Rule 497(c)
Registration No.:33-12738
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Fundamental
Fixed-lncome Fund
Tax-Free Money Market Series
90 Washington Street
New York, New York 10006
1-800-225-6814
Prospectus
April 25, 1996
This Prospectus pertains to the Tax-Free Money
Market Series (Money Market Series) of the
Fundamental Fixed-lncome Fund (the Fund), an
open-end, non-diversified management investment
company (commonly referred to as a mutual fund).
The investment objective of the Money Market
Series is to provide as high a level of current
income exempt from federal income tax as is
consistent with the preservation of capital and
liquidity. Shares of the Money Market Series are
neither insured nor guaranteed by the United
States Government. There is no assurance that the
Money Market Series will be able to maintain a
stable net asset value of $1.00 per share or that
the Money Market Series' investment objective will
be achieved.
This Prospectus concisely sets forth the
information about the Money Market Series that you
should know before investing. You should read and
retain this Prospectus for your future reference.
More information about the Money Market Series is
included in the Statement of Additional
Information, also dated April 25, 1996, which has
been filed with the Securities and Exchange
Commission and is incorporated into this
Prospectus by reference. A copy of the Statement
of Additional Information may be obtained free of
charge by writing to the Fund at the address
listed above, or by calling (800) 322-6864.
Shareholder inquiries may also be placed through
this number.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED
SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE
SECURITIES AGENCY NOR HAS THE
COMMISSION OR ANY STATE
SECURITIES AGENCY PASSED UPON
THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Contents
Annual Operating Expenses 2
Financial Highlights 2
Investment Objective and Policies 4
Repurchase Agreements 4
Variable Rate Securities 5
When-lssued Securities 5
Standby Commitments 5
Temporary Investments 6
Investment Considerations
and Restrictions 6
Private Activity Bonds 7
Legislative Changes 7
Miscellaneous 7
Management 8
Information about Shares
of the Money Market Series 9
Description of Shares 9
How to Purchase Shares 9
Methods of Payment 10
Purchase Price and Net Asset Value 11
Distribution Expenses 11
Redemptions 12
Transfers 14
Dividends and Taxes 14
General Information 15
Investor Services 15
Calculation of Yield 16
Exchangeability of Shares 16
Other Information 17
Experts 17
Statement of Additional Information 17
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Annual Operating
Expenses
The following table sets forth the annual
operating expenses of the Money Market Series
expressed as a percentage of the average net
assets of the Money Market Series and a
hypothetical illustration of the amount of
operating expenses of the Money Market Series that
would be incurred by an investor purchasing $1000
of shares of the Money Market Series who redeems
his or her investment at the end of one, three,
five and ten years.
Annual Operating Expenses
(as a percentage of average net assets)
- -------------------------------------------------
Management fees .50%
12b-1 fees1 .50%
Other expenses .53%
----
Total operating expenses 1.53%
----
Example: You would pay the following expenses on a
$1000 investment assuming (1) a 5% annual return
and (2) redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------
$16 $48 $83 $182
1As a result of distribution fees of .50% per
annum of the Fund's average daily net assets, a
long-term shareholder may pay more than the
economic equivalent of the maximum front-end sales
charge permitted by the National Association of
Securities Dealers, Inc.
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The purpose of the preceding table is to
assist an investor in the Money Market Series in
understanding the various costs and expenses that
will be directly or indirectly borne by such
investor.
The example set forth in the above table is
for information purposes only and should not be
considered as a representation of past or future
expenses of the Money Market Series or of past or
future returns on an investment in the Money
Market Series. Actual expenses of the Money Market
Series and the return on an investment in the
Money Market Series may vary significantly from
the expenses and investment return assumed in the
above example.
Financial Highlights
The following information has been audited by
McGladrey & Pullen, LLP, independent public
accountants, in connection with their audit of the
Money Market Series' financial statements.
McGladrey & Pullen's report on the Money Market
Series' financial statements for the year ended
December 31, 1995 appears at the end of the
Statement of Additional Information. The
information listed below should be read in
conjunction with the Money Market Series' full
financial statements.
Selected per share data-Money Market Series
for the period from October 1, 1987 (commencement
of operations) to December 31, 1987, and for the
years ended December 31, 1988, 1989, 1990, 1991,
1992, 1993, 1994 and 1995, for each share
outstanding throughout the period:
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<TABLE>
<CAPTION>
Period From
October 1,
1987* to
Years Ended December 31, December
---------------------------------------------------------------------------- 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment operations:
Net investment income ................... 0.026 0.017 0.014 0.028 0.047 0.050 0.053 0.044 0.012
Net realized and unrealized gain on
investments ........................... 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.001
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........................ 0.026 0.017 0.014 0.028 0.047 0.050 0.053 0.044 0.013
------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income .... (0.026) (0.017) (0.014) (0.028) (0.047) (0.050) (0.053) (0.044) (0.012)
Distributions from realized gain on
securities ............................ 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 (0.001)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ................. (0.026) (0.017) (0.014) (0.028) (0.047) (0.050) (0.053) (0.044) (0.013)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ====== ====== ====== ====== ====== ======
Total Return ............................ 2.60% 1.69% 1.62% 2.79% 4.86% 5.14% 5.45% 4.54% 1.19%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) ......... 11,251 9,004 5,830 32,488 8,310 6,906 4,136 2,520 1,620
Ratios to Average Net Assets:
Expenses(1) ........................... 1.53%+ 0.91% 0.95% 0.42% 0.05% 0.91% 1.03% 1.08% 1.04%**
Net investment income ................. 2.43% 1.55% 1.25% 2.76% 4.74% 5.09% 5.31% 4.50% 4.83%**
BANK LOANS
Amount outstanding at end of period (000
omitted) .............................. $ - $ 451 $ 290 $ 20 $ 58 $ 0 $ 10 $ 0 $ 0
Average amount of bank loans
outstanding during the period (000
omitted) .............................. $ 41 $ 53 $ 111 $ 69 $ 124T $ 15 $ 6T $ 13T $ 4T
Average number of shares outstanding
during the period (000 omitted) ....... 44,432 56,267 25,786 7,980 6,984 4,426T ,175T 1.657T 754T
Average amount of debt per share during
the period ............................ $ .001 $ .001 $ .004 $ .009 $ .018 $ .003 $ .002 $ .009 $ .005
<FN>
TMonthly Average.
*Commencement of operations.
**Annualized.
(1) The Manager voluntarily assumed certain expenses of the Fund during the
periods ended December 31, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and
1987. Had such expenses not been so assumed, the ratio of expenses to
average net assets would have been 1.35%, 1.62%, 2.08%, 1.62%, 2.32%, 2.72%,
6.35% and 19.33%.
+ This ratio would have been 1.35%, net of expense offset of .18%.
</FN>
</TABLE>
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Investment Objective and Policies
The investment objective of the Money Market
Series of the Fundamental Fixed-Income Fund is to
provide as high a level of current income exempt
from federal income tax as is consistent with the
preservation of capital and liquidity. The Money
Market Series will seek to achieve its objective
by investing, under normal circumstances, at least
80% of its assets in a managed portfolio of
high-quality debt securities, including bonds
other than private activity bonds issued after
August 7, 1986, issued by or on behalf of states,
territories, and possessions of the United States,
the District of Columbia, and their political
subdivisions, agencies, and instrumentalities, the
interest from which is exempt from federal income
tax (municipal bonds). As a defensive measure
under certain market conditions, the Money Market
Series may invest up to 50% of its assets in
short-term taxable investments. See Temporary
Investments.
The Money Market Series invests only in U.S.
dollar-denominated securities which are rated in
one of the two highest rating categories for debt
obligations by Standard & Poor's Corporation
("S&P") and Moody's Investors Service, Inc.
("Moody's"), two nationally recognized statistical
rating organizations ("NRSROs") (or one NRSRO if
the instrument was rated by only one such
organization) or, if unrated, are of comparable
quality as determined in accordance with
procedures established by the board of trustees of
the Fund.
Under normal market circumstances the Money Market
Series will invest at least 80% of its assets in
high-quality municipal bonds rated AA, SP-1, or
higher by S&P or MIG-1 or Prime-1 by Moody's or
are unrated but judged by the Fund's investment
adviser to be of at least comparable quality in
accordance with procedures established by the
board of trustees of the Fund. At least 80% of the
Money Market Series' assets will be invested in
obligations with remaining maturities of 13 months
or less. Accordingly, the securities in which the
Money Market Series will invest may not yield as
high a level of current income as longer term or
lower grade securities that generally have less
liquidity and greater fluctuation in value.
