Rule 497(c)
Registration No.:33-12738
FUNDAMENTAL FIXED INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
P.O. Box 1013
Bowling Green Station
New York, New York 10274-1013
STATEMENT OF ADDITIONAL INFORMATION
April 25, 1996
AS SUPPLEMENTED ON JULY 17, 1996
This Statement of Additional Information provides certain
detailed information concerning the High-Yield Municipal Bond Series (the
"High-Yield Series") of the Fundamental Fixed Income Fund (the "Fund"). The
High-Yield Series seeks to provide a high level of current income exempt from
federal income taxes through the investment in a portfolio of lower quality
municipal bonds (generally with maturities of 20 years or more). Of course,
there can be no assurance that the investment objective will be achieved. Lower
quality municipal bonds are at times referred to as "junk bonds."
This Statement of Additional Information is not a Prospectus
and should be read in conjunction with the High Yield Series' current
Prospectus, a copy of which may be obtained by writing to Fundamental Service
Corporation at P.O. Box 1013, Bowling Green Station, New York, New York
10274-1013 or by calling (800) 322-6864.
This Statement of Additional Information relates to the
High-Yield Series' Prospectus dated April 25, 1996.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS
AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
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TABLE OF CONTENTS
Page
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS............................... 3
MANAGEMENT OF THE FUND........................................................ 7
DISTRIBUTION PLAN.............................................................10
INVESTMENT MANAGER............................................................13
PORTFOLIO TRANSACTIONS........................................................15
CUSTODIAN AND INDEPENDENT ACCOUNTANTS.........................................17
TAXES.........................................................................17
DESCRIPTION OF SHARES.........................................................26
CERTAIN LIABILITIES...........................................................26
DETERMINATION OF NET ASSET VALUE..............................................27
CALCULATION OF YIELD AND AVERAGE
ANNUAL TOTAL RETURN.........................................................28
OTHER INFORMATION.............................................................31
FINANCIAL STATEMENTS..........................................................31
APPENDIX.....................................................................A-1
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the High-Yield Series dated April 25, 1996
(the "Prospectus") identifies the investment objective and the principal
investment policies of the High-Yield Series. Other investment policies and a
further description of certain of the policies described in the Prospectus are
set forth below.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the High-Yield Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
High-Yield Series' assets immediately, while awaiting delivery of securities
purchased on a "when-issued" basis, short-term obligations that offer same day
settlement and earnings will normally be purchased. Although short-term
investments will normally be in tax-exempt securities, short-term taxable
securities may be purchased if suitable short-term tax-exempt securities are not
available. When a commitment to purchase a security on a "when-issued" basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the assets of the High-Yield
Series equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, cash or high-quality debt securities sufficient
to cover any commitments are always expected to be available. Nonetheless, such
purchases may involve more risk than other types of purchases, as described in
the Prospectus.
Futures Contracts. The High-Yield Series may enter into
contracts for the future acquisition or delivery of fixed-income securities
("Futures Contracts"). This investment technique is designed only to hedge
against anticipated future changes in interest rates which otherwise might
either adversely affect the value of the High-Yield Series' securities or
adversely affect the prices of long-term bonds which the High-Yield Series
intends to purchase at a later date (although the High-Yield Series may engage
in transactions in futures contracts for income purposes if Commodity Futures
Trading Commission regulations on this issue change). If interest rates move in
an unexpected manner, the High-Yield Series will not achieve the anticipated
benefits of Futures Contracts or may realize a loss.
Options. The High-Yield Series intends to both purchase and
write options on securities and Futures Contracts, within the limits described
in the Prospectus. The market for options on tax-exempt securities is a new and
developing one, and
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consequently the High-Yield Series faces the risk that such options acquired by
it may not be readily marketable. As the market for options on tax-exempt
securities expands, the HighYield Series expects that its activities with
respect to options will expand also (subject to any applicable investment
restrictions).
Portfolio Management. The High-Yield Series intends to fully
manage its portfolio by buying and selling securities, as well as holding
securities to maturity. In managing its portfolio, the High-Yield Series seeks
to take advantage of market developments and yield disparities, which may
include use of the following strategies:
(1) shortening the average maturity of its
portfolio in anticipation of a rise in interest rates so as to minimize
depreciation of principal;
(2) lengthening the average maturity of its
portfolio in anticipation of a decline in interest rates so as to maximize
tax-exempt yield;
(3) selling one type of debt security (e.g.,
revenue bonds) and buying another (e.g., general obligation bonds) when
disparities arise in the relative values of each; and
(4) changing from one debt security to an
essentially similar debt security when their respective yields appear distorted
due to market factors.
The High-Yield Series engages in portfolio trading if it
believes a transaction, net of costs (including custodian charges), will help in
achieving its investment objective.
Portfolio Turnover. Pursuit by the High-Yield Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the High-Yield Series of broker commissions, dealer spreads
and other transaction costs relating to the purchase and the sale of securities.
Portfolio turnover rate for a given fiscal year is calculated by dividing the
lesser of the amount of the purchases or the amount of the sales of portfolio
securities during the year by the monthly average of the value of the portfolio
securities during the year. Securities with maturities or expiration dates of
one year or less at the time of acquisition by the High-Yield Series are
excluded from this calculation. A high portfolio turnover rate increases
transactions costs of the High-Yield Series and increases the likelihood of the
distribution of taxable capital gains to investors. For the
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fiscal years ended December 31, 1994 and 1995, the High-Yield Series' portfolio
turnover rates were approximately 75% and 44% respectively.
INVESTMENT RESTRICTIONS
The High-Yield Series has adopted the following policies as
"fundamental policies", which cannot be changed without the approval of the
holders of a majority of the shares of the High-Yield Series (which, as used in
this Statement of Additional Information, means the lesser of (i) more than 50%
of the outstanding shares, or (ii) 67% or more of the shares present at a
meeting at which holders of more than 50% of the outstanding shares are
represented in person or by proxy). The High-Yield Series may not:
(1) issue senior securities;
(2) borrow money in an amount not exceeding 33
1/3% of the value of its total assets and subject to a 300% asset coverage
requirement, or pledge mortgage or hypothecate any of its assets, except to
secure such permitted borrowings;
(3) underwrite securities issued by other
persons, except insofar as the High-Yield Series may technically be deemed an
underwriter under the Securities Act of 1933 in selling a portfolio security;
(4) purchase or sell real estate (including
limited partnership interests but excluding Municipal Bonds secured by real
estate or interests therein) or interests in oil, gas or mineral leases;
(5) make loans to others except (i) through the
use of repurchase agreements, provided that not more than 10% of its total
assets are invested at any one time in repurchase agreements of more than one
week in length or in other restricted or illiquid securities, (ii) through the
lending of its portfolio securities in accordance with the limitations set forth
in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES - Lending of
Portfolio Securities" and (iii) that the purchase of debt securities in
accordance with its investment policies shall not constitute loans for purposes
of this restriction;
(6) purchase or retain the securities of any
issuer, if, to the High-Yield Series' knowledge, those individual officers,
directors or trustees of the Fund, or of the investment advisor of the
High-Yield Series, who own beneficially own more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than 5% of
the outstanding securities of such issuer;
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(7) purchase securities, if, as a result of such
purchase, 25% or more of its total assets would be invested in non-governmental
industrial revenue bonds, the payment of the principal and interest on which are
the responsibility of issuers in the same industry, provided that it may invest
more than 25% of its total assets in industrial revenue bonds;
(8) make short sales of securities or purchase
any securities or evidences of interests therein on margin, except that the
High-Yield Series may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the High-Yield
Series may make deposits on margin in connection with interest rate futures
contracts;
(9) purchase or sell commodities or commodities
contracts except financial futures and related options as described in the
High-Yield Series' Prospectus; or
(10) invest in securities which are restricted as
to disposition under federal securities laws or for which there is no readily
available market (i.e., market makers do not exist or will not entertain bids or
offers).
The above restrictions, along with the fundamental policies
identified in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES -
Miscellaneous," constitute all of the fundamental policies of the High-Yield
Series.
For the purposes of the High-Yield Series' investment
restrictions, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of the principal and
interest on the security.
Operating Policies. The High-Yield Series has adopted the
following operating policies which are not fundamental and which may be changed
without shareholder approval. The High-Yield Series may enter into repurchase
agreements (a purchase of and a simultaneous commitment to resell a security at
an agreed upon price on an agreed upon date) only with member banks of the
Federal Reserve System and only if collateralized by U.S. Government securities.
