-----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, Qr/d2xOdTma6RQJWthCqW9MTglUvz2tt59QMM0whWVNq7TJD9QzvioFqDajIMcu8 +8r+DSp8FJ1IXEwJn8GYDQ== 0000950007-96-000039.txt : 19960305 0000950007-96-000039.hdr.sgml : 19960305 ACCESSION NUMBER: 0000950007-96-000039 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960304 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUNDAMENTAL FIXED INCOME FUND CENTRAL INDEX KEY: 0000811668 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05063 FILM NUMBER: 96530901 BUSINESS ADDRESS: STREET 1: 90 WASHINGTON ST - 19TH FL CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2126353005 FORMER COMPANY: FORMER CONFORMED NAME: FUNDAMENTAL PORTFOLIO ADVISORS FIXED INCOME FUND DATE OF NAME CHANGE: 19870715 N-30D 1 SEMI-ANNUAL FUNDAMENTAL FIXED INCOME FUND U.S. GOVERNMENT STRATEGIC INCOME FUND Dear Fellow Shareholder: Financial assets scored remarkable gains in 1995. For example, the Dow Jones Industrial Average ended the year above 5,000 for a gain of about 33%. The Treasury bellweather thirty year "long" bond ended 1995 with a yield less than 6%, and the Bond Buyer lndex of forty actively traded municipal bonds registered a 15% rise. A plethora of favorable developments was behind these gains. The economic fundamentals of modest growth and low inflation not only remained in tact, but actually began to be thought of as an enduring phenomenon. Rhetoric flowing from the White House and Congress seemed to indicate that genuine progress could be made toward erasing the federal budget deficit. Finally, the Federal Reserve began to reverse its tightfisted policy of 1994 by modestly reducing short term interest rates, for the first time in July, and then again in December. Saving and investment seemed to become fashionable again, as wage earners poured record sums into IRA and 401K retirement plans. Importantly, unlike 1993 when the Federal Reserve actively lowered interest rates to stimulate business activity, the Fed pursued a different strategy in 1995. Indeed, throughout the year the Central Bank was being accused of being too stringent rather than too lenient. The upshot was that market interest rates fell faster than the Federal Reserve cut rates, such that the spread between short and long term interest rates narrowed dramatically throughout the year. This is important for 1996 in two respects. First, the narrowness of the interest rate spread discourages speculation and leverage. Second, since the spread itself is a reflection of a stringent monetary policy, it is highly unlikely that either economic activity or inflation will get off the ground. Indeed, while the economy may well skirt a recession in 1996, the downside risks to the economy seem greater than the upside potential. Thus, in our view, the credit easing that began in 1995 is likely to continue in 1996. As a result, interest rates are likely to continue to trend down while bond prices trend up. Unlike 1995, though, we would expect short term interest rates to begin falling somewhat faster than long term rates in 1996. Investors in the US Government Strategic Income Fund earned a 15.43% total return for 1995. This placed the Fund in the top 3% in its class as ranked by Lipper Analytical Services. In addition, the Fund's yield consistently exceeded 7% in the second half of the year, ranking it first among its peers according to Lipper. The fund provided investors with a yield significantly above that of the benchmark Treasury long bond. The composition of the Fund's portfolio changed in 1995. The purpose was to reduce volatility and increase yield. To this end all holdings of inverse floating rate bonds were replaced with higher coupon fixed rate and two tiered floating rate obligations. These will maintain high fixed coupon rates as long as Federal Reserve policy does not swing significantly toward restraint. In addition, because we were and for that matter still are conservative on the interest rate outlook, the Fund's duration was consistently maintained at between 2.5 and 3 years. With this duration, the Fund's Net Asset Value was able to rise somewhat as bond prices appreciated. As we entered 1996, duration was still generally being maintained close to but never exceeding, three years, as we believe the Federal Reserve will continue lowering interest rates. While the Fund will always incur interest rate risk, credit and currency risk has effectively been eliminated by our strategy of only investing in US Government and US Government Agency securities. Nonetheless, the issue of a credit default by the US Government has recently arisen as the Congress has at various times objected to an increase in the federal debt ceiling. In our view, this is just part of the political gamesmanship that is being played in Washington as negotiations over a plan to balance the federal budget move into the home stretch. In fact, the prospect of a US Government default is absolutely preposterous, and in the end no elected official will allow such an event to occur. Thus, the Fund will continue to invest in US Government obligations, and we feel confident that continued strong returns and a high current yield can be maintained. Our hedging operation proved successful in 1995. We believe as the spread between short and long term interest rates begins to widen in 1996, the success of our past hedging strategy will be repeated. Of course, interest rates and bond prices will always fluctuate, so investors are urged to undertake an investment program over time rather than in one lump sum. Meanwhile, we thank you for your continued trust, and we look forward to continuing to serve you in the future. Sincerely, Dr. Vincent J. Malanga President 1 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND (chart material) The Fundamental U.S. Government Strategic Income Fund Average Annual Total Return Ended on 12/31/95 Since Inception 1 Year (2/18/92) 15.43% 0.12% 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Thousands ($) $12,455 Lehman Brothers 1-3 Year Government Bond Index* $11,055 Consumer Price Index $10,045 Fundamental U.S. Government Strategic Income Fund 2/18/92 12/31/92 12/31/93 12/31/94 12/31/95 Past performance is not predictive of future performance. The above illustration compares a $10,000 investment made in The Fundamental U.S. Government Strategic Income Fund on 2/18/92 (Inception Date) to a $10,000 investment made in the Lehman Brothers 1-3 Year Government Bond Index on that date. For comparative purposes the value of the Index on 2/24/92 is used as the beginning value on 2/18/92. All dividends and capital gain distributions are reinvested. The Fund invests primarily in U.S. Government securities and its performance takes into account fees and expenses. Unlike the Fund, the Lehman Brothers 1-3 Year Government Bond Index is an unmanaged total return performance benchmark for the short-term, U.S. Government bond market calculated by using bonds selected to be representative of the market. The Index does not take into account fees and expenses. Further information relating to Fund performance, including expense reimbursements, if applicable, is contained in the Funds Prospectus and elsewhere in this report. *Source:Lehman Brothers. The Consumer Price Index is a commonly used measure of inflation; it does not represent an investment return. 2 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND (left column) STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 - -------------------------------------------------------------------------------- ASSETS Investment in securities, at value (cost $19,364,775) (Notes 5 and 6) ......... $22,828,137 Interest receivable .................... 110,989 ----------- Total assets ..................... 22,939,126 ----------- LIABILITIES Notes payable .......................... 63,000 Options written at value (premiums received $62,325) (Note 5) ........... 93,360 Securities sold subject to repurchase (Note 6) ............................. 7,431,045 Payables: Capital stock redeemed ............... 7,962 Dividends declared ................... 23,784 Accrued expenses ..................... 99,265 Variation margin ..................... 26,481 ----------- Total liabilities ................ 7,744,897 ----------- NET ASSETS consisting of: Accumulated net realized loss ......... $(18,337,748) Unrealized appreciation of securities . 3,463,362 Unrealized depreciation of options written .............................. (31,035) Unrealized depreciation of open future contracts ............................ (183,771) Paid-in-capital applicable to 10,191,431 shares of beneficial interest ............................. 30,283,421 ------------ $15,194,229 =========== NET ASSET VALUE PER SHARE ................ $1.49 ===== (Right Column) STATEMENT OF OPERATIONS Year Ended December 31, 1995 - -------------------------------------------------------------------------------- INVESTMENT INCOME Interest income, net of $455,877 of interest expense ..................... $ 1,491,430 EXPENSES (Notes 2, 3 and 6) Investment advisory fees ............... $ 121,770 Custodian and accounting fees .......... 47,886 Transfer agent fees .................... 62,540 Professional fees ...................... 305,365 Trustees' fees ......................... 16,893 Printing and postage ................... 2,393 Interest on bank borrowing ............. 32,761 Distribution expenses .................. 40,695 Other .................................. 60,789 Less: Expenses waived or reimbursed by manager and affiliate ............. (162,388) ----------- Total expenses 528,704 ----------- Net investment income ............ 962,726 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on: Investments .......................... (10,482,851) Future and options on futures ........ (3,905,275) (14,388,126) ----------- Change in unrealized appreciation (depreciation) of investments, options and futures contracts for the year: Investments ........................ 15,547,752 Open option contracts written ...... (12,178) Open futures contracts ............. 127,400 15,662,974 ----------- ----------- Net gain on investments ................ 1,274,848 ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS ........................ $ 2,237,574 =========== (Bottom) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Year Ended Year Ended December December 31, 1995 31, 1994 -------- -------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income ................................................................... $ 962,726 $ 3,223,702 Net realized gain (loss) on investments ................................................. (14,388,126) 6,321,524 Unrealized appreciation (depreciation) on investments, options and futures contracts .... 15,662,974 (21,438,948) ------------ ------------ Net increase (decrease) in net assets from operations ............................. 2,237,574 (11,893,722) DIVIDENDS PAID TO SHAREHOLDERS FROM Investment income ....................................................................... (962,726) (3,223,702) CAPITAL SHARE TRANSACTIONS (Note 4) ....................................................... (5,170,959) (28,974,362) ------------ ------------ Total decrease .................................................................... (3,896,111) (44,091,786) NET ASSETS Beginning of year ....................................................................... 19,090,340 63,182,126 ------------ ------------ End of year ............................................................................. $ 15,194,229 $ 19,090,340 ============ ============
See Notes to Financial Statements. 3 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF OPTIONS WRITTEN December 31, 1995 - --------------------------------------------------------------------------------
Number of Expiration Contracts++ Options Written Month Value - ----------- --------------- ---------- -------- 25 U.S. Treasury Bonds, Call @ $122 February 1996 $ 20,703 50 U.S. Treasury Bonds, Call @ $122 March 1996 72,657 -------- $ 93,360 ======== ++Each contract represents $100,000 face value of U.S. Treasury Bond Futures.
