Fundamental Family of Funds
March 12, 1999
Dear Shareholder:
Let me begin by acknowledging that 1998 was a tumultuous year both in the
markets and within the Fundamental Funds. Domestically our economy has weathered
incredible political upheaval while generating outstanding growth with minimal
inflation. With a continuously vigilant Federal Reserve prepared to act at the
first sign of renewed inflation, the bond markets gingerly marched to lower
levels throughout the first half of 1998.
Moreover, a strong equity market, solid domestic growth and falling
interest rates appeared to offer the best of all worlds. However, the true
international dependency of world economies was never so apparent as during the
effective meltdown of the Russian and Asian economies during the 3rd quarter of
1998. These developments sent shock waves through both the European and US
markets. We continue to suffer aftershocks as weak economies around the globe
generate concern regarding how long the U.S. economy can remain vibrant and
insulated from these events.
These events eased any concern the market may have had regarding Fed
tightening and in fact set the stage for a series of rate cuts, driving long
term interest rates down below 5% for the first time in thirty years. The bond
markets reached yield levels of 4.72% in early October, but have steadily inched
higher since that point.
The result of all these forces is a bond market at historically low
levels, minimal inflation, a strong stock market, solid economic growth, and a
balanced federal budget. With these conditions in place, now the markets ask:
How long can this last?
<PAGE>
In the midst of all this market activity, the Fundamental Funds
experienced incredible upheaval of its own. The discontinuance of management
agreements with one advisor and the decision to abandon a reorganization plan
with another, coupled with changes in Board membership, led to inconsistent
management and performance. The Funds across the board suffered.
Cornerstone Equity Advisors, Inc. was selected as interim manager on
September 29, 1998. Cornerstone's intentions are to bring to the Funds improved
and stable performance, a professionalism in behavior and a commitment to
expense reduction. The opportunity for a fresh start is upon us and we look
forward to working for you in 1999.
Let me thank you for your trust and support.
Sincerely,
/s/ Stephen C. Leslie
Stephen C. Leslie
President
<PAGE>
NEW YORK MUNI FUND
March 12, 1999
Dear Shareholder:
During 1998, New York's economy continued to improve, driven in large
measure by falling interest rates and steady job growth. Wall Street continued
to play a significant role in the local New York City economy. Improved
financial conditions also led to the continued credit improvement of New York
issuers. Once again, New York was the leading issuer of municipal bond debt in
the nation.
New York Muni Fund performed poorly again in 1998, as its total return was
(2.69)% for the year. Continued regulatory investigations, higher than normal
professional fees, resulting from management upheaval and the instability of not
having a permanent investment advisor in place, contributed significantly to
this performance. Additionally, an inordinate dependence on inverse floaters
(derivatives), by prior management, created a riskier portfolio than Cornerstone
deem appropriate.
Throughout the fourth quarter, we attempted to improve both the quality of
the portfolio by raising the percentage of AAA bonds, raising the coupon
structure and reducing our dependency on derivatives. These measures will reduce
the risk profile of the portfolio and may improve income. Cornerstone has begun
to turn around a difficult situation, and 1999 should bring positive changes.
Sincerely,
/s/ Stephen C. Leslie
Stephen C. Leslie
President
1
<PAGE>
---------------------------------
New York Muni Fund
---------------------------------
Average Annual Total Return
Ended on 12/31/98
---------------------------------
1 Year 5 Year 10 Year
---------------------------------
(2.69)% (3.47)% 2.86%
---------------------------------
[The following table was depicted as a line graph in the printed material.]
Lehman
Brothers New York
Municipal Consumer Muni
Bond Index* Price Index Fund
$22,024 $13,562 $13,250
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in the New York Muni
Fund on 12/31/88 to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. 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.
2
<PAGE>
NEW YORK MUNI FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value
(Note 4) (cost $117,857,875) ................................ $112,912,321
------------
Cash ........................................................ 792,299
Interest receivable ......................................... 2,194,163
Fund shares sold ............................................ 12,334
------------
Total assets ............................................ 115,911,117
------------
LIABILITIES
Loans payable (Note 6) ...................................... 17,694,000
Fund shares redeemed ........................................ 35,919,613
Investment securities purchased ............................. 1,547,501
Dividend payable ............................................ 31,148
Accrued expenses ............................................ 191,790
------------
Total liabilities ....................................... 55,384,052
------------
NET ASSETS consisting of:
Accumulated net realized loss ............ $(22,260,297)
Unrealized depreciation of investments ... (4,945,554)
Paid-in-capital applicable to
74,796,787 shares of $.01
par value capital stock (Note 5) ...... 87,732,916
------------
$ 60,527,065
============
NET ASSET VALUE PER SHARE ....................................... $.81
====
STATEMENT OF OPERATIONS
Year ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income................................................ $ 6,266,727
EXPENSES (Notes 2 and 3)
Management fees............................. $ 500,696
Custodian and fund accounting fees ......... 135,093
Transfer agent fees......................... 256,643
Professional fees........................... 565,937
Administration fees......................... 136,953
Directors' fees............................. 25,129
Printing and postage........................ 11,174
Interest.................................... 1,095,532
Operating expenses on
defaulted bonds........................... 89,149
Distribution fees........................... 177,718
Other....................................... 78,214
------------
Total expenses......................... 3,072,238
Less:
Expenses paid indirectly (Note 8) ........ (990)
Expenses waived........................... (51,200)
------------
Net expense.............................................. 3,020,048
------------
Net investment income.................................... 3,246,679
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on:
Investments............................... 2,136,643
Futures and options on futures ........... (112,180)
------------
2,024,463
Net change in unrealized depreciation
of investments............................ (271,695)
------------
Net gain on investments ....................................... 1,752,768
------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS.................................................. $ 4,999,447
============
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income .................................................. $ 3,246,679 $ 2,899,806
Net realized gain (loss) of investments ................................ 2,024,463 (2,367,322)
Net change in unrealized appreciation (depreciation) on investments .... (271,695) 5,608,133
------------- -------------
Net increase in net assets from operations .................... 4,999,447 6,140,617
DISTRIBUTIONS:
Distributions from investment income ................................... (3,252,079) (2,899,806)
Distributions in excess of net investment income ....................... -- (27,444)
Return of capital distribution ......................................... -- (551,666)
Distributions from net realized gain from investments .................. -- (24,556)
CAPITAL SHARE TRANSACTIONS (Note 5) .................................... (75,815,710) (64,787,531)
------------- -------------
Total decrease ................................................ (74,068,342) (62,150,386)
NET ASSETS:
Beginning of year ...................................................... 134,595,407 196,745,793
------------- -------------
End of year ............................................................ $ 60,527,065 $ 134,595,407
============= =============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
NEW YORK MUNI FUND
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
Cash Flows From Operating Activities
Net increase to net assets from operations ................. $ 4,999,447
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities ........................ (908,018,520)
Proceeds on sale of securities ........................... 912,669,891
Premiums received for options written .................... 262,839
Premiums paid to close options written ................... (212,746)
Increase in interest receivable .......................... (709,896)
Decrease in accrued expenses ............................. (200,714)
Net accretion of discount on securities .................. (240,743)
Net realized gain:
Investments ............................................ (2,136,643)
Options written ........................................ (50,093)
Unrealized depreciation on securities .................... 271,695
---------------
Net cash provided by operating activities ............ 6,634,517
---------------
Cash Flows From Financing Activities:*
Decrease in loans payable ................................ (20,483,582)
Proceeds on shares sold .................................. 1,911,989,479
Payment on shares repurchased ............................ (1,896,049,541)
Cash dividends paid ...................................... (1,298,574)
---------------
Net cash used in financing activities ................ (5,842,218)
---------------
Net increase in cash ................................. 792,299
Cash at beginning of year ................................... 0
---------------
Cash at end of year ......................................... $ 792,299
===============
- --------------
* Non-cash financing activities not included herein consist of reinvestment
of dividends of $1,949,801.
Cash payments for interest expense totaled $956,715.
See Notes to Financial Statements.
4
<PAGE>
NEW YORK MUNI FUND
STATEMENT OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue!!! Type! Rating!! Value
--------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
$ 1,000,000+ Amherst NY Industrial Development Agency Lease Rev, SurfaceRink Complex,
LOC Keyhawk, 5.65%, 10/01/22.................................................... FCLT A $ 1,045,838
8,650,000+ First Albany Corporation Municipal Trust Certificate Series 98-1, IFRN*, AMBAC,
7.63%, 07/01/24................................................................. LRIB Not Rated 8,732,011
(Trust Certificates relating to NY MTA Ser B, AMBAC, 5.13%, 07/01/24)
500,000 Long Island Power Authority, New York Electrical Systems Revenue Bond,
Series A, 5.25%, 12/01/26....................................................... FCLT A- 503,823
3,500,000 Long Island Power Authority, New York Electrical Systems Revenue Bond,
Series A, 5.50%, 12/01/29....................................................... FCLT A- 3,597,965
1,900,000 Long Island Power Authority, New York Electrical Systems Revenue Bond,
Series 6, 3.90%, 05/01/33....................................................... FCSI AA 1,900,000
5,955,000+ MTA, New York Commuter Facilities Revenue Bond
Series A, 5.25%, 07/01/28....................................................... FCLT A- 6,021,660
300,000 MTA, NY Transportation Facilities Rev SVC Contract
Series 8, 5.38%, 07/01/21....................................................... FCLT A- 307,749
2,300,000 Nassau County, NY, IDA Cold Spring Harbor Lab Project
LOC Morgan Guaranty Trust, 4.00%, 07/01/19...................................... FCSI AA+ 2,300,000
1,100,000 New York, NY, GO Series A-5, LOC KBC Bank N.V.
4.00%, 08/01/16................................................................. FCSI AA- 1,100,000
14,600,000x New York, NY, Inverse Floating Rate Notes*
5.25%, 08/15/17................................................................. INLT A- 14,984,140
2,100,000 New York, NY, GO Series B, SPA Rabobank Nederland
4.00%, 08/15/18................................................................. FCSI Aaa 2,100,000
1,000,000 New York, NY, GO Series E-4, LOC State Street Bank & Trust Co.
4.00%, 08/01/21................................................................. FCSI AA 1,000,000
500,000 New York NY Series B, 5.25%,0 8/01/15.............................................. FCLT A- 510,979
2,500,000+ New York, NY, IDA, IDR, Brooklyn Navy Yard Cogen Partners
5.75%, 10/01/36................................................................. FCLT BBB- 2,579,555
300,000 New York City, MWFA, Water &Sewer Systems Rev, FGIC
Series C, 4.00%, 06/15/23....................................................... FCSI Aaa 300,000
2,000,000 New York City, MWFA, Water &Sewer Systems Rev, FGIC
Series G, 4.00%, 06/15/24....................................................... FCSI Aaa 2,000,000
1,100,000 New York City, MWFA, Water &Sewer Systems Rev
Residual Int Tr Rcpts, Series 29, SPA Lehman Brothers, 3.60%, 06/15/30 ......... FCSI Aaa 1,100,000
6,700,000+ New York City, MWFA, Water &Sewer Systems Rev
Residual Int Tr Rcpts, Series 29, FGIC Insured, 7.20%, 06/15/30................. LRIB Aaa 6,732,160
2,300,000 New York, NY, Cultural Revenue Bond, Solomon R Guggenheim Foundation
4.00%, 12/01/15................................................................. FCSI Aa 2,300,000
1,300,000 New York, NY, IDA, Civic Facility Revenue, LOC Credit Local De France
4.00%, 12/01/14................................................................. FCSI Aa 1,300,000
2,200,000+ New York State, DAR, Department of Health
5.50%, 07/01/25................................................................. FCLT A 2,263,941
1,300,000 New York State, DAR, Bishop Henry B Hucles Nursing Home
5.63%, 02/15/18................................................................. FCLT Aa1 1,368,401
2,000,000+ New York State, DAR, Mental Health Series E, AMBAC,
5.25%, 02/15/18................................................................. FCLT Aaa 2,037,628
1,950,000+ New York State, DAR, St. Vincent DePaul Residence, LOC Allied Irish
Banks PLC, 5.30%, 07/01/18...................................................... FCLT Aa3 2,014,490
7,000,000 New York State, DAR, TRS 27, LOC Bank of New York
3.90%, 07/01/24................................................................. FCSI Aaa 7,000,000
4,500,000+ New York State, DAR, City University System Residual Int Tr Recpts 27,
MBIA Insured, Liquidity The Bank of New York, 7.70%, 07/01/24................... LRIB Aaa 5,090,715
</TABLE>
5
<PAGE>
NEW YORK MUNI FUND
STATEMENT OF INVESTMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue!!! Type! Rating! Value
--------- -------- ----- ------- -----
<S> <C> <C> <C> <C>
$ 13,460,000+ New York State, DAR, City University System Residual Int Tr Recpts 28,
AMBAC Insured, Liquidity The Bank of New York, 8.16%, 07/01/25............... LRIB Aaa $ 14,441,920
500,000 New York State, DAR, Eger Health Care Center, FHA 232,
5.10%, 02/01/28.............................................................. FCLT Aaa 503,346
2,000,000+ New York State, DAR, FHA, Highland Hospital Rochester
Series A, MBIA Insured, 5.45%, 08/01/37...................................... FCLT Aaa 2,067,174
1,445,000 New York State, DAR, SPL, ACT, School District Programs
FSA Insured, 5.50%, 07/01/16................................................. FCLT Aaa 1,508,823
1,505,000 New York State, DAR, 4201 School District Programs
5.25%, 07/01/15.............................................................. FCLT Baa1 1,532,650
2,200,000 New York State Energy Research & Development Authority, Pollution Control Rev
LOC Morgan Guaranty Trust, 3.95%, 06/01/29................................... FCSI Aa3 2,200,000
9,805,000x# Niagara County NY, IDA Falls Street Faire Project AMT, 10.00% 09/01/06
(see Note 4 to Financial Statements)......................................... FCSI NR 3,509,700
5,870,000x# Niagara Falls NY, URA, Old Falls Street Improvement Project, 11.00% 05/01/09
(see Note 4 to Financial Statements)......................................... FCSI NR 2,101,167
1,000,000 Otsego County, NY, Industrial Development Agency, Civic Facility Revenue, FSA,
Aurelia Osborn Fox Memorial Hospital Series A, 5.35%, 10/01/17............... FCLT Aaa 1,030,735
6,50,000 Puerto Rico Commonwealth GO, Capital Appreciation,
Public Improvement, 07/01/16................................................. FCLT A 2,824,426
1,000,000 Suffolk County, NY, IDA, IDR Nissequogue Cogen Partners Fac.
