FUNDAMENTAL FIXED INCOME FUND
U.S. GOVERNMENT STRATEGIC INCOME FUND
Dear Fellow Shareholder:
Financial assets scored remarkable gains in 1995. For example, the Dow Jones
Industrial Average ended the year above 5,000 for a gain of about 33%. The
Treasury bellweather thirty year "long" bond ended 1995 with a yield less than
6%, and the Bond Buyer lndex of forty actively traded municipal bonds registered
a 15% rise.
A plethora of favorable developments was behind these gains. The economic
fundamentals of modest growth and low inflation not only remained in tact, but
actually began to be thought of as an enduring phenomenon. Rhetoric flowing from
the White House and Congress seemed to indicate that genuine progress could be
made toward erasing the federal budget deficit. Finally, the Federal Reserve
began to reverse its tightfisted policy of 1994 by modestly reducing short term
interest rates, for the first time in July, and then again in December. Saving
and investment seemed to become fashionable again, as wage earners poured record
sums into IRA and 401K retirement plans.
Importantly, unlike 1993 when the Federal Reserve actively lowered interest
rates to stimulate business activity, the Fed pursued a different strategy in
1995. Indeed, throughout the year the Central Bank was being accused of being
too stringent rather than too lenient. The upshot was that market interest rates
fell faster than the Federal Reserve cut rates, such that the spread between
short and long term interest rates narrowed dramatically throughout the year.
This is important for 1996 in two respects. First, the narrowness of the
interest rate spread discourages speculation and leverage. Second, since the
spread itself is a reflection of a stringent monetary policy, it is highly
unlikely that either economic activity or inflation will get off the ground.
Indeed, while the economy may well skirt a recession in 1996, the downside risks
to the economy seem greater than the upside potential.
Thus, in our view, the credit easing that began in 1995 is likely to
continue in 1996. As a result, interest rates are likely to continue to trend
down while bond prices trend up. Unlike 1995, though, we would expect short term
interest rates to begin falling somewhat faster than long term rates in 1996.
Investors in the US Government Strategic Income Fund earned a 15.43% total
return for 1995. This placed the Fund in the top 3% in its class as ranked by
Lipper Analytical Services. In addition, the Fund's yield consistently exceeded
7% in the second half of the year, ranking it first among its peers according to
Lipper. The fund provided investors with a yield significantly above that of the
benchmark Treasury long bond.
The composition of the Fund's portfolio changed in 1995. The purpose was to
reduce volatility and increase yield. To this end all holdings of inverse
floating rate bonds were replaced with higher coupon fixed rate and two tiered
floating rate obligations. These will maintain high fixed coupon rates as long
as Federal Reserve policy does not swing significantly toward restraint.
In addition, because we were and for that matter still are conservative on
the interest rate outlook, the Fund's duration was consistently maintained at
between 2.5 and 3 years. With this duration, the Fund's Net Asset Value was able
to rise somewhat as bond prices appreciated. As we entered 1996, duration was
still generally being maintained close to but never exceeding, three years, as
we believe the Federal Reserve will continue lowering interest rates.
While the Fund will always incur interest rate risk, credit and currency
risk has effectively been eliminated by our strategy of only investing in US
Government and US Government Agency securities. Nonetheless, the issue of a
credit default by the US Government has recently arisen as the Congress has at
various times objected to an increase in the federal debt ceiling.
In our view, this is just part of the political gamesmanship that is being
played in Washington as negotiations over a plan to balance the federal budget
move into the home stretch. In fact, the prospect of a US Government default is
absolutely preposterous, and in the end no elected official will allow such an
event to occur.
Thus, the Fund will continue to invest in US Government obligations, and we
feel confident that continued strong returns and a high current yield can be
maintained. Our hedging operation proved successful in 1995. We believe as the
spread between short and long term interest rates begins to widen in 1996, the
success of our past hedging strategy will be repeated.
Of course, interest rates and bond prices will always fluctuate, so
investors are urged to undertake an investment program over time rather than in
one lump sum. Meanwhile, we thank you for your continued trust, and we look
forward to continuing to serve you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
1
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(chart material)
The Fundamental
U.S. Government
Strategic Income Fund
Average Annual Total Return
Ended on 12/31/95
Since Inception
1 Year (2/18/92)
15.43% 0.12%
13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
Thousands ($)
$12,455
Lehman Brothers
1-3 Year Government
Bond Index*
$11,055
Consumer
Price Index
$10,045
Fundamental U.S.
Government
Strategic Income
Fund
2/18/92 12/31/92 12/31/93 12/31/94 12/31/95
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in The Fundamental
U.S. Government Strategic Income Fund on 2/18/92 (Inception Date) to a $10,000
investment made in the Lehman Brothers 1-3 Year Government Bond Index on that
date. For comparative purposes the value of the Index on 2/24/92 is used as the
beginning value on 2/18/92. All dividends and capital gain distributions are
reinvested.
The Fund invests primarily in U.S. Government securities and its performance
takes into account fees and expenses. Unlike the Fund, the Lehman Brothers 1-3
Year Government Bond Index is an unmanaged total return performance benchmark
for the short-term, U.S. Government bond market calculated by using bonds
selected to be representative of the market. The Index does not take into
account fees and expenses. Further information relating to Fund performance,
including expense reimbursements, if applicable, is contained in the Funds
Prospectus and elsewhere in this report.
*Source:Lehman Brothers.
