Note 4 to the financial statements. ++ Approximately $172,308,270 market value of securities are segregated in whole or in part as collateral securing a line of credit x The Fund owns 100% of the security and therefore there is no trading in the security. See Note 4 to the financial statements. LEGEND o Type FCLT --Fixed Coupon Long Term FCSI --Fixed Coupon Short or Intermediate Term LRIB --Residual Interest Bond Long Term INLT --Indexed Inverse Floating Rate Bond Long Term oo Ratings If a security has a split rating the highest applicable rating is used, including published ratings on identical credits for individual securities not individually rated. NR--Not Rated ooo Issue AMBAC American Municipal Bond Assurance Corporation AMT Alternative Minimum Tax CAB Capital Appreciation Bond CFR Civic Facility Revenue COP Certificates of Participation DAR Dormitory Authority Revenue ECF Educational Construction Fund EFC Environmental Facilities Corp. ETM Escrowed to Maturity FGIC Financial Guaranty Insurance Corporation FHA Federal Housing Administration FSA Financial Security Association GO General Obligation HFA Housing Financing Agency HIC Hospital Improvement Corporation IDA Industrial Development Authority ITEMECF Industrial, Tourist, Education, Medical and Environmental Control Facilities LOC Letter of Credit MBIA Municipal Bond Insurance Assurance Corporation MCF Medical Care Facilities MCFFA Medical Care Facilities Finance Agency MWFA Municipal Water Finance Authority NHRB Nursing Home Revenue Bond RB Revenue Bond RDA Research and Development Authority SWMA Solid Waste Management Authority URA Urban Renewal Authority See Notes to Financial Statements. 7 NEW YORK MUNI FUND NOTES TO FINANCIAL STATEMENTS December 31, 1996 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES New York Muni Fund (the Fund) is a series of Fundamental Funds, Inc. (the "Company"). The Company is an open-end management investment company registered under the Investment Company Act of 1940. The Fund seeks to provide a high level of income that is excluded from gross income for Federal income tax purposes and exempt from New York State and New York City personal income taxes. The Fund intends to achieve its objective by investing substantially all of its total assets in municipal obligations of New York State, its political subdivisions and its duly constituted authorities and corporations. The Fund employs leverage in attempting to achieve this objective. The following is a summary of significant accounting policies followed in the preparation of its financial statements: Valuation of Securities--The Fund's portfolio securities are valued on the basis of prices provided by an independent pricing service when, in the opinion of persons designated by the Fund's directors, such prices are believed to reflect the fair market value of such securities. Prices of non-exchange traded portfolio securities provided by independent pricing services are generally determined without regard to bid or last sale prices but take into account institutional size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Securities traded or dealt in upon a securities exchange and not subject to restrictions against resale as well as options and futures contracts listed for trading on a securities exchange or board of trade are valued at the last quoted sales price, or, in the absence of a sale, at the mean of the last bid and asked prices. Options not listed for trading on a securities exchange or board of trade for which over-the-counter market quotations are readily available are valued at the mean of the current bid and asked prices. Money market and short-term debt instruments with a remaining maturity of 60 days or less will be valued on an amortized cost basis. Municipal daily or weekly variable rate demand instruments will be priced at par value plus accrued interest. Securities not priced in a manner described above and other assets are valued by persons designated by the Fund's directors using methods which the directors believe reflect fair value. Futures Contracts and Options Written on Future Contracts--Initial margin deposits with respect to these contracts are maintained by the Fund's custodian in segregated asset accounts. Subsequent changes in the daily valuation of open contracts are recognized as unrealized gains or losses. Variation margin payments are made or received as daily appreciation or depreciation in the value of these contracts occurs. Realized gains or losses are recorded when a contract is closed. Options Written on Municipal Bonds--The Fund may write options on municipal bonds. Premiums received for options written are recorded as a liability and subsequently marked to market daily to reflect the current value of the options written. If the written option