5.50%, 01/01/23.............................................................. FCLT Not Rated 1,001,325
------------
Total Investments (Cost $117,857,875**).............................. $112,912,321
============
</TABLE>
* Inverse Floating Rate Notes (IFRN) are instruments whose interest rates
bear an inverse relationship to the interest rate on another security or
value of an index. Rates shown are at December 31, 1998.
** Cost for Federal income tax purposes is $118,436,167.
# 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 Fund, or its affiliates, owns 100% of the security. See Note 4 to the
financial statements.
+ $57,027,092 market value of securities are segregated in whole or in part
as collateral securing a line of credit.
Legend
!Type FCLT --Fixed Coupon Long Term
FCSI --Fixed Coupon Short or Intermediate Term
LRIB --Residual Interest Bond Long Term
INLT --Indexed Inverse Floating Rate Bond Long Term
!!Ratings If a security has a split rating the highest applicable rating is
used, including published ratings on identical credits for
individual securities not individually rated.
NR--Non Rated
Not Rated - Issues which are not rated have not sought out the
rating of a recognized rating service.
!!!Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CAB Capital Appreciation Bond
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
HDA Housing Development Agency
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
MTA Metropolitan Transit Authority
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.
6
<PAGE>
NEW YORK MUNI FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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.
Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable and tax exempt
income to its shareholders. Therefore, no provision for federal income tax
is required.
Distributions--The Fund declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions of net capital gains, if any, realized on sales of
investments are made annually, as declared by the Fund's Board of
Directors. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General--Securities transactions are accounted for on a trade date
basis. Interest income is accrued as earned. Premiums and original issue
discount on securities purchased are amortized over the life of the
respective securities. Realized gains and losses from the sale of
securities are recorded on an identified cost basis. Net operating
expenses incurred on properties collateralizing defaulted bonds are
charged to operating expenses as incurred. Costs incurred to restructure
defaulted bonds are charged to realized loss as incurred.
Accounting Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
7
<PAGE>
NEW YORK MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
2. Investment Advisory Fees, Other Transactions with Affiliates
Management Agreement
The Series had a Management Agreement with Fundamental Portfolio Advisors
("FPA") until May 31, 1998. Effective June 1, 1998, the Board of Directors
terminated the agreement with FPA, and selected Tocqueville Asset Management
L.P. ("TAM") as the initial interim manager. TAM served as interim manager from
June 1, 1998 through September 28, 1998. Effective September 29, 1998,
Cornerstone Equity Advisors, Inc. ("Cornerstone") agreed to act as interim
manager for the Series, pending shareholder approval of a new management
agreement with Cornerstone. Pursuant to the agreement, the investment adviser to
the Series 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 Directors.
In consideration for the services provided under the agreements the Series paid
FPA and TAM an annual management fee in an amount equal to .50% of the Series'
average daily net assets 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. Cornerstone is seeking shareholder ratification of fees for its 1998
services to the Series. If ratified by shareholders, Cornerstone will receive
fees of $32,727.52 for the period November 30, 1998 through December 31, 1998.
TAM earned fees of $180,063 for the period June 1, 1998 through September 28,
1998. Total management fees for the year ended December 31, 1998 are set forth
in the Statement of Operations. See Note 9 regarding subsequent events.
Plan of Distribution
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 paid Fundamental Service Corporation ("FSC"), an affiliate of FPA, the
former manager, a fee which accrued daily and paid monthly at an annual rate of
.50% of the Series' average daily net assets. Amounts paid under the plan were
to compensate FSC for the services it provided and the expenses it bore in
distributing the Series' shares to investors. On June 1, 1998, the Board of
Directors ceased authorizing payments to be paid pursuant to the plan. FSC
waived fees and reimbursed expenses of $51,200 for the five month period ended
May 31, 1998. The amount incurred by the Series pursuant to the agreement for
the year ended December 31, 1998 is set forth in the Statement of Operations.
Indemnification Payments to Affiliates
FPA and FSC (on behalf of certain of their directors, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from three of the funds
in the Fundamental Family of Funds for attorneys' fees incurred by them in
defending certain proceedings. Upon learning of the payments, the Independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Articles of Incorporation and contracts that call
for indemnification specify that no indemnification shall be provided to a
person who shall be found to have engaged in "disabling conduct" as defined by
applicable law. The Indemnitees have undertaken to reimburse the Fundamental
Family of Funds for any indemnification expenses for which it is determined that
they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Funds in the form of fees forgone or other
similar payments. FPA and FSC waived fees during the year ended December 31,
1997, and have asserted that they elected to forgo these fees because the
Fundamental Family of Funds were paying legal expenses pursuant to
indemnification. Pending clarification of the legal issues involved, the
indemnitees have placed into an escrow account $106,863 as of April 30, 1998.
The independent Directors instructed FPA to escrow the full amount incurred by
the Fundamental Family of Funds of approximately $287,000. In addition the Board
of Directors has not authorized the payment of management fees in the amount of
$76,000 prior to the termination of the management agreements between FPA and
the Fundamental Family of Funds. See Note 9 regarding subsequent events.
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. The Directors also received additional
compensation for special services as requested by the Board.
8
<PAGE>
NEW YORK MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
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.
The Fund, through its investment banker and manager, negotiated the sale
of the Falls Street Station project. The net proceeds received on the sale of
approximately $2,800,000 were accounted for as a pro rata recovery of principal
of each of the bonds. The remaining principal value of the Fall Street Station
IDA Bond of approximately $3,887,000 was charged to realized loss on
investments.
The remaining two securities are being valued under methods approved by
the Board of Directors. The aggregate value of these securities is $5,610,867
(35.8% to their aggregate face value of $15,675,000). There is uncertainty as to
the timing of events and the subsequent ability of the Projects to generate cash
flows sufficient to provide repayment of the bonds. No interest income was
accrued on these bonds during the year ended December 31, 1998. The Fund through
its investment banker, engaged a property manager to maintain the Projects on
its behalf, and the Fund is paying the net operating expenses of the Project.
Net operating expenses related to the Projects for the year ended December 31,
1998 are disclosed in the statement of operations, and cumulatively from October
6, 1992 to December 31, 1998 totaled approximately $773,778.
Additionally, the Fund owns 100% of securities as indicated in the
Statement of Investments. As a result of its ownership position there is no
active trading in these securities. 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 $20,595,007
(34% of net assets) at December 31, 1998.
Other Investment Transactions:
During the year ended December 31, 1998, purchases and sales of investment
securities, other than short-term obligations, were $353,317,191 and
$384,569,892, respectively. There were no purchases or sales of long-term U.S.
Government securities.
As of December 31, 1998 net unrealized depreciation of portfolio
securities on a federal income tax basis amounted to $5,523,845 composed of
unrealized appreciation of $4,058,326 and unrealized depreciation of $9,582,171.
The Fund has capital loss carryforwards available to offset future capital
gains as follows:
Amount Expiration
------ ----------
$16,478,000 December 31, 2002
3,430,000 December 31, 2004
2,233,000 December 31, 2005
-----------
$22,141,000
===========
9
<PAGE>
NEW YORK MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
5. Capital Stock
As of December 31, 1998 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, 1998 December 31, 1997
---------------------------------- ----------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold ................. 2,233,068,385 $ 1,853,855,695 2,692,167,470 $ 2,280,916,160
Shares issued on reinvestment
of dividends .............. 2,349,700 1,949,801 3,788,810 3,223,013
Shares redeemed ............. (2,317,457,670) (1,931,621,206) (2,765,077,644) (2,348,926,704)
--------------- --------------- --------------- ---------------
Net (decrease) .............. (82,039,585) $ (75,815,710) (69,121,364) $ (64,787,531)
=============== =============== =============== ===============
</TABLE>
6. Line of Credit
The Fund has a line of credit agreement with a bank collateralized by
portfolio securities. At December 31, 1998, $17,694,000 was outstanding under
this line of credit and interest accrues at the banks' prime rate (6.25%) at
December 31, 1998). Additionally, the Fund has a temporary arrangement in place
with its custodian bank whereby overdrafts of the Fund's custody account are
charged interest at the banks' prime rate. There was no overdraft outstanding at
December 31, 1998.
7. Termination of Agreement
On August 12, 1998, each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) abandoned and terminated an Agreement
and Plan of Reorganization (the "Plan") under which each fund (the "Fundamental
Fund") would have transfered all of its assets and liabilities to a
newly-created corresponding series of The Tocqueville Trust.
8. Expenses Paid Indirectly
The Fund has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to $990 for the year ended December 31, 1998.
9. Subsequent Events
On February 12, 1999, the Fundamental Boards directed Cornerstone to place
a substantial portion of any consulting and licensing fee payments to Lance M.
Brofman ("Brofman") in escrow in order to satisfy FPA's 1998 and 1999 payment
obligations to members of a Settlement Class. The "Settlement Class" consists of
persons and entities that purchased shares of the Series from January 1, 1992
through and including April 15, 1994; Fundamental U.S. Government Strategic
Income Fund from March 2, 1992 through and including August 11, 1994; and The
California Muni Fund from January 1, 1993 through and including July 31, 1994.
Cornerstone is required to place into an escrow account for the benefit of the
Settlement Class, out of the amounts it would otherwise pay Brofman under
certain Consulting and Licensing Agreements, 831/3% of any payments to Brofman
until such time as FPA's 1998 and 1999 payments obligations to the Settlement
Class, each in the amount of $102,115, have been paid. On February 12, 1999, the
Fundamental Boards also authorized the release of $176,157 from an escrow
account and from amounts withheld for payment to FPA pursuant to an agreement
with Brofman and FPA, the provisions of which provide for, among other things,
the immediate payment by FPA into an escrow account for the benefit of members
of the Settlement Class. The $176,157 released represented the sum of: (i)
$106,863, the amount previously escrowed by Vincent J. Malanga on behalf of FPA,
FSC and certain of their directors, officers, shareholders, employees and
control persons, following a demand therefor by the Fundamental Funds'
Independent Board Members, and (ii) $69,294, the amount of management fees
withheld for payment to FPA pursuant to action previously taken by the
Fundamental Funds' Independent Board Members.
On March 12, 1999, the shareholders of the Fund voted to approve
Cornerstone as the Fund's investment adviser, and approved the payment of
management fees earned by Cornerstone during its tenure as interim investment
adviser. Additionally, the shareholders voted to elect five new members to serve
on the Board of Directors. Separately, the Board of Directors voted to change
the name of the Fund entity to Cornerstone Funds, Inc., and the name of the Fund
to Cornerstone New York Muni Fund.
On March 31, 1999, the Fund's Board of Directors approved reimbursing
Cornerstone for its costs incurred while acting as interim manager from
September 29, 1998 to November 30, 1998.
10
<PAGE>
NEW YORK MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
10. Option Contracts Written
The premium amount and the number of option contracts written during the
year ended December 31, 1998, were as follows:
Premium Number of
Amount Contracts
--------- ---------
Options outstanding at December 31, 1997 .... $ -- --
Options written ............................. 262,839 4,950
Options closed .............................. (262,839) (4,950)
--------- ---------
Options outstanding at December 31, 1998 .... $ -- --
========= =========
11. Selected Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1998* 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Year .............. $ 0.86 $ 0.87 $ 0.98 $ 0.88 $ 1.18
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income ........................... 0.03 0.02 0.04 0.04 0.06
Net realized and unrealized gains (losses)
on investments ................................ (0.05) (0.01) (0.11) 0.10 (0.29)
-------- -------- -------- -------- --------
Total from investment operations ............ (0.02) 0.01 (0.07) 0.14 (0.23)
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income ............ (0.03) (0.02) (0.04) (0.04) (0.06)
Dividends from net realized gains ............... -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions ......................... (0.03) (0.02) (0.04) (0.04) (0.07)
-------- -------- -------- -------- --------
Net Asset Value, End of Year .................... $ 0.81 $ 0.86 $ 0.87 $ 0.98 $ 0.88
======== ======== ======== ======== ========
Total Return ................................ (2.69%) 1.46% (7.73%) 15.67% (20.47%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) ................... $ 60,527 $134,595 $196,746 $226,692 $212,665
Ratios to Average Net Assets:
Interest expense .............................. 1.09% 1.10% 2.11% 2.09% 1.59%
Operating expenses ............................ 1.90%+ 2.64%+ 1.66% 1.55% 1.62%
-------- -------- -------- -------- --------
Total expenses ............................ 2.99%+ 3.74%+ 3.77% 3.64% 3.21%
======== ======== ======== ======== ========
Net investment income ..................... 3.23%+ 2.23%+ 3.89% 3.81% 5.34%
Portfolio turnover rate ......................... 339.43% 399.38% 347.44% 347.50% 289.69%
</TABLE>
+ These ratios are after expense reimbursement of 0.05% and 0.03% for the
years ended December 31, 1998 and 1997, respectively.