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
2
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(left column)
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
ASSETS
Investment in securities, at value (cost
$19,364,775) (Notes 5 and 6) ......... $22,828,137
Interest receivable .................... 110,989
-----------
Total assets ..................... 22,939,126
-----------
LIABILITIES
Notes payable .......................... 63,000
Options written at value (premiums
received $62,325) (Note 5) ........... 93,360
Securities sold subject to repurchase
(Note 6) ............................. 7,431,045
Payables:
Capital stock redeemed ............... 7,962
Dividends declared ................... 23,784
Accrued expenses ..................... 99,265
Variation margin ..................... 26,481
-----------
Total liabilities ................ 7,744,897
-----------
NET ASSETS consisting of:
Accumulated net realized loss ......... $(18,337,748)
Unrealized appreciation of securities . 3,463,362
Unrealized depreciation of options
written .............................. (31,035)
Unrealized depreciation of open future
contracts ............................ (183,771)
Paid-in-capital applicable to
10,191,431 shares of beneficial
interest ............................. 30,283,421
------------
$15,194,229
===========
NET ASSET VALUE PER SHARE ................ $1.49
=====
(Right Column)
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income, net of $455,877 of
interest expense ..................... $ 1,491,430
EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ............... $ 121,770
Custodian and accounting fees .......... 47,886
Transfer agent fees .................... 62,540
Professional fees ...................... 305,365
Trustees' fees ......................... 16,893
Printing and postage ................... 2,393
Interest on bank borrowing ............. 32,761
Distribution expenses .................. 40,695
Other .................................. 60,789
Less: Expenses waived or reimbursed
by manager and affiliate ............. (162,388)
-----------
Total expenses 528,704
-----------
Net investment income ............ 962,726
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on:
Investments .......................... (10,482,851)
Future and options on futures ........ (3,905,275) (14,388,126)
-----------
Change in unrealized appreciation
(depreciation) of investments,
options and futures contracts
for the year:
Investments ........................ 15,547,752
Open option contracts written ...... (12,178)
Open futures contracts ............. 127,400 15,662,974
----------- -----------
Net gain on investments ................ 1,274,848
-----------
NET INCREASE IN NET ASSETS
FROM OPERATIONS ........................ $ 2,237,574
===========
(Bottom)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December December
31, 1995 31, 1994
-------- --------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income ................................................................... $ 962,726 $ 3,223,702
Net realized gain (loss) on investments ................................................. (14,388,126) 6,321,524
Unrealized appreciation (depreciation) on investments, options and futures contracts .... 15,662,974 (21,438,948)
------------ ------------
Net increase (decrease) in net assets from operations ............................. 2,237,574 (11,893,722)
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ....................................................................... (962,726) (3,223,702)
CAPITAL SHARE TRANSACTIONS (Note 4) ....................................................... (5,170,959) (28,974,362)
------------ ------------
Total decrease .................................................................... (3,896,111) (44,091,786)
NET ASSETS
Beginning of year ....................................................................... 19,090,340 63,182,126
------------ ------------
End of year ............................................................................. $ 15,194,229 $ 19,090,340
============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF OPTIONS WRITTEN
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Expiration
Contracts++ Options Written Month Value
- ----------- --------------- ---------- --------
<S> <C> <C> <C>
25 U.S. Treasury Bonds, Call @ $122 February 1996 $ 20,703
50 U.S. Treasury Bonds, Call @ $122 March 1996 72,657
--------
$ 93,360
========
<FN>
++Each contract represents $100,000 face value of U.S. Treasury Bond Futures.
</FN>
</TABLE>
STATEMENT OF CASH FLOWS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
<TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net increase in net assets from operations ............................... $ 2,237,574
Adjustments to reconcile net increase in net assets from operations to
net cash provided by operating activities:
Purchase of investment securities ........................................ (30,993,645)
Proceeds on sale of securities ........................................... 42,446,029
Premiums received for options written .................................... 1,043,355
Premiums paid to close options written ................................... (2,410,864)
Decrease in interest receivable .......................................... 372,942
Decrease in variation margin receivable .................................. 59,294
Decrease in accrued expenses ............................................. (63,798)
Net accretion of discount on securities .................................. (337,697)
Net realized (gain) loss:
Investments ............................................................ 10,482,161
Options written ........................................................ 1,016,659
Unrealized appreciation on securities and options written for the period . (15,535,574)
-----------
Total adjustments .................................................... 6,078,862
-----------
Net cash provided by operating activities ............................ 8,316,436
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Net repayments of note payable and securities sold subject to repurchase ... (2,177,075)
Proceeds on shares sold .................................................... 1,819,736
Payment on shares repurchased .............................................. (7,761,803)
Cash dividends paid ........................................................ (237,526)
-----------
Net cash provided by financing activities ............................ (8,356,668)
-----------
Net decrease in cash ................................................. (40,232)
CASH AT BEGINNING OF YEAR .................................................... 40,232
-----------
CASH AT END OF YEAR .......................................................... $ 0
===========
<FN>
*Non-cash financing activities not included herein consist of reinvestment of dividends of $779,070.
Cash payments for interest expense totaled $488,706 for the period.