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Investments in rated securities not rated in
the highest category by these two NRSROs (or one
NRSRO if the instrument was rated by only one such
organization), and unrated securities not
determined by the investment adviser, in
accordance with procedures established by the
board of trustees, to be comparable to those rated
in the highest category, will be limited to 5% of
the Money Market Series' total assets, with the
investment in any such issuer being limited to not
more than the greater of 1% of the Money Market
Series' total assets or $1 million. The Money
Market Series may invest in obligations issued or
guaranteed by the U.S. Government without any such
limitation.
Municipal bonds include debt obligations
issued to obtain funds for various public
purposes, including construction of public
facilities, repayment of outstanding obligations,
and payment of general operating expenses. The
Money Market Series will hold two categories of
municipal bonds: general obligation bonds, which
are backed by the faith, credit, and taxing power
of the issuing municipality and considered to be
the safest type of municipal bond; and revenue
bonds, which are backed by the revenues of a
specific project or facility or in some cases, by
the proceeds of special excise taxes, user fees,
or other specific revenue sources. Certain revenue
bonds may be issued to obtain funding for
privately operated facilities. These bonds, known
as private activity bonds, are backed by the
credit and security of a private user and
therefore have more potential risk.
Repurchase Agreements
The Money Market Series my enter into repurchase
agreements with commercial banks, brokers, or
dealers pursuant to which the Money Market Series
acquires a money market instrument (generally a
U.S. Government obligations qualifying for
purchase by the Money Market Series) that is
subject to resale by the Money Market Series) that
is subject to resale by the Money Market Series on
a specified date (generally within one week) at a
specified price (which price reflects an agreed-on
interest rate effecitve for the period of time the
Money Market Series holds the investment and is
unrelated to the interest rate on the instrument).
As a matter of fundamental policy, the Money
Market Series will not enter into repurchase
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agreements of more than one week in length if as a
result, more than 10% of the total assets of the
Money Market Series would be invested in such
agreements or other restricted or illiquid
securities. The Money Market Series enters into
repurchase agreements for the purpose of making
short-term cash investments. Risks involved in
entering into repurchase agreements include the
possibility of default or bankruptcy by the other
party to the agreement. The Money Market Series'
investment adviser will monitor the
creditworthiness of parties with which it enters
into repurchase agreements.
Variable Rate Securities
The Money Market Series may invest in variable
rate municipal bonds with or without demand
features. Interest rates on such securities
fluctuate based on changes in specified market
rates, such as the prime rate, or are adjusted at
predetermined intervals, at least every six
months. The Money Market Series' investment
adviser believes that the variable rate feature of
these securities may reduce the fluctuations
possible in the market value of fixed-rate
securities. A demand feature allows the Money
Market Series to demand prepayment of the
principal amount of the municipal bond prior to
its maturity. Some demand obligations are
guaranteed by banks or other financial
institutions, which may enhance the quality of the
underlying security.
When-lssued Securities
The Money Market Series purchases some municipal
bonds on a when-issued basis, which means that it
may take as long as 60 days or more before they
are delivered and paid for. The commitment to
purchase a security for which payment will be made
at a future date may be deemed a separate
security. The purchase price and interest rate of
when-issued securities is fixed at the time the
commitment to purchase is entered into. Although
the amount of municipal bonds for which there may
be purchase commitments on a when-issued basis is
not limited, it is expected that under normal
circumstances not more than 25% of the total
assets of the Money Market Series will be
committed to such purchases. The Money Market
Series does not start earning interest on
when-issued securities until settlement is made.
In order to invest the
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assets of the Money Market Series 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 made in tax-exempt
securities, short-term taxable securities may be
purchased if suitable short-term tax-exempt
securities are not available. See "Temporary
Investments."
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
Money Market Series' assets 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. However, although it is not intended
that such purchases will be made for speculative
purposes, and although the Money Market Series
intends to adhere to the provisions of the
Securities and Exchange Commission policy,
purchases of securities on a when-issued basis may
involve more risk than other types of purchases.
For example, when the time comes to pay for a
when-issued security, portfolio securities of the
Money Market Series may have to be sold in order
for the Money Market Series to meet its payment
obligations, and a sale of securities to meet such
obligations carries with it a greater potential
for the realization of capital gain, which is not
tax-exempt. Also, if it is necessary to sell the
when-issued security before delivery, the Money
Market Series may incur a loss because of market
fluctuations since the time the commitment to
purchase the when-issued security was made.
Moreover, any gain resulting from any such sale
would not be tax-exempt. Additionally, because of
market fluctuations between the time of commitment
to purchase and the date of purchase, the
when-issued security may have a lesser (or
greater) value at the time of purchase than the
Money Market Series' payment obligations with
respect to the security.
Standby Commitments
The Money Market Series may acquire standby com-
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mitments with respect to municipal bonds held in
its portfolio. A standby commitment is an
agreement in which a dealer agrees to purchase, at
the Money Market Series' option, specified
municipal bonds at specified prices. The total
amount paid by the Money Market Series for
outstanding standby commitments it holds will not
exceed one-half of 1% of the Money Market Series'
total assets calculated immediately after each
standby commitment is acquired. The Money Market
Series will enter into standby commitments for the
purpose of reducing portfolio risk with respect to
certain securities. The Money Market Series will
not enter into a standby commitment unless (1) the
Money Market Series owns the security subject to
the standby commitment and (2) the Money Market
Series' investment adviser determines at the time
the Money Market Series enters into the standby
commitment that the Money Market Series would be
willing to sell the underlying security at the
price specified in the standby commitment.
Temporary Investments
The Money Market Series anticipates that it may
from time to time invest a portion of its total
assets, on a temporary basis, in short-term
fixed-income obligations whose interest is subject
to federal income tax. Such investments are made
only under conditions that in the opinion of the
investment adviser of the Money Market Series make
such investments advisable. For example, the Money
Market Series may invest in taxable obligations
pending investment in municipal bonds of proceeds
from the sale of its shares or investments or to
ensure the liquidity needed to satisfy redemptions
of shares and the day-to-day operating expenses of
the Money Market Series. The Money Market Series
invests in only those taxable obligations that are
(1) rated AA or higher by S&P or Aa or higher by
Moody's or unrated but judged by its investment
adviser to be of at least comparable quality, (2)
obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities,
or (3) obligations of banks (including
certificates of deposit, bankers' acceptances, and
repurchase agreements) with at least
$1,000,000,000 of assets. No more than 50% of the
assets of the Money Market Series may be invested
in taxable obligations at any one time, and the
Money
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Market Series anticipates that on a 12-month
average, taxable obligations will constitute less
than 10% of the value of its total investments.
Investment Considerations
and Restrictions
The Money Market Series provides investors with
the ability to purchase securities exempt from
federal income tax in large denominations and to
achieve diversification of both investments and
maturity schedule. However, these advantages may
be substantially reduced or eliminated during
periods when interest rates in general are
declining or interest rates on the Money Market
Series' municipal bonds are lower than interest
rates on municipal bonds with maturities greater
than those of the Money Market Series.
The high-quality municipal bonds in which the
Money Market Series will invest may not offer so
high a yield as may be achieved from lower quality
instruments having less liquidity and greater
fluctuation in value.
The ability of the Money Market Series to
achieve its investment objective depends partially
on prompt payment by issuers of the interest on,
and principal of, municipal bonds held by the
Money Market Series. A moratorium, default, or
other failure to pay interest or principal when
due on any municipal bond, in addition to
affecting the market value and liquidity of that
particular security, could affect the market value
and liquidity of other municipal bonds held by the
Money Market Series. The market for municipal
bonds is smaller than the market for taxable money
market securities and can be temporarily affected
by large purchases and sales, including those by
the Money Market Series.
Because the Money Market Series will invest in
municipal bonds maturing in not more than one
year, portfolio turnover will be high. In
addition, the Money Market Series will attempt to
increase yields by trading securities to take
advantage of short-term interest rate disparities.
Because a high turnover rate increases transaction
costs and the possibility of taxable short-term
gains, the Money Market Series will carefully
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weigh the added cost of short-term investments
against anticipated gains. If the Money Market
Series disposes of a municipal bond prior to
maturity, it may realize a loss or a gain. The
value of the Money Market Series will generally
vary inversely with the movement of interest
rates.
The Money Market Series has adopted a number
of investment restrictions and policies that may
help to reduce risk:
* The Money Market Series will not purchase a
municipal bond if as a result more than 25% of
the assets of the Money Market Series would be
invested in the securities of a particular
industry. This limitation does not apply to the
investment of its assets in banks, U.S.
Government securities, or federal agency
obligations.
* The Money Market Series will not borrow money
except to meet redemptions, and then in amounts
not exceeding 33.33% (taken at the lower of
cost or current value) of its total assets
(including the amount borrowed) or mortgage,
pledge or hypothecate its assets except in
connection with any such borrowing and in
amounts not in excess of the dollar amounts
borrowed.
* At no time will the Money Market Series commit
more than 10% of its assets to illiquid
securities, including repurchase agreements
that mature in more than seven days.
