-----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, M2tdaKf0BEUhWWBGD3mJclm8XsiCQ5XKG8D5ZIabDDAV+3iMiH7UsAXqFbmPjeJR 3o4GEU6rH/M4uZ6wSYKfmA== 0000894189-99-000374.txt : 20000211 0000894189-99-000374.hdr.sgml : 20000211 ACCESSION NUMBER: 0000894189-99-000374 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA MUNI FUND CENTRAL INDEX KEY: 0000715756 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 136828244 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03674 FILM NUMBER: 99720075 BUSINESS ADDRESS: STREET 1: 90 WASHINGTON ST - 19TH FL CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2126353000 MAIL ADDRESS: STREET 1: 90 WASHINGTON ST STREET 2: 19TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10006 N-30D 1 CORNERSTONE CA MUNI FUND INVESTMENT ADVISOR Cornerstone Equity Advisors, Inc. New York, New York INDEPENDENT AUDITORS PricewaterhouseCoopers, LLP New York, New York COUNSEL TO THE FUNDS Wilke Farr & Gallager New York, New York WWW.CORNERSTONEFAMILY.COM These reports and the financial statements contained herein are submitted for the general information of the shareholders of the Funds. These reports are not authorized for distribution to prospective investors in the Funds unless preceeded or accompianied by an effective prospectus SEMI ANNUAL REPORT JUNE 30, 1999 CORNERSTONE NEW YORK MUNI FUND CORNERSTONE CALIFORNIA MUNI FUND CORNERSTONE FIXED INCOME FUNDS Cornerstone Tax-Free Money-Market Series Cornerstone High Yield Municipal Bond Series Cornerstone U.S. Government Strategic Income Fund CORNERSTONE FAMILY OF FUNDS June 30, 1999 Dear Shareholders, The first half of 1999 brought about some interesting developments in the market. Our domestic economy continues to show incredible resilience, generating continued strong economic growth with what appears to be moderate inflation. However, the Federal Reserve has remained vigilant regarding inflation, resulting in a bond market that has become increasingly bearish. The bond market officially turned bearish in the second quarter of 1999. With long treasury yields climbing over 150 basis points (1.5%) from 4.72% in early October to almost 6.25% in June, and with the Federal Reserve having tightened in June and poised for further rate hikes, the bond market lost its confidence and is thoroughly dependant on Federal Reserve announcements and economic data for direction. This uncertainty coupled with reduced summer activity has led to a difficult environment for bonds. With this backdrop, instituting corrective measures to the portfolios was a real challenge. However, to a large degree, many of our restructuring goals have been met. In the New York Muni fund, we have specifically reduced the Fund's dependence on derivatives. Our task now is to establish a less volatile portfolio, while attempting to generate high income and maintain duration neutrality. Although the performance of the New York Muni Fund has been erratic and disappointing (-6.03%), improvements in the structural nature of the portfolio should lead to better results. The California Muni Fund has been our strongest performer, although its results have been mixed. The Fund is ranked the #1 Fund in the State in total income by Lipper Analytical Services for the period January through June 1999. The California Muni Fund was ranked #4 in total return by Lipper for the period January through May 1999, but suffered during June and fell down in the ratings. Our goal is to maintain our income performance and make strategic adjustments to improve total return. The Cornerstone Fixed Income Funds (US Government Strategic Fund Inc and The High Yield Municipal Bond Fund), require portfolio reconstruction. Both funds are small; The High Yield Municipal Fund is being restructured to improve income and liquidity while the U S Governmental Strategic Fund is exploring additional opportunities in taxable securities. The most positive development for the Cornerstone Family of Funds is our persistent drive to lower the Funds expenses. Renegotiations with a major vendor and changes in our service provider mix are beginning to show positive results. Continued accomplishments in the area of cost reduction will lead to further improvements in performance an operational efficiency. Let me thank you for your trust and support. Sincerely, Stephen C. Leslie President CORNERSTONE NEW YORK MUNI FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) ASSETS Investments, at value (cost $112,267,063) $101,641,945 Cash 2,943,335 Investment securities sold 2,755,207 Interest receivable 1,895,505 Total assets 109,235,992 LIABILITIES Investment securities purchased $ 2,569,603 Dividends payable 52,969 Due to Adviser 25,934 Accrued expenses 719,287 Total liabilities 3,367,793 NET ASSETS consisting of: Accumulated net realized loss $(20,967,516) Unrealized depreciation of investments (10,625,118) Paid-in-capital applicable to 140,957,243 shares of $.01 par value capital stock 137,460,833 $105,868,199 NET ASSET VALUE PER SHARE $0.75 CORNERSTONE NEW YORK MUNI FUND STATEMENT OF OPERATIONS SIX MONTH PERIOD ENDED JUNE 30, 1999 (UNAUDITED) INVESTMENT INCOME Interest income $2,774,844 EXPENSES Management fees $194,249 Custodian and fund accounting fees 59,858 Transfer agent fees and expenses 94,240 Professional fees 101,452 Administration fees 47,436 Director's fees 22,289 Printing and postage 9,941 Interest 876,459 Operating expenses on defaulted bonds 58,359 Distribution fees 93,477 Other 25,839 Total expenses 1,583,599 Net investment income 1,191,245 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on: investments 1,302,781 defaulted Bonds (10,000) 1,292,781 Net change in unrealized depreciation of investments (5,679,564) Net gain on investments (4,386,783) NET DECREASE IN NET ASSETS FROM OPERATIONS $(3,195,538) CORNERSTONE NEW YORK MUNI FUND STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 1999 (UNAUDITED)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999* 1998 INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS: Net investment income $ 1,191,245 $ 3,246,679 Net realized gain on investments 1,292,781 2,024,463 Net change in unrealized depreciation on investments (5,679,564) (271,695) Net increase (decrease) in net assets from operations (3,195,538) 4,999,447 DISTRIBUTIONS: Distributions from investment income (1,191,245) (3,252,079) CAPITAL SHARE TRANSACTIONS (Note 5) 49,727,917 (75,815,710) TOTAL INCREASE (DECREASE) IN NET ASSETS 45,341,134 (74,068,342) NET ASSETS: Beginning of year 60,527,065 134,595,407 End of year $ 105,868,199 $ 60,527,065 *Unaudited
See Notes to Financial Statements CORNERSTONE NEW YORK MUNI FUND STATEMENT OF CASH FLOWS JUNE 30, 1999 (UNAUDITED) INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net decrease to net assets from operations $ (3,195,538) Adjustments to reconcile net decrease in net assets from operations to net cash provided by operating activities: Purchase of investment securities (776,743,936) Proceeds on sale of securities 781,963,449 Decrease in interest receivable 298,658 Increase in accrued expenses 553,431 Net accreation of discount on securities (59,025) Net realized gain: Investments (1,292,781) Unrealized depreciation on securities 5,679,564 Net cash provided by operating activities 7,193,822 CASH FLOWS FROM FINANCING ACTIVITIES:* Decrease in notes payable (17,694,000) Proceeds on shares sold 1,336,661,424 Payment on shares repurchased (1,323,487,612) Cash dividends paid (522,598) Net cash used in financing activities (5,042,786) Net decrease in cash 2,151,036 Cash at beginning of year 792,299 Cash at end of year $2,943,335
* Non-cash financing activities not included herein consist of reinvestment of dividends of $646,826 See notes to Financial Statements CORNERSTONE NEW YORK MUNI FUND STATEMENT OF INVESTMENTS JUNE 30, 1999 (UNAUDITED)
PRINCIPAL AMOUNT ISSUE TYPE RATING VALUE $ 1,000,000 Amherst NY IDA Lease Revision, Surface Rink Complex, LOC Keyhawk, 5.65%, 10/01/22 FCLT A $ 1,011,540 3,250,000 Long Island Power Authority, New York Electrical Systems RB,Series A, 5.50%,12/01/29 FCLT A- 3,170,177 1,650,000 MTA, New York Commuter Facilities RB, Series A, 7.00%, 07/01/06 FCSI Aaa 1,867,924 300,000 MTA, NY Transportation Facilities Revenue Contract,Series 8, 5.38%, 07/01/21 FCLT A- 295,434 2,500,000 Municipal Assistance Corp for New York City, Series G 6.00%, 07/01/07 FCSI Aa2 2,699,133 1,700,000 Nassau County, NY , IDA Cold Spring Harbor Lab Project SPA Morgan Guaranty Trust, 3.35%, 01/01/34 FCSI A+ 1,700,000 3,250,000 New York, NY, Series B 5.38%, 08/01/22 FCLT A3 3,170,079 500,000 New York , NY, Series B 5.25%, 08/01/15 FCLT A- 490,401 2,500,000 New York, NY, IDA, IDR, Brooklyn Navy Yard Cogen Partners 5.75%, 10/01/36 FCLT BBB- 2,492,120 9,000,000 New York, NY, IDA, IDR, Brooklyn Navy Yard Cogen Partners 5.65%, 10/01/28 FCLT Baa3 9,011,934 4,000,000 New York, NY, IDA, Special Facility Revenue, 1990 American Airlines, Inc., 5.40%, 07/01/20 FCLT Baa1 3,873,148 1,545,000 New York, NY , IDA, CFR, College of New Rochelle Project, 5.50%, 07/01/19 FCLT Baa2 1,524,719 2,500,000 New York City, Transitional Authority, Triborough, Series A, 5.63% 01/01/14 FCLT Aaa 2,561,745 1,000,000 New York City, Transitional Financial Authority Revenue Var-Future Tax Secd-Series C, 3.40%, 05/01/28 FCSI Aa3 1,000,000 2,000,000 New York City, Cultural Revenue Bond, Soloman R Guggenheim Foundation 3.35%, 12/01/15 FCSI Aa1 2,000,000 2,200,000 New York State, DAR, Department of Health 5.50%, 07/01/21 FCLT A 2,187,946 1,500,000 New York State, DAR, Office Facilities - Audit & Control 5.50%, 04/01/23 FCLT Aaa 1,510,192 1,300,000 New York State, DAR, Bishop Henry B. Hucles Nursing Home 5.63%, 07/01/18 FCLT Aa1 1,329,477 1,950,000 New York State, DAR, St Vincent DePaul Residence, LOC Allied Irish Banks PLC, 5.30%, 07/01/18 FCLT Aa3 1,950,000 4,500,000 New York State, DAR, TRS 27, 9.02%, 07/01/24 FCLT Aaa 4,619,570 2,000,000 New York State, DAR, Cornell