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