FUNDAMENTAL FIXED INCOME FUND
US GOVERNMENT STRATEGIC INCOME FUND
Dear Fellow Shareholder:
Fixed income securities prices began to improve in the first half of
calendar 1995. The benchmark Treasury 7.5% "long bond" rose 15.9% after dropping
11.3% last year.Fundamental's U.S. Government Strategic Income Fund improved
much more modestly, registering a 3.42% return for the period.
After 1994's irrational decline in fixed income securities prices, sanity
began to return with the new year. Actually, securities prices bottomed
coincidentally with the November 1994 Congressional elections, as financial
markets seemed to take heart from Republican promises to balance the federal
budget and reverse fifty years of "New Deal" legislation. As the new year
progressed, financial markets became increasingly secure upon mounting evidence
that legislators were actually keeping their promises.
Significant progress toward a balanced budget probably will not be evident
until 1998. But importantly, it appears that the glide path toward balance is
set. Meanwhile, economic growth slowed significantly during this year's first
half, and as growth has slowed, fears of a rise in inflation receded.
Interestingly, despite the bond market's fear of higher inflation in 1994, not
only did inflation not rise, but prospects began to improve for an actual
further decline in future price pressures.
These developments not only eliminated fears that the Federal Reserve would
endlessly tighten credit, but it actually gave rise to an expectation that some
of last year's restraint would be reversed. And indeed, the Federal Reserve
slightly eased its tight grip on credit early in July.
The composition of the U.S. Government Fund portfolio was significantly
altered during the January through June period. The objective was to both
increase the dividend yield of the Fund while reducing volatility of Net Asset
Value. This has been accomplished. The yield has increased and the Fund's per
share price remained relatively stable, fluctuating within a range of seven
cents per share, during the January through June period.
As we look ahead, we expect to be able to maintain or even increase the
Fund's yield. We think the Federal Reserve will continue to gradually reduce
short term interest rates. The result should be a modest widening of the spread
between short and long term interest rates. This should benefit the Fund's
yield. If we are right in our expectation of significant progress toward federal
budget deficit reduction, the Fund's Net Asset Value should improve as well. We
thank you for your continued support, and we look forward to continuing to serve
you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
1
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Cash .............................................. $ 141,901
Investment in securities, at value (cost
$21,900,071) (Notes 5 and 6) .................... 24,033,875
Receivables:
Interest ........................................ 136,386
Capital shares sold ............................. 200
-----------
Total assets ................................ 24,312,362
-----------
LIABILITIES
Notes payable ..................................... 87,036
Options written at value (premiums
received $233,825) (Note 5) ..................... 224,298
Securities sold subject to repurchase
(Note 6) ........................................ 7,638,817
Payables:
Investments purchased ........................... 279,308
Capital stock redeemed .......................... 1,000
Dividends declared .............................. 22,460
Accrued expenses ................................ 148,870
Variation margin ................................ 23,438
-----------
Total liabilities ........................... 8,425,227
-----------
NET ASSETS consisting of:
Accumulated net realized loss ..................... $(18,433,796)
Unrealized appreciation of securities ............. 2,133,804
Unrealized appreciation of options
written ......................................... 9,527
Unrealized appreciation of open future
contracts ....................................... 22,278
Paid-in-capital applicable to
11,515,432 shares of beneficial
interest ........................................ 32,155,322
------------
$15,887,135
===========
NET ASSET VALUE PER SHARE ........................... $1.38
=====
(Right Column)
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income, net of $248,407 of
interest expense ............................... $ 701,259
EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ......................... $ 64,109
Custodian and accounting fees .................... 14,758
Transfer agent fees .............................. 25,981
Professional fees ................................ 90,627
Trustees' fees ................................... 10,272
Printing and postage ............................. 941
Interest on bank borrowing ....................... 15,359
Distribution expenses ............................ 21,370
Other ............................................ 7,334
-----------
Total expenses ............................. 250,751
------------
Net investment income ...................... 450,508
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on:
Investments .................................... (11,213,765)
Future and options on futures .................. (3,270,409) (14,484,174)
-----------
Change in unrealized appreciation
of investments, options and
futures contracts for the period:
Investments .................................. 14,218,194
Open option contracts written ................ 28,384
Open futures contracts ....................... 333,449 14,580,027
----------- ------------
Net gain on investments .......................... 95,853
------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS .................................. $ 546,361
============
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, 1995 December
(Unaudited) 31, 1994
------------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ..................................................................... $ 450,508 $ 3,223,702
Net realized gain (loss) on investments ................................................... (14,484,174) 6,321,524
Unrealized appreciation (depreciation) on investments, options and futures contracts ...... 14,580,027 (21,438,948)
------------ ------------
Net increase (decrease) in net assets from operations ............................... 546,361 (11,893,722)
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ......................................................................... (450,508) (3,233,702)
CAPITAL SHARE TRANSACTIONS (Note 4) ......................................................... (3,299,058) (028,974,362)
------------ ------------
Total decrease ...................................................................... (3,203,205) (44,091,786)
NET ASSETS
Beginning of period ....................................................................... 19,090,340 63,182,126
------------ ------------
End of period ............................................................................. $ 15,887,135 $ 19,090,340
============ ============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF OPTIONS WRITTEN
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Number of Expiration
Contracts(D)(D) Options Written Month Value
- --------------- --------------- ---------- -----
145 U.S. Treasury Bonds, Call @ $114 ..... September 1995 $224,298
(D)(D)Each contract represents $100,000 face value of U.S. Treasury Bond
Futures.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets from operations ............................................................. $ 546,361
Adjustments to reconcile net increase in net assets from operations to
net cash provided by operating activities:
Purchase of investment securities ...................................................................... (24,539,038)
Proceeds on sale of securities ......................................................................... 32,846,705
Premiums received for options written .................................................................. 595,312
Premiums paid to close options written ................................................................. (1,798,036)
Decrease in interest receivable ........................................................................ 347,545
Decrease in variation margin receivable ................................................................ 56,251
Decrease in accrued expenses ........................................................................... (11,465)
Net accretion of discount on securities ................................................................ (180,572)
Net realized (gain) loss:
Investments .......................................................................................... 11,213,765
Options written ...................................................................................... 1,023,372
Unrealized appreciation on securities and options written for the period .............................. (14,246,578)
------------
Total adjustments .................................................................................. 5,307,261
------------
Net cash provided by operating activities .......................................................... 5,853,622
------------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Net repayments on sale of securities sold subject to repurchase .......................................... (1,762,591)
Net repayments of note payable ........................................................................... (185,404)
Proceeds on shares sold .................................................................................. 1,252,912
Payment on shares repurchased ............................................................................ (4,949,899)
Cash dividends paid ...................................................................................... (106,971)
------------
Net cash provided by financing activities .......................................................... (5,751,953)
------------
Net increase in cash ............................................................................... 101,669
CASH AT BEGINNING OF PERIOD ................................................................................ 40,232
------------
CASH AT END OF PERIOD ...................................................................................... $ 141,901
============
<FN>
*Non-cash financing activities not included herein consist of reinvestment of dividends of $389,729.