Borrowings are subject to the additional
restriction that the value of the Money Market
Series' assets, less its liabilities other than
borrowings, must always be equal to or greater
than 300% of all of its borrowings (including the
proposed borrowing). If this 300% coverage
requirement is not met, the Money Market Series
must, within three days, reduce its debt to the
extent necessary to meet such coverage
requirement, and to do so, it may have to sell a
portion of its investments at a time when such a
sale would otherwise be inadvisable. Interest on
money borrowed is an expense of the Money Market
Series.
Private Activity Bonds
The Internal Revenue Code of 1986 treats interest
from certain municipal bonds (referred to as
private activity
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bonds) as a tax preference item under the
alternative minimum tax. Thus, corporate and
individual shareholders may incur an alternative
minimum tax liability as a result of receiving
tax-exempt dividends from the Money Market Series
to the extent such dividends are attributable to
interest from private activity bonds. The Money
Market Series will invest in private activity
bonds only when it believes that the yield
disparity between private activity bonds and other
municipal bonds makes an investment in private
activity bonds attractive. In addition, because
all tax-exempt dividends are included in a
corporate shareholder's adjusted current earnings
(which are used in computing a separate preference
item for corporations), corporate shareholders may
incur an alternative minimum tax liability as a
result of receiving any tax-exempt dividends from
the Money Market Series. Tax-exempt interest and
income referred to throughout this Prospectus
means interest and income that is excluded from
gross income for federal income tax purposes but
may be a tax preference item and taxable under the
alternative minimum tax. Further, such tax-exempt
interest and income may be subject to taxation
under the tax laws of any state or local taxing
authority. See "Information about Shares of the
Money Market Series-Dividends and Taxes."
Legislative Changes
As a result of the Tax Reform Act of 1986, the
types of municipal bonds qualifying for the
federal income taxexemption for interest has been
restricted, tax-exempt interest on municipal bonds
is treated as a tax preference item or otherwise
may result in an alternative minimum tax liability
for corporate and individual investors, and all
deductions by financial institutions for interest
allocable to certain tax-exempt obligations has
been denied. Additional legislation affecting the
Money Market Series or municipal bonds may be
introduced in the future. For additional
information concerning legislative changes, see
the Statement of Additional Information.
Miscellaneous
The Money Market Series' investment
objective of providing a high level of current
income exempt from federal income tax and its
policy of investing, under
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normal circumstances, at least 80% of its assets
in municipal bonds are fundamental policies of the
Money Market Series, which may not be changed
without the approval of a majority of the
outstanding shares of the Money Market Series.
The Statement of Additional Information
includes a discussion of other investment policies
and a listing of specific investment restrictions
that govern the Money Market Series' investment
policies. The specific investment restrictions
identified in the Statement of Additional
Information may not be changed without shareholder
approval. If a percentage restriction or a rating
restriction on investments or utilization of
assets 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 Money Market Series' securities or from a
change in the rating of a portfolio security will
not be considered a violation of policy.
Management
The board of trustees of the Fund has the overall
responsibility for the management and supervision
of the Money Market Series. There are currently
five trustees, four of whom are not considered to
be interested persons of the Fund within the
meaning of the Investment Company Act of 1940 (the
1940 Act). The trustees meet regularly each
quarter. By virtue of the functions performed by
Fundamental Portfolio Advisors, Inc. (the
Manager), the investment adviser of the Money
Market Series, neither the Fund nor the Money
Market Series require any employees other than the
executive officers of the Fund, all of whom
receive their compensation from the Manager or
other sources. The Statement of Additional
Information contains the names and general
background of each trustee and executive officer
of the Fund.
Dr. Lance Brofman is the Fund's portfolio
manager. Dr. Brofman received an M.B.A. and a
Ph.D. in Economics and Finance from New York
University in 1978. He is currently the Chief
Portfolio Strategist for the Fundamental Family of
Funds.
Pursuant to a management agreement between the
Fund and the Manager, the Manager serves as
investment adviser to the Money Market Series and
is responsible for the overall management of the
busi-
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ness affairs and assets of the Money Market
Series, subject to the authority of the Fund's
board of trustees. The Manager's post office
address is P.O. Box 1013, Bowling Green Station,
New York, New York 10274-1013. Under the terms of
the management agreement, the Manager is also
authorized to buy and sell securities for the
account of the Money Market Series, in its
discretion, subject to the right of the Fund's
trustees to disapprove any such purchase or sale
(in which case the transaction would be reversed).
The Money Market Series pays all brokerage
commissions in connection with its portfolio
transactions. The Money Market Series also bears
the expense, pro rata with the other series of the
Fund, of maintaining the Fund's registration as an
investment company under the 1940 Act and of
registering its shares under the Securities Act of
1933. The Money Market Series also pays certain
other costs and expenses, which are more fully
described in the Statement of Additional
Information under the caption Investment Adviser.
As compensation for the performance of its
management services and the assumption of certain
expenses of the Money Market 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 Money
Market Series equal to 0.5% of the Money Market
Series' average daily net asset value up to
$100,000,000 and decreasing by .02% for each
$100,000,000 increase in net assets down to 0.4%
of net assets in excess of $500,000,000.
Under the management agreement and pursuant to
authority granted by the trustees, the Manager is
authorized to place portfolio transactions with
dealer firms that have provided assistance in the
distribution of shares of the Money Market Series
or shares of other series of the Fund or other
funds for which the Manager acts as investment
adviser 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.
In addition to paying a management fee to the
Manager, the Money Market Series also pays a
distribution
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fee to Fundamental Service Corporation, an
affiliate of the Manager. See "Information about
Shares of the Money Market Series-Distribution
Expenses." The Manager also manages and serves as
investment adviser to two other investment
companies, New York Muni Fund, Inc. and The
California Muni Fund. The Manager is a Delaware
corporation that was incorporated in 1986.
Information about Shares
of the Money Market Series
Description of Shares
The Fund is an open-end, non-diversified
management investment company that was organized
as a Massachusetts business trust on March 19,
1987. The Money Market Series is a non-diversified
portfolio of the Fund and thus by itself does not
constitute a balanced investment plan. The
Declaration of Trust under which the Fund was
organized authorizes the trustees of the Fund to
issue an unlimited number of shares of beneficial
interest in the Fund, 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 Money Market Series,
the High-Yield Municipal Bond Series and the
Fundamental U.S. Government Strategic Income Fund
Series.
The trustees may establish additional series of
shares. As an open-end investment company, the
Fund continuously offers shares of its Money
Market Series to the public and under normal
conditions must redeem these shares on demand of
any registered holder at the then-current net
asset value per share.
Each share of the Money Market Series
represents an equal proportionate interest in the
Money Market Series with each other share in the
series. Shares entitle their holders to one vote
per share. Investors in the Money Market Series
are entitled to vote in the election of trustees,
on the adoption of any management contract or
distribution plan, on any change in a fundamental
investment policy with respect to the Money Market
Series and on other matters submitted to
shareholder vote, as provided in the Fund's
Declaration of Trust. Shares of the Fund are voted
by individual series, except (1) when required by
the
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1940 Act they are voted in the aggregate, and (2)
when the trustees determine that a matter affects
only one or more particular series of shares, only
the shares of such series are entitled to vote on
such matter. Shares of the Money Market Series
have no cumulative voting rights, preemptive
rights, or subscription rights. The shares are
freely transferable and fully paid and except as
set forth in the Statement of Additional
Information, are non-assessable.
The Money Market Series has its own assets,
which are recorded separately on the Fund's books
from the assets of the Fund's other series and
held by the trustees of the Fund in trust for
investors in the Money Market Series. All income
and proceeds earned and expenses incurred by the
Money Market Series are allocated to the Money
Market Series, and the portion of all income and
expenses earned or incurred by the Fund, rather
than by an individual series of the Fund, which is
properly allocable to the Money Market Series, is
allocated to the Money Market Series. On
liquidating the Fund or the Money Market Series,
investors in the Money Market Series would be
entitled to share pro rata in the net assets of
the Money Market Series available for distribution
to shareholders.
Shares will remain on deposit with the
transfer agent for the Money Market Series and
certificates will not be issued.
How to Purchase Shares
Shares of the Money Market Series may be purchased
either directly from the Money Market Series or
through securities dealers, banks, or other
financial institutions. The Money Market Series
has a minimum initial purchase requirement of
$1000 and a minimum subsequent purchase
requirement of $100.
Subsequent purchases are made in the same
manner as initial purchases.