</FN>
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
December 31, 1995
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
------ ---- ---- -----
United States Treasury Securities-43.21%
United States Treasury Bonds
5,500,000 9.00% 11/15/18 $ 7,497,173
4,300,000* 0.00% 11/15/11 2,312,411
85,000* 0.00% 11/15/03 54,455
-----------
(Cost $8,098,571) 9,864,039
-----------
United States Agency Backed Securities-56.79%
Federal Home Loan Mortgage Corporation
843,718+ 9.25% 08/15/23 914,505
250,454+ 6.50% 12/15/23 223,308
FNMA-Federal National Mortgage Assoc. Collateralized Mortgage Obligations
3,671,204+ TTIB** 03/25/23 3,821,099
356,450+ 15.50% 03/25/23 362,239
490,760+ TTIB** 05/25/23 528,882
1,519,480+ TTIB** 11/25/23 1,478,879
980,392 TTIB** 11/25/23 1,088,706
1,000,000(beta) 8.75% 12/25/23 1,112,230
465,436+ 12.50% 08/25/23 470,700
953,000 9.00% 02/25/24 957,470
Department of Navy, FNMA Guaranteed
100,000+ 0.00% 04/01/09 43,189
REFCO-Resolution Funding Corporation
600,000 0.00% 07/15/10 248,994
-----------
(Cost $10,120,746) 11,250,201
-----------
FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities
100,000* 11/02/12 34,024
100,000* 05/02/14 30,580
125,000 05/02/15 35,565
200,000+ 11/02/18 44,613
148,000* 05/11/12 52,068
99,000* 11/11/13 31,321
119,000* 11/11/14 35,042
320,000+ 11/11/17 76,269
281,000* 05/30/14 85,455
261,000* 11/30/15 71,232
164,000* 11/30/16 41,666
167,000* 08/08/17 40,477
100,000* 08/03/18 22,669
182,000* 06/06/15 51,431
109,000+ 12/06/17 25,848
137,000* 08/03/15 38,267
5
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
------ ---- ---- -----
FICO-Financing Corporation (U.S. Government Agency) Zero Coupon Securities
(continued)
208,000 02/03/16 $ 56,114
138,000* 02/03/11 53,055
250,000 10/06/14 74,140
205,000+* 04/06/17 50,811
259,000* 10/05/15 71,453
100,000+ 10/05/17 23,991
217,000+ 04/05/18 50,272
375,000* 04/05/19 81,349
74,000 04/05/15 21,171
100,000 10/05/16 25,692
240,000* 10/06/17 60,300
135,000 04/06/04 83,230
444,000+ 08/08/16 115,387
100,000+ 02/08/17 25,050
200,000* 04/06/17 49,572
129,000 10/06/17 30,943
108,000+ 11/30/17 25,644
100,000+ 02/03/12 35,855
118,000* 08/03/16 30,698
144,000 08/03/18 32,643
-----------
(Cost $1,145,458) $ 1,713,897
-----------
Total investments (Cost $19,364,775++) $22,828,137
===========
** Two-Tiered Index Floating Rate Bonds (TTIB) are instruments whose
interest rate is fixed over various ranges of the interest rate on
another security or the value of an index, but variable within certain
ranges of the same security or index.
+ Collateral or partial collateral for securities sold subject to
repurchase (Note 6)
* Segregated, in whole or part, as initial margin for futures contracts
(Note 5)
++ Cost is the same for Federal income tax purposes
(beta) Security valued in good faith under procedures approved by the Fund's
Board of Trustees.
See Notes to Financial Statements.
6
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
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 Fund seeks to provide high current income with minimum risk of principal and
relative stability of net asset value.
Valuation of Securities-Investments are stated at value based on prices
provided by a pricing service which takes into account appropriate factors
such as institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices, because such valuations are believed to reflect
more accurately the fair value of such securities. Securities not priced in
this manner are valued at the mean between the most recently quoted bid and
ask prices provided by dealers. Securities for which quotations are not
readily available are valued in good faith under methods approved by the
Board of Trustees.
Futures Contracts-Initial margin deposits with respect to these
contracts are maintained by the Fund's custodian in segregated asset
accounts. Subsequent changes in the daily valuation of open contracts are
recognized as unrealized gains or losses. Variation margin payments are made
or received as daily appreciation or depreciation in the value of these
contracts occurs. Realized gains or losses are recorded when a contract is
closed.
Repurchase Agreements-The Series may invest in repurchase agreements,
which are agreements pursuant to which securities are acquired from a third
party with the commitment that they will be repurchased by the seller at a
fixed price on an agreed upon date. The Series may enter into repurchase
agreements with banks or lenders meeting the creditworthiness standards
established by the Board of Trustees. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. It is the Fund's
policy that its custodian take possession of the underlying collateral
securities the value of which exceeds the purchase price including accrued
interest earned on the underlying security. If the seller defaults, and the
value of the collateral declines, realization of the collateral by the Fund
may be delayed or limited.
Reverse Repurchase Agreements-The Series may enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Series
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Under the Investment Company Act of 1940 reverse repurchase
agreements are generally regarded as a form of borrowing. At the time the
Series enters into a reverse repurchase agreement it will establish and
maintain a segregated account with its custodian containing securities from
its portfolio having a value not less than the repurchase price including
accrued interest.
Federal Income Taxes-It is the Series' policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable and tax exempt
income to its shareholders. Therefore, no provision for federal income tax
is required.
Distributions-The Series declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions to shareholders, which are determined in accordance
with income tax regulations, are recorded on the ex-dividend date.
Distributions of net capital gain, if any, realized on sales of investments
are anticipated to be made before the close of the Series' fiscal year, as
declared by the Board of Trustees. Dividends are reinvested at the net asset
value unless shareholders request payment in cash.
General-Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gain and loss from the sale
of securities are recorded on an identified cost basis. Original issue
discounts and premiums are amortized over the life of the respective
securities. Premiums are charged against interest income and original issue
discounts are accreted to interest income.
Accounting Estimates-The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
7
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
2. Investment Advisory Fees and Other Transactions With Affiliates
The Series has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement the Manager serves as investment
adviser to the Series and is responsible for the overall management of the
business affairs and assets of the Series subject to the authority of the Fund's
Board of Trustees. In compensation for the services provided by the Manager, the
Series will pay an annual management fee in an amount equal to .75% of the
Series' average daily net assets up to $500 million, .725% on the next $500
million, and .70% per annum on assets over $1 billion. The Manager is required
to reimburse the Series for its expenses (excluding interest, taxes, brokerage
fees and extraordinary expenses) to the extent that such expenses, including the
management fees, exceed the limits on investment company expenses prescribed in
any state in which the Series' shares are qualified for sale. The manager
voluntarily waived fees and reimbursed expenses of $121,770 for the year ended
December 31, 1995.
The Series has adopted a Distribution and Marketing Plan, pursuant to Rule
12b-1, promulgated under the Investment Company Act of 1940, under which the
Series pays to Fundamental Service Corporation (FSC), an affiliate of the
Manager, a fee which is accrued daily and paid monthly at an annual rate of
0.25% of the Series' average daily net assets. Amounts paid under the plan are
to compensate FSC for the services it provides and the expenses it bears in
distributing the Series' shares to investors. The amount incurred by the Series
pursuant to the agreement for the year ended December 31, 1995 is set forth in
the statement of operations. FSC has waived fees in the amount of $40,618.