Cash payments for interest expense totaled $16,996 for the period.
</FN>
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
--------- -------- -------- -----
United States Treasury Securities-40.47%
United States Treasury Bonds
6,000,000 9.00% 11/15/18 $ 7,603,122
4,300,000* 0.00% 11/15/06 2,073,671
85,000* 0.00% 11/15/03 49,974
-----------
(Cost $8,589,506) 9,726,767
-----------
United States Agency Backed Securities-59.53%
Federal Home Loan Mortgage Corporation
843,717 D1 9.25% 08/15/23 901,815
126,744 6.50% 12/25/23 105,594
FNMA-Federal National Mortgage Assoc.
4,142,203 D1 TTIB** 03/25/23 3,557,117
490,760 D1 TTIB** 05/25/23 455,248
980,392 TTIB** 11/25/23 811,392
1,000,000 8.75% 12/25/23 1,103,550
2,194,000 D1 9.00% 04/25/23 2,200,648
1,453,000 9.00% 02/25/24 1,460,991
Department of Navy, FNMA Guaranteed
100,000 D1 0.00% 04/01/09 37,922
REFCO-Resolution Funding Corporation
600,000 0.00% 07/15/10 216,286
SLMA-Student Loan Marketing Association
1,595,000 0.00% 05/15/14 347,876
TVA-Tennessee Valley Authority
1,000,000* 0.00% 04/15/12 280,264
-----------
(Cost $11,018,510) 11,478,703
-----------
FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities
86,000 03/07/08 35,786
100,000* 11/02/12 28,717
100,000* 05/02/14 25,552
125,000 05/02/15 29,529
200,000 D1 11/02/18 36,215
283,000 D1 11/01/07 120,843
148,000* 05/11/12 44,056
99,000* 11/11/13 26,225
119,000* 11/11/14 29,158
320,000 D1 11/11/17 62,236
281,000* 05/30/14 71,364
261,000* 11/30/15 58,991
164,000* 11/30/16 34,319
133,000 D1 02/08/08 55,687
76,000* 02/08/10 27,071
133,000 D1 02/08/16 29,598
207,000 08/08/16 44,318
167,000* 08/08/17 33,100
4
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
<TABLE>
PORTFOLIO OF INVESTMENTS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
--------- -------- -------- -----
FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities (continued)
<S> <C> <C>
198,000* 04/06/09 $ 75,623
138,000 12/06/07 58,599
100,000* 08/03/18 18,436
182,000* 06/06/15 42,699
428,000* 06/16/16 92,800
109,000 D1 12/06/17 21,090
137,000* 08/03/15 31,771
208,000 02/03/16 46,341
138,000* 02/03/11 45,431
64,000* 04/06/12 19,196
250,000 10/06/14 61,732
205,000 D1* 04/06/17 41,736
106,000 D1 10/06/17 20,761
183,000 04/05/09 69,910
259,000* 10/05/15 59,255
100,000 D1 10/05/17 19,590
217,000 D1 04/05/18 40,982
574,000 D1 10/05/18 104,506
375,000* 04/05/19 65,821
74,000 04/05/15 17,576
592,000 D1 04/05/16 130,079
304,000* 04/05/16 66,797
100,000 10/05/16 21,166
110,000* 06/06/04 61,024
240,000* 10/06/17 47,515
385,000* 06/06/19 66,896
984,000 09/26/15 225,595
135,000 04/06/04 75,842
444,000 D1 08/08/16 95,060
100,000 D1 02/08/17 20,603
200,000* 04/06/17 40,718
129,000 10/06/17 25,266
108,000 D1 11/30/17 20,924
310,000* 02/03/11 102,055
100,000 D1 02/03/12 30,411
118,000* 08/03/16 25,289
144,000 08/03/18 26,545
(Cost $2,292,055) 2,828,405
-----------
Total investments (Cost $21,900,071(DD)) $24,033,875
-----------
<FN>
**Two-Tiered Index Floating Rate Bonds (TTIB) are instruments whose interest
rate are fixed over various ranges of the interest rate on another security
or the value of an index, but variable within certain ranges of the same
security or index.
(D)Collateral or partial collateral for securities sold subject to repurchase
(Note 6)
*Segregated, in whole or part, as initial margin for futures contracts (Note
5)
(DD)Cost is approximately the same for Federal income tax purposes
</FN>
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
operates as a series company currently issuing three classes of shares of
beneficial interest, the Tax-Free Money Market Series, the High-Yield Municipal
Bond Series and the U.S. Government Strategic Income Fund (the Series). Each
series is considered a separate entity for financial reporting and tax purposes.
Valuation of Securities-Investments are stated at value based on prices
provided by a pricing service which takes into account appropriate factors
such as institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices, because such valuations are believed to reflect
more accurately the fair value of such securities. Securities not priced in
this manner are valued at the mean between the most recently quoted bid and
ask prices provided by dealers. Securities for which quotations are not
readily available are valued in good faith by persons designated by the
Board of Trustees.
Futures Contracts-Initial margin deposits with respect to these
contracts are maintained by the Fund's custodian in segregated asset
accounts. Subsequent changes in the daily valuation of open contracts are
recognized as unrealized gains or losses. Variation margin payments are made
or received as daily appreciation or depreciation in the value of these
contracts occurs. Realized gains or losses are recorded when a contract is
closed.
Repurchase Agreements-The Series may invest in repurchase agreements,
which are agreements pursuant to which securities are acquired from a third
party with the commitment that they will be repurchased by the seller at a
fixed price on an agreed upon date. The Series may enter into repurchase
agreements with banks or lenders meeting the creditworthiness standards
established by the Board of Trustees. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. 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. Original issue
discounts and premiums are amortized over the life of the respective
securities. Premiums are charged against interest income and original issue
discounts are accreted to interest income.
6
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
2. Investment Advisory Fees and Other Transactions With Affiliates
The Series has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement the Manager serves as investment
adviser to the Series and is responsible for the overall management of the
business affairs and assets of the Series subject to the authority of the Fund's
Board of Trustees. In compensation for the services provided by the Manager, the
Series will pay an annual management fee in an amount equal to .75% of the
Series' average daily net assets up to $500 million, .725% on the next $500
million, and .70% per annum on assets over $1 billion. The Manager is required
to reimburse the Series for its expenses (excluding interest, taxes, brokerage
fees and extraordinary expenses) to the extent that such expenses, including the
management fees, exceed the limits on investment company expenses prescribed in
any state in which the Series' shares are qualified for sale.