* See Note 2 for changes in investment adviser during 1998.
BANK LOANS
<TABLE>
<S> <C> <C> <C> <C> <C>
Amount outstanding at end of year (000 omitted) ......................... $ 17,694 $ 38,178 $ 1,200 $ 64,575 $ 20,000
Average amount of bank loans outstanding during the year (000 omitted) .. $ 13,816 $ 20,631 $ 49,448 $ 49,603 $ 54,479
Average number of shares outstanding during the year (000 omitted) ...... 120,853 153,535 178,456 191,692 206,323
Average amount of debt per share during the year ........................ $ .114 $ .134 $ .277 $ .259 $ .264
</TABLE>
11
<PAGE>
NEW YORK MUNI FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
New York Muni Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of New York Muni Fund as of December 31, 1998, 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, 1998 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 as of December 31, 1998 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.
/s/ McGladrey & Pullen, LLP
New York, New York
February 26, 1999, except for the last two paragraphs of Note 9 as to which the
date is March 31, 1999.
12
<PAGE>
THE CALIFORNIA MUNI FUND
March 12, 1999
Dear Shareholder:
California's economy continued to improve along with the general economy.
California was the second largest issuer of municipal debt in the nation, yet
demand for California issues was particularly strong. The fall in interest rates
was especially noticeable in the California market and overall, California
portfolios performed admirably.
The California Muni Fund suffered from the same management upheaval and
excessive expenses as our other funds. The Fund recorded a 4.03% total return
for 1998, dropping it into the middle of the pack amongst California mutual
funds after a reasonably impressive year in 1997. The year ended with
Cornerstone's attempt to improve coupon structure, and increase our proportion
of AAA credits.
Sincerely,
/s/ Stephen C. Leslie
Stephen C. Leslie
President
13
<PAGE>
---------------------------------
The California Muni Fund
---------------------------------
Average Annual Total Return
Ended on 12/31/98
---------------------------------
1 Year 5 Year 10 Year
---------------------------------
4.03% 2.42% 5.39%
---------------------------------
[The following table was depicted as a line graph in the printed material.]
Lehman The
Brothers California
Municipal Muni Consumer
Bond Index* Fund Price Index
$22,024 $16,908 $13,562
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in The California Muni
Fund on 12/31/88 to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. All dividends and capital gain distributions are
reinvested.
The Fund invests primarily in California 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.
14
<PAGE>
THE CALIFORNIA MUNI FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value
(Note 5) (cost $20,473,953) ................................. $20,990,813
Interest receivable ........................................... 278,218
-----------
Total assets ............................................ 21,269,031
-----------
LIABILITIES
Bank overdraft ................................................ 5,900,534
Fund shares redeemed .......................................... 5,926,832
Dividends payable ............................................. 17,167
Accrued expenses .............................................. 16,270
-----------
Total liabilities ........................................... 11,860,803
-----------
NET ASSETS consisting of:
Unrealized appreciation of
investments .................................. $ 516,860
Paid-in-capital applicable to
1,191,047 shares of beneficial
interest (Note 4) ............................ 8,891,368
----------- -----------
................................................................ $ 9,408,228
===========
NET ASSET VALUE PER SHARE ....................................... $ 7.90
===========
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ............................................... $972,997
EXPENSES (Notes 2 and 3)
Management fees ................................ $ 59,645
Custodian and fund accounting fees ............. 18,710
Transfer agent fees ............................ 22,707
Professional fees .............................. 98,221
Administration fees ............................ 12,332
Trustees' fees ................................. 3,015
Printing and postage ........................... 15,375
Distribution expenses .......................... 21,802
Interest on bank borrowing ..................... 76,716
Other .......................................... 7,669
-----------
Total expenses ......................... 336,192
Less:
Expenses paid indirectly
(Note 8) ................................... (4,567)
-----------
Net expense ........................................... 331,625
-----------
Net investment income ................................. 641,372
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments .............................. 57,578
Net change in unrealized
appreciation of investments ................................. 250,713
-----------
Net gain on investments ............................... 308,291
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ...................................................... $ 949,663
===========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income .................................... $ 641,372 $ 580,253
Net realized gain on investments ......................... 57,578 493,308
Net change in unrealized appreciation of investments ..... 250,713 374,518
------------ ------------
Net increase in net assets from operations ........... 949,663 1,448,079
DISTRIBUTIONS:
Distributions from investment income ..................... (641,372) (580,253)
Distributions from net realized gains from investments ... (278,367) --
CAPITAL SHARE TRANSACTIONS (Note 4) ........................ (4,453,700) (3,287,401)
------------ ------------
Total decrease ....................................... (4,423,776) (2,419,575)
NET ASSETS:
Beginning of year ........................................ 13,832,004 16,251,579
------------ ------------
End of year .............................................. $ 9,408,228 $ 13,832,004
============ ============
</TABLE>
See Notes to Financial Statements
15
<PAGE>
THE CALIFORNIA MUNI FUND
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Increase (Decrease) in Cash
Cash Flows From Operating Activities
Net increase to net assets from operations ........................ $ 949,663
Adjustments to reconcile net increase in net assets from operations
to net cash used in operating activities:
Purchase of investment securities ............................... (105,288,657)
Proceeds on sale of securities .................................. 93,817,261
Increase in interest receivable ................................. (26,017)
Decrease in accrued expenses .................................... (36,623)
Net accretion of discount on securities ......................... (27,295)
Net realized gain:
Investments ................................................... (57,578)
Unrealized appreciation on securities ............................. (250,713)
------------
Net cash used in operating activities ..................... (10,919,959)
------------
Cash Flows From Financing Activities:*
Increase in notes payable ....................................... 5,397,516
Proceeds on shares sold ......................................... 198,900,380
Payment on shares repurchased ................................... (193,050,598)
Cash dividends paid ............................................. (327,339)
------------
Net cash provided by financing activities ................. 10,919,959
------------
Net decrease in cash ...................................... 0
Cash at beginning of year ........................................... 0
------------
Cash at end of year ................................................. $ 0
============
</TABLE>
- ----------
* Non-cash financing activities not included herein consist of reinvestment
of dividends of $585,456.
Cash payments for interest expense totaled $42,205.
See Notes to Financial Statements.
16
<PAGE>
THE CALIFORNIA MUNI FUND
STATEMENT OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue!!! Type Rating Value
--------- -------- ---- ------ -----
<S> <C> <C> <C> <C>
$ 100,000# Arvin, Development Corporation, COP, RB, 8.75%, 9/01/18 ........................... FCLT NR $ 24,505
200,000 Beverly Hills, PFA, RB, IFRN*, MBIA Insured, 7.32%, 6/01/15 ....................... LRIB AAA 224,284
100,000 CSAC Finance Corp, COP, Sutter County Health Facilities Project, 7.80%, 1/01/21 ... FCLT Baa1 101,828
500,000 California Health Facilities, HFA Rev, Kaiser Permanente, Series B, 5.25%,
10/01/16 ....................................................................... FCSI A 508,297
65,000 California, HFA, Home Mortgage, RB, Series A, MBIA Insured, 5.70%, 8/01/10 ........ FCSI Aaa 69,191
1,500,000 California Statewide Communities Development Authority, Lease Rev, United
Airlines, Series A, 5.70%, 10/01/33 ............................................ FCSI BB+ 1,542,438
800,000 California Statewide Communities Development Authority, COPS, MBIA, SPA, Bank
of America Note, 3.95%, 4/01/28 ................................................ FCSI Aaa 800,000
300,000 California Statewide Communities Development Authority, Cedars Sinai Medical
Project, COP, RB, IFRN*, 7.32%, 11/01/15 ....................................... LRIB A1 314,213
2,300,000 Chula Vista, CA, IDR, San Diego Gas, Series A, 3.95%, 7/01/21 ..................... FCSI A 2,300,000
300,000 East Bay, Wastewater System Project, RB, Refunding, AMBAC Insured, IFRN*,
6.87%, 6/01/20 ................................................................. LRIB AAA 321,702
2,000,000 Irvine, CA Improvement Bond, Assessment District No. 97-16, LOC, Societe
Generale, 4.00%, 9/02/22 ....................................................... FCSI AA- 2,000,000
500,000 Irvine Ranch, CA, Water District, COPS, LOC, Toronto Dominion Bank, 5.00%,
8/01/16 ........................................................................ FCSI Aa3 500,000
170,000 Lake Elsinore, USD, Refunding, COP, 6.90%, 2/01/20 ................................ FCLT BBB 184,107
10,000 Los Angeles, Home Mortgage, RB, 9.00%, 6/15/18 .................................... FCLT A 10,078
1,691,233 Los Angeles, HFA, MFH Project C, CAB, RB, 12.00%, 12/01/29 ........................ FCLT NR 1,253,907
110,000 Northern California Power Agency, Multiple Capital Facilities, RB, IFRN*, MBIA
Insured, IFRN*, 9.09%, 8/01/25 ................................................. LRIB AAA 124,011
140,000 Northern California Power Agency, Multiple Capital Facilities, RB, IFRN*, MBIA
Insured, IFRN*, 9.14%, 8/01/25 ................................................. LRIB AAA 162,290
250,000 Northern California Transmission Agency, CA-ORE Transmission Project, RB, MBIA
Insured, IFRN*, 7.31%, 4/29/24 ................................................. LRIB AAA 255,724
500,000 Orange County Airport, RB, Refunding, MBIA Insured, 5.63%, 7/01/12 ................ FCLT Aaa 547,161
250,000 Orange County, LTA, RB, IFRN*, 7.55%, 2/14/11 ..................................... LRIB AA 301,691
250,000 Orange County, LTA, RB, IFRN*, 7.91%, 2/14/11 ..................................... LRIB AAA 286,421
3,000,000 Orange County, Sanitation Districts, COPS, Ref. No. 1-3 5-7 &11, LOC, Societe
Generale, 5.10%, 8/01/16 ....................................................... FCSI AAA 3,000,000
170,000 Panoche, Water District, COP, 7.50%, 12/01/08 ..................................... FCSI A 181,855
3,000,000 Puerto Rico Commonwealth GO, CAB, 7/01/17 ......................................... LRIB A 1,231,776
250,000 Rancho, Water District Financing Authority, RB, Prerefunded @ 104, AMBAC
Insured, IFRN*, 9.17%, 8/17/21 ................................................. LRIB AAA 296,411
</TABLE>
17
<PAGE>
THE CALIFORNIA MUNI FUND
STATEMENT OF INVESTMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue!!! Type Rating Value
--------- -------- ---- ------ -----
<S> <C> <C> <C> <C>
$ 250,000 Redding, Electric System, COP, Series A, FGIC Insured, IFRN*, 7.54%, 6/01/19 ...... LRIB AAA $ 270,275
500,000 San Bernardino, COP, Series B. MBIA Insured, IFRN*, 6.80%, 7/01/16 ................ INLT AAA 540,763
900,000 San Bernardino, COP, Series PA38, IFRN*, 12.23%, 7/01/16, Rule 144A Security
(restricted as to resale except to qualified institutions) ..................... LRIB NR 1,105,253
200,000 San Diego Water Authority, COP, FGIC Insured, IFRN*, 7.90%, 4/22/09 ............... LRIB AAA 251,876
1,440,000x San Jose, CRA, Series PA-38, TAB, MBIA Insured, IFRN*, 8.09%, 8/01/16, Rule
144A Security (restricted as to resale except to qualified institutions) ....... LRIB NR 1,579,985
250,000 Southern California Public Power Authority, FGIC Isured, IFRN*, 6.62%, 7/01/17 .... LRIB AAA 248,111
40,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, 6.45%, 12/01/28 ..................... FCLT AAA 43,399
30,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series B, 6.30%, 12/01/28 ........... FCLT AAA 32,554
250,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series E, 6.40%, 12/01/28 ........... FCLT AAA 273,562
100,000 Upland, HFA, RB, 7.85%, 7/02/20 ................................................... FCLT BBB 103,145
-----------
Total Investments (Cost $20,473,953**) ..................................... $20,990,813
===========
</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, 1998.
** Cost is the same for Federal income tax purposes.
# Denotes non-income producing security: Security is in default.
x The Fund owns 100% of the security and therefore there is no trading in
the security.
Legend
!Type FCLT --Fixed Coupon Long Term
FCSI --Fixed Coupon Short or Intermediate Term
LRIB --Residual Interest Bond Long Term
INLT --Indexed Inverse Floating Rate Bond Long Term
!!Ratings If a security has a split rating the highest
applicable rating is used, including published
ratings on identicial credits for individual
securities not individually rated. Ratings are
unaudited.
NR --Not Rated
Not Rated - Issues which are not rated have not
sought out the rating of a recognized rating service.