If the vendor of a repurchase agreement fails to pay the sum agreed to on the
agreed upon delivery date, the High-Yield Series would have the right to sell
the U.S. Government securities, but might incur a loss in so doing and in
certain cases may not be permitted to sell the U.S. Government securities. As
noted in paragraph (5) on page 5, the High-Yield Series may not invest more than
10% of its assets in repurchase agreements maturing in more than seven days. In
addition, in order to comply with certain state statutes, the High-Yield Series
will not pledge, mortgage or hypothecate its portfolio securities if at the time
the value of the securities
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so pledged, mortgaged or hypothecated would exceed 10% of the value of the
High-Yield Series. For purposes of this restriction, collateral arrangements
with respect to the writing of stock options, financial futures, options on
financial futures and collateral arrangements with respect to margin
requirements are not deemed to be a pledge of assets, and for purposes of the
restriction in paragraph (1) above, neither such arrangements nor the purchase
or sale of futures or purchase of related options are deemed to be the issuance
of a senior security.
Percentage Restrictions. If a percentage restriction on
investment or utilization of assets set forth above is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the portfolio securities of the
High-Yield Series will not be considered a violation of such policy.
MANAGEMENT OF THE FUND
The Fund's Board of Trustees provides broad supervision over
the affairs of the Fund and of the High-Yield Series. The officers of the Fund
are responsible for the operations of the High-Yield Series. The Trustees and
executive officers of the Fund are listed below, together with their principal
occupations during the last five years. Each Trustee who is considered to be an
"interested person" of the Fund, as defined by the 1940 Act, is indicated by an
asterisk (*).
James C. Armstrong: Trustee of the Fund. Mr. Armstrong is a
partner in Armstrong/Seltzer Communications Inc., a New York management,
consulting and public relations firm. He was formerly Executive Director, Global
Public Affairs Institute at New York University and Professor, Bell of
Pennsylvania Chair in Telecommunications, Temple University, and is a management
consultant. He was with American Telephone and Telegraph Company for 15 years.
His last position with AT&T was Director, Corporate Policy Analysis. Mr.
Armstrong previously held positions at the Institute for Defense Analysis, the
Office of the Postmaster General, and on the faculty of the University of
Maryland. He has been a consultant to government, academic and business
organizations, and has served on various government-industry task forces and
committees. Mr. Armstrong was an Officer in the United States Navy and holds a
Ph.D. in nuclear physics. Mr. Armstrong's address is 51 Mt. Pleasant Road,
Morristown, New Jersey 07960.
James A. Bowers: Trustee of the Fund. Mr. Bowers is a
consultant for Prototypes (formerly Director of Finance and Administration), The
American Telephone and Telegraph Company, The RAND Corporation and CogniTech
Services Corporation. He was
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employed at AT&T for 23 years. His latest position with AT&T was in the Treasury
Department as District Manager-Securities and Exchange Commission Reporting. Mr.
Bowers holds Bachelor of Science and Master of Arts degrees in Economics from
Florida Atlantic University. Mr. Bowers' address is 60 East Eighth Street, New
York, N.Y. 10003.
Clark L. Bullock: Trustee of the Fund. Mr. Bullock is Chairman
of the Board of Shelter Rock Investors Services Corp., a privately-held, New
York-based investment company. Mr. Bullock received a Masters of Science degree
in Mathematical Economics from Purdue University in 1972 and a Bachelor of Arts
degree in International Relations from the University of Arizona. Mr. Bullock's
address is c/o Shelter Rock Investors, 150 Hopper Avenue, Waldwick, NJ 07463.
L. Greg Ferrone: Trustee of the Fund. Mr. Ferrone is a
consultant with IntraNet, Inc., a provider of computer systems to the domestic
and international banking industry. Previously he was the Director of Sales &
Marketing for RAV Communications Inc., Vice President/Regional Manager with
National Westminster Bank USA and an officer at Security Pacific Bank. Mr.
Ferrone received a Bachelor of Science degree from Rensselaer Polytechnic
Institute in 1972 and studied at the Stonier Graduate School of Banking. Mr.
Ferrone's address is 83 Ronald Court, Ramsey, New Jersey 07446.
*Vincent J. Malanga: Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Fund, The California Muni Fund and
Fundamental Funds, Inc. Mr. Malanga is President, Treasurer and a Director of
Fundamental Portfolio Advisors, Inc., Executive Vice President, Secretary and a
Director of Fundamental Service Corporation, and President, LaSalle Economics
Inc., an economic consulting firm. Mr. Malanga is Vice President, Secretary and
a 50% shareholder of LaSalle Portfolio Management, Inc., the general partner of
both LPM Financial Futures Fund I, Limited Partnership and LPM Equities Fund
Limited Partnership. Prior thereto, he was a Vice President and Senior Economist
at A. Gary Shilling & Company, Inc., an economic consulting and brokerage firm.
He previously served as an Economist at White, Weld & Co. (an investment banking
and brokerage firm) and so served from 1976 to 1978. Prior thereto, Mr. Malanga,
who holds a Ph.D. in Economics from Fordham University, was an Economist at the
Federal Reserve Bank of New York. Mr. Malanga's address is 90 Washington Street,
19th Floor, New York, New York 10006.
David P. Wieder: Vice President of the Fund. Secretary of
Fundamental Portfolio Advisors, Inc., and President
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and a Director of Fundamental Shareholder Services, Inc. Mr. Wieder holds a
Bachelor of Science degree in Economics from Cornell University. Mr. Wieder's
address is 90 Washington Street, 19th Floor, New York, New York 10006.
Carole M. Laible: Secretary of the Fund. Treasurer and
Secretary of Fundamental Shareholder Services, Inc. She was formerly a General
Service Manager for McGladrey & Pullen. Ms. Laible received a Bachelor of
Science degree from St. John's University in 1986. Ms. Laible's address is 90
Washington Street, 19th Floor, New York, New York 10006.
All of the Trustees of the Fund are also Trustees or Directors
of Fundamental Funds, Inc. and The California Muni Fund. All of the officers of
the Fund hold similar offices with Fundamental Funds, Inc. and The California
Muni Fund.
The High-Yield Series does not pay any salary or compensation
to any of its officers, all of whom are officers or employees of Fundamental
Portfolio Advisors, Inc. (the "Manager"). For services and attendance at board
meetings and meetings of committees which are common to the Fund, New York Muni
Fund, Inc. and The California Muni Fund (other affiliated mutual funds for which
the Manager acts as the investment advisor), each Trustee of the Fund who is not
affiliated with the Manager is compensated at the rate of $6,500 per quarter
prorated among the three funds based on their respective net assets at the end
of each quarter. Each such Trustee is also reimbursed by the three funds, on the
same basis, for actual out-of-pocket expenses relating to his attendance at
meetings. The Manager pays the compensation of the Fund's officers and of the
one Trustee that is affiliated with the Manager. For the fiscal year ended
December 31, 1995, trustees' fees totalling $25,641 were paid by the Fund to the
Trustees as a group ($468 for the High-Yield Series, $18,072 for the Tax-Free
Money Market Series and $6,624 for the Fundamental U.S. Government Strategic
Income Fund Series).
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COMPENSATION TABLE
(FOR EACH CURRENT BOARD MEMBER
RECEIVING COMPENSATION FROM
A FUNDAMENTAL FUND FOR THE
MOST RECENTLY COMPLETED FISCAL YEAR)
AGGREGATE COMPENSATION FROM FUND
AGGREGATE
COMPENSATION
PAID BY ALL
HIGH- U.S. FUNDS MANAGED
YIELD TAX- GOV'T BY
CALI- MUNI- FREE STRA- FUNDAMENTAL
FORNIA CIPAL MONEY TEGIC PORTFOLIO
NAME NY MUNI MUNI BOND MARKET INCOME ADVISORS, INC.
