FUNDAMENTAL FIXED INCOME FUND
U.S. GOVERNMENT STRATEGIC INCOME FUND
Dear Fellow Shareholder:
Interest rates rose sharply in this year's first half, and bond prices
consequently fell. As a result, the Net Asset Value of the Fundamental U.S.
Government Strategic Income Fund dropped from $1.49 per share at year end 1995,
to $1.39 per share on June 30, 1996. However, with the spread between short and
long term interest rates widening in the period, the Fund's 30-day yield was
11.23% as of June 30, 1996.
1996 began with a high degree of optimism in the global financial markets
that Congress and the Clinton Administration would reach a bipartisan agreement
to eliminate the federal budget deficit by the turn of the century. This hope
seemed to be shattered in mid-winter. At the same time, evidence began to
surface that economic activity was accelerating. This raised anxieties about a
possible credit tightening move by the Federal Reserve, which drove down bond
prices.
None of this seemed to concern the equity market. Strong money flows
propelled equity prices to new heights. By mid-year the yield on long term
Treasury bonds climbed from about 6% to over 7%, meaning that the price of
thirty year Treausry bonds fell by nearly 12%, while the Dow Jones Industrial
Average posted a 10.5% advance. Mosts measures began to flash signals that
equities were becoming quite expensive compared to fixed income securities.
We were disappointed by the collapse of federal budget negotiations,
although in our view this was providing a buying opportunity for fixed income
investors. After all, despite the political stalemate, policies toward deficit
reduction remain firmly entrenched, and the deficit continues to shrink both
absolutely and as a share of the economy. Meanwhile, while the economy is
continuing to grow, this growth is moderate and noninflationary. For these
reasons we have not thought the Federal Reserve would tighten credit by raising
short term interest rates. But even if the Federal Reserve is so inclined, any
tightening is likely to be minor, and not indicative of a trend.
The Fundamental U.S. Government Strategic Income Fund employs leverage
attempting to boost its yield. A widening gap between short and long term
interest rates is beneficial to this strategy. Looking ahead, we think it is
likely that the widening gap that was evident in this year's first half will
narrow. We believe a narrowing will likely occur as short term interest rates
remain relatively stable while long term rates fall, so as to more accurately
reflect a slow growth and low inflation environment. The result of such a
narrowing is that the high yield that the Fund generated in this year's first
half may fall somewhat in the second half. But the flip side of this is that the
rise in bond prices that would occur as long term interest rates moderate should
be beneficial to the Fund's Net Asset Value.
If you have been reinvesting your dividends this period, and if we are right
in our overall assessment, the benefits of reinvestment will be evident as the
rest of 1996 unfolds. On balance, we think the outlook is favorable for fixed
income markets, and we expect bond markets to make up some of the ground that
was lost to equity markets as the year progresses. We thank you for your
continued trust and we look forward to continuing to serve you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investment in securities, at value (cost
$18,898,611) (Notes 5 and 6) ............. $20,196,947
Receivables:
Investments sold ......................... 73,531
Interest ................................. 100,909
Capital shares sold ...................... 1,450
-----------
Total assets ......................... 20,372,837
-----------
LIABILITIES
Notes payable .............................. 527,000
Options written at value (premiums
received $128,484) (Note 5) .............. 180,625
Securities sold subject to repurchase
(Note 6) ................................. 5,693,733
Payables:
Capital stock redeemed ................... 287
Dividends declared ....................... 29,954
Accrued expenses ......................... 241,704
Variation margin ......................... 128,431
-----------
Total liabilities .................... 6,801,734
-----------
NET ASSETS consisting of:
Accumulated net realized loss ............. $(17,186,108)
Unrealized appreciation of securities ..... 1,298,336
Unrealized depreciation of options written . (52,141)
Unrealized depreciation of open future
contracts ................................ (120,636)
Paid-in-capital applicable to 9,732,137
shares of beneficial interest ............ 29,631,652
------------
$13,571,103
===========
NET ASSET VALUE PER SHARE .................... $1.39
=====
(Right Column)
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996
(Unaudited)
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income, net of $175,660
of interest expense ...................... $ 857,531
EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ................... $ 53,169
Custodian and accounting fees .............. 10,222
Transfer agent fees ........................ 34,074
Professional fees .......................... 158,409
Trustees' fees ............................. 2,941