STATEMENT OF CASH FLOWS Year Ended December 31, 1995 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES Net increase in net assets from operations ............................... $ 2,237,574 Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Purchase of investment securities ........................................ (30,993,645) Proceeds on sale of securities ........................................... 42,446,029 Premiums received for options written .................................... 1,043,355 Premiums paid to close options written ................................... (2,410,864) Decrease in interest receivable .......................................... 372,942 Decrease in variation margin receivable .................................. 59,294 Decrease in accrued expenses ............................................. (63,798) Net accretion of discount on securities .................................. (337,697) Net realized (gain) loss: Investments ............................................................ 10,482,161 Options written ........................................................ 1,016,659 Unrealized appreciation on securities and options written for the period . (15,535,574) ----------- Total adjustments .................................................... 6,078,862 ----------- Net cash provided by operating activities ............................ 8,316,436 ----------- CASH FLOWS FROM FINANCING ACTIVITIES:* Net repayments of note payable and securities sold subject to repurchase ... (2,177,075) Proceeds on shares sold .................................................... 1,819,736 Payment on shares repurchased .............................................. (7,761,803) Cash dividends paid ........................................................ (237,526) ----------- Net cash provided by financing activities ............................ (8,356,668) ----------- Net decrease in cash ................................................. (40,232) CASH AT BEGINNING OF YEAR .................................................... 40,232 ----------- CASH AT END OF YEAR .......................................................... $ 0 =========== *Non-cash financing activities not included herein consist of reinvestment of dividends of $779,070. Cash payments for interest expense totaled $488,706 for the period.
See Notes to Financial Statements. 4 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND STATEMENT OF INVESTMENTS December 31, 1995 - -------------------------------------------------------------------------------- Principal Interest Maturity Amount Rate Date Value ------ ---- ---- ----- United States Treasury Securities-43.21% United States Treasury Bonds 5,500,000 9.00% 11/15/18 $ 7,497,173 4,300,000* 0.00% 11/15/11 2,312,411 85,000* 0.00% 11/15/03 54,455 ----------- (Cost $8,098,571) 9,864,039 ----------- United States Agency Backed Securities-56.79% Federal Home Loan Mortgage Corporation 843,718+ 9.25% 08/15/23 914,505 250,454+ 6.50% 12/15/23 223,308 FNMA-Federal National Mortgage Assoc. Collateralized Mortgage Obligations 3,671,204+ TTIB** 03/25/23 3,821,099 356,450+ 15.50% 03/25/23 362,239 490,760+ TTIB** 05/25/23 528,882 1,519,480+ TTIB** 11/25/23 1,478,879 980,392 TTIB** 11/25/23 1,088,706 1,000,000(beta) 8.75% 12/25/23 1,112,230 465,436+ 12.50% 08/25/23 470,700 953,000 9.00% 02/25/24 957,470 Department of Navy, FNMA Guaranteed 100,000+ 0.00% 04/01/09 43,189 REFCO-Resolution Funding Corporation 600,000 0.00% 07/15/10 248,994 ----------- (Cost $10,120,746) 11,250,201 ----------- FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities 100,000* 11/02/12 34,024 100,000* 05/02/14 30,580 125,000 05/02/15 35,565 200,000+ 11/02/18 44,613 148,000* 05/11/12 52,068 99,000* 11/11/13 31,321 119,000* 11/11/14 35,042 320,000+ 11/11/17 76,269 281,000* 05/30/14 85,455 261,000* 11/30/15 71,232 164,000* 11/30/16 41,666 167,000* 08/08/17 40,477 100,000* 08/03/18 22,669 182,000* 06/06/15 51,431 109,000+ 12/06/17 25,848 137,000* 08/03/15 38,267 5 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND PORTFOLIO OF INVESTMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- Principal Interest Maturity Amount Rate Date Value ------ ---- ---- ----- FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities (continued) 208,000 02/03/16 $ 56,114 138,000* 02/03/11 53,055 250,000 10/06/14 74,140 205,000+* 04/06/17 50,811 259,000* 10/05/15 71,453 100,000+ 10/05/17 23,991 217,000+ 04/05/18 50,272 375,000* 04/05/19 81,349 74,000 04/05/15 21,171 100,000 10/05/16 25,692 240,000* 10/06/17 60,300 135,000 04/06/04 83,230 444,000+ 08/08/16 115,387 100,000+ 02/08/17 25,050 200,000* 04/06/17 49,572 129,000 10/06/17 30,943 108,000+ 11/30/17 25,644 100,000+ 02/03/12 35,855 118,000* 08/03/16 30,698 144,000 08/03/18 32,643 ----------- (Cost $1,145,458) $ 1,713,897 ----------- Total investments (Cost $19,364,775++) $22,828,137 =========== ** Two-Tiered Index Floating Rate Bonds (TTIB) are instruments whose interest rate is fixed over various ranges of the interest rate on another security or the value of an index, but variable within certain ranges of the same security or index. + Collateral or partial collateral for securities sold subject to repurchase (Note 6) * Segregated, in whole or part, as initial margin for futures contracts (Note 5) ++ Cost is the same for Federal income tax purposes (beta) Security valued in good faith under procedures approved by the Fund's Board of Trustees. See Notes to Financial Statements. 6 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS December 31, 1995 - -------------------------------------------------------------------------------- 1. Significant Accounting Policies Fundamental 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 Tax-Free Money Market Series, the High-Yield Municipal Bond Series and the U.S. Government Strategic Income Fund (the Series). Each series is considered a separate entity for financial reporting and tax purposes. The Fund seeks to provide high current income with minimum risk of principal and relative stability of net asset value. Valuation of Securities-Investments are stated at value based on prices provided by a pricing service which takes into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the-counter prices, because such valuations are believed to reflect more accurately the fair value of such securities. Securities not priced in this manner are valued at the mean between the most recently quoted bid and ask prices provided by dealers. Securities for which quotations are not readily available are valued in good faith under methods approved by the Board of Trustees. 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. It is the Fund's policy that its custodian take possession of the underlying collateral securities the value of which exceeds the purchase price including accrued interest earned on the underlying security. If the seller defaults, and the value of the collateral declines, realization of the collateral by the Fund may be delayed or limited. 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 to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. 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 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. 7 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- 2. Investment Advisory Fees and Other Transactions With Affiliates The Series has a Management Agreement with Fundamental Portfolio Advisors, Inc. (the Manager). Pursuant to the agreement the Manager serves as investment adviser to the Series and is responsible for the overall management of the business affairs and assets of the Series subject to the authority of the Fund's Board of Trustees. In compensation for the services provided by the Manager, the Series will pay an annual management fee in an amount equal to .75% of the Series' average daily net assets up to $500 million, .725% on the next $500 million, and .70% per annum on assets over $1 billion. The Manager is required to reimburse the Series for its expenses (excluding interest, taxes, brokerage fees and extraordinary expenses) to the extent that such expenses, including the management fees, exceed the limits on investment company expenses prescribed in any state in which the Series' shares are qualified for sale. The manager voluntarily waived fees and reimbursed expenses of $121,770 for the year ended December 31, 1995. The Series has adopted a Distribution and Marketing Plan, pursuant to Rule 12b-1, promulgated under the Investment Company Act of 1940, under which the Series pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a fee which is accrued daily and paid monthly at an annual rate of 0.25% of the Series' average daily net assets. Amounts paid under the plan are to compensate FSC for the services it provides and the expenses it bears in distributing the Series' shares to investors. The amount incurred by the Series pursuant to the agreement for the year ended December 31, 1995 is set forth in the statement of operations. FSC has waived fees in the amount of $40,618. The Fund compensates Fundamental Shareholders Services, Inc. (FSSI), an affiliate of the Manager, for services it provides under a Transfer Agent and Service Agreement. The amount incurred by the Series pursuant to the agreement for the year ended December 31, 1995 is set forth in the Statement of Operations. 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 $6,500 per quarter pro rated among the funds based on their respective average net assets. 4. Shares of Beneficial Interest As of December 31, 1995 there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid-in amounted to $30,283,421. Transactions in shares of beneficial interest were as follows:
Year Ended Year Ended December 31, 1995 December 31, 1994 ----------------------------- ------------------------------- Shares Amount Shares Amount ------ ------ ------ ------ Shares sold 1,300,415 $1,819,736 7,503,044 $13,099,717 Shares issued on reinvestment of dividends 554,101 779,070 1,398,152 2,335,836 Shares redeemed (5,559,992) (7,769,765) (26,452,420) (44,409,915) ---------- ----------- ----------- ------------ Net decrease (3,705,476) $(5,170,959) (17,551,224) $(28,974,362) ========== =========== =========== ============
5. Complex Services, Off Balance Sheet Risks and Investment Transactions Collaterialized Mortgage Obligations and Multi-Class Pass-Through Securities: The Fund invests in collateralized mortgage obligations ("CMOs") which are debt instruments issued by special purpose entities which are secured by pools of mortgage loans or other mortgage-backed securities. Multi-class pass-through securities are equity interests in a trust composed of mortgage loans or other mortgage-backed securities. Payments of principal and interest on underlying collateral provide the funds to pay debt service on the CMO or make scheduled distributions on the multi-class pass-through security. The Fund may invest in CMOs and multi-class pass-through securities issued by agencies or instrumentalities of the U.S. Government. 8 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- Two-Tiered Index Floating Rate Bonds (TTIB): The Fund invests in variable rate securities commonly called "TTIBs" which are collateralized mortgage obligations. The interest rate on these securities are fixed over various ranges of the interest rate on another security or the value of an index, but variable within certain ranges of the same security or index. Changes in interest rate on the other security or index affect the rate paid on the TTIB, and the TTIB's price will be more volatile than that of a fixed-rate bond. Futures Contracts and Options on Futures Contracts: The Fund invests in futures contracts consisting primarily of US Treasury Bond Futures. A futures contract is an agreement between two parties to buy and sell a security for a set price on a future date. Futures contracts are traded on designated "contract markets" which through their clearing corporations, guarantee performance of the contracts. In addition the fund invests in options on US Treasury Bond Futures which gives the holder a right to buy or sell futures contracts in the future. Unlike a futures contract which requires the parties to the contract to buy and sell a security on a set date, an option on a futures contract entitles its holder to decide before a future date whether to enter into such a futures contract. Both types of contracts are marked to market daily and changes in valuation will affect the net asset value of the Fund. The Fund's principal objective in holding or issuing derivative financial instruments is as a hedge against interest-rate fluctuations in its bond portfolio, and to enhance its total return. The Fund's principal investment objective is to maximize the level of interest income while maintaining acceptable levels of interest-rate and liquidity risk. To achieve this objective, the Fund uses a combination of derivative financial instruments principally consisting of US Treasury Bond Futures and Options on US Treasury Bond Futures. Typically the Fund sells treasury bond futures contracts or writes treasury bond option contracts. These activities create off balance sheet risk since the Fund may be unable to enter into an offsetting position and under the terms of the contract deliver the security at a specified time at a specified price. The cost to the Fund of acquiring the security to deliver may be in excess of recorded amounts and result in a loss to the Fund. For the year ended December 31, 1995, the Fund had daily average notional amounts outstanding of approximately $6,687,000 and $10,787,000 of short positions on US Treasury Bond Futures and Options Written on US Treasury Bond Futures respectively. Realized gains and losses from these transactions are stated separately in the Statement of Operations. The Fund had the following open futures contracts at December 31, 1995. Principal Expiration Unrealized Type Amount Position Month Gain ---- ------ -------- ----- ----- U.S. Treasury Bond ....... $6,500,000 Short March 1996 $183,771 Portfolio securities with an aggregate value of approximately $3,250,000 have been segregated as collateral for this contract as of December 31, 1995. In addition, the following table summarizes option contracts written by the Series for the year ended December 31, 1995: Number of Premiums Realized Contracts Received Cost Loss --------- -------- ---- ---- Contracts outstanding December 31, 1994 ....... 375 $ 413,175 Options written ........... 1,230 1,043,354 Contracts closed or expired (1,530) (1,394,204) $2,410,863 $(1,016,659) ------ ---------- Contracts outstanding December 31, 1995 ....... 75 $ 62,325 ===== ========= Other Investment Transactions For the year ended December 31, 1995, the cost of purchases and proceeds from sales of investment securities, other than short-term obligations, were $28,242,059 and $39,141,080, respectively. 9 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- As of December 31, 1995, net unrealized appreciation of portfolio securities amounted to $3,463,362 comprised entirely of unrealized appreciation. As of December 31, 1995, the Fund has available for federal income tax purposes an unused capital loss carryover of approximately $15,000,000 which expires in 2002. 6. Borrowing The Fund has a line of credit agreement with its custodian bank collateralized by cash and portfolio securities to the extent of the amounts borrowed. Borrowings under this agreement bear interest linked to the bank's prime rate. The Series enters into reverse repurchase agreements collateralized by portfolio securities equal in value to the repurchase price. Portfolio securities with an aggregate value of approximately $8,290,000 have been segregated as collateral for securities sold subject to repurchase as of December 31, 1995. 7. Selected Financial Information
Year Year February 18, Year Ended Ended Ended 1992 to December 31, December 31, December 31, December 31, Per share operating performance 1995 1994 1993 1992 (for a share outstanding throughout the period) ------ ------ ------ ------- Net asset value, beginning of period ....................... $ 1.37 $ 2.01 $ 2.02 $ 2.00 ------ ------ ------ ------ Income from investment operations Net investment income ...................................... 0.08 0.14 0.16 0.15 Net realized and unrealized gain/(loss) on investments ..... 0.12 (0.64) - 0.02 ------ ------ ------ ------ Total from investment operations ................... 0.20 (0.50) 0.16 0.17 ------ ------ ------ ------ Less distributions Dividends from net investment income ....................... (0.08) (0.14) (0.16) (0.15) Dividends from net realized gains .......................... - - (0.01) - ------ ------ ------ ------ Net asset value, end of period ............................. $ 1.49 $ 1.37 $ 2.01 $ 2.02 ====== ====== ====== ====== Total return ............................................... 15.43% (25.57%) 8.14% 10.76%** Ratios/supplemental data: Net assets, end of period (000 omitted) .................... 15,194 19,090 63,182 40,500 Ratios to average net aset (annualized): Interest expense ......................................... 0.20% 0.12% 0.05% 0.09% Operating expenses ....................................... 3.05% 2.16% 1.39% 0.96% ------ ------ ------ ------ Total expenses ..................................... 3.25%+ 2.28% 1.44%+ 1.05%+ ====== ====== ====== ====== Net investment income .................................... 5.91% 8.94% 7.85% 8.50% Portfolio turnover rate .................................... 114.36% 60.66% 90.59% 115.39% Borrowings Amount outstanding at end of period (000 omitted) .......... 7,481 9,674 31,072 19,666 Average amount of debt outstanding during the period (000 omitted) ............................................ 7,790 16,592 28,756 13,779 Average number of shares outstanding during the period (000 omitted) ............................................ 11,571 21,436 28,922 12,683 Average amount of debt per share during the period ......... .67 .77 .99 1.09 *Commencement of operations. **Annualized. +These ratios are after expense reimbursement of 1.0% for the year ended December 31, 1995, .13% for the year ended December 31, 1993, and 1.05% for the period of February 18, 1992 to December 31, 1992.