Investors can purchase shares without a sales
charge if they purchase the shares directly from
the Money Market Series. However, investors may be
charged a fee if they purchase shares through
securities dealers, banks, or other financial
institutions. Investors opening a new account for
the Money
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Market Series must complete and submit a purchase
application along with payment of the purchase
price for their initial investment. Investors
purchasing additional shares of the Money Market
Series should include their account number along
with payment of the purchase price for additional
shares being purchased. Investors may re-open an
account with a minimum investment of $100 and
without filing a purchase application during the
year in which the account was closed or during the
following calendar year if the information on the
original purchase application is still applicable.
The Money Market Series may require the filing of
a statement that all information on the original
purchase application remains applicable.
For customers of certain financial
institutions who offer the service, investors may
have their "free-credit" cash balances
automatically invested in shares of the Money
Market Series. These investments are not subject
to the minimum purchase requirements described
above.
A purchase order becomes effective immediately
on receipt by Fundamental Shareholder Services,
Inc., as agent for the Money Market Series, if it
is received before 4:00 P.M. on any business day.
After a purchase order becomes effective,
confirmation of the purchase is sent to the
investor, and the purchase is credited to the
investor's account. The Fund, or any series
thereof, reserves the right to reject any purchase
order.
The Fundamental Automatic Investment Program
offers a simple way to maintain a regular
investment program. The Fund has waived the
initial investment minimum for you when you open a
new account and invest $100 or more per month
through the Fundamental Automatic Investment
Program. The Fundamental Automatic Investment
Program allows you to purchase shares (minimum of
$50 per transaction) at regular intervals.
Investments are made by transferring funds
directly from your checking, or bank money market
account. At your option investments can be made,
once a month on either the fifth or the twentieth
day, or twice a month on both days.
To establish a Fundamental Automatic
Investment Program, or to add this option to your
existing account simply complete an authorization
form, which
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can be obtained by calling 1-800-322-6864. You may
cancel this privilege or change the amount you
invest at any time. Initial Program setup and any
modifications may take up to ten days to take
effect. There is currently no charge for this
service, and the Fund may terminate or modify this
privilege at any time.
Shares of the Money Market Series may be
purchased only in states where the shares are
qualified for sale.
Methods of Payment
Payment of the purchase price for shares of the
Money Market Series may be made in any of the
following manners.
Payment by Wire. An expeditious method of
purchasing shares involves transmitting federal
funds by bank wire to The Chase Manhattan Bank,
N.A. To purchase shares by wire transfer, instruct
a commercial bank to wire money to The Chase
Manhattan Bank, N.A., ABA #021000021, credit to:
United States Trust Company of New York, A/C
#920-1-073195 further credit to: Fundamental
Family of Funds, a/c #2073919. The wire transfer
should be accompanied by the investor's name,
address, and social security number (in the case
of new investors) or account number (in the case
of persons already owning shares of that series).
Payment by Check. Shares may also be purchased
by check. Checks should be made payable to
Fundamental Family of Funds and mailed to
Fundamental Shareholder Services, Inc., Agent,
P.O. Box 1013, Bowling Green Station, New York,
N.Y. 10274-1013. If your check does not clear,
Fundamental Shareholder Services, Inc. will cancel
your purchase and you could be liable for any
losses or fees incurred. The Fund reserves the
right to limit the number of checks processed at
any one time and will notify investors prior to
exercising this right.
Exchange of Shares. Persons holding shares of
any other series of the Fund or any other mutual
fund for which Fundamental Portfolio Advisors,
Inc., the Fund's investment adviser, acts as
investment adviser
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may purchase shares of the Money Market Series by
exchanging shares of such other series or mutual
fund. See "General Information-Exchangeability of
Shares."
Social Security Direct-Deposit Privilege. A
person receiving social security benefits may
purchase shares by having some or all of his or
her social security check directly deposited into
his or her account. For details about this
privilege, contact the Fund by calling (800)
322-6864.
Purchase Price and Net Asset Value
Each share of the Money Market Series is sold at
its net asset value next determined after a
purchase order becomes effective. It is the
intention of the Money Market Series to maintain a
per share net asset value of $1, although no such
net asset value can be guaranteed. The net asset
value per share of the Money Market 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. The net asset value per share of the
Money Market Series is also determined on any
other day that the level of trading in its
portfolio securities is sufficiently high that the
current net asset value per share might be
materially affected by changes in the value of its
portfolio securities. On any day on which no
purchase orders for the shares of the Money Market
Series become effective and no shares are tendered
for redemption, the net asset value per share will
not be determined. The net asset value per share
of the Money Market Series is computed by taking
the amount of the value of all of its assets, less
its liabilities, and dividing it by the number of
outstanding shares. For purposes of determining
net asset value, expenses of the Money Market
Series are accrued daily and taken into account.
The portfolio securities of the Money Market
Series are valued on an amortized cost basis.
Under this valuation method, a portfolio
instrument is valued at cost and any premium or
discount is amortized on a constant basis until
maturity. Other assets are valued at fair value as
determined in good faith by persons des-
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ignated by the Fund's trustees using methods
determined by the trustees.
Distribution Expenses
The Fund has adopted a plan of distribution
pursuant to Rule 12b-1 of the 1940 Act (the plan),
under which the Money Market Series pays to
Fundamental Service Corporation (FSC) a fee, which
is accrued daily and paid monthly, at an annual
rate of .50% of the Money Market Series' average
daily net assets. Amounts paid under the plan are
paid to FSC to compensate it for services it
provides and expenses it bears in distributing the
Money Market Series' shares to investors,
including payment of compensation by FSC to
securities dealers and other financial
institutions and organizations, such as banks,
trust companies, savings and loan associations,
and investment advisers to obtain various
distribution related and/or administrative
services for the Money Market Series. Expenses of
FSC also include expenses of its employees, who
engage in or support distribution of shares or
service shareholder accounts, including overhead
and telephone expenses; printing and distributing
prospectuses and reports used in connection with
the offering of the Money Market Series' shares;
and preparing, printing, and distributing sales
literature and advertising materials. FSC is an
affiliate of the Manager. Fees to FSC amounted to
$199,493 for the year ended December 31, 1995.
The Glass-Steagall Act prohibits banks from
engaging in the business of underwriting, selling,
or distributing securities, such as shares of a
mutual fund. Although the scope of this
prohibition under the Glass-Steagall Act has not
been fully defined, in FSC's opinion it should not
prohibit banks from being paid for performing
shareholder-servicing functions under the plan.
If, because of changes in law or regulation or due
to new interpretations of existing law, a bank or
the Fund were prevented from continuing these
arrangements, it is expected that the Fund's
trustees would make other arrangements for these
services and shareholders would not suffer adverse
financial consequences.
At any given time, FSC may incur expenses in
distributing shares of the Money Market Series
pursuant
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to the plan that would be in excess of the total
of payments made by the Money Market Series
pursuant to the plan. For example, if during a
year of the plan FSC incurs $500,000 of expenses
pursuant to the plan on sales of $100 million of
the Money Market Series and FSC receives a
distribution fee calculated at the annual rate of
0.50% of the Money Market Series' average daily
net assets (assuming $50 million in average daily
net assets), FSC would have incurred, at the end
of such year, $250,000 in excess expenses under
the plan during such year. Because there is no
requirement under the plan to reimburse FSC for
all its expenses or any requirement to continue
the plan from year to year, this excess amount
does not constitute a liability of the Money
Market Series, and the Money Market Series will
not reimburse FSC for any such excess amount.
Although payments under the plan by the Money
Market Series may not be directly used to finance
distribution of shares of other series of the
Fund, under the plan and similar plans adopted by
other series of the Fund, FSC may pay for
distribution expenses of any such series from any
source available to it, including any profits it
may realize. Accordingly, it is possible but not
likely until the Money Market Series has at least
$150,000,000 in net assets, that FSC may use
profits it realizes from the Money Market Series
to finance another series of the Fund.
Redemptions
Each investor in the Money Market Series has the
right to cause the Money Market Series to redeem
his or her shares, by making a request to
Fundamental Shareholder Services, Inc. in
accordance with the procedures of either the
regular redemption procedure, the telephone
redemption privilege, the expedited redemption
privilege, or the check redemption privilege, as
described in the following paragraphs. If
Fundamental Shareholder Services, Inc. receives a
redemption request before the close of trading on
any day the New York Stock Exchange is open for
trading, the redemption will become effective on
that day and be made at the net asset value per
share of the Money Market Series, as determined at
the close of trading on that day, and payment will
be made on the following business day. If
Fundamental Shareholder Services, Inc. receives a
redemption request following the close
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of trading on the New York Stock Exchange, or on
any day the New York Stock Exchange is not open
for business, the redemption will become effective
on the next day the New York Stock Exchange is
open for trading and be made at the net asset
value per share of the Money Market Series, as
determined at the close of trading on that day,
and payment will be made on the following business
day. Investors are entitled to receive all
dividends on shares being redeemed that are
declared on or before the effective date of the
redemption of such shares. The net asset value per
share of the Money Market Series received by an
investor on redeeming shares may be more or less
than the purchase price per share paid by such
investor, depending on the market value of the
portfolio of the Money Market Series at the time
of redemption.