Printing and postage ....................... 283
Interest on bank borrowing ................. 6,491
Distribution expenses ...................... 17,772
Other ...................................... 7,443
----------
290,804
----------
Fees waived .................................. 70,941
----------
Total expenses ....................... 219,863
----------
Net investment income ................ 637,668
----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on:
Investments .............................. 63,633
Future and options on futures ............ 1,088,007 1,151,640
----------
Change in unrealized appreciation
(depreciation) of investments,
options and futures contracts
for the period:
Investments ............................ (2,165,016)
Open option contracts written .......... (21,106)
Open futures contracts ................. 63,135 (2,122,997)
---------- ----------
Net gain on investments (971,357)
----------
NET (DECREASE) IN NET ASSETS
FROM OPERATIONS ............................. $ (333,689)
===========
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months
Ended Year Ended
June 30, 1996 December
(Unaudited) 31, 1995
----------- --------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ............................ $ 637,668 $ 962,726
Net realized gain (loss) on investments .......... 1,151,640 (14,388,126)
Unrealized appreciation (depreciation) on
investments, options and futures contracts ..... (2,122,997) 15,662,974)
Net increase (decrease) in net assets
from operations ........................... (333,689) 2,237,574
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ................................ (637,668) (962,726)
CAPITAL SHARE TRANSACTIONS (Note 4) ................ (651,769) (5,170,959)
---------- ----------
Total decrease ............................. (1,623,126) (3,896,111)
NET ASSETS
Beginning of period .............................. 15,194,229 19,090,340
---------- ----------
End of period .................................... $13,571,103 $15,194,229
---------- ----------
See Notes to Financial Statements.
2
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets from operations ........................ $ (333,689)
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities ............................. (1,835,057)
Proceeds on sale of securities ................................ 2,410,093
Premiums received for options written ......................... 244,261
Premiums paid to close options written ........................ (44,961)
Decrease in interest receivable ............................... 10,080
Increase in variation margin receivable ....................... 101,950
Decrease in accrued expenses .................................. 142,439
Net accretion of discount on securities ....................... (117,369)
Net realized (gain) loss:
Investments ................................................. (65,024)
Options written ............................................. (133,141)
Unrealized appreciation on securities and options written
for the period .............................................. 2,186,122
-----------
Total adjustments ......................................... 2,899,393
-----------
Net cash provided by operating activities ................. 2,565,704
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Net repayments on sale of securities sold subject to repurchase . (1,737,312)
Net borrowings of note payable .................................. 464,000
Proceeds on shares sold ......................................... 1,044,678
Payment on shares repurchased ................................... (2,171,608)
Cash dividends paid ............................................. (165,462)
-----------
Net cash provided by financing activities ................. (2,565,704)
-----------
Net increase in cash ...................................... 0
-----------
CASH AT BEGINNING OF PERIOD ....................................... 0
CASH AT END OF PERIOD ............................................. $ 0
-----------
*Non-cash financing activities not included herein consist of reinvestment of
dividends of $466,036.
Cash payments for interest expense totaled $7,933 for the period.
STATEMENT OF OPTIONS WRITTEN
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Number of Expiration
Contracts++ Options Written Month Value
- ----------- --------------- ------- -----
40 U.S. Treasury Bonds, Call @ $108 ... September 1996 $105,625
40 U.S. Treasury Bonds, Call @ $110 ... September 1996 60,000
20 U.S. Treasury Bonds, Call @ $112 ... September 1996 15,000
--------
$180,625
========
++Each contract represents $100,000 face value of U.S. Treasury Bond Futures.
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate* Date Value
------ ---- ---- -----
United States Treasury Securities-46.43%
United States Treasury Bonds
85,000++ 0.00% ZCS 11/15/03 $ 51,844
4,300,000++ 0.00% PS 11/15/06 2,131,876
5,900,000* 9.00% 11/15/18 7,194,313
----------
(Cost $8,640,617) 9,378,033
----------
United States Agency Backed Securities-53.57%
Federal Home Loan Mortgage Corporation
843,718* 9.25% 08/15/23 894,572
258,705* 6.50% Z-bond 12/15/23 201,110
750,000 15.50% IFRN 05/15/24 728,063
261,112 16.80% IFRN 05/25/24 260,631
FNMA-Federal National Mortgage Assoc.