10 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND NOTES TO FINANCIAL STATEMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- 8. Contingencies The Fund has been named as a defendant in two related class action lawsuits alleging that the Fund invested in certain derivitive financial instruments that were inconsistent with the Fund's stated investment objectives. The suits claim that the defendants, which include the Fund's investment adviser, distributor, and certain control persons, are liable for damages because there existed material misstatements or omissions in the prospectuses that rendered them misleading. Management has entered into negotiations with the plaintiffs who have consented to a series of adjournments of all operative dates in the litigation. These negotiations have resulted in a settlement in principle with the plaintiffs that, if consummated, would require a payment of approximately $500,000 or more under certain future circumstances by the Fund's investment adviser and no liability or cost to the Fund or its shareholders. The contemplated stipulation of settlement expressly states that the settlement does not constitute an admission of wrongdoing by the Fund or any of the other defendants. The settlement remains subject to final documentation and agreement by the parties and approval by the Court. If the settlement is not successfully concluded, the Fund intends to contest the litigation vigorously. If this litigation ever goes forward, it would involve significant complexities that preclude a present determination of whether any liability to the Fund ultimately would result and, if so, whether any such liability would be material to the financial position of the Fund. Accordingly, and because the contemplated settlement does not require any payment by the Fund, no amount has been accrued in the financial statements with respect to this matter. In addition, Management is cooperating in a formal investigation being conducted by the Securities and Exchange Commission concerning the Fund, the Fund's adviser and affiliated entities. Among other things, the investigation concerns the sufficiency of disclosures set forth in the Fund's prior advertising and prospectus, the consistency of the Fund's practices with those disclosures, and the Fund's investment in inverse floating rate notes between 1993 and 1995. Currently, the Fund has no inverse floating rate notes in its portfolio. 11 INDEPENDENT AUDITOR'S REPORT The Board of Trustees and Shareholders Fundamental U.S. Government Strategic Income Fund We have audited the accompanying statement of assets and liabilities including the statement of investments and statement of options written, of the Fundamental U.S. Government Strategic Income Fund Series of Fundamental Fixed-lncome Fund as of December 31, 1995 and the related statements of operations and cash flows for the year then ended, and the statement of changes in net assets for the two years then ended and selected financial information for the three years then ended and the period from February 18, 1992 (date of inception) to December 31, 1992. These financial statements and selected financial information are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and selected financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and selected financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected financial information referred to above present fairly, in all material respects, the financial position of the Fundamental U.S. Government Strategic Income Fund of Fundamental Fixed-lncome Fund as of December 31, 1995, the results of its operations, changes in its net assets, cash flows, and selected financial information for the periods indicated, in conformity with generally accepted accounting principles. S I G N A T U R E New York, New York February 13, 1996 12 Left Col. FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND 90 Washington Street New York, New York 10006 1-800-322-6864 Independent Auditors McGladrey & Pullen, LLP New York, NY 10017 Attorney Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, NY 10022 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Right Col. Annual Report December 31, 1995 FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND FUNDAMENTAL Left Col. FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 - -------------------------------------------------------------------------------- ASSETS Investment in securities at value (cost $84,920,453) ........................................ $84,920,453 Cash ........................................................ 511,739 Receivables: Interest .................................................. 333,558 Capital shares sold ....................................... 5,852,289 ----------- Total assets .......................................... 91,618,039 ----------- LIABILITIES Payables: Capital shares redeemed ................................... 80,211,207 Dividends ................................................. 1,822 Accrued expenses ............................................ 154,463 ----------- Total liabilities ..................................... 80,367,492 ----------- NET ASSETS equivalent to $1.00 per share on 11,259,435 shares of beneficial interest outstanding (Note 4) ........................................ $11,250,547 =========== Right Col.l STATEMENT OF OPERATIONS Year Ended December 31, 1995 - -------------------------------------------------------------------------------- INVESTMENT INCOME Interest income ............................... $1,678,952 EXPENSES (Notes 2 and 3) Investment advisory fees ...................... $222,162 Custodian and accounting fees ................. 77,931 Transfer agent fees ........................... 41,525 Trustees' fees ................................ 33,034 Professional fees ............................. 40,721 Distribution fees ............................. 222,162 Interest ...................................... 3,610 Postage and printing .......................... 1,860 Registration .................................. 8,740 Other ......................................... 26,575 -------- 678,320 Less: Expenses offset (Note 6) ................ (77,931) -------- Total expenses .......................... 600,389 ---------- NET INCREASE IN NET ASSETS FROM OPERATIONS ...................................... $1,078,563 ========== STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
For the Year For the Year Ended Ended December 31, December 31, 1995 1994 ----------- ---------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income ................................... $ 1,078,563 $ 870,365 Net realized gain on investments ........................ - 401 ----------- ---------- Net increase in net assets from operations ........ 1,078,563 870,766 DIVIDENDS PAID TO SHAREHOLDERS FROM Investment income ....................................... (1,078,563) (870,365) CAPITAL SHARE TRANSACTIONS (Note 4) ....................... 2,246,999 3,173,383 ----------- ---------- Total increase .................................... 2,246,999 3,173,784 NET ASSETS: Beginning of year ....................................... 9,003,548 5,829,764 ----------- ---------- End of year ............................................. $11,250,547 $9,003,548 =========== ==========