expires unexercised, the premium received is treated as realized gain. If the option is exercised, the premium received is used to reduce the cost of the security purchased or sold. Federal Income Taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to "regulated investment companies" and to distribute all of its taxable and tax exempt income to its shareholders. Therefore, no provision for federal income tax is required. Distributions--The Fund declares dividends daily from its net investment income and pays such dividends on the last business day of each month. Distributions of net capital gains, if any, realized on sales of investments are made annually, as declared by the Fund's Board of Directors. Distributions are determined in accordance with income tax regulations. Dividends are reinvested at the net asset value unless shareholders request payment in cash. General--Securities transactions are accounted for on a trade date basis. Interest income is accrued as earned. Premiums and original issue discount on securities purchased are amortized over the life of the respective securities. Realized gains and losses from the sale of securities are recorded on an identified cost basis. Net operating expenses incurred on properties collateralizing defaulted bonds are charged to operating expenses as incurred. Costs incurred to restructure defaulted bonds are charged to realized losses as incurred. Accounting 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 8 NEW YORK MUNI FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 - -------------------------------------------------------------------------------- 2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Under a Management Agreement, the Fund pays an investment management fee to Fundamental Portfolio Advisors, Inc. (the Manager) equal to 0.5% of the Fund's average daily net asset value up to $100 million and decreasing by .02% of each $100 million increase in net assets down to 0.4% of net assets in excess of $500 million. The Manager is required to reimburse the Fund an amount not exceeding the amount of fees payable to the Manager under the agreement for any fiscal year, if, and to the extent that the aggregate operating expenses of the Fund for any fiscal year including the fees payable to the Manager, but excluding interest expenses, taxes, brokerage fees and commissions, expenses paid pursuant to the Distribution Plan, and extraordinary expenses exceeds, on an annual basis, 1.5% of the average daily net assets of the Fund. No such reimbursement was required for the year ended December 31, 1996. The Manager and the Fund's Directors are cooperating in an investigation being conducted by the Securities and Exchange Commission concerning an affiliated fund. The Commission's staff indicated an intention to recommend to the Commission the commencement of certain proceedings. Pursuant to a Distribution Plan (the Plan) adopted pursuant to Rule 12b-1 promulgated under the Investment Company Act of 1940, the Fund may pay certain promotional and advertising expenses and may compensate certain registered securities dealers and financial institutions for services provided in connection with the processing of orders for purchase or redemption of the Fund's shares and furnishing other shareholder services. Payments by the Fund shall not in the aggregate, in any fiscal year, exceed 0.5% of the average daily net assets of the Fund. Under a distribution agreement with Fundamental Service Corporation (FSC), an affiliate of the Manager, amounts are paid under the Plan to compensate FSC for the services it provides and the expenses it bears in distributing the Fund's shares to investors. Any cumulative distribution expenses related to the Fund incurred by FSC in excess of the annual maximum amount payable by the Fund under the Plan may be carried forward for three years in anticipation of reimbursement by the Fund on a "first in-first out" basis. If the Plan is terminated or discontinued in accordance with its terms, the obligation of the Fund to make payments to FSC will cease and the Fund will not be required to make payments past the termination date. Amounts paid to FSC pursuant to the agreement totaled $384,123 for the year ended December 31, 1996. The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of the manager, for the services it provides under a Transfer Agent and Service Agreement. Transfer agent fees for the year ended December 31, 1996 are set forth in the statement of operations. 3. DIRECTORS' FEES All of the Directors of the Fund are also directors or trustees of two other affiliated mutual funds for which the Manager acts as investment adviser. For services and attendance at board meetings and meetings of committees which are common to each Fund, each Director who is not affiliated with the Manager is compensated at the rate of $6,500 per quarter pro rated among the funds based on their respective average net assets. 