Regular Redemption Procedure. Investors may
redeem their shares by sending a written
redemption request to Fundamental Shareholder
Services, Inc., which request must specify the
number of shares to be redeemed and be signed by
the investor of record. For redemptions exceeding
$50,000 (and for all written redemptions,
regardless of amount, made within 30 days
following any change in account registration), the
signature of the investor on the redemption
request must be guaranteed by an eligible
guarantor institution approved by Fundamental
Shareholder Services, Inc. Signature guarantees in
proper form generally will be accepted from
domestic banks, a member of a national securities
exchange, credit unions and savings associations,
as well as from participants in the Securities
Transfer Agents Medallion Program ("STAMP"). If
you have any questions with respect to signature
guarantees, please call the transfer agent at
(800) 322-6864. Fundamental Shareholder Services,
Inc. may, at its option, request further
documentation from corporations, executors,
administrators, trustees, or guardians. If a
redemption request is sent to the Money Market
Series, the Money Market Series will forward it to
Fundamental Shareholder Services, Inc. Redemption
requests will not become effective until all
proper documents have been received by Fundamental
Shareholder Services, Inc. Requests for redemption
that are subject to any special condition, or
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specify an effective date other than as provided
herein, cannot be accepted and will be returned to
the investor.
Telephone Redemption Privilege. An investor
may, by either completing the appropriate section
of the purchase application, or by later making a
written request to Fundamental Shareholder
Services, Inc., containing his or her signature
guaranteed by an eligible guarantor (see above),
obtain the telephone redemption privilege for any
of his or her accounts. Provided that your account
registration has not changed within the last 30
days, an investor may redeem up to $150,000 worth
of shares from an account for which he or she has
the telephone redemption privilege by making a
telephone redemption request to Fundamental
Shareholder Services, Inc., at (800) 322-6864.
Telephone calls may be recorded. A check for the
proceeds of such a redemption will be issued in
the name of the investor of record and mailed to
the investor's address as it appears on the
records of the Money Market Series. Both the Money
Market Series and Fundamental Shareholder
Services, Inc. reserve the right to refuse or
limit a telephone redemption request and to modify
the telephone redemption privilege at any time.
Neither the Fund nor its transfer agent will
be liable for following instructions communicated
by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a
written confirmation statement of all telephone
call transactions will be mailed to shareholders
at their address of record within 3 business days
after the telephone call transaction. Since you
will bear the risk of loss, you should verify the
accuracy of telephone transactions immediately
upon receipt of your confirmation statement.
Expedited Redemption Privilege. An investor in
any series of the Fund may, by either completing
the appropriate section of the purchase
application, or by later making a written request
to Fundamental Shareholder Services, Inc.,
containing his or her signature guaranteed by an
eligible guarantor (see above), obtain the
expedited redemption privilege for any of his or
her accounts. The expedited redemption privilege
allows the investor to have the proceeds of any
redemption of shares in any amount of $5000 or
more transferred by wiring federal funds to the
commercial
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bank or savings and loan institution specified in
his or her purchase application or written request
for the expedited redemption privilege. Expedited
redemption requests may be made by either mail (to
the address specified under regular redemption
procedure) or by telephone (to the number
specified under telephone redemption privilege).
The proceeds of such a redemption may be subject
to a deduction of the usual and customary charge.
An investor may change the account or commercial
bank designated to receive the redemption proceeds
by sending a written request to Fundamental
Shareholder Services, Inc., containing his or her
signature guaranteed in the manner just described.
Both the Money Market Series and Fundamental
Shareholder Services, Inc. reserve the right to
refuse or limit an expedited redemption request
and to modify the expedited redemption privilege
at any time.
Check Redemption Privilege. An investor in any
series of the Fund may, by either completing the
appropriate section of the purchase application,
or by later making a written request to the Money
Market Series, obtain redemption checks for any of
his or her accounts. These checks may be used by
the investor in any lawful manner and may be
payable to the order of any person or company in
an amount of $100 or more. When a check is
presented to Fundamental Shareholder Services,
Inc. for payment, Fundamental Shareholder
Services, Inc. , as agent for the investor, will
cause the Money Market Series to redeem a
sufficient number of shares in the investor's
account to cover the amount of the check.
Investors using the check redemption privilege
will be subject to the same rules and regulations
applicable to other checking accounts at United
States Trust Company of New York. There is no
charge to the investor for using the check
redemption privilege, except that a fee may be
imposed by Fundamental Shareholder Services, Inc.
if an investor requests that it stop payment of a
Redemption Check or if it cannot honor a
Redemption Check due to insufficient funds or
other valid reasons. The check redemption
privilege may not be used to close an account. The
check redemption privilege may be modified or
terminated at any time by either the Money Market
Series or Fundamental Shareholder Services, Inc.
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At times, the Money Market Series may be
requested to redeem shares for which it has not
yet received good payment. The Money Market Series
may delay, or cause to be delayed, payment of
redemption proceeds until such time as it has
assured itself that good payment has been received
for the purchase of such shares, which may take up
to 15 days. In the case of payment by check, the
determination of whether the check has been paid
by the paying institution can generally be made
within 7 days, but may take longer. Investors may
avoid the possibility of any such delay by
purchasing shares by wire. In the event of delays
in paying redemption proceeds, the Money Market
Series will take all available steps to expedite
collection of the investment check.
If shares are purchased by check, you may
write checks against such shares only after 15
days from the date the purchase was executed.
Shareholders who draw against shares purchased
fewer than 15 days from the date of original
purchase, will be charged usual and customary bank
fees.
The Money Market Series reserves the right to
suspend the right of redemption or postpone the
day of payment with respect to its shares (1)
during any period when the New York Stock Exchange
is closed (other than customary weekend and
holiday closings); (2) during any period when
trading markets that the Money Market Series
normally uses are restricted or an emergency
exists as determined by the Securities and
Exchange Commission, so that disposal of the Money
Market Series' investments or determination of its
net asset value is not reasonably practicable; or
(3) for such other periods as the Securities and
Exchange Commission by order may permit to protect
investors.
If an investor's account has an aggregate net
asset value of less than $100, the Money Market
Series may redeem the shares held in such account
if the net asset value of such account has not
been increased to at least $100 within 60 days of
notice by the Money Market Series to such investor
of its intention to redeem the shares in such
account. The Money Market Series will not redeem
the shares of an account with a net
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asset value of less than $100 if the account was
reduced from the initial minimum investment of
$1000 or more to below $100 as a result of market
activity.
Transfers
An investor may transfer shares of the Money
Market Series by submitting to Fundamental
Shareholder Services, Inc. a written request for
transfer, signed by the registered holder of the
shares and indicating the name of, the social
security number or taxpayer identification number
of, and the distribution and redemption options
elected by, the new registered holder. Fundamental
Shareholder Services, Inc. may, at its option,
request further documentation from transferors who
are corporations, executors, administrators,
trustees, or guardians.
Dividends and Taxes
The Money Market Series will declare on each
business day just prior to the calculation of its
net asset value all of its net investment income
(consisting of earned interest income less
expenses) as a dividend on shares of record at the
close of business on the preceding business day.
Dividends are distributed on the last business day
of each calendar month. The Money Market Series
normally distributes capital gains, if any, before
the end of its fiscal year. All dividends and
capital gains distributions by the Money Market
Series will be in the form of additional shares
unless the investor has made an election, either
on his or her purchase application or in a
subsequent written request to Fundamental
Shareholder Services, Inc., to receive such
distributions in cash. An investor may change his
or her distribution election by filing a written
request with Fundamental Shareholder Services,
Inc. at least four days prior to the date of a
distribution.
The Money Market Series intends to qualify as
a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended
(the Code). If the Money Market Series so
qualifies, it will not pay any federal corporate
income taxes on net taxable income or net realized
capital gains that are distributed to investors in
a timely manner. If the Money Market Series fails
to meet certain distribution
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requirements at the end of the calendar year, the
Money Market Series will be subject to a 4% excise
tax on a portion of its undistributed taxable
income. The Money Market Series intends to make
distributions in a timely manner and accordingly
does not expect to be subject to federal income
tax or the excise tax.
Distributions by the Money Market Series of
its tax-exempt interest income (net of expenses)
are designated as exempt-interest dividends and
investors should exclude the interest from their
gross income for federal income tax purposes. It
is a policy of the Money Market Series to maximize
the percentage of distributions to investors that
are not subject to federal income taxes. However,
a small portion of the Money Market Series' net
investment income may, under certain
circumstances, be taxable and distributions
thereof, as well as distributions of any capital
gains, are taxable to investors. Distributions by
the Money Market Series of any taxable net
investment income and of any net short-term
capital gains over its net long-term capital loss
are taxable to investors asordinary income. Such
distributions constitute dividends for federal
income tax purposes but do not qualify for the 70%
dividends-received deduction for corporations.
