Rule 497(c)
Registration No.:33-12738
(left column)
Fundamental
Fixed-lncome Fund
High-Yield Municipal Bond
Series
90 Washington Street
New York, NY 10006
1-800-225-6864
Prospectus
April 25, 1996
This Prospectus pertains to the High-Yield Municipal Bond Series
(High-Yield 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 High-Yield Series is to provide
a high level of current income exempt from federal income taxes through
investment in a portfolio of lower quality municipal bonds (generally with
maturities of 20 years or more). Although it is not entirely illustrative of
lower quality municipal bonds, lower quality bonds in general, are commonly
referred to as "junk bonds."
This Prospectus concisely sets forth information about the High-Yield
Series that you should know before investing. You should read and retain this
Prospectus for your future reference. More information about the High-Yield
Series is included in the Statement of Additional Information for the High-Yield
Series, 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 BY THE
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.
(right column)
Contents
Annual Operating Expenses .................................................. 2
Financial Highlights ....................................................... 2
Investment Objective and Policies .......................................... 4
Special Considerations ................................................. 6
Temporary Investments .................................................. 6
Participation Interests, Variable
and Floating Rate Investments ........................................ 7
When-lssued Securities ................................................. 8
Futures Contracts ...................................................... 8
Options ................................................................ 10
Repurchase Agreements .................................................. 11
Lending Portfolio Securities ........................................... 11
Borrowings ............................................................. 12
Portfolio Transactions and Turnover .................................... 12
Private Activity Bonds ................................................. 12
Legislative Changes .................................................... 12
Miscellaneous .......................................................... 13
Management ................................................................. 13
Information about Shares
of the High-Yield Series ................................................. 14
Description of Shares .................................................. 14
How to Purchase Shares ................................................. 15
Methods of Payment ..................................................... 15
Purchase Price and Net Asset Value ..................................... 16
Distribution Expenses .................................................. 16
Redemptions ............................................................ 17
Transfers .............................................................. 19
Dividends and Taxes .................................................... 20
General Information ........................................................ 21
Investor Services ...................................................... 21
Calculating Yield and
Average Annual Total Return .......................................... 21
Exchangeability of Shares .............................................. 22
Other Information ...................................................... 23
Dividend FLEXIVEST Option .............................................. 23
Experts ................................................................ 23
Statement of Additional Information .................................... 23
Appendix A-Portfolio Composition ........................................... A-1
Appendix B-Description of Municipal
Bond Ratings ............................................................. B-1
<PAGE>
(left column)
Annual Operating
Expenses
The following table sets forth the estimated annual operating expenses of
the High-Yield Series expressed as a percentage of the average net assets of the
High-Yield Series and a hypothetical illustration of the amount of operating
expenses of the High-Yield Series that would be incurred by an investor
purchasing $1000 of shares of the High-Yield Series that 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, net of fees waived 0%
12b-1 fees1 .50%
Other expenses, net of reimbursements 2.00%
-----
Total operating expenses 2.50%
=====
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
- --------------------------------------------------------------------------------
$25 $78 $133 $284
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 rules of the
National Association of Securities Dealers, Inc.
The purpose of the preceding table is to assist an investor in the
High-Yield 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 High-Yield Series or of past or future returns on an investment in the
High-Yield Series. Actual expenses of the High-Yield Series and the return on an
investment in the High-Yield Series may vary significantly from the expenses and
investment return assumed in the above example.
(Right column)
For further information regarding management fees, 12b-1 fees, and other
expenses of the High-Yield Series, including information regarding the basis on
which management fees and 12b-1 fees are paid and expense reimbursements
provided by the High-Yield Series' investment adviser, see "Management" and
"Information about Shares of the High-Yield Series-Distribution Expenses" in
this Prospectus, and the Financial Statements included at the end of the
Statement of Additional Information.
Investors should note that absent the expense reimbursement arrangement set
forth in the High-Yield Series' Management Agreement, the High-Yield Series'
expenses would have been 8.72% of its average net assets.
Financial Highlights
The following information has been audited by McGladrey & Pullen, LLP,
independent public accountants, in connection with their audit of the High-Yield
Series' financial statements. McGladrey & Pullen's report on the High-Yield
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 High-Yield Series' full financial
statements.
Selected per share data-High-Yield 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:
2
<PAGE>
<TABLE>
<CAPTION>
Period From
October 1,*
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 ............ $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02 $ 8.01 $ 8.14 $ 8.69 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income ........................... 0.34 0.43 0.39 0.43 0.42 0.53 0.61 0.81 0.31
Net realized and unrealized gain
(losses) on investments ....................... 1.15 (1.35) (0.03) 0.01 0.27 (0.99) (0.13) (0.55) (1.31)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations .......... 1.49 (0.92) 0.36 0.44 0.69 (0.46) 0.48 0.26 (1.00)
------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income ............ (0.34) (0.43) (0.39) (0.43) (0.42) (0.53) (0.61) (0.81) (0.31)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Period .................. 7.07 $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02 $ 8.01 $ 8.14 $ 8.69
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (annualized) ....................... 25.70% (12.92%) 5.11% 6.26% 10.14% (5.85%) 5.91% 3.46% (9.97%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) ................. 1,457 979 1,087 1,050 1,176 1,471 1,719 1,793 383
Ratios to Average Net Assets:
Expenses, net of reimbursment (1) ............. 8.72% 2.50% 2.50% 2.87% 2.63% 2.24% 2.61% 2.76% 2.71%**
Net investment income ......................... 3.85% 6.70% 5.40% 5.89% 5.93% 6.90% 7.35% 9.28% 13.84%**
Portfolio turnover rate ......................... 43.51% 75.31% 84.89% 100.21% 15.78% 17.11% 41.10% 25.05% 21.00%
BANK LOANS
Amount outstanding at end of
period (000 omitted) .......................... 379 $ - $ - $ 20 $ 103 $ - $ - $ - $ 27
Average amount of bank loans
outstanding during the period (000 omitted) ... 61 $ - $ - $ 57T $ 29T $ 32T $ 35T $ 10T $ 16T
Average number of shares outstanding
during the period (000 omitted) ............... 183 156 145 144T 188T 205T 226T 120T 33T
Average amount of debt per share during the year. 0.33 $ - $ - $0.40 $0.15 $0.16 $0.15 $0.08 $0.50
<FN>
** Annualized.
* Commencement.
T Monthly Average.
(1) The Manager and others assumed certain expenses of the Fund during the years
ended December 31, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995
equivalent to 2.26%, 2.13%, 2.09%, 2.27%, .11%, 4.83%, 5.76%, 6.20% and
6.22% of average net assets, respectively.
</FN>
</TABLE>
3
<PAGE>
(Left column)
Investment Objective and Policies
The investment objective of the High-Yield Series is to provide a high level of
current income exempt from federal income taxes through the investment in a
portfolio of lower quality municipal bonds.
The policy of the High-Yield Series is to invest under normal circumstances
at least 80% of its assets in debt securities issued by, or on behalf of,
states, territories, and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, or instrumentalities, the
interest on which is exempt from federal income tax (municipal bonds). As a
temporary defensive measure under certain market conditions, the High-Yield
Series may invest up to 50% of its assets in short-term taxable investments. See
Temporary Investments below.
The High-Yield Series invests at least 65% of its assets in the lower
quality, high-yield municipal bonds that are rated BB or lower by Standard &
Poor's Corporation (S&P) or Ba or lower by Moody's Investors Service, Inc.
(Moody's) or are unrated but judged by the Fund's investment adviser to be of at
least comparable quality. The High-Yield Series may not invest any of its assets
in municipal bonds that are not currently paying income or in municipal bonds
that are rated lower than C by S&P or Moody's. There is no limit on the
percentage of its assets that the High-Yield Series may invest in unrated
securities that would otherwise qualify for purchase by the High-Yield Series.
Although the High-Yield Series invests its assets predominantly in the lower
quality municipal bonds described above due to the higher yield they provide,
the High-Yield Series may under certain conditions invest in higher quality
securities. For example, certain securities with higher risk characteristics
that the Fund invests in, such as inverse floaters and previously non-rated zero
coupon bonds that have been escrowed with government securities, may have
relatively high credit ratings, but still may have higher risk characteristics
that make them appropriate for high yield investors.
The lower quality municipal bonds that comprise a majority of the High-Yield
Series' investments generally produce a higher current yield than do municipal
(right column)
bonds of higher ratings. However, these municipal bonds are considered
speculative because they involve greater price volatility and risk than do
higher rated securities and yields on these bonds will tend to fluctuate over
time. Although the market value of all fixed-income securities varies as a
result of changes in prevailing interest rates (e.g., when interest rates rise,
the market value of fixed-income securities can be expected to decline), values
of lower rated securities tend to react differently than the values of higher
rated securities. The prices of lower rated securities are less sensitive to
changes in interest rates than higher rated securities. Conversely, lower rated
municipal bonds also involve a greater risk of default by the issuer in the
payment of principal and income and are more sensitive to economic downturns and
recessions than higher rated securities. The financial stress resulting from an
economic downturn could have a greater negative effect on the ability of issuers
of lower rated municipal bonds to service their principal and interest payments,
to meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other securities in the
High-Yield Series' portfolio, the net asset value of the High-Yield Series will
be negatively affected. Moreover, as the market for lower rated municipal bonds
is a relatively new one which has not yet been tested in a recession, a severe
economic downturn might increase the number of defaults, thereby adversely
affecting the value of all outstanding lower rated municipal bonds and
disrupting the market for such bonds. Securities purchased by the High-Yield
Series as part of an initial underwriting present an additional risk due to
their lack of market history. These risks are exacerbated with respect to
municipal bonds rated CCC or lower by S&P or Caa or lower by Moody's. Unrated
securities generally carry the same risks as do lower rated securities.
The High-Yield Series may invest in lower rated municipal bonds that are
structured as zero coupon or pay-in-kind bonds. Such bonds may be more
speculative and subject to greater fluctuation in value due to changes in
interest rates than lower rated, income-bearing municipal bonds. In addition,
zero coupon and pay-in-kind bonds are also subject to the risk that
4
<PAGE>
(left column)
in the event of a default, a fund may realize no return on its investment,
because these bonds do not pay cash interest. Zero coupon, or deferred interest,
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are issued
and traded at a discount from their face amounts or par value. Pay-in-kind bonds
are securities that pay interest through the issuance of additional bonds.
Holders of zero coupon securities are considered to receive each year the
portion of the original issue discount on such securities that accrues that year
(and, in the case of a taxable zero coupon security, must include such amount in
gross income), even though the holders receive no cash payments during the year.
Consequently, as a fund is accruing original issue discount on these securities
(whether taxable or tax-exempt) prior to the receipt of cash payment, it is
still subject to the requirement that it distribute substantially all of its
income (including tax-exempt income) to its shareholders in order to qualify as
a "regulated investment company" under applicable tax law. Therefore, such fund
may have to dispose of its portfolio securities under disadvantageous
circumstances or leverage itself by borrowing to generate the cash necessary to
satisfy its distribution requirements.
Lower rated municipal bonds are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
rated municipal bonds tend to be institutions, rather than individuals, a factor
that further limits the secondary market. To the extent that no established
retail secondary market exists, many lower rated municipal bonds may not be as
liquid as Treasury and investment grade bonds. The ability of the High-Yield
Series to sell lower rated municipal bonds will be adversely affected to the
extent that such bonds are thinly traded or illiquid. Moreover, the ability of
the High-Yield Series to value lower rated municipal bonds becomes more
difficult, and judgment plays a greater role in valuation, as there is less
reliable, objective data available with respect to such bonds that are thinly
traded or illiquid.
(right column)
Because investors may perceive that there are greater risks associated with
the medium to lower rated municipal bonds of the type in which the High-Yield
Series may invest, the yields and prices of such securities may tend to
fluctuate more than those for securities with a higher rating. Changes in
perception of issuers' creditworthiness tend to occur more frequently and in a
more pronounced manner in the lower quality segments of the municipal bond
market than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
The general legislative environment has included discussions and legislative
proposals relating to the tax treatment of high-yield municipal bonds. Any or a
combination of such proposals, if enacted into law, could negatively affect the
value of the high-yield municipal bonds in the High-Yield Series' portfolio. The
likelihood of any such legislation is uncertain.
Fund management believes that the risks of investing in such high-yielding,
municipal bonds may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and S&P is
considered in selecting portfolio securities, they evaluate the safety of the
principal and the interest payments of the security, not their market value
risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. The Fund relies, primarily, on its
own credit analysis, which includes a study of the existing debt, capital
structure, ability to service debts and to pay dividends, and the current trend
of earnings for any issuer under consideration for the High-Yield Series'
investment portfolio. This may suggest, however, that the achievement of the
High-Yield Series' investment objective is more dependent on its proprietary
credit analysis, than is otherwise the case for a fund that invests in higher
quality bonds. See Appendix A for a summary of the High-Yield Series' asset
composition, based on the monthly weighted average of credit ratings of its
portfolio securities.
The High-Yield Series normally purchases long-term municipal bonds with
maturities of 20 years or greater because such municipal bonds generally pro-
5
<PAGE>
(left column)
duce higher yields than short-term municipal bonds. Although the market value of
all fixed-income securities generally varies inversely with changes in interest
rates, long-term securities are more exposed to this variation than short-term
securities and thus more likely to cause some instability in the High-Yield
Series' share price. The High-Yield Series reserves the right to vary the
average maturity of securities it holds.
A large portion of the High-Yield Series' assets may be invested in
municipal bonds whose interest payments are derived from revenues from similar
projects or whose issuers share the same geographic location. Consequently, the
asset value and performance of the High-Yield Series may be more susceptible to
certain economic, political, or regulatory developments than if the High-Yield
Series had a more diversified portfolio of investments.
In making investments, the High-Yield Series considers the advice of its
investment adviser and uses the Fund's research facilities to perform its own
credit analysis, consisting of an examination of the economic feasibility of
revenue bond project financings and general purpose borrowings; the financial
condition of the issuer or guarantor with respect to liquidity; cash flow and
ability to meet anticipated debt service requirements; and various economic,
political, industrial, and geographic trends. Through credit analysis and
portfolio diversification, investment risk can be reduced; however, there can be
no assurances that losses will not occur. For a general discussion of municipal
bonds, see the Appendix included at the end of the Statement of Additional
Information. For the ratings of S&P and Moody's for municipal bonds, see
Appendix B to this Prospectus.