The Series has adopted a Distribution and Marketing Plan, pursuant to Rule
12b-1, promulgated under the Investment Company Act of 1940, under which the
Series pays to Fundamental Service Corporation (FSC), an affiliate of the
Manager, a fee which is accrued daily and paid monthly at an annual rate of
0.25% of the Series' average daily net assets. Amounts paid under the plan are
to compensate FSC for the services it provides and the expenses it bears in
distributing the Series' share's to investors. The amount incurred by the Series
pursuant to the agreement for the six months ended June 30, 1995 is set forth in
the statement of operations.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of June 30, 1995 there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid-in amounted to $32,155,322.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------------------- -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold .......................... 902,462 $1,253,112 7,503,044 $13,099,717
Shares issued on reinvestment of
dividends .......................... 287,427 398,729 1,398,152 2,335,836
Shares redeemed ...................... (3,571,365) (4,950,899) (26,452,420) (44,409,915)
---------- ----------- ----------- ------------
Net decrease ......................... (2,381,476) ($3,299,058) (17,551,224) ($28,974,362)
========== =========== =========== ============
</TABLE>
5. Complex Services, Off Balance Sheet Risks and Investment Transactions
Two-Tiered Index Floating Rate Bonds (TTIB):
The Fund invests in variable rate securities commonly called "TTIBs". The
interest rate on these securities are fixed over various ranges of the interest
rate on another security or the value of an index, but variable within certain
ranges of the same security or index. Changes in interest rate on the other
security or index affect the rate paid on the TTIB, and the TTIB's price will be
more volatile than that of a fixed-rate bond.
Futures Contracts and Options on Futures Contracts:
The Fund invests in futures contracts consisting primarily of US Treasury
Bond Futures. A futures contract is an agreement between two parties to buy and
sell a security for a set price on a future date. Futures contracts are traded
on designated "contract markets" which through their clearing corporations,
guarantee performance of the contracts. In addition the fund invests in options
on US Treasury Bond Futures which gives the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract which requires the
parties to the contract to buy and sell a security on a set date, an option on a
7
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
futures contract entitles its holder to decide before a future date whether to
enter into such a futures contract. Both types of contracts are marked to market
daily and changes in valuation will affect the net asset value of the Fund.
The Fund's principal objective in holding or issuing derivative financial
instruments is as a hedge against interest-rate fluctuations in its municipal
bond portfolio, and to enhance its total return. The Fund's principal objective
is to maximize the level of interest income while maintaining acceptable levels
of interest-rate and liquidity risk. To achieve this objective, the Fund uses a
combination of derivative financial instruments principally consisting of US
Treasury Bond Futures and Options on US Treasury Bond Futures. Typically the
Fund sells treasury bond futures contracts or writes treasury bond option
contracts. These activities create off balance sheet risk since the Fund may be
unable to enter into an offsetting position and under the terms of the contract
deliver the security at a specified time at a specified price. The cost to the
Fund of acquiring the security to deliver may be in excess of recorded amounts
and result in a loss to the Fund. For the six months ended June 30, 1995, the
Fund had daily average notional amounts outstanding of approximately $13,032,044
and $18,456,746 of short positions on US Treasury Bond Futures and Options
Written on US Treasury Bond Futures respectively. Realized gains and losses from
these transactions are stated separately in the Statement of Operations.
The Fund had the following open futures contracts at June 30, 1995.
Principal Expiration Unrealized
Type Amount Position Month Gain
---- --------- -------- ---------- ----------
U.S. Treasury Bond ....... $5,000,000 Short 9/95 $22,278
Portfolio securities with an aggregate value of approximately $3,564,576
have been segregated as initial margin as of June 30, 1995.
In addition, the following table summarizes option contracts written by the
Series for the six months ended June 30, 1995:
Number of Premiums Realized
Contracts Received Cost Loss
--------- -------- ---- ----
Contracts outstanding
December 31, 1994 .......... 375 $413,175
Options written .............. 485 595,314
Contracts closed or expired .. 715 774,664 $1,798,036 $(1,023,372)
Contracts outstanding
June 30, 1995 ............... 145 $233,825
=== ========
Other Investment Transactions
For the six months ended June 30, 1995, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$22,066,761 and $24,062,831, respectively.
As of June 30, 1995, net unrealized appreciation of portfolio securities
amounted to $2,133,804 composed of unrealized appreciation of $2,133,804 and
unrealized depreciation of $0. Net unrealized appreciation of options written
amounted to $9,527 composed of unrealized appreciation of $30,670 and unrealized
depreciation of $21,144.
6. Borrowing
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.
The Series enters into reverse repurchase agreements collateralized by
portfolio securities equal in value to the repurchase price. Portfolio
securities with an aggregate value of approximately $7,945,915 have been
segregated as collateral for securities sold subject to repurchase as of June
30, 1995.
The maximum month-end and the average amount of borrowing outstanding under
these arrangements during the six months ended June
30, 1995 were approximately $9,846,709 and $8,098,148.
8
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
7. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended Year Year February 18,
June 30, Ended Ended 1992* to
1995 December 31, December 31, December 31,
(Unaudited) 1994 1993 1992
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ....................... $ 1.37 $ 2.01 $ 2.02 $ 2.00
------ ------ ------ ------
Income from investment operations
Net investment income ...................................... .037 0.14 0.16 0.15
Net realized and unrealized gain/(loss) on investments ..... .010 (0.64) - 0.02
------ ------ ------ ------
Total from investment operations ................... .047 (0.50) 0.16 0.17
------ ------ ------ ------
Less distributions
Dividends from net investment income ....................... (.037) (0.14) (0.16) (0.15)
Dividends from net realized gains .......................... - - (0.01) -
------ ------ ------ ------
Net asset value, end of period ............................. $ 1.38 $ 1.37 $ 2.01 $ 2.02
====== ====== ====== ======
Total return ............................................... 3.42% (25.57%) 8.14% 10.76%**
Ratios/supplemental data:
Net assets, end of period (000 omitted) .................... 15,887 19,020 63,182 40,500
Ratios to average net aset (annualized):
Interest expense ......................................... .18% 0.12% 0.05% 0.09%
Operating expenses ....................................... 2.75% 2.16% 1.39% 0.96%
------ ------ ------ ------
Total expenses ..................................... 2.93% 2.28% 1.44%(D) 1.05%(D)
====== ====== ====== ======
Net investment income .................................... 5.27% 8.94% 7.85% 8.50%
Portfolio turnover rate .................................... 2.83% 60.66% 90.59% 115.39%
Borrowings
Amount outstanding at end of period (000 omitted) .......... 7,726 9,674 31,072 19,666
Average amount of debt outstanding during the period
(000 omitted) ............................................ 8,098 16,592 28,756 13,779
Average number of shares outstanding during the period
(000 omitted) ............................................ 12,341 21,436 28,922 12,683
Average amount of debt per share during the period ......... .66 .77 .99 1.09
<FN>
*Commencement of operations.