!!!Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CAB Capital Appreciation Bond
CGIC Capital Guaranty Insurance Company
COP Certificate of Participation
CRA California Redevelopment Agency
FGIC Financial Guaranty Insurance Corporation
FNMA Federal National Mortgage Association
FSA Financial Security Assurance, Inc.
GNMA Government National Mortgage Association
HFA Housing Finance Authority
LTA Local Transportation Authority
MBIA Municipal Bond Insurance Assurance Corporation
MFH Multi Family Housing
PFA Public Financing Authority
RB Revenue Bond
TAB Tax Allocation Bond
TAR Tax Allocation Refunding
USD Unified School District
See Notes to Financial Statements.
18
<PAGE>
THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The California Muni Fund (the Fund) was organized as a Massachusetts
business trust and is registered as an open end management investment company
under the Investment Company Act of 1940. The Fund's objective is to provide as
high a level of income that is excluded from gross income for Federal income tax
purposes and exempt from California personal income tax as is consistent with
the preservation of capital. The Fund employs leverage in attempting to achieve
its objective. The following is a summary of significant accounting policies
followed in the preparation of its financial statements:
Valuation of Securities-The Fund's portfolio securities are valued on the
basis of prices provided by an independent pricing service when, in the opinion
of persons designated by the Fund's trustees, such prices are believed to
reflect the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Securities not priced in a
manner described above and other assets are valued by persons designated by the
Fund's trustees using methods which the trustees believe accurately reflects
fair value.
Federal Income Taxes-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable and tax exempt income to its
shareholders. Therefore, no provision for federal income tax is required.
Distributions-The Fund declares dividends daily from its net investment
income and pays such dividends on the last business day of each month.
Distributions of net capital gains, if any, realized on sales of investments are
made annually, as declared by the Fund's Board of Trustees. Dividends are
reinvested at the net asset value unless shareholders request payment in cash.
General-Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Premiums and original issue discount on
securities purchased are amortized over the life of the respective securities.
Realized gains and losses from the sale of securities are recorded on an
identified cost basis.
Accounting Estimates-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. Investment Advisory Fees and Other Transactions With Affiliates
Management Agreement
The Fund had a Management Agreement with Fundamental Portfolio Advisors
("FPA") until May 31, 1998. Effective June 1, 1998, the Board of Trustees
terminated the agreement with FPA, and selected Tocqueville Asset Management
L.P. ("TAM") as the initial interim manager. TAM served as interim manager from
June 1, 1998 through September 28, 1998. Effective September 29, 1998,
Cornerstone Equity Advisors, Inc. ("Cornerstone") agreed to act as interim
manager for the Fund, pending shareholder approval of a new management agreement
with Cornerstone. Pursuant to the agreement, the investment adviser to the Fund
is responsible for the overall management of the business affairs and assets of
the Fund, subject to the authority of the Fund's Board of Trustees. In
consideration for the services provided under the agreements, the Fund paid FPA
and TAM an annual management fee in an amount equal .50% of the Fund's average
daily net assets up to $100
19
<PAGE>
THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
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. Cornerstone is seeking
shareholder ratification of fees for its 1998 services to the Fund. If ratified
by shareholders, Cornerstone will receive fees of $4,340 for the period November
30, 1998 through December 31, 1998. TAM earned fees of $20,667 for the period
June 1, 1998 through September 28, 1998. Total management fees for the year
ended December 31, 1998 are set forth in the Statement of Operations. See Note 9
regarding subsequent events.
Plan of Distribution
The Fund has adopted a Distribution and Marketing Plan, pursuant to Rule
12b-1, promulgated under the Investment Company Act of 1940, under which the
Fund paid Fundamental Service Corporation ("FSC"), an affiliate of FPA, the
former manager, a fee which accrued daily and paid monthly at an annual rate of
.50% of the Funds' average daily net assets. Amounts paid under the plan were to
compensate FSC for the services it provided and the expenses it bore in
distributing the Fund's shares to investors. On June 1, 1998, the Board of
Trustees ceased authorizing payments to be paid pursuant to the plan. The amount
incurred by the Fund pursuant to the agreement for the year ended December 31,
1998 is set forth in the Statement of Operations.
Indemnification Payments to Affiliates
FPA and FSC (on behalf of certain of their trustees, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from three of the funds
in the Fundamental Family of Funds for attorneys' fees incurred by them in
defending certain proceedings. Upon learning of the payments, the Independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust and contracts that call for
indemnification specify that no indemnification shall be provided to a person
who shall be found to have engaged in "disabling conduct" as defined by
applicable law. The Indemnitees have undertaken to reimburse the Fundamental
Family of Funds for any indemnification expenses for which it is determined that
they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Funds in the form of fees forgone or other
similar payments. FPA and FSC waived fees during the year ended December 31,
1997, and have asserted that they elected to forgo these fees because the
Fundamental Family of Funds were paying legal expenses pursuant to
indemnification. Pending clarification of the legal issues involved, the
Indemnitees have placed into an escrow account $106,863 as of April 30, 1998.
The independent Trustees instructed FPA to escrow the full amount incurred by
the Fundamental Family of Funds of approximately $287,000. In addition the Board
of Trustees has not authorized the payment of management fees in the amount of
$76,000 prior to the termination of the management agreements between FPA and
the Fundamental Family of Funds. See Note 9 regarding subsequent events.
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. The Trustees also received additional
compensation for special services as requested by the Board.
4. Shares of Beneficial Interest
As of December 31, 1998 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in which amounted
to $8,891,368. Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
---------------------- -----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 24,066,397 $193,938,274 32,632,214 $256,708,018
Shares issued
on reinvestment
of dividends 72,537 585,456 51,101 419,765
Shares redeemed (24,620,804) (198,977,430) (33,097,092) (260,415,184)
----------- ------------ ----------- ------------
Net decrease (481,870) $ (4,453,700) (413,777) (3,287,401)
=========== ============ =========== ============
</TABLE>
20
<PAGE>
THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
5. Complex Securities and Investment Transactions
Inverse Floating Rate Notes:
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. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.
Investment Transactions:
During the year ended December 31, 1998, the cost of purchases and
proceeds from sales of investment securities, other than short-term obligations,
were $37,907,714 and $35,217,261, respectively. There were no purchases or sales
of long-term U.S. Government securities.
As of December 31, 1998 the net unrealized appreciation of portfolio
securities amounted to $516,860 composed of unrealized appreciation of
$1,030,070 and unrealized depreciation of $513,210.
6. Line of Credit
The Fund has a temporary arrangement in place with its custodian bank
whereby overdrafts of the Fund's custody account are charged interest at the
current prime rate. The amount outstanding at December 31, 1998 was $5,900,534.
7. Termination of Agreement
On August 12, 1998, each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) abandoned and terminated an Agreement
and Plan of Reorganization (the "Plan") under which each fund (the "Fundamental
Fund") would have transfered all of its assets and liabilities to a
newly-created corresponding series of The Tocqueville Trust.
8. Expenses Paid Indirectly
The Fund has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to approximately $4,567 for the year ended December 31,
1998.
9. Subsequent Events
On February 12, 1999, the Fundamental Boards directed Cornerstone to place
a substantial portion of any consulting and licensing fee payments to Lance M.
Brofman ("Brofman") in escrow in order to satisfy FPA's 1998 and 1999 payment
obligations to members of a Settlement Class. The "Settlement Class" consists of
persons and entities that purchased shares of the New York Muni Fund from
January 1, 1992 through and including April 15, 1994; Fundamental U.S.
Government Strategic Income Fund from March 2, 1992 through and including August
11, 1994; and The California Muni Fund from January 1, 1993 through and
including July 31, 1994. Cornerstone is required to place into an escrow account
for the benefit of the Settlement Class, out of the amounts it would otherwise
pay Brofman under certain Consulting and Licensing Agreements, 83-1/3% of any
payments to Brofman until such time as FPA's 1998 and 1999 payments obligations
to the Settlement Class, each in the amount of $102,115, have been paid. On
February 12, 1999, the Fundamental Boards also authorized the release of
$176,157 from an escrow account and from amounts withheld for payment to FPA
pursuant to an agreement with Brofman and FPA, the provisions of which provide
for, among other things, the immediate payment by FPA into an escrow account for
the benefit of members of the Settlement Class. The $176,157 released
represented the sum of: (i) $106,863, the amount previously escrowed by Vincent
J. Malanga on behalf of FPA, FSC and certain of their directors, officers,
shareholders, employees and control persons, following a demand therefor by the
Fundamental Funds' Independent Board Members, and (ii) $69,294, the amount of
management fees withheld for payment to FPA pursuant to action previously taken
by the Fundamental Funds' Independent Board Members.
21
<PAGE>
THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
On March 12, 1999, the shareholders of the Fund voted to approve
Cornerstone as the Fund's investment adviser, and approved the payment of
management fees earned by Cornerstone during its tenure as interim investment
adviser. Additonally, the shareholders voted to elect five new members to serve
on the Board of Trustees.
On March 31, 1999, the Fund's Board of Trustees approved reimbursing
Cornerstone for its costs incurred while acting as interim manager from
September 29, 1998 to November 30, 1998.
10. Selected Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1998+ 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, Beginning of Year ............. $ 8.27 $ 7.79 $ 8.91 $ 7.10 $ 9.49
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income .......................... 0.48 0.38 0.41 0.42 0.55
Net realized and unrealized gains (losses)
on investments ............................... (0.20) 0.48 (1.12) 1.81 (2.39)
-------- -------- -------- -------- --------
Total from investment operations ....... 0.28 0.86 (0.71) 2.23 (1.84)
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income ........... (0.48) (0.38) (0.41) (0.42) (0.55)
Dividends from net realized gains .............. (0.17) -- -- -- --
-------- -------- -------- -------- --------
Total distributions .................... (0.65) (0.38) (0.41) (0.42) (0.55)
-------- -------- -------- -------- --------
Net Asset Value, End of Year ................... $ 7.90 $ 8.27 $ 7.79 $ 8.91 $ 7.10
======== ======== ======== ======== ========
Total Return ................................... 4.03% 11.33% (8.01%) 32.02% (19.89%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) .................. $ 9,408 $ 13,832 $ 16,252 $ 12,622 $ 10,558
Ratios to Average Net Assets:
Interest expense ............................. .64% .42% .45% .39% .98%
Operating expenses ........................... 2.14% 2.95%* 2.81% 2.81% 2.50%
-------- -------- -------- -------- --------
Total expenses ......................... 2.78%** 3.37%* 3.26% 3.20% 3.48%
======== ======== ======== ======== ========
Net investment income .................. 5.38% 4.55%* 4.88% 5.02% 6.80%
Portfolio turnover rate ........................ 282.21% 70.86% 89.83% 53.27% 15.88%
</TABLE>
* These ratios are after expense reimbursement of .03%,for the year ended
December 31, 1997.
** This ratio would have been 2.82%, net of expenses paid indirectly of 0.04%
for the year ended December 31, 1998.
+ See Note 2 for changes in investment adviser during 1998.
22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
The California Muni Fund
We have audited the accompanying statement of assets and liabilities
including the statement of investments of The California Muni Fund as of
December 31, 1998 and the related statements of operations and cash flows for
the year then ended, statements 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, 1998 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
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 California Muni Fund as of December 31, 1998, the
results of its operations, cash flows, changes in its net assets, and selected
financial information for the periods indicated, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
February 26, 1999, except for last two paragraphs of Note 9 as to which the date
is March 31, 1999.
22
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at amortized cost ............................ $ 2,370,000
Cash ...................................................... 14,905,469
Interest receivable ....................................... 16,727
Fund shares sold .......................................... 42,131,794
-----------
Total assets ........................................ 59,423,990
-----------
LIABILITIES
Fund shares redeemed ...................................... 34,215
Dividends payable ......................................... 1,949
Accrued expenses .......................................... 91,467
-----------
Total liabilities ................................... 127,631
-----------
NET ASSETS equivalent to $1.00 per share on
59,302,218 shares of beneficial interest
outstanding (Note 4) ...................................... $59,296,359
===========
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income .............................................. $ 1,012,896
EXPENSES (Notes 2 and 3)
Management fees ............................... $ 157,064
Custodian and accounting fees ................. 48,235
Transfer agent fees ........................... 89,646
Professional fees ............................. 120,097
Administration fees ........................... 36,975
Trustees' fees ................................ 8,171
Postage and printing .......................... 13,483
Distribution fees ............................. 99,867
Other ......................................... 12,387
-----------
Total expenses .......................... 585,925
Less:
Expenses paid indirectly (Note 6) ............. (30,130)
-----------
Net expenses ........................................... 555,795
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ................................................... $ 457,101
===========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income ............................. $ 457,101 $ 1,025,345
------------ ------------
Net increase in net assets from operations .. 457,101 1,025,345
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ................................. (457,101) (1,025,345)
CAPITAL SHARE TRANSACTIONS (Note 4) ................. 46,033,191 8,642,404
------------ ------------
Total increase .............................. 46,033,191 8,642,404
NET ASSETS:
Beginning of year ................................. 13,263,168 4,620,764
------------ ------------
End of year ....................................... $ 59,296,359 $ 13,263,168
============ ============
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue! Value
------ ------ -----
<S> <C> <C>
$ 70,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Marine
Midland Bank, 3.50%, 12/01/09 ......................................... $ 70,000
500,000 East Baton Rouge Parish, LA, 3.20%, 11/01/19 ............................ 500,000
200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 3.85%, 4/01/10 ... 200,000
200,000 Garfield County, OK, PCR, Oklahoma Gas & Electric Co. Project A, VRDN*,
3.60%, 1/01/25 ........................................................ 200,000
700,000 Louisiana ST Offshore, 4.00%, 08/01/10 .................................. 700,000
300,000 Missouri, PCR, Monsanto Project, VRDN*, 3.70%, 2/01/09 .................. 300,000
200,000 Missouri, Third Street Building Project, SPA First Chicago, VRDN*, 3.60%,
9/01/08 ............................................................... 200,000
200,000 Nebraska Higher Education Loan Program, SPA, SLMA, MBIA Insured,
VRDN*, 3.45%, 12/01/15 ................................................ 200,000
----------
Total Investments (Cost $2,370,000**) ................................... $2,370,000
==========
</TABLE>
* Variable Rate Demand Notes (VRDN) are instruments whose interest rate
changes on a specific date and/or whose interest rates vary with changes
in a designated base rate.
