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