356,450* 15.50% TTIB 03/25/23 362,204
3,671,204* 15.33% TTIB 03/25/23 3,769,261
490,760 15.49% TTIB 05/25/23 495,721
465,436* 12.50% TTIB 08/25/23 413,861
1,519,480* 13.50% TTIB 11/25/23 1,233,210
980,392 13.26% TTIB 11/25/23 843,529
REFCO-Resolution Funding Corporation
600,000 0.00% ZCS 07/15/10 223,788
Department of Navy, FNMA Guaranteed
100,000 0.00% ZCS 04/01/09 39,156
----------
(Cost $9,168,776) 9,465,106
----------
FICO-Financing Corporation (U.S. Government Agency) ZCS
138,000++ 02/03/11 47,209
100,000* 02/03/12 31,594
148,000++ 05/11/12 45,756
100,000++ 11/02/12 29,805
100,000++ 05/02/14 26,526
281,000++ 05/30/14 74,097
250,000 10/06/14 64,123
119,000++ 11/11/14 30,304
125,000 05/02/15 30,669
182,000++ 06/06/15 44,338
137,000++ 08/03/15 32,982
259,000++ 10/05/15 61,562
261,000++ 11/30/15 61,342
208,000 02/03/16 48,242
118,000++ 08/03/16 26,315
444,000* 08/08/16 98,915
100,000 10/05/16 21,994
164,000++ 11/30/16 35,623
4
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate* Date Value
------ ---- ---- -----
FICO-Financing Corporation (U.S. Government Agency) ZCS (continued)
100,000* 02/08/17 $ 21,380
205,000++* 04/06/17 43,299
200,000++ 04/06/17 42,243
167,000++ 08/08/17 34,388
100,000* 10/05/17 20,349
240,000++ 10/06/17 51,289
129,000 10/06/17 26,245
320,000* 11/11/17 64,636
108,000* 11/30/17 21,730
109,000* 12/06/17 21,901
217,000* 04/05/18 42,534
100,000++ 08/03/18 19,125
144,000 08/03/18 27,540
200,000* 11/02/18 37,551
375,000++ 04/05/19 68,204
-----------
(Cost $1,089,218) 1,353,810
-----------
Total investments (Cost $18,898,611(DD)) $20,196,949
===========
+ Collateral or partial collateral for securities sold subject to repurchase
(Note 6)
++ Segregated, in whole or part, as initial margin for futures contracts
(Note 5)
(DD) Cost is approximately the same for Federal income tax purposes
(degree)Legend-TTIB: Two-Tiered Index Floating Rate Bonds are instruments whose
interest rates are fixed over various ranges of the
interest rate on another security or the value of an
index, but variable within certain ranges of the same
security or index. Coupons shown are at June 30, 1996.
ZCS: Zero Coupon Securities are instruments whose interest and
principle are paid at maturity.
Z Bond: A Z Bond is an instrument whose monthly interest coupon is
paid at a fixed rate in additional principle. Principle is
paid at maturity.
PS: Principle Stripped Bonds are instruments whose principle
and coupon have been separated and sold separately.
IFRN: Inverse Floating Rate Notes are instruments whose interest
rates bear an inverse relationship to the interest rate on
another security or the value of an index. Coupons shown
are at June 30, 1996.
See Notes to Financial Statements.
5
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
operates as a series company currently issuing three classes of shares of
beneficial interest, the Tax-Free Money Market Series, the High-Yield Municipal
Bond Series and the U.S. Government Strategic Income Fund (the Series). The
objective of the Series is to provide high current income with minimum risk of
principal and relative stability of net asset value. The Series seeks to achieve
its objective by investing primarily in U.S. Government Obligations. U.S.
Government Obligations consist of marketable securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (hereunder collectively
referred to as "Government Securities"). The Series also uses leverage in
seeking to achieve its investment objective. Each series is considered a
separate entity for financial reporting and tax purposes.
Valuation of Securities-The 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 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. 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 reflect fair value.
Futures Contracts-Initial margin deposits with respect to these
contracts are maintained by the Fund's custodian in segregated asset
accounts. Subsequent changes in the daily valuation of open contracts are
recognized as unrealized gains or losses. Variation margin payments are made
or received as daily appreciation or depreciation in the value of these
contracts occurs. Realized gains or losses are recorded when a contract is
closed.