**Annualized.
(D)These ratios are after expense reimbursement of .13% for the year ended December 31, 1993, and 1.05% for the period of
February 18, 1992 to December 31, 1992.
</FN>
</TABLE>
8. Contingencies
The Fund has been named as a defendant in a class action lawsuit alleging
that the Fund invested in certain derivative financial instruments that were
inconsistent with the Fund's stated investment objectives. The suit claims that
the defendants, which include the Fund's investment advisor, distributor, and
certain control persons, are liable for damages because there existed material
misstatements or omissions in the prospectuses that rendered them misleading.
Management has entered into negotiatons with the plaintiffs who have
consented to a series of adjournments of all operative dates in the litigation.
Management is hopeful that these negotiations will lead to a resolution; if that
is not possible, the Fund intends to contest the case vigorously. This lawsuit
is in a preliminary state and involves significant complexities which result in
an inability to determine whether any liability will result and if so, whether
any such liability would be significant to the financial position of the Fund.
Accordingly, no amount has been accrued in the financial statements with resect
to this matter.
In addition, management is cooperating in a private investigation by a
regulatory authority concerning the sale of the Fund's shares.
9
<PAGE>
(Left Column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(Right Column)
Semi-Annual Report
June 30, 1995
(Unaudited)
(LOGO) FUNDAMENTAL
FIXED-INCOME FUND
Tax-Free
Money Market Series
(LOGO) FUNDAMENTAL
Fundamental Family of Funds
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value
(cost $76,733,613) ........................................... $76,733,613
Cash ........................................................... 526,875
Receivables:
Interest ..................................................... 279,008
Capital shares sold .......................................... 505,679
-----------
Total assets .......................................... 78,045,175
-----------
LIABILITIES
Payables:
Capital shares redeemed ...................................... 45,000
Dividends .................................................... 1,360
Accrued expenses ............................................... 183,730
-----------
Total liabilities ..................................... 230,090
-----------
NET ASSETS equivalent to $1.00 per share on
77,823,973 shares of beneficial interest
outstanding (Note 4) ........................................... $77,815,085
===========
(Right Column)
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ......................................... $849,186
EXPENSES (Notes 2 and 3)
Investment advisory fees ................................ $112,437
Custodian and accounting fees ........................... 2,082
Transfer agent fees ..................................... 26,184
Trustees' fees .......................................... 32,961
Professional fees ....................................... 26,928
Distribution fees ....................................... 112,437
Interest ................................................ 2,624
Postage and printing .................................... 3,271
Registration ............................................ 7,120
Other ................................................... 17,663
--------
Total expenses ................................ 343,707
--------
NET INCREASE IN NET ASSETS FROM
OPERATIONS .............................................. $505,479
========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
June 30, 1995 December 31,
(Unaudited) 1994
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income .................................. $ 505,479 $ 870,365
Net realized gain (loss) on investments ................ - 401
----------- ----------
Net increase in net assets from operations ..... 505,479 870,766
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ...................................... (505,479) (870,365)
CAPITAL SHARE TRANSACTIONS (Note 4) ...................... 68,811,537 3,173,383
----------- ----------
Total increase (decrease) ...................... 68,811,537 3,173,784
NET ASSETS:
Beginning of period .................................... 9,003,548 5,829,764
----------- ----------
End of period .......................................... $77,815,085 $9,003,548
=========== ==========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue(o) Value
- ----------- -------- -----
<S> <C> <C>
$4,750,000 Burke County, GA, Development Authority PCR, Georgia Power Co, Daily
VRDN*, 07/01/24 .................................................................... $ 4,750,000
92,000D1 Clermont County, OH, HFR, Mercy Health Care Project, MBIA Insured, Weekly
VRDN*, 12/01/15 .................................................................... 92,000
80,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, LOC Wells Fargo Bank,
Monthly VRDN*, 12/01/09 ............................................................ 80,000
200,000 Delaware County, PA, SWDF, Scott Paper Project, LOC Fuji Bank, Weekly
VRDN*, 12/01/18 .................................................................... 200,000
1,600,000 District of Columbia, General Fund Recovery, LOC Westdeutsche Landesbank,
Daily VRDN*, 06/01/03 .............................................................. 1,600,000
4,900,000 District of Columbia, LOC Bank of Novia Scotia, Daily VRDN*, 10/01/07 ................ 4,900,000
6,700,000 District of Columbia, RB, American Association for Advancement of Science,
LOC Nations Bank, Daily VRDN*, 10/01/22 ............................................ 6,700,000
200,000 Fulton County, GA, PCR, General Motors Project, Weekly VRDN*, 04/01/10 ............... 200,000
155,000 Genesee County, NY, IDR, Orcon Industries, AMT, LOC Fleet Bank, Monthly
VRDN*, 12/01/98 .................................................................... 155,000
300,000 Harris County, TX, Health Facilities Development Corp., The Methodist Hospital,
Morgan Guaranty Liquidity, Daily VRDN*, 12/01/25 .................................. 300,000
1,400,000 Hillsborough County, FL, IDA, PCR Tampa Electric Company, Gannon Project,
Daily VRDN*, 05/15/18 .............................................................. 1,400,000
300,000 Illinois Educational Facility Authority, RB, Art Institute of Chicago, Weekly
VRDN*, 03/01/27 .................................................................... 300,000
300,000D1 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank, Weekly
VRDN*, 09/01/15 .................................................................... 300,000
500,000 Illinois HFAR, West Suburban Hospital Medical Center, LOC First Chicago Bank,
Weekly VRDN*, 07/01/05 ............................................................. 500,000
300,000 Irvine Ranch Water District, Orange County CA, LOC Sumitomo Bank, Daily
VRDN*, 10/01/99 .................................................................... 300,000
3,700,000 Irvine Ranch Water District, Orange County Consolidated, RB, LOC Bank
America, Daily VRDN*, 07/03/95 ..................................................... 3,700,000
215,000 Jacksonville, FL, Electric Authority Revenue, Prerefunded @ 101.5 on 10/01/95,
7.250 .............................................................................. 219,630
1,600,000 Louisiana State Offshore Terminal Authority Deepwater Port, LOC Union Bank
Switzerland, Daily VRDN*, 09/01/08 ................................................. 1,600,000
4,800,000 Louisiana Recovery District, Sales Tax Bond, MBIA Insured, SPA Swiss Bank,