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JAMES C. ARMSTRONG $18,333 $1,376 $117 $4,518 $1,656 $26,000
JAMES A. BOWERS 18,333 1,376 117 4,518 1,656 26,000
CLARK L. BULLOCK 18,333 1,376 117 4,518 1,656 26,000
L. GREG FERRONE 18,333 1,376 217 4,518 1,656 26,000
Transfer Agent
Fundamental Shareholder Services, Inc., P.O. Box 1013, Bowling
Green Station, New York, New York 10274-1013, an affiliate of Fundamental
Portfolio Advisors, Inc. and Fundamental Service Corporation, performs all
services in connection with the transfer of shares of the High-Yield Series,
acts as its dividend disbursing agent, and as administrator of the exchange,
check redemption, telephone redemption and expedited redemption privileges of
the High-Yield Series, pursuant to a Transfer Agency and Service Agreement dated
as of February 1, 1990. During the year ended December 31, 1995, all fees earned
($6,011) were paid by the Manager.
DISTRIBUTION PLAN
As discussed in the Prospectus, the Fund has entered into a
Distribution Agreement with FSC. FSC is a Delaware corporation which is owned
approximately 43.7% by each of Messrs. Thomas W.
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Buckingham, a consultant to the Manager, and Vincent J. Malanga, a Trustee and
officer of the Fund and a director and officer of the Manager, and 9.8% by Dr.
Lance M. Brofman, an employee of the Manager. The Trustees who are not, and were
not at the time they voted, interested persons of the Fund, as defined in the
1940 Act (the "Independent Trustees"), have approved the Distribution Agreement.
The Distribution Agreement provides that FSC will bear the distribution expenses
of the High-Yield Series not borne by the High-Yield Series. The Distribution
Agreement was approved by action of the Trustees of the Fund and entered into by
the Fund and FSC on March 28, 1989. The Distribution Agreement will continue in
effect from year-to-year if it is specifically approved, at least annually, in
the manner required by the 1940 Act. The Board of Trustees last approved the
Distribution Agreement on October 18, 1995.
FSC bears all expenses it incurs in providing services under
the Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the
High-Yield Series. FSC also pays certain expenses in connection with the
distribution of the High-Yield Series' shares, including the cost of preparing,
printing and distributing advertising or promotional materials, and the cost of
printing and distributing prospectuses and supplements thereto to prospective
shareholders. The High-Yield Series bears the cost of registering its shares
under federal and state securities law.
The Fund and FSC have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, FSC will use its best efforts in
rendering services to the Fund.
The Fund has adopted a plan of distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the High-Yield Series
pays FSC compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the High-Yield Series' average daily net assets. The Plan was adopted
by a majority vote of the Board of Trustees, including all of the Independent
Trustees (none of whom had or have any direct or indirect financial interest in
the operation of the Plan), cast in person at a meeting called for the purpose
of voting on the Plan on September 29, 1987 by the then sole shareholders of the
High-Yield Series.
Pursuant to the Plan, FSC provides the Fund, for review by the
Trustees, and the Trustees review, at least quarterly, a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made.
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No interested person of the Fund nor any Trustee of the Fund
who is not an interested person of the Fund, as defined in the 1940 Act, has any
direct financial interest in the operation of the Plan except to the extent that
FSC and certain of its employees may be deemed to have such an interest as a
result of receiving a portion of the amounts expended thereunder by the Fund.
The Plan has been renewed to continue in effect until December
31, 1996. The Plan will continue in effect from year-to-year thereafter,
provided such continuance is approved annually by vote of the Trustees in the
manner described above. It may not be amended to increase materially the amount
to be spent for the services described therein without approval of the
shareholders of the Fund, and material amendments of the Plan must also be
approved by the Trustees in the manner described above. The Plan may be
terminated at any time, without payment of any penalty, by vote of the majority
of the Trustees who are not interested persons of the Fund, and with no direct
or indirect financial interest in the operations of the Plan, or by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act). The Plan will automatically terminate in the event of its assignment
(as defined in the 1940 Act). So long as the Plan is in effect, the election and
nomination of the Independent Trustees shall be committed to the discretion of
the Independent Trustees. In the Trustees' quarterly review of the Plan, they
will consider its continued appropriateness and the level of compensation
provided therein.
All of the aggregate amount of 12b-1 fees incurred by the
High-Yield Series during the last fiscal year ($5,981) was paid to FSC for
expenses incurred by it pursuant to the Plan.
The Glass-Steagall Act prohibits banks from engaging in the
business of underwriting, selling or distributing securities. Although the scope
of this prohibition under the Glass-Steagall Act has not been clearly defined by
the courts or appropriate regulatory agencies, FSC believes that the
Glass-Steagall Act should not preclude a bank from performing shareholder
support services, servicing and recordkeeping functions. FSC intends to engage
banks only to perform such functions. However, changes in federal or state
statutes and regulations pertaining to the permissible activities of banks and
their affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. In such event,
changes in the operation of the High-Yield Series might occur, including
possible termination of any automatic investment or redemption or other services
then provided by a bank. It is not expected that shareholders would suffer any
adverse financial
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consequences as a result of any of these occurrences. The High-Yield Series may
execute portfolio transactions with and purchase securities issued by depository
institutions that indirectly receive payments under the Plan. No preference will
be shown in the selection of investments for the instruments of such depository
institutions.
INVESTMENT MANAGER
The Fund has entered into an agreement (the "Management
Agreement") with Fundamental Portfolio Advisors, Inc. (the "Manager"), 90
Washington Street, 19th Floor, New York, New York 10006, to act as its
investment adviser. The Management Agreement will continue in effect from year
to year if it is specifically approved, at least annually, by the vote of a
majority of the Board of Trustees of the Fund (including a majority of the Board
of Trustees who are not parties to the Management Agreement or interested
persons of any such parties) cast in person at a meeting called for the purpose
of voting on such renewal. The Board of Trustees last approved the Management
Agreement on October 19, 1994. The Management Agreement terminates if assigned
and may be terminated without penalty by either party by vote of its Board of
Directors or Trustees or a majority of its outstanding voting securities and the
giving of sixty days' written notice.
Under the terms of the Management Agreement, the Manager
serves as investment adviser to the High-Yield Series and is responsible for the
overall management of the business affairs and assets of the High-Yield Series,
subject to the authority of the Fund's Board of Trustees. The Manager also is
authorized under the Management Agreement to buy and sell securities for the
account of the High-Yield Series, in its discretion, subject to the right of the
Fund's Trustees to disapprove any such purchase or sale. The Manager pays all of
the ordinary operating expenses of the High-Yield Series, including executive
salaries and the rental of office space, with the exception of the following,
which are to be paid by the High-Yield Series: (1) charges and expenses for
determining from time-to-time the net asset value of the High-Yield Series and
the keeping of its books and records,(2) the charges and expenses of any
auditors, custodian, transfer agent, plan agent, dividend disbursing agent and
registrar performing services for the High-Yield Series, (3) brokers'
commissions, and issue and transfer taxes, chargeable to the High-Yield Series
in connection with securities transactions, (4) insurance premiums, interest
charges, dues and fees for membership in trade associations and all taxes and
fees payable by the High-Yield Series to federal, state or other governmental
agencies, (5) fees and expenses involved in registering and maintaining
registrations of the shares of the High-Yield Series with the Securities and
Exchange Commission, (6) all expenses of shareholders' and Trustees' meetings
and of
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preparing, printing and distributing notices, proxy statements and all reports
to shareholders and to governmental agencies, (7) charges and expenses of legal
counsel to the Fund, (8) compensation of those Trustees of the Fund as such who
are not affiliated with or interested persons of the Manager or the Fund (other
than as Trustees), (9) fees and expenses incurred pursuant to the 12b-1 Plan and
(10) such nonrecurring or extraordinary expenses as may arise, including
litigation affecting the Fund or the High-Yield Series and any indemnification
by the Fund of its trustees, officers, employees or agents with respect thereto.
To the extent any of the foregoing charges or expenses are incurred by the Fund
for the benefit of each of the Fund's series, the High-Yield Series is
responsible for payment of the portion of such charges or expenses which are
properly allocable to the High-Yield Series.
As compensation for the performance of its management services
and the assumption of certain expenses of the High-Yield Series and the Fund,
the Manager is entitled under the Management Agreement to an annual management
fee (which is computed daily and paid monthly) from the High-Yield Series equal
to the following percentage of the average daily net asset value of the
High-Yield Series.