Repurchase Agreements-The Series may invest in repurchase agreements,
which are agreements pursuant to which securities are acquired from a third
party with the commitment that they will be repurchased by the seller at a
fixed price on an agreed upon date. The Series may enter into repurchase
agreements with banks or lenders meeting the creditworthiness standards
established by the Board of Trustees. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. The Series'
repurchase agreements will at all times be fully collateralized in an amount
equal to the purchase price including accrued interest earned on the
underlying security.
Reverse Repurchase Agreements-The Series may enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Series
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Under the Investment Company Act of 1940 reverse repurchase
agreements are generally regarded as a form of borrowing. At the time the
Series enters into a reverse repurchase agreement it will establish and
maintain a segregated account with its custodian containing securities from
its portfolio having a value not less than the repurchase price including
accrued interest.
6
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
Federal Income Taxes-It is the Series' policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated
investment companies" and to distribute all of its taxable and tax exempt
income to its shareholders. Therefore, no provision for federal income tax
is required.
Distributions-The Series declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions of net capital gain, if any, realized on sales of
investments are anticipated to be made before the close of the Series'
fiscal year, as declared by the Board of Trustees. Dividends are reinvested
at the net asset value unless shareholders request payment in cash.
General-Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gain and loss from the sale
of securities are recorded on an identified cost basis. Original issue
discounts and premiums are amortized over the life of the respective
securities. Premiums are charged against interest income and original issue
discounts are accreted to interest income.
Accounting Estimates-The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
2. Investment Advisory Fees and Other Transactions With Affiliates
The Series has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement the Manager serves as investment
adviser to the Series and is responsible for the overall management of the
business affairs and assets of the Series subject to the authority of the Fund's
Board of Trustees. In compensation for the services provided by the Manager, the
Series will pay an annual management fee in an amount equal to .75% of the
Series' average daily net assets up to $500 million, .725% on the next $500
million, and .70% per annum on assets over $1 billion. The Manager is required
to reimburse the Series for its expenses (excluding interest, taxes, brokerage
fees and extraordinary expenses) to the extent that such expenese, including the
management fees, exceed the limits on investment company expenses prescribed in
any state in which the Series' shares are qualified for sale. The manager
voluntarily waived fees of $53,169 for the six months ended June 30, 1996.
The Series has adopted a Distribution and Marketing Plan, pursuant to Rule
12b-1, promulgated under the Investment Company Act of 1940, under which the
Series pays to Fundamental Service Corporation (FSC), an affiliate of the
Manager, a fee which is accrued daily and paid monthly at an annual rate of
0.25% of the Series' average daily net assets. Amounts paid under the plan are
to compensate FSC for the services it provides and the expenses it bears in
distributing the Series' shares to investors. The amount incurred by the Series
pursuant to the agreement for the six months ended June 30, 1996 is set forth in
the statement of operations. FSC has waived fees in the amount of $17,772.
The Series compensates Fundamental Shareholders Services, Inc. (FSSI), an
affiliate of the Manager, for services it provides under a Transfer Agent and
Service Agreement. The amount incurred by the Series pursuant to the agreement
for the six months ended June 30, 1996 is set forth in the Statement of
Operations.
The Series effects a significant portion of its futures and options
transactions through LAS Investments, Inc. (LAS), an affiliated broker-dealer.
Commissions paid to LAS amounted to approximately $1,800 for the six months
ended June 30, 1996.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
7
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
4. Shares of Beneficial Interest
As of June 30, 1996 there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid-in amounted to $29,631,653.
Transactions in shares of beneficial interest were as follows:
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
------------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold ................... 730,808 $1,046,128 1,300,415 $1,819,736
Shares issued on reinvestment
of dividends ................ 327,194 466,036 554,101 779,070
Shares redeemed ............... (1,517,296) (2,163,933) (5,559,992) (7,769,765)
--------- --------- --------- ----------
Net decrease .................. (459,294) ($ 651,769) (3,705,476) ($5,170,959)
========= ========= ========= ==========
5. Complex Services, Off Balance Sheet Risks and Investment Transactions
Two-Tiered Index Floating Rate Bonds (TTIB):
The Fund invests in variable rate securities commonly called "TTIBs". The
interest rate on these securities are fixed over various ranges of the interest
rate on another security or the value of an index, but variable within certain
ranges of the same security or index. Changes in interest rate on the other
security or index affect the rate paid on the TTIB, and the TTIB's price will be
more volatile than that of a fixed-rate bond.