Distributions of any net capital gains are
designated as capital gain dividends and are
taxable as long-term capital gains without regard
to the length of time the investor has held shares
of the Money Market Series. If an investor sells
shares held for six months or less at a loss, the
loss will be disallowed to the extent of any
exempt-interest dividends received on the shares
and (to the extent not disallowed) will be treated
as a long-term capital loss to the extent of any
capital gain dividends received on the shares.
Exempt-interest dividends, ordinary income
dividends and capital gain dividends may also be
subject to state and local income taxes. The tax
consequences of dividend distributions are not
affected by the form of such distributions (i.e.,
cash or additional shares of the Money Market
Series).
As a result of the Tax Reform Act of 1986,
tax-exempt interest on specified private activity
bonds issued after August 7, 1986, is treated as a
tax preference item subject to the alternative
minimum tax.
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Thus, corporate and individual investors may incur
an alternative minimum tax liability as a result
of receiving exempt-interest dividends from the
Money Market Series to the extent such dividends
are attributable to interest from private activity
bonds. In addition, because all exempt-interest
dividends are included in a corporate investor's
adjusted current earnings (which are used in
computing a separate preference item for
corporations), corporate investors may incur an
alternative minimum tax liability as a result of
receiving any exempt-interest dividends from the
Money Market Series. For a description of the
alternative minimum tax, see the Statement of
Additional Information.
Investors should also be aware that the Code
prohibits the deduction for federal income tax
purposes of interest paid on any loan that may be
deemed to have been made or continued for the
purpose of acquiring or carrying shares of a
mutual fund, such as the Money Market Series, that
distributes exempt-interest dividends.
The foregoing description relates only to
federal income tax consequences for investors who
are U.S. citizens or corporations. Investors
should consult their own advisers regarding these
matters and state, local, and other applicable tax
laws. The Money Market Series may be required by
federal law to withhold 31% of reportable payments
(which may include ordinary income dividends,
capital gain dividends, and redemptions) paid to
investors who have not complied with IRS
regulations. In order to avoid this withholding
requirement, investors must certify on their
application or a separate W-9 form, that their
social security or taxpayer identification number
is correct and that they are not currently subject
to backup withholding or that they are exempt from
backup withholding. The federal income tax status
of all distributions by the Money Market Series
will be reported to investors annually.
General Information
Investor Services
Fundamental Shareholder Services, Inc. is the
transfer agent and dividend-paying agent for
shares of the
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Money Market Series and The Chase Manhattan Bank,
N.A. acts as custodian for assets of the Money
Market Series. Inquiries regarding the Money
Market Series should be addressed to Fundamental
Shareholder Services, Inc.
Fundamental Shareholder Services, Inc.
maintains an account for each investor in the
Money Market Series, and all of the investor's
transactions are recorded in this account.
Confirmation statements showing details of
transactions are sent to investors following each
transaction, and each investor is sent a monthly
account summary.
Annual and semi-annual reports of the Money
Market Series together with the list of securities
held by the Money Market Series in its portfolio
are mailed to each investor in the Money Market
Series.
Investors whose shares are held in the name of
an investment broker-dealer or other party will
not normally have an account with the Money Market
Series and may not be able to use some of the
services available to investors of record.
Calculation of Yield
The Money Market Series may from time to time
advertise the Money Market Series' yield and
effective yield. The Money Market Series' yield
refers to the income generated by an investment in
the Money Market Series over a seven-day period
(which period will be stated in the
advertisement). This income is then annualized;
that is, the amount of income generated by the
investment during the seven-day period is assumed
to be generated each week over a 52-week period
and is shown as a percentage of the investment.
The effective yield is calculated similarly, but
when annualized, the income earned by an
investment in the Money Market Series is assumed
to be reinvested. The effective yield will be
slightly higher than the yield because of the
compounding effect of the assumed reinvestment.
The Money Market Series may also from time to
time advertise its taxable equivalent yield and
taxable
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equivalent effective yield. The Money Market
Series' taxable equivalent yield is determined by
dividing that portion of the Money Market Series'
yield (calculated as just described) that is
tax-exempt by one minus a stated marginal federal
income tax rate and adding the product to that
portion, if any, of the yield of the Money Market
Series that is not tax-exempt. The Money Market
Series' taxable equivalent effective yield is
determined in a similar manner.
Both yield and effective yield quotations are
based on historical earnings of the Money Market
Series. Both yields will fluctuate over time and
are not necessarily representative of future
income or distributions or the actual return to be
earned by an investor, nor are they necessarily a
sound basis for comparing the Money Market Series
with bank deposits or other fixed-income
investments.
Exchangeability of Shares
Investors may exchange shares of the Money Market
Series having an aggregate net asset value of
$1000 or more for shares of any other series of
the Fund or any other mutual fund for which the
Manager acts as theinvestment adviser by either
(1) delivering to Fundamental Shareholder
Services, Inc. a written request specifying the
number of shares of the Money Market Series to be
exchanged and the series of the Fund or the mutual
fund in which they wish to invest after such an
exchange, or (2) in the case of those investors
who have the telephone redemption privilege,
making such a request by telephone. (See
"Redemption-Telephone Redemption Privilege" for a
discussion of the Fund's policy with respect to
losses resulting from unauthorized telephone
transactions). The exchange is effected by
redeeming the investor's shares of the Money
Market Series and issuing to the investor shares
of the series or mutual fund in which he or she is
investing. The shares of both the Money Market
Series and the series or mutual fund being
invested in are valued for purposes of this
exchange at the net asset value per share of the
Money Market Series and such other series or fund,
respectively, as next deter- mined after receipt
by Fundamental Shareholder Services, Inc. of the
exchange request.
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The exchange privilege is available only in
those states where such exchange can legally be
made and exchanges may only be made between
accounts with identical account registration and
account numbers and is subject to the suitability
requirements, if any, of the series or fund for
which an exchange is proposed to be made. Prior to
effecting an exchange, an investor should consider
the investment policies of the series or mutual
fund he or she is investing in. Any exchange is,
in effect, a redemption of shares in one fund and
a purchase of the other fund. A capital gain or
loss for federal income tax purposes may be
realized by the investor with the exchange.
Other Information
The Code of Ethics of Fundamental Portfolio
Advisors, Inc. and the Fund prohibits all
affiliated personnel from engaging in personal
investment activities which compete with or
attempt to take advantage of the Fund's planned
portfolio transactions. Theobjective of the Code
of Ethics of both the Fund and Fundamental
Portfolio Advisors, Inc. is that their operations
be carried out for the exclusive benefit of the
Fund's shareholders. Both organizations maintain
Right Col.
careful monitoring of compliance with the Code of
Ethics.
Experts
The financial statements included at the end of
the Statement of Additional Information, and the
information under the caption "Financial
Highlights" in this Prospectus have been so
included in reliance on the report of McGladrey &
Pullen, LLP, independent certified public
accountants, as experts in accounting and
auditing.
Statement of Additional Information
The Statement of Additional Information for the
Money Market Series, dated the date of this
Prospectus, contains more detailed information
about the Money Market Series, including
information relating to (1) its investment
policies and restrictions, (2) its investment
adviser and the trustees and officers of the Fund,
(3) portfolio trading, (4) various services
provided for investors in the Money Market Series,
(5) the method used to calculate yield and
effective yield and (6) financial statements and
certain other financial information.
<PAGE>
Left Col.
FUNDAMENTAL
FIXED INCOME FUND
90 Washington Street
New York NY 10006
1-800-225-6864
Transfer Agent
Fundamental Shareholder Services, Inc.
P.O. Box 1013New York, NY 10274
1-800-322-6864
Counsel to the Fund
Kramer, Levin, Naftalis, Nessen
Kamin & Frankel
New York, New York
Independent Accountants
McGladrey & Pullen, LLP
New York, New York
No person has been authorized to give any information or
to make any representations other than those contained in
this Prospectus and in the Funds official sales
literature in connection with the offer of the Funds
shares, and, if given or made, such other information or
representations must not be relied upon as having been
authorized by the Fund. This Prospectus does not
constitute an offer in any State in which, or to any
person to whom, such offering may not lawfully be made.
Right Col.