Daily VRDN*, 4.350%, 07/01/98 ...................................................... 4,800,000
100,000D1 Maryland Department of Housing & Community Development, Single Family
Program, Putable Semiannaully, 04/01/17, 4.350% .................................... 100,000
1,200,000 Massachusetts State Updates, LOC National Westminster Bank, Daily VRDN*,
12/01/97 ........................................................................... 1,200,000
</TABLE>
2
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue(o) Value
- ------------ -------- -----
<S> <C> <C>
$ 200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp., Weekly
VRDN*, 07/07/95 .................................................................... $ 200,000
6,800,00 McIntosh, AL, PCR, Ciba Geigy Project, LOC Credit Suisse, Daily VRDN*,
07/01/04 ........................................................................... 6,800,000
200,000 Missouri, Third Street Building Project, Weekly VRDN*, 08/01/99 ...................... 200,000
300,000 Missouri, PCR, Monsanto Project, Weekly VRDN*, 02/01/09 .............................. 300,000
300,000D1 Montgomery, AL, Baptist Medical Center, Special Care Facilities Financing
Authority, AMBAC Insured, Weekly VRDN*, 12/01/30 ................................... 300,000
200,000D1 Nebraska Higher Education Loan Program, SLMA, MBIA Insured, SPA, Weekly
VRDN*, 12/01/15 .................................................................... 200,000
3,200,000 New York City, NY, Series D, SPA Citibank, Daily VRDN*, 08/01/95 ..................... 3,200,000
13,500,000 New York City, NY, Municipal Water Finance Authority, FGIC Insured, Daily
VRDN*, 06/15/24 .................................................................... 13,500,000
300,000 Ohio State Building Authority, Correctional Facilities, Prerefunded @ 103 on
10/01/95, 9.100% ................................................................... 311,979
2,600,000 Peninsula, VA Port Authority, Shell Oil Company, Daily VRDN*, 12/01/05 ............... 2,600,000
100,000 Pennsylvania Higher Education Facilities Authority, Carnegie Mellon Project,
Weekly VRDN*, 11/01/15 ............................................................. 100,000
200,000 Petaluma, CA, City Elementary School District, TAN, 4.350%, 07/05/95 ................. 200,004
4,000,000 Port Authority of NY & NJ, Special Obligation Revenue, SPA Morgan Guaranty,
Daily VRDN*, 05/01/19 .............................................................. 4,000,000
6,800,000 Power County, ID, PCR, FMC Corporation, LOC Barclays Bank, Daily VRDN*,
12/01/10 ........................................................................... 6,800,000
125,000 Scioto County, OH, HFR, VHA Central Capital Project, AMBAC Insured, Weekly
VRDN*, 12/01/25 .................................................................... 125,000
200,000D1 Wake County, NC, PCR, Carolina Power & Light Project, LOC Sumitomo Bank,
Weekly VRDN*, 10/01/15 ............................................................. 200,000
4,300,000 Unita County, WY, PCR, Chevron Project, Daily VRDN*, 12/01/22 ........................ 4,300,000
-----------
Total Investments (Cost $76,733,613**) ............................................... $76,733,613
===========
<FN>
*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.
D1 Approximately $1,192,000 market value of securities are segregated in whole or in part as collateral securing
a line of credit.
</FN>
</TABLE>
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Legend
(o)Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
HFA Housing Finance Authority
HFAR Health Facilities Authority Revenue
HFDC Health Facilities Development Corporation
HFR Hospital Facilities Revenue
IDR Industrial Development Revenue
LOC Letter of Credit
MBIA Municipal Bond Insurance Assurance Corporation
PCR Pollution Control Revenue
RB Revenue Bond
SLMA Student Loan Marketing Association
SPA Stand By Bond Purchase Agreement
SWDF Solid Waste Disposal Facility
TAN Tax Anticipation Note
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
acts as a series company currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield Municipal Bond Series
and the U.S. Government Strategic Income Fund. Each series is considered a
separate entity for financial reporting and tax purposes. The following is a
summary of significant accounting policies followed in the preparation of the
Series' financial statements:
Valuation of Securities:
Investments are stated at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any premium or discount is
amortized on a constant basis to the maturity of the instrument.
Amortization of premium is charged to income, and accretion of market
discount is credited to unrealized gains. The maturity of investments is
deemed to be the longer of the period required before the Fund is
entitled to receive payment of the principal amount or the period
remaining until the next interest adjustment.
Federal Income Taxes:
It is the Series' policy to comply with the requirements of the Internal
Revenue Code applicable to "regulated investment companies" and to
distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment income and
pays such dividends on the last Wednesday of each month. Distributions
of net capital gains are made annually, as declared by the Fund's Board
of Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General:
Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gains and losses from the
sale of securities are recorded on an identified cost basis.
2. Investment Advisory Fees and Other Transactions with Affiliates
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the Tax-Free Money Market Series and is responsible for the overall
management of the business affairs and assets of the Series subject to the
authority of the Fund's Board of Trustees. In compensation for the services
provided by the Manager the Series will pay an annual management fee in an
amount equal to 0.5% of the Series' average daily net assets up to $100 million
and decreasing by .02% for each $100 million increase in net assets down to 0.4%
of net assets in excess of $500 million. The Manager is required to reimburse
the Series on a monthly basis for its expenses (exclusive of interest, taxes,
brokerage fees and expenses paid pursuant to the Plan of Distribution, and
extraordinary expenses) to the
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
extent that such expenses, including the management fee, exceed the limits on
investment company expenses prescribed in any state in which the Series' shares
are qualified for sale. No expense reimbursement was required for the six months
ended June 30, 1995.
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, under which the Series
pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a
fee, which is accrued daily and paid monthly, at an annual rate of 0.5% of the
Series' average daily net assets. The amounts paid under the plan compensate FSC
for the services it provides and the expenses it bears in distributing the
Series' shares to investors. Distribution fees for the six months ended June 30,
1995 are set forth in the Statement of Operations.
The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of
the Manager, for the services it provides under a Transfer Agent and Service
Agreement. Transfer agent fees for the six months ended June 30, 1995 are set
forth in the Statement of Operations.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each Fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of June 30, 1995 there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid in amounted to $77,823,973.