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
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. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.
Futures Contracts and Options on Futures Contracts:
The Fund invests in futures contracts consisting
primarily of US Treasury Bond Futures. A futures contract is an agreement
between two parties to buy and sell a security for a set price on a future date.
Futures contracts are traded on designated "contract markets" which through
their clearing corporations, guarantee performance of the contracts. In addition
the fund invests in options on US Treasury Bond Futures which gives the holder a
right to buy or sell futures contracts in the future. Unlike a futures contract
which requires the parties to the contract to buy and sell a security on a set
date, an option on a futures contract entitles its holder to decide before a
future date whether to enter into such a futures contract. Both types of
contracts are marked to market daily and changes in valuation will affect the
net asset value of the Fund.
The Fund's principal objective in holding or
issuing derivative financial instruments is as a hedge against interest-rate
fluctuations in its municipal bond portfolio, and to enhance its total return.
The Fund's principal objective is to maximize the level of interest income while
maintaining acceptable levels of interest-rate and liquidity risk. To achieve
this objective, the Fund uses a combination of derivative financial instruments
principally consisting of US Treasury Bond Futures and Options on US Treasury
Bond Futures. Typically the Fund sells treasury bond futures contracts or writes
treasury bond option contracts. These activities create off balance sheet risk
since the Fund may be unable to enter into an offsetting position and under the
terms of the contract deliver the security at a specified time at a specified
price. The cost to the Fund of acquiring the security to deliver may be in
excess of recorded amounts and result in a loss to the Fund. For the six months
ended June 30, 1996, the Fund had daily average notional amounts outstanding of
approximately $11,890,110 and $6,296,703 of short positions on US Treasury Bond
Futures and Options Written on US Treasury Bond Futures respectively. Realized
gains and losses from these transactions are stated separately in the Statement
of Operations.
8
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)0
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
The Fund had the following open futures contracts at June 30, 1996.
Principal Expiration Unrealized
Type Amount Position Month Loss
---- ------ -------- ----- ----
U.S. Treasury Bond ........... $11,000,000 Short 9/96 ($120,636)
Portfolio securities with an aggregate value of approximately $2,925,000
have been segregated as initial margin as of June 30, 1996.
In addition, the following table summarizes option contracts written by the
Series for the six months ended June 30, 1996:
Number of Premiums Realized
Contracts Received Cost Loss
--------- -------- ---- ----
Contracts outstanding
December 31, 1995 ........... 75 $62,325
Options written ............... 250 244,261
Contracts closed or expired ... (225) (178,102) $44,961 ($133,141)
--- --------
Contracts outstanding
June 30, 1996 ............... 100 $128,484
=== ========
Other Investment Transactions
For the six months ended June 30, 1996, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$1,835,057 and $1,512,904, respectively.
As of June 30, 1996, net unrealized appreciation of portfolio securities
amounted to $1,298,336 composed of unrealized appreciation of $1,391,822 and
unrealized depreciation of $93,486. Net unrealized depreciation of options
written amounted to $52,141 composed of unrealized appreciation of $5,494 and
unrealized depreciation of $57,635.
6. Borrowing
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.
The Series enters into reverse repurchase agreements collateralized by
portfolio securities equal in value to the repurchase price. Portfolio
securities with an aggregate value of approximately $8,168,851 have been
segregated as collateral for securities sold subject to repurchase as of June
30, 1996.
The maximum month-end and the average amount of borrowing outstanding under
these arrangements during the six months ended June
30, 1996 were approximately $6,611,752 and $7,459,222.
7. Contingencies
The Fund was named as a defendant in two class action lawsuits: Schur v.
Fundamental U.S. Government Strategic Income Fund, et al., United States
District Court, Southern District of New York and Vandyke, et al, v. Fundamental
U.S. Government Strategic Income Fund, et al., United States District Court,
Southern District of California (which was transferred to the United States
District Court, Southern District of New York). Also named as defendants in one
or both of these actions were the Trust, the Manager, the Distributor, and
alleged control persons of the Fund.