University, Series B, SPA Morgan Guaranty Trust, 3.35%, 07/01/25 FCSI Aa2 2,000,000 500,000 New York State, DAR, Eger Health Care Center, FHA 232, 5.10%, 02/01/28 FCLT Aaa 477,554 2,000,000 New York State, DAR, FHA, Highland Hospital Rochester Series A, MBIA Insured, 5.45%, 08/01/37 FCLT Aaa 2,003,096 1,445,000 New York State, DAR, School District Programs FSA Insured, 5.50%, 07/01/16 FCLT Aaa 1,452,566 1,505,000 New York State, DAR, 4201 School District Programs 5.25%, 07/01/15 FCLT Baa1 1,471,557 300,000 New York State Energy RDA, PCR Dates-Niagara Mohawk Power- Series A, 3.50%, 06/01/23 FCSI AA- 300,000 2,500,000 New York State Energy RDA, PCR Adj-Ref- New York State Electric & Gas Corp - C, 3.80%, 06/01/29 FCSI Aa3 2,500,000 1,500,000 New York State Energy RDA, PCR Commercial Paper Rate-New York State Electric & Gas Corp - D, 3.80%, 10/01/29 FCSI Aa2 1,500,000 2,500,000 New York State Energy RDA, PCR Adj-Ref-New York State Electric & Gas Corp - E, 5.90%,12/01/06 FCSI Aaa 2,677,900 2,500,000 New York State TWY Authority, Highway & Bridge TR FD, Series A, 6.00%, 04/01/14 FCLT A3 2,713,700 2,250,000 New York State TWY Authority, Service Contract RevisionLOC Highway & Bridge - Series A-2, 5.25%, 04/01/06 FCSI Aaa 2,312,863 15,160,000 New York State Urban Development Corporation, Sr Lien - Corporate Purpose 5.50%, 07/01/26 FCLT Aaa 15,429,120 3,000,000 New York State Urban Development Corporation, Sub Lien - Corporate Purpose 5.50%, 07/01/22 FCLT A2 3,014,793 9,805,000 Niagra County NY, IDA, Falls Street Faire Project 10.00%, 09/01/06 (see Note 4 to Financial Statements) FCSI NR 3,509,700 5,870,000 Niagara Falls NY, URA, Old Falls Street Improvement 11.00%, 05/01/09 (see Note 4 to Financial Statements) FCSI NR 2,101,166 1,000,000 Otsego County, NY, Industrial Development Agency, CFR, FSA, Aurelia Osborn Fox Memorial Hospital Series A, 5.35%, 10/01/17 FCLT Aaa 993,006 4,500,000 Puerto Rico Commonwealth GO, Capital Appreciation, Public Improvement, 07/01/16 FCLT A 1,842,921 2,500,000 Puerto Rico Commonwealth GO, 5.38%, 07/01/25 FCLT Baa1 2,506,442 1,250,000 Rensselaer County, NY, IDA, CFR, Polytechnic Inst Project Series B, 5.50%, 08/01/22 FCLT A1 1,250,000 250,000 Suffolk County, NY, IDA, CFR, Mattituck-Laurel Library Project 6.00%, 09/01/19 FCLT Aaa 264,247 3,000,000 Suffolk County, NY, IDA, IDR Nissequogue Cogen Partners Facilities 5.50%, 01/01/23 FCLT NR 2,855,775 Total Investments (Cost $112,267,063**) $ 101,641,945
# The value of these non-income producing securities have 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. * The Fund, or its affiliates, own 100% of the security. See Note 4 to the financial statements. ** The cost is approximately the same for income tax purposes. LEGEND 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 Ratings If a security has a split rating the highest applicable rating is used, including published ratings on indentical credits for individual securities not individually rated. NR - Non Rated Not Rated - Issues which are not rated have not sought out the rating of a recognized rating service. Issue AMT Alternative Minimum Tax CFR Civic Facility Revenue DAR Dormitory Authority Revenue FHA Federal Housing Administration FSA Financial Security Association GO General Obligation IDA Industrial Development Authority IDR Industrial Development Revenue LOC Letter of Credit MBIA Municipal Bond Insurance Assurance Corp. MTA Metropolitan Transit Authority PCR Pollution Control Revenue RB Revenue Bond RDA Research and Development Authority SPA Stand By Bond Purchase Agreement URA Urban Renewal Authority CORNERSTONE NEW YORK MUNI FUND NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Cornerstone New York Muni Fund (the Fund) is a series of Cornerstone Funds, Inc. (the "Company"). The Company is an open-end management investment company registered under the Investments 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-coun ter 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 payme nts 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. 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. 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 real ized loss 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. 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS MANAGEMENT AGREEMENT Cornerstone Equity Advisors Inc. ("Cornerstone" or the "Manager"), is the investment advisor to the Fund under an Investment Advisory Agreement approved by the shareholders on March 12, 1999. For its services, Cornerstone receives a fee from the Cornerstone New York Muni Fund, payable monthly, at an annual rate of .50% on the first $100 million of its average daily net assets, and decreasing by .02% for each $100 million increase in net assets down to an annual rate of .40% of net assets in excess of $500 million. During the fiscal year ending December 31, 1998, Fundamental Portfolio Advisors Inc. served as an investment adviser to the Fund (from January 1, to May 31, 1998) and Tocqueville Asset Management L.P. served as interim investment advisor to the Fund (from June 1, to September 28, 1998) each at the same rate applicable to Cornerstone's current and interim advisory contracts. PLAN OF DISTRIBUTION The Board of Directors and the shareholders of the Fund have approved a plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to the Plan, 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 processing orders for the purchase or redemption of Fund shares, and for furnishing other shareholder services. Payments by the Fund shall not, in the aggregate, in any fiscal year of the Fund, exceed one-half of 1% of the daily net assets of the Fund for expenses incurred in distributing and promoting the Fund's shares. The Plan will make payments only for expenses actually incurred by such dealers and financial institutions. Because these payments are paid out of the Fund's assets on a continual basis over time, these fees will increase the cost of your investment and may cost you more than other types of sales charges. 3. DIRECTOR'S 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 $5,000 per quarter pro rated among the funds based on their respective average net assets. 4. COMPLEX SECURITIES, CONCENTRATIONS OF CREDIT RISK, AND INVESTMENT TRANSACTIONS 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 May1, 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. The Fund, through its investment banker and manager, negotiated the sale of the Falls Street Station project. The net proceeds received on the sale of approximately $2,800,000 were accounted for as a pro rata recovery of principal of each of the bonds. The remaining principal value of the Fall Street Station IDA Bond of approximately $3,887,000 was charged to realized loss on investments. The remaining two securities are being valued under methods approved by the Board of Directors. The aggregate value of these securities is $5,610,867 (35.8% to their aggregate face value of $15,675,000). 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 during the six month period ended June 30, 1999. The Fund, through its investment banker, engaged a property manager to maintain the Projects on its behalf, and the Fund is paying the net operating expenses of the Project. Net operating expenses related to the Projects for the six months ended June 30, 1999 are disclosed in the statement of operations, and cumulatively from October 6, 1992 to June 30, 1998 totaled approximately $832,137. Additionally, the Fund owns 100% of securities as indicated in the Statement of Investments. As a result of its ownership position there is no active trading in these securities. The market value of securities owned 100% by the Fund was approximately $5,610,866 (5.3% of net assets) at June 30, 1999. Other Investment Transactions: During the six months ended June 30, 1999, purchases and sales of investment securities, other than short-term obligations, were $239,061,038 and $236,013,657, respectively. There were no purchases or sales of long-term U.S. Government securities. As of June 30, 1999 net unrealized depreciation of portfolio securities, on a Federal income tax basis, amounted to $10,625,118 composed of unrealized appreciation of $227,203 and unrealized depreciation of $10,852,321. The Fund has capital loss carryforwards available to offset future capital gains as follows: AMOUNT EXPIRATION $16,478,000 December 31, 2002 3,430,000 December 31, 2004 2,233,000 December 31, 2005 $22,141,000 5. CAPITAL STOCK As of June 30, 1999 there were 500,000,000 shares of $.01 par value capital stock authorized. Transactions in capital stock were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 SHARES AMOUNT SHARES AMOUNT Shares sold 1,670,896,397 $ 1,336,649,090 2,233,068,385 $ 1,853,855,695 Shares issued on reinvestment of dividends 801,152 646,826 2,349,700 1,949,801 Shares redeemed (1,605,537,093) $ (1,287,567,999) 2,317,457,670)$(1,931,621,406) Net increase (decrease) 66,160,456 $ 49,727,917 (82,039,585) $ (75,815,710)
6. LINE OF CREDIT The Fund has a line of credit agreement with its custodian bank collateralized by portfolio securities. At June 30, 1999, there was no outstanding balance under this line of credit. Interest on this line of credit accrues at the bank's prime rate (7.75% at June 30, 1999.) Additionally, the Fund has a temporary arrangement in place with its custodian bank whereby overdrafts of the Fund's custody account are charged interest at the bank's prime rate. There was no overdraft outstanding at June 30, 1999. 7. SELECTED FINANCIAL INFORMATION