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000
or more but less than $200,000,000 .78%
Net asset value of $200,000,000
or more but less than $300,000,000 .76%
Net asset value of $300,000,000
or more but less than $400,000,000 .74%
Net asset value of $400,000,000
or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
However, if for any fiscal year in which the aggregate
operating expenses of the High-Yield Series (including the management fee but
exclusive of taxes, interest expenses, brokerage fees and commissions, fees and
expenses paid pursuant to the Plan and extraordinary expenses beyond the control
of, and not caused by bad faith, negligence or malfeasance of, the Manager, if
any), are in excess of the expense limitation of any state having jurisdiction
over the High-Yield Series, the Manager will reimburse the High-Yield Series on
a monthly basis for the amount of such excess.
The above management fee is higher than the management fee
paid by most other mutual funds, due to the extensive credit analysis performed
by the Manager with respect to the High-Yield Series. For the period commencing
October 1, 1987 (the commencement of the High-Yield Series' operations) and
ended
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December 31, 1987 and for the years ended December 31, 1988, 1989, 1990, 1991,
1992, 1993 , 1994 and 1995 the Manager waived its management fees, and
reimbursed expenses of the High-Yield Series in amounts of $24,175, $73,527,
$39,005, $34,589, $1,498, $50,224, $54,485 , $51,925 and $74,369 respectively,
as expense reimbursements under the Management Agreement.
Mr. Vincent J. Malanga, a trustee and officer of the Fund, and
Dr. Lance M. Brofman, chief portfolio strategist of the High-Yield Series, each
own approximately 48.5% of the outstanding shares of voting capital stock of the
Manager.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities
are placed on behalf of the High-Yield Series by the Manager pursuant to
authority contained in the Management Agreement (subject to the right of the
Trustees to reverse any such transaction). The Manager is and may in the future
also be responsible for the placement of transaction orders for the other series
of the Fund and for other investment companies for which the Manager acts as
investment advisor. Securities purchased and sold on behalf of the High-Yield
Series will be traded in the over-the-counter market on a net basis (i.e.
without commission) through dealers acting for their own account and not as
brokers or otherwise involve transactions directly with the issuer of the
instrument. In selecting dealers, the Manager will consider various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability, and financial condition
of the dealer; the dealer's execution services rendered on a continuing basis;
and the reasonableness of any dealer spreads and commissions (if any).
Dealers may be selected who provide brokerage and/or research
services to the Fund or High-Yield Series and/or other investment companies over
which the Manager exercises investment discretion. Such services may include
advice concerning the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). The
Manager maintains a listing of dealers who provide such services on a regular
basis. However, because it is anticipated that many transactions on behalf of
the High-Yield Series, other series of the Fund and other funds over which the
Manager exercises
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investment discretion are placed with dealers (including dealers on the list)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such dealers solely
because such services were provided.
The receipt of research from dealers may be useful to the
Manager in rendering investment management services to the High-Yield Series
and/or other series of the Fund and other funds over which the Manager exercises
investment discretion, and conversely, such information provided by brokers or
dealers who have executed transaction orders on behalf of such other clients of
the Manager may be useful to it in carrying out its obligations to the
High-Yield Series. The receipt of such research has not reduced the Manager's
normal independent research activities; however, it enables the Manager to avoid
the additional expenses which might otherwise be incurred if it were to attempt
to develop comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the
High-Yield Series may receive spreads or commissions which are in excess of the
amount of spreads or commissions which other brokers or dealers would have
charged for effecting such transactions. In order to cause the High-Yield Series
to pay such higher spreads or commissions, the Manager must determine in good
faith that such spreads or commissions are reasonable in relation to the value
of the brokerage and/or research services provided by such executing broker or
dealers viewed in terms of a particular transaction or the Manager's overall
responsibilities to the High-Yield Series, the Fund or the Manager's other
clients. In reaching this determination, the Manager will not attempt to place a
specific dollar value on the brokerage and/or research services provided or to
determine what portion of the compensation should be related to those services.
The Manager is authorized to place portfolio transactions with
dealer firms that have provided assistance in the distribution of shares of the
High-Yield Series or shares of other series of the Fund or other funds for which
the Manager acts as investment advisor if it reasonably believes that the
quality of the transaction and the amount of the spread are comparable to what
they would be with other qualified dealers.
During the years ended December 31, 1989, 1990, 1991, 1992,
1993 , 1994 and 1995 the High-Yield Series did not pay any brokerage
commissions.
The Funds' Trustees and brokerage allocation committee
(comprised solely of non-interested Trustees) periodically review the Manager's
performance of its responsibilities in connection with the placement of
portfolio transactions on behalf of the High-Yield Series and the Fund and
review the dealer spreads paid
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by the High-Yield Series and the Fund over representative periods of time to
determine if they are reasonable in relation to the benefits to the Fund and its
portfolios.
From January 1, 1990 to January 31, 1996, the Manager directed
syndicate designations in the aggregate dollar amount of $858,094 to Capital
Institutional Services, Inc. ("CIS") in connection with the Fundamental Funds'
bond purchases through underwriting syndicates. The Manager has represented that
CIS, a third-party research provider, at the Manager's direction, paid portions
of such syndicate designations to approximately 30 different firms that provided
research services used by the Manager in managing the Fundamental Funds,
including Capital Market Services, Inc. ("CMS"). Further, that CMS was paid by
CIS $115,000 for research provided to the Manager and used by it in managing the
High-Yield Series and the other funds in the Fundamental complex. The $115,000
dollar amount paid by CIS to CMS for the three most recent fiscal years of the
High-Yield Series was: $35,000 in 1995; $55,000 in 1994; and $25,000 in 1993.
The Manager has also represented that it was recently learned that at all times
during the three most recent fiscal years of the High-Yield Series, CMS was 100%
owned by Mr. Donald E. Newell's wife. Mr. Vincent J. Malanga and Mr. Donald E.
Newell are each executive officers and 50% shareholders of LaSalle Portfolio
Management, Inc. On May 23, 1996, in order to remove any appearance of
impropriety concerning all of the payments made by CIS to CMS in return for
research the Manager obtained from CMS, the Fund's independent Trustees asked
the Manager to obtain $115,000 "to or for the benefit of the [Fundamental]
Funds, either from CMS or one of its affiliates directly, or out of [the
Manager's] own resources." That request is currently under consideration by the
Manager.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Chase Manhattan Bank,N.A. (the "Bank"), 114 West 47th
Street, New York, New York, acts as Custodian of the Fund's cash and securities.
The Bank also acts as bookkeeping agent for the Fund, and in that capacity
monitors the Fund's accounting records and calculates its net asset value.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, N.Y.,
acts as independent public accountants for the Fund, performing an annual audit
of the Fund's financial statements and preparing its tax returns.
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the High-Yield Series and its shareholders
that are not described in the Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the High-Yield Series or its
shareholders, and the discussions here and in the Prospectus are not intended as
substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The High-Yield Series has elected to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the High-Yield Series
is not subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by the High-Yield Series made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be
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considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
If the High-Yield Series has a net capital loss (i.e., the
excess of capital losses over capital gains) for any year, the amount thereof
may be carried forward up to eight years and treated as a short-term capital
loss which can be used to offset capital gains in such years. As of December 31,
1995, the High-Yield Series has capital loss carryforwards of approximately
$198,899, which expire in varying amounts between December 31, 1998 and December
31, 2004. Under Code Section 382, if the High-Yield Series has an "ownership
change," the High-Yield Series' use of its capital loss carryforwards in any
year following the ownership change will be limited to an amount equal to the
net asset value of the High-Yield Series immediately prior to the ownership
change multiplied by the highest adjusted long-term tax-exempt rate (which is
published monthly by the Internal Revenue Service (the "IRS")) in effect for any
month in the 3-calendar-month period ending with the calendar month of change
occurs (the highest rate for the 3- month period ending in arch, 1996 is 531%).
The High-Yield will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control or knowledge
of the High-Yield Series, there can be no assurance that the High-Yield Series
will not have, or has not already had, an ownership change. If the High-Yield
Series has or has had an ownership change, any capital gain net income for any
year following the ownership change in excess of the annual limitation on the
capital loss carryforwards will have to be distributed by the High-Yield Series
and will be taxable to shareholders as described under "High-Yield Series
Distributions" below.
In addition to satisfying the Distribution Requirement, a
regulated investment company must: (1) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement"); and (2)
derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "ShortShort Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign currency
gains, including those derived from options, futures and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's
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investments in stock or securities (or options or futures thereon). Because of
the Short-Short Gain Test, the High-Yield Series may have to limit the sale of
appreciated securities that it has held for less than three months. However, the
Short-Short Gain Test will not prevent the High-Yield Series from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the High-Yield Series at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the High-Yield Series
on the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation (including municipal
obligations) purchased by the HighYield Series at a market discount (generally,
at a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of the market discount which accrued during the period
of time the High-Yield Series held the debt obligation.