Transactions in shares of beneficial interest, all at $1.00 per share were as
follows:
Six Months Year ended
Ended December 31,
June 30, 1995 1994
------------- --------------
Shares sold .................................. $1,582,529,500 $3,016,643,058
Shares issued on reinvestment of dividends ... 511,278 841,613
Shares redeemed .............................. (1,514,229,241) (3,014,311,288)
-------------- --------------
Net increase (decrease) .................... $ 68,811,537 $ 3,173,383
============== ==============
5. Line of Credit
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.
The maximum month-end and the average borrowings outstanding during the six
months ended June 30, 1995 under this credit arrangement were approximately
$500,000 and $59,386, respectively.
6
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
6. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, 1995 ---------------------------------------
(Unaudited) 1994 1993 1992 1991
----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA AND RATIOS
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Period .......................... $ 1.00 $1.00 $1.00 $1.00 $1.00
------- ------ ------ ------ ------
Income from investment operations:
Net investment income ......................................... 0.012 0.017 0.014 .028 .047
------- ------ ------ ------ ------
Less Distributions:
Dividends from net investment income .......................... (0.012) (0.017) (0.014) (.028) (.047)
------- ------ ------ ------ ------
Net Asset Value, End of Period ................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ====== ======
Total Return .................................................. 1.17% 1.69% 1.62% 2.79% 4.86%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ....................... 77,815 9,004 5,830 32,488 8,310
Ratios to Average Net Assets (annualized):
Expenses .................................................... 1.53% 0.91%(D) .95%(D) .42%(D) .05%(D)
Net investment income ....................................... 2.25% 1.55% 1.25% 2.76% 4.74%
BANK LOANS
Amount outstanding at end of period
(000 omitted) ............................................... $ - $ 451 $ 290 $ 20 $ 58
Average amount of bank loans outstanding during the period
(000 omitted) ............................................... $ 59 $ 53 $ 111 $ 69 $ 124*
Average number of shares outstanding during the period (000
omitted) .................................................... 45,348 56,267 25,786 7,980 6,984*
Average amount of debt per share during the period ............ $ .001 $ .001 $.004 $.009 $.018
<FN>
*Based on month end average loans or shares.
(D)These ratios are after expense reimbursements of .44%, .67%, 1.66%, and 1.57%, for each of the years ended
December 31, 1994, 1993, 1992 and 1991, respectively.
</FN>
</TABLE>
7
<PAGE>
(Left Column)
FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(Right Column)
Semi-Annual Report
June 30, 1995
(Unaudited)
(LOGO) FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
(LOGO) FUNDAMENTAL
Fundamental Family of Funds
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL BOND SERIES
Dear Shareholder:
Fixed income security prices began to recover in the first half of calendar
1995. The benchmark Treasury 7.5% "long bond" rose 15.9% after dropping 11.3%
last year. Over this period, the Bond Buyer Index of forty actively traded
investment grade municipal bonds rose by only 7.3%.
After 1994's irrational decline in fixed income securities prices, sanity began
to return with the new year. Actually securities prices bottomed coincidentally
with the November 1994 Congressional elections, as financial markets seemed to
take heart from Republican promises to balance the federal budget and reverse
fifty years of "New Deal" legislation. As the new year progressed, financial
markets became increasingly secure upon mounting evidence that legislators were
actually keeping their promises.
Significant progress toward a balanced budget probably will not be evident until
1998. But importantly, it appears that the glide path toward balance is set.
Meanwhile, economic growth slowed significantly during this year's first half,
and as growth has slowed, fears of a rise in inflation receded. Interestingly,
despite the bond market's fear of higher inflation in 1994, not only did
inflation not rise, but prospects began to improve for an actual further decline
in future price pressures.
These developments not only eliminated fears that the Federal Reserve would
endlessly tighten credit, but it actually gave rise to an expectation that some
of last year's restraint would be reversed. And indeed, the Federal Reserve
slightly eased its tight grip on credit early in July.
With interest rate pressures reversing, and bond prices appreciating,
Fundamental's High Yield Municipal Bond Fund racked up a 13.6% total return for
the six month period ending June 30, 1995. This far exceeded the 7.3% increase
in the Bond Buyer municipal index, and it was the highest return for all High
Yield municipal funds.
Fundamental's High Yield Municipal Bond Fund benefited from the big decline in
municipal issuance that has been in progress over the past two years. But like
all municipal bonds, high yield municipal bonds were negatively impacted during
the spring as government officials began discussing reforms to the federal
income tax system. The so-called "flat tax" seemed to receive the most
attention. In a flat tax system all income would be taxed at the same rate, and
in its most extreme form all deductions would be eliminated, including those for
real estate taxes, mortgage interest, municipal bond interest, and state and
local income taxes.
1
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL BOND SERIES
The "Flat Tax" is far from being enacted, and in our view it is unlikely to ever
be enacted. But merely mentioning the elimination of municipal bond interest
deductions hurt the municipal bond market, and it caused municipal bonds to
underperform. We think this is creating an opportunity for investors because
municipal bond prices have already adjusted to a flat tax. So, as tax hysteria
subsides, it is reasonable to believe that municipal bonds will perform on a par
with Treasuries, with the distinct possibility that municipal bonds will
outperform Treasuries going forward.
Easing fears of tax reform, a relative scarcity of tax-free securities, and the
positive fundamentals of slow economic growth and low inflation should enable
the fixed income market and the Fundamental High Yield Fund to generate strong
returns for the remainder of the year. We thank you for your continued trust,
and we look forward to continuing to serve you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
2
<PAGE>
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Investment in securities at value (Note 5) (cost $1,497,445) $ 1,254,912
Interest receivable 19,575
------------
Total assets 1,274,487
------------
Liabilities
Notes payable 10,733
Dividend payable 969
Accrued expenses 21,862
Payable for shares redeemed 16
------------
Total liabilities 33,580
------------
Net Assets consisting of:
Accumulated net realized loss $ (112,318)
Unrealized depreciation of securities (242,533)
Paid-in-capital applicable to 189,205
shares of beneficial interest 1,595,758
------------
$ 1,240,907
============
Net asset value per share $ 6.56
============
See Notes to Financial Statements.