YEAR ENDED JUNE 30, YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 1994 (UNAUDITED) PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net Asset Value, Beginning of Year $ 0.81 $ 0.86 $ 0.87 $ 0.98 $ 0.88 $ 1.18 Income from Investment operations: Net investment income 0.01 0.03 0.02 0.04 0.04 0.06 Net realized and unrealized gains (losses) on investments (0.06) (0.05) (0.01) (0.11) 0.10 (0.29) Total from investment operations (0.05) (0.02) 0.01 (0.07) 0.14 (0.23) Less Distributions: Dividends from net investment income (0.01) (0.03) (0.02) (0.04) (0.04) (0.06) Dividends from net realized gains (0.01) - - - - - Total distributions (0.01) (0.03) (0.02) (0.04) (0.04) (0.07) Net Asset Value, End of Year $ 0.75 $ 0.81 $ 0.86 $ 0.87 $ 0.98 $ 0.88 Total Return (5.93%) (2.69%) 1.46% (7.73%) 15.67 (20.47%) RATIOS / SUPPLEMENTAL DATA Net Assets, End of Year (000) $105,868 $ 60,527 $ 134,595 $196,746 $226,692 $212,665 Ratios to Average Net Assets: Interest expense 2.25% 1.09% 1.10% 2.11% 2.09% 1.59% Operating Expense 1.82% 1.90%* 2.64%* 1.66% 1.55% 1.62% Total expenses 4.07% 2.99%* 3.74%* 3.77% 3.64% 3.21% Net investment income 3.06% 3.23%* 2.23%* 3.89% 3.81% 5.34% Portfolio turnover rate 252.37% 339.43% 399.38% 347.44% 347.50% 289.69%
*These ratios are after expense reimbursements of 0.05% and 0.03% for the years ended December 31, 1998 and 1997, respectively. CORNERSTONE CALIFORNIA MUNI FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) ASSETS Investments, at value (cost $18,794,390) $18,786,764 Interest receivable 343,600 Total assets 19,130,364 LIABILITIES Bank Overdraft 78,105 Investment Securities Purchased 1,532,040 Dividends payable 25,874 Due to Advisor 3,939 Accrued expenses 81,685 Total liabilities 1,721,643 NET ASSETS consisting of: Accumulated net realized loss $(20,551) Unrealized depreciation of investments (7,626) Paid-in-capital applicable to 2,323,577 shares of beneficial interest 17,436,898 $17,408,721 NET ASSET VALUE PER SHARE $7.49 CORNERSTONE CALIFORNIA MUNI FUND STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) INVESTMENT INCOME Interest income $561,457 EXPENSES Management fees $27,684 Custodian and fund accounting fees 12,964 Transfer agent fees and expenses 12,684 Professional fees 17,325 Administration fees 6,667 Trustees' fees 3,169 Printing and postage 3,238 Interest 169,404 Distribution fees 13,531 Other 2,123 Total expenses 268,789 Less: Expenses Paid Indirectly (973) Net expense 267,816 Net investment income 293,641 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (20,551) Net change in unrealized appreciation or depreciation of investments (542,486) Net loss on investments (545,037) NET DECREASE IN NET ASSETS FROM OPERATIONS $(251,396) CORNERSTONE CALIFORNIA MUNI FUND STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 1999 (UNAUDITED) SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999* 1998 INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS: Net investment income $293,641 $641,372 Net realized loss on investments (20,551) 57,578 Net change in unrealized appreciation or depreciation on investments (524,486) 250,713 Net Increase (decrease) in net assets from operations (251,396) 949,663 DISTRIBUTIONS: Distributions from investment income (293,641) (641,372) Distributions from net realized gains from investments 0 (278,367) CAPITAL SHARE TRANSACTIONS 8,454,530 (4,453,700) Total increase (decrease) 8,000,493 (4,423,776) NET ASSETS: Beginning of year 9,408,228 13,832,004 End of year $17,408,721 $9,408,228 *Unaudited
See Notes to Financial Statements CORNERSTONE CALIFORNIA MUNI FUND STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net decrease to net assets from operations $(251,396) Adjustments to reconcile net decrease in net assets from operations To net cash provided by operating activities: Purchase of investment securities (46,091,579) Proceeds on sale of securities 49,281,130 Decrease in interest receivable (51,902) Increase in accrued expenses 69,354 Net accreation of discount on securities (11,979) Net realized loss: Investments 20,551 Unrealized depreciation on securities 524,486 Net cash provided by operating activities 3,488,665 CASH FLOWS FROM FINANCING ACTIVITIES:* Decrease in notes payable (5,822,429) Proceeds on shares sold 179,675,170 Payment on shares repurchased (177,189,365) Cash dividends paid (152,041) Net cash used in financing activities (3,488,665) Net decrease in cash 0 Cash at beginning of year 0 Cash at end of year $0
* Non-cash financing activities not included herein consist of reinvestment of dividends of $132,893. See notes to Financial Statements CORNERSTONE CALIFORNIA MUNI FUND STATEMENT OF INVESTMENTS JUNE 30, 1999 (UNAUDITED) PRINCIPAL AMOUNT ISSUE TYPE RATING VALUE $ 500,000 Alameda Corridor Transition Authority, California Revision Sr Lien, Series A, 5.25%, 10/01/21 FCLT Aaa $ 492,220 100,000 # Arvin, Development Corporation, COP, RB, 8.75%, 09/01/18 FCLT NR 24,505 200,000 Beverly Hills, PFA, RB, IFRN*, MBIA Insured, 7.32%, 06/01/15 LRIB AAA 215,322 100,000 CSAC Finance Corp, COP, Sutter County Health Facilities Project, 7.80%, 01/01/21 FCLT Baa1 101,612 1,000,000 California Educational Facilities Authority Revenue, Pooled College & University, 5.25%, 04/01/24 FCLT Baa3 936,828 1,500,000 California Educational Facilities Authority Revenue, University of Southern California, 5.50%, 10/01/27 FCLT Aa2 1,513,181 500,000 California Health Facilities, Financial Authority Revision, Sutter Health, Series A, 5.35%, 08/15/28 FCLT Not Rated 496,318 500,000 California Health Facilities, HFA Rev, Kaiser Permanente, Series B, 5.25%, 10/01/16 FCSI A 486,684 60,000 California, HFA, Home Mortgage, RB, Series A, MBIA Insured, 5.70%, 08/01/10 FCSI Aaa 61,972 1,500,000 California Statewide Communities Development Authority Lease Rev United Airlines Series A, 5.70%, 10/01/33 FCSI BB+ 1,477,634 1,100,000 California Statewide Communities Development Authority, CTFS Partnership, 3.75%, 04/01/28 FCSI Aaa 1,100,000 1,000,000 California Statewide Communities Development Authority, CTFS Partnership The Internext Group, 5.38%, 04/01/17 FCLT Not Rated 950,508 750,000 California Statewide Communities Development Authority, CTFS Partnership Childrens Hospital Los Angeles, 5.25%, 08/15/29 FCLT A1 722,508 300,000 California Statewide Communities Development Authority, Cedars Sinai Medical Project, COP, RB, IFRN*, 7.58%, 11/01/15 LRIB A1 302,401 300,000 East Bay, Wastewater System Project, RB, Refunding, AMBAC Insured, IFRN*, 6.87%, 06/01/20 LRIB AAA 307,571 1,700,000 Irvine, CA Improvement Bond, Assessment District No. 89-10, LOC Nationale Westminster, LOC Nationale Westminster, 2.90%, 09/02/15 FCSI Aa2 1,700,000 170,000 Lake Elsinore, USD, Refunding, COP, 6.90%, 02/01/20 FCLT BBB 188,656 10,000 Los Angeles, Home Mortgage, RB, 9.00%, 06/15/18 FCLT A 10,075 1,792,707 Los Angeles, HFA, MFH Project C, CAB, RB, 12.00%, 12/01/29 FCLT NR 1,326,325 110,000 Northern California Power Agency, Multiple Capital Facilities, RB, MBIA Insured, IFRN*, 9.56%, 08/01/25 LRIB AAA 121,484 140,000 Northern California Power Agency, Multiple Capital Facilities, RB, MBIA Insured, IFRN*, 9.54%, 08/01/25 LRIB AAA 158,943 250,000 Northern California Transmission Agency, CA-ORE Transmission Project, RB, MBIA Insured, IFRN*, 7.31%, 04/29/02 LRIB AAA 244,207 500,000 Orange County Airport, RB, Refunding, MBIA Insured, 5.63%, 07/01/12 FCLT Aaa 521,368 250,000 Orange County, LTA, RB, IFRN*, 7.55%, 02/14/11 LRIB AA 287,878 250,000 Orange County, LTA, RB, IFRN*, 8.19%, 02/14/11 LRIB AAA 274,599 170,000 Panoche, Water District, COP, 7.50%, 12/01/08 FCSI A 177,985 250,000 Rancho, Water District Financing Authority, RB, Prerefunded @ 104, AMBAC Insured, IFRN*, 9.68%, 08/17/21 LRIB AAA 286,374 250,000 Redding, Electric System, COP, Series A, FGIC Insured, IFRN*, 7.54%, 06/01/19 LRIB AAA 257,709 500,000 San Bernadino, COP, Series B, MBIA Insured, IFRN*, 6.80%, 07/01/16 INLT AAA 518,048 900,000 San Bernadino, COP, Series PA38, IFRN*, 12.23%, 07/01/16, Rule 144A Security (restricted as to resale except to qualified institutions) LRIB Not Rated 1,062,499 200,000 San Diego Water Authority, COP, FGIC Insured, IFRN*,8.19%, 04/22/09 LRIB AAA 238,187 1,440,000 X San Jose, CRA, Series PA-38, TAB, MBIA Insured, IFRN*, 8.09%, 08/01/16, Rule 144 A Security (restricted as to resale except to qualified institutions) LRIB Not Rated 1,545,267 250,000 Southern California Public Power Authority, FGIC Insured, IFRN*, 8.16%, 07/01/17 LRIB AAA 238,014 40,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, 6.45%, 12/01/28 FCLT AAA 42,264 30,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series B, 6.30%, 12/01/28 FCLT AAA 31,274 250,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series E, 6.40%, 12/01/28 FCLT AAA 263,392 100,000 Upland, HFA, RB, 7.85%, 07/02/20 FCLT BBB 102,952 Total Investments (Cost $18,794,390**) $18,786,764 * 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 June 30, 1999. ** Cost is the same for Federal income tax purposes. # Denotes non-income producing security. Security is in default. X The Fund owns 100% of the security and therefore there is no trading in the security. LEGEND 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 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. Ratings are unaudited. NR - Non Rated Not Rated - Issues which are not rated have not sought out the rating of a recognized rating service ISSUE AMBAC American Municipal Bond Assurance Corporation AMT Alternative Minimum Tax CAB Capital Appreciation Bond COP Certificate of Participation CTFS Certificates FGIC Financial Guaranty Insurance Corporation FNMA Federal National Mortgage Association GNMA Government National Mortgage Association HFA Housing Finance Authority LOC Letter of Credit LTA Local Transportation Authority MBIA Municipal Bond Insurance Assurance Corporation MFH Multi Family Housing PFA Public Finance Authority RB Revenue Bond TAB Tax Allocation Bond USD Unified School District CORNERSTONE CALIFORNIA MUNI FUND NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Cornerstone California Muni Fund (the Fund) was organized as a Massachusetts business trust and is registered as an open end management investment company under the Investment Company Act of 1940. The Fund's objective is to provide as high a level of income that is excluded from gross income for Federal income tax purposes and exempt from California personal income tax as is consistent with the preservation of capital. The Fund employs leverage in attempting to achieve its 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 trustees, 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-coun ter 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. Securities not priced in a manner described above and other assets are valued by persons designated by the Fund's trustees using methods which the trustees believe accurately reflects fair value. 