The suits were filed in July and Augusts of 1994, respectively, and alleged
that the Fund invested in certain financial instruments, primarily
"derivatives," that were inconsistent with the Fund's stated objectives as set
forth in its prospectus. The suits claimed that defendants are liable under
Sections 11 and/or 12 of the Securities Act of 1933 because there existed
material misstatements or omissions in the prospectus that rendered it
misleading. They also claimed that defendants are liable under Section 10(b) of
the Securities and Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder)
for making material misstatements or omissions in connection with the purchase
or sale of securities. The Vandyke action also alleged common law claims,
including fraud.
By Stipulation of Settlement dated April 5, 1996, a settlement was reached
with the plaintiffs. By Final Judgement and Order of Consolidation and Dismissal
with Prejudice dated July 17, 1996, the Stipulation of Settlement was approved
by the Court. The settlement requires a payment of approximately $500,000 or
more under certain future circumstances by the Fund's investment adviser to the
class members as set forth in the Stipulation of Settlement. Under no
circumstances will the settlement result in any liability or cost to the Fund or
its shareholders. The settlement has, however, resulted in the dismissal of the
lawsuits and a release from liability issuing in favor of all defendants
including the Fund. The Stipulation of Settlement also expressly states that the
settlement does not constitute an admission of wrongdoing by the Fund or any of
the other defendants.
In addition, Management is cooperating in an investigation being conducted
by the Securities and Exchange Commission concerning the Fund, the Manager and
affiliated entities. Among other things, the investigation concerns the
sufficiency of disclosures set forth in the Fund's prior advertising and
prospectus, the consistency of the Fund's practices with those disclosures, the
Fund's investment in inverse floating rate notes between 1993 and 1995, the
valuation of the Fund's portfolio securities, and the Manager's designation of
brokerage commissions or fees on portfolio transactions effected on behalf of
the Fund and its affiliates in consideration of the receipt of research
services.
9
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
8. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended Year Year Year February 18,
June 30, Ended Ended Ended 1992* to
1996 December 31 December 31, December 31, December 31,
(Unaudited) 1995 1994 1993 1992
----------- -------- -------- -------- --------
Per share operating performance
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................ $ 1.49 $ 1.37 $ 2.01 $ 2.02 $ 2.00
------ ------ ------ ------ ------
Income from investment operations
Net investment income ............................... 0.06 0.08 0.14 0.16 0.15
Net realized and unrealized gain/(loss) on
investments ....................................... (0.10) 0.12 (0.64) - 0.02
------ ------ ------ ------ ------
Total from investment operations ........... (0.04) 0.20 (0.50) 0.16 0.17
------ ------ ------ ------ ------
Less distributions
Dividends from net investment income ................ (0.06) (0.08) (0.14) (0.16) (0.15)
Dividends from net realized gains ................... - - - (0.01) -
------ ------ ------ ------ ------
Net asset value, end of period ...................... $ 1.39 $ 1.49 $ 1.37 $ 2.01 $ 2.02
====== ====== ====== ====== ======
Total return ........................................ (2.42%) 15.43% (25.57%) 8.14% 10.76%**
Ratios/supplemental data:
Net assets, end of period (000 omitted) ............. 13,157 15,194 19,020 63,182 40,500
Interest expense .................................. 0.09% 0.20% 0.12% 0.05% 0.09%
Operating expenses ................................ 3.00% 3.05% 2.16% 1.39% 0.96%
------ ------ ------ ------ ------
Total expenses+ ............................ 3.09%+** 3.25%+ 2.28%+ 1.44%+ 1.05%+
====== ====== ====== ====== ======
Net investment income ............................. 8.97%** 5.91% 8.94% 7.85% 8.50%
Portfolio turnover rate ............................. 8.53% 114.36% 60.66% 90.59% 115.39%
Borrowings
Amount outstanding at end of period
(000 omitted) ..................................... 5,694 7,481 9,674 31,072 19,666
Average amount of debt outstanding during the
period (000 omitted) .............................. 6,612 7,790 16,592 28,756 13,779
Average number of shares outstanding during
the period (000 omitted) .......................... 9,942 11,571 21,436 28,922 12,683
Average amount of debt per share during the
period ............................................ .67 .67 .77 .99 1.09
<FN>
**Commencement of operations.
**Annualized.
*These ratios are after expense reimbursement of 1.0%** for the six months ended June 30, 1996, 1.0% and .13% for the
years ended December 31, 1995 and 1993, respectively, and 1.05% for the period March 2, 1992 to December 31, 1992. These
ratios exclude 2.47%** for the six months ended June 30, 1996, 2.8%, 1.9% and 1.4% for the years ended December 31, 1995,
1994 and 1993, respectively, and 1.2% for the period March 2, 1992 to December 31, 1992 of interest expense on
securities sold subject to repurchase which was netted against interest income.