Special Considerations
The High Yield Series owns $100,000 principal amount of a Niagara Falls New York
Urban Renewal Agency 11% Bond due to mature on May 1, 2009, which has missed
interest and sinking fund payments. As of April 10, 1996, the value of the bond
represents approximately 2.44% of the High Yield Series' total assets. The Fund
ceased accruing interest on this bond as of May 1, 1991. Interest earned but not
(right column)
recorded for the year ended December 31, 1995 totaled $11,000. No cash payments
were received for interest during the year ended December 31, 1995. This bond is
valued in good faith under procedures determined by the Fund's Board of Trustees
at 49.34% of face value as of April 10, 1996.
On October 6, 1992 the Fund, in conjunction with its affiliate, entered into
an agreement whereby the lessors of the Projects would be paid in consideration
of (i) the assignment of all subleases, rents and secur-ity deposits from the
tenants of the Projects, (ii) surrender control of the Projects to the Fund,
(iii) waive any and all rights and interests of any kind in the Projects, (iv)
obtain and deliver cancellations of all leases with related parties to the
lessors, (v) the lessors shall assign development rights to certain real estate
parcels, (vi) providing an itemization of all debts in the Projects. The Fund
has retained an investment banker to assist it in finding the highest and the
best use of the Projects. The Fund, through its investment banker, engaged a
manager to operate the Projects on its behalf, and the Fund is paying its
prorata portion of the net operating expenses of the Projects.
As of April 10, 1996, the High Yield Series held portfolio securities in
default with an aggregate value of $101,395 (5.02% of total assets).
Temporary Investments
The High-Yield 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,
the interest on which is subject to federal income taxes. Such investments are
made only under conditions that, in the opinion of the investment adviser of the
High-Yield Series, make such investments advisable. For example, the High-Yield
Series may invest in taxable obligations pending investment in municipal bonds
of the 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 High-Yield Series. The High-Yield Series invests in only those
taxable obligations that are (1) rated A or higher by S&P or Moody's or unrated
but judged by its investment adviser to be of at least comparable quality; (2)
obli-
6
<PAGE>
(left column)
gations 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 High-Yield
Series may be invested in taxable obligations at any one time, and the
High-Yield Series anticipates that on a 12-month average, taxable obligations
will constitute less than 10% of the value of its total investments.
The High-Yield Series also invests, from time to time, a portion of its
assets in higher quality municipal bonds (those rated BBB or above by S&P or Baa
or above by Moody's), such as when there is an influx of assets and sufficient
suitable lower quality municipal bonds are not available, or during a period
when yield spreads among municipal bonds are narrow and the marginally higher
yields of lower quality municipal bonds do not justify, in the judgment of the
investment adviser of the High-Yield Series, the increased risk involved.
Securities rated BBB by S&P or Baa by Moody's are considered medium grade,
neither highly protected nor poorly secured, with some elements of uncertainty
over any great length of time and certain speculative characteristics as well.
Participation Interests, Variable and
Floating Rate Instruments
The Fund may purchase participation interests from financial institutions. These
participation interests give the purchaser an undivided interest in one or more
underlying municipal obligations. The Fund may also invest in municipal
obligations which have variable interest rates that are readjusted periodically.
Such readjustment may be based either upon a predetermined standard, such as a
bank prime rate or the U.S. Treasury bill rate, or upon prevailing market
conditions. Many variable instruments are subject to redemption or repurchase at
par on demand by the Fund (usually upon no more than seven days' notice). All
variable rate instruments must meet the quality standards of the Fund. The
Manager will monitor the pricing, quality and liquidity of the variable rate
municipal obligations held by the Fund.
(right column)
The Fund may purchase inverse floaters which are instruments whose interest
rates bear an inverse relationship to the interest rate on another security or
the value of an index. Changes in the interest rate on the other security or
index inversely affect the residual interest rate paid on the inverse floater,
with the result that the inverse floater's price will be considerably more
volatile than that of a fixed-rate bond. For example, a municipal issuer may
decide to issue two variable rate instruments instead of a single long-term,
fixed-rate bond. The interest rate on one instrument reflects short-term
interest rates. Typically, this component pays an interest rate that is reset
periodically through an auction process, while the interest rate on the other
instrument (the inverse floater) pays a current residual interest rate based on
the total difference between the total interest paid by the issuer on the
municipal obligation and the auction rate paid on the auction component. This
reflects the approximate rate the issuer would have paid on a fixed-rate bond
multiplied by two, minus the interest rate paid on the short-term instrument.
Depending on market availability, the two portions may be recombined to form a
fixed-rate municipal bond. The market for inverse floaters is relatively new.
The Fund may purchase both the auction and the residual components.
The Fund may invest in municipal obligations that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap". The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
The Fund may purchase various types of structured municipal bonds whose
interest rates fluctuate according to changes in other interest rates for some
period and then revert to a fixed rate. The relationship between the interest
rate on these bonds and the other interest rate or index may be direct or
inverse, or it may be based on the relationship between two other interest rates
such as the relationship between taxable and tax-exempt interest rates.
7
<PAGE>
(left column)
When-Issued Securities
The High-Yield 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 are 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 50% of the
total assets of the High-Yield Series will be committed to such purchases. The
High-Yield Series does not start earning interest on when-issued securities
until settlement is made. In order to invest the assets of the High-Yield 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 are normally 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 High-Yield 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. Although it is not intended
that such purchases would be made for speculative purposes and although the
High-Yield Series intends to adhere to 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 High-Yield Series may
have to he sold in order for the High-Yield Series to meet its payment
obligations, and a sale of
(right column)
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 High-Yield 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 High-Yield Series' payment obligations with respect to
the security.
Futures Contracts
A futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade that have been designated contracts markets by the Commodity Futures
Trading Commission (the CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and through their
clearing corporations, the boards of trade guarantee performance of the
contracts. Presently, there are futures contracts based on such debt securities
as long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, three-month U.S.
Treasury bills, municipal bonds and bank certificates of deposit. While futures
contracts based on debt securities do provide for the delivery and acceptance of
securities, such deliveries and acceptances are very seldom made. Generally, the
futures contract is terminated by the execution of an offsetting transaction. An
offsetting transaction for a futures contract sale is effected by that party
entering into a futures contract purchase for the same aggregate amount of the
specified type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, that party is immediately
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, that party pays the difference and realizes a loss.
Similarly, closing out a futures contract purchase is effected by that party
entering into a futures contract
8
<PAGE>
(left column)
sale. If the offsetting sale price exceeds the purchase price, that party
realizes a gain; if the purchase price exceeds the offsetting sale price, that
party realizes a loss. At the time a futures contract is made, a small good
faith deposit called initial margin is required from each party to the futures
contract. The initial margin deposit is generally 1.5-5% of a contract's face
value. Thereafter, the futures contract is valued daily, and payment of
variation margin is required, so that each day, each party pays out cash in an
amount equal to any decline in the contract's value or receives cash equal to
any increase.
The High-Yield Series enters into futures contracts involving debt
securities backed by the full faith and credit of the U.S. Government. The
High-Yield Series' purpose in entering into futures contracts is to protect the
High-Yield Series from the adverse effects of fluctuations in interest rates
without actually buying or selling long-term debt securities. For example,
because the High-Yield Series owns long-term bonds, if interest rates were
expected to increase, the High-Yield Series might enter into futures contracts
for the sale of debt securities. This would have much the same effect as selling
an equivalent value of the High-Yield Series' long-term bonds. If interest rates
did increase, the value of the debt securities in the High-Yield Series'
portfolio would decline, but the value of such futures contracts would increase
at approximately the same rate, thereby preventing the net asset value of the
High-Yield Series from declining as much as it otherwise would have.
Similarly, when interest rates are expected to decline, the High-Yield
Series may enter into futures contracts as a hedge against the anticipated
increase in the price of long-term bonds. Because the value of such futures
contracts should vary directly with the price of long-term bonds, the High-Yield
Series could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, futures contracts could be liquidated and High-Yield Series cash reserves
could be used to buy long-term bonds on the cash market. The High-Yield Series
could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when
(right column)
interest rates are expected to increase. However, because the futures market is
more liquid than the cash market, using futures contracts as an investment
technique allows the High-Yield Series to maintain a defensive position without
having to sell its portfolio securities. This technique would be particularly
appropriate when the cash flow from the sale of new shares of the High-Yield
Series could have the effect of diluting dividend earnings.
Futures contracts may also be used to protect the High-Yield Series
portfolio from shifts in value due to overvaluation or undervaluation of the
municipal bond market as compared to the taxable bond market. For instance, if
the municipal bond market appeared to be overvalued relative to the U.S.
Government bond market, a hedge could be created by executing futures contracts
for the sale of municipal bonds and for the purchase of government bonds in like
amounts.
Investment by the High-Yield Series in futures contracts is subject to a
restriction because of CFTC regulations; the High-Yield Series may enter into
future contracts only as a temporary defensive measure for hedging purposes. If
the CFTC changes its regulations so that the High-Yield Series is permitted to
invest in futures contracts for income purposes without having to register with
the CFTC, the High-Yield Series may engage in transactions in futures contracts
for this purpose.
The High-Yield Series maintains a segregated asset account containing cash
or cash equivalents in an amount sufficient to cover its obligations with
respect to all of its futures contracts.
The ordinary spreads between prices in the cash and futures markets are
subject to distortion due to the following differences in the natures of those
markets. First, all participants in the futures market are subject to initial
deposit and variation margin requirements. Rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the
9
<PAGE>
(left column)
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, margin deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate trends by the Fund's investment adviser and a corresponding
purchase or sale of futures contracts may still not adequately protect the
High-Yield Series from the adverse effects of an increase or decrease in
interest rates.
In addition, to the extent that the High-Yield Series enters into futures
contracts for securities other than municipal bonds, there is a possibility that
the value of such futures contracts would not vary in direct proportion to the
value of the High-Yield Series' portfolio securities because the value of
municipal bonds and other debt securities may not react exactly the same to a
general change in interest rates or to factors other than changes in the general
level of interest rates.
Investments in futures contracts also entail the risk that if the judgment
of the High-Yield Series' investment adviser about the general direction of
interest rates is incorrect, the High-Yield Series' overall performance may be
worse than if it had not invested in futures contracts as a hedging technique.
For example, if the High-Yield Series sold futures contracts as a hedge against
the possibility of an increase in interest rates, which would adversely affect
the price of bonds held in its portfolio, and interest rates decreased instead,
the High-Yield Series would lose part or all of the benefit of the increased
value of its bonds because it would have offsetting losses in such futures
contracts. In addition, in such situations, if the High-Yield Series has
insufficient cash, or borrowings are unavailable or undesirable, it may have to
sell bonds from its portfolio to meet daily variation margin requirements. Such
sales of bonds may have to be made at times when it is otherwise disadvantageous
to do so.
Options
Options are the right to buy or sell securities, or futures contracts, in the
future. A put option gives the
(right column)
holder the right to sell a designated security for a set price within a
specified time period, and a call option gives the holder the right to buy a
designated security for a set price within a specified time period. Currently,
the market for options on tax-exempt securities is very small. There are also
options on futures contracts, which entitle a holder to enter into a futures
contract, on specified terms, within a specified time period. Unlike a futures
contract, which requires parties to the contract to buy and sell a security for
a set price on a set date, an option merely entitles its holder to decide on or
before a future date whether to purchase or sell a security at a set price or to
enter into a specified futures contract. If the holder decides not to exercise
an option, all that is lost is the price, called the premium, paid for the
option. Further, because the value of the option is fixed at the point of sale,
there are no daily payments of cash to reflect the change in the value of the
underlying transaction. However, since an option gives the buyer the right to
enter into a transaction or contract at a set price for a fixed period of time,
its value does change daily, and that change is reflected in the net asset value
of the High-Yield Series.
The High-Yield Series will buy only options listed on national securities
exchanges, except for agreements (sometimes called cash puts) that may accompany
the purchase of a new issue of bonds from a dealer.
Just as options give certain rights to their holders, they impose certain
obligations on the other party to an option, called the writer. The writer is
the party obligated to sell securities to, or purchase securities from, the
holder of an option on his or her exercise of an option to purchase or sell
securities. For undertaking such an obligation, the writer receives a premium,
less a commission charged by a broker, which the writer keeps regardless of
whether the option is exercised.
The High-Yield Series will write call options only on securities it holds in
its portfolio (which is called covered call writing) and liquid debt secured
puts, which means that the High-Yield Series maintains in a segregated account
with the custodian cash, U.S.
10
<PAGE>
Treasury bills, or other high-grade, liquid debt obligations with a value equal
to the exercise price of the put. A written put may also be cash secured if the
High-Yield Series holds a put on the same security and the exercise price of
such put is equal to or greater than the exercise price of the put written by
the High-Yield Series. The High-Yield Series may not write put options unless
its investment adviser determines at the time of the transaction that the
High-Yield Series desires to acquire the underlying security at the price
established in the put. Option writing can be used advantageously to generate
incremental income when the outlook is for relatively stable bond prices;
however, such income may be taxable.
The risk the High-Yield Series assumes when it buys an option is the loss of
the premium paid for the option. In order for the High-Yield Series to profit
from the purchase of an option, the price of the underlying security must change
and the change must be sufficient to cover both the premium paid for the option
and any related brokerage commissions. The risk involved in writing call options
is that the market value of the security underlying the option may increase
above the option price. If that occurred, the option would most likely be
exercised and the High-Yield Series would be obligated to sell the underlying
security for a price below its then-current market value. The risk involved in
writing put options is that the market value of the security underlying the
option may decrease below the option price and the High-Yield Series would be
obligated to purchase the security at a price above its then-current market
price.
Repurchase Agreements
The High-Yield Series may enter into repurchase agreements with commercial
banks, brokers, or dealers pursuant to which the High-Yield Series acquires a
money market instrument (generally a U.S. Government obligation qualifying for
purchase by the High-Yield Series) that is subject to resale by the High-Yield
Series on a specified date (generally within one week) at a specified price
(which price reflects an agreed-on interest rate effective for the period of
time the High-Yield Series holds the investment and is unrelated to the interest
rate on the
(right column)
instrument). As a matter of fundamental policy, the High-Yield Series will not
enter into repurchase agreements of more than one week in length if as a result
more than 10% of the total assets of the High-Yield Series would be invested in
such agreements or other restricted or illiquid securities. The High-Yield
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 High-Yield Series' investment adviser monitors on a periodic basis the
creditworthiness of parties with which it enters into repurchase agreements.