See Notes to Financial Statements. 1
FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES STATEMENT OF INVESTMENTS December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------ Principal Amount Issue0 Value ------ ----- ----- $5,000,000 Ascension Parish, LA, PCR, BASF, Wyandotte Corp, LOC Bank of Tokyo, VRDN*, 5.90%, 1/02/96 ................................................................ $ 5,000,000 5,200,000 Burke County, GA, Development Authorily PCR, Georgia Power Co, Daily VRDN*, 6.00%, 1/02/96 ................................................................ 5,200,000 87,000 Clermont County, OH, HFR, Mercy Health Care Project, MBIA Insured, VRDN*, 5.10%, 1/05/96 ....................................................................... 87,000 6,400,000 Columbia, AL, IDR, PCR, Alabama Power Company Project, VRDN*, 6.00%, 1/02/96 .............................................................................. 6,400,000 80,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Wells Fargo Bank, 3.90%, 1/01/96 ................................................................. 80,000 200,000 Delaware County, PA, SWDF, Scott Paper Project, LOC Fuji Bank, VRDN*, 5.50%, 1/05/96 ....................................................................... 200,000 250,000 Detroit City, Ml, School District, State School Aid Notes, 4.50%, 5/01/96 .............. 250,522 300,000 District of Columbia, General Fund Recovery, LOC Westdeutsche Landesbank, Daily VRDN*, 6.00%, 1/02/96 ....................................................................... 300,000 4,500,000 East Baton Rouge Parish, LA, PCR, Exxon Corp, VRDN*, 6.00%, 1/02/96 .................... 4,500,000 200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 5.20%, 1/05/96 .................. 200,000 135,000 Genesee County, NY, IDR, Orcon Industries, AMT, LOC Fleet Bank, VRDN*, 4.25%, 1/01/96 ....................................................................... 135,000 3,700,000 Gulf Coast, TX, IDA, Marine Terminal RB, Amoco Oil Project, AMT, VRDN*, 6.15%, 1/05/96 ....................................................................... 3,700,000 5,000,000 Harris County, TX, Health Facilities Development Corp., The Methodist Hospital, Morgan Guaranty Liquidity, Daily VRDN*, 6.00%, 1/1/96 ................................ 5,000,000 300,000 Illinois Educational Facility Authority, RB, Art Institute of Chicago, Weekly Northern Trust Liqudity VRDN*, 5.10%, 1/05/96 ........................................ 300,000 1,600,000 Illinois HFAR, Elmhurst Memorial Hospital, RB, Sanwa Bank Liqudity, VRDN*, 6.50%, 1/02/96 ....................................................................... 1,600,000 300,000 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank, VRDN*, 5.10%, 1/05/96 .............................................................................. 300,000 2,000,000 Illinois HFAR, Northwest Community Hospital, RB, Sanwa Bank Liquidity, VRDN*, 6.50%, 1/02/96 ................................................................ 2,000,000 200,000 Illinois HFAR, West Suburban Hospital Medical Center, LOC First Chicago Bank, VRDN*, 5.10%, 1/05/96 ................................................................ 200,000 1,600,000 Irvine Ranch Water District, CA, Consolidated, Series 93, LOC Bank of America, VRDN* 6.00%, 1/02/96 ................................................................. 1,600,000 1,800,000 Irvine Ranch Water District, Orange County Consolidated, RB, LOC Bank America, Daily VDRN*, 6.00%, 1/02/96 .......................................................... 1,800,000 7,600,000 Los Angeles Regional Airports Improvement Corp, LOC Societe Generale, VRDN*, 6.00%, 1/02/96 ................................................................ 7,600,000
2
FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES STATEMENT OF INVESTMENTS (continued) December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------ Principal Amount Issue0 Value ------ ----- ----- $4,200,000 Louisiana Recovery District, Sales Tax Bond, MBIA Insured, SPA Swiss Bank Corp, Daily VDRN*, 6.00%, 1/02/96 .................................................... $4,200,000 90,000 Maryland Department of Housing & Community Development, Single Family Program, Putable Semiannually, 3.90%, 4/01/96 ........................................ 90,000 4,000,000 Massachusetts State Updates, LOC National Westminster Bank, Daily VRDN*, 5.90%, 1/02/96 ....................................................................... 4,000,000 200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp. VRDN*, 5.00%, 1/05/96 ....................................................................... 200,000 300,000 Missouri, PCR, Monsanto Project, VRDN*, 5.00%, 1/05/96 ................................. 300,000 200,000 Missouri, Third Street Building Project, VRDN*, 5.35%, 1/05/96 ......................... 200,000 300,000 Montgomery, AL, Baptist Medical Cntr, Special Care Facilities Financing Auth, AMBAC Insured, SPA First Chicago, VRDN*, 5.00%, 1/2/96 ............................... 300,000 200,000 Nebraska Higher Education Loan Program, MBIA Insured, VRDN*, SPA SLMA, 4.90%, 1/02/96 ....................................................................... 200,000 6,000,000 New York City, NY, GO, LOC Chemical Bank, VRDN*, 5.95%, 1/02/96 ........................ 6,000,000 8,300,000 New York City, NY, GO, LOC Fuji Bank, VRDN*, 6.25%, 1/02/96 ............................ 8,300,000 1,600,000 New York City, NY, GO, LOC Sumitori Bank, VRDN*, 6.00%, 1/02/96 ........................ 1,600,000 5,200,000 New York City, NY, Municipal Water Financial Authority, FGIC Insured, VRDN*, 5.90%, 1/02/96 ....................................................................... 5,200,000 300,000 New York State, Job Development Authority, Fuji Bank Liquidity, VRDN*, 6.25%, 1/02/96 ....................................................................... 300,000 1,200,000 Peninsula, VA Port Authority, Shell Oil Company, VRDN*, 5.90%, 1/02/961,200,000 300,000 Philadelphia, PA, TRANS, 4.50%, 6/27/96 ................................................ 300,845 200,000 Purdue University, IN, Student Fee Bonds, Series K, VRDN*, 5.10%, 1/05/96 .............. 200,000 300,000 San Francisco City & County Unified School District, TRANS, 4.50%, 7/25/96 ............. 300,972 125,000 Scioto County, OH, HFR, VHA Central Capital Project, AMBAC Insured, VRDN*, 5.00%, 1/05/96 ....................................................................... 125,000 250,000 Texas State, TRANS, 4.75%, 8/30/96 ..................................................... 251,114 5,000,000 Unita County, WY, PCR, Chevron Project, VRDN*, 5.90%, 1/02/96 .......................... 5,000,000 200,000 Wake County, NC, PCR, Carolina Power & Light Project, LOC Sumitomo Bank, VRDN*, 5.50%, 1/05/96 ....................................................................... 200,000 ----------- Total Investments (Cost $84,920,453**) ................................................. $84,920,453 =========== *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.