3
<PAGE>
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Investment Income
Interest income $ 41,885
Expenses (Notes 2, 3 and 6)
Investment advisory fees $ 4,398
Custodian and accounting fees 15,958
Transfer agent fees 3,104
Trustee fees 420
Distribution fees 2,749
Professional fees 21,002
Printing and postage 6,322
Other 1,832
--------
55,786
Less: Expenses waived or reimbursed by
the manager and affiliates (41,888)
Total expenses 13,898
---------
Net investment income 27,987
Realized and unrealized gain on investments
Net realized gain on investments 46,613
Change in unrealized depreciation of
investments for the year 62,231
--------
Net gain on investments 108,844
---------
Net increase in net assets from operations $ 136,831
=========
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
June 30, 1995
(Unaudited)
Par Value Security Description(CK) Value
- --------------------------------------------------------------------------------
40,000 Allegheny County, PA, IDA, AFR, USAir Inc., 8.875, 3/01/21 40,734
50,000 Angels, CA, Improvement Bond Act of 1915, Greenhorn Creek,
Association, 7.300, 9/02/21 49,078
35,000(DD) Babylon, NY, IDA, RFR, Babylon Recycling Center, 8.875,
3/01/11 30,796
40,000 Brookhaven, NY, IDA, CFR, Dowling College, 06.750, 3/01/23 40,220
35,000 Cass County, MO, IDA, 7.375, 10/01/22 35,407
250,000 Colorado Health Facilities Authority, RHR, Liberty Heights
Project, ETM, CAB, 7/15/24 32,318
50,000 Decatur, GA, Downtown Development Authority, IDR, Decatur
Hotel Project, AMT, 8.750, 11/01/16 50,000
500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 1/01/26 57,800
50,000(DD) Franklin County, FL, IDA, Franklin Shipbuilding Project,
10.50, 4/01/08 12,612
45,000 Illinois Health Facilities Authority, Midwest Physician Group
Ltd. 45,896
Project, RB, 8.125, 1/15/19
35,000 Indianapolis, IN, RB, Robin Run Village Project,
7.625,10/01/22 37,313
50,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State
Osteopathic, 8.250, 12/15/14 51,621
50,000 Los Angeles, CA, Regional Airport, Continental Airlines, AMT,
9.250, 8/01/24 53,845
35,000 Maine Finance Authority, Solid Waste RFR, Bowater Inc.,
Project, 7.750, 10/01/22 37,250
65,000(DD) Missouri State Health & Educational Facilities, Central
Medical Center Inc Project, 7.000, 6/01/11 3,901
35,000 Montgomery County, PA, HEHA, Hospital Revenue, Series A,
8.375, 11/01/11 36,223
95,000 Montgomery County, TX, Health Facilities Development Corp.,
The Woodlands Medical Center, 8.850, 8/15/14 103,297
25,000 New York, NY, GO, IFRN*, 9/30/03 41,011
15,000 New York, NY, MTA, Series P, 5.750, 7/01/15 14,085
100,000(D) Niagara Falls, NY, URA, Old Falls Street Improvement
Project, 11.00, 5/01/99 49,288
50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical 50,272
Center, 7.250, 7/01/22
30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project,
7.250, 7/01/18 31,453
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
June 30, 1995
(Unaudited)
Par Value Security Description(CK) Value
- --------------------------------------------------------------------------------
10,000 Riverside, CA, Parkview Community Hospital Project, 9.000,
12/01/95 10,150
100,000 San Bernardino County, CA, COP, IFRN*, 7/01/16 88,145
40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue,.7.000, 1/01/30 40,135
60,000 San Jose, CA, Redevelopment Agency, Tax Allocation Bonds,
IFRN*, MBIA Insured, 8/01/16 41,740
250,000 Savannah, GA, Economic Development Authority Revenue,
ETM, CAB, 12/01/21 40,640
50,000 Schuylkill County, PA, IDA Resource Recovery, Schuylkill
Energy Res Inc., AMT, 6.500, 1/01/10 48,452
50,000 Tomball, TX, Hospital Authority Revenue, Refunding, 6.125,
7/01/23 44,910
20,000(DD) Tri-State Health Care Corp., PA, First Humanics Corp., Henry
Clay 13.75,12/01/14 4,019
10,000 Troy, NY, IDA, Hendrick Hudson Hotel Project, 12.00, 3/01/97 4,745
15,000(D) Troy, NY, IDA, Hudson River Project, 11.00, 12/01/94 11,250
75,000(DD) Villages at Castle Rock, CO, Metropolitan District #4, 8.500,
6/01/31 16,309
-----------
Total Investments (Cost $1,497,445**) $ 1,254,912
===========
** Cost is the same for income tax purposes
* Inverse Floating Rate Notes (IFRN) are instruments whose rates bear an
inverse relationship to the interest rate another security or the value
of an index.
(D) The value of this non-income producing security has been estimated in
good faith under methods determined the Fund's Board of Trustees.
(DD) Non-income producing security.
(CK) Description AFR Airport Facilities Revenue
AMT Subject to Alternative Minimum Tax
CAB Capital Appreciation Bond
COP Certificate of Participation
CFR Civic Facility Revenue
ETM Escrowed to Maturity
GO General Obligation
HEHA Higher Education and Health Authority
HTA Highway & Transportation Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue
MTA Metropolitan Transportation Authority
MBIA Municipal Bond Insurance Assurance Corporation
PCR Pollution Control Revenue
RFR Recycling Facility Revenue
RHR Retirement Housing Revenue
RB Revenue Bond
TCA Transportation Corridor Agency
URA Urban Renewal Agency
See Notes to Financial Statements
6
<PAGE>
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Year Ended
Ended June 30 December 31,
1995 1994
(Unaudited)
- --------------------------------------------------------------------------------
Increase (decrease) in net assets from:
Operations
Net investment income $ 27,987 $ 68,184
Net realized gain (loss) on investments 46,613 (54,302)
Unrealized appreciation (depreciation) of
investments for the period 62,231 (161,607)
----------- ----------
Net increase (decrease) in net assets from
operations 136,831 (147,725)
Dividends paid to shareholders from
Investment income (27,987) (68,184)
Capital share transactions (Note 4) 152,905 108,138
----------- ----------
Total increase (decrease) 261,749 (107,771)
Net assets
Beginning of the period 979,158 1,086,929
----------- ----------
End of the period $ 1,240,907 $ 979,158
=========== ==========
See Notes to Financial Statements.
7
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management investment
company registered under the Investment Company Act of 1940. The Fund operates
as a series company currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield Municipal Bond Series
and the U.S. Government Strategic Income Fund (the Series). Each series is
considered a separate entity for financial reporting and tax purposes. The
Series seeks to provide a high level of current income exempt from federal
income tax through investment in a portfolio of lower quality municipal bonds,
generally referred to as "junk bonds." These bonds are considered speculative
because they involve greater price volatility and risk than do higher rated
bonds. The following is a summary of significant accounting policies followed in
the preparation of the Series' financial statements:
Valuation of Securities: Investments are stated at value based on prices
provided by a pricing service which takes into account appropriate factors such
as institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices,
because such valuations are believed to reflect more accurately the fair value
of such securities. Securities not priced in this manner are valued in good
faith by the Board of Trustees.