FUNDAMENTAL
FIXED INCOME FUND
Tax-Free
Money Market Series
Prospectus
April 25, 1996
FUNDAMENTAL
Family of Funds
Rule 497(c)
Registration No.:33-12738
FUNDAMENTAL FIXED INCOME FUND
TAX-FREE MONEY MARKET SERIES
P.O. Box 1013
Bowling Green Station
New York, New York 10274-1013
STATEMENT OF ADDITIONAL INFORMATION
April 25, 1996
This Statement of Additional Information provides certain
detailed information concerning the Tax-Free Money Market Series (the "Money
Market Series") of the Fundamental Fixed Income Fund (the "Fund"). The Money
Market Series seeks to provide as high a level of current income exempt from
federal income tax as is consistent with the preservation of capital and
liquidity through the investment in a portfolio of high-quality municipal bonds
(generally with maturities of one year or less) ("Municipal Bonds"). Of course,
there can be no assurance that the investment objective will be achieved.
SHARES OF THE MONEY MARKET SERIES ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET
SERIES WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Statement of Additional Information is not a Prospectus
and should be read in conjunction with the Money Market 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 Money
Market 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.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE AND POLICIES................................... 3
INVESTMENT LIMITATIONS.............................................. 4
MANAGEMENT OF THE FUND.............................................. 5
DISTRIBUTION PLAN................................................... 9
INVESTMENT MANAGER.................................................. 11
PORTFOLIO TRANSACTIONS.............................................. 13
CUSTODIAN AND INDEPENDENT ACCOUNTANTS............................... 15
TAXES............................................................... 16
DESCRIPTION OF SHARES............................................... 23
CERTAIN LIABILITIES................................................. 24
DETERMINATION OF NET ASSET VALUE.................................... 24
CALCULATION OF YIELD................................................ 26
OTHER INFORMATION................................................... 27
FINANCIAL STATEMENTS................................................ 27
APPENDIX............................................................A-1
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INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the Money Market Series dated April 25, 1996
(the "Prospectus") identifies the investment objective and the principal
investment policies of the Money Market 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 Money Market Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
Money Market 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 Money
Market 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.
Standby Commitments. The Money Market Series may acquire
standby commitments with respect to Municipal Bonds held in its portfolio. A
standby commitment is an agreement in which a dealer agrees to purchase, at the
Money Market Series' option, specified Municipal Bonds at specified prices. The
total amount paid by the Money Market Series for outstanding standby commitments
it holds will not exceed 1/2 of 1% of the Money Market Series' total assets
calculated immediately after each standby commitment is acquired. The
acquisition of a standby commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. See "DETERMINATION OF NET ASSET VALUE" below. The actual
standby commitment will be valued at zero in determining net asset value. The
cost of the standby commitment will be reflected as an unrealized loss for the
period during which the commitment is held by the Money Market Series and will
be reflected in realized gain or loss when the commitment is exercised or
expires.
Portfolio Turnover. Pursuit by the Money Market Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio
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turnover." Portfolio turnover may involve payments by the Money Market 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.
INVESTMENT LIMITATIONS
The Money Market 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 Money Market 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 Money Market Series may not:
1. purchase the securities of any issuer, if, as a result
of such purchase, more than 25% 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, in banks or in U.S. government securities;
2. borrow money, except to meet redemptions in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its total
assets (including the amount borrowed);
3. commit more than 10% of its assets to illiquid
securities, including repurchase agreements that mature in more than seven days;
4. make short sales of securities;
5. purchase securities on margin;
6. write, purchase or otherwise invest in any put (except
for standby commitments, as described in the Prospectus), call, straddle or
spread option or buy or sell real estate, commodities or commodity futures
contracts or invest in oil, gas or mineral exploration or development programs;
7. make loans to any person, except by (a) the purchase of
a debt obligation in which the Money Market Series is permitted to invest and
(b) engaging in repurchase agreements;
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8. knowingly purchase any security that is subject to
legal or contractual restrictions on resale or for which there is no readily
available market;
9. purchase the securities of other investment companies
or investment trusts, except as they may be acquired as part of a merger,
consolidation or acquisition of assets;
10. purchase or retain the securities of any issuer if any
officer or Trustee of the Fund or of the Fund's investment advisor is an officer
or director of such issuer and owns beneficially more than 1/2 of 1% of the
securities of such issuer and all of the officers and Trustees of the Fund and
of the Fund's investment advisor together own more than 5% of the securities of
such issuer;
11. act as an underwriter, except as it may be deemed to be
an underwriter in a sale of restricted securities;
12. invest in companies for the purpose of exercising
control or management; or
13. issue senior securities.
For the purposes of the Money Market 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 Money Market Series has adopted the
following operating policy which is not fundamental and which may be changed
without shareholder approval: To comply with certain state statutes, the Money
Market Series will not pledge, mortgage or hypothecate its portfolio securities
if at the time the value of the securities so pledged, mortgaged or hypothecated
would exceed 10% of the value of the Money Market Series.
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 Money
Market 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 Money Market Series. The officers of the Fund
are responsible for the operations of the Money Market Series. The Trustees and
executive officers of the
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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 Investment Company Act of 1940 (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 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
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<PAGE>
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 New
York Muni Fund, 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 Portfoloio 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, 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 New York Muni Fund, 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 Money Market 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
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<PAGE>
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 Municipal Bond Series, $18,072 for the Money Market Series and
$6,624 for the Fundamental U.S.Government Strategic Income Fund Series).
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.
- ---- ------- ---- ---- ------ ------ --------------
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 1,376 117 4,518 1,656 26,000
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<PAGE>
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 Money Market Series,
acts as its dividend disbursing agent, and as administrator of the exchange,
check redemption, telephone redemption and expedited redemption privileges of
the Money Market Series pursuant to a Transfer Agency and Service Agreement
dated as of February 1, 1990. During the year ended December 31, 1995, fees paid
to the Transfer Agent by the Money Market Series amounted to $41,525.
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. 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 Money Market Series not borne by the Money Market 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 Money
Market Series. FSC also pays certain expenses in connection with the
distribution of the Money Market 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 Money Market Series bears the cost of registering
its shares under federal and state securities law.
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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 Money Market Series
pays FSC compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the Money Market 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 and by Messrs. Thomas W.
Buckingham and Vincent J. Malanga as the then sole shareholders of the Money
Market Series. During the year ended December 31, 1995, amounts incurred by the
Fund under the plan aggregated $222,162 .
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.
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
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<PAGE>
Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
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 Money Market 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 consequences as a result of any of these occurrences. The
Money Market 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"), P.O. Box
1013, Bowling Green Station, New York, New York 10274-1013, 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 18, 1995. 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.
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Under the terms of the Management Agreement, the Manager
serves as investment adviser to the Money Market Series and is responsible for
the overall management of the business affairs and assets of the Money Market
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 Money Market 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 Money Market Series, including
executive salaries and the rental of office space, with the exception of the
following, which are to be paid by the Money Market Series: (1) charges and
expenses for determining from time-to-time the net asset value of the Money
Market 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 Money Market Series,
(3) brokers' commissions, and issue and transfer taxes, chargeable to the Money
Market 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 Money Market Series to federal, state or
other governmental agencies, (5) fees and expenses involved in registering and
maintaining registrations of the shares of the Money Market Series with the
Securities and Exchange Commission, (6) all expenses of shareholders' and
Trustees' meetings and of 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 Money
Market 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 Money Market Series is responsible for payment of the portion
of such charges or expenses which are properly allocable to the Money Market
Series.
As compensation for the performance of its management services
and the assumption of certain expenses of the Money Market 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 Money Market Series
equal to the percentage listed below of the average daily net asset value of the
Money Market Series.
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Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000
or more but less than $200,000,000 .48%
Net asset value of $200,000,000
or more but less than $300,000,000 .46%
Net asset value of $300,000,000
or more but less than $400,000,000 .44%
Net asset value of $400,000,000
or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
However, if for any fiscal year in which the aggregate
operating expenses of the Money Market 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 Money Market Series, the Manager will reimburse the Money Market Series
on a monthly basis for the amount of such excess.
For the period commencing October 1, 1987 (the commencement of
the Money Market Series' operations) and ended December 31, 1987 and for the
years ended December 31, 1988, 1989, 1990, 1991, 1992 and 1993, the Manager
waived its management fees and paid on behalf of the Money Market Series
$24,639, $77,495, $37,383, $38,348, $81,068, $90,681 and $27,160, 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 Money Market 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 Money Market 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 other funds for which the Manager acts as investment advisor.
Securities purchased and sold on behalf of the Money Market Series will be
traded 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 brokers or dealers, the Manager will
consider various relevant factors, including, but not limited
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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.
Dealers may be selected who provide brokerage and/or research
services to the Fund or Money Market 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 Money Market Series, other series of the Fund and other funds over which the
Manager exercises 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 Money Market 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 the Manager in carrying out its obligations to the
Money Market 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
Money Market 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 Money Market
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
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the Money Market 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
Money Market 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 through 1995 the
Money Market 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 Money Market Series and the Fund and
review the dealer spreads paid by the Money Market 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.
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, New York,
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 Money Market 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 Money Market Series or its
shareholders, and the discussions here and in the Prospectus are not intended as
substitutes for careful tax planning.