** Cost is the same for Federal income tax purposes.
Legend
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
GO General Obligation
ETM Escrowed to Maturity
HFAR Health Facilities Authority Revenue
HFR Hospital Facilities Revenue
IDB Industrial Development Bond
IDR Industrial Development Revenue
LOC Letter of Credit
MBIA Municipal Bond Insurance Assurance Corporation
PCR Pollution Control Revenue
PHA Public Housing Authority
RB Revenue Bond
SLMA Student Loan Marketing Association
SPA Stand By Bond Purchase Agreement
SWDF Solid Waste Disposal Facility
TRANS Tax Revenue Anticipation Notes
See Notes to Financial Statements.
25
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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 Fundamental U.S. Government Strategic Income Fund Series. Each series is
considered a separate entity for financial reporting and tax purposes. The
Tax-Free Money Market Series (the Series) investment objective is to provide as
high a level of current income exempt from federal income tax as is consistent
with the preservaton of capital and liquidity. The following is a summary of
significant accounting policies followed in the preparation of the Series'
financial statements:
Valuation of Securities:
Investments are stated at amortized cost. Under this valuation
method, a portfolio instrument is valued at cost and any premium or
discount is amortized on a constant basis to the maturity of the
instrument. Amortization of premium is charged to income, and
accretion of market discount is credited to unrealized gains. The
maturity of investments is deemed to be the longer of the period
required before the Fund is entitled to receive payment of 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 business day of each month.
Distributions of net capital gains are made annually, as declared by
the Fund's Board of Trustees. Dividends are reinvested at the net
asset value unless shareholders request payment in cash.
General:
Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gains and losses from
the sale of securities are recorded on an identified cost basis.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.
26
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
2. Investment Advisory Fees and Other Transactions with Affiliates
Management Agreement
The Fund had a Management Agreement with Fundamental Portfolio Advisors,
("FPA") until May 31, 1998. Effective June 1, 1998, the Board of Trustees
terminated the agreement with FPA, and selected Tocqueville Asset Management
L.P. ("TAM") as the initial interim manager. TAM served as interim manager from
June 1, 1998 through September 28, 1998. Effective September 29, 1998,
Cornerstone Equity Advisors, Inc. ("Cornerstone") agreed to act as interim
manager for the Series, pending shareholder approval of a new management
agreement with Cornerstone. Pursuant to the agreement, the investment adviser to
the Series 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 consideration for the services provided under the agreements, the Series paid
FPA and TAM an annual management fee in an amount equal to .50% of the Series'
average daily net assets 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. Cornerstone is seeking shareholder ratification of fees for its 1998
services to the Series. If ratified by shareholders, Cornerstone will receive
fees of $18,709 for the period November 30, 1998 through December 31, 1998. TAM
earned fees of $20,732 for the period June 1, 1998 through September 28, 1998.
Total management fees for the year ended December 31, 1998 are set forth in the
Statement of Operations. See Note 8 regarding subsequent events.
Plan of Distribution
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 paid Fundamental Service Corporation ("FSC"), an affiliate of FPA, the
former manager, a fee which accrued daily and paid monthly at an annual rate of
.50% of the Series' average daily net assets. Amounts paid under the plan were
to compensate FSC for the services it provided and the expenses it bore in
distributing the Series' shares to investors. On June 1, 1998, the Board of
Trustees ceased authorizing payments to be paid pursuant to the plan. The amount
incurred by the Series pursuant to the agreement for the year ended December 31,
1998 is set forth in the Statement of Operations.
Indemnification Payments to Affiliates
FPA and FSC (on behalf of certain of their trustees, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from three of the funds
in the Fundamental Family of Funds for attorneys' fees incurred by them in
defending certain proceedings. Upon learning of the payments, the Independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust and contracts that call for
indemnification specify that no indemnification shall be provided to a person
who shall be found to have engaged in "disabling conduct" as defined by
applicable law. The Indemnitees have undertaken to reimburse the Fundamental
Family of Funds for any indemnification expenses for which it is determined that
they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Funds in the form of fees forgone or other
similar payments. FPA and FSC waived fees during the year ended December 31,
1997, and have asserted that they elected to forgo these fees because the
Fundamental Family of Funds were paying legal expenses pursuant to
indemnification. Pending clarification of the legal issues involved, the
Indemnitees have placed into an escrow account $106,863 as of April 30, 1998.
The independent Trustees instructed FPA to escrow
27
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
the full amount incurred by the Fundamental Family of Funds of approximately
$287,000. In addition the Board of Trustees has not authorized the payment of
management fees in the amount of $76,000 prior to the termination of the
management agreements between FPA and the Fundamental Family of Funds. See Note
8 regarding subsequent events.
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. The Trustees also received additional
compensation for special services as requested by the Board.
4. Shares of Beneficial Interest
As of December 31, 1998 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$59,302,218. Transactions in shares of beneficial interest, all at $1.00 per
share were as follows:
Year Ended Year Ended
December 31, December 31,
1998 1997
--------------- ---------------
Shares sold ................................. $ 2,125,152,302 $ 2,566,332,934
Shares issued on reinvestment of dividends .. 77,023 1,048,578
Shares redeemed ............................. (2,079,196,134) (2,558,739,108)
--------------- ---------------
Net increase .......................... $ 46,033,191 $ 8,642,404
=============== ===============
5. Line of Credit
The Series has a temporary arrangement in place with its custodian bank
whereby overdrafts of the Fund's custody account are charged interest at the
current prime rate. There was no overdraft outstanding at December 31, 1998.
6. Expenses Paid Indirectly
The Series 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 $30,130 for the year ended December 31, 1998.
7. Termination of Agreement
On August 12, 1998, each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) abandoned and terminated an Agreement
and Plan of Reorganization (the "Plan") under which each fund (the "Fundamental
Fund") would have transfered all of its assets and liabilities to a
newly-created corresponding series of The Tocqueville Trust.
8. Subsequent Events
On February 12, 1999, the Fundamental Boards directed Cornerstone to place
a substantial portion of any consulting and licensing fee payments to Lance M.
Brofman ("Brofman") in escrow in order to satisfy FPA's 1998 and 1999 payment
obligations to members of a Settlement Class. The "Settlement Class" consists of
persons and entities that purchased shares of the New York Muni Fund from
January 1, 1992 through and including April
28
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
15, 1994; Fundamental U.S. Government Strategic Income Fund from March 2, 1992
through and including August 11, 1994; and The California Muni Fund from January
1, 1993 through and including July 31, 1994. Cornerstone is required to place
into an escrow account for the benefit of the Settlement Class, out of the
amounts it would otherwise pay Brofman under certain Consulting and Licensing
Agreements, 83-1/3% of any payments to Brofman until such time as FPA's 1998 and
1999 payments obligations to the Settlement Class, each in the amount of
$102,115, have been paid. On February 12, 1999, the Fundamental Boards also
authorized the release of $176,157 from an escrow account and from amounts
withheld for payment to FPA pursuant to an agreement with Brofman and FPA, the
provisions of which provide for, among other things, the immediate payment by
FPA into an escrow account for the benefit of members of the Settlement Class.
The $176,157 released represented the sum of: (i) $106,863, the amount
previously escrowed by Vincent J. Malanga on behalf of FPA, FSC and certain of
their directors, officers, shareholders, employees and control persons,
following a demand therefor by the Fundamental Funds' Independent Board Members,
and (ii) $69,294, the amount of management fees withheld for payment to FPA
pursuant to action previously taken by the Fundamental Funds' Independent Board
Members.
On March 12, 1999, the shareholders of the Series voted to approve
Cornerstone as the Series' investment adviser, and approved the payment of
management fees earned by Cornerstone during its tenure as interim investment
adviser. Additionally, the shareholders voted to elect five new members to serve
on the Board of Trustees. Separately, the Board of Trustees voted to change the
name of the Fund to Cornerstone Fixed Income Funds, and the name of the Series
to Cornerstone Tax-Free Money Market Series.
On March 31, 1999, the Fund's Board of Trustees approved reimbursing
Cornerstone for its costs incurred while acting as interim manager from
September 29, 1998 to November 30, 1998.
9. Selected Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1998* 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
(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 ....................................... 0.02 0.02 0.02 0.03 0.02
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ........................ (0.02) (0.02) (0.02) (0.03) (0.02)
-------- -------- -------- -------- --------
Net Asset Value, End of Year ................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return ................................................ 1.77% 2.19% 2.28% 2.60% 1.69%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000 omitted) ....................... $ 59,296 $ 13,263 $ 4,621 $ 11,251 $ 9,004
Ratios to Average Net Assets
Expenses ................................................. 1.87%+ 1.52%++ 1.54%++ 1.53%++ 0.91%+
Net investment income .................................... 1.46% 2.10% 2.04% 2.43% 1.55%
</TABLE>
+ These ratios are after expense reimbursement of .02% and .44% for
each of the years ended December 31, 1997 and 1994, respectively.
++ These ratios would have been 1.77%, 1.44%, 1.40% and 1.35% net of
expenses paid indirectly of 0.10%, .08%, .14% and .18% for the years
ended December 31, 1998, 1997, 1996 and 1995, respectively.
* See Note 2 for changes in investment adviser during 1998.
29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Tax-Free Money Market Series of
Fundamental Fixed-Income 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-Income Fund as of December 31, 1998 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, 1998 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
presentation. 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-Income Fund as
of December 31, 1998, 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/ McGladrey & Pullen, LLP
New York, New York
February 26, 1999, except for last two paragraphs of Note 8 as to which the date
is March 31, 1999.
30
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH YIELD MUNICIPAL BOND SERIES
March 12, 1999
Dear Shareholder:
After having posted the highest return for all high yield tax exempt bond
funds in 1997 and recording the highest return over a three year period (1995 to
1997), 14.81%, the High Yield Muni Fund's performance floundered in 1998,
generating a total return of +0.74%.
Frankly, given 1998's interest rate environment, the only plausible
explanation for this Fund's performance was the upheaval that occurred to the
management structure of the Funds. However, at year's end, the six month
annualized return was +1.31%. We believe that Cornerstone is on the right track
for 1999; we've identified the challenge and have embraced it.
Sincerely,
/s/ Stephen C. Leslie
Stephen C. Leslie
President
31
<PAGE>
--------------------------------
Fundamental Fixed Income Fund
High Yield Municipal Bond Series
--------------------------------
Average Annual Total Return
Ended on 12/31/98
--------------------------------
1 Year 5 Year 10 Year
--------------------------------
0.74% 5.83% 5.00%
--------------------------------
[The following table was depicted as a line graph in the printed material.]
Lehman High Yield
Brothers Municipal
Municipal Bond Consumer
Bond Index Series Price Index
$22,024 $16,697 $13,562
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in the Fund on
12/31/88 to a $10,000 investment made in the Lehman Brothers Municipal Bond
Index on that date. All dividends and capital gain distributions are reinvested.
The Fund invests primarily in high yield 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 the Fund
performance, including expense reimbursements, if applicable, is contained in
the Fund's Prospectus and elsewhere in this report.
Lehman Index Source: Lehman Brothers.