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 Trustees. 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. 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. 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS MANAGEMENT AGREEMENT Cornerstone Equity Advisors Inc. ("Cornerstone" or the "Manager"), is the investment advisor to the Fund under an Investment Advisory Agreement approved by the shareholders on March 12, 1999. For its services, Cornerstone receives a fee from the Cornerstone California Muni Fund, payable monthly, at an annual rate of .50% on the first $100 million of its average daily net assets, and decreasing by .02% for each $100 million increase in net assets down to an annual rate of .40% on net assets in excess of $500 million. During the fiscal year ended December 31, 1998, Fundamental Portfolio Advisors Inc. served as investment advisor to the Fund (from January 1, to May 31 1998), and Tocqueville Asset Management L.P. served as interim investment advisor to the Fund (from June 1, to September 28 1998) each at the same rate applicable to Cornerstone's current and interim advisory contracts. PLAN OF DISTRIBUTION The Board of Trustees and shareholders of the Fund have approved a plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Persuant to the Plan, 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 processing orders for the purchase or redemption of Fund shares, and for furnishing other shareholder services. Payments by the Fund shall not, in the aggregate, in any fiscal year of the Fund, exceed one-half of 1% of the daily net assets of the Fund for expenses incurred in distributing and promoting the Fund's shares. The Plan will make payments only for expenses actually incurred by such dealers and financial institutions. 3. TRUSTEES' FEES All of the Trustees 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 Trustee who is not affiliated with the Manager is compensated at the rate of $5,000 per quarter pro rated among the funds based on their respective average net assets. 4. COMPLEX SECURITIES 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 volitile than that of a fixed rate bond. Certain interest rate movements and other market factors can substantially affect the liquidity of IFRN's. Investment Transactions: During the six months ended June 30, 1999, purchases and sales of investment securities, other than short-term obligations, were $7,059,661 and $2,731,130 respectively. There were no purchases of long-term U.S. Government securities. As of June 30, 1999 net unrealized depreciation of portfolio securities, on a Federal income tax basis, amounted to $7,626 composed of unrealized appreciation of $767,216 and unrealized depreciation of $774,842. 5. SHARES OF BENIFICIAL INTEREST As of June 30, 1999 there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid-in which amounted to $19,436,898. Transactions in shares of beneficial interest were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 SHARES AMOUNT SHARES AMOUNT Shares sold 22,765,652 $179,675,170 24,066,397 $ 193,938,274 Shares issued on reinvestment of dividends 16,804 132,893 72,537 585,456 Shares redeemed (21,679,926) (171,262,533) (24,620,804) (198,977,430) Net increase 1,132,530 $ 8,545,530 (481,870) $ (4,453,700)
6. LINE OF CREDIT The Fund has a line of credit agreement with its custodian bank collateralized by portfolio securities. At June 30, 1999, there was no outstanding balance under this line of credit. Interest on this line of credit accrues at the bank's prime rate, (7.75% at June 30, 1999.) Additionally, the Fund has a temporary arrangement in place with its custodian bank whereby overdrafts of the Fund's custody account are charged interest at the bank's prime rate. There was an overdraft balance at June 30,1999 of $78,105. 7. EXPENSE PAID INDIRECTLY The Fund has an arrangement with its custodian whereby credits earned on cash balances maintained at the custodian are used to offset custody charges. These credits amounted to approximately $973 for the six months ended June 30, 1999. 8. SELECTED FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, 1999 1998++ 1997 1996 1995 1994 PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net Asset Value, Beginning of Year $ 7.90 $ 8.27 $ 7.79 $ 8.91 $ 7.10 $ 9.49 Income from Investment operations: Net investment income 0.22 0.48 0.38 0.41 0.42 0.55 Net realized and unrealized gains (losses) from investments (0.41) (0.20) 0.48 (1.12) 1.81 (2.39) Total from investment operations (0.19) 0.28 0.86 (0.71) 2.33 (1.84) Less Distributions: Dividends from net investment income (0.22) (0.48) (0.38) (0.41) (0.42) (0.55) Dividends from net realized gains - (0.17) - - - - Total distributions (0.22) (0.65) (0.38) (0.41) (0.42) (0.55) Net Asset Value, End of Year $7.49 $7.90 $8.27 $7.79 $8.91 $7.10 Total Return (3.03%) 4.03 11.33% (8.01%) 32.02% (19.89%) RATIOS / SUPPLEMENTAL DATA Net Assets, End of Year (000) $17,409 $9,408 $13,832 $16,252 $12,622 $10,558 Ratios to Average Net Assets: Interest expense 3.06%@ 0.64% 0.42% 0.45% 0.39% 0.98% Operating Expense 1.78%@ 2.14% 2.95%* 2.81% 2.81% 2.50% Total expenses 4.84%+@ 2.78%** 3.37%* 3.26% 3.20% 3.48% Net investment income 5.31%@ 5.38% 4.55%* 4.88% 5.02% 6.80% Portfolio turnover rate 19.54% 282.51% 70.86% 89.86% 53.27% 15.88%
* These ratios are after expense reimbursements of 0.03% for the year ended December 31, 1997. ** This ratio would have been 2.82%, net of expenses paid indirectly of 0.04 for the year ended December 31, 1998 + This ratio would have been 4.84%, net of expenses paid indirectly of 0.01 for the six months ended June 30, 1999. ++ See note 2 for changes in investment advisor during 1998. @ Annualized CORNERSTONE FIXED INCOME FUNDS CORNERSTONE TAX-FREE MONEY MARKET SERIES STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) ASSETS Investments, at amortized cost $1,170,000 Cash 1,520,744 Interest receivable 15,154 Fund shares sold 562 Total assets 2,706,490 LIABILITIES Fund shares redeemed 84,040 Dividends payable 191 Due to Advisor 22,837 Accrued expenses 307,820 Total liabilities 418,888 NET ASSETS Equivalent to $1.00 per share on 2,297,461 shares of benificial interest outstanding $2,291,602 CORNERSTONE FIXED INCOME FUNDS CORNERSTONE TAX-FREE MONEY MARKET SERIES STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) INVESTMENT INCOME Interest income $681,330 EXPENSES Management fees $111,927 Custodian and fund accounting fees 66,513 Transfer agent fees and expenses 40,934 Professional fees 184,982 Administration fees 24,987 Trustees' fees 12,872 Printing and postage 3,350 Interest 978 Distribution fees 68,639 Other 7,916 Total expenses 523,098 Less: Expenses paid indirectly (31,374) Net expenses 491,724 NET INCREASE IN NET ASSETS FROM OPERATIONS $189,606 CORNERSTONE FIXED INCOME FUNDS CORNERSTONE TAX-FREE MONEY MARKET SERIES STATEMENT OF CHANGES IN NET ASSETS SIX MONTH PERIOD ENDED JUNE 30, 1999 (UNAUDITED) SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999* 1998 INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $189,606 $457,101 Net increase in net assets from operations 189,606 457,101 DIVIDENDS PAID TO SHAREHOLDERS FROM Investment income (189,606) (457,101) CAPITAL SHARE TRANSACTIONS (57,004,757) 46,032,148 Total increase (decrease) (57,004,757) 46,033,191 NET ASSETS: Beginning of year 59,296,359 13,263,168 End of year $2,291,602 $59,296,359 *Unaudited See Notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE TAX-FREE MONEY MARKET SERIES STATEMENT OF INVESTMENTS JUNE 30, 1999 (UNAUDITED) PRINCIPAL ISSUE VALUE AMOUNT $ 70,000 Cuyahoga County, OH, IDR S & R Playhouse Realty, VRDN*, LOC Marine Midland Bank, 3.40%, 12/01/09 $ 70,000 200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 2.20%, 04/01/10 200,000 200,000 Garfield County, OK, PCR, Oklahoma Gas & Electric Co. Project A, VRDN* 2.35%, 01/01/25 200,000 300,000 Missouri, PCR, Monsanto Project, VRDN*, 2.25%, 02/01/09 300,000 200,000 Missouri, Third Street Building Project, SPA First National Bank Chicago, VRDN*, 2.10%, 08/01/99 200,000 200,000 Nebraska Higher Education Loan Program, SPA, SLMA, MBIA Insured, VRDN*, 3.55%, 12/01/15 200,000 Total Investments (Cost $1,170,000**) $1,170,000 *Variable Rate Demand Notes (VRDN) are instruments whose interest rate changes on a specific date and / or whose interest rates vary with changes in a designated base rate. **Cost is the same for Federal income tax purposes. LEGEND ISSUE IDR Industrial Development Revenue MBIA Municipal Bond Insurance Assurance Corporation PCR Pollution Control Revenue SLMA Student Loan Marketing Association SPA Stand By Bond Purchase Agreement LOC Letter of Credit See Notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE TAX-FREE MONEY MARKET SERIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Fixed-Income Fund (the Fund) is an open-end management investment company registered under the Investment Company Act of 1940. The Fund acts as a series company currently issuing three classes of shares of beneficial interest, the Cornerstone Tax-Free Money Market Series, the Cornerstone High-Yield Municipal Bond Series and the Cornerstone U.S. Government Strategic Income Fund. Each series is considered a separate entity for financial reporting and tax purposes. The Tax-Free Money Market Series (the Series) investment objective is to provide as high a level of current income exempt from federal income tax as is consistent with the preservaton of capital and liquidity. The following is a summary of significant accounting policies followed in the preparation of the Series' financial statements: Valuation of Securities: Investments are stated at amortized cost. Under this valuation method, a portfolio instrument is valued at cost and any premium or discount is amortized on a constant basis to the maturity of the instrument. Amortization of premium is charged to income, and accretion of market discount is credited to unrealized gains. The maturity of investments is deemed to be the longer of the period required before the Fund is entitled to receive payment of theprincipal amount or the period remaining until the next interest adjustment. Federal Income Taxes: It is the Series' 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 Series declares dividends daily from its net investment incomeand pays such dividends on the last business day of each month. Distributions of net capital gains are made annually, as declared by the Fund's Board of Trustees. 