4. COMPLEX SECURITIES, CONCENTRATIONS OF CREDIT RISK, AND INVESTMENT TRANSACTIONS INVERSE FLOATING RATE NOTES (IFRN): The Fund invests in variable rate securities commonly called "inverse floaters". The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rate on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed-rate bond. Additionally, some of these securities contain a "leverage factor"whereby the interest rate moves inversely by a "factor" to the benchmark rate. For example, the rates on the inverse floating rate note may move inversely at three times the benchmark rate. Certain interest rate movements and other market factors can substantially affect the liquidity of IFRN's. CONCENTRATION OF CREDIT RISK AND TRANSACTIONS IN DEFAULTED BONDS: The Fund owned 100% of two Niagara Falls Industrial Development Agency bonds ("IDA Bonds") due to mature on September 1, 2006, and 98.3% of a Niagara Falls New York Urban Renewal Agency 11% bond ("URA Bond") due to mature on May 1, 2009 which are in default. The IDA Bonds are secured by commercial retail and office buildings known as the Falls Street Faire and Falls Street Station Projects ("Projects"). The URA Bond is secured by certain rental payments from the Projects. 9 NEW YORK MUNI FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 - -------------------------------------------------------------------------------- The Fund, through its investment banker and manager, negotiated agreements whereby the Fund received cash of $3,000,000 subsequent to December 31, 1996 and executed an assumption agreement with the purchasers of the Falls Street Faire and Station Projects. Under the assumption agreement the purchaser has agreed to assume debt of $8,000,000 bearing interest at 10% per annum in exchange for the Fall Street Faire Project. The assumption agreement provides for certain interest and forbearance payments in accordance with the agreement's payment schedule. These securities are being valued under methods approved by the Board of Directors. The aggregate value of these securities is $8,397,267 (42.64% to their aggregate face value of $19,695,000). There is uncertainty as to the timing of events and the subsequent ability of the Projects to generate cash flows sufficient to provide repayment of the bonds. No interest income was accrued on these bonds during the year ended December 31, 1996. Legal investment banking, and other restructuring costs charged to realized loss totaled approximately $294,000 for the year ended December 31, 1996 ($1,487,000 cumulatively from October 6, 1992 to December 31, 1996). The Fund through its investment banker, engaged a manager to maintain the Projects on its behalf, and the Fund is paying the net operating expenses of the Projects. Net operating expenses related to the Projects for the year ended December 31, 1996 are disclosed in the statement of operations, and cumulatively from October 6, 1992 to December 31, 1996 totaled approximately $612,629 Additionally, the Fund owns 100% of several securities as indicated in the Statement of Investments. As a result of its ownership position there is no active trading in these securities. Valuations of these securities are provided by a pricing service and are believed by the Manager to reflect fair value. The market value of securities owned 100% by the Fund was approximately $92,714,000 (47% of net assets) including the securities described in the previous paragraph at December 31, 1996. With respect to securities owned 100% by the Fund, the $25,000,000 New York State Thruway FGIC Insured, IFRN Bonds, in addition to the $8,397,267 bonds described in the preceding paragraph, have been valued using methods approved by the Board of Directos. OTHER INVESTMENT TRANSACTIONS: During the year ended December 31, 1996, purchases and sales of investment securities, other than short-term obligations, were $735,241,325 and $795,122,155 respectively. As of December 31, 1996 net unrealized depreciation of portfolio securities on a federal income tax basis amounted to $10,290,342 composed of unrealized appreciation of $3,794,391 and unrealized depreciation of $14,084,733. The Fund has capital loss carryforwards available to offset future capital gains as follows: Amount Expiration ------- --------- $18,503,000 December 31, 2002 2,152,000 December 31, 2004 ----------- $20,655,000 =========== 5. CAPITAL STOCK As of December 31, 1996 there were 500,000,000 shares of $.01 par value capital stock authorized. Transactions in capital stock were as follows:
Year Ended Year Ended December 31, 1996 December 31, 1995 -------------------------- -------------------------- Shares Amount Shares Amount ------------- ------------- ------------- -------------- Shares sold .................... 3,704,110,578 $3,314,430,819 3,269,945,429 $3,074,627,178 Shares issued on reinvestment of dividends ................. 5,501,544 4,939,206 6,772,089 6,361,886 Shares redeemed ................ (3,714,943,217) (3,342,618,858) (3,287,552,791) (3,094,515,295) ------------ ------------ ------------- ------------- Net (decrease) ................. (5,331,095) $ (23,248,833) (10,835,273) $(13,526,231) ============ ============ ============= =============
6. LINE OF CREDIT The Fund has line of credit agreements with banks collateralized by cash and portfolio securities. Borrowings under these agreements bear interest linked to the banks' prime rate. Pursuant to these agreements $1,200,000 was outstanding at December 31, 1996. The maximum month end and the average borrowings outstanding during the year ended December 31, 1996 were $90,000,000 and $49,448,000, respectively. 10 NEW YORK MUNI FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1996 - -------------------------------------------------------------------------------- 7. SELECTED FINANCIAL INFORMATION
Years Ended December 31, ------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net Asset Value, Beginning of Year .................. $0.98 $0.88 $1.18 $1.21 $1.14 ------ ------ ------ ------ ------ Income from investment operations: Net investment income ............................... .035 .035 .056 .065 .061 Net realized and unrealized gains (losses) on investments .................................... (.110) .101 (.290) .082 .070 ------ ------ ------ ------ ------ Total from investment operations ........... (.075) .136 (.234) .147 .131 ------ ------ ------ ------ ------ Less Distributions: Dividends from net investment income ................ (.035) (.035) (.056) (.065) (.060) Dividends from net realized gains ................... -- (.001) (.010) (.112) (.001) ------ ------ ------ ------ ------ Total distributions ........................ (.035) (.036) (.066) (.177) (.061) ------ ------ ------ ------ ------ Net Asset Value, End of Year ........................ $0.87 $0.98 $0.88 $1.18 $1.21 ====== ====== ====== ====== ====== Total Return ............................... (7.73%) 15.67% (20.47%) 12.58% 11.83% RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (000) ....................... $196,746 $226,692 $212,665 $275,552 $196,516 Ratios to Average Net Assets: Interest expense .................................. 2.11% 2.09% 1.59% .61% .19% Operating expenses ................................ 1.66% 1.55% 1.62% 1.44% 1.50% ------ ------ ------ ------ ------ Total expenses ............................. 3.77% 3.64% 3.21% 2.05% 1.69% ====== ====== ====== ====== ====== Net investment income ...................... 3.89% 3.81% 5.34% 5.20% 5.16% Portfolio turnover rate ............................. 347.44% 347.50% 289.69% 404.05% 460.58% BANK LOANS Amount outstanding at end of year (000 omitted) ..... $1,200 $64,575 $20,000 $20,873 $725 Average amount of bank loans outstanding during the year (000 omitted) ..................................... $49,448 $49,603 $54,479 $24,100 $5,194 Average number of shares outstanding during the year (000 omitted) ..................................... 178,456 191,692 206,323 184,664 161,404 Average amount of debt per share during the year $.277 $.259 $.264 $.131 $.032
11 INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- The Board of Directors and Shareholders New York Muni Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the statement of investments, of New York Muni Fund, Inc. as of December 31, 1996, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and selected financial information for each of the five years in the period then ended. These financial statements and selected financial information are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and selected financial information 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 selected financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected financial information referred to above present fairly, in all material respects, the financial position of New York Muni Fund, Inc. as of December 31, 1996 and the results of its operations, cash flows, changes in net assets, and selected financial information for the periods indicated, in conformity with generally accepted accounting principles. As discussed in Note 4 the Fund owns 100% of certain securities as of December 31, 1996. These securities include $33,397,267 of bonds (16.9% of net assets), whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. S I G N A T U R E New York, New York February 21, 1997 except for the last paragraph in Note 4 as to which the date is March 6, 1997 12 -----END PRIVACY-ENHANCED MESSAGE-----