3 FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES STATEMENT OF INVESTMENTS (continued) December 31, 1995 - ------------------------------------------------------------------------------- Legend 0Issue AMBAC American Municipal Bond Assurance Corporation AMT Alternative Minimum Tax HFA Housing Finance Authority HFAR Health Facilities Authority Revenue HFDC Health Facilities Development Corporation HFR Hospital Facilities Revenue IDR Industrial Development Revenue LOC Letter of Credit MBIA Municipal Bond Insurance Assurance Corporation PCR Pollution Control Revenue RB Revenue Bond SLMA Student Loan Marketing Association SPA Stand By Bond Purchase Agreement SWDF Solid Waste Disposal Facility TAN Tax Anticipation Note See Notes to Financial Statements. 4 FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES NOTES TO FINANCIAL STATEMENTS) December 31, 1995 - ------------------------------------------------------------------------------- 1. Significant Accounting Policies Fundamental 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 Tax-Free Money Market Series, the High-Yield Municipal Bond Series and the U.S. Government Strategic Income Fund. Each series is considered a separate entity for financial reporting and tax purposes. The Fund seeks to provide as high a level of current income exempt from federal income taxes 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 the principal 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 income and pays such dividends on the last Wednesday 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 Fees and Other Transactions with Affiliates The Fund has a Management Agreement with Fundamental Portfolio Advisors, Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment adviser to the Tax-Free Money Market Series and is responsible for the overall management of the business affairs and assets of the Series subject to the authority of 5 FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES NOTES TO FINANCIAL STATEMENTS) December 31, 1995 - ------------------------------------------------------------------------------- the Fund's Board of Trustees. In compensation for the services provided by the Manager the Series will pay an annual management fee in an amount equal to 0.5% of the Series' average daily net assets up to $100 million and decreasing by .02% for each $100 million increase in net assets down to 0.4% of net assets in excess of $500 million. The Manager is required to reimburse the Series on a monthly basis for its expenses (exclusive of interest, taxes, brokerage fees and expenses paid pursuant to the Plan of Distribution, and extraordinary expenses) to the extent that such expenses, including the management fee, exceed the limits on investment company expenses prescribed in any state in which the Series' shares are qualified for sale. No expense reimbursement was required for the year ended December 31, 1995. The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1 promulgated under the Investment Company Act of 1940, under which the Series pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a fee, which is accrued daily and paid monthly, at an annual rate of 0.5% of the Series' average daily net assets. The amounts paid under the plan compensate FSC for the services it provides and the expenses it bears in distributing the Series' shares to investors. Fees to FSC amounted to $199,493 for the year ended December 31, 1995. The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of the Manager, for the services it provides under a Transfer Agent and Service Agreement. Transfer agent fees for the year ended December 31, 1995 are set forth in the Statement of Operations. 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 $6,500 per quarter pro rated among the funds based on their respective average net assets. 4. Shares of Beneficial Interest As of December 31, 1995 there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid in amounted to $11,259,435. Transactions in shares of beneficial interest, all at $1.00 per share were as follows: 1995 1994 -------------- -------------- Shares sold ................................. $3,142,235,917 $3,016,643,058 Shares issued on reinvestment of dividends .. 1,075,300 841,613 Shares redeemed ............................. (3,141,064,218) (3,014,311,288) -------------- -------------- Net increase ............................ $ 2,246,999 $ 3,173,383 ============== ============== 5. Line of Credit The Fund has a line of credit agreement with its custodian bank collateralized by cash and portfolio securities to the extent of the amounts borrowed. Borrowings under this agreement bear interest linked to the bank's prime rate. 6 FUNDAMENTAL FIXED-INCOME FUND TAX-FREE MONEY MARKET SERIES NOTES TO FINANCIAL STATEMENTS) December 31, 1995 - ------------------------------------------------------------------------------- 6. Expense Offset Arrangement 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 $77,931 for the year ended December 31, 1995.
7. Selected Financial Information Years Ended December 31, 1995 1994 1993 1992 1991 ------ ------ ------ ----- ----- 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 ------ ----- ----- ----- ----- Income from investment operations: Net investment income ..................................... 0.026 0.017 0.014 .028 .047 ------ ------ ------ ----- ----- Less Distributions: Dividends from net investment income ...................... (0.026) (0.017) (0.014) (.028) (.047) ------ ------ ------ ----- ----- Net Asset Value, End of Year .............................. $ 1.00 $1.00 $1.00 $1.00 $1.00 ====== ===== ===== ===== ===== Total Return .............................................. 2.60% 1.69% 1.62% 2.79% 4.86% RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (000 omitted) ..................... 11,251 9,004 5,830 32,488 8,310 Ratios to Average Net Assets Expenses** ............................................ 1.53%++ 0.91%+ .95%+ .42%+ .05%+ Net investment income ................................. 2.43% 1.55% 1.25% 2.76% 4.74% BANK LOANS Amount outstanding at end of period (000 omitted) ........................................... $ - $ 451 $ 290 $ 20 $ 58 Average amount of bank loans outstanding during the year (000 omitted) ........................................... $ 41 $ 53 $ 111 $ 69 $ 124* Average number of shares outstanding during the year (000 omitted) ........................................... 44,432 56,267 25,786 7,980 6,984* Average amount of debt per share during the year .......... $ .001 $ .001 $ .004 $ .009 $ .018 *Based on month end average loans or shares. **The expense ratio for the year ended December 31, 1995 is based on total expenses, before expense reimbursements and expense offsets. Ratios for periods prior to this date are net of expense reimbursements. +These ratios are after expense reimbursements of .44%, .67%, 1.66%, and 1.57%, for each of the years ended December 31, 1994, 1993, 1992 and 1991, respectively. + +This ratio would have been 1.35%, net of expense offsets of .18%.
7 INDEPENDENT AUDITOR'S REPORT The Board of Trustees and Shareholders Tax-Free Money Market Series of Fundamental Fixed-lncome Fund We have audited the accompanying statement of assets and liabilities, including the statement of investments, of the Tax-Free Money Market Series of Fundamental Fixed-lncome Fund as of December 31, 1995 and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the selected financial information for each of the five years in the period then ended. These financial statements and selected financial information are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and selected financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and selected financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statement and selected financial information referred to above present fairly, in all material respects, the financial position of the Tax-Free Money Market Series of Fundamental Fixed-!ncome Fund as of December 31, 1995, and the results of its operations, changes in net assets, and selected financial information for the periods indicated, in conformity with generally accepted accounting principles. S I G N A T U R E New York, New York February 13, 1996 8 Left Col. FUNDAMENTAL FIXED-INCOME FUND 90 Washington Street New York, New York 10006 1-800-322-6864 Independent Auditors McGladrey & Pullen, LLP New York, NY 10017 Attorney Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, NY 10022 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Right Col. Annual Report December 31, 1995 FUNDAMENTAL FIXED-INCOME FUND Tax-Free Money Market Series FUNDAMENTAL Dear Fellow Shareholder: Financial assets scored remarkable gains in 1995. For example, the Dow Jones Industrial Average ended the year above 5000, for a gain of about 33%. The Treasury bellweather thirty- year "long" bond finished 1995 with a yield less than 6%, and the Bond Buyer index of forty actively traded municipal bonds increased by 15%. A plethora of favorable developments were behind these gains. The economic fundamentals of modest growth and low inflation not only remained intact, but actually began to be thought of as an enduring phenomenon. And rhetoric flowing from the White House and Congress seemed to indicate that genuine progress could be made toward erasing the federal budget deficit. Finally, the Federal Reserve began to reverse its tightfisted policy of 1994 by modestly reducing short-term interest rates, for the first time in July, and then again in December. In this environment saving and investment seemed to become fashionable again, as wage earners poured record sums into IRA and 401(k) retirement plans. Importantly, unlike 1993 when the Federal Reserve actively lowered interest rates to stimulate business activity, the Fed pursued