The Fund compensates Fundamental Shareholders Services, Inc. (FSSI), an
affiliate of the Manager, for services it provides under a Transfer Agent and
Service Agreement. The amount incurred by the Series pursuant to the agreement
for the year ended December 31, 1995 is set forth in the Statement of
Operations.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets. 4. Shares of Beneficial Interest
As of December 31, 1995 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid-in amounted to
$30,283,421. Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------------------- -------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 1,300,415 $1,819,736 7,503,044 $13,099,717
Shares issued on reinvestment of
dividends 554,101 779,070 1,398,152 2,335,836
Shares redeemed (5,559,992) (7,769,765) (26,452,420) (44,409,915)
---------- ----------- ----------- ------------
Net decrease (3,705,476) $(5,170,959) (17,551,224) $(28,974,362)
========== =========== =========== ============
</TABLE>
5. Complex Services, Off Balance Sheet Risks and Investment Transactions
Collaterialized Mortgage Obligations and Multi-Class Pass-Through Securities:
The Fund invests in collateralized mortgage obligations ("CMOs") which are
debt instruments issued by special purpose entities which are secured by pools
of mortgage loans or other mortgage-backed securities. Multi-class pass-through
securities are equity interests in a trust composed of mortgage loans or other
mortgage-backed securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the CMO or make scheduled
distributions on the multi-class pass-through security. The Fund may invest in
CMOs and multi-class pass-through securities issued by agencies or
instrumentalities of the U.S. Government.
8
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
Two-Tiered Index Floating Rate Bonds (TTIB):
The Fund invests in variable rate securities commonly called "TTIBs" which
are collateralized mortgage obligations. The interest rate on these securities
are fixed over various ranges of the interest rate on another security or the
value of an index, but variable within certain ranges of the same security or
index. Changes in interest rate on the other security or index affect the rate
paid on the TTIB, and the TTIB's price will be more volatile than that of a
fixed-rate bond.
Futures Contracts and Options on Futures Contracts:
The Fund invests in futures contracts consisting primarily of US Treasury
Bond Futures. A futures contract is an agreement between two parties to buy and
sell a security for a set price on a future date. Futures contracts are traded
on designated "contract markets" which through their clearing corporations,
guarantee performance of the contracts. In addition the fund invests in options
on US Treasury Bond Futures which gives the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract which requires the
parties to the contract to buy and sell a security on a set date, an option on a
futures contract entitles its holder to decide before a future date whether to
enter into such a futures contract. Both types of contracts are marked to market
daily and changes in valuation will affect the net asset value of the Fund.
The Fund's principal objective in holding or issuing derivative financial
instruments is as a hedge against interest-rate fluctuations in its bond
portfolio, and to enhance its total return. The Fund's principal investment
objective is to maximize the level of interest income while maintaining
acceptable levels of interest-rate and liquidity risk. To achieve this
objective, the Fund uses a combination of derivative financial instruments
principally consisting of US Treasury Bond Futures and Options on US Treasury
Bond Futures. Typically the Fund sells treasury bond futures contracts or writes
treasury bond option contracts. These activities create off balance sheet risk
since the Fund may be unable to enter into an offsetting position and under the
terms of the contract deliver the security at a specified time at a specified
price. The cost to the Fund of acquiring the security to deliver may be in
excess of recorded amounts and result in a loss to the Fund. For the year ended
December 31, 1995, the Fund had daily average notional amounts outstanding of
approximately $6,687,000 and $10,787,000 of short positions on US Treasury Bond
Futures and Options Written on US Treasury Bond Futures respectively. Realized
gains and losses from these transactions are stated separately in the Statement
of Operations.
The Fund had the following open futures contracts at December 31, 1995.
Principal Expiration Unrealized
Type Amount Position Month Gain
---- ------ -------- ----- -----
U.S. Treasury Bond ....... $6,500,000 Short March 1996 $183,771
Portfolio securities with an aggregate value of approximately $3,250,000
have been segregated as collateral for this contract as of December 31, 1995.
In addition, the following table summarizes option contracts written by the
Series for the year ended December 31, 1995:
Number of Premiums Realized
Contracts Received Cost Loss
--------- -------- ---- ----
Contracts outstanding
December 31, 1994 ....... 375 $ 413,175
Options written ........... 1,230 1,043,354
Contracts closed or expired (1,530) (1,394,204) $2,410,863 $(1,016,659)
------ ----------
Contracts outstanding
December 31, 1995 ....... 75 $ 62,325
===== =========
Other Investment Transactions
For the year ended December 31, 1995, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$28,242,059 and $39,141,080, respectively.
9
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
As of December 31, 1995, net unrealized appreciation of portfolio securities
amounted to $3,463,362 comprised entirely of unrealized appreciation. As of
December 31, 1995, the Fund has available for federal income tax purposes an
unused capital loss carryover of approximately $15,000,000 which expires in
2002.
6. Borrowing
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.
The Series enters into reverse repurchase agreements collateralized by
portfolio securities equal in value to the repurchase price. Portfolio
securities with an aggregate value of approximately $8,290,000 have been
segregated as collateral for securities sold subject to repurchase as of
December 31, 1995.