Lending Portfolio Securities
The High-Yield Series may lend securities in its portfolio to brokers, dealers,
banks, or other institutional borrowers of securities for the purpose of
obtaining additional income, provided that the borrower maintains with the
High-Yield Series collateral in the form of cash or cash equivalents, such as
Treasury bills, equal to at least l00% of the fair market value of the
securities lent. Borrowers of portfolio securities of the High-Yield Series pay
to the High-Yield Series any income accruing on borrowed securities during the
time such securities are on loan and may also pay to the High-Yield Series a
specified amount of interest on the borrowed securities. In addition, the
High-Yield Series is entitled to earn additional income by investing the
collateral it holds. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
of any loaned securities fail financially. For this reason, the investment
adviser of the High-Yield Series will evaluate and monitor the creditworthiness
of firms that borrow securities from the High-Yield Series. The High-Yield
Series will not lend its portfolio securities if as a result more than 30% of
its total assets will be subject to such loans. In addition, because income
derived from lending its portfolio securities is not tax-exempt, the High-Yield
Series limits lending its securities in accordance with its investment
objective. Accordingly, it is not anticipated that the High-Yield Series will
normally engage in any material amount of portfolio lending.
11
<PAGE>
(left column)
Borrowings
The High-Yield Series may borrow money in an amount up to 33.33% of its total
assets. Borrowings are also subject to the restriction that the value of the
High-Yield 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
High-Yield 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
unadvisable.
Interest on money borrowed is an expense of the High-Yield Series and
decreases its net earnings. While money borrowed may be used by the High-Yield
Series for investment in securities, the interest paid on borrowed money reduces
the amount of money available for investment by the High-Yield Series. The
interest paid by the High-Yield Series on borrowings may be more or less than
the yield on the securities purchased with borrowed funds.
The High-Yield Series may borrow in order to meet redemption requests and
for investment. Borrowing for investment increases both investment opportunity
and investment risk. Since the High-Yield Series' assets fluctuate in value, and
the obligation resulting from the borrowing is fixed, the net asset value per
share of the High-Yield Series will tend to increase more when the High-Yield
Series' investments increase in value and decrease more when the High-Yield
Series' investments decrease in value than would otherwise be the case. This is
a speculative factor known as leverage.
Portfolio Transactions and Turnover
The High-Yield Series is fully managed by purchasing and selling securities
as well as by holding selected securities to maturity. In purchasing and selling
portfolio securities, the High-Yield Series seeks to take advantage of
variations in the creditworthiness of issuers. For a description of the
strategies that may be used by the High-Yield Series in purchasing and selling
portfolio securities, see the Statement of Additional Information.
(right column)
While it is not possible to predict accurately the rate of turnover of the
High-Yield Series' portfolio on an annual basis, it is anticipated that the rate
will not materially exceed 100%. A portfolio turnover of 100% would occur if all
of the securities in the portfolio were changed once in a 12-month period.
Computation of portfolio turnover excludes transactions in securities having a
maturity of one year or less at the time of acquisition. A high portfolio
turnover rate increases transaction costs of the High-Yield Series and increases
the likelihood of distributing taxable capital gains to investors.
Private Activity Bonds
Interest from certain municipal bonds (referred to as private activity bonds) is
treated as a tax preference item under the alternative minimum tax. Thus,
corporate and individual investors may incur an alternative minimum tax
liability as a result of receiving tax-exempt dividends from the High-Yield
Series to the extent such dividends are attributable to interest from private
activity bonds. The High-Yield Series invests 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 corporate taxpayers), corporate shareholders may incur an
alternative minimum tax liability as a result of receiving any tax-exempt
dividends from the High-Yield Series. Tax-exempt interest and income referred to
throughout this Prospectus mean interest and income that is excluded from gross
income for federal income tax purposes but that 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 High-Yield
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 tax
12
<PAGE>
(left column)
exemption for interest has been restricted, tax-exempt interest on certain
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
deductions by financial institutions for interest allocable to certain
tax-exempt obligations has been denied. Additional legislation affecting the
High-Yield Series or municipal bonds may be introduced in the future. For
additional information concerning legislative changes, see the Statement of
Additional Information.
Miscellaneous
The High-Yield Series' investment objective of providing a high level of current
income exempt from federal income taxes and its policy of investing, under
normal circumstances, at least 80% of its assets in municipal bonds are
fundamental policies of the High-Yield Series, which may not be changed without
the approval of a majority of the outstanding shares of the High-Yield Series.
The Statement of Additional Information includes a discussion of other
investment policies and lists specific investment restrictions that govern
High-Yield 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 use of assets is adhered to at the time an investment is made or
assets are so used, a later change in percentage resulting from changes in the
value of the High-Yield Series securities or from a change in the rating of a
portfolio security will not be considered a violation of policy.
Management
The Fund's board of trustees has overall responsibility for managing and
supervising the High-Yield 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 High-Yield
Series,
(right column)
neither the Fund nor the High-Yield 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 High-Yield Series and is responsible
for the overall management of the business affairs and assets of the High-Yield
Series, subject to the authority of the Fund's board of trustees. The Manager'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 High-Yield 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 High-Yield Series pays all brokerage commissions in connection with its
portfolio transactions. The High-Yield Series also bears the expense, pro rata
with 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 High-Yield Series also pays certain other costs and
expenses, which are more fully described in the Statement of Additional
Information.
As compensation for the performance of its management services and the
assumption of certain expenses of the High-Yield Series and the Fund, the
Manager is entitled under the Management Agreement to an annual management fee
(which is computed daily and paid monthly) from the High-Yield Series equal to
the following percentage of the average daily net asset value of the High-Yield
Series:
13
<PAGE>
(left column)
Annual
Average Daily Net Asset Value Fee Payable
- --------------------------------------------------------------
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000 or
more but less than $200,000,000 .78%
Net asset value of $200,000,000 or
more but less than $300,000,000 .76%
Net asset value of $300,000,000 or
more but less than $400,000,000 .74%
Net asset value of $400,000,000 or
more but less than $500,000,000 .72%
Net asset value of $500,000,000 or
more .70%
- --------------------------------------------------------------
The preceding management fee is higher than the management fee paid by most
other mutual funds because of the extensive credit analysis performed by the
Manager with respect to the High-Yield Series. For the year ended December 31,
1995, the Manager voluntarily waived fees and reimbursed expenses of $57,191.
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 distributing shares of the High-Yield
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 from other qualified dealers.
In addition to paying a management fee to the Manager, the High-Yield Series
also pays a distribution fee in an amount up to .5% of its net asset value to
Fundamental Service Corporation, an affiliate of the Manager. See "Information
about Shares of the High-Yield Series-Distribution Expenses." The Manager also
manages and serves as investment
(right column)
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 High-Yield 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 High-Yield
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, that may
be divided into such separate series as the trustees may establish. The Fund
currently has three series of shares: the High-Yield Series, the Tax-Free Money
Market Series and the Fundamental U.S. Government Strategic Income Fund Series.
The trustees may establish additional series of shares. As an open-end
investment company, the Fund continuously offers shares of its High-Yield Series
to the public and under normal conditions must redeem these shares on demand
from any registered holder at the then-current net asset value per share.
Each share of the High-Yield Series represents an equal proportionate
interest in the High-Yield Series with each other share in the series. Shares
entitle their holders to one vote per share. Investors in the High-Yield 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 High-Yield 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 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 High-Yield Series have no
14
<PAGE>
(left column)
cumulative voting rights, preemptive rights, or subscription rights. Shares are
freely transferable and fully paid and except as set forth in the Statement of
Additional Information are non-assessable.
The High-Yield Series has its own assets, which are recorded on the books of
the Fund separately from assets of the Fund's other series, and held by the
Fund's trustees in trust for investors in the High-Yield Series. All income and
proceeds earned and expenses incurred by the High-Yield Series are allocated to
the High-Yield 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 High-Yield Series, is allocated to the High-Yield
Series. On liquidation of the Fund or the High-Yield Series, investors in the
High-Yield Series would be entitled to share pro rata in the net assets of the
High-Yield Series available for distribution to shareholders.
Shares will remain on deposit with the transfer agent for the High-Yield
Series and certificates will not be issued.
How to Purchase Shares
Shares of the High-Yield Series may be purchased either directly from the Fund
or through securities dealers, banks or other financial institutions. The
High-Yield 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 shares
directly from the Fund. 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 High-Yield 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 High-Yield
Series should include their account number with payment of the purchase price
for additional shares being purchased. Investors may reopen an account with a
minimum investment of $100 and without filing a
(right column)
purchase application during the year in which the account was closed or during
the following calendar year if information on the original purchase application
is still applicable. The High-Yield Series may require filing a statement that
all information on the original purchase application remains applicable.
A purchase order becomes effective immediately on receipt by Fundamental
Shareholder Services, Inc., as agent for the High-Yield 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 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 High-Yield 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 High-Yield Series may be made in
any of the following manners:
Payment by wire: An expeditious method of purchasing shares is the
transmittal of federal funds by
15
<PAGE>
bank wire to The Chase Manahattan 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 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 of any other mutual fund for which Fundamental Portfolio Advisors, Inc., the
investment adviser of the Fund, acts as the investment adviser may purchase
shares of the High-Yield Series by exchanging shares of such other series or
mutual fund. See General Information-Exchangeability of Shares.
Purchase Price and Net Asset Value
Each share of the High-Yield Series is sold at its net asset value next
determined after a purchase order becomes effective. The net asset value per
share of the High-Yield Series is determined at 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 High-Yield 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 on
which
(right column)
no purchase orders for the shares of the High-Yield 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 High-Yield 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 High-Yield Series are accrued daily and taken
into account.
The High-Yield Series' portfolio securities are valued on the basis of
prices provided by an independent pricing service when, in the opinion of
persons designated by the Fund's trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other assets are
valued by persons designated by the Fund's trustees using methods which the
trustees believe accurately reflects fair value. The prices realized from the
sale of these securities could be less than those originally paid by the
High-Yield Series or less than what may be considered the fair value of such
securities.
The High-Yield Series has a minimum initial purchase requirement of $1000
and a minimum subsequent purchase requirement of $100. Subsequent
16
<PAGE>
(leftcolumn)
purchases are made in the same manner as initial purchases.
Distribution Expenses
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 of the
1940 Act (the plan), under which the High-Yield Series pays to Fundamental
Service Corporation (FSC) a fee, which is accrued daily and paid monthly, at an
annual rate of 0.50% of the High-Yield Series' average daily net assets. Amounts
paid under the plan are paid to FSC to compensate it for the services it
provides and the expenses it bears in the distribution of the High-Yield 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 High-Yield
Series. Expenses of FSC also include the expenses of its employees, who engage
in or support distribution of shares or service shareholder accounts, including
overhead and telephone expenses; printing and distributing prospectuses and
reports used in connection with the offering of the High-Yield Series' shares;
and preparing, printing, and distributing sales literature and advertising
materials. FSC is an affiliate of the Manager. The amount of expenses which
would have been incurred by the High-Yield Series pursuant to the plan for the
year ended December 31, 1995 ($5,981) was waived by FSC.
The Glass-Steagall Act prohibits banks from engaging in 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 because of 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.
(right column)
At any given time, FSC may incur expenses in distributing shares of the
High-Yield Series pursuant to the plan that would be in excess of the total of
payments made by the High-Yield 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 High-Yield Series and FSC receives a
distribution fee calculated at the annual rate of 0.50% of the High-Yield
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 High-Yield Series, and the High-Yield Series will not reimburse FSC for
any such excess amount. Although payments under the plan by the High-Yield
Series may not be used directly to finance distribution of shares of other
series of the Fund, under the plan and similar plans adopted by the Fund's other
series, 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 High-Yield Series has at least $150,000,000 in
net assets, that FSC may use profits it realizes from the High-Yield Series to
finance another series of the Fund.
Redemptions
Each investor in the High-Yield Series has the right to cause the High-Yield
Series to redeem his or her shares by making a request to Fundamental
Shareholder Services, Inc. in accordance with either the regular redemption
procedure, the telephone redemption privilege, the expedited redemption
privilege, or the check redemption privilege, as described below. 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 High-Yield 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,
17
<PAGE>
(left column)
Inc. receives a redemption request following the close 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 High-Yield 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 High-Yield 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 High-Yield 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 changes in
account registration), the signature of the investor on the redemption request
must be guaranteed by an eligible guarantor institution appointed 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 High-Yield Series, the
High-Yield 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
(right column)
that are subject to any special condition or 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, either by completing the
appropriate section of the purchase application, or by making a later 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 per day 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 High-Yield Series. Both the High-Yield 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 three business days after the telephone call
transaction. Since you will bear the risk of loss, you should verifty 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 from any
18
<PAGE>
redemption of shares in the amount of $5000 or more transferred by wiring
federal funds to the commercial bank or savings and loan institution specified
in his or her purchase application or written request for the expedited
redemption privilege. The commercial bank or savings and loan institution
specified must be a member of the Federal Reserve System. Expedited redemption
requests may be made either by mail to the address specified under regular
redemption procedure or by telephone to the number specified under telephone
redemption privilege. The proceeds from such a redemption may be subject to a
deduction of the usual and customary charge. An investor may change the account
or commercial bank designation to receive the redemption proceeds by sending a
written request to Fundamental Shareholder Services, Inc. containing his or her
signature guaranteed in the manner described above. Both the High-Yield 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 High-Yield 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 High-Yield 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 that are applicable to other checking accounts at United States
Trust Company of New York. There is currently 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
(right column)
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 High-Yield Series or Fundamental Shareholder Services, Inc.
At times, the High-Yield Series may be requested to redeem shares for which
it has not yet received good payment. The High-Yield 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, 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 High-Yield Series will take all available steps to
expedite collection of the investment check.
If shares were 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 High-Yield 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
High-Yield Series normally uses are restricted or an emergency exists as
determined by the Securities and Exchange Commission, so that disposing of the
High-Yield Series' investments or determining 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
$1000, the High-Yield 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 High-Yield
19
<PAGE>
(left column)
Series to such investor of its intention to redeem the shares in such account.
The High-Yield Series will not redeem the shares of an account with a net asset
value of less than $100 if the account was reduced from the initial minimum
investment of $1000 to below $100 as a result of market activity.
Transfers
An investor may transfer shares of the High-Yield 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, social security
number or taxpayer identification number of, and distribution and redemption
options elected by, the new registered holder. Fundamental Shareholder Services,
Inc. may, at its option, request further documentation from transferors that are
corporations, executors, administrators, trustees, or guardians.