</FN>
</TABLE>
10
<PAGE>
(Left Column)
FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(Right Column)
Semi-Annual Report
June 30, 1996
(Unaudited)
(LOGO) FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
(LOGO) FUNDAMENTAL
Fundamental Family of Funds
<PAGE>
(left column)
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value
(cost $92,429,766) .......................................... $92,429,766
Cash .......................................................... 625,625
Receivables:
Interest .................................................... 250,660
Capital shares sold ......................................... 9,186
-----------
Total assets .......................................... 93,315,237
-----------
LIABILITIES
Payables:
Capital shares redeemed ..................................... 63,075,124
Investments purchased ....................................... 201,052
Dividends ................................................... 757
Accrued expenses .............................................. 334,929
-----------
Total liabilities ..................................... 63,611,862
-----------
NET ASSETS equivalent to $1.00 per share on
29,712,263 shares of beneficial interest
outstanding (Note 4) .......................................... $29,703,375
===========
(Right Column)
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996
(Unaudited)
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ................................... $976,679
EXPENSES (Notes 2 and 3)
Investment advisory fees .......................... $146,232
Custodian and accounting fees ..................... 42,582
Transfer agent fees ............................... 34,882
Trustees' fees .................................... 12,132
Professional fees ................................. 48,899
Distribution fees ................................. 146,232
Interest .......................................... 32
Postage and printing .............................. 2,736
Registration ...................................... 2,577
Other ............................................. 278
--------
436,582
Less: Expense offset (Note 6) ..................... (39,000)
--------
Total expenses ........................... 397,582
--------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ........................................ $579,097
========
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
For the Six For the Year
Months Ended Ended
June 30, 1996 December 31,
(Unaudited) 1995
------------- ------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ........................ $ 579,097 $ 1,078,563
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ............................ (579,097) (1,078,563)
CAPITAL SHARE TRANSACTIONS (Note 4) ............ 18,452,828 2,246,999
----------- -----------
Total increase ........................ 18,452,828 2,246,999
NET ASSETS:
Beginning of period .......................... 11,250,547 9,003,548
----------- -----------
End of period ................................ $29,703,375 $11,250,547
=========== ===========
See Notes to Financial Statements.
1
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Principal
Amount Issue(degree) Value
- --------- ------------- -----
<S> <C> <C>
$ 200,000 Alameda County, CA, TRANS, 4.50, 6/30/97 .................................................... $ 201,052
4,400,000 Anchorage, AK, Higher Educational, Pacific University Project, LOC Seattle First National
Bank, VRDN*, 3.55, 7/01/17 ................................................................ 4,400,000
87,000+ Clermont County, OH, HFR, Mercy Health Care Project, MBIA Insured, VRDN*, 3.35, 12/01/05 .... 87,000
80,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Wells Fargo Bank,
3.75, 12/01/09 ............................................................................ 80,000
200,000 Delaware County, PA, SWDF, Scott Paper Project, Kimberly-Clark Corp Guaranty,
VRDN*, 3.20, 12/01/18 ..................................................................... 200,000
200,000 District of Columbia, General Recovery Fund, LOC Westduetsche Landesbank, VRDN*,
3.75, 6/01/03 ............................................................................. 200,000
4,000,000 District of Columbia, GO, LOC Bank of Nova Scotia, VRDN*, 3.80, 10/01/07 .................... 4,000,000
3,800,000 District of Columbia, GO, LOC National Westminster, VRDN*, 3.80, 10/01/07 ................... 3,800,000
200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 3.50, 4/01/10 ........................ 200,000
135,000 Genesee County, NY, IDR, Orcon Industries, AMT, LOC Fleet Bank, VRDN*, 4.25, 12/01/98 ....... 135,000
300,000+ Illinois Educational Facility Authority, RB, Art Institute of Chicago, Northern