7. Selected Financial Information
<TABLE>
<CAPTION>
Year Year February 18,
Year Ended Ended Ended 1992 to
December 31, December 31, December 31, December 31,
Per share operating performance 1995 1994 1993 1992
(for a share outstanding throughout the period) ------ ------ ------ -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 1.37 $ 2.01 $ 2.02 $ 2.00
------ ------ ------ ------
Income from investment operations
Net investment income ...................................... 0.08 0.14 0.16 0.15
Net realized and unrealized gain/(loss) on investments ..... 0.12 (0.64) - 0.02
------ ------ ------ ------
Total from investment operations ................... 0.20 (0.50) 0.16 0.17
------ ------ ------ ------
Less distributions
Dividends from net investment income ....................... (0.08) (0.14) (0.16) (0.15)
Dividends from net realized gains .......................... - - (0.01) -
------ ------ ------ ------
Net asset value, end of period ............................. $ 1.49 $ 1.37 $ 2.01 $ 2.02
====== ====== ====== ======
Total return ............................................... 15.43% (25.57%) 8.14% 10.76%**
Ratios/supplemental data:
Net assets, end of period (000 omitted) .................... 15,194 19,090 63,182 40,500
Ratios to average net aset (annualized):
Interest expense ......................................... 0.20% 0.12% 0.05% 0.09%
Operating expenses ....................................... 3.05% 2.16% 1.39% 0.96%
------ ------ ------ ------
Total expenses ..................................... 3.25%+ 2.28% 1.44%+ 1.05%+
====== ====== ====== ======
Net investment income .................................... 5.91% 8.94% 7.85% 8.50%
Portfolio turnover rate .................................... 114.36% 60.66% 90.59% 115.39%
Borrowings
Amount outstanding at end of period (000 omitted) .......... 7,481 9,674 31,072 19,666
Average amount of debt outstanding during the period
(000 omitted) ............................................ 7,790 16,592 28,756 13,779
Average number of shares outstanding during the period
(000 omitted) ............................................ 11,571 21,436 28,922 12,683
Average amount of debt per share during the period ......... .67 .77 .99 1.09
<FN>
*Commencement of operations.
**Annualized.
+These ratios are after expense reimbursement of 1.0% for the year ended
December 31, 1995, .13% for the year ended December 31, 1993, and 1.05% for
the period of February 18, 1992 to December 31, 1992.
</FN>
</TABLE>
10
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1995
- --------------------------------------------------------------------------------
8. Contingencies
The Fund has been named as a defendant in two related class action lawsuits
alleging that the Fund invested in certain derivitive financial instruments that
were inconsistent with the Fund's stated investment objectives. The suits claim
that the defendants, which include the Fund's investment adviser, distributor,
and certain control persons, are liable for damages because there existed
material misstatements or omissions in the prospectuses that rendered them
misleading.
Management has entered into negotiations with the plaintiffs who have
consented to a series of adjournments of all operative dates in the litigation.
These negotiations have resulted in a settlement in principle with the
plaintiffs that, if consummated, would require a payment of approximately
$500,000 or more under certain future circumstances by the Fund's investment
adviser and no liability or cost to the Fund or its shareholders. The
contemplated stipulation of settlement expressly states that the settlement does
not constitute an admission of wrongdoing by the Fund or any of the other
defendants. The settlement remains subject to final documentation and agreement
by the parties and approval by the Court. If the settlement is not successfully
concluded, the Fund intends to contest the litigation vigorously. If this
litigation ever goes forward, it would involve significant complexities that
preclude a present determination of whether any liability to the Fund ultimately
would result and, if so, whether any such liability would be material to the
financial position of the Fund. Accordingly, and because the contemplated
settlement does not require any payment by the Fund, no amount has been accrued
in the financial statements with respect to this matter.
In addition, Management is cooperating in a formal investigation being
conducted by the Securities and Exchange Commission concerning the Fund, the
Fund's adviser and affiliated entities. Among other things, the investigation
concerns the sufficiency of disclosures set forth in the Fund's prior
advertising and prospectus, the consistency of the Fund's practices with those
disclosures, and the Fund's investment in inverse floating rate notes between
1993 and 1995. Currently, the Fund has no inverse floating rate notes in its
portfolio.
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Fundamental U.S. Government Strategic Income Fund
We have audited the accompanying statement of assets and liabilities
including the statement of investments and statement of options written, of the
Fundamental U.S. Government Strategic Income Fund Series of Fundamental
Fixed-lncome Fund as of December 31, 1995 and the related statements of
operations and cash flows for the year then ended, and the statement of changes
in net assets for the two years then ended and selected financial information
for the three years then ended and the period from February 18, 1992 (date of
inception) to December 31, 1992. These financial statements and selected
financial information are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995 by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Fundamental U.S. Government Strategic Income Fund of Fundamental
Fixed-lncome Fund as of December 31, 1995, the results of its operations,
changes in its net assets, cash flows, and selected financial information for
the periods indicated, in conformity with generally accepted accounting
principles.
S I G N A T U R E
New York, New York
February 13, 1996
12
<PAGE>
Left Col.
FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC 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
U.S. GOVERNMENT
STRATEGIC INCOME FUND
FUNDAMENTAL
<PAGE>
Left Col.