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
32
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 5)
(cost $2,433,107) .......................................... $ 2,497,024
Interest receivable .......................................... 41,747
-----------
Total assets ........................................... 2,538,771
-----------
LIABILITIES
Bank overdraft (Note 6) ...................................... 544,665
Fund shares redeemed ......................................... 406,455
Dividends payable ............................................ 457
Accrued expenses ............................................. 15,194
-----------
Total liabilities ...................................... 966,771
-----------
NET ASSETS consisting of:
Accumulated net
realized loss ................................ $ (133,160)
Unrealized appreciation
of securities ................................ 63,917
Paid-in-capital applicable to
215,221 shares of
beneficial interest
(Note 4) ..................................... 1,641,243
-----------
$ 1,572,000
===========
NET ASSET VALUE PER SHARE ...................................... $ 7.30
===========
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income .............................................. $ 162,614
EXPENSES (Notes 2 and 3)
Management fees ................................ $ 16,631
Custodian and accounting fees .................. 9,512
Transfer agent fees ............................ 7,835
Professional fees .............................. 10,738
Administration fees ............................ 1,799
Trustees' fees ................................. 539
Printing and postage ........................... 13,819
Distribution fees .............................. 4,139
Interest on bank borrowing 17,455
Other .......................................... 4,770
-----------
Total expenses ........................... 87,237
-----------
Net investment income .................................. 75,377
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments ............... 25,554
Net change in unrealized appreciation
of investments ............................... (28,820)
-----------
Net loss on investments ................................ (3,266)
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ................................................... $ 72,111
===========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income ................................................. $ 75,377 $ 93,414
Net realized gain on investments ...................................... 25,554 17,891
Net change in unrealized appreciation (depreciation) on investments ... (28,820) 166,782
----------- -----------
Net increase in net assets from operations ...................... 72,111 278,087
DISTRIBUTIONS:
Distributions from investment income .................................. (75,377) (93,414)
CAPITAL SHARE TRANSACTIONS (Note 4) ..................................... (679,719) 212,100
----------- -----------
Total increase (decrease) ....................................... (682,985) 396,773
NET ASSETS:
Beginning of year ..................................................... 2,254,985 1,858,212
----------- -----------
End of year ........................................................... $ 1,572,000 $ 2,254,985
=========== ===========
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Increase (Decrease) in Cash
Cash Flows From Operating Activities
Net increase to net assets from operations ........................... $ 72,111
Adjustments to reconcile net increase in net assets from operations
to net cash used in operating activities:
Purchase of investment securities .................................. (4,006,033)
Proceeds on sale of securities ..................................... 3,749,238
Increase in interest receivable .................................... (1,401)
Increase in accrued expenses ....................................... 3,459
Net accretion of discount on securities ............................ (26,855)
Net realized gain:
Investments ...................................................... (25,554)
Unrealized appreciation on securities ................................ 28,820
-----------
Net cash used in operating activities ...................... (206,215)
-----------
Cash Flows From Financing Activities:*
Increase in notes payable .......................................... 92,352
Proceeds on shares sold ............................................ 19,747,045
Payment on shares repurchased ...................................... (19,612,626)
Cash dividends paid ................................................ (20,556)
-----------
Net cash provided by financing activities .................. 206,215
-----------
Net decrease in cash ....................................... 0
Cash at beginning of year .............................................. 0
-----------
Cash at end of year .................................................... $ 0
===========
</TABLE>
- ----------
* Non-cash financing activities not included herein consist of reinvestment
of dividends of $55,597.
Cash payments for interest expense totaled $11,036.
See Notes to Financial Statements.
34
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue! Value
--------- ------ -----
<S> <C> <C>
$ 40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.75%, 3/01/23 ........................................... $ 42,876
250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 7/15/24 ............... 66,883
100,000 Corona, CA, COP, Vista Hospital Systems Inc., 8.38%, 7/01/11 ........................................ 111,912
500,000 East Baton Rouge Parish, LA, Pollution Control Revenue, Exxon Project, 3.20%, 11/01/19 .............. 500,000
100,000 Escambia, FL, Housing Corporation, Royal Arms Project, Series B, 9.00%, 7/01/16 ..................... 100,072
100,000 First Albany Corporation Municipal Trust Certificate, Series 98-2, IFRN*, AMBAC, 7.63%, 7/01/24 ..... 100,948
(Trust Certificates relating to PR Comwlth Ser B, AMBAC, 5.00, 7/01/28)
500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 1/01/26 ............................................. 120,508
25,000 Hildago County, TX, Health Services, Mission Hospital Inc. Project, 6.88%, 8/15/26 .................. 27,433
50,000+ Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste Tire
Project, 7.88%, 4/01/11 .......................................................................... 10,577
45,000 Illinois Health Facilities Authority, Midwest Physician Group Ltd Project, RB, 8.13%, 11/15/19 ...... 55,568
35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.63%, 10/01/22 .................................... 38,275
45,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.25%, 12/15/14 ................ 51,585
630,000 Marengo County, AL, Port Authority Facilities, RB, CAB, Series A, 3/01/19 ........................... 165,810
85,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical Center,
8.85%, 8/15/14 ................................................................................... 89,706
100,000 New York City, NY, Municipal Water Finance Authority, Water & Sewer RB, TR Receipts Series 29,
7.20%, 6/15/30 ................................................................................... 100,480
100,000 New York State, DAR, City University System Residual Int Tr Recpts 27, MBIA Insured, Liquidity
The Bank of New York, 7.65%, 7/01/24 ............................................................. 113,127
100,000 New York State, DAR, City University System Residual Int Tr Recpts 28, AMBAC Insured, Liquidity
The Bank of New York, 7.10%, 7/01/25 ............................................................. 107,295
100,000#x+ Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00%, 5/01/09 ....................... 35,795
50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.25%, 7/01/22 ................. 57,186
75,000 Perdido, FL, Housing Corporation, RB, Series B. 9.25%, 11/01/16 ..................................... 75,044
30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.25%, 7/01/18 ............................. 7,816
60,000 Port Chester, NY, IDA, Nadal Industries Inc. Project, 7.00%, 2/01/16 ................................ 62,572
75,000 San Antonio, TX, HFC, Multi Family Housing, RB, Agape Metro Housing Project, Series A, 8.63%,
12/01/26 ......................................................................................... 76,222
75,000 San Bernardino, CA, San Bernardino Community Hospital, RB, 7.88%, 12/01/19 .......................... 77,025
100,000 San Bernardino County, CA, COP, Series PA-38, MBIA Insured, IFRN*, 12.23%, 7/01/16, Rule 144A
Security (restricted as to resale except to qualified institutions) .............................. 122,806
</TABLE>
35
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS (continued)
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue! Value
--------- ------ -----
<S> <C> <C>
$ 60,000x San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN*, MBIA Insured, 8.09%, 8/01/16,
MBIA Insured, Rule 144A Security (restricted as to resale except to qualified institutions) ...... $ 65,833
40,000 Schuylkill County, PA, IDA Resouce Recovery, Schuylkill Energy Res Inc., AMT, 6.50%, 1/01/10 ........ 40,719
15,000#+ Troy, NY, IDA, Hudson River Project, 11.00%, 12/01/94 ............................................... 6,150
75,000@+ Villages at Castle Rock, CO, Metropolitan District #4, 8.50%, 6/01/31 ............................... 39,148
25,000 Wayne, MI, AFR, Northwest Airlines Inc., 6.75%, 12/01/15 ............................................ 27,653
-----------
Total Investments (Cost $2,433,107)** ............................................................... $ 2,497,024
===========
</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 as of December 31, 1998.
** Cost is approximately the same for income tax purposes.
# The value of this non-income producing security has been estimated by
persons designated by the Fund's Board of Trustees using methods the
Trustees believe reflect fair value. See note 5 to the financial
statements.
+ Denotes non-income producing security.
@ Security in default. Interest paid on cash flow basis. Rate shown as of
December 31, 1998.
x The Fund, or its affiliates owns 100% of the security and therefore there
is no trading in the security.
Legend
!Issue AFR Airport Facilities Revenue
AMBAC American Municipal Bond Assurance Corporation
AMT Subject to Alternative Minimum Tax
CAB Capital Appreciation Bond
COP Certificate of Participation
CFR Civic Facility Revenue
DAR Dorm Authority Revenue
ETM Escrowed to Maturity
FHA Federal Housing Authority
HEHA Higher Education and Health Authority
HFC Housing Finance Corporation
IDA Industrial Development Authority
MBIA Municipal Bond Insurance Assurance Corporation
RB Revenue Bond
RHR Retirement Housing Revenue
TCA Transportation Corridor Agency
URA Urban Renewal Agency
See Notes to Financial Statements.
36
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
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 Fundamental U.S. Government Strategic Income Fund Series
(the Series). Each series is considered a separate entity for financial
reporting and tax purposes. The High-Yield Municipal Bond Series (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 higher rated bonds. The following
is a summary of significant accounting policies followed in the preparation of
the Series' financial statements:
Valuation of Securities: The Series' portfolio securities are valued on the
basis of prices provided by an independent pricing service when, in the opinion
of persons designated by the Fund's trustees, such prices are believed to
reflect the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Securities not priced in a
manner described above and other assets are valued by persons designated by the
Fund's trustees using methods which the trustees believe accurately reflects
fair value.
Federal Income Taxes: It is the Series' policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions: The Series declares dividends daily from its net investment
income and pays such dividends on the last business day of each month.
Distributions of net capital gain, if any, realized on sales of investments are
anticipated to be made before the close of the Series' fiscal year, as declared
by the Board of Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General: Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gain and loss from the sale of
securities are recorded on an identified cost basis. Original issue discounts
and premiums are amortized over the life of the respective securities. Premiums
are amortized and charged against interest income and original issue discounts
are accreted to interest income.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
37
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
2. Investment Advisory Fees and Other Transactions with Affiliates
Management Agreement
The Series had a Management Agreement with Fundamental Portfolio Advisors
("FPA") until May 31, 1998. Effective June 1, 1998, the Board of Trustees
terminated the agreement with FPA and selected Tocqueville Asset Management L.P.
("TAM") as the initial interim manager. TAM served as interim manager from June
1, 1998 through September 28, 1998. Effective September 29, 1998, Cornerstone
Equity Advisors, Inc. ("Cornerstone") agreed to act as interim manager for the
Series, pending shareholder approval of a new management agreement with
Cornerstone. Pursuant to the agreement, the investment adviser to the Series 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
consideration for the services provided under the agreements, the Series paid
FPA and TAM an annual management fee in an amount equal to .80% 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 .70% of net assets in excess of $500
million. Cornerstone is seeking shareholder ratification of fees for its 1998
services to the Series. If ratified by shareholders, Cornerstone will receive
fees of $1,170 for the period November 30, 1998 through December 31, 1998. TAM
earned fees of $5,717 for the period June 1, 1998 through September 28, 1998.
Total management fees for the year ended December 31, 1998 are set forth in the
Statement of Operations. See Note 8 regarding subsequent events.
Plan of Distribution
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 paid Fundamental Service Corporation ("FSC"), an affiliate of FPA, the
former manager, a fee which accrued daily and paid monthly at an annual rate of
.50% of the Series' average daily net assets. Amounts paid under the plan were
to compensate FSC for the services it provides and the expenses it bore in
distributing the Series' shares to investors. On June 1, 1998, the Board of
Trustees ceased authorizing payments to be paid pursuant to the plan. The amount
incurred by the Series pursuant to the agreement for the year ended December 31,
1998 is set forth in the Statement of Operations.
Indemnification Payments to Affiliates
FPA and FSC (on behalf of certain of their trustees, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from three of the funds
in the Fundamental Family of Funds for attorneys' fees incurred by them in
defending certain proceedings. Upon learning of the payments, the Independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust and contracts that call for
indemnification specify that no indemnification shall be provided to a person
who shall be found to have engaged in "disabling conduct" as defined by
applicable law. The Indemnitees have undertaken to reimburse the Fundamental
Family of Funds for any indemnification expenses for which it is determined that
they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Funds in the form of fees forgone or other
similar payments. FPA and FSC waived fees during the year ended December 31,
1997, and have asserted that they elected to forgo these fees because the
Fundamental Family of Funds were paying legal expenses pursuant to
indemnification. Pending clarification of the legal issues involved, the
Indemnitees have placed into an escrow account $106,863 as of April 30, 1998.
The independent Trustees instructed FPA to escrow
38
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
the full amount incurred by the Fundamental Family of Funds of approximately
$287,000. In addition the Board of Trustees has not authorized the payment of
management fees in the amount of $76,000 prior to the termination of the
management agreements between FPA and the Fundamental Family of Funds. See Note
8 regarding subsequent events.
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. The Trustees also received additional
compensation for special services as requested by the Board.
4. Shares of Beneficial Interest
As of December 31, 1998, there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$1,641,243. Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold .................................. 2,609,245 $ 19,283,525 2,941,324 $ 20,530,136
Shares issued on reinvestment of dividends ... 7,508 55,597 11,426 79,995
Shares redeemed .............................. (2,701,004) (20,018,841) (2,924,097) (20,398,031)
---------- ------------ ---------- ------------
Net increase (decrease) ................. (84,251) $ (679,719) 28,653 $ 212,100
========== ============ ========== ============
</TABLE>
5. Investment Transactions
The Series invests in variable rate securities commonly called "inverse
floaters." The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in
interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed-rate bond. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.
The Series invests in lower rated or unrated ("junk") securities which are
more likely to react to developments affecting market risk and credit risk than
would higher rated securities which react primarily to interest rate
fluctuations. The Series held securities in default with an aggregate value of
$91,670 at December 31, 1998 (5.8% of net assets). As indicated in the Statement
of Investments, the Troy, NY Industrial Revenue Bond, 11% due December 1, 1994
with a par value of $15,000 and a value of $6,150 at December 31, 1998 has been
estimated in good faith under methods determined by the Board of Trustees.
The Series owns 1.7% of a Niagara Falls New York Urban Renewal Agency 11%
Bond ("URA Bond") due to mature on May 1, 2009 which has missed interest and
sinking fund payments. An affiliated investment company owns 98.3% of this bond
issue. The Series was party to an agreement whereby certain related bonds owned
by an affiliate were to be subject to repayment under a debt assumption
agreement. The agreement allowed the affiliate to allocate a portion of the debt
services it receives to the URA Bond. In exchange the Series forfeited certain
rights it had as holder of the URA bond. The debt assumption was not completed
and the timing and amount of debt service payments is uncertain. The value of
this bond is $35,795 and is valued at 35.80% of face value at December 31, 1998
under methods determined by the Board of Trustees.
39
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
During the year ended December 31, 1998, the cost of purchases and
proceeds from sales of investment securities, other than short-term obligations,
were $1,300,119 and $2,159,238, respectively.
As of December 31, 1998 net unrealized appreciation of portfolio
securities amounted to $63,917, composed of unrealized appreciation of $221,146
and unrealized depreciation of $157,229.