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. Realized gains and losses from the sale of securities are recorded on an identified cost basis. 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. 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS MANAGEMENT AGREEMENT Cornerstone Equity Advisors Inc. ("Cornerstone" or the "Manager"), is the investment advisor to the Fund under an Investment Advisory Agreement approved by the shareholders on march 12, 1999. For its services, Cornerstone receives a fee from the Cornerstone Fixed Income Fund, payable monthly, at an annual rate of .50% on the first $100 million of its average daily net assets, and decreasing by .02% of each $100 million increase in net assets down to an annual rate of .40% on net assets in excess of $500 million. During the fiscal year ended December 31, 1998, Fundamental Portfolio Advisors Inc. served as investment advisor to the Fund (from January 1, to May 31, 1998) and Tocqueville Asset Management L.P. served as interim investment advisor to the Fund (from June 1, to September 28, 1998) each at the same rate applicable to Cornerstone's current and interim advisory contracts. PLAN OF DISTRIBUTION The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of the 1940 Act (the Plan), under which the Series pays to Cresvale International (US) LLC (the "Distributor") a fee, which is accrued daily and paid monthly, at an annual rate of .50% of the Series' average daily net assets. Amounts paid under the plan are paid to the distributor to compensate it for services it provides and expenses it bears in distributing the Series' shares to investors, including payment of compensation by the Distribu tor to securities dealers and other financial institutions and organizations to obtain various distribution related and/or administrative services for the Series. Expenses of the Distributor also include expenses of its employees, who engage in or support distribution of shares or service shareholder accounts, including overhead and telephone expenses; printing and distributing prospectuses and reports used in connection with the offering of the Series' shares; and preparing, printing, and distributing sales literature and advertising materials. 3. TRUSTEES' FEES All of the Trustees of the Fund are also directors or trustees of two other affiliated mutual funds for which the Manager acts as investment advisor. For services and attendance at Board meetings and meetings of committees which are common to each Fund, each Trustee who is not affiliated with the Manager is compensated at the rate of $5,000 per quarter pro rated among the funds based on their respective average net assets. 4. SHARES OF BENEFICIAL INTEREST As of June 30, 1999 there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid in which amounted to $2,279,461. Transactions in shares of beneficial interest, all at $1.00 per share were as follows. SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 AMOUNT AMOUNT Shares sold 1,478,938,249 2,125,152,302 Shares issued on reinvestment of dividends 32,278 77,023 Shares redeemed (1,535,975,284) (2,079,196,134) Net increase (decrease) $ (57,004,757) 46,033,191 5. Line of Credit The Fund has a line of credit agreement with its custodian bank collateralized by portfolio securities. At June 30, 1999, there was no outstanding balance under this line of credit. Interest on this line of credit accrues at the bank's prime rate, (7.75% at June 30, 1999.) Additionally, the Fund has a temporary arrangement in place with its custodian bank whereby overdrafts of the Fund's custody account are charged interest at the bank's prime rate. There was no overdraft outstanding at June 30, 1999. 6. Expenses Paid Indirectly The Fund has an arrangement with its custodian whereby credits earned on cash balances maintained at the the custodian are used to offset custody charges. These credits amounted to approximatly $31,374 for the six months ended June 30, 1999. 7. Selected Financial Information
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, 1999 1998++ 1997 1996 1995 1994 PER SHARE DATA AND RATIOS (for a share outstanding throughout the period) Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from Investment operations: Net investment income 0.01 0.02 0.02 0.02 0.03 0.02 Less Distributions: Dividends from net investment income (0.01) (0.02) (0.02) (0.02) (0.03) (0.02) Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Total Return 0.49% 1.77% 2.19% 2.28% 2.60% 1.69% RATIOS / SUPPLEMENTAL DATA Net Assets, End of Year (000) $2,292 $59,596 $ 13,263 $ 4,621 $ 11,251 $ 9,004 Ratios to Average Net Assets: Expense 2.34%*@ 1.87%* 1.52%*+ 1.54%* 1.53%* 0.91%*+ Net investment income. 0.85%@ 1.46% 2.10% 2.04% 2.43% 1.55%
+ These ratios are after expense reimbursements of 0.02% and 0.44% for the years ended December 31, 1997 and 1994, respectively. * These ratios would have been 2.20%, 1.77%, 1.40%, and 1.35% net of expenses paid indirectly of 0.14%, 0.10, 0.08%, 0.14% and 0.18 % for the six months ended June 30, 1999 and the years ended December 31, 1998, 1997, 1996 and 1995, respectively. ++ See Note 2 for changes in investment advisor during 1998 @ Annualized CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) ASSETS Investments, at value (cost $1,820,067) $1,769,040 Interest receivable 33,089 Total assets 1,802,129 LIABILITIES Bank overdraft $240,192 Dividends payable 4,361 Due to Advisor 8,128 Accrued expenses 8,379 Total liabilities 261,060 NET ASSETS consisting of: Accumulated net realized loss $(123,609) Unrealized depreciation of securities (51,027) Paid-in-capital applicable to 226,235 shares of Beneficial Interest 1,715,705 1,541,069 NET ASSET VALUE PER SHARE $6.81 CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF OPERATIONS JUNE 30, 1999 (UNAUDITED) INVESTMENT INCOME Interest income $73,520 EXPENSES Management fees $6,151 Custodian and fund accounting fees 5,257 Transfer agent fees and expenses 4,698 Professional fees 1,107 Administration fees 926 Trustees' fees 443 Printing and postage 957 Distribution fees 1,945 Interest 15,622 Other 433 Total expenses 37,539 Total Investment Income 35,981 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 9,551 Net change in unrealized appreciation or depreciation of investments (114,944) Net loss on investments (105,393) NET DECREASE IN NET ASSETS FROM OPERATIONS ($69,412) CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 1999 (UNAUDITED)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999* 1998 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income $35,981 $75,733 Net realized gain on investments 9,551 25,554 Net change in unrealized appreciation or depreciation on investments (114,944) (28,820) Net increase (decrease) in net assets from operations (69,412) 72,111 DISTRIBUTIONS: Distributions from investment income (35,981) (75,377) CAPITAL SHARE TRANSACTIONS 74,462 (676,719) Total decrease (30,931) (682,985) NET ASSETS: Beginning of year 1,572,000 2,254,985 End of year $1,541,069 $1,572,000 *Unaudited
See Notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF CASH FLOWS JUNE 30, 1999 (UNAUDITED) INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net decrease to net assets from operations ($69,412) Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Purchase of investment securities (514,844) Proceeds on sale of securities 1,146,108 Decrease in interest receivable 8,658 Increase in accrued expenses 1,313 Net accreation of discount on securities 0 Net realized gain: Investments (9,551) Unrealized depreciation on securities 114,944 Net cash provided by operating activities 668,542 CASH FLOW FROM FINANCING ACTIVITIES:* Decrease in notes payable (304,473) Proceeds on shares sold 6,251,542 Payment on shares repurchased (6,608,264) Cash dividends paid (7,347) Net cash used in financing activities (668,542) Net decrease in cash 0 Cash at beginning of year 0 Cash at end of year $0 * Non-cash financing activities not included herein consist of reinvestment of dividends of $24,729. See notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF INVESTMENTS JUNE 30, 1999 (UNAUDITED) PRINCIPAL AMOUNT ISSUE VALUE $250,000 Bibb County, GA, Development Authority Multi-Family Revenue Emerald Coast Housing II, Inc., Series A, 7.25%, 11/01/28 $240,306 40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.75%, 03/01/23 42,115 250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 07/15/24 60,307 100,000 Escambia, FL, Housing Corporation, Royal Arms Project, Series B, 9.00%, 07/01/16 100,055 500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 01/01/26 113,907 25,000 Hidalgo County, TX, Health Services, Mission Hospital Inc. Project, 6.88%, 08/15/26 26,617 50,000 + Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste Tire