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value
(cost $84,920,453) ........................................ $84,920,453
Cash ........................................................ 511,739
Receivables:
Interest .................................................. 333,558
Capital shares sold ....................................... 5,852,289
-----------
Total assets .......................................... 91,618,039
-----------
LIABILITIES
Payables:
Capital shares redeemed ................................... 80,211,207
Dividends ................................................. 1,822
Accrued expenses ............................................ 154,463
-----------
Total liabilities ..................................... 80,367,492
-----------
NET ASSETS equivalent to $1.00 per share on
11,259,435 shares of beneficial interest
outstanding (Note 4) ........................................ $11,250,547
===========
Right Col.l
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ............................... $1,678,952
EXPENSES (Notes 2 and 3)
Investment advisory fees ...................... $222,162
Custodian and accounting fees ................. 77,931
Transfer agent fees ........................... 41,525
Trustees' fees ................................ 33,034
Professional fees ............................. 40,721
Distribution fees ............................. 222,162
Interest ...................................... 3,610
Postage and printing .......................... 1,860
Registration .................................. 8,740
Other ......................................... 26,575
--------
678,320
Less: Expenses offset (Note 6) ................ (77,931)
--------
Total expenses .......................... 600,389
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ...................................... $1,078,563
==========
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, December 31,
1995 1994
----------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ................................... $ 1,078,563 $ 870,365
Net realized gain on investments ........................ - 401
----------- ----------
Net increase in net assets from operations ........ 1,078,563 870,766
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ....................................... (1,078,563) (870,365)
CAPITAL SHARE TRANSACTIONS (Note 4) ....................... 2,246,999 3,173,383
----------- ----------
Total increase .................................... 2,246,999 3,173,784
NET ASSETS:
Beginning of year ....................................... 9,003,548 5,829,764
----------- ----------
End of year ............................................. $11,250,547 $9,003,548
=========== ==========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
Principal
Amount Issue0 Value
------ ----- -----
<S> <C> <C>
$5,000,000 Ascension Parish, LA, PCR, BASF, Wyandotte Corp, LOC Bank of Tokyo,
VRDN*, 5.90%, 1/02/96 ................................................................ $ 5,000,000
5,200,000 Burke County, GA, Development Authorily PCR, Georgia Power Co, Daily
VRDN*, 6.00%, 1/02/96 ................................................................ 5,200,000
87,000 Clermont County, OH, HFR, Mercy Health Care Project, MBIA Insured, VRDN*,
5.10%, 1/05/96 ....................................................................... 87,000
6,400,000 Columbia, AL, IDR, PCR, Alabama Power Company Project, VRDN*, 6.00%,
1/02/96 .............................................................................. 6,400,000
80,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Wells Fargo
Bank, 3.90%, 1/01/96 ................................................................. 80,000
200,000 Delaware County, PA, SWDF, Scott Paper Project, LOC Fuji Bank, VRDN*,
5.50%, 1/05/96 ....................................................................... 200,000
250,000 Detroit City, Ml, School District, State School Aid Notes, 4.50%, 5/01/96 .............. 250,522
300,000 District of Columbia, General Fund Recovery, LOC Westdeutsche Landesbank, Daily VRDN*,
6.00%, 1/02/96 ....................................................................... 300,000
4,500,000 East Baton Rouge Parish, LA, PCR, Exxon Corp, VRDN*, 6.00%, 1/02/96 .................... 4,500,000
200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 5.20%, 1/05/96 .................. 200,000
135,000 Genesee County, NY, IDR, Orcon Industries, AMT, LOC Fleet Bank, VRDN*,
4.25%, 1/01/96 ....................................................................... 135,000
3,700,000 Gulf Coast, TX, IDA, Marine Terminal RB, Amoco Oil Project, AMT, VRDN*,
6.15%, 1/05/96 ....................................................................... 3,700,000
5,000,000 Harris County, TX, Health Facilities Development Corp., The Methodist Hospital,
Morgan Guaranty Liquidity, Daily VRDN*, 6.00%, 1/1/96 ................................ 5,000,000
300,000 Illinois Educational Facility Authority, RB, Art Institute of Chicago, Weekly
Northern Trust Liqudity VRDN*, 5.10%, 1/05/96 ........................................ 300,000
1,600,000 Illinois HFAR, Elmhurst Memorial Hospital, RB, Sanwa Bank Liqudity, VRDN*,
6.50%, 1/02/96 ....................................................................... 1,600,000
300,000 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank, VRDN*, 5.10%,
1/05/96 .............................................................................. 300,000
2,000,000 Illinois HFAR, Northwest Community Hospital, RB, Sanwa Bank Liquidity,
VRDN*, 6.50%, 1/02/96 ................................................................ 2,000,000
200,000 Illinois HFAR, West Suburban Hospital Medical Center, LOC First Chicago Bank,
VRDN*, 5.10%, 1/05/96 ................................................................ 200,000
1,600,000 Irvine Ranch Water District, CA, Consolidated, Series 93, LOC Bank of America,
VRDN* 6.00%, 1/02/96 ................................................................. 1,600,000
1,800,000 Irvine Ranch Water District, Orange County Consolidated, RB, LOC Bank America,
Daily VDRN*, 6.00%, 1/02/96 .......................................................... 1,800,000
7,600,000 Los Angeles Regional Airports Improvement Corp, LOC Societe Generale,
VRDN*, 6.00%, 1/02/96 ................................................................ 7,600,000
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS (continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
Principal
Amount Issue0 Value
------ ----- -----
<S> <C> <C>
$4,200,000 Louisiana Recovery District, Sales Tax Bond, MBIA Insured, SPA Swiss Bank
Corp, Daily VDRN*, 6.00%, 1/02/96 .................................................... $4,200,000
90,000 Maryland Department of Housing & Community Development, Single Family
Program, Putable Semiannually, 3.90%, 4/01/96 ........................................ 90,000
4,000,000 Massachusetts State Updates, LOC National Westminster Bank, Daily VRDN*,
5.90%, 1/02/96 ....................................................................... 4,000,000
200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp. VRDN*,
5.00%, 1/05/96 ....................................................................... 200,000
300,000 Missouri, PCR, Monsanto Project, VRDN*, 5.00%, 1/05/96 ................................. 300,000
200,000 Missouri, Third Street Building Project, VRDN*, 5.35%, 1/05/96 ......................... 200,000
300,000 Montgomery, AL, Baptist Medical Cntr, Special Care Facilities Financing Auth,
AMBAC Insured, SPA First Chicago, VRDN*, 5.00%, 1/2/96 ............................... 300,000
200,000 Nebraska Higher Education Loan Program, MBIA Insured, VRDN*, SPA SLMA,
4.90%, 1/02/96 ....................................................................... 200,000
6,000,000 New York City, NY, GO, LOC Chemical Bank, VRDN*, 5.95%, 1/02/96 ........................ 6,000,000
8,300,000 New York City, NY, GO, LOC Fuji Bank, VRDN*, 6.25%, 1/02/96 ............................ 8,300,000
1,600,000 New York City, NY, GO, LOC Sumitori Bank, VRDN*, 6.00%, 1/02/96 ........................ 1,600,000
5,200,000 New York City, NY, Municipal Water Financial Authority, FGIC Insured, VRDN*,
5.90%, 1/02/96 ....................................................................... 5,200,000
300,000 New York State, Job Development Authority, Fuji Bank Liquidity, VRDN*,
6.25%, 1/02/96 ....................................................................... 300,000
1,200,000 Peninsula, VA Port Authority, Shell Oil Company, VRDN*, 5.90%, 1/02/961,200,000
300,000 Philadelphia, PA, TRANS, 4.50%, 6/27/96 ................................................ 300,845
200,000 Purdue University, IN, Student Fee Bonds, Series K, VRDN*, 5.10%, 1/05/96 .............. 200,000
300,000 San Francisco City & County Unified School District, TRANS, 4.50%, 7/25/96 ............. 300,972
125,000 Scioto County, OH, HFR, VHA Central Capital Project, AMBAC Insured, VRDN*,
5.00%, 1/05/96 ....................................................................... 125,000
250,000 Texas State, TRANS, 4.75%, 8/30/96 ..................................................... 251,114
5,000,000 Unita County, WY, PCR, Chevron Project, VRDN*, 5.90%, 1/02/96 .......................... 5,000,000
200,000 Wake County, NC, PCR, Carolina Power & Light Project, LOC Sumitomo Bank, VRDN*,
5.50%, 1/05/96 ....................................................................... 200,000
-----------
Total Investments (Cost $84,920,453**) ................................................. $84,920,453
===========
<FN>
*Variable Rate Demand Notes (VRDN) are instruments whose interest rate changes
on a specific date and/or whose interest rates vary with changes in a
designated base rate.