In general, for purposes of determining whether capital gain
or loss recognized by the High-Yield Series on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another asset
so used, or (2) the asset is otherwise held by the High-Yield Series as part of
a "straddle" (which term generally excludes a situation where the asset is stock
and the High-Yield Series grants a qualified covered call option (which, among
other things, must not be deep-in-themoney) with respect thereto). However, for
purposes of the ShortShort Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, the
High-Yield Series may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the High-Yield Series on the lapse of,
or any gain or loss recognized by the High-Yield Series from a closing
transaction with respect to, an option written by the HighYield Series will be
treated as a short-term capital gain or loss. For purposes of the Short-Short
Gain Test, the holding period of an option written by the High-Yield Series will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, the High-Yield Series may be
limited in its ability to write options which expire within
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three months and to enter into closing transactions at a gain within three
months of the writing of options.
Transactions that may be engaged in by the High-Yield Series
(such as regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The High-Yield Series, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the High-Yield Series that are not Section 1256
contracts. The IRS has held in several private rulings (and Treasury Regulations
now provide) that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above,
the High-Yield Series must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the High-Yield Series' taxable year, at least 50% of the value of the
High-Yield Series' assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the High-Yield Series has not invested more than
5% of the value of the High-Yield Series' total assets in securities of such
issuer and as to which the HighYield Series does not hold more than 10% of the
outstanding voting
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securities of such issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies),
or in two or more issuers which the High-Yield Series controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security, not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the High-Yield Series does not qualify
as a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
High-Yield Series' current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The High-Yield Series intends to make sufficient distributions
or deemed distributions of its ordinary taxable
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income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. However, investors should note that the
High-Yield Series may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
High-Yield Series Distributions
The High-Yield Series anticipates distributing substantially
all of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and treated as
dividends for federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The High-Yield Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The HighYield Series
currently intends to distribute any such amounts. Net capital gain that is
distributed and designated as a capital gain dividend will be taxable to
shareholders as long-term capital gain, regardless of the length of time the
shareholder has held his shares or whether such gain was recognized by the
High-Yield Series prior to the date on which the shareholder acquired his
shares.
The High-Yield Series intends to qualify to pay exemptinterest
dividends by satisfying the requirement that at the close of each quarter of the
High-Yield Series' taxable year at least 50% of the High-Yield Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
High-Yield Series will constitute exempt-interest dividends to the extent of the
High-Yield Series' tax-exempt interest income (net of expenses and amortized
bond premium). Exempt-interest dividends distributed to shareholders of the
High-Yield Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file a federal income tax return
will be required to report the receipt of exempt-interest dividends on their
returns. Moreover, while exempt-interest dividends are excluded from gross
income for federal income tax purposes, they may be subject to alternative
minimum tax ("AMT") in certain circumstances and may have other collateral tax
consequences as discussed below. Distributions by the High-Yield Series of any
investment company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it
exceeds, the regular tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount.
In addition, under the Superfund Amendments and Reauthorization Act of 1986, a
tax is imposed for taxable years beginning after 1986 and before 1996 at
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the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. Exempt-interest dividends derived from certain
"private activity" municipal obligations issued after August 7, 1986 will
generally constitute an item of tax preference includable in AMTI for both
corporate and noncorporate taxpayers. In addition, exempt-interest dividends
derived from all municipal obligations, regardless of the date of issue, must be
included in adjusted current earnings, which are used in computing an additional
corporate preference item (i.e., 75% of the excess of a corporate taxpayer's
adjusted current earnings over its AMTI (determined without regard to this item
and the AMT net operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in
computing the portion, if any, of social security or railroad retirement
benefits that must be included in an individual shareholder's gross income and
subject to federal income tax. Further, a shareholder of the High-Yield Series
is denied a deduction for interest on indebtedness incurred or continued to
purchase or carry shares of the High-Yield Series. Moreover, a shareholder who
is (or is related to) a "substantial user" of a facility financed by industrial
development bonds held by the HighYield Series will likely be subject to tax on
dividends paid by the High-Yield Series which are derived from interest on such
bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the High-Yield Series that do not constitute
ordinary income dividends, exempt-interest dividends or capital gain dividends
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any excess will be treated as gain
from the sale of his shares, as discussed below.
Distributions by the High-Yield Series will be treated in the
manner described above regardless of whether such distributions are paid in cash
or reinvested in additional shares of the HighYield Series (or of another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the High-Yield
Series reflects undistributed net investment income or recognized capital gain
net income, or unrealized appreciation in the value of the assets of the
High-Yield Series, distributions of such amounts will be taxable to the
shareholder in the manner described above, although
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such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the High-Yield Series into account in the year in which they are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the High-Yield Series) on
December 31 of such calendar year if such dividends are actually paid in January
of the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made) to them
during the year.
The High-Yield Series will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of ordinary income dividends and
capital gain dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the High-Yield Series that it is not subject to
backup withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or
redemption of shares of the High-Yield Series in an amount equal to the
difference between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the High-Yield Series
within 30 days before or after the sale or redemption. In general, any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
of the High-Yield Series will be considered capital gain or loss and will be
long-term capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) generally will
apply in determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
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Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the High-Yield Series is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the High-Yield Series is not effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
ordinary income dividends paid to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) upon the
gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares of
the High-Yield Series, capital gain dividends and exemptinterest dividends and
amounts retained by the High-Yield Series that are designated as undistributed
capital gains.
If the income from the High-Yield Series is effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then ordinary income dividends, capital gain dividends, and any gains realized
upon the sale of shares of the High-Yield Series will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
In the case of a foreign noncorporate shareholder, the
High-Yield Series may be required to withhold U.S. federal income tax at a rate
of 31% on distributions that are otherwise exempt from withholding (or taxable
at a reduced treaty rate), unless the shareholder furnishes the High-Yield
Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the High-Yield Series, including the applicability of foreign
taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, perhaps with retroactive effect.
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Rules of state and local taxation of ordinary income
dividends, exempt-interest dividends and capital gain dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax advisers
as to the consequences to them of federal, state and local tax rules with
respect to an investment in the High-Yield Series.
. DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees
to authorize the issuance of an unlimited number of full and fractional shares
of beneficial interest (without par value), which may be divided into such
separate series as the Trustees may establish. The Fund currently has three
series of shares: the High-Yield Series, the Tax-Free Money Market Series and
the Fundamental U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares into
a greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an equal proportionate
interest in the Fund with each other share. The shares of any additional series
would participate equally in the earnings, dividends and assets of the
particular series, and would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series would vote together in the election and selection of
Trustees and accountants. Upon liquidation of the High-Yield Series, each
series' shareholder is entitled to share pro rata in the net assets available
for distribution to shareholders from such series.
Shareholders are entitled to one vote for each share held and
may vote in the election of Trustees and on other matters submitted to meetings
of shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are
governed by its Declaration of Trust dated March 19, 1987, a copy of which is on
file with the office of The Secretary of the Commonwealth of Massachusetts.
Theoretically, shareholders of a
-26-
<PAGE>
Massachusetts business trust may, under certain circumstances, be held
personally liable for the obligations of the trust. However, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Fund or any series of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or its Trustees. Moreover, the Declaration of Trust
provides for the indemnification out of Fund property of any shareholders held
personally liable for any obligations of the Fund or any series of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss beyond his or her investment because of shareholder
liability would be limited to circumstances in which the Fund itself will be
unable to meet its obligations. In light of the nature of the Fund's business,
the possibility of the Fund's liabilities exceeding its assets, and therefore a
shareholder's risk of personal liability, is extremely remote.