Project, 7.88%, 04/01/11 10,577 45,000 Illinois Health Facilities Authority, Midwest Physician Group Ltd Project, RB, 8.13%, 11/15/19 53,549 35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.63%, 10/01/22 37,602 45,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.25%, 12/15/14 50,217 630,000 Marengo County, AL, Port Authority Facilities, RB, CAB, Series A, 03/01/19 145,815 85,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical Center, 8.85%, 08/15/14 87,280 100,000 New York State, DAR, City University System Residual Int Tr Recpts 27, MBIA Insured, Liquidity The Bank of New York, 9.02%, 07/01/24 102,657 100,000 #X+ Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00%, 05/01/09 35,795 50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.25%, 07/01/22 55,490 75,000 Perdido, FL, Housing Corporation, RB, Series B, 9.25%, 11/01/16 75,031 30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.25%, 07/01/18 6,158 60,000 Port Chester, NY, IDA, Nadal Industries Inc. Project, 7.00%, 02/01/16 60,225 25,000 Saint Paul, MN, Port Authority Industrial Development Revenue 1996 Lottery, Series H, 8.50%, 09/01/11 23,846 75,000 San Antonio, TX, HFC, Multi Family Housing, RB, Agape Metro Housing Project, Series A, 8.63%, 12/01/26 75,533 75,000 San Bernadino, CA, San Bernadino Community Hospital, RB, 7.88%, 12/01/19 76,798 100,000 San Bernadino County, CA, COP, Series PA-38, MBIA Insured, IFRN*, 12.23%, 07/01/16, Rule 144A Security (restricted as to resale except to qualified institutions) 118,055 60,000 X San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN*, 9.09%, 08/01/16, MBIA Insured, Rule 144A Security (restricted as to resale except to qualified institutions) 64,386 35,000 Schuylkill County, PA, IDA Resource Recovery, Schuykill Energy Res Inc., AMT, 6.50%, 01/01/10 34,790 15,000 #+ Troy, NY, IDA, Hudson River Project, 11.00%, 12/01/04 6,150 75,000 @+ Villages at Castle Rock, CO, Metropolitan District #4, 8.50%, 06/01/31 39,148 25,000 Wayne, MI, AFR, Northwest Airlines Inc. 6.75%, 12/01/15 26,631 Total Investments (Cost $1,820,067**) $1,769,040 * 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 as of June 30, 1999. ** Cost is approximately the same for income tax purposes. # The value of this non-income producing security has been estimated by persons designated by the Fund's Board of Trustees using methods the Trustees believe reflect fair value. See note 5 to the financial statements. + Non-Income Producing Security Denotes non-income producing security. @ Security in default. Interest paid on cash flow basis. Rate shown as of June 30, 1999. X The Fund, or its affiliates, own 100% of the security and therefore there is no trading in this security. LEGEND Issue AFR Airport Facilities Revenue CAB Capital Appreciation Bond COP Certificate of Participation CFR Civic Facility Revenue ETM Escrowed to Maturity HEHA Higher Education and Health Authority HFC Housing Finance Corporation IDA Industrial Development Authority MBIA Municipal Bond Insurance Assurance Corporation RB Revenue Bond RHR Retirement Housing Revenue TCA Transportation Corridor Agency URA Urban Renewal Agency See Notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Fixed-Income Fund (the Fund) is an open-end management investment company registered under the Investment Company Act of 1940. The Fund operates as a series company currently issuing three classes of shares of beneficial interest, the Cornerstone Tax-Free Money Market Series, the Cornerstone High-Yield Municipal Bond Series and the Cornerstone U.S. Government Strategic Income Fund. Each series is considered a separate entity for financial reporting and tax purposes. The High-Yield Municipal Bond Series seeks to provide a high level of current income exempt from federal income tax through investment in a portfolio of lower quality municipal bonds, generally referred to as "junk bonds." These bonds are considered speculative because they involve greater price volatility and risk than higher rated bonds. The following is a summary of significant accounting policies followed in the preparation of the Series' financial statements: Valuation of Securities: The Series' 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 trustees, 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. Securities not priced in a manner described above and other assets are valued by persons designated by the Fund's trustees using methods which the trustees believe accurately reflects fair value. Federal Income Taxes: It is the Series' 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 Series declares dividends daily from its net investment income and pays such dividends on the last business day of each month. Distributions of net capital gain, if any, realized on sales of investments are anticipated to be made before the close of the Series' fiscal year, as declared by the Board of Trustees. 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. Realized gain and loss from the sale of securities are recorded on an identified cost basis. Original issue discounts and premiums are amortized over the life of the respective securities. Premiums are amortized and charged against interest income and original issue discounts are accreted to interest income. 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. 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS MANAGEMENT AGREEMENT Cornerstone Equity Advisors Inc. ("Cornerstone" ot the "Manager"), is the investment advisor to the Fund under an Investment Advisory Agreement approved by the shareholders on March 12, 1999. For its services, Cornerstone receives a fee from the Cornerstone High-Yield Municipal Bond Series, payable monthly, at an annual rate of .80% on the first $100 million of its average daily net assets, and decreasing by .02% of each $100 million increase in net assets down to .70% of net assets in excess of $500 million. During the year 1998, Fundamental Portfolio Advisors Inc. served as investment advisor to the Fund (from January 1, to May 31, 1998), and Tocqueville Asset Management L.P. served as interim investment advisor to the Fund (from June 1, to September 28, 1998) each at the same rate applicable to Cornerstone's current and interim advisory contracts. PLAN OF DISTRIBUTION The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of the 1940 Act (the Plan), under which the High-Yield Municipal Bond Series pays to Cresvale International (US) LLC (the "Distributor") a fee, which is accrued daily and paid monthly, at an annual rate of .50% of the High-Yield Municipal Bonds Series' average daily net assets. Amounts paid under the plan are paid to the Distributor to compensate it for services it provides and expenses it bears in distributing the High-Yield Municipal Bonds Series' shares to investors, including payment of compensation by the Distributor to securities dealers and other financial institutions and organizations to obtain various distribution related and/or administrative services for the High-Yield Municipal Bonds Series. Expenses of the Distributor also include expenses of its employees who engage in or support distribution of shares or service shareholder accounts, including overhead and telephone expenses; printing and distributing prospectuses and reports used in connection with the offering of the High-Yield Municipal Bonds Series' shares; and preparing, printing, and distributing, and distributing sales literature and advertising materials. Because these payments are paid out of High-Yield Municipal Bonds Series' assets on a continual basis over time, these fees will increase the cost of your investment and may cost you more than other types of sales charges. 3. TRUSTEES' FEES All of the Trustees of the Fund are also directors or trustees of two other affiliated mutual funds for which the Manager acts as investment advisor. For services and attendance at Board meetings and meetings of committees which are common to each fund, each Trustee who is not affiliated with the Manager is compensated at the rate of $5,000 per quarter pro rated among the funds based on their respective average net assets. 4. SHARES OF BENEFICIAL INTEREST As of June 30, 1999 there were an unlimited number of shares of beneficial interest (no par value) authorized and paid in which amounted to $1,715,705. Transactions in shares of benificial interest were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 SHARES AMOUNT SHARES AMOUNT Shares sold 870,994 $ 6,251,542 2,609,245 $ 19,283,525 Shares issued on reinvestment of dividends 3,451 24,729 7,508 55,597 Shares redeemed (863,381) (6,201,809) (2,701,004) (20,018,841) Net increase (decrease) 111,014 $ 74,462 (84,251) $ (679,719)