**Cost is the same for Federal income tax purposes.
</FN>
</TABLE>
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS (continued)
December 31, 1995
- -------------------------------------------------------------------------------
Legend
0Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
HFA Housing Finance Authority
HFAR Health Facilities Authority Revenue
HFDC Health Facilities Development Corporation
HFR Hospital Facilities Revenue
IDR Industrial Development Revenue
LOC Letter of Credit
MBIA Municipal Bond Insurance Assurance Corporation
PCR Pollution Control Revenue
RB Revenue Bond
SLMA Student Loan Marketing Association
SPA Stand By Bond Purchase Agreement
SWDF Solid Waste Disposal Facility
TAN Tax Anticipation Note
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS)
December 31, 1995
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
acts as a series company currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield Municipal Bond Series
and the U.S. Government Strategic Income Fund. Each series is considered a
separate entity for financial reporting and tax purposes. The Fund seeks to
provide as high a level of current income exempt from federal income taxes as is
consistent with the preservaton of capital and liquidity. The following is a
summary of significant accounting policies followed in the preparation of the
Series' financial statements:
Valuation of Securities:
Investments are stated at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any premium or discount is
amortized on a constant basis to the maturity of the instrument.
Amortization of premium is charged to income, and accretion of market
discount is credited to unrealized gains. The maturity of investments is
deemed to be the longer of the period required before the Fund is entitled
to receive payment of the principal amount or the period remaining until
the next interest adjustment.
Federal Income Taxes:
It is the Series' policy to comply with the requirements of the Internal
Revenue Code applicable to "regulated investment companies" and to
distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment income and
pays such dividends on the last Wednesday of each month. Distributions of
net capital gains are made annually, as declared by the Fund's Board of
Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General:
Securities transactions are accounted for on a trade date basis. Interest
income is accrued as earned. Realized gains and losses from the sale of
securities are recorded on an identified cost basis.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
2. Investment Advisory Fees and Other Transactions with Affiliates
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the Tax-Free Money Market Series and is responsible for the overall
management of the business affairs and assets of the Series subject to the
authority of
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS)
December 31, 1995
- -------------------------------------------------------------------------------
the Fund's Board of Trustees. In compensation for the services provided by the
Manager the Series will pay an annual management fee in an amount equal to 0.5%
of the Series' average daily net assets up to $100 million and decreasing by
.02% for each $100 million increase in net assets down to 0.4% of net assets in
excess of $500 million. The Manager is required to reimburse the Series on a
monthly basis for its expenses (exclusive of interest, taxes, brokerage fees and
expenses paid pursuant to the Plan of Distribution, and extraordinary expenses)
to the extent that such expenses, including the management fee, exceed the
limits on investment company expenses prescribed in any state in which the
Series' shares are qualified for sale. No expense reimbursement was required for
the 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. The amounts paid under the plan compensate FSC
for the services it provides and the expenses it bears in distributing the
Series' shares to investors. Fees to FSC amounted to $199,493 for the year ended
December 31, 1995.
The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of
the Manager, for the services it provides under a Transfer Agent and Service
Agreement. Transfer agent fees for the year ended December 31, 1995 are set
forth in the Statement of Operations.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each Fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of December 31, 1995 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$11,259,435. Transactions in shares of beneficial interest, all at $1.00 per
share were as follows:
1995 1994
-------------- --------------
Shares sold ................................. $3,142,235,917 $3,016,643,058
Shares issued on reinvestment of dividends .. 1,075,300 841,613
Shares redeemed ............................. (3,141,064,218) (3,014,311,288)
-------------- --------------
Net increase ............................ $ 2,246,999 $ 3,173,383
============== ==============
5. Line of Credit
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.
6
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS)
December 31, 1995
- -------------------------------------------------------------------------------
6. Expense Offset Arrangement
The Fund has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to $77,931 for the year ended December 31, 1995.
<TABLE>
<CAPTION>
7. Selected Financial Information
Years Ended December 31,
1995 1994 1993 1992 1991
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA AND RATIOS
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Year ........................ $ 1.00 $1.00 $1.00 $1.00 $1.00
------ ----- ----- ----- -----
Income from investment operations:
Net investment income ..................................... 0.026 0.017 0.014 .028 .047
------ ------ ------ ----- -----
Less Distributions:
Dividends from net investment income ...................... (0.026) (0.017) (0.014) (.028) (.047)
------ ------ ------ ----- -----
Net Asset Value, End of Year .............................. $ 1.00 $1.00 $1.00 $1.00 $1.00
====== ===== ===== ===== =====
Total Return .............................................. 2.60% 1.69% 1.62% 2.79% 4.86%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000 omitted) ..................... 11,251 9,004 5,830 32,488 8,310
Ratios to Average Net Assets
Expenses** ............................................ 1.53%++ 0.91%+ .95%+ .42%+ .05%+
Net investment income ................................. 2.43% 1.55% 1.25% 2.76% 4.74%
BANK LOANS
Amount outstanding at end of period
(000 omitted) ........................................... $ - $ 451 $ 290 $ 20 $ 58
Average amount of bank loans outstanding during the year
(000 omitted) ........................................... $ 41 $ 53 $ 111 $ 69 $ 124*
Average number of shares outstanding during the year
(000 omitted) ........................................... 44,432 56,267 25,786 7,980 6,984*
Average amount of debt per share during the year .......... $ .001 $ .001 $ .004 $ .009 $ .018
<FN>
*Based on month end average loans or shares.