The Declaration of Trust further provides that the Fund shall
indemnify each of its Trustees and officers against liabilities and expenses
reasonably incurred by them, in connection with, or arising out of, any action,
suit or proceeding, threatened against or otherwise involving such Trustee or
officer, directly or indirectly, by reason of being or having been a Trustee or
officer of the Fund. The Declaration of Trust does not authorize the Fund to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of the High-Yield Series is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 P.M., New York time) on each day that both the New York Stock Exchange and
the Fund's custodian bank are open for business. This determination is made once
during each such day as of the close of the New York Stock Exchange by deducting
the amount of the High-Yield Series' liabilities from the value of its assets
and dividing the difference by the number of its shares outstanding. Debt
securities (other than short-term obligations), including listed issues, are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take 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
-27-
<PAGE>
prices, because such valuations are believed to reflect more accurately the fair
value of such securities. Use of the pricing service has been approved by the
Board of Trustees. Short-term obligations are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Portfolio
securities for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
CALCULATION OF YIELD AND AVERAGE
ANNUAL TOTAL RETURN
The High-Yield Series' yield quotations and average annual
total return quotations as they may appear in the Prospectus, this Statement of
Additional Information or in advertising and sales material are calculated by
standard methods prescribed by the Securities and Exchange Commission.
The High-Yield Series' yield is computed by dividing the
High-Yield Series' net investment income per share during a base period of 30
days, or one month, by the net asset value per share of the High-Yield Series on
the last day of such base period in accordance with the following formula:
a-b 6
YIELD = 2 [(----- +1) -1]
cd
Where: a = dividends and interest earned during the
period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the
High-Yield Series is computed based on the market value of the obligation
(including actual accrued interest, if any) at the close of business on the last
day of each month, or, with respect to obligations purchased during the month,
the purchase price (plus actual accrued interest, if any).
-28-
<PAGE>
(ii) The yield to maturity of each obligation is then divided
by 360 and the resulting quotient is multiplied by the market value of the
obligation (including actual accrued interest, if any) to determine the interest
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For these purposes it is assumed that each month
has 30 days.
(iii) Interest earned on all debt obligations during the
30-day or one month period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
(v) In the case of a tax-exempt obligation issued without
original issue discount and having a current market discount, the coupon rate of
interest of the obligation is used in lieu of yield to maturity to determine
interest income earned on the obligation. In the case of a tax-exempt obligation
with original issue discount where the discount based on the current market
value of the obligation exceeds the then remaining portion of original issue
discount (i.e. market discount), the yield to maturity used to determine
interest income earned on the obligation is the imputed rate based on the
original issue discount calculation. In the case of a tax-exempt obligation with
original issue discount where the discount based on the current market value of
the obligation is less than the then remaining portion of the original issue
discount (market premium), the yield to maturity used to determine interest
income earned on the obligation is based on the market value of the obligation.
With respect to the treatment of discount and premium on
mortgage or other receivables-backed obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), the
High-Yield Series accounts for gain or loss attributable to actual monthly pay
downs as an increase or decrease to interest income during the period. In
addition, the High-Yield Series may elect (i) to amortize the discount or
premium on a remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if the weighted average maturity date is not
available, or (ii) not to amortize the discount or premium on a remaining
security.
For purposes of computing yield, dividend income is recognized
by accruing 1/360 of the stated dividend rate of each obligation in the
High-Yield Series' portfolio each day that the obligation is in the portfolio.
The High-Yield Series does not use equalization accounting in the calculation of
yield. Expenses accrued during any base period, if any, pursuant to the
-29-
<PAGE>
Distribution Plan are included among the expenses accrued during the base
period. Any reimbursement accrued pursuant to the Distribution Plan during a
base period, if any, will reduce expenses accrued pursuant to such Plan, but
only to the extent the reimbursement does not exceed the accrued expenses for
the base period.
The High-Yield Series' yield for the one-month period ended
December 31, 1995 determined in accordance with the above formula is 5.56%.
Average annual total return quotations are computed by finding
the average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the end of a
designated period (or fractional portion
thereof)
For purposes of the above computation, it is assumed that all
dividends and distributions made by the High-Yield Series are reinvested at net
asset value during the designated period. The average annual total return
quotation is determined to the nearest 1/100 of 1%. The average annual total
return for the High-Yield Series for the year ended December 31, 1995 was
25.70%. The average annual total return for the High Yield Series for the 5 year
period ended December 31, 1995 was 6.13%. Since inception, October 1, 1987, the
average annual total return was 2.75%.
In determining the average annual total return (calculated as
provided above), recurring fees, if any, that are charged to all shareholder
accounts are taken into consideration. For any account fees that vary with the
size of the account, the account fee used for purposes of the above computation
is assumed to be the fee that would be charged to the High-Yield Series' mean
account size.
I The High-Yield Series may also from time-to-time advertise
its taxable equivalent yield. The High-Yield Series'
-30-
<PAGE>
taxable equivalent yield is determined by dividing that portion of the
High-Yield Series' yield (calculated as described above) that is tax-exempt by
one minus the stated marginal federal income tax rate and adding the product to
that portion, if any,of the yield of the High-Yield Series that is not
tax-exempt. The taxable equivalent yield of the High-Yield Series for the
one-month period ended December 31, 1995 was 9.21% for a taxpayer whose income
was subject to the then highest marginal federal income tax rate of 39.6%.
The High-Yield Series' yield and average annual total return
will vary from time-to-time depending on market conditions, the composition of
the High-Yield Series' portfolio and operating expenses of the High-Yield
Series. These factors and possible differences in the methods used in
calculating yields and returns should be considered when comparing performance
information regarding the High-Yield Series' to information published for other
investment companies and other investment vehicles. Yields and return quotations
should also be considered relative to changes in the value of the High-Yield
Series' shares and the risk associated with the High-Yield Series' investment
objective and policies. At any time in the future, yields and return quotations
may be higher or lower than past yields or return quotations and there can be no
assurance that any historical yield or return quotation will continue in the
future. In addition, the yield and average annual total return figures set forth
above in this Statement of Additional Information should be evaluated in light
of the limited operating history of the High-Yield Series.
OTHER INFORMATION
As of April 22, 1996, the following persons were known by
Fund management to have owned beneficially, directly or indirectly, 5% or more
of the outstanding shares of the High Yield Series: Evelyn Brady, 222 East 56th
Street, Apt. 3E, New York, New York 10022 (5.97%), Anthony Arcidiaceno, 220-36
67th Avenue, Bayside, New York 11364 (6.40%), Daivd I. and Elaine M. Kingsley,
15 Whitewood Road, Edison, New Jersey 08820 (5.69%) and Kenneth S. and Heidi G.
Widelitz, Trustees of the Widelitz Family Trust, 10519 Lauriston Avenue, Los
Angeles, California 90064 (16.20%). As of such date, the Trustees and officers
of the Fund as a group owned less than 1% of the outstanding shares of
High-Yield Series.
FINANCIAL STATEMENTS
Audited financial statements of the High-Yield Series for the
year ended December 31, 1995 are attached hereto.
-31-
<PAGE>
APPENDIX
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions. In addition, certain types of private activity bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit, port facilities,
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term Municipal
Bonds if the interest paid thereon qualifies as exempt from federal income tax.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of
factors, including general money market conditions, supply and demand and
general conditions of the Municipal Bond market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and
A-1
<PAGE>
rating may have different yields while Bonds of the same maturity and coupon
with different ratings may have the same yield.
A-2
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL BOND SERIES
(chart material)
- ----------------------------------------------------------
FFIF High Yield Municipal Bond Series
Avg Annual Total Return Thru 12/31/95
- ----------------------------------------------------------
1 Year 5 Year Since Inception (10/1/87)
25.70% 6.13% 2.75%
- ----------------------------------------------------------
$25,000
$20,000
$15,000
$10,000
$5,000
9/30/87
12/31/88
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
Lehman Brothers
Index $20,873
Consumer Price
Index $13,380
FFIF High Yield
Series $12,507
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in the Fund on 10/1/87
(Inception Date) to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. For comparative purposes the value of the index on
9/30/87 is used as the beginning value on 10/1/87. All dividends and capital
gain distributions are reinvested.
The Fund invests primarily in lower grade municipal securities and its
performance takes into account fees and expenses. Unlike the Fund, the Lehman
Brothers Municipal Bond Index is an unmanaged total return performance benchmark
for the long-term, investment-grade tax exempt bond market calculated by using
municipal bonds selected to be representative of the market. The Index does not
take into account fees and expenses. Further information relating to the Fund's
performance, including expense reimbursements, if applicable, is contained in
the Fund's Prospectus and elsewhere in this report.