a different strategy in 1995. Indeed, throughout the year the Central Bank was being accused of being too stringent rather than too lenient. The upshot was that market interest rates fell faster than the Federal Reserve's own rate cuts, such that the spread between short- and long-term interest rates narrowed dramatically throughout the year. This is important for 1996 in two respects. First, the narrowness of the interest rate spread discourages speculation and leverage. Second, since the spread itself is a reflection of a stringent monetary policy, it is highly unlikely that either economic activity or inflation will get off the ground. Indeed, while the economy may well skirt a recession in 1996, the downside risks to the economy seem greater than the upside potential. Thus, the credit easing that began in 1995 is likely to continue in 1996, in our view, and as a result interest rates are likely to continue to trend down while bond prices trend up. Unlike 1995, though, we would expect short-term interest rates to begin falling somewhat faster than long-term rates in 1996. The municipal bond market began 1995 on a strong note as it benefitted from the positive fundamentals of slow growth and low inflation, as well as from a reduction in the issuance of state and local bonds that began in 1994. By late spring, however, municipals began to underperform Treasuries as discussions about a reform of the tax system, and specifically a flat tax, received attention. In a pure flat tax system all incomes would be taxed at the same rate, and in its most extreme form all deductions would be eliminated, including those for real estate taxes, mortgage interest, municipal bond interest, and state and local income taxes. The flat tax is a long way from being enacted, and even if it ever is enacted, it will be significantly amended. In our view it is unlikely to ever be enacted, and indeed, the Clinton Administration has already come out squarely against it. Nevertheless, the mere mention of eliminating the interest deduction on municipal bonds hurt the market such that by autumn, yields on municipal bonds were about comparable to the yield on Treasury bonds, instead of being lower, as is normal. In our view this anomaly is presenting municipal bond investors with a unique opportunity. As this tax hysteria subsides, munis will once again sell at a premium relative to Treasuries, meaning that municipal bond prices will rise to Treasuries. And in the worst case, munis will yield on a par with Treasuries, which is practically the case currently. Investors in Fundamental's High-Yield Municipal Bond Fund were handsomely rewarded in 1995. Net Asset Value rose from $5.92 per share at the end of 1994 to $7.07 at the end of 1995 for a hefty 25.7% total return. As a result, the High-Yield Municipal Bond Fund was the year's highest ranking High-Yield Municipal Bond Fund. The High-Yield Municipal Bond Fund is particularly sensitive to fluctuations in short-term interest rates, so as the Federal Reserve began to ease credit around mid-year, the Fund was positively affected. Moreover, because we were generally constructive on the interest rate outlook for 1995, the Fund's portfolio maintained a long duration. If in fact the Federal Reserve continues gradually lowering short-term interest rates in 1996, the High-Yield Municipal Bond Fund will further benefit. Nonetheless, returns such as those generated in 1995 should not be expected to recur. Interest rates will probably not fall as sharply in 1996 as they did in 1995. However, as discussions about the flat tax are clarified, or more likely terminated, municipal bonds will outperform Treasuries, and this will be positive for the High-Yield Municipal Bond Fund. Of course, interest rates and bond prices will always fluctuate, so investors are urged to undertake an investment program over time rather than in one lump sum. Meanwhile, we thank you for your continued trust, and we look forward to continuing to serve you in the future. Sincerely, Dr. Vincent J. Malanga FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 ASSETS Investment in securities at value (Note 5) (cost $1,879,365) $1,828,053 Interest receivable 31,848 Receivable for shares sold 16,000 ---------- Total assets $1,875,901 ---------- LIABILITIES Bank overdraft payable $ 378,766 Payable for shares redeemed 26,658 Dividend payable 1,162 Accrued expenses 11,880 ---------- Total liabilities $ 418,466 ---------- Net assets consisting of: Accumulated net realized loss $ (198,899) Unrealized depreciation of securities (51,312) Paid-in-capital applicable to 206,234 shares of beneficial interest 1,707,646 ---------- $1,457,435 ========== Net asset value per share $ 7.07 ========== See Notes to Financial Statements. FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF OPERATIONS Year Ended December 31, 1995 Investment income: Interest income $ 91,471 Expenses (Notes 2, 3 and 6): Investment advisory fees $ 9,569 Custodian and accounting fees 28,192 Transfer agent fees 6,011 Trustee fees 707 Distribution fees 5,981 Professional fees 40,715 Printing and postage 6,170 Other 6,904 -------- 104,249 Less expenses waived or reimbursed by the manager and affiliate (74,369) -------- Total expenses 29,880 --------- Net investment income 61,591 Realized and unrealized gain (loss) on investments: Net realized loss on investments (39,968) Change in unrealized appreciation of investments for the year 253,452 -------- Net gain on investments 213,484 --------- Net increase in net assets from operations $ 275,075 ========= See Notes to Financial Statements. FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES STATEMENTS OF CHANGES IN NET ASSETS Years Ended December 31, 1995 and 1994 1995 1994 ---------- ---------- Increase (decrease) in net assets from: Operations: Net investment income $ 61,591 $ 68,184 Net realized loss on investments (39,968) (54,302) Unrealized appreciation (depreciation) of investments for the year 253,452 (161,607) ---------- ---------- Net increase (decrease) in net assets from operations 275,075 (147,725) Dividends paid to shareholders from net investment income (61,591) (68,184) Capital share transactions (Note 4) 264,793 108,138 ---------- ---------- Total increase (decrease) 478,277 (107,771) Net assets: Beginning of year 979,158 1,086,929 ---------- ---------- End of year $1,457,435 $ 979,158 ========== ========== See Notes to Financial Statements. FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF INVESTMENTS December 31, 1995 Par Value Security Description Value - --------- -------------------- ----- $ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc., 8.875%, 3/1/21 $ 42,118 50,000 Angels, CA, Improvement Bond Act of 1915, Greenhorn Creek Association, 7.300%, 9/2/21 52,371 75,000 Apple Valley, MN, IDR, K-Mart Corporation Project, 6.000%, 4/1/01 66,822 35,000++ Babylon, NY, IDA, RFR, Babylon Recycling Center, 8.875%, 3/1/11 17,549 40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.750%, 3/1/23 42,060 75,000 California Alternative Energy & Advanced Transmission Finance Authority, SRI International Project, 8.000%, 12/1/20 72,562 60,000 California Health Facilities Authority, Valley Presbyterian Hospital Project, RB, Series A, 9.000%, 5/1/12 60,076 35,000 Cass County, MO, IDA, 7.375%, 10/1/22 37,483 250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 7/15/24 38,955 50,000 Decatur, GA, Downtown Development Authority, IDR, Decatur Hotel Project, AMT, 8.750%, 11/1/16 50,880 500,000 Foothill/Eastern TCA, Toll Road Revenue, CAB, 1/1/26 74,410 50,000 Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste Tire Project, 7.875%, 4/1/11 50,410 45,000 Illinois Health Facilities Authority, Midwest, Physician Group Ltd. Project, RB, 8.125%, 11/15/19 48,361 35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.625%, 10/1/22 38,576 50,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.250%, 12/15/14 53,013 50,000 Los Angeles, CA, Regional Airport, Continental Airlines, AMT, 9.250%, 8/1/24 56,951 35,000 Maine Finance Authority, Solid Waste RFR, Bowater Inc. Project, 7.750%, 10/1/22 38,723 35,000 Montgomery County, PA, HEHA, Hospital Revenue, Series A, 8.375%, 11/1/11 37,037 95,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical Center, 8.850%, 8/15/14 104,448 25,000' New York, NY, GO, IFRN, 10/1/03 40,827 100,000+ Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00%, 5/1/99 49,336 50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.250%, 7/1/22 52,910 30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.250%, 7/1/18 32,556 75,000 San Bernardino, CA, San Bernardino Community Hospital, RB, 7.875%, 12/1/19 75,000 FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES STATEMENT OF INVESTMENTS December 31, 1995 Par Value Security Description Value - --------- -------------------- ----- $100,000' San Bernardino, CA, COP, IFRN, 7/1/16 $ 104,168 40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue, 7.000%, 1/1/30 42,609 60,000' San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN, MBIA Insured, 8/1/16 55,216 250,000 Savannah, GA, Economic Development Authority Revenue, ETM, CAB, 12/1/21 45,977 50,000 Schuylkill County, PA, IDA Resource Recovery, Schuylkill Energy Res. Inc., AMT, 6.500%, 1/1/10 51,937 50,000 Tomball, TX, Hospital Authority Revenue, Refunding, 6.125%, 7/1/23 49,280 20,000++ Tri-State Health Care Corp., PA, First Humanics Corp., Henry Clay Project, 13.75%, 12/1/14 4,019 15,000+ Troy,NY, IDA, Hudson River Project, 11.00%, 12/1/14 11,250 75,000++ Villages at Castle Rock, CO, Metropolitan District #4, 8.500%, 6/1/31 19,501 100,000 Wayne MI, AFR, Northwest Airlines Inc. 6.750%, 12/1/15 103,134 50,000 Wisconsin Health & Educational Facilities Authority, National Agency of New Berlin Project, RB, 8.000%, 8/15/25 49,489 75,000 York County, VA, IDA, K-Mart