Federal Income Taxes: It is the Series' policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions: The Series declares dividends daily from its net investment
income and pays such dividends on the last Wednesday 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.
Note 2. Investment Advisory Fees and Other Transactions With Affiliates
The Fund has a Management Agreement with Fundamental Portfolio Advisors, Inc.
(the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the High-Yield Municipal Bond Series and is responsible for the
overall management of the business affairs and assets of the Series subject to
the authority of the Funds' Board of Trustees. In compensation for the services
provided by the Manager, the Series will pay an annual management fee in an
amount equal to 0.8% of the Series' average daily net assets up to $100 million
and decreasing by .02% for each $100 million increase in net assets down to 0.7%
of net assets in excess of $500 million. The Manager is required to reimburse
the Series on a monthly basis for its expenses (exclusive of interest, taxes,
brokerage fees and expenses paid pursuant to the Plan of Distribution, and
extraordinary expenses) to the extent that such expenses, including the
management fee, exceed the limits on investment company expenses prescribed in
any state in which the Series' shares are qualified for sale. The Manager
voluntarily waived fees and reimbursed expenses of $39,139 for the six months
ended June 30, 1995.
8
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1 promulgated
under the Investment Company Act of 1940, under which the Series pays to
Fundamental Service Corporation (FSC), an affiliate of the Manager, a fee, which
is accrued daily and paid monthly, at an annual rate of 0.5% of the Series'
average daily net assets. Amounts paid under the plan are to compensate FSC for
the services it provides and the expenses it bears in distributing the Series'
shares to investors. FSC has waived all fees in the amount of $2,749 for the six
months ended June 30, 1995.
The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of the
Manager, for the services it provides under a Transfer Agent and Service
Agreement. Transfer agent fees are set forth in the Statement of Operations.
Note 3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
Note 4. Shares of Beneficial Interest
As of June 30, 1995, there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid in amounted to $1,595,758.
Transactions in shares of beneficial interest were as follows:
For the Six Months Ended For the Year Ended
June 30, 1995 December 31, 1994
------------------------ ------------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 32,930 $212,167 82,599 $534,554
Shares issued on reinvestment of 4,148 26,209 7,829 50,715
dividends
Shares redeemed (13,311) (85,471) (74,527) (477,131)
------- -------- ------- --------
Net increase 23,767 $152,905 15,901 $108,138
======= ======== ======= ========
Note 5. Investment Transactions
The Fund invests in variable rate securities commonly called "inverse floaters."
The interest rates on these securities have an inverse relationship to the
interest rate of other securities or the value of an index. Changes in interest
rate on the other security or index inversely affect the rate paid on the
inverse floater, and the inverse floater's price will be more volatile than that
of a fixed-rate bond.
9
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
The Fund invests in lower rated or unrated ("junk") securities which are more
likely to react to developments affecting market risk and credit risk than would
higher rated securities which react primarily to interest rate fluctuations. The
Fund held securities in default with an aggregate value of $128,175 at June 30,
1995 (10.2% of net assets). A bond with a par value of $15,000 and a value of
$11,250 at June 30, 1995 has been estimated in good faith under methods
determined by the Board of Trustees.
The Fund owns 1.7% of a Niagara Falls New York Urban Renewal Agency 11% Bond
("URA Bond") due to mature on May 1, 2009 which has missed interest and sinking
fund payments. An affiliated investment company owns 98.3% of this bond issue.
The ability of this bond issue to make future payments is dependent on the
ability of the underlying projects making certain rental payments. There is
uncertainty as to the timing of events and the subsequent ability of this bond
issue to make service debt payments. The value of this bond was $49,288. The
bond is valued at 49.29% of face value at June 30, 1995 under methods determined
by the Board of Trustees.
During the six months ended June 30, 1995, the cost of purchases and proceeds
from sales of investment securities, other that short-term obligations, were
$389,531 and $157,486, respectively. This capital loss carry forward may be used
to offset future capital gain for tax purposes, and expires in varying amounts
between December 31, 1988 and December 31, 2002.
As of June 30, 1995, net unrealized depreciation of portfolio securities
amounted to $242,533, composed of unrealized appreciation of $33,179 and
unrealized depreciation of $275,712.
10
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Note 6. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
1995 --------------------------------------
(unaudited) 1994 1993 1992 1991
-------------------------------------------------------
Per share operating performance
(for a share outstanding throughout the
period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02
-------------------------------------------------------
Income from investment operations:
Net investment income 0.16 0.43 0.39 0.43 0.42
Net realized and unrealized gains
(losses) on investments 0.64 (1.35) (0.03) 0.01 0.27
-------------------------------------------------------
Total from investment operations 0.80 (0.92) 0.36 0.44 0.69
-------------------------------------------------------
Less distributions:
Dividends from net investment income (0.16) (0.43) (0.39) (0.43) (0.42)
-------------------------------------------------------
Net asset value, end of period $ 6.56 $ 5.92 $ 7.27 $ 7.30 $ 7.29
-------------------------------------------------------
-------------------------------------------------------
Total Return 13.64% (12.92)% 5.11% 6.26% 10.14%
Ratios/Supplemental Data
Net assets, end of period (000 omitted) 1,241 979 1,087 1,050 1,176
Ratios to average net assets:
Expenses 2.53%*(D) 2.50%* 2.50%* 2.87%* 2.63%*
Net investment income 5.09%*(D) 6.70%* 5.40%* 5.89%* 5.93%*
Portfolio turnover rate 17.45% 75.31% 84.89% 100.21% 15.78%
Bank loans
Amount outstanding at end of period
(000 omitted) $ - $ - $ - $ 20 $ 103
Average amount of bank loans
outstanding during the period
(000 omitted) $ - $ - $ - $ 57 $ 29
Average number of shares outstanding
during the period (000 omitted) 174 156 145 144 188
Average amount of debt per share
during the period $ - $ - $ - $ 0.4 $ 0.15
</TABLE>
* These ratios are after expense reimbursements of 7.62% for the six months
ended June 30, 1995 and 6.20%, 5.76%, 4.83% and .11% for each of the years
ended December 31, 1994, 1993, 1992, and 1991, respectively.
(D) Annualized
11
<PAGE>
(Left Column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York, New York 10006
1-800-322-6864
The financial statements contained herein are submitted for the
general information of the shareholders of the Fund. This report
is not authorized for distribution to prospective investors in the Fund
unless preceded or accompanied by an effective prospectus.
(Right Column)
Semi-Annual Report
June 30, 1995
(Unaudited)
FUNDAMENTAL
FIXED-INCOME FUND
HIGH YIELD MUNICIPAL BOND
SERIES