Lehman Index Source: Lehman Brothers
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
ASSETS
Investment in securities at value (Note 5)
(cost $1,879,365) $1,828,053
Interest receivable 31,848
Receivable for shares sold 16,000
----------
Total assets $1,875,901
----------
LIABILITIES
Bank overdraft payable $ 378,766
Payable for shares redeemed 26,658
Dividend payable 1,162
Accrued expenses 11,880
----------
Total liabilities $ 418,466
----------
Net assets consisting of:
Accumulated net realized loss $ (198,899)
Unrealized depreciation of securities (51,312)
Paid-in-capital applicable to 206,234
shares of beneficial interest 1,707,646
----------
$1,457,435
==========
Net asset value per share $ 7.07
==========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
Investment income:
Interest income $ 91,471
Expenses (Notes 2, 3 and 6):
Investment advisory fees $ 9,569
Custodian and accounting fees 28,192
Transfer agent fees 6,011
Trustee fees 707
Distribution fees 5,981
Professional fees 40,715
Printing and postage 6,170
Other 6,904
--------
104,249
Less expenses waived or reimbursed by
the manager and affiliate (74,369)
--------
Total expenses 29,880
---------
Net investment income 61,591
Realized and unrealized gain (loss)
on investments:
Net realized loss on investments (39,968)
Change in unrealized appreciation of
investments for the year 253,452
--------
Net gain on investments 213,484
---------
Net increase in net assets
from operations $ 275,075
=========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31, 1995 and 1994
1995 1994
---------- ----------
Increase (decrease) in net assets from:
Operations:
Net investment income $ 61,591 $ 68,184
Net realized loss on investments (39,968) (54,302)
Unrealized appreciation (depreciation)
of investments for the year 253,452 (161,607)
---------- ----------
Net increase (decrease) in net
assets from operations 275,075 (147,725)
Dividends paid to shareholders from net
investment income (61,591) (68,184)
Capital share transactions (Note 4) 264,793 108,138
---------- ----------
Total increase (decrease) 478,277 (107,771)
Net assets:
Beginning of year 979,158 1,086,929
---------- ----------
End of year $1,457,435 $ 979,158
========== ==========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1995
Par Value Security Description Value
- --------- -------------------- -----
$ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc.,
8.875%, 3/1/21 $ 42,118
50,000 Angels, CA, Improvement Bond Act of 1915,
Greenhorn Creek Association, 7.300%, 9/2/21 52,371
75,000 Apple Valley, MN, IDR, K-Mart Corporation
Project, 6.000%, 4/1/01 66,822
35,000++ Babylon, NY, IDA, RFR, Babylon Recycling
Center, 8.875%, 3/1/11 17,549
40,000 Brookhaven, NY, IDA, CFR, Dowling College,
6.750%, 3/1/23 42,060
75,000 California Alternative Energy & Advanced
Transmission Finance Authority, SRI
International Project, 8.000%, 12/1/20 72,562
60,000 California Health Facilities Authority,
Valley Presbyterian Hospital Project, RB,
Series A, 9.000%, 5/1/12 60,076
35,000 Cass County, MO, IDA, 7.375%, 10/1/22 37,483
250,000 Colorado Health Facilities Authority, RHR,
Liberty Heights Project, ETM, CAB, 7/15/24 38,955
50,000 Decatur, GA, Downtown Development Authority,
IDR, Decatur Hotel Project, AMT, 8.750%, 11/1/16 50,880
500,000 Foothill/Eastern TCA, Toll Road Revenue, CAB,
1/1/26 74,410
50,000 Illinois Development Financial Authority, Solid
Waste Disposal, RB, Ford Heights Waste Tire
Project, 7.875%, 4/1/11 50,410
45,000 Illinois Health Facilities Authority, Midwest,
Physician Group Ltd. Project, RB, 8.125%, 11/15/19 48,361
35,000 Indianapolis, IN, RB, Robin Run Village Project,
7.625%, 10/1/22 38,576
50,000 Joplin, MO, IDA, Hospital Facilities Revenue,
Tri State Osteopathic, 8.250%, 12/15/14 53,013
50,000 Los Angeles, CA, Regional Airport, Continental
Airlines, AMT, 9.250%, 8/1/24 56,951
35,000 Maine Finance Authority, Solid Waste RFR, Bowater
Inc. Project, 7.750%, 10/1/22 38,723
35,000 Montgomery County, PA, HEHA, Hospital Revenue,
Series A, 8.375%, 11/1/11 37,037
95,000 Montgomery County, TX, Health Facilities Development
Corp., The Woodlands Medical Center, 8.850%, 8/15/14 104,448
25,000' New York, NY, GO, IFRN, 10/1/03 40,827
100,000+ Niagara Falls, NY, URA, Old Falls Street Improvement
Project, 11.00%, 5/1/99 49,336
50,000 Northeast, TX, Hospital Authority Revenue, Northeast
Medical Center, 7.250%, 7/1/22 52,910
30,000 Philadelphia, PA, HEHA, Graduate Health Systems
Project, 7.250%, 7/1/18 32,556
75,000 San Bernardino, CA, San Bernardino Community Hospital,
RB, 7.875%, 12/1/19 75,000
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1995
Par Value Security Description Value
- --------- -------------------- -----
$100,000' San Bernardino, CA, COP, IFRN, 7/1/16 $ 104,168
40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue,
7.000%, 1/1/30 42,609
60,000' San Jose, CA, Redevelopment Agency, Tax Allocation
Bonds, IFRN, MBIA Insured, 8/1/16 55,216
250,000 Savannah, GA, Economic Development Authority
Revenue, ETM, CAB, 12/1/21 45,977
50,000 Schuylkill County, PA, IDA Resource Recovery,
Schuylkill Energy Res. Inc., AMT, 6.500%, 1/1/10 51,937
50,000 Tomball, TX, Hospital Authority Revenue,
Refunding, 6.125%, 7/1/23 49,280
20,000++ Tri-State Health Care Corp., PA, First Humanics
Corp., Henry Clay Project, 13.75%, 12/1/14 4,019
15,000+ Troy,NY, IDA, Hudson River Project, 11.00%,
12/1/14 11,250
75,000++ Villages at Castle Rock, CO, Metropolitan
District #4, 8.500%, 6/1/31 19,501
100,000 Wayne MI, AFR, Northwest Airlines Inc. 6.750%,
12/1/15 103,134
50,000 Wisconsin Health & Educational Facilities
Authority, National Agency of New Berlin Project,
RB, 8.000%, 8/15/25 49,489
75,000 York County, VA, IDA, K-Mart Corp. Project, RB,
5.750%, 12/1/09 58,039
----------
Total investments (cost $1,879,365") $1,828,053
==========
" Cost is approximately the same for income tax purposes.
' Inverse Floating Rate Notes (IFRN) are instruments whose rates bear an
inverse relationship to the interest rate on another security or the
value of an index.
+ The value of this non-income producing security has been estimated in
good faith under methods determined by the Fund's Board of Trustees
(Note 5).
++ Non-income producing security (Note 5).
* Description:
AFR Airport Facilities Revenue
AMT Subject to Alternative Minimum Tax
CAB Capital Appreciation Bond
COP Certificate of Participation
CFR Civic Facility Revenue
ETM Escrowed to Maturity
GO General Obligation
HEHA High Education and Health Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue
MBIA Municipal Bond Insurance Assurance Corporation
RFR Recycling Facility Revenue
RHR Retirement Housing Revenue
RB Revenue Bond
TCA Transportation Corridor Agency
URA Urban Renewal Agency
IFRN Inverse Floating Rate Note
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end
management investment company registered under the Investment
Company Act of 1940. The Fund operates as a series company
currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield
Municipal Bond Series and the U.S. Government Strategic
Income Fund (the Series). Each series is considered a
separate entity for financial reporting and tax purposes.
The Series seeks to provide a high level of current income
exempt from federal income tax through investment in a
portfolio of lower quality municipal bonds, generally
referred to as "junk bonds." These bonds are considered
speculative because they involve greater price volatility and
risk than do higher rated bonds. The following is a summary
of significant accounting policies followed in the
preparation of the Series' financial statements:
Valuation of securities:
Investments are stated at value based on prices provided by
a pricing service which takes into account appropriate
factors such as institution-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-
counter prices, because such valuations are believed to
reflect more accurately the fair value of such securities.
Securities not priced in this manner are valued in good
faith by the Board of Trustees.