Dividends and Taxes
The High-Yield Series declares, on each business day just prior to calculating
its net asset value, all of its net investment income (consisting of earned
interest income less expenses) as a dividend on shares of record as of the close
of business on the preceding business day. Dividends are distributed on the last
business day of each calendar month. The High-Yield Series normally distributes
capital gains, if any, before the end of its fiscal year. All dividends and
capital gains distributions by the High-Yield 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 High-Yield 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 High-Yield Series so qualifies, it will not pay any federal income taxes
on net income or net realized capital gains that are distributed to investors
(right column)
in a timely manner. If the High-Yield Series fails to meet certain distribution
requirements at the end of the calendar year, the High-Yield Series will be
subject to a 4% excise tax on a portion of its undistributed income. The
High-Yield 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 High-Yield Series of its tax-exempt interest income
(net of expenses) are designated as exempt-interest dividends and are treated as
tax-exempt interest for federal income tax purposes. However, investors are
required to report the receipt of exempt-interest dividends, together with other
tax-exempt interest, on their federal income tax returns. In addition, these
exempt interest dividends may be subject to the federal alternative minimum tax,
and to state and local income tax, and will be taken into account in determining
the portion, if any, of social security benefits received which must be included
in gross income for federal income tax purposes. It is a policy of the
High-Yield Series to maximize the percentage of distributions that are not
subject to federal income taxes. However, a small portion of the High-Yield
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 High-Yield Series of any taxable net
investment income and of any net short-term capital gains are taxable to
investors as ordinary 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 long-term 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
High-Yield Series. Exempt-interest dividends, ordinary income dividends and
capital gain dividends may also subject an investor 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 High-Yield
Series).
An investor will recognize gain or loss on the sale or redemption of shares
of the High-Yield Series in an
20
<PAGE>
(left column)
amount equal to the difference between the proceeds of the sale or redemption
and the investor's adjusted tax basis in the shares. 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.
Under the Code, 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. Thus, corporate and individual investors may incur an
alternative minimum tax liability as a result of receiving exempt-interest
dividends from the High-Yield 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
corporate taxpayers), corporate investors may incur an alternative minimum tax
liability as a result of receiving any exempt-interest dividends from the
High-Yield 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 High-Yield 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 tax advisers regarding these matters and state, local, and other
applicable tax laws. The High-Yield 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 certified on their applications or separate W-9 forms that their social
security or taxpayer identification numbers are correct and that they are not
currently subject to backup withholding or that they are exempt from
(right column)
backup withholding. The federal income tax status of all distributions by the
High-Yield Series will be reported to investors annually.
General Information
Investor Services
Fundamental Shareholder Services, Inc. is the transfer and dividend paying agent
for shares of the High-Yield Series and The Chase Manhattan Bank, N.A. acts as
custodian for the High-Yield Series' assets. Inquiries regarding the High-Yield
Series should be addressed to Fundamental Shareholder Services, Inc.
Fundamental Shareholder Services, Inc. maintains an account for each
investor in the High-Yield 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 High-Yield Series together with the
list of securities held by the High-Yield Series in its portfolio are mailed to
each investor in the High-Yield 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 High-Yield Series and
may not be able to use some of the services available to investors of record.
Calculating Yield and
Average Annual Total Return
The High-Yield Series may from time to time include yield information in
advertisements or information furnished to existing or proposed shareholders.
The High-Yield Series' yield is computed by dividing the High-Yield Series' net
investment income per share during a base period of 30 days, or one month, by
the net asset value per share of the High-Yield Series on the last day of such
base period. The resulting 30-day yield is then annualized pursuant to the bond
equivalent annualization method described below. The High-Yield Series' net
21
<PAGE>
(left column)
investment income per share is determined by dividing the High-Yield Series' net
investment income during the base period by the average number of shares of the
High-Yield Series entitled to receive dividends during the base period. The
High-Yield Series' 30-day yield (computed as described above) is then annualized
by a computation that assumes the High-Yield Series' net investment income is
earned and reinvested for a six-month period at the same rate as during the
30-day base period and the resulting six-month income will again be generated
over an additional six-month period.
The High-Yield Series may also from time to time advertise its taxable
equivalent yield. The High-Yield Series' taxable equivalent yield is determined
by dividing that portion of the High-Yield Series' yield (calculated as
described above) that is tax-exempt by one minus the stated marginal federal
income tax rate and adding the product to that portion, if any, of the yield of
the High-Yield Series that is not tax-exempt.
The High-Yield Series may also furnish to existing or prospective
shareholders information concerning the average annual total return on an
investment in the High-Yield Series for a designated period of time. The average
annual total return quotation for a given period is computed by determining the
average annual compounded rate of return that would cause a hypothetical
investment made on the first day of the designated period (assuming all
dividends and distributions are reinvested) to equal the resulting net asset
value of such hypothetical investment on the last day of the designated period.
Yield and average annual total return quotations of the High-Yield Series
do not take into account any required payments for federal or state income
taxes.
The High-Yield Series' yield and average annual total return will vary from
time to time depending on market conditions, composition of the High-Yield
Series' portfolio, and operating expenses of the High-Yield Series. These
factors and possible differences in method used in calculating yields and
returns should be considered when comparing performance information about the
High-Yield Series to information published for other investment companies and
other investment vehicles. Yields and return quotations should also be
considered relative to changes in the
(right column)
value of the High-Yield Series' shares and the risk associated with the
High-Yield Series' investment objective and policies. At any time in the future,
yields and return quotations may be higher or lower than past yields or return
quotations, and there can be no assurance that any historical yield or return
quotation will continue in the future.
The High-Yield Series may also include comparative performance information
in advertising or marketing the High-Yield Series' shares. Such performance
information may include data from Lipper Analytical Services Inc. and
Morningstar, Inc., or other industry publications.
For more information about computing yield or average annual total return
quotations, see the Statement of Additional Information.
Exchangeability of Shares
Investors may exchange shares of the High-Yield 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 the investment adviser, by
either (1) delivering a written request to Fundamental Shareholder Services,
Inc., specifying the number of shares of the High-Yield Series to be exchanged
and the series of the Fund or the mutual fund in which they wish to invest in
connection with such an exchange or (2) by 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 High-Yield 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 High-Yield 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 High-Yield Series and such
other series or fund, respectively, as next determined after receipt by
Fundamental Shareholder Services, Inc. of the exchange request.
The exchange privilege is available in only those states where such
exchange can legally be made and
22
<PAGE>
(left column)
exchanges may only be made between accounts with identical account registration
and account numbers and is subject to the suitability requirements, if any, for
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. An exchange
by an investor is a taxable event for federal income tax purposes that may
result in a capital gain or loss.
Dividend FLEXIVEST Option
Shareholders of the High-Yield Series may elect to have all dividends and
distributions paid by such Series automatically reinvested in shares of the
Fund's Tax-Free Money Market Series at its net asset value on the payment date
of such dividend or distribution, provided the shareholder has: (i) a minimum
opening account balance in the Tax-Free Money Market Series of at least $1,000;
and (ii) made appropriate selection of the FLEXIVEST option in the
"Distributions" section of the Account Application Form.
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
(right column)
the Fund's planned portfolio transactions. The objec-tive 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 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 upon 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 High-Yield Series, dated the
date of this Prospectus, contains more detailed information about the High-Yield
Series, including information relating to its (1) investment policies and
restrictions, (2) its investment adviser and the Fund's trustees and officers,
(3) portfolio trading, (4) various services provided for investors in the
High-Yield Series, (5) the method used to calculate yield and average annual
total return and (6) financial statements and certain other financial
information.
23
<PAGE>
Appendix A
PORTFOLIO COMPOSITION
During the fiscal year ended December 31, 1995, the asset composition of the
High-Yield Series, based on the monthly weighted average of credit ratings of
portfolio securities, was as follows:
S&P or Percentage of Percentage of assets
Moody's assets rated by unrated but determined to
Rating rating agency be of comparable quality*
------ ------------- -------------------------
AAA or Aaa 15.25% 0%
AA or Aa 0.00% 0%
A 8.56% 0%
BBB or Baa 34.03% 0%
BB or Ba 5.48% 0%
B 3.49% 0%
Below B 0.00% 33.19%
- -----------
*Based on the monthly weighted average of credit ratings, 33.19% of the
High-Yield Series' assets were invested in unrated securities during the fiscal
year ended December 31, 1995. Unrated securities are not necessarily
lower-quality securities. Issuers of municipal securities frequently choose not
to incur the expense of obtaining a rating. Please refer to Appendix B for a
more complete discussion of these ratings.
A-1
<PAGE>
Appendix B
DESCRIPTION OF MUNICIPAL BOND RATINGS
Standard & Poor's Corporation
AAA
This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA
Bonds rated AA also qualify as high quality debt obligations. Capacity to
repay principal and pay interest is very strong, and in the majority of
instances, they differ from AAA issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than are bonds in higher rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (\'96): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
B-1
<PAGE>
Moody's Investors Service, Inc.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Note: Those
bonds in the Aa through B groups which Moody's believes possess the strongest
investment attributes are designated by the symbols Aa1, A1 and Baa1.
A
Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
B-2
<PAGE>
(left column)
FUNDAMENTAL
FIXED INCOME FUND
90 Washington Street
New York NY 10006
1-800-225-6864
Transfer Agent
Fundamental Shareholder Services, Inc.
P.O. Box 1013
New 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 column)
FUNDAMENTAL
FIXED INCOME FUND
High Yield
Municipal Bond Series
Prospectus
April 25, 1996
FUNDAMENTAL
Family of Funds
Rule 497(c)
Registration No.:33-12738
FUNDAMENTAL FIXED INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
P.O. Box 1013
Bowling Green Station
New York, New York 10274-1013
STATEMENT OF ADDITIONAL INFORMATION
April 25, 1996
This Statement of Additional Information provides certain
detailed information concerning the High-Yield Municipal Bond Series (the
"High-Yield Series") of the Fundamental Fixed Income Fund (the "Fund"). The
High-Yield Series seeks to provide a high level of current income exempt from
federal income taxes through the investment in a portfolio of lower quality
municipal bonds (generally with maturities of 20 years or more). Of course,
there can be no assurance that the investment objective will be achieved. Lower
quality municipal bonds are at times referred to as "junk bonds."
This Statement of Additional Information is not a Prospectus
and should be read in conjunction with the High Yield Series' current
Prospectus, a copy of which may be obtained by writing to Fundamental Service
Corporation at P.O. Box 1013, Bowling Green Station, New York, New York
10274-1013 or by calling (800) 322-6864.
This Statement of Additional Information relates to the
High-Yield Series' Prospectus dated April 25, 1996.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS
AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS............................... 3
MANAGEMENT OF THE FUND........................................................ 7
DISTRIBUTION PLAN.............................................................10
INVESTMENT MANAGER............................................................13
PORTFOLIO TRANSACTIONS........................................................15
CUSTODIAN AND INDEPENDENT ACCOUNTANTS.........................................17
TAXES.........................................................................17
DESCRIPTION OF SHARES.........................................................26
CERTAIN LIABILITIES...........................................................26
DETERMINATION OF NET ASSET VALUE..............................................27
CALCULATION OF YIELD AND AVERAGE
ANNUAL TOTAL RETURN.........................................................28
OTHER INFORMATION.............................................................31
FINANCIAL STATEMENTS..........................................................31
APPENDIX.....................................................................A-1
-2-
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the High-Yield Series dated April 25, 1996
(the "Prospectus") identifies the investment objective and the principal
investment policies of the High-Yield Series. Other investment policies and a
further description of certain of the policies described in the Prospectus are
set forth below.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the High-Yield Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
High-Yield Series' assets immediately, while awaiting delivery of securities
purchased on a "when-issued" basis, short-term obligations that offer same day
settlement and earnings will normally be purchased. Although short-term
investments will normally be in tax-exempt securities, short-term taxable
securities may be purchased if suitable short-term tax-exempt securities are not
available. When a commitment to purchase a security on a "when-issued" basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the assets of the High-Yield
Series equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, cash or high-quality debt securities sufficient
to cover any commitments are always expected to be available. Nonetheless, such
purchases may involve more risk than other types of purchases, as described in
the Prospectus.
Futures Contracts. The High-Yield Series may enter into
contracts for the future acquisition or delivery of fixed-income securities
("Futures Contracts"). This investment technique is designed only to hedge
against anticipated future changes in interest rates which otherwise might
either adversely affect the value of the High-Yield Series' securities or
adversely affect the prices of long-term bonds which the High-Yield Series
intends to purchase at a later date (although the High-Yield Series may engage
in transactions in futures contracts for income purposes if Commodity Futures
Trading Commission regulations on this issue change). If interest rates move in
an unexpected manner, the High-Yield Series will not achieve the anticipated
benefits of Futures Contracts or may realize a loss.
Options. The High-Yield Series intends to both purchase and
write options on securities and Futures Contracts, within the limits described
in the Prospectus. The market for options on tax-exempt securities is a new and
developing one, and
-3-
<PAGE>
consequently the High-Yield Series faces the risk that such options acquired by
it may not be readily marketable. As the market for options on tax-exempt
securities expands, the HighYield Series expects that its activities with
respect to options will expand also (subject to any applicable investment
restrictions).
Portfolio Management. The High-Yield Series intends to fully
manage its portfolio by buying and selling securities, as well as holding
securities to maturity. In managing its portfolio, the High-Yield Series seeks
to take advantage of market developments and yield disparities, which may
include use of the following strategies:
(1) shortening the average maturity of its
portfolio in anticipation of a rise in interest rates so as to minimize
depreciation of principal;
(2) lengthening the average maturity of its
portfolio in anticipation of a decline in interest rates so as to maximize
tax-exempt yield;
(3) selling one type of debt security (e.g.,
revenue bonds) and buying another (e.g., general obligation bonds) when
disparities arise in the relative values of each; and
(4) changing from one debt security to an
essentially similar debt security when their respective yields appear distorted
due to market factors.
The High-Yield Series engages in portfolio trading if it
believes a transaction, net of costs (including custodian charges), will help in
achieving its investment objective.
Portfolio Turnover. Pursuit by the High-Yield Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the High-Yield Series of broker commissions, dealer spreads
and other transaction costs relating to the purchase and the sale of securities.
Portfolio turnover rate for a given fiscal year is calculated by dividing the
lesser of the amount of the purchases or the amount of the sales of portfolio
securities during the year by the monthly average of the value of the portfolio
securities during the year. Securities with maturities or expiration dates of
one year or less at the time of acquisition by the High-Yield Series are
excluded from this calculation. A high portfolio turnover rate increases
transactions costs of the High-Yield Series and increases the likelihood of the
distribution of taxable capital gains to investors. For the
-4-
<PAGE>
fiscal years ended December 31, 1994 and 1995, the High-Yield Series' portfolio
turnover rates were approximately 75% and 44% respectively.