The Series has capital loss carryforwards to offset future capital gains
as follows:
Amount Expiration
------ ----------
$20,200 12/31/1999
20,500 12/31/2000
54,300 12/31/2002
39,900 12/31/2003
---------
$134,900
=========
6. Line of Credit
The Series has a temporary arrangement in place with its custodian bank
whereby overdrafts of the Series' custody account are charged interest at the
current prime rate. The amount outstanding at December 31, 1998 was $544,665.
7. Termination of Agreement
On August 12, 1998, each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) abandoned and terminated an Agreement
and Plan of Reorganization (the "Plan") under which each fund (the "Fundamental
Fund") would have transfered all of its assets and liabilities to a
newly-created corresponding series of The Tocqueville Trust.
8. Subsequent Events
On February 12, 1999, the Fundamental Boards directed Cornerstone to place
a substantial portion of any consulting and licensing fee payments to Lance M.
Brofman ("Brofman") in escrow in order to satisfy FPA's 1998 and 1999 payment
obligations to members of a Settlement Class. The "Settlement Class" consists of
persons and entities that purchased shares of the New York Muni Fund from
January 1, 1992 through and including April 15, 1994; Fundamental U.S. Goverment
Strategic Income Fund from March 2, 1992 through and including August 11, 1994;
and The California Muni Fund from January 1, 1993 through and including July 31,
1994. Cornerstone is required to place into an escrow account for the benefit of
the Settlement Class, out of the amounts it would otherwise pay Brofman under
certain Consulting and Licensing Agreements, 83-1/3% of any payments to Brofman
until such time as FPA's 1998 and 1999 payments obligations to the Settlement
Class, each in the amount of $102,115, have been paid. On February 12, 1999, the
Fundamental Boards also authorized the release of $176,157 from an escrow
account and from amounts withheld for payment to FPA pursuant to an agreement
with Brofman and FPA, the provisions of which provide for, among other things,
the immediate payment by FPA into an escrow account for the benefit of members
of the Settlement Class. The $176,157 released represented the sum of: (i)
$106,863, the amount previously escrowed by Vincent J. Malanga on behalf of FPA,
FSC and certain of their directors, officers, shareholders, employees and
control persons, following a demand therefor by the Fundamental Funds'
Independent Board Members, and (ii) $69,294, the amount of management fees
withheld for payment to FPA pursuant to action previously taken by the
Fundamental Funds' Independent Board Members.
40
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
On March 12, 1999, the shareholders of the Series voted to approve
Cornerstone as the Series' investment adviser, and approved the payment of
management fees earned by Cornerstone during its tenure as interim investment
adviser. Additionally, the shareholders voted to elect five new members to serve
on the Board of Trustees. Separately, the Board of Trustees voted to change the
name of the Fund to Cornerstone Fixed Income Funds, and the name of the Series
to Cornerstone High Yield Municipal Bond Series.
On March 31, 1999, the Fund's Board of Trustees approved reimbursing
Cornerstone for its costs incurred while acting as interim manager from
September 29, 1998 to November 30, 1998.
9. Selected Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998+ 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of year ........................... $ 7.53 $ 6.86 $ 7.07 $ 5.92 $ 7.27
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ...................................... 0.29 0.37 0.47 0.34 0.43
Net realized and unrealized gains (losses) on investments .. (0.23) 0.67 (0.21) 1.15 (1.35)
------- ------- ------- ------- -------
Total from investment operations ........................... 0.06 1.04 0.26 1.49 (0.92)
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income ......................... (0.29) (0.37) (0.47) (0.34) (0.43)
------- ------- ------- ------- -------
Net asset value, end of year ................................. $ 7.30 $ 7.53 $ 6.86 $ 7.07 $ 5.92
======= ======= ======= ======= =======
Total Return ................................................. 0.74% 15.71% 4.05% 25.70% (12.92%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) ...................... $ 1,572 $ 2,255 $ 1,858 $ 1,457 $ 979
Ratios to average net assets:
Interest expense ......................................... .84% -- -- -- --
Operating expenses ....................................... 3.36% 2.58% 2.49% 2.50% 2.50%
------- ------- ------- ------- -------
Total expenses ....................................... 4.20% 2.58%* 2.49%* 2.50%* 2.50%*
Net investment income .................................... 3.63% 5.12%* 6.85%* 5.15%* 6.70%*
Portfolio turnover rate ...................................... 57.02% 133.79% 139.26% 43.51% 75.31%
</TABLE>
* These ratios are after expense reimbursements of 3.52%, 4.59%, 6.22% and
6.20%, for each of the years ended December 31, 1997, 1996, 1995 and 1994,
respectively.
+ See Note 2 for changes in investment adviser during 1998.
41
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
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, 1998, and the related statements of
operations and cash flows 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 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. Our procedures included
confirmation of securities owned as of December 31, 1998 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 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, 1998, 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.
/s/ McGladrey & Pullen, LLP
New York, New York
February 26, 1999, except for the last two paragraphs of Note 8 as to which the
date is March 31, 1999.
42
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
March 12, 1999
Dear Shareholder:
Fundamental U.S. Government Strategic Income Fund posted a return of
- -4.61% in 1998, after having generated a 5.51% total return for 1997. Continued
high professional fees and the management upheaval were large factors
contributing to this performance.
The turnaround of this portfolio began to bear fruit as the six month
annualized return, as of 12-31-98 was 0.03%. Although rates have risen since
early October when long treasuries yielded 4.72%, the Fund has begun to generate
positive returns each month since Cornerstone began managing the Fund. We are
optimistic for better performance in 1999.
Sincerely,
/s/ Stephen C. Leslie
Stephen C. Leslie
President
43
<PAGE>
---------------------------------
Fundamental Fixed Income Fund
U.S. Government
Strategic Income Fund
---------------------------------
Average Annual Total Return
Ended on 12/31/98
---------------------------------
Since Inception
1 Year 5 Year (2/18/92)
---------------------------------
(4.61)% (1.91)% 0.88%
---------------------------------
[The following table was depicted as a line graph in the printed material.]
Lehman
Brothers U.S.
1-3 Year Government
Government Consumer Strategic Income
Bond Index* Price Index Fund
$14,994 $11,860 $10,617
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 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.
44
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value
(Notes 5 & 6)
(cost $5,454,607) ........................................... $ 5,430,068
Interest receivable ........................................... 81,458
------------
Total assets .......................................... 5,511,526
------------
LIABILITIES
Bank overdraft ................................................ 664,779
Fund shares redeemed .......................................... 32,086
Dividends payable ............................................. 923
Accrued expenses .............................................. 10,085
------------
Total liabilities ..................................... 707,873
------------
NET ASSETS consisting of:
Accumulated net realized loss .................. $(16,663,290)
Unrealized depreciation of
investments .................................. (24,539)
Paid-in-capital applicable to
3,718,984 shares of beneficial
interest (Note) .............................. 21,491,482
------------
$ 4,803,653
============
NET ASSET VALUE PER SHARE ....................................... $ 1.29
============
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ............................................... $ 768,144
EXPENSES (Notes 2 and 3)
Management fees .................................. $ 58,529
Custodian and fund
accounting fees ................................ 15,954
Transfer agent fees .............................. 34,005
Professional fees ................................ 121,749
Administration fees .............................. 10,932
Trustees' fees ................................... 2,146
Printing and postage ............................. 18,894
Interest ......................................... 112,790
Distribution expenses ............................ 12,001
Other ............................................ 11,602
-----------
Total expenses ............................. 398,602
Less: Expenses paid
indirectly (Note 8) ...................... (4,298)
-----------
Net expenses ............................................ 394,304
-----------
Net investment income ................................... 373,840
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investments .................................... 1,410,632
Futures and options
on futures ................................... (240,362)
-----------
1,170,270
Net change in unrealized
appreciation (depreciation) on:
Investments .................................... (2,024,492)
Futures ........................................ 103,270
Options contracts written ...................... (8,176)
-----------
(1,929,398)
Net loss on investments ......................................... (759,128)
-----------
NET DECREASE IN NET ASSETS
FROM OPERATIONS ............................................... $ (385,288)
===========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income ...................................... $ 373,840 $ 807,458
Net realized gain on investments ........................... 1,170,270 71,015
Net change in unrealized depreciation of investments ....... (1,929,398) (273,480)
------------ ------------
Net increase (decrease) in net assets from operations .. (385,288) 604,993
DISTRIBUTIONS:
Distributions from investment income ....................... (373,840) (807,458)
CAPITAL SHARE TRANSACTIONS (Note 4) .......................... (4,467,565) (2,991,556)
------------ ------------
Total decrease ......................................... (5,226,693) (3,194,021)
NET ASSETS:
Beginning of year .......................................... 10,030,346 13,224,367
------------ ------------
End of year ................................................ $ 4,803,653 $ 10,030,346
============ ============
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets from operations ................................. $ (385,288)
Adjustments to reconcile net increase in net assets from operations to
net cash provided by operating activities:
Purchase of investment securities .......................................... (20,047,040)
Proceeds on sale of securities ............................................. 29,204,803
Premiums received for options written ...................................... 162,717
Premiums paid to close options written ..................................... (135,069)
Decrease in variation margin receivable .................................... (41,563)
Increase in interest receivable ............................................ (13,719)
Decrease in accrued expenses ............................................... (12,495)
Net accretion of discount on securities .................................... (177,899)
Net realized gain:
Investments .............................................................. (1,410,632)
Options written .......................................................... (46,449)
Unrealized appreciation on securities and options written for the period ... 2,032,668
------------
Net cash provided by operating activities .............................. 9,130,034
------------
CASH FLOW FROM FINANCING ACTIVITIES:*
Net repayments on sale of securities sold subject to repurchase (4,744,054)
Increase in notes payable .................................................... 438,872
Proceeds on shares sold ...................................................... 388,497
Payment on shares repurchased ................................................ (5,106,240)
Cash dividends paid .......................................................... (107,109)
------------
Net cash used in financing activities .................................. (9,130,034)
------------
Net decrease in cash ................................................... 0
CASH AT BEGINNING OF YEAR ...................................................... 0
------------
CASH AT END OF YEAR ............................................................ $ 0
============
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment
of dividends of $276,912.
Cash payments for interest expense totaled $113,765 for the period.
See Notes to Financial Statements.
46
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue! Value
------ ----- -----
<S> <C> <C>
US Government Agencies
$2,000,000 FNMA Med Term Note, 5.97%, 7/03/03 .............................. $2,015,436
1,000,000 FNMA, 6.04%, 10/22/03 ........................................... 998,125
925,000 Lubbock Texas Hsg Finacne Corp, GNMA Mtg Bkd, 5.90%, 12/01/03 ... 926,116
1,500,000 Tennessee Valley Authority, 5.00%, 12/18/03 ..................... 1,490,391
----------
Total Investments (Cost $5,454,607*) ............................ $5,430,068
==========
</TABLE>
* Cost is approximately the same for Federal income tax purposes.
See Notes to Financial Statements.
47
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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 Fundamental U.S. Government Strategic Income Fund Series
(the Series). The objective of the Series is to provide high current income with
minimum risk of principal and relative stability of net asset value. The Series
seeks to achieve its objective by investing primarily in U.S. Government
Obligations. U.S. Government Obligations consist of marketable securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
(hereunder collectively referred to as "Government Securities"). The Series also
uses leverage in seeking to achieve its investment objective. Each series is
considered a separate entity for financial reporting and tax purposes.
Valuation of Securities-The Series' portfolio securities are valued
on the basis of prices provided by an independent pricing service when, in
the opinion of persons designated by the Fund's trustees, such prices are
believed to reflect the fair market value of such securities. Prices of
non-exchange traded portfolio securities provided by independent pricing
services are generally determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data. Securities traded or dealt
in upon a securities exchange and not subject to restrictions against
resale as well as options and futures contracts listed for trading on a
securities exchange or board of trade are valued at the last quoted sales
price, or, in the absence of a sale, at the mean of the last bid and asked
prices. Options not listed for trading on a securities exchange or board
of trade for which over-the-counter market quotations are readily
available are valued at the mean of the the current bid and asked prices.
Money market and short-term debt instruments with a remaining maturity of
60 days or less will be valued on an amortized cost basis. Securities not
priced in a manner described above and other assets are valued by persons
designated by the Fund's trustees using methods which the trustees believe
reflect fair value.
Futures Contracts-Initial margin deposits with respect to these
contracts are maintained by the Fund's custodian in segregated asset
accounts. Subsequent changes in the daily valuation of open contracts are
recognized as unrealized gains or losses. Variation margin payments are
made or received as daily appreciation or depreciation in the value of
these contracts occurs. Realized gains or losses are recorded when a
contract is closed.
Repurchase Agreements-The Series may invest in repurchase
agreements, which are agreements pursuant to which securities are acquired
from a third party with the commitment that they will be repurchased by
the seller at a fixed price on an agreed upon date. The Series may enter
into repurchase agreements with banks or lenders meeting the
creditworthiness standards established by the Board of Trustees. The
resale price reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of
the purchased security. The Series' repurchase agreements will at all
times be fully collateralized in an amount equal to the purchase price
including accrued interest earned on the underlying security.
48
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
Reverse Repurchase Agreements-The Series may enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Series
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Under the Investment Company Act of 1940 reverse
repurchase agreements are generally regarded as a form of borrowing. At
the time the Series enters into a reverse repurchase agreement it will
establish and maintain a segregated account with its custodian containing
securities from its portfolio having a value not less than the repurchase
price including accrued interest.