5. INVESTMENT TRANSACTIONS The Series 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. Certain interest rate movements and other market factors can substantially affect the liquidity of IFRN's. The Series invests in lower rated or unrated ("junk") securities which are more likely to react to developments affecting market risk and credit risk than would higher rated securities which react primarily to interest rate fluctuations. The Series held securities in default with an aggregate value of $91,670 at December 31, 1998 (5.8% of net assets). As indicated in the Statement of Investments, the Troy, NY Industrial Revenue Bond, 11% due December 1, 1994 with a par value of $15,000 and a value of $6,1 50 at December 31, 1998 has been estimated in good faith under methods determined by the Board of Trustees. The Series owns 1.7% of a Niagara Falls New York Urban Renewal Agency 11% Bond ("URA Bond") due to mature on May 1, 2009 which has missed interest and sinking fund payments. An affiliated investment company owns 98.3% of this bond issue. The Series was party to an agreement whereby certain related bonds owned by an affiliate were to be subject to repayment under a debt assumption agreement. The agreement allowed the affiliate to allocate a portion of the debt services it receives to the URA Bond. In exchange the Series forfeited certain rights it had as holder of the URA bond. The debt assumption was not completed and the timing and amount of debt service payments is uncertain. The value of this bond is $35,795 and is valued at 35.80% of face value at June30, 1999 under methods determined by the Board of Trustees. During the six months ended June 30, 1999, the cost of purchases and proceeds from sales of investment securities, other than short-term obligations, were $514,844 and $646,108, respectively. As of June 30, 1999 net unrealized depreciation of portfolio securities amounted to $51,027, composed of unrealized appreciation of $120,522 and unrealized depreciation of $171,579. The Series has capital loss carryforwards to offset future capital gains as follows: AMOUNT EXPIRATION $20,200 12/31/1999 20,500 12/31/2000 54,300 12/31/2002 39,900 12/31/2003 $134,900 6. LINE OF CREDIT The Fund has a credit agreement with the custodian bank collateralized by portfolio securities. At June 30, 1999, there was no outstanding balance under this line of credit. Interest on this line of credit accrues at the bank's prime rate (7.75% at June 30, 1999.) Additionally, the Fund has a temporary arrangement in place with its custodian bank whereby overdrafts of the Fund's custody account are charged interest at the bank's prime rate. There was an overdraft balance of $240,192 at June 30, 1999. 7. SELECTED FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, 1999 1998+ 1997 1996 1995 1994 (UNAUDITED) PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net Asset Value, Beginning of Year $ 7.39 $ 7.53 $ 6.86 $ 7.07 $ 5.92 $ 7.27 Income from Investment operations: Net investment income 0.16 0.29 0.37 0.47 0.34 0.43 Net realized and unrealized gains (losses) from investments (0.49) (0.23) 0.67 (0.21) 1.15 (1.35) Total from investment operations (0.33) 0.06 1.04 0.26 1.49 (0.92) Less Distributions: Dividends from net investment income (0.16) (0.29) (0.37) (0.47) (0.34) (0.43) Net Asset Value, End of Year $ 6.81 $ 7.30 $ 7.53 $ 6.86 $ 7.07 $ 5.92 Total Return (4.54%) 0.74% 15.71% 4.05% 25.70% (12.9%) RATIOS / SUPPLEMENTAL DATA Net Assets, End of Year (000) $ 1,541 $ 1,572 $ 2,255 $ 1,858 $ 1,457 $ 979 Ratios to Average Net Assets: Interest expense 2.02%** .84% - - - Operating Expense 2.83%** 3.36% 2.58% 2.49% 2.50% 2.50% Total expenses 4.85% 4.20% 2.48%* 2.49%* 2.50%* 2.50%* Net investment income 4.65% 3.63% 5.12%* 6.85%* 5.15%* 6.70%* Portfolio turnover rate 27.17% 57.02% 133.79% 139.26% 43.51% 75.31%
* These ratios are after expense reimbursements of 3.52%, 4.59%, 6.22%, and 6.20% for the each of the years ended December 31, 1997, 1996, 1995, and 1994 respectively. ** Annualized + See note 2 for changes in investment advisor during 1998. CORNERSTONE FIXED INCOME FUNDS CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) ASSETS Investments, at value (cost $3,971,262) $3,860,389 Cash 7,005 Interest receivable 33,089 Total assets 3,925,548 LIABILITIES Dividends payable 5,022 Due to Advisor 2,428 Accrued expenses 5,314 Total liabilities 12,764 NET ASSETS consisting of: Accumulated net realized loss $(16,744,150) Unrealized depreciation of securities (110,873) Paid-in-capital applicable to 3,148,873 shares of Benificial Interest 20,767,807 3,912,784 NET ASSET VALUE PER SHARE $1.24 CORNERSTONE FIXED INCOME FUNDS CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF OPERATIONS JUNE 30, 1999 (UNAUDITED) INVESTMENT INCOME Interest income $134,753 EXPENSES Management fees $16,065 Custodian and fund accounting fees 5,845 Transfer agent fees 11,293 Professional fees 32,520 Administration fees 2,193 Trustees' fees 1,227 Printing and postage 2,895 Distribution fees 2,716 Interest 5,687 Registration Fees 8,122 Other 1,057 Total expenses 89,863 Less: Expenses paid indirectly (Note ?) (1,605) Net expense 87,758 Total Investment Income 46,995 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (80,860) Net change in unrealized depreciation of investments (86,664) Net loss on investments (167,194) NET DECREASE IN NET ASSETS FROM OPERATIONS ($120,199) CORNERSTONE FIXED INCOME FUNDS CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 1999 (UNAUDITED) SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1999* 1998 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income $46,995 $373,842 Net realized gain (loss) on investments (80,860) 1,170,270 Net change in unrealized change on investments (86,334) (1,929,398) Net decrease in net assets from operations (120,199) (385,288) DISTRIBUTIONS: Distributions from investment income (46,995) (373,840) CAPITAL SHARE TRANSACTIONS (Note 5) (732,675) (4,467,566) Total Increase (decrease) (860,869) (5,226,693) NET ASSETS: Beginning of year 4,803,653 10,030,346 End of year $3,912,784 $4,803,653 *Unaudited See Notes to Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF CASH FLOWS JUNE 30, 1999 (UNAUDITED) INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net decrease to net assets from operations ($120,199) Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Purchase of investment securities (7,062,522) Proceeds on sale of securities 8,464,530 Decrease in interest receivable 23,304 Increase in accrued expenses (2,343) Net accreation of discount on securities 477 Net realized gain: Investments 80,860 Unrealized depreciation on securities 86,334 Net cash provided by operating activities 1,470,441 CASH FLOW FROM FINANCING ACTIVITIES:* Decrease in notes payable (664,779) Proceeds on shares sold 39,004 Payment on shares repurchased (827,217) Cash dividends paid (10,444) Net cash used in financing activities (1,463,436) Net increase in cash 7,005 Cash at beginning of year 0 Cash at end of year $7,005 See notes to Financial Statements CORNERSTONE FIXED INCOME FUND U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF INVESTMENTS JUNE 30, 1999 (UNAUDITED) PRINCIPAL AMOUNT ISSUE VALUE $1,500,000 Federal National Mortgage Assoc. Med Term Note, 6.59% 05/29/08 $1,452,060 2,000,000 Federal National Mortgage Assoc. Med Term Note, 5.75% 02/03/04 1,941,772 470,000 Lubbok Texas Hsg Finance Corp GNMA Mtg Bkd, 5.90% 12/01/03 466,557 Total Investments (Cost $3,971,262*) $3,860,389 * Cost is approximately the same for Federal Income Tax purposes See Notes To Financial Statements CORNERSTONE FIXED INCOME FUNDS CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Fixed-Income Funds (the Fund) is an open-end management investment company registered under the Investment Company Act of 1940. The Fund operates as a series company currently issuing three classes of shares of beneficial interest, the Cornerstone Tax-Free Money Market Series, the Cornerstone High-Yield Municipal Bond Series and the Cornerstone U.S. Government Strategic Income Fund. The objective of the Series is to provide high current income with minimum risk of principal and relative stability of net asset value. The Series seeks to achieve its objective by investing primarily in U.S. Government Obligations. U.S. Government Obligations consist of marketable securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities (hereunder collectively referred to as "Government Securities"). The Series also uses leverage in seeking to achieve its investment objective. Each series is considered a separate entity for financial reporting and tax purposes. Valuation of Securities-The Series' 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 trustees, 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 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. Securities not priced in a manner described above and other assets are valued by persons designated by the Fund's trustees using methods which the trustees believe reflect fair value. Futures 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. Repurchase Agreements-The Series may invest in repurchase agreements, which are agreements pursuant to which securities are acquired from a third party with the commitment that they will be repurchased by the seller at a fixed price on an agreed upon date. The Series may enter into repurchase agreements with banks or lenders meeting the creditworthiness standards established by the Board of Trustees. The resale price reflects the purchase price plus an agreed upon market rate of interest which is unrelated to the coupon rate or date of maturity of the purchased security. The Series' repurchase agreements will at all times be fully collateralized in an amount equal to the purchase price including accrued interest earned on the underlying security. Reverse Repurchase Agreements-The Series may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, the Series sells securities and agrees to repurchase them at a mutually agreed upon date and price. Under the Investment Company Act of 1940 reverse repurchase agreements are generally regarded as a form of borrowing. At the time the Series enters into a reverse repurchase agreement it will establish and maintain a segregated account with its custodian containing securities from its portfolio having a value not less than the repurchase price including accrued interest. Federal Income Taxes-It is the Series' 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 Series declares dividends daily from its net investment income and pays such dividends on the last business day of each month. Distributions of net capital gain, if any, realized on sales of investments are anticipated to be made before the close of the Series' fiscal year, as declared by the Board of Trustees. 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. Realized gain and loss from the sale of securities are recorded on an identified cost basis. Discounts and premiums are amortized over the life of the respective securities. Premiums are charged against interest income and discounts are accreted to interest income. 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. 