INVESTMENT RESTRICTIONS
The High-Yield Series has adopted the following policies as
"fundamental policies", which cannot be changed without the approval of the
holders of a majority of the shares of the High-Yield Series (which, as used in
this Statement of Additional Information, means the lesser of (i) more than 50%
of the outstanding shares, or (ii) 67% or more of the shares present at a
meeting at which holders of more than 50% of the outstanding shares are
represented in person or by proxy). The High-Yield Series may not:
(1) issue senior securities;
(2) borrow money in an amount not exceeding 33
1/3% of the value of its total assets and subject to a 300% asset coverage
requirement, or pledge mortgage or hypothecate any of its assets, except to
secure such permitted borrowings;
(3) underwrite securities issued by other
persons, except insofar as the High-Yield Series may technically be deemed an
underwriter under the Securities Act of 1933 in selling a portfolio security;
(4) purchase or sell real estate (including
limited partnership interests but excluding Municipal Bonds secured by real
estate or interests therein) or interests in oil, gas or mineral leases;
(5) make loans to others except (i) through the
use of repurchase agreements, provided that not more than 10% of its total
assets are invested at any one time in repurchase agreements of more than one
week in length or in other restricted or illiquid securities, (ii) through the
lending of its portfolio securities in accordance with the limitations set forth
in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES - Lending of
Portfolio Securities" and (iii) that the purchase of debt securities in
accordance with its investment policies shall not constitute loans for purposes
of this restriction;
(6) purchase or retain the securities of any
issuer, if, to the High-Yield Series' knowledge, those individual officers,
directors or trustees of the Fund, or of the investment advisor of the
High-Yield Series, who own beneficially own more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than 5% of
the outstanding securities of such issuer;
-5-
<PAGE>
(7) purchase securities, if, as a result of such
purchase, 25% or more of its total assets would be invested in non-governmental
industrial revenue bonds, the payment of the principal and interest on which are
the responsibility of issuers in the same industry, provided that it may invest
more than 25% of its total assets in industrial revenue bonds;
(8) make short sales of securities or purchase
any securities or evidences of interests therein on margin, except that the
High-Yield Series may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the High-Yield
Series may make deposits on margin in connection with interest rate futures
contracts;
(9) purchase or sell commodities or commodities
contracts except financial futures and related options as described in the
High-Yield Series' Prospectus; or
(10) invest in securities which are restricted as
to disposition under federal securities laws or for which there is no readily
available market (i.e., market makers do not exist or will not entertain bids or
offers).
The above restrictions, along with the fundamental policies
identified in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES -
Miscellaneous," constitute all of the fundamental policies of the High-Yield
Series.
For the purposes of the High-Yield Series' investment
restrictions, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of the principal and
interest on the security.
Operating Policies. The High-Yield Series has adopted the
following operating policies which are not fundamental and which may be changed
without shareholder approval. The High-Yield Series may enter into repurchase
agreements (a purchase of and a simultaneous commitment to resell a security at
an agreed upon price on an agreed upon date) only with member banks of the
Federal Reserve System and only if collateralized by U.S. Government securities.
If the vendor of a repurchase agreement fails to pay the sum agreed to on the
agreed upon delivery date, the High-Yield Series would have the right to sell
the U.S. Government securities, but might incur a loss in so doing and in
certain cases may not be permitted to sell the U.S. Government securities. As
noted in paragraph (5) on page 5, the High-Yield Series may not invest more than
10% of its assets in repurchase agreements maturing in more than seven days. In
addition, in order to comply with certain state statutes, the High-Yield Series
will not pledge, mortgage or hypothecate its portfolio securities if at the time
the value of the securities
-6-
<PAGE>
so pledged, mortgaged or hypothecated would exceed 10% of the value of the
High-Yield Series. For purposes of this restriction, collateral arrangements
with respect to the writing of stock options, financial futures, options on
financial futures and collateral arrangements with respect to margin
requirements are not deemed to be a pledge of assets, and for purposes of the
restriction in paragraph (1) above, neither such arrangements nor the purchase
or sale of futures or purchase of related options are deemed to be the issuance
of a senior security.
Percentage Restrictions. If a percentage restriction on
investment or utilization of assets set forth above is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the portfolio securities of the
High-Yield Series will not be considered a violation of such policy.
MANAGEMENT OF THE FUND
The Fund's Board of Trustees provides broad supervision over
the affairs of the Fund and of the High-Yield Series. The officers of the Fund
are responsible for the operations of the High-Yield Series. The Trustees and
executive officers of the Fund are listed below, together with their principal
occupations during the last five years. Each Trustee who is considered to be an
"interested person" of the Fund, as defined by the 1940 Act, is indicated by an
asterisk (*).
James C. Armstrong: Trustee of the Fund. Mr. Armstrong is a
partner in Armstrong/Seltzer Communications Inc., a New York management,
consulting and public relations firm. He was formerly Executive Director, Global
Public Affairs Institute at New York University and Professor, Bell of
Pennsylvania Chair in Telecommunications, Temple University, and is a management
consultant. He was with American Telephone and Telegraph Company for 15 years.
His last position with AT&T was Director, Corporate Policy Analysis. Mr.
Armstrong previously held positions at the Institute for Defense Analysis, the
Office of the Postmaster General, and on the faculty of the University of
Maryland. He has been a consultant to government, academic and business
organizations, and has served on various government-industry task forces and
committees. Mr. Armstrong was an Officer in the United States Navy and holds a
Ph.D. in nuclear physics. Mr. Armstrong's address is 51 Mt. Pleasant Road,
Morristown, New Jersey 07960.
James A. Bowers: Trustee of the Fund. Mr. Bowers is a
consultant for Prototypes (formerly Director of Finance and Administration), The
American Telephone and Telegraph Company, The RAND Corporation and CogniTech
Services Corporation. He was
-7-
<PAGE>
employed at AT&T for 23 years. His latest position with AT&T was in the Treasury
Department as District Manager-Securities and Exchange Commission Reporting. Mr.
Bowers holds Bachelor of Science and Master of Arts degrees in Economics from
Florida Atlantic University. Mr. Bowers' address is 60 East Eighth Street, New
York, N.Y. 10003.
Clark L. Bullock: Trustee of the Fund. Mr. Bullock is Chairman
of the Board of Shelter Rock Investors Services Corp., a privately-held, New
York-based investment company. Mr. Bullock received a Masters of Science degree
in Mathematical Economics from Purdue University in 1972 and a Bachelor of Arts
degree in International Relations from the University of Arizona. Mr. Bullock's
address is c/o Shelter Rock Investors, 150 Hopper Avenue, Waldwick, NJ 07463.
L. Greg Ferrone: Trustee of the Fund. Mr. Ferrone is a
consultant with IntraNet, Inc., a provider of computer systems to the domestic
and international banking industry. Previously he was the Director of Sales &
Marketing for RAV Communications Inc., Vice President/Regional Manager with
National Westminster Bank USA and an officer at Security Pacific Bank. Mr.
Ferrone received a Bachelor of Science degree from Rensselaer Polytechnic
Institute in 1972 and studied at the Stonier Graduate School of Banking. Mr.
Ferrone's address is 83 Ronald Court, Ramsey, New Jersey 07446.
*Vincent J. Malanga: Chairman of the Board, Chief Executive
Officer, President and Treasurer of the Fund, The California Muni Fund and
Fundamental Funds, Inc. Mr. Malanga is President, Treasurer and a Director of
Fundamental Portfolio Advisors, Inc., Executive Vice President, Secretary and a
Director of Fundamental Service Corporation, and President, LaSalle Economics
Inc., an economic consulting firm. Mr. Malanga is Vice President, Secretary and
a 50% shareholder of LaSalle Portfolio Management, Inc., the general partner of
both LPM Financial Futures Fund I, Limited Partnership and LPM Equities Fund
Limited Partnership. Prior thereto, he was a Vice President and Senior Economist
at A. Gary Shilling & Company, Inc., an economic consulting and brokerage firm.
He previously served as an Economist at White, Weld & Co. (an investment banking
and brokerage firm) and so served from 1976 to 1978. Prior thereto, Mr. Malanga,
who holds a Ph.D. in Economics from Fordham University, was an Economist at the
Federal Reserve Bank of New York. Mr. Malanga's address is 90 Washington Street,
19th Floor, New York, New York 10006.
David P. Wieder: Vice President of the Fund. Secretary of
Fundamental Portfolio Advisors, Inc., and President
-8-
<PAGE>
and a Director of Fundamental Shareholder Services, Inc. Mr. Wieder holds a
Bachelor of Science degree in Economics from Cornell University. Mr. Wieder's
address is 90 Washington Street, 19th Floor, New York, New York 10006.
Carole M. Laible: Secretary of the Fund. Treasurer and
Secretary of Fundamental Shareholder Services, Inc. She was formerly a General
Service Manager for McGladrey & Pullen. Ms. Laible received a Bachelor of
Science degree from St. John's University in 1986. Ms. Laible's address is 90
Washington Street, 19th Floor, New York, New York 10006.
All of the Trustees of the Fund are also Trustees or Directors
of Fundamental Funds, Inc. and The California Muni Fund. All of the officers of
the Fund hold similar offices with Fundamental Funds, Inc. and The California
Muni Fund.
The High-Yield Series does not pay any salary or compensation
to any of its officers, all of whom are officers or employees of Fundamental
Portfolio Advisors, Inc. (the "Manager"). For services and attendance at board
meetings and meetings of committees which are common to the Fund, New York Muni
Fund, Inc. and The California Muni Fund (other affiliated mutual funds for which
the Manager acts as the investment advisor), each Trustee of the Fund who is not
affiliated with the Manager is compensated at the rate of $6,500 per quarter
prorated among the three funds based on their respective net assets at the end
of each quarter. Each such Trustee is also reimbursed by the three funds, on the
same basis, for actual out-of-pocket expenses relating to his attendance at
meetings. The Manager pays the compensation of the Fund's officers and of the
one Trustee that is affiliated with the Manager. For the fiscal year ended
December 31, 1995, trustees' fees totalling $25,641 were paid by the Fund to the
Trustees as a group ($468 for the High-Yield Series, $18,072 for the Tax-Free
Money Market Series and $6,624 for the Fundamental U.S. Government Strategic
Income Fund Series).
-9-
<PAGE>
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 1,376 217 4,518 1,656 26,000
Transfer Agent
Fundamental Shareholder Services, Inc., P.O. Box 1013, Bowling
Green Station, New York, New York 10274-1013, an affiliate of Fundamental
Portfolio Advisors, Inc. and Fundamental Service Corporation, performs all
services in connection with the transfer of shares of the High-Yield Series,
acts as its dividend disbursing agent, and as administrator of the exchange,
check redemption, telephone redemption and expedited redemption privileges of
the High-Yield Series, pursuant to a Transfer Agency and Service Agreement dated
as of February 1, 1990. During the year ended December 31, 1995, all fees earned
($6,011) were paid by the Manager.
DISTRIBUTION PLAN
As discussed in the Prospectus, the Fund has entered into a
Distribution Agreement with FSC. FSC is a Delaware corporation which is owned
approximately 43.7% by each of Messrs. Thomas W.
-10-
<PAGE>
Buckingham, a consultant to the Manager, and Vincent J. Malanga, a Trustee and
officer of the Fund and a director and officer of the Manager, and 9.8% by Dr.
Lance M. Brofman, an employee of the Manager. The Trustees who are not, and were
not at the time they voted, interested persons of the Fund, as defined in the
1940 Act (the "Independent Trustees"), have approved the Distribution Agreement.
The Distribution Agreement provides that FSC will bear the distribution expenses
of the High-Yield Series not borne by the High-Yield Series. The Distribution
Agreement was approved by action of the Trustees of the Fund and entered into by
the Fund and FSC on March 28, 1989. The Distribution Agreement will continue in
effect from year-to-year if it is specifically approved, at least annually, in
the manner required by the 1940 Act. The Board of Trustees last approved the
Distribution Agreement on October 18, 1995.
FSC bears all expenses it incurs in providing services under
the Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the
High-Yield Series. FSC also pays certain expenses in connection with the
distribution of the High-Yield Series' shares, including the cost of preparing,
printing and distributing advertising or promotional materials, and the cost of
printing and distributing prospectuses and supplements thereto to prospective
shareholders. The High-Yield Series bears the cost of registering its shares
under federal and state securities law.
The Fund and FSC have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, FSC will use its best efforts in
rendering services to the Fund.
The Fund has adopted a plan of distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the High-Yield Series
pays FSC compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the High-Yield Series' average daily net assets. The Plan was adopted
by a majority vote of the Board of Trustees, including all of the Independent
Trustees (none of whom had or have any direct or indirect financial interest in
the operation of the Plan), cast in person at a meeting called for the purpose
of voting on the Plan on September 29, 1987 by the then sole shareholders of the
High-Yield Series.
Pursuant to the Plan, FSC provides the Fund, for review by the
Trustees, and the Trustees review, at least quarterly, a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made.
-11-
<PAGE>
No interested person of the Fund nor any Trustee of the Fund
who is not an interested person of the Fund, as defined in the 1940 Act, has any
direct financial interest in the operation of the Plan except to the extent that
FSC and certain of its employees may be deemed to have such an interest as a
result of receiving a portion of the amounts expended thereunder by the Fund.
The Plan has been renewed to continue in effect until December
31, 1996. The Plan will continue in effect from year-to-year thereafter,
provided such continuance is approved annually by vote of the Trustees in the
manner described above. It may not be amended to increase materially the amount
to be spent for the services described therein without approval of the
shareholders of the Fund, and material amendments of the Plan must also be
approved by the Trustees in the manner described above. The Plan may be
terminated at any time, without payment of any penalty, by vote of the majority
of the Trustees who are not interested persons of the Fund, and with no direct
or indirect financial interest in the operations of the Plan, or by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act). The Plan will automatically terminate in the event of its assignment
(as defined in the 1940 Act). So long as the Plan is in effect, the election and
nomination of the Independent Trustees shall be committed to the discretion of
the Independent Trustees. In the Trustees' quarterly review of the Plan, they
will consider its continued appropriateness and the level of compensation
provided therein.
All of the aggregate amount of 12b-1 fees incurred by the
High-Yield Series during the last fiscal year ($5,981) was paid to FSC for
expenses incurred by it pursuant to the Plan.
The Glass-Steagall Act prohibits banks from engaging in the
business of underwriting, selling or distributing securities. Although the scope
of this prohibition under the Glass-Steagall Act has not been clearly defined by
the courts or appropriate regulatory agencies, FSC believes that the
Glass-Steagall Act should not preclude a bank from performing shareholder
support services, servicing and recordkeeping functions. FSC intends to engage
banks only to perform such functions. However, changes in federal or state
statutes and regulations pertaining to the permissible activities of banks and
their affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. In such event,
changes in the operation of the High-Yield Series might occur, including
possible termination of any automatic investment or redemption or other services
then provided by a bank. It is not expected that shareholders would suffer any
adverse financial
-12-
<PAGE>
consequences as a result of any of these occurrences. The High-Yield Series may
execute portfolio transactions with and purchase securities issued by depository
institutions that indirectly receive payments under the Plan. No preference will
be shown in the selection of investments for the instruments of such depository
institutions.