Federal Income Taxes-It is the Series' policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable and tax exempt
income to its shareholders. Therefore, no provision for federal income tax
is required.
Distributions-The Series declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions of net capital gain, if any, realized on sales of
investments are anticipated to be made before the close of the Series'
fiscal year, as declared by the Board of Trustees. Dividends are
reinvested at the net asset value unless shareholders request payment in
cash.
General-Securities transactions are accounted for on a trade date
basis. Interest income is accrued as earned. Realized gain and loss from
the sale of securities are recorded on an identified cost basis. Discounts
and premiums are amortized over the life of the respective securities.
Premiums are charged against interest income and discounts are accreted to
interest income.
Accounting Estimates-The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
2. Investment Advisory Fees and Other Transactions With Affiliates
Management Agreement
The Series had a Management Agreement with Fundamental Portfolio Advisors
("FPA") until May 31, 1998. Effective June 1, 1998, the Board of Trustees
terminated the agreement with FPA, and selected Tocqueville Asset Management
L.P. ("TAM") as the initial interim manager. TAM served as interim manager from
June 1, 1998 through September 28, 1998. Effective September 29, 1998,
Cornerstone Equity Advisors, Inc. ("Cornerstone") agreed to act as interim
manager for the Series, pending shareholder approval of a new management
agreement with Cornerstone. Pursuant to the agreement, the investment adviser to
the Series 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 consideration for the services provided under the respective agreements, the
Series paid FPA and TAM 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. Cornerstone is seeking
shareholder ratification of fees for its 1998 services to the Series. If
ratified by shareholders, Cornerstone will receive fees of $3,187 for the period
November 30, 1998 through December 31, 1998. TAM earned fees of $18,058 for the
period June 1, 1998 through September 28, 1998. Total management fees for the
six months ended June 30, 1998 are set forth in the Statement of Operations. See
Note 9 regarding subsequent events.
49
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
Plan of Distribution
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 paid Fundamental Service Corporation ("FSC"), an affiliate of FPA, the
former manager, a fee which accrued daily and paid monthly at an annual rate of
.25% of the Series' average daily net assets. Amounts paid under the plan are to
compensate FSC for the services it provided and the expenses it bore in
distributing the Series' shares to investors. On June 1, 1998, the Board of
Trustees ceased authorizing payments to be paid pursuant to the plan. The amount
incurred by the Series pursuant to the agreement for the year ended December 31,
1998 is set forth in the Statement of Operations.
Indemnification Payments to Affiliates
FPA and FSC (on behalf of certain of their trustees, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from three of the funds
in the Fundamental Family of Funds for attorneys' fees incurred by them in
defending certain proceedings. Upon learning of the payments, the Independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust and contracts that call for
indemnification specify that no indemnification shall be provided to a person
who shall be found to have engaged in "disabling conduct" as defined by
applicable law. The Indemnitees have undertaken to reimburse the Fundamental
Family of Funds for any indemnification expenses for which it is determined that
they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Funds in the form of fees forgone or other
similar payments. FPA and FSC waived fees during the year ended December 31,
1997, and have asserted that they elected to forgo these fees because the
Fundamental Family of Funds were paying legal expenses pursuant to
indemnification. Pending clarification of the legal issues involved, the
Indemnitees have placed into an escrow account $106,863 as of April 30, 1998.
The independent Trustees instructed FPA to escrow the full amount incurred by
the Fundamental Family of Funds of approximately $287,000. In addition the Board
of Trustees has not authorized the payment of management fees in the amount of
$76,000 prior to the termination of the management agreements between FPA and
the Fundamental Family of Funds. See Note 9 regarding subsequent events.
Commissions Paid to Affiliate
The Series effects a significant portion of its futures and options
transactions through LAS Investments, Inc. (LAS), an affiliated broker-dealer.
Commissions paid to LAS amounted to approximately $6,752 for the year ended
December 31, 1998.
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. The Trustees also received additional
compensation for special services as requested by the Board.
50
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
4. Shares of Beneficial Interest
As of December 31, 1998 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid-in amounted to
$21,491,482. Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------ ------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold .................. 280,608 $ 384,496 521,491 $ 732,057
Shares issued on
reinvestment of dividends .. 200,845 276,912 457,380 642,058
Shares redeemed .............. (3,879,157) (5,128,973) (3,119,211) (4,365,671)
---------- ----------- ---------- -----------
Net decrease ................. (3,397,704) ($4,467,565) (2,140,340) ($2,991,556)
========== =========== ========== ===========
</TABLE>
5. Complex Services, Off Balance Sheet Risks and Investment Transactions
Two-Tiered Index Floating Rate Bonds (TTIB):
The Series invests in Two-Tiered Index Floating Rate Bonds. The term
two-tiered refers to the two coupon levels that the TTIB's coupon can reset to.
The "first tier" is the TTIB's fixed rate coupon, effective as long as the
underlying index is at or below the strike level. Above the strike, the TTIB
coupon resets to a formula similar to an inverse floating rate note. See
discussion of inverse floating rate notes below. Changes in interest rate on the
underlying 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.
Inverse Floating Rate Notes (IFRN):
The Series invests in variable rate securities commonly called "inverse
floaters". The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in
interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed-rate bond. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.
Futures Contracts and Options on Futures Contracts:
The Series 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.
51
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
The Series' principal objective in holding or issuing derivative financial
instruments is as a hedge against interest-rate fluctuations in its US
Government bond portfolio, and to enhance its total return. The Series'
principal objective is to maximize the level of interest income while
maintaining acceptable levels of interest-rate and liquidity risk. To achieve
this objective, the Series uses a combination of derivative financial
instruments principally consisting of US Treasury Bond Futures and Options on US
Treasury Bond Futures. Typically the Series sells treasury bond futures
contracts or writes treasury bond option contracts. These activities create off
balance sheet risk since the Series 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 Series of acquiring the security to
deliver may be in excess of recorded amounts and result in a loss to the Series.
The following table summarizes contracts written by the Series for the
year ended December 31, 1998:
Number of Premium
Contracts Amount
--------- ---------
Contracts outstanding December 31, 1997 ........... 40 $ 18,801
Options written ................................... 315 162,717
Contracts closed or expired ....................... (355) (181,518)
---- ---------
Contracts outstanding December 31, 1998 ........... 0 $ 0
==== =========
Other Investment Transactions
For the year ended December 31, 1998, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$5,467,800 and $14,542,542, respectively.
As of December 31, 1998, the Series had no unrealized appreciation or
depreciation for tax purposes since it has elected to recognize market value
changes each day for tax purposes.
The Series has capital loss carryforwards to offset future capital gains
as follows:
Amount Expiration
------ ----------
$15,071,500 12/31/2002
588,100 12/31/2004
251,400 12/31/2005
808,000 12/31/2006
-----------
$16,719,000
===========
6. Line of Credit
The Series has a temporary arrangement in place with its custodian bank
whereby overdrafts of the Series' custody account are charged interest at the
current prime rate. The amount outstanding at December 31, 1998 was $664,779.
52
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
7. Agreement and Plan of Reorganization
On August 12, 1998, each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) agreed to abandon and terminate an
Agreement and Plan of Reorganization (the "Plan") under which each fund (the
"Fundamental Fund") will transfer all of its assets and liabilities to a
newly-created corresponding series of The Tocqueville Trust (the "Tocqueville
Fund") in exchange for shares of the Tocqueville Fund.
8. Expense Paid Indirectly
The Series has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to approximately $4,298 for the year ended December 31,
1998.
9. Subsequent Events
On February 12, 1999, the Fundamental Boards directed Cornerstone to place
a substantial portion of any consulting and licensing fee payments to Lance M.
Brofman ("Brofman") in escrow in order to satisfy FPA's 1998 and 1999 payment
obligations to members of a Settlement Class. The "Settlement Class" consists of
persons and entities that purchased shares of the New York Muni Fund from
January 1, 1992 through and including April 15, 1994; Fundamental U.S.
Government Strategic Income Fund from March 2, 1992 through and including August
11, 1994; and The California Muni Fund from January 1, 1993 through and
including July 31, 1994. Cornerstone is required to place into an escrow account
for the benefit of the Settlement Class, out of the amounts it would otherwise
pay Brofman under certain Consulting and Licensing Agreements, 83-1/3% of any
payments to Brofman until such time as FPA's 1998 and 1999 payments obligations
to the Settlement Class, each in the amount of $102,115, have been paid. On
February 12, 1999, the Fundamental Boards also authorized the release of
$176,157 from an escrow account and from amounts withheld for payment to FPA
pursuant to an agreement with Brofman and FPA, the provisions of which provide
for, among other things, the immediate payment by FPA into an escrow account for
the benefit of members of the Settlement Class. The $176,157 released
represented the sum of: (i) $106,863, the amount previously escrowed by Vincent
J. Malanga on behalf of FPA, FSC and certain of their directors, officers,
shareholders, employees and control persons, following a demand therefor by the
Fundamental Funds' Independent Board Members, and (ii) $69,294, the amount of
management fees withheld for payment to FPA pursuant to action previously taken
by the Fundamental Funds' Independent Board Members.
On March 12, 1999, the shareholders of the Series voted to approve
Cornerstone as the Series' investment adviser, and approved the payment of
management fees earned by Cornerstone during its tenure as interim investment
adviser. Additionally, the shareholders voted to elect five new members to serve
on the Board of Trustees. Separately, the Board of Trustees voted to change the
name of the Fund to Cornerstone Fixed Income Funds, and the name of the Series
to Cornerstone U.S. Government Strategic Income Fund.
On March 31, 1999, the Fund's Board of Trustees approved reimbursing
Cornerstone for its costs incurred while acting as interim manager from
September 29, 1998 to November 30, 1998.
53
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- --------------------------------------------------------------------------------
10. Selected Financial Information
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998* 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 1.41 $ 1.43 $ 1.49 $ 1.37 $ 2.01
-------- -------- -------- -------- --------
Income from investment operations
Net investment income ............................ 0.06 0.10 0.13 0.08 0.14
Net realized and unrealized gain/(loss) on
investments .................................... (0.12) (0.02) (0.06) 0.12 (0.64)
-------- -------- -------- -------- --------
Total from investment operations ......... (0.06) 0.08 0.07 0.20 (0.50)
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income ............. (0.06) (0.10) (0.13) (0.08) (0.14)
Dividends from net realized gains ................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 1.29 $ 1.41 $ 1.43 $ 1.49 $ 1.37
======== ======== ======== ======== ========
Total return ..................................... (4.61%) 5.51% 5.02% 15.43% (25.57%)
Ratios/supplemental data:
Net assets, end of year (000 omitted) ............ $ 4,804 $ 10,030 $ 13,224 $ 15,194 $ 19,020
Ratios to average net assets
Interest expense (a) ........................... 1.45% 2.75% 2.61% 3.00% 2.01%
Operating expenses ............................. 3.60% 5.75% 3.41% 3.05% 2.16%
-------- -------- -------- -------- --------
Total expenses+ (a) ...................... 5.05%++ 8.50% 6.02% 6.05% 4.17%
======== ======== ======== ======== ========
Net investment income+ ......................... 4.79% 6.83% 9.01% 5.91% 8.94%
Portfolio turnover rate .......................... 68.44% 12.55% 12.65% 114.36% 60.66%
</TABLE>
+ These ratios are after expense reimbursement of 1.37%, 2.02% and 1.00% for
each of the years ended December 31, 1997, 1996, and 1995, respectively.
** Net investment income per share represents net investment income divided
by the average shares outstanding throughout the year.
(a) The ratios for each of the years in the three year period ending December
31, 1996 have been reclassified to conform with the 1997 presentations.
++ This ratio would have been 5.11%, net of expenses paid indirectly of
0.06%.
* See Note 2 for changes in investment adviser in 1998.
54
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Fundamental Fixed-Income Fund
Fundamental U.S. Government Strategic Income Fund Series
We have audited the accompanying statement of assets and liabilities
including the statement of investments, of the Fundamental U.S. Government
Strategic Income Fund Series of Fundamental Fixed-Income Fund as of December 31,
1998 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 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, 1998 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
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
Series of Fundamental Fixed-lncome Fund as of December 31, 1998, 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/ McGladrey & Pullen, LLP
New York, New York
February 26, 1999, except for the last two paragraphs of Note 9 as to which the
date is March 31, 1999.
55
<PAGE>
Investment Advisor
Cornerstone Equity Advisors Inc.
67 Wall Street
New York, NY 10019
Independent Auditors
McGladrey & Pullen, LLP
New York, NY 10017
Legal Counsel
Kramer, Levin, Naftalis, & Frankel LLP
919 Third Avenue
New York, NY 10022
These reports and the financial statements contained herein are submitted for
the general information of the shareholders of the Funds. These reports are not
authorized for distribution to prospective investors in the Funds unless
preceded or accompanied by an effective prospectus.
<PAGE>
- --------------------------------------------------------------------------------
Annual Report
December 31, 1998
NEW YORK MUNI FUND
THE CALIFORNIA MUNI FUND
FUNDAMENTAL
FIXED-INCOME FUND
TAX-FREE
MONEY MARKET SERIES
HIGH-YIELD
MUNICIPAL BOND SERIES
FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
[LOGO] FUNDAMENTAL
Fundamental Family of Funds
- --------------------------------------------------------------------------------