Federal income taxes:
It is the Series' policy to comply with the requirements of
the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable
and tax exempt income to its shareholders. Therefore, no
provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment
income and pays such dividends on the last business day of
each month. Distributions of net capital gain, if any,
realized on sales of investments are anticipated to be made
before the close of the Series' fiscal year, as declared by
the Board of Trustees. Dividends are reinvested at the net
asset value unless shareholders request payment in cash.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
General:
Securities transactions are accounted for on a trade date
basis. Interest income is accrued as earned. Realized
gain and loss from the sale of securities are recorded on
an identified cost basis. Original issue discounts and
premiums are amortized over the life of the respective
securities. Premiums are amortized and charged against
interest income and original issue discounts are accreted
to interest income.
Accounting estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
increases and decreases in net assets from operations
during the reporting period. Actual results could differ
from those estimates.
Note 2. Investment Advisory Fees and Other Transactions With
Affiliates
The Fund has a Management Agreement with Fundamental
Portfolio Advisors, Inc. (the Manager). Pursuant to the
agreement, the Manager serves as investment adviser to the
High-Yield Municipal Bond Series and is responsible for the
overall management of the business affairs and assets of the
Series subject to the authority of the Funds' Board of
Trustees. In compensation for the services provided by the
Manager, the Series will pay an annual management fee in an
amount equal to 0.8% of the Series' average daily net assets
up to $100 million and decreasing by.02% for each $100
million increase in net assets down to 0.7% of net assets in
excess of $500 million. The Manager is required to reimburse
the Series on a monthly basis for its expenses (exclusive of
interest, taxes, brokerage fees and expenses paid pursuant to
the Plan of Distribution, and extraordinary expenses) to the
extent that such expenses, including the management fee,
exceed the limits on investment company expenses prescribed
in any state in which the Series' shares are qualified for
sale. The Manager voluntarily waived fees and reimbursed
expenses of $57,191 for the year ended December 31, 1995.
The Fund has adopted a Plan of Distribution, pursuant to Rule
12b-1 promulgated under the Investment Company Act of 1940,
under which the Series pays to Fundamental Service
Corporation (FSC), an affiliate of the Manager, a fee, which
is accrued daily and paid monthly, at an annual rate of 0.5%
of the Series' average daily net assets. Amounts paid under
the plan are to compensate FSC for the services it provides
<PAGE>
and the expenses it bears in distributing the Series' shares
to investors. FSC has waived all fees and reimbursed certain
expenses in the amount of $11,167 for the year ended
December 31, 1995.
The Fund compensates Fundamental Shareholder Services, Inc.
(FSSI), an affiliate of the Manager, for the services it
provides under a Transfer Agent and Service Agreement. FSSI
has waived all fees in the amount of $6,011 for the year
ended December 31, 1995.
Note 3. Trustees' Fees
All of the Trustees of the Fund are also directors or
trustees of two other affiliated mutual funds for which the
Manager acts as investment adviser. For services and
attendance at board meetings and meetings of committees which
are common to each fund, each Trustee who is not affiliated
with the Manager is compensated at the rate of $6,500 per
quarter pro rated among the funds based on their respective
average.
Note 4. Shares of Beneficial Interest
As of December 31, 1995, there were an unlimited number of
shares of beneficial interest (no par value) authorized and
capital paid in amounted to $1,707,646. Transactions in
shares of beneficial interest were as follows:
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 137,251 $921,557 82,599 $534,554
Shares issued on
reinvestment of
dividends 8,305 54,195 7,829 50,715
Shares redeemed (104,760) (710,959) (74,527) (477,131)
------- -------- ------ --------
Net increase 40,796 $264,793 15,901 $108,138
======= ======== ====== ========
Note 5. Complex Securities and Investment Transactions
Inverse floating rate notes (IFRN):
The Fund invests in variable rate securities commonly
called "inverse floaters." The interest rates on these
securities have an inverse relationship to the interest
rate of other securities or the value of an index. Changes
in the interest rate on the other security or index
inversely affect the rate paid on the inverse floater, and
the inverse floater's price will be more volatile than that
of a fixed-rate bond.
<PAGE>
Investments transactions:
The Fund invests in lower rated or unrated ("junk")
securities which are more likely to react to developments
affecting market risk and credit risk than would higher
rated securities which react primarily to interest rate
fluctuations. The Fund held securities in default with an
aggregate value of $101,655 at December 31, 1995 (5.42% of
total assets). As indicated in the Statement of
Investments the Troy, NY Industrial Revenue Bond, 11% due
December 1, 2014 with a par value of $15,000 and a value of
$11,250 at December 31, 1995 has been estimated in good
faith under methods determined by the Board of Trustees.
The Fund owns 1.7% of a Niagara Falls New York Urban
Renewal Agency 11% Bond ("URA Bond") due to mature on
May 1, 2009 which has missed interest and sinking fund
payments. An affiliated investment company owns 98.3% of
this bond issue. The ability of this bond issue to make
future payments is dependent on the ability of the
underlying projects making certain rental payments. There
is uncertainty as to the timing of events and the
subsequent ability of this bond issue to make service debt
payments. The value of this bond was $49,336. The bond is
valued at 49.3% of face value at December 31, 1995 under
methods determined by the Board of Trustees.
During the year ended December 31, 1995, the cost of
purchases and proceeds from sales of investment securities,
other that short-term obligations, were $1,158,619 and
$536,639, respectively. Accumulated undistributed net
realized loss as of December 31, 1995 was $198,899. This
capital loss carry forward may be used to offset future
capital gains for tax purposes, and expires in varying
amounts between December 31, 1998 and December 31, 2004.
As of December 31, 1995, net unrealized depreciation of
portfolio securities amounted to $51,312 composed of
unrealized appreciation of $105,513 and unrealized
depreciation of $156,825.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 6. Selected Financial Information
Per share operating performance (for a share outstanding
throughout the year):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02
------ ------ ------ ------ ------
Income from investment
operations:
Net investment income $ .34 $ .43 $ .39 $ .43 $ .42
Net realized and
unrealized gains
(losses) on
investments 1.15 (1.35) (.03) .01 .27
------ ------ ------ ------ ------
Total from investment
operations 1.49 (0.92) 0.36 0.44 0.69
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (.34) (.43) (.39) (.43) (.42)
------ ------ ------ ------ ------
Net asset value,
end of year $ 7.07 $ 5.92 $ 7.27 $ 7.30 $ 7.29
====== ====== ====== ====== ======
Total return 25.70% (12.92)% 5.11% 6.26% 10.14%
Ratios/supplemental data:
Net assets, end of
year (000's) 1,457 979 1,087 1,050 1,176
Ratios to average net
assets:
Expenses* 2.50% 2.50% 2.50% 2.87% 2.63%
Net investment income* 5.15% 6.70% 5.40% 5.89% 5.93%
Portfolio turnover rate 43.51% 75.31% 84.89% 100.21% 15.78%
Bank loans:
Amount outstanding at
end of year (000
omitted) $ 379 $ - $ - $ 20 $ 103
Average amount of
bank loans
outstanding during
the year (000 omitted) 61 - - 57 29
Average number of
shares outstanding
during the year
(000 omitted) 183 156 145 144 188
Average amount of debt
per share during the
year $.33 $ - $ - $ 0.40 $0.15
<FN>
* These ratios are after expense reimbursements of 6.22%, 6.20%, 5.76%,
4.83%, and .11% for each of the years ended December 31, 1995,
1994, 1993, 1992 and 1991, respectively.
</FN>
</TABLE>
<PAGE>
Independent Auditor's Report
To the Board of Trustees and Shareholders
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Fundamental Fixed-Income
Fund High-Yield Municipal Bond Series as of December 31, 1995, and the
related statements of operations for the year then ended, the
statement of changes in net assets for each of the two years then
ended and the selected financial information for each of the five
years then ended. These financial statements and selected financial
information are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected financial
information referred to above present fairly, in all material
respects, the financial position of Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series as of December 31, 1995, and the
results of its operations, changes in net assets, and selected
financial information for the periods indicated, in conformity with
generally accepted accounting principles.
New York, New York
February 13, 1996
<PAGE>
Left Col.
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York, New York 10006
1-800-322-6864
Independent Auditors
McGladrey & Pullen, LLP
New York, NY 10017
Attorney
Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
919 Third Avenue
New York, NY 10022
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
Right Col.
Annual Report
December 31, 1995
FUNDAMENTAL
FIXED-INCOME FUND
High Yield
Municipal Bond Series
Revised 4/15/96
FUNDAMENTAL
<PAGE>