**The expense ratio for the year ended December 31, 1995 is based on total
expenses, before expense reimbursements and expense offsets. Ratios for
periods prior to this date are net of expense reimbursements.
+These ratios are after expense reimbursements of .44%, .67%, 1.66%, and 1.57%,
for each of the years ended December 31, 1994, 1993, 1992 and 1991,
respectively. + +This ratio would have been 1.35%, net of expense offsets of
.18%.
</FN>
</TABLE>
7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of the Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund as of December 31, 1995 and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presenation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statement and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Tax-Free Money Market Series of Fundamental Fixed-!ncome Fund 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.
S I G N A T U R E
New York, New York
February 13, 1996
8
<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
Tax-Free
Money Market Series
FUNDAMENTAL
<PAGE>
Dear Fellow Shareholder:
Financial assets scored remarkable gains in 1995. For
example, the Dow Jones Industrial Average ended the year above
5000, for a gain of about 33%. The Treasury bellweather thirty-
year "long" bond finished 1995 with a yield less than 6%, and the
Bond Buyer index of forty actively traded municipal bonds
increased by 15%.
A plethora of favorable developments were behind these
gains. The economic fundamentals of modest growth and low
inflation not only remained intact, but actually began to be
thought of as an enduring phenomenon. And rhetoric flowing from
the White House and Congress seemed to indicate that genuine
progress could be made toward erasing the federal budget deficit.
Finally, the Federal Reserve began to reverse its tightfisted
policy of 1994 by modestly reducing short-term interest rates,
for the first time in July, and then again in December. In this
environment saving and investment seemed to become fashionable
again, as wage earners poured record sums into IRA and 401(k)
retirement plans.
Importantly, unlike 1993 when the Federal Reserve actively
lowered interest rates to stimulate business activity, the Fed
pursued a different strategy in 1995. Indeed, throughout the
year the Central Bank was being accused of being too stringent
rather than too lenient. The upshot was that market interest
rates fell faster than the Federal Reserve's own rate cuts, such
that the spread between short- and long-term interest rates
narrowed dramatically throughout the year.
This is important for 1996 in two respects. First, the
narrowness of the interest rate spread discourages speculation
and leverage. Second, since the spread itself is a reflection of
a stringent monetary policy, it is highly unlikely that either
economic activity or inflation will get off the ground. Indeed,
while the economy may well skirt a recession in 1996, the
downside risks to the economy seem greater than the upside
potential.
Thus, the credit easing that began in 1995 is likely to
continue in 1996, in our view, and as a result interest rates are
likely to continue to trend down while bond prices trend up.
Unlike 1995, though, we would expect short-term interest rates to
begin falling somewhat faster than long-term rates in 1996.
The municipal bond market began 1995 on a strong note as it
benefitted from the positive fundamentals of slow growth and low
inflation, as well as from a reduction in the issuance of state
and local bonds that began in 1994. By late spring, however,
municipals began to underperform Treasuries as discussions about
a reform of the tax system, and specifically a flat tax, received
attention.
<PAGE>
In a pure flat tax system all incomes would be taxed at the
same rate, and in its most extreme form all deductions would be
eliminated, including those for real estate taxes, mortgage
interest, municipal bond interest, and state and local income
taxes.
The flat tax is a long way from being enacted, and even if
it ever is enacted, it will be significantly amended. In our
view it is unlikely to ever be enacted, and indeed, the Clinton
Administration has already come out squarely against it.
Nevertheless, the mere mention of eliminating the interest
deduction on municipal bonds hurt the market such that by autumn,
yields on municipal bonds were about comparable to the yield on
Treasury bonds, instead of being lower, as is normal.
In our view this anomaly is presenting municipal bond
investors with a unique opportunity. As this tax hysteria
subsides, munis will once again sell at a premium relative to
Treasuries, meaning that municipal bond prices will rise to
Treasuries. And in the worst case, munis will yield on a par
with Treasuries, which is practically the case currently.
Investors in Fundamental's High-Yield Municipal Bond Fund
were handsomely rewarded in 1995. Net Asset Value rose from
$5.92 per share at the end of 1994 to $7.07 at the end of 1995
for a hefty 25.7% total return. As a result, the High-Yield
Municipal Bond Fund was the year's highest ranking High-Yield
Municipal Bond Fund.
The High-Yield Municipal Bond Fund is particularly sensitive
to fluctuations in short-term interest rates, so as the Federal
Reserve began to ease credit around mid-year, the Fund was
positively affected. Moreover, because we were generally
constructive on the interest rate outlook for 1995, the Fund's
portfolio maintained a long duration. If in fact the Federal
Reserve continues gradually lowering short-term interest rates in
1996, the High-Yield Municipal Bond Fund will further benefit.
Nonetheless, returns such as those generated in 1995 should
not be expected to recur. Interest rates will probably not fall
as sharply in 1996 as they did in 1995. However, as discussions
about the flat tax are clarified, or more likely terminated,
municipal bonds will outperform Treasuries, and this will be
positive for the High-Yield Municipal Bond Fund.
Of course, interest rates and bond prices will always
fluctuate, so investors are urged to undertake an investment
program over time rather than in one lump sum. Meanwhile, we
thank you for your continued trust, and we look forward to
continuing to serve you in the future.
Sincerely,
Dr. Vincent J. Malanga
<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* 8.72% 2.50% 2.50% 2.87% 2.63%
Net investment income* 3.85% 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 3.8%, 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
FUNDAMENTAL