Corp. Project, RB, 5.750%, 12/1/09 58,039 ---------- Total investments (cost $1,879,365") $1,828,053 ========== " Cost is approximately the same for income tax purposes. ' Inverse Floating Rate Notes (IFRN) are instruments whose rates bear an inverse relationship to the interest rate on another security or the value of an index. + The value of this non-income producing security has been estimated in good faith under methods determined by the Fund's Board of Trustees (Note 5). ++ Non-income producing security (Note 5). * Description: AFR Airport Facilities Revenue AMT Subject to Alternative Minimum Tax CAB Capital Appreciation Bond COP Certificate of Participation CFR Civic Facility Revenue ETM Escrowed to Maturity GO General Obligation HEHA High Education and Health Authority IDA Industrial Development Authority IDR Industrial Development Revenue MBIA Municipal Bond Insurance Assurance Corporation RFR Recycling Facility Revenue RHR Retirement Housing Revenue RB Revenue Bond TCA Transportation Corridor Agency URA Urban Renewal Agency IFRN Inverse Floating Rate Note FUNDAMENTAL FIXED-INCOME FUND HIGH-YIELD MUNICIPAL BOND SERIES NOTES TO FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Fundamental 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 Tax-Free Money Market Series, the High-Yield Municipal Bond Series and the U.S. Government Strategic Income Fund (the Series). Each series is considered a separate entity for financial reporting and tax purposes. The 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 do higher rated bonds. 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 value based on prices provided by a pricing service which takes into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the- counter prices, because such valuations are believed to reflect more accurately the fair value of such securities. Securities not priced in this manner are valued in good faith by the Board of Trustees. 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. NOTES TO FINANCIAL STATEMENTS 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. Note 2. Investment Advisory Fees and Other Transactions With Affiliates The Fund has a Management Agreement with Fundamental Portfolio Advisors, Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment adviser to the High-Yield Municipal Bond Series and is responsible for the overall management of the business affairs and assets of the Series subject to the authority of the Funds' Board of Trustees. In compensation for the services provided by the Manager, the Series will pay an annual management fee in an amount equal to 0.8% of the Series' average daily net assets up to $100 million and decreasing by.02% for each $100 million increase in net assets down to 0.7% of net assets in excess of $500 million. The Manager is required to reimburse the Series on a monthly basis for its expenses (exclusive of interest, taxes, brokerage fees and expenses paid pursuant to the Plan of Distribution, and extraordinary expenses) to the extent that such expenses, including the management fee, exceed the limits on investment company expenses prescribed in any state in which the Series' shares are qualified for sale. The Manager voluntarily waived fees and reimbursed expenses of $57,191 for the year ended December 31, 1995. The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1 promulgated under the Investment Company Act of 1940, under which the Series pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a fee, which is accrued daily and paid monthly, at an annual rate of 0.5% of the Series' average daily net assets. Amounts paid under the plan are to compensate FSC for the services it provides and the expenses it bears in distributing the Series' shares to investors. FSC has waived all fees and reimbursed certain expenses in the amount of $11,167 for the year ended December 31, 1995. The Fund compensates Fundamental Shareholder Services, Inc. (FSSI), an affiliate of the Manager, for the services it provides under a Transfer Agent and Service Agreement. FSSI has waived all fees in the amount of $6,011 for the year ended December 31, 1995. Note 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 $6,500 per quarter pro rated among the funds based on their respective average. Note 4. Shares of Beneficial Interest As of December 31, 1995, there were an unlimited number of shares of beneficial interest (no par value) authorized and capital paid in amounted to $1,707,646. Transactions in shares of beneficial interest were as follows: Year Ended Year Ended December 31, 1995 December 31, 1994 ----------------- ----------------- Shares Amount Shares Amount ------ ------ ------ ------ Shares sold 137,251 $921,557 82,599 $534,554 Shares issued on reinvestment of dividends 8,305 54,195 7,829 50,715 Shares redeemed (104,760) (710,959) (74,527) (477,131) ------- -------- ------ -------- Net increase 40,796 $264,793 15,901 $108,138 ======= ======== ====== ======== Note 5. 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 the 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. Investments transactions: The Fund 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 Fund held securities in default with an aggregate value of $101,655 at December 31, 1995 (5.42% of total assets). As indicated in the Statement of Investments the Troy, NY Industrial Revenue Bond, 11% due December 1, 2014 with a par value of $15,000 and a value of $11,250 at December 31, 1995 has been estimated in good faith under methods determined by the Board of Trustees. The Fund 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 ability of this bond issue to make future payments is dependent on the ability of the underlying projects making certain rental payments. There is uncertainty as to the timing of events and the subsequent ability of this bond issue to make service debt payments. The value of this bond was $49,336. The bond is valued at 49.3% of face value at December 31, 1995 under methods determined by the Board of Trustees. During the year ended December 31, 1995, the cost of purchases and proceeds from sales of investment securities, other that short-term obligations, were $1,158,619 and $536,639, respectively. Accumulated undistributed net realized loss as of December 31, 1995 was $198,899. This capital loss carry forward may be used to offset future capital gains for tax purposes, and expires in varying amounts between December 31, 1998 and December 31, 2004. As of December 31, 1995, net unrealized depreciation of portfolio securities amounted to $51,312 composed of unrealized appreciation of $105,513 and unrealized depreciation of $156,825. NOTES TO FINANCIAL STATEMENTS Note 6. Selected Financial Information Per share operating performance (for a share outstanding throughout the year):
Years Ended December 31, ------------------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Net asset value, beginning of year $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02 ------ ------ ------ ------ ------ Income from investment operations: Net investment income $ .34 $ .43 $ .39 $ .43 $ .42 Net realized and unrealized gains (losses) on investments 1.15 (1.35) (.03) .01 .27 ------ ------ ------ ------ ------ Total from investment operations 1.49 (0.92) 0.36 0.44 0.69 ------ ------ ------ ------ ------ Less distributions: Dividends from net investment income (.34) (.43) (.39) (.43) (.42) ------ ------ ------ ------ ------ Net asset value, end of year $ 7.07 $ 5.92 $ 7.27 $ 7.30 $ 7.29 ====== ====== ====== ====== ====== Total return 25.70% (12.92)% 5.11% 6.26% 10.14% Ratios/supplemental data: Net assets, end of year (000's) 1,457 979 1,087 1,050 1,176 Ratios to average net assets: Expenses* 8.72% 2.50% 2.50% 2.87% 2.63% Net investment income* 3.85% 6.70% 5.40% 5.89% 5.93% Portfolio turnover rate 43.51% 75.31% 84.89% 100.21% 15.78% Bank loans: Amount outstanding at end of year (000 omitted) $ 379 $ - $ - $ 20 $ 103 Average amount of bank loans outstanding during the year (000 omitted) 61 - - 57 29 Average number of shares outstanding during the year (000 omitted) 183 156 145 144 188 Average amount of debt per share during the year $.33 $ - $ - $ 0.40 $0.15 * These ratios are after expense reimbursements of 3.8%, 6.20%, 5.76%, 4.83%, and .11% for each of the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
Independent Auditor's Report To the Board of Trustees and Shareholders Fundamental Fixed-Income Fund High-Yield Municipal Bond Series We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Fundamental Fixed-Income Fund High-Yield Municipal Bond Series as of December 31, 1995, and the related statements of operations for the year then ended, the statement of changes in net assets for each of the two years then ended and the selected financial information for each of the five years then ended. These financial statements and selected financial information are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected financial information referred to above present fairly, in all material respects, the financial position of Fundamental Fixed-Income Fund High-Yield Municipal Bond Series as of December 31, 1995, and the results of its operations, changes in net assets, and selected financial information for the periods indicated, in conformity with generally accepted accounting principles. New York, New York February 13, 1996 Left Col. FUNDAMENTAL FIXED-INCOME FUND 90 Washington Street New York, New York 10006 1-800-322-6864 Independent Auditors McGladrey & Pullen, LLP New York, NY 10017 Attorney Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, NY 10022 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Right Col. Annual Report December 31, 1995 FUNDAMENTAL FIXED-INCOME FUND High Yield Municipal Bond Series FUNDAMENTAL -----END PRIVACY-ENHANCED MESSAGE-----