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS MANAGEMENT AGREEMENT Cornerstone Equity Advisors Inc, ("Cornerstone" or the "Manager"), is the investment advisor to the Fund under an Investment Advisory Agreement approved by the shareholders on March 12, 1999. For its services, Cornerstone reveives a fee from the Cornerstone U.S. Government Strategic Income Fund, payable monthly, at an annual rate of .75% of its average daily net assets up to $500 million, .725% per annum on the next $500 million, and .70% per annum on assets over $1 billion. During the fiscal year ended December 31, 1998, Fundamental Portfolio Advisors Inc. served as investment advisor to the Fund (from January 1, to May 31, 1998), and Tocqueville Asset Management L.P. served as interim investment advisor to the Fund (from June 1, to September 28, 1998) each at the same rate applicable to Cornerstone's current and interim advisory contracts. PLAN OF DISTRIBUTION The Fund has adopted a plan of distribution persuant to Rule 12b-1 of the 1940 Act (the "Plan"), under which the Cornerstone U.S. Government Strategic Income Fund pays to Cresvale International (US) LLC (the "Distributor") a fee, which is accrued daily and paid monthly, at an annual rate of .50% of the Fund's average daily net assets. Amounts paid under the Plan are paid to the Distributor to compensate it for services it provides and expenses it bears in distributing the Cornerstone U.S. Government Strategi c Income Fund shares to investors, including payment of compensation by the Distributor to securities dealers and other financial institutions and organizations to obtain various distribution related and/or administrative services for the Fund. Expenses of the Distributor also incluse expenses of its employees, who engage in or support distribution of shares or service shareholder accounts, including overhead and telephone expenses; printing and distributing prospectuses and reports used in connection with the offering of the Fund's shares; and preparing, printing, and distributing sales literature and advertising materials. Because these payments are paid out of the Cornerstone U.S. Government Strategic Income Fund's assets on a continual basis over time, these fees will increase the cost of your investment and may cost you more than other types of sales charges. 3. TRUSTEES' FEES All of the Trustees of the Fund are also directors or trustees of two other affiliated mutual funds for which the Manager acts as investment advisor. For services and attendance at Board meetings and meetings of committees which are common to each fund, each Trustee who is not affiliated with the Manager is compensated at the rate of $5,000 per quarter pro rated among the funds based on their respective average net assets. 4. SHARES OF BENEFICIAL INTEREST As of June 30, 1999 there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid-in which amounted to $1,715,705. Transactions of shares of beneficial interest were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 SHARES AMOUNT SHARES AMOUNT Shares sold 30,698 39,004 2,609,245 $ 19,283,525 Shares issued on reinvestment of dividends 25,637 32,452 7,508 55,597 Shares redeemed (626,444) (795,131) (2,701,004) (20,018,841) Net (decrease) (570,109) $ (723,675) (84,251) $ (679,719)
5. INVESTMENT TRANSACTIONS During the six months ended June 30, 1999, purchases and sales of investment securities, other than short-term obligations, were $5,562,709 and $6,964,530, respectively. As of June 30, 1999 the Series had no unrealized appreciation or depreciation for tax purposes since it has elected to recognize market value changes each day for tax purposes. The Series has capital loss carryforwards to offset future capital gains as follows: AMOUNT EXPIRATION $15,071,500 December 31, 2002 588,100 December 31, 2004 251,400 December 31, 2005 808,000 December 31, 2006 $16,719,000 6. LINE OF CREDIT The Fund has a line of credit agreement with its custodian bank collateralized by portfolio securities. At June 30, 1999, there was no outstanding balance under this line of credit. Interest on this line of credit accrues at the bank's prime rate, (7.75% at June 30, 1999). Additionally, the Fund has a temporary arrangement in place with its custodian bank whereby overdrafts of the Fund's custody account are charged interest at the bank's prime rate. There was no overdraft balance at June 30, 1999. 7. EXPENSE PAID INDIRECTLY: The Fund has an arrangement with its custodian whereby credits earned on cash balances maintained at the custodian are used to offset custody charges. These credits amounted to approximately $1,862 for the six months ended June 30, 1999. 8. SELECTED FINANCIAL INFORMATION
YEAR ENDED JUNE 30, YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 1994 (UNAUDITED) PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net Asset Value, Beginning of Year $ 1.29 $ 1.41 $ 1.43 $ 1.49 $ 1.37 $ 2.01 Income from Investment operations: Net investment income 0.01 0.06 0.10 0.13 0.08 0.14 Net realized and unrealized gains (losses) from investments (0.05) (0.12) (0.02) (0.06) 0.12 (0.64) Total from investment operations (0.04) (0.06) 0.08 0.07 (0.20) (0.58) Less Distributions: Dividends from net investment income (0.01) (0.06) (0.10) (0.13) (0.08) (0.14) Net Asset Value, End of Year $1.24 $1.29 $1.41 $1.43 $1.49 $1.37 Total Return (2.84%) (4.61%) 5.51% 5.02% 15.43% (25.57%) RATIOS / SUPPLEMENTAL DATA Net Assets, End of Year (000) $3,913 $4,804 $10,030 $13,224 $15,194 $19,020 Ratios to Average Net Assets: Interest expense 0.27% 1.54% 2.75% 2.61% 3.00% 2.01% Operating Expense 3.83% 3.30% 5.75% 3.41% 3.05% 2.16% Total expenses(+) (a) 4.10%* 5.05%* 8.50% 6.02% 6.05% 4.17% Net investment income. 2.20% 4.79% 6.83% 9.01% 5.91% 8.94% Portfolio turnover rate 121.83% 68.44% 12.55% 12.65% 114.36% 60.66%
+ These ratios are after expense reimbursements of 1.37%, 2.02%, and 1.00% for the each of the years ended December 31, 1997, 1996, and 1995 respectively. (a) The ratios for each of the years in the three year period ending December 31, 1996 have been reclassified to confirmed with the 1997 presentations. * These ratios would have been 4.17% and 5.11% for the six months ended June 30, 1999 and the year ended Decmeber 31, 1998 net of expenses paid indirectly of 0.07% and 0.06% respectively. CORNERSTONE FUNDS RESULTS OF SPECIAL MEETING OF SHAREHOLDERS MARCH 12, 1999 On March 12, 1999, a Special Meeting of Shareholders of the Funds was held (1) to approve or disapprove a new investment advisory agreement with Cornerstone Equity Advisors, Inc. (2) to elect six directors/trustees (3) to ratify the payment of advisory fees by the Funds to Cornerstone Equity Advisors, Inc. for the period from November 30, 1998 through the date of the special meeting. and (4) reclassification of the investment policy for the Tax-Free Money Market Series. THE TOTAL NUMBER OF SHARES OF THE FUNDS PRESENT BY PROXY WERE AS FOLLOWS: Number of Shares Percentage of shares present by proxy entitled to vote FUNDAMENTAL FUNDS, INC. 87,917,028 63% THE CALIFORNIA MUNI FUND 1,868,684 85% FUNDAMENTAL FIXED INCOME FUND Fundamental U.S. Govenment Strategic Income Fund 2,613,929 71% High-Yield Municipal Bond Series 200,962 75% Tax-Free Money Market Series 4,056,242 73% THE RESULTS OF VOTING FOR OR AGAINST THE APPROVAL OF THE NEW ADVISORY AGREEMENT FOLLOWS: NUMBER OF SHARES For Against Abstain FUNDAMENTAL FUNDS, INC. 80,872,439 2,917,699 4,303,704 THE CALIFORNIA MUNI FUND 1,801,058 7,832 58,793 FUNDAMENTAL FIXED INCOME FUND Fundamental U.S. Govenment Strategic Income Fund 2,368,698 86,178 159,455 High-Yield Municipal Bond Series 188,217 7,008 5,737 Tax-Free Money Market Series 3,989,365 12,344 102,740 THE RESULTS OF THE VOTING FOR THE ELECTION OF DIRECTORS OF FUNDAMENTAL FUNDS, INC. FOLLOWS: Withold For election Authority Status William J. Armstrong 83,315,984 4,618,366 New Director L. Greg Ferrone 40,685,477 47,248,875 Incumbent G. John Fulvio 83,585,408 4,348,443 New Director Stephen C. Leslie. 83,539,143 4,395,207 New Director Leroy E. Rodman 83,091,346 4,843,004 New Director Dr. Yvonne Scruggs-Lefwich 82,853,417 5,080,834 New Director CORNERSTONE FUNDS RESULTS OF SPECIAL MEETING OF SHAREHOLDERS MARCH 12, 1999 THE RESULTS OF THE VOTING FOR THE ELECTION OF TRUSTEES OF THE CALIFORNIA MUNI FUND FOLLOWS: Withold For election Authority Status William J. Armstrong 1,830,875 36,808 New Trustee L. Greg Ferrone 1,005,669 862,014 Incumbent G. John Fulvio 1,830,876 36,808 New Trustee Stephen C. Leslie 1,830,876 36,808 New Trustee Leroy E. Rodman 1,830,876 36,808 New Trustee Dr. Yvonne Scruggs-Lefwich 1,830,876 36,808 New Trustee THE RESULTS OF THE VOTING FOR THE ELECTION OF TRUSTEES OF FUNDAMENTAL FIXED INCOME FUND FOLLOWS: Withold For election Authority Status William J. Armstrong 6,561,234 360,948 New Trustee L. Greg Ferrone 3,960,869 2,822,019 Incumbent G. John Fulvio 6,625,335 293,847 New Trustee Stephen C. Leslie 6,627,504 291,678 New Trustee Leroy E. Rodman 6,617,582 301,601 New Trustee Dr. Yvonne Scruggs-Lefwich 6,607,608 311,575 New Trustee THE RESULTS OF VOTING FOR OR AGAINST THE RATIFICATION OF PAYMENT OF ADVISORY FEES BY THE FUNDS TO CORNERSTONE EQUITY ADVISORS INC., FOR THE PERIOD FROM NOVEMBER 30, 1998 THROUGH THE DATE OF THE SPECIAL MEETING FOLLOWS: Number of shares For Against Abstain FUNDAMENTAL FUNDS, INC. 79,856,636 3,795,257 4,539,949 THE CALIFORNIA MUNI FUND 1,797,358 12,338 57,989 FUNDAMENTAL FIXED INCOME FUND Fundamental U.S. Govenment Strategic Income Fund 2,335,870 103,349 175,003 High-Yield Municipal Bond Series 186,561 7,036 7,365 Tax-Free Money Market Series 3,974,179 14,564 115,706 THE RESULTS OF VOTING FOR OR AGAINST RECLASSIFICATION OF INVESTMENT POLICY FOR THE TAX-FREE MONEY MARKET SERIES FOLLOWS: Number of shares For Against Abstain FUNDAMENTAL FIXED INCOME FUND Tax-Free Money Market Series 3,877,120 18,638 108,691 -----END PRIVACY-ENHANCED MESSAGE-----