INVESTMENT MANAGER
The Fund has entered into an agreement (the "Management
Agreement") with Fundamental Portfolio Advisors, Inc. (the "Manager"), 90
Washington Street, 19th Floor, New York, New York 10006, to act as its
investment adviser. The Management Agreement will continue in effect from year
to year if it is specifically approved, at least annually, by the vote of a
majority of the Board of Trustees of the Fund (including a majority of the Board
of Trustees who are not parties to the Management Agreement or interested
persons of any such parties) cast in person at a meeting called for the purpose
of voting on such renewal. The Board of Trustees last approved the Management
Agreement on October 19, 1994. The Management Agreement terminates if assigned
and may be terminated without penalty by either party by vote of its Board of
Directors or Trustees or a majority of its outstanding voting securities and the
giving of sixty days' written notice.
Under the terms of the Management Agreement, the Manager
serves as investment adviser to the High-Yield Series and is responsible for the
overall management of the business affairs and assets of the High-Yield Series,
subject to the authority of the Fund's Board of Trustees. The Manager also is
authorized under the Management Agreement to buy and sell securities for the
account of the High-Yield Series, in its discretion, subject to the right of the
Fund's Trustees to disapprove any such purchase or sale. The Manager pays all of
the ordinary operating expenses of the High-Yield Series, including executive
salaries and the rental of office space, with the exception of the following,
which are to be paid by the High-Yield Series: (1) charges and expenses for
determining from time-to-time the net asset value of the High-Yield Series and
the keeping of its books and records,(2) the charges and expenses of any
auditors, custodian, transfer agent, plan agent, dividend disbursing agent and
registrar performing services for the High-Yield Series, (3) brokers'
commissions, and issue and transfer taxes, chargeable to the High-Yield Series
in connection with securities transactions, (4) insurance premiums, interest
charges, dues and fees for membership in trade associations and all taxes and
fees payable by the High-Yield Series to federal, state or other governmental
agencies, (5) fees and expenses involved in registering and maintaining
registrations of the shares of the High-Yield Series with the Securities and
Exchange Commission, (6) all expenses of shareholders' and Trustees' meetings
and of
-13-
<PAGE>
preparing, printing and distributing notices, proxy statements and all reports
to shareholders and to governmental agencies, (7) charges and expenses of legal
counsel to the Fund, (8) compensation of those Trustees of the Fund as such who
are not affiliated with or interested persons of the Manager or the Fund (other
than as Trustees), (9) fees and expenses incurred pursuant to the 12b-1 Plan and
(10) such nonrecurring or extraordinary expenses as may arise, including
litigation affecting the Fund or the High-Yield Series and any indemnification
by the Fund of its trustees, officers, employees or agents with respect thereto.
To the extent any of the foregoing charges or expenses are incurred by the Fund
for the benefit of each of the Fund's series, the High-Yield Series is
responsible for payment of the portion of such charges or expenses which are
properly allocable to the High-Yield Series.
As compensation for the performance of its management services
and the assumption of certain expenses of the High-Yield Series and the Fund,
the Manager is entitled under the Management Agreement to an annual management
fee (which is computed daily and paid monthly) from the High-Yield Series equal
to the following percentage of the average daily net asset value of the
High-Yield Series.
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000
or more but less than $200,000,000 .78%
Net asset value of $200,000,000
or more but less than $300,000,000 .76%
Net asset value of $300,000,000
or more but less than $400,000,000 .74%
Net asset value of $400,000,000
or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
However, if for any fiscal year in which the aggregate
operating expenses of the High-Yield Series (including the management fee but
exclusive of taxes, interest expenses, brokerage fees and commissions, fees and
expenses paid pursuant to the Plan and extraordinary expenses beyond the control
of, and not caused by bad faith, negligence or malfeasance of, the Manager, if
any), are in excess of the expense limitation of any state having jurisdiction
over the High-Yield Series, the Manager will reimburse the High-Yield Series on
a monthly basis for the amount of such excess.
The above management fee is higher than the management fee
paid by most other mutual funds, due to the extensive credit analysis performed
by the Manager with respect to the High-Yield Series. For the period commencing
October 1, 1987 (the commencement of the High-Yield Series' operations) and
ended
-14-
<PAGE>
December 31, 1987 and for the years ended December 31, 1988, 1989, 1990, 1991,
1992, 1993 , 1994 and 1995 the Manager waived its management fees, and
reimbursed expenses of the High-Yield Series in amounts of $24,175, $73,527,
$39,005, $34,589, $1,498, $50,224, $54,485 , $51,925 and $74,369 respectively,
as expense reimbursements under the Management Agreement.
Mr. Vincent J. Malanga, a trustee and officer of the Fund, and
Dr. Lance M. Brofman, chief portfolio strategist of the High-Yield Series, each
own approximately 48.5% of the outstanding shares of voting capital stock of the
Manager.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities
are placed on behalf of the High-Yield Series by the Manager pursuant to
authority contained in the Management Agreement (subject to the right of the
Trustees to reverse any such transaction). The Manager is and may in the future
also be responsible for the placement of transaction orders for the other series
of the Fund and for other investment companies for which the Manager acts as
investment advisor. Securities purchased and sold on behalf of the High-Yield
Series will be traded in the over-the-counter market on a net basis (i.e.
without commission) through dealers acting for their own account and not as
brokers or otherwise involve transactions directly with the issuer of the
instrument. In selecting dealers, the Manager will consider various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability, and financial condition
of the dealer; the dealer's execution services rendered on a continuing basis;
and the reasonableness of any dealer spreads and commissions (if any).
Dealers may be selected who provide brokerage and/or research
services to the Fund or High-Yield Series and/or other investment companies over
which the Manager exercises investment discretion. Such services may include
advice concerning the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). The
Manager maintains a listing of dealers who provide such services on a regular
basis. However, because it is anticipated that many transactions on behalf of
the High-Yield Series, other series of the Fund and other funds over which the
Manager exercises
-15-
<PAGE>
investment discretion are placed with dealers (including dealers on the list)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such dealers solely
because such services were provided.
The receipt of research from dealers may be useful to the
Manager in rendering investment management services to the High-Yield Series
and/or other series of the Fund and other funds over which the Manager exercises
investment discretion, and conversely, such information provided by brokers or
dealers who have executed transaction orders on behalf of such other clients of
the Manager may be useful to it in carrying out its obligations to the
High-Yield Series. The receipt of such research has not reduced the Manager's
normal independent research activities; however, it enables the Manager to avoid
the additional expenses which might otherwise be incurred if it were to attempt
to develop comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the
High-Yield Series may receive spreads or commissions which are in excess of the
amount of spreads or commissions which other brokers or dealers would have
charged for effecting such transactions. In order to cause the High-Yield Series
to pay such higher spreads or commissions, the Manager must determine in good
faith that such spreads or commissions are reasonable in relation to the value
of the brokerage and/or research services provided by such executing broker or
dealers viewed in terms of a particular transaction or the Manager's overall
responsibilities to the High-Yield Series, the Fund or the Manager's other
clients. In reaching this determination, the Manager will not attempt to place a
specific dollar value on the brokerage and/or research services provided or to
determine what portion of the compensation should be related to those services.
The Manager is authorized to place portfolio transactions with
dealer firms that have provided assistance in the distribution of shares of the
High-Yield Series or shares of other series of the Fund or other funds for which
the Manager acts as investment advisor if it reasonably believes that the
quality of the transaction and the amount of the spread are comparable to what
they would be with other qualified dealers.
During the years ended December 31, 1989, 1990, 1991, 1992,
1993 , 1994 and 1995 the High-Yield Series did not pay any brokerage
commissions.
The Funds' Trustees and brokerage allocation committee
(comprised solely of non-interested Trustees) periodically review the Manager's
performance of its responsibilities in connection with the placement of
portfolio transactions on behalf of the High-Yield Series and the Fund and
review the dealer spreads paid
-16-
<PAGE>
by the High-Yield Series and the Fund over representative periods of time to
determine if they are reasonable in relation to the benefits to the Fund and its
portfolios.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
The Chase Manhattan Bank,N.A. (the "Bank"), 114 West 47th
Street, New York, New York, acts as Custodian of the Fund's cash and securities.
The Bank also acts as bookkeeping agent for the Fund, and in that capacity
monitors the Fund's accounting records and calculates its net asset value.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, N.Y.,
acts as independent public accountants for the Fund, performing an annual audit
of the Fund's financial statements and preparing its tax returns.
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the High-Yield Series and its shareholders
that are not described in the Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the High-Yield Series or its
shareholders, and the discussions here and in the Prospectus are not intended as
substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The High-Yield Series has elected to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the High-Yield Series
is not subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by the High-Yield Series made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be
-17-
<PAGE>
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
If the High-Yield Series has a net capital loss (i.e., the
excess of capital losses over capital gains) for any year, the amount thereof
may be carried forward up to eight years and treated as a short-term capital
loss which can be used to offset capital gains in such years. As of December 31,
1995, the High-Yield Series has capital loss carryforwards of approximately
$198,899, which expire in varying amounts between December 31, 1998 and December
31, 2004. Under Code Section 382, if the High-Yield Series has an "ownership
change," the High-Yield Series' use of its capital loss carryforwards in any
year following the ownership change will be limited to an amount equal to the
net asset value of the High-Yield Series immediately prior to the ownership
change multiplied by the highest adjusted long-term tax-exempt rate (which is
published monthly by the Internal Revenue Service (the "IRS")) in effect for any
month in the 3-calendar-month period ending with the calendar month of change
occurs (the highest rate for the 3- month period ending in arch, 1996 is 531%).
The High-Yield will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control or knowledge
of the High-Yield Series, there can be no assurance that the High-Yield Series
will not have, or has not already had, an ownership change. If the High-Yield
Series has or has had an ownership change, any capital gain net income for any
year following the ownership change in excess of the annual limitation on the
capital loss carryforwards will have to be distributed by the High-Yield Series
and will be taxable to shareholders as described under "High-Yield Series
Distributions" below.
In addition to satisfying the Distribution Requirement, a
regulated investment company must: (1) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement"); and (2)
derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "ShortShort Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign currency
gains, including those derived from options, futures and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's
-18-
<PAGE>
investments in stock or securities (or options or futures thereon). Because of
the Short-Short Gain Test, the High-Yield Series may have to limit the sale of
appreciated securities that it has held for less than three months. However, the
Short-Short Gain Test will not prevent the High-Yield Series from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the High-Yield Series at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the High-Yield Series
on the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation (including municipal
obligations) purchased by the HighYield Series at a market discount (generally,
at a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of the market discount which accrued during the period
of time the High-Yield Series held the debt obligation.
In general, for purposes of determining whether capital gain
or loss recognized by the High-Yield Series on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another asset
so used, or (2) the asset is otherwise held by the High-Yield Series as part of
a "straddle" (which term generally excludes a situation where the asset is stock
and the High-Yield Series grants a qualified covered call option (which, among
other things, must not be deep-in-themoney) with respect thereto). However, for
purposes of the ShortShort Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, the
High-Yield Series may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the High-Yield Series on the lapse of,
or any gain or loss recognized by the High-Yield Series from a closing
transaction with respect to, an option written by the HighYield Series will be
treated as a short-term capital gain or loss. For purposes of the Short-Short
Gain Test, the holding period of an option written by the High-Yield Series will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, the High-Yield Series may be
limited in its ability to write options which expire within
-19-
<PAGE>
three months and to enter into closing transactions at a gain within three
months of the writing of options.
Transactions that may be engaged in by the High-Yield Series
(such as regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The High-Yield Series, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the High-Yield Series that are not Section 1256
contracts. The IRS has held in several private rulings (and Treasury Regulations
now provide) that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above,
the High-Yield Series must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the High-Yield Series' taxable year, at least 50% of the value of the
High-Yield Series' assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the High-Yield Series has not invested more than
5% of the value of the High-Yield Series' total assets in securities of such
issuer and as to which the HighYield Series does not hold more than 10% of the
outstanding voting
-20-
<PAGE>
securities of such issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies),
or in two or more issuers which the High-Yield Series controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security, not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the High-Yield Series does not qualify
as a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
High-Yield Series' current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The High-Yield Series intends to make sufficient distributions
or deemed distributions of its ordinary taxable
-21-
<PAGE>
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. However, investors should note that the
High-Yield Series may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
High-Yield Series Distributions
The High-Yield Series anticipates distributing substantially
all of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and treated as
dividends for federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The High-Yield Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The HighYield Series
currently intends to distribute any such amounts. Net capital gain that is
distributed and designated as a capital gain dividend will be taxable to
shareholders as long-term capital gain, regardless of the length of time the
shareholder has held his shares or whether such gain was recognized by the
High-Yield Series prior to the date on which the shareholder acquired his
shares.
The High-Yield Series intends to qualify to pay exemptinterest
dividends by satisfying the requirement that at the close of each quarter of the
High-Yield Series' taxable year at least 50% of the High-Yield Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
High-Yield Series will constitute exempt-interest dividends to the extent of the
High-Yield Series' tax-exempt interest income (net of expenses and amortized
bond premium). Exempt-interest dividends distributed to shareholders of the
High-Yield Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file a federal income tax return
will be required to report the receipt of exempt-interest dividends on their
returns. Moreover, while exempt-interest dividends are excluded from gross
income for federal income tax purposes, they may be subject to alternative
minimum tax ("AMT") in certain circumstances and may have other collateral tax
consequences as discussed below. Distributions by the High-Yield Series of any
investment company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it
exceeds, the regular tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount.
In addition, under the Superfund Amendments and Reauthorization Act of 1986, a
tax is imposed for taxable years beginning after 1986 and before 1996 at
-22-
<PAGE>
the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. Exempt-interest dividends derived from certain
"private activity" municipal obligations issued after August 7, 1986 will
generally constitute an item of tax preference includable in AMTI for both
corporate and noncorporate taxpayers. In addition, exempt-interest dividends
derived from all municipal obligations, regardless of the date of issue, must be
included in adjusted current earnings, which are used in computing an additional
corporate preference item (i.e., 75% of the excess of a corporate taxpayer's
adjusted current earnings over its AMTI (determined without regard to this item
and the AMT net operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in
computing the portion, if any, of social security or railroad retirement
benefits that must be included in an individual shareholder's gross income and
subject to federal income tax. Further, a shareholder of the High-Yield Series
is denied a deduction for interest on indebtedness incurred or continued to
purchase or carry shares of the High-Yield Series. Moreover, a shareholder who
is (or is related to) a "substantial user" of a facility financed by industrial
development bonds held by the HighYield Series will likely be subject to tax on
dividends paid by the High-Yield Series which are derived from interest on such
bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the High-Yield Series that do not constitute
ordinary income dividends, exempt-interest dividends or capital gain dividends
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any excess will be treated as gain
from the sale of his shares, as discussed below.
Distributions by the High-Yield Series will be treated in the
manner described above regardless of whether such distributions are paid in cash
or reinvested in additional shares of the HighYield Series (or of another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the High-Yield
Series reflects undistributed net investment income or recognized capital gain
net income, or unrealized appreciation in the value of the assets of the
High-Yield Series, distributions of such amounts will be taxable to the
shareholder in the manner described above, although
-23-
<PAGE>
such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the High-Yield Series into account in the year in which they are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the High-Yield Series) on
December 31 of such calendar year if such dividends are actually paid in January
of the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made) to them
during the year.
The High-Yield Series will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of ordinary income dividends and
capital gain dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the High-Yield Series that it is not subject to
backup withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or
redemption of shares of the High-Yield Series in an amount equal to the
difference between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the High-Yield Series
within 30 days before or after the sale or redemption. In general, any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
of the High-Yield Series will be considered capital gain or loss and will be
long-term capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) generally will
apply in determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
-24-
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the High-Yield Series is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the High-Yield Series is not effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
ordinary income dividends paid to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) upon the
gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares of
the High-Yield Series, capital gain dividends and exemptinterest dividends and
amounts retained by the High-Yield Series that are designated as undistributed
capital gains.
If the income from the High-Yield Series is effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then ordinary income dividends, capital gain dividends, and any gains realized
upon the sale of shares of the High-Yield Series will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
In the case of a foreign noncorporate shareholder, the
High-Yield Series may be required to withhold U.S. federal income tax at a rate
of 31% on distributions that are otherwise exempt from withholding (or taxable
at a reduced treaty rate), unless the shareholder furnishes the High-Yield
Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the High-Yield Series, including the applicability of foreign
taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, perhaps with retroactive effect.
-25-
<PAGE>
Rules of state and local taxation of ordinary income
dividends, exempt-interest dividends and capital gain dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax advisers
as to the consequences to them of federal, state and local tax rules with
respect to an investment in the High-Yield Series.
. DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees
to authorize the issuance of an unlimited number of full and fractional shares
of beneficial interest (without par value), which may be divided into such
separate series as the Trustees may establish. The Fund currently has three
series of shares: the High-Yield Series, the Tax-Free Money Market Series and
the Fundamental U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares into
a greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an equal proportionate
interest in the Fund with each other share. The shares of any additional series
would participate equally in the earnings, dividends and assets of the
particular series, and would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series would vote together in the election and selection of
Trustees and accountants. Upon liquidation of the High-Yield Series, each
series' shareholder is entitled to share pro rata in the net assets available
for distribution to shareholders from such series.
Shareholders are entitled to one vote for each share held and
may vote in the election of Trustees and on other matters submitted to meetings
of shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are
governed by its Declaration of Trust dated March 19, 1987, a copy of which is on
file with the office of The Secretary of the Commonwealth of Massachusetts.
Theoretically, shareholders of a
-26-
<PAGE>
Massachusetts business trust may, under certain circumstances, be held
personally liable for the obligations of the trust. However, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Fund or any series of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or its Trustees. Moreover, the Declaration of Trust
provides for the indemnification out of Fund property of any shareholders held
personally liable for any obligations of the Fund or any series of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss beyond his or her investment because of shareholder
liability would be limited to circumstances in which the Fund itself will be
unable to meet its obligations. In light of the nature of the Fund's business,
the possibility of the Fund's liabilities exceeding its assets, and therefore a
shareholder's risk of personal liability, is extremely remote.
The Declaration of Trust further provides that the Fund shall
indemnify each of its Trustees and officers against liabilities and expenses
reasonably incurred by them, in connection with, or arising out of, any action,
suit or proceeding, threatened against or otherwise involving such Trustee or
officer, directly or indirectly, by reason of being or having been a Trustee or
officer of the Fund. The Declaration of Trust does not authorize the Fund to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of the High-Yield Series is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 P.M., New York time) on each day that both the New York Stock Exchange and
the Fund's custodian bank are open for business. This determination is made once
during each such day as of the close of the New York Stock Exchange by deducting
the amount of the High-Yield Series' liabilities from the value of its assets
and dividing the difference by the number of its shares outstanding. Debt
securities (other than short-term obligations), including listed issues, are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institution-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon exchange or over-the-counter
-27-
<PAGE>
prices, because such valuations are believed to reflect more accurately the fair
value of such securities. Use of the pricing service has been approved by the
Board of Trustees. Short-term obligations are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Portfolio
securities for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
CALCULATION OF YIELD AND AVERAGE
ANNUAL TOTAL RETURN
The High-Yield Series' yield quotations and average annual
total return quotations as they may appear in the Prospectus, this Statement of
Additional Information or in advertising and sales material are calculated by
standard methods prescribed by the Securities and Exchange Commission.
The High-Yield Series' yield is computed by dividing the
High-Yield Series' net investment income per share during a base period of 30
days, or one month, by the net asset value per share of the High-Yield Series on
the last day of such base period in accordance with the following formula:
a-b 6
YIELD = 2 [(----- +1) -1]
cd
Where: a = dividends and interest earned during the
period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the
High-Yield Series is computed based on the market value of the obligation
(including actual accrued interest, if any) at the close of business on the last
day of each month, or, with respect to obligations purchased during the month,
the purchase price (plus actual accrued interest, if any).
-28-
<PAGE>
(ii) The yield to maturity of each obligation is then divided
by 360 and the resulting quotient is multiplied by the market value of the
obligation (including actual accrued interest, if any) to determine the interest
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For these purposes it is assumed that each month
has 30 days.
(iii) Interest earned on all debt obligations during the
30-day or one month period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
(v) In the case of a tax-exempt obligation issued without
original issue discount and having a current market discount, the coupon rate of
interest of the obligation is used in lieu of yield to maturity to determine
interest income earned on the obligation. In the case of a tax-exempt obligation
with original issue discount where the discount based on the current market
value of the obligation exceeds the then remaining portion of original issue
discount (i.e. market discount), the yield to maturity used to determine
interest income earned on the obligation is the imputed rate based on the
original issue discount calculation. In the case of a tax-exempt obligation with
original issue discount where the discount based on the current market value of
the obligation is less than the then remaining portion of the original issue
discount (market premium), the yield to maturity used to determine interest
income earned on the obligation is based on the market value of the obligation.
With respect to the treatment of discount and premium on
mortgage or other receivables-backed obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), the
High-Yield Series accounts for gain or loss attributable to actual monthly pay
downs as an increase or decrease to interest income during the period. In
addition, the High-Yield Series may elect (i) to amortize the discount or
premium on a remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if the weighted average maturity date is not
available, or (ii) not to amortize the discount or premium on a remaining
security.
For purposes of computing yield, dividend income is recognized
by accruing 1/360 of the stated dividend rate of each obligation in the
High-Yield Series' portfolio each day that the obligation is in the portfolio.
The High-Yield Series does not use equalization accounting in the calculation of
yield. Expenses accrued during any base period, if any, pursuant to the
-29-
<PAGE>
Distribution Plan are included among the expenses accrued during the base
period. Any reimbursement accrued pursuant to the Distribution Plan during a
base period, if any, will reduce expenses accrued pursuant to such Plan, but
only to the extent the reimbursement does not exceed the accrued expenses for
the base period.
The High-Yield Series' yield for the one-month period ended
December 31, 1995 determined in accordance with the above formula is 5.56%.
Average annual total return quotations are computed by finding
the average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the end of a
designated period (or fractional portion
thereof)
For purposes of the above computation, it is assumed that all
dividends and distributions made by the High-Yield Series are reinvested at net
asset value during the designated period. The average annual total return
quotation is determined to the nearest 1/100 of 1%. The average annual total
return for the High-Yield Series for the year ended December 31, 1995 was
25.70%. The average annual total return for the High Yield Series for the 5 year
period ended December 31, 1995 was 6.13%. Since inception, October 1, 1987, the
average annual total return was 2.75%.
In determining the average annual total return (calculated as
provided above), recurring fees, if any, that are charged to all shareholder
accounts are taken into consideration. For any account fees that vary with the
size of the account, the account fee used for purposes of the above computation
is assumed to be the fee that would be charged to the High-Yield Series' mean
account size.
I The High-Yield Series may also from time-to-time advertise
its taxable equivalent yield. The High-Yield Series'
-30-
<PAGE>
taxable equivalent yield is determined by dividing that portion of the
High-Yield Series' yield (calculated as described above) that is tax-exempt by
one minus the stated marginal federal income tax rate and adding the product to
that portion, if any,of the yield of the High-Yield Series that is not
tax-exempt. The taxable equivalent yield of the High-Yield Series for the
one-month period ended December 31, 1995 was 9.21% for a taxpayer whose income
was subject to the then highest marginal federal income tax rate of 39.6%.
The High-Yield Series' yield and average annual total return
will vary from time-to-time depending on market conditions, the composition of
the High-Yield Series' portfolio and operating expenses of the High-Yield
Series. These factors and possible differences in the methods used in
calculating yields and returns should be considered when comparing performance
information regarding the High-Yield Series' to information published for other
investment companies and other investment vehicles. Yields and return quotations
should also be considered relative to changes in the value of the High-Yield
Series' shares and the risk associated with the High-Yield Series' investment
objective and policies. At any time in the future, yields and return quotations
may be higher or lower than past yields or return quotations and there can be no
assurance that any historical yield or return quotation will continue in the
future. In addition, the yield and average annual total return figures set forth
above in this Statement of Additional Information should be evaluated in light
of the limited operating history of the High-Yield Series.
OTHER INFORMATION
As of April 22, 1996, the following persons were known by
Fund management to have owned beneficially, directly or indirectly, 5% or more
of the outstanding shares of the High Yield Series: Evelyn Brady, 222 East 56th
Street, Apt. 3E, New York, New York 10022 (5.97%), Anthony Arcidiaceno, 220-36
67th Avenue, Bayside, New York 11364 (6.40%), Daivd I. and Elaine M. Kingsley,
15 Whitewood Road, Edison, New Jersey 08820 (5.69%) and Kenneth S. and Heidi G.
Widelitz, Trustees of the Widelitz Family Trust, 10519 Lauriston Avenue, Los
Angeles, California 90064 (16.20%). As of such date, the Trustees and officers
of the Fund as a group owned less than 1% of the outstanding shares of
High-Yield Series.
FINANCIAL STATEMENTS
Audited financial statements of the High-Yield Series for the
year ended December 31, 1995 are attached hereto.
-31-
<PAGE>
APPENDIX
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions. In addition, certain types of private activity bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit, port facilities,
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term Municipal
Bonds if the interest paid thereon qualifies as exempt from federal income tax.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of
factors, including general money market conditions, supply and demand and
general conditions of the Municipal Bond market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and
A-1
<PAGE>
rating may have different yields while Bonds of the same maturity and coupon
with different ratings may have the same yield.
A-2
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL BOND SERIES
(chart material)
- ----------------------------------------------------------
FFIF High Yield Municipal Bond Series
Avg Annual Total Return Thru 12/31/95
- ----------------------------------------------------------
1 Year 5 Year Since Inception (10/1/87)
25.70% 6.13% 2.75%
- ----------------------------------------------------------
$25,000
$20,000
$15,000
$10,000
$5,000
9/30/87
12/31/88
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
Lehman Brothers
Index $20,873
Consumer Price
Index $13,380
FFIF High Yield
Series $12,507
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in the Fund on 10/1/87
(Inception Date) to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. For comparative purposes the value of the index on
9/30/87 is used as the beginning value on 10/1/87. All dividends and capital
gain distributions are reinvested.
The Fund invests primarily in lower grade municipal securities and its
performance takes into account fees and expenses. Unlike the Fund, the Lehman
Brothers Municipal Bond Index is an unmanaged total return performance benchmark
for the long-term, investment-grade tax exempt bond market calculated by using
municipal bonds selected to be representative of the market. The Index does not
take into account fees and expenses. Further information relating to the Fund's
performance, including expense reimbursements, if applicable, is contained in
the Fund's Prospectus and elsewhere in this report.
Lehman Index Source: Lehman Brothers
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
ASSETS
Investment in securities at value (Note 5)
(cost $1,879,365) $1,828,053
Interest receivable 31,848
Receivable for shares sold 16,000
----------
Total assets $1,875,901
----------
LIABILITIES
Bank overdraft payable $ 378,766
Payable for shares redeemed 26,658
Dividend payable 1,162
Accrued expenses 11,880
----------
Total liabilities $ 418,466
----------
Net assets consisting of:
Accumulated net realized loss $ (198,899)
Unrealized depreciation of securities (51,312)
Paid-in-capital applicable to 206,234
shares of beneficial interest 1,707,646
----------
$1,457,435
==========
Net asset value per share $ 7.07
==========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
Investment income:
Interest income $ 91,471
Expenses (Notes 2, 3 and 6):
Investment advisory fees $ 9,569
Custodian and accounting fees 28,192
Transfer agent fees 6,011
Trustee fees 707
Distribution fees 5,981
Professional fees 40,715
Printing and postage 6,170
Other 6,904
--------
104,249
Less expenses waived or reimbursed by
the manager and affiliate (74,369)
--------
Total expenses 29,880
---------
Net investment income 61,591
Realized and unrealized gain (loss)
on investments:
Net realized loss on investments (39,968)
Change in unrealized appreciation of
investments for the year 253,452
--------
Net gain on investments 213,484
---------
Net increase in net assets
from operations $ 275,075
=========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31, 1995 and 1994
1995 1994
---------- ----------
Increase (decrease) in net assets from:
Operations:
Net investment income $ 61,591 $ 68,184
Net realized loss on investments (39,968) (54,302)
Unrealized appreciation (depreciation)
of investments for the year 253,452 (161,607)
---------- ----------
Net increase (decrease) in net
assets from operations 275,075 (147,725)
Dividends paid to shareholders from net
investment income (61,591) (68,184)
Capital share transactions (Note 4) 264,793 108,138
---------- ----------
Total increase (decrease) 478,277 (107,771)
Net assets:
Beginning of year 979,158 1,086,929
---------- ----------
End of year $1,457,435 $ 979,158
========== ==========
See Notes to Financial Statements.
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1995
Par Value Security Description Value
- --------- -------------------- -----
$ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc.,
8.875%, 3/1/21 $ 42,118
50,000 Angels, CA, Improvement Bond Act of 1915,
Greenhorn Creek Association, 7.300%, 9/2/21 52,371
75,000 Apple Valley, MN, IDR, K-Mart Corporation
Project, 6.000%, 4/1/01 66,822
35,000++ Babylon, NY, IDA, RFR, Babylon Recycling
Center, 8.875%, 3/1/11 17,549
40,000 Brookhaven, NY, IDA, CFR, Dowling College,
6.750%, 3/1/23 42,060
75,000 California Alternative Energy & Advanced
Transmission Finance Authority, SRI
International Project, 8.000%, 12/1/20 72,562
60,000 California Health Facilities Authority,
Valley Presbyterian Hospital Project, RB,
Series A, 9.000%, 5/1/12 60,076
35,000 Cass County, MO, IDA, 7.375%, 10/1/22 37,483
250,000 Colorado Health Facilities Authority, RHR,
Liberty Heights Project, ETM, CAB, 7/15/24 38,955
50,000 Decatur, GA, Downtown Development Authority,
IDR, Decatur Hotel Project, AMT, 8.750%, 11/1/16 50,880
500,000 Foothill/Eastern TCA, Toll Road Revenue, CAB,
1/1/26 74,410
50,000 Illinois Development Financial Authority, Solid
Waste Disposal, RB, Ford Heights Waste Tire
Project, 7.875%, 4/1/11 50,410
45,000 Illinois Health Facilities Authority, Midwest,
Physician Group Ltd. Project, RB, 8.125%, 11/15/19 48,361
35,000 Indianapolis, IN, RB, Robin Run Village Project,
7.625%, 10/1/22 38,576
50,000 Joplin, MO, IDA, Hospital Facilities Revenue,
Tri State Osteopathic, 8.250%, 12/15/14 53,013
50,000 Los Angeles, CA, Regional Airport, Continental
Airlines, AMT, 9.250%, 8/1/24 56,951
35,000 Maine Finance Authority, Solid Waste RFR, Bowater
Inc. Project, 7.750%, 10/1/22 38,723
35,000 Montgomery County, PA, HEHA, Hospital Revenue,
Series A, 8.375%, 11/1/11 37,037
95,000 Montgomery County, TX, Health Facilities Development
Corp., The Woodlands Medical Center, 8.850%, 8/15/14 104,448
25,000' New York, NY, GO, IFRN, 10/1/03 40,827
100,000+ Niagara Falls, NY, URA, Old Falls Street Improvement
Project, 11.00%, 5/1/99 49,336
50,000 Northeast, TX, Hospital Authority Revenue, Northeast
Medical Center, 7.250%, 7/1/22 52,910
30,000 Philadelphia, PA, HEHA, Graduate Health Systems
Project, 7.250%, 7/1/18 32,556
75,000 San Bernardino, CA, San Bernardino Community Hospital,
RB, 7.875%, 12/1/19 75,000
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1995
Par Value Security Description Value
- --------- -------------------- -----
$100,000' San Bernardino, CA, COP, IFRN, 7/1/16 $ 104,168
40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue,
7.000%, 1/1/30 42,609
60,000' San Jose, CA, Redevelopment Agency, Tax Allocation
Bonds, IFRN, MBIA Insured, 8/1/16 55,216
250,000 Savannah, GA, Economic Development Authority
Revenue, ETM, CAB, 12/1/21 45,977
50,000 Schuylkill County, PA, IDA Resource Recovery,
Schuylkill Energy Res. Inc., AMT, 6.500%, 1/1/10 51,937
50,000 Tomball, TX, Hospital Authority Revenue,
Refunding, 6.125%, 7/1/23 49,280
20,000++ Tri-State Health Care Corp., PA, First Humanics
Corp., Henry Clay Project, 13.75%, 12/1/14 4,019
15,000+ Troy,NY, IDA, Hudson River Project, 11.00%,
12/1/14 11,250
75,000++ Villages at Castle Rock, CO, Metropolitan
District #4, 8.500%, 6/1/31 19,501
100,000 Wayne MI, AFR, Northwest Airlines Inc. 6.750%,
12/1/15 103,134
50,000 Wisconsin Health & Educational Facilities
Authority, National Agency of New Berlin Project,
RB, 8.000%, 8/15/25 49,489
75,000 York County, VA, IDA, K-Mart Corp. Project, RB,
5.750%, 12/1/09 58,039
----------
Total investments (cost $1,879,365") $1,828,053
==========
" Cost is approximately the same for income tax purposes.
' Inverse Floating Rate Notes (IFRN) are instruments whose rates bear an
inverse relationship to the interest rate on another security or the
value of an index.
+ The value of this non-income producing security has been estimated in
good faith under methods determined by the Fund's Board of Trustees
(Note 5).
++ Non-income producing security (Note 5).
* Description:
AFR Airport Facilities Revenue
AMT Subject to Alternative Minimum Tax
CAB Capital Appreciation Bond
COP Certificate of Participation
CFR Civic Facility Revenue
ETM Escrowed to Maturity
GO General Obligation
HEHA High Education and Health Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue
MBIA Municipal Bond Insurance Assurance Corporation
RFR Recycling Facility Revenue
RHR Retirement Housing Revenue
RB Revenue Bond
TCA Transportation Corridor Agency
URA Urban Renewal Agency
IFRN Inverse Floating Rate Note
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end
management investment company registered under the Investment
Company Act of 1940. The Fund operates as a series company
currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield
Municipal Bond Series and the U.S. Government Strategic
Income Fund (the Series). Each series is considered a
separate entity for financial reporting and tax purposes.
The Series seeks to provide a high level of current income
exempt from federal income tax through investment in a
portfolio of lower quality municipal bonds, generally
referred to as "junk bonds." These bonds are considered
speculative because they involve greater price volatility and
risk than do higher rated bonds. The following is a summary
of significant accounting policies followed in the
preparation of the Series' financial statements:
Valuation of securities:
Investments are stated at value based on prices provided by
a pricing service which takes into account appropriate
factors such as institution-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-
counter prices, because such valuations are believed to
reflect more accurately the fair value of such securities.
Securities not priced in this manner are valued in good
faith by the Board of Trustees.
Federal income taxes:
It is the Series' policy to comply with the requirements of
the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable
and tax exempt income to its shareholders. Therefore, no
provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment
income and pays such dividends on the last business day of
each month. Distributions of net capital gain, if any,
realized on sales of investments are anticipated to be made
before the close of the Series' fiscal year, as declared by
the Board of Trustees. Dividends are reinvested at the net
asset value unless shareholders request payment in cash.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
General:
Securities transactions are accounted for on a trade date
basis. Interest income is accrued as earned. Realized
gain and loss from the sale of securities are recorded on
an identified cost basis. Original issue discounts and
premiums are amortized over the life of the respective
securities. Premiums are amortized and charged against
interest income and original issue discounts are accreted
to interest income.
Accounting estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
increases and decreases in net assets from operations
during the reporting period. Actual results could differ
from those estimates.
Note 2. Investment Advisory Fees and Other Transactions With
Affiliates
The Fund has a Management Agreement with Fundamental
Portfolio Advisors, Inc. (the Manager). Pursuant to the
agreement, the Manager serves as investment adviser to the
High-Yield Municipal Bond Series and is responsible for the
overall management of the business affairs and assets of the
Series subject to the authority of the Funds' Board of
Trustees. In compensation for the services provided by the
Manager, the Series will pay an annual management fee in an
amount equal to 0.8% of the Series' average daily net assets
up to $100 million and decreasing by.02% for each $100
million increase in net assets down to 0.7% of net assets in
excess of $500 million. The Manager is required to reimburse
the Series on a monthly basis for its expenses (exclusive of
interest, taxes, brokerage fees and expenses paid pursuant to
the Plan of Distribution, and extraordinary expenses) to the
extent that such expenses, including the management fee,
exceed the limits on investment company expenses prescribed
in any state in which the Series' shares are qualified for
sale. The Manager voluntarily waived fees and reimbursed
expenses of $57,191 for the year ended December 31, 1995.
The Fund has adopted a Plan of Distribution, pursuant to Rule
12b-1 promulgated under the Investment Company Act of 1940,
under which the Series pays to Fundamental Service
Corporation (FSC), an affiliate of the Manager, a fee, which
is accrued daily and paid monthly, at an annual rate of 0.5%
of the Series' average daily net assets. Amounts paid under
the plan are to compensate FSC for the services it provides
<PAGE>
and the expenses it bears in distributing the Series' shares
to investors. FSC has waived all fees and reimbursed certain
expenses in the amount of $11,167 for the year ended
December 31, 1995.
The Fund compensates Fundamental Shareholder Services, Inc.
(FSSI), an affiliate of the Manager, for the services it
provides under a Transfer Agent and Service Agreement. FSSI
has waived all fees in the amount of $6,011 for the year
ended December 31, 1995.
Note 3. Trustees' Fees
All of the Trustees of the Fund are also directors or
trustees of two other affiliated mutual funds for which the
Manager acts as investment adviser. For services and
attendance at board meetings and meetings of committees which
are common to each fund, each Trustee who is not affiliated
with the Manager is compensated at the rate of $6,500 per
quarter pro rated among the funds based on their respective
average.
Note 4. Shares of Beneficial Interest
As of December 31, 1995, there were an unlimited number of
shares of beneficial interest (no par value) authorized and
capital paid in amounted to $1,707,646. Transactions in
shares of beneficial interest were as follows:
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 137,251 $921,557 82,599 $534,554
Shares issued on
reinvestment of
dividends 8,305 54,195 7,829 50,715
Shares redeemed (104,760) (710,959) (74,527) (477,131)
------- -------- ------ --------
Net increase 40,796 $264,793 15,901 $108,138
======= ======== ====== ========
Note 5. Complex Securities and Investment Transactions
Inverse floating rate notes (IFRN):
The Fund invests in variable rate securities commonly
called "inverse floaters." The interest rates on these
securities have an inverse relationship to the interest
rate of other securities or the value of an index. Changes
in the interest rate on the other security or index
inversely affect the rate paid on the inverse floater, and
the inverse floater's price will be more volatile than that
of a fixed-rate bond.
<PAGE>
Investments transactions:
The Fund invests in lower rated or unrated ("junk")
securities which are more likely to react to developments
affecting market risk and credit risk than would higher
rated securities which react primarily to interest rate
fluctuations. The Fund held securities in default with an
aggregate value of $101,655 at December 31, 1995 (5.42% of
total assets). As indicated in the Statement of
Investments the Troy, NY Industrial Revenue Bond, 11% due
December 1, 2014 with a par value of $15,000 and a value of
$11,250 at December 31, 1995 has been estimated in good
faith under methods determined by the Board of Trustees.
The Fund owns 1.7% of a Niagara Falls New York Urban
Renewal Agency 11% Bond ("URA Bond") due to mature on
May 1, 2009 which has missed interest and sinking fund
payments. An affiliated investment company owns 98.3% of
this bond issue. The ability of this bond issue to make
future payments is dependent on the ability of the
underlying projects making certain rental payments. There
is uncertainty as to the timing of events and the
subsequent ability of this bond issue to make service debt
payments. The value of this bond was $49,336. The bond is
valued at 49.3% of face value at December 31, 1995 under
methods determined by the Board of Trustees.
During the year ended December 31, 1995, the cost of
purchases and proceeds from sales of investment securities,
other that short-term obligations, were $1,158,619 and
$536,639, respectively. Accumulated undistributed net
realized loss as of December 31, 1995 was $198,899. This
capital loss carry forward may be used to offset future
capital gains for tax purposes, and expires in varying
amounts between December 31, 1998 and December 31, 2004.
As of December 31, 1995, net unrealized depreciation of
portfolio securities amounted to $51,312 composed of
unrealized appreciation of $105,513 and unrealized
depreciation of $156,825.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 6. Selected Financial Information
Per share operating performance (for a share outstanding
throughout the year):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 5.92 $ 7.27 $ 7.30 $ 7.29 $ 7.02
------ ------ ------ ------ ------
Income from investment
operations:
Net investment income $ .34 $ .43 $ .39 $ .43 $ .42
Net realized and
unrealized gains
(losses) on
investments 1.15 (1.35) (.03) .01 .27
------ ------ ------ ------ ------
Total from investment
operations 1.49 (0.92) 0.36 0.44 0.69
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (.34) (.43) (.39) (.43) (.42)
------ ------ ------ ------ ------
Net asset value,
end of year $ 7.07 $ 5.92 $ 7.27 $ 7.30 $ 7.29
====== ====== ====== ====== ======
Total return 25.70% (12.92)% 5.11% 6.26% 10.14%
Ratios/supplemental data:
Net assets, end of
year (000's) 1,457 979 1,087 1,050 1,176
Ratios to average net
assets:
Expenses* 2.50% 2.50% 2.50% 2.87% 2.63%
Net investment income* 5.15% 6.70% 5.40% 5.89% 5.93%
Portfolio turnover rate 43.51% 75.31% 84.89% 100.21% 15.78%
Bank loans:
Amount outstanding at
end of year (000
omitted) $ 379 $ - $ - $ 20 $ 103
Average amount of
bank loans
outstanding during
the year (000 omitted) 61 - - 57 29
Average number of
shares outstanding
during the year
(000 omitted) 183 156 145 144 188
Average amount of debt
per share during the
year $.33 $ - $ - $ 0.40 $0.15
<FN>
* These ratios are after expense reimbursements of 6.22%, 6.20%, 5.76%,
4.83%, and .11% for each of the years ended December 31, 1995,
1994, 1993, 1992 and 1991, respectively.
</FN>
</TABLE>
<PAGE>
Independent Auditor's Report
To the Board of Trustees and Shareholders
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Fundamental Fixed-Income
Fund High-Yield Municipal Bond Series as of December 31, 1995, and the
related statements of operations for the year then ended, the
statement of changes in net assets for each of the two years then
ended and the selected financial information for each of the five
years then ended. These financial statements and selected financial
information are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected financial
information referred to above present fairly, in all material
respects, the financial position of Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series as of December 31, 1995, and the
results of its operations, changes in net assets, and selected
financial information for the periods indicated, in conformity with
generally accepted accounting principles.
New York, New York
February 13, 1996
<PAGE>
Left Col.
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York, New York 10006
1-800-322-6864
Independent Auditors
McGladrey & Pullen, LLP
New York, NY 10017
Attorney
Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
919 Third Avenue
New York, NY 10022
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
Right Col.
Annual Report
December 31, 1995
FUNDAMENTAL
FIXED-INCOME FUND
High Yield
Municipal Bond Series
Revised 4/15/96
FUNDAMENTAL
<PAGE>