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Qualification as a Regulated Investment Company
The Money Market 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 Money Market 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 Money Market Series made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
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 investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the Money
Market 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 Money Market 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)
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received by the Money Market 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 Money Market 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 Money Market 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 Money Market Series held the debt
obligation.
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 Money Market 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 Money Market Series' taxable year, at least 50% of the value of
the Money Market 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 Money Market Series has not
invested more than 5% of the value of the Money Market Series' total assets in
securities of such issuer and as to which the Money Market Series does not hold
more than 10% of the outstanding voting 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 Money
Market Series controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the Money Market 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
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shareholders as ordinary dividends to the extent of the Money Market 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 Money Market Series intends to make sufficient
distributions or deemed distributions of its ordinary taxable 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 Money Market Series may
in certain circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
Money Market Series Distributions
The Money Market 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.
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The Money Market Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The Money Market 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 Money
Market Series prior to the date on which the shareholder acquired his shares.
The Money Market Series intends to qualify to pay
exemptinterest dividends by satisfying the requirement that at the close of each
quarter of the Money Market Series' taxable year at least 50% of the Money
Market Series' total assets consists of tax-exempt municipal obligations.
Distributions from the Money Market Series will constitute exempt-interest
dividends to the extent of the Money Market Series' tax-exempt interest income
(net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of the Money Market 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 Money Market 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 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.
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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 Money Market Series
is denied a deduction for interest on indebtedness incurred or continued to
purchase or carry shares of the Money Market Series. Moreover, a shareholder who
is (or is related to) a "substantial user" of a facility financed by industrial
development bonds held by the Money Market Series will likely be subject to tax
on dividends paid by the Money Market 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 Money Market 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 Money Market 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 Money Market 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 Money Market Series reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the value
of the assets of the Money Market Series, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by
the Money Market Series into account in the year in which the distributions 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 Money
Market 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
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tax consequences of distributions made (or deemed made) during the year.
The Money Market 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 Money Market Series that it is not subject to
backup withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
The Money Market Series seeks to maintain a stable net asset
value of $1.00 per share; however, there can be no assurance that the Money
Market Series will do this. In such a case, a shareholder will recognize gain or
loss on the sale or redemption of shares of the Money Market 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
Money Market 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 Money Market 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.
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
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shareholder"), depends on whether the income from the Money Market Series is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Money Market 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 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 Money Market
Series, capital gain dividends and exempt-interest dividends and amounts
retained by the Money Market Series that are designated as undistributed capital
gains.
If the income from the Money Market 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 Money Market 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 Money
Market Series may be required to withhold U.S. federal income tax at a rate of
31% on distributions that are otherwise exempt from withholding tax (or taxable
at a reduced treaty rate) unless the shareholder furnishes the Money Market
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 Money Market 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, and any such changes or decisions may have a retroactive effect.
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
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of federal, state and local tax rules with respect to an investment in the Money
Market 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 Money Market Series, the High-Yield Municipal Bond 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 Fund, the Fund's
shareholders are entitled to share pro rata in the Fund's net assets available
for distribution to shareholders.
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 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
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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 per share of the Money Market 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. The net asset value per share
of the Money Market Series is also determined on any other day in which the
level of trading in its portfolio securities is sufficiently high that the
current net asset value per share might be materially affected by changes in the
value of its portfolio securities. On any day in which no purchase orders for
the shares of the Money Market Series become effective and no shares are
tendered for redemption, the net asset value per share is not determined.
Except as set forth in the following paragraph, the Money
Market Series' portfolio instruments are valued on each business day on the
basis of amortized cost. This technique involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During
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periods of declining interest rates, the daily yield on shares of the Money
Market Series computed as described above may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Money Market
Series resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Money Market Series would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values and existing investors in the Money Market Series would
receive less investment income. The converse would apply in a period of rising
interest rates.
Standby commitments will be valued at zero in determining net
asset value. "When-issued" securities will be valued at the value of the
security at the time the commitment to purchase is entered into.
The valuation of the Money Market Series' portfolio
instruments based upon their amortized cost and the concomitant maintenance of
the Money Market Series' per share net asset value of $1.00 is permitted in
accordance with Rule 2a-7 under the Investment Company Act of 1940, pursuant to
which the Money Market Series must adhere to certain conditions. The Money
Market Series must maintain a dollar-weighted average portfolio maturity of 90
days or less, purchase only instruments having remaining maturities of 13 months
or less and invest only in securities determined by the Trustees to present
minimal credit risks. (See the Prospectus for additional information). The
maturities of variable rate demand instruments held in the Money Market Series'
portfolio will be deemed to be the longer of the demand period, or the period
remaining until the next interest rate adjustment, although stated maturities
may be in excess of one year. The Trustees must establish procedures designed to
stabilize, to the extent reasonably possible, the Money Market Series' price per
share as computed for the purpose of sales and redemptions at a single value. It
is the intention of the Money Market Series to maintain a per-share net asset
value of $1.00 but there can be no assurance of this. Such procedures will
include review of the Money Market Series' portfolio holdings by the Trustees,
at such intervals as they may deem appropriate, to determine whether the Money
Market Series' net asset value calculated by using available market quotations
deviates from $1.00 per share and, if so, whether such deviation may result in
material dilution or is otherwise unfair to existing shareholders. In the event
the Trustees determine that such a deviation exists, they have agreed to take
such corrective action as they regard as necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity;
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withholding dividends; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations.
CALCULATION OF YIELD
The Money Market Series' yield quotations as they may appear
in the Prospectus, this Statement of Additional Information or in advertising
and sales material are calculated by a standard method prescribed by the
Securities and Exchange Commission. Under this method, the yield quotation is
based on a hypothetical account having a balance of exactly one share at the
beginning of a seven-day period.
The yield quotation is computed as follows: The net change,
exclusive of capital changes (i.e., realized gains and losses from the sale of
securities and unrealized appreciation and depreciation), in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the base period is determined by subtracting a hypothetical charge reflecting
expense deductions from the hypothetical account, and dividing the net change in
value by the value of the share at the beginning of the base period. This base
period return is then multiplied by 365/7 with the resulting yield figure
carried to the nearest 100th of 1%. The determination of net change in account
value reflects the value of additional shares purchased with dividends from the
original share, dividends declared on both the original share and any such
additional shares, and all fees that are charged to the Money Market Series, in
proportion to the length of the base period and the Money Market Series' average
account size (with respect to any fees that vary with the size of an account).
The Money Market Series also may advertise a quotation of
effective yield. Effective yield is computed by compounding the unannualized
base period return determined as in the preceding paragraph by adding 1 to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] - 1.
The Money Market Series' taxable equivalent yield is
determined by dividing that portion of the Money Market Series' yield
(calculated as described above) that is tax-exempt by one minus a stated
marginal federal income tax rate and adding the product to that portion, if any,
of the yield of the Money Market Series that is not tax-exempt. The Money Market
Series' taxable equivalent effective yield is determined by dividing that
portion of the Money Market Series' effective yield (calculated as described
above) that is tax-exempt by one minus a stated marginal federal income tax rate
and adding the product to that portion, if
-26-
<PAGE>
any, of the effective yield of the Money Market Series that is not tax-exempt.
The Money Market Series' taxable equivalent yield and taxable equivalent
effective yield assume that the proportion of income of the Money Market Series
that is tax-exempt over the seven-day period used in determining the yield and
effective yield quotations is constant over the 52-week period over which such
yield quotations are annualized.
The yield and effective yield of the Money Market Series for
the seven-day period ended December 31, 1995 was 4.31% and 4.41%, respectively.
The taxable equivalent yield and taxable equivalent effective
yield of the Money Market Series for the seven-day period ended December 31,
1995 was 7.14% and 7.30%, respectively, for a taxpayer whose income was subject
to the then highest marginal federal income tax rate of 39.6%.
OTHER INFORMATION
As of April 22, 1996, the Trustees and officers of the Fund as
a group beneficially owned less than 1% of the outstanding shares of the Money
Market Series. As of such date, the following persons were known by Fund
management to have owned beneficially, directly or indirectly, 5% or more of the
outstanding shares of the Money Market Series: William and Anne Hinckley
(5.16%), 7215 Mission Hills Drive, Las Vegas, Nevada 89113, Perry M. Kalick
(17.43%), 820 Post Road, Scarsdale, New York 10583, Esther Miller, Trustee of
the Garel Trust (16.35%), 13-47 Zito Court Fairlawn, New Jersey 07410.
FINANCIAL STATEMENTS
Audited financial statements of the Money Market Series for
the year ended December 31, 1994 are attached hereto.
-27-
<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 rating may have different
yields while Bonds of the same maturity and coupon with different ratings may
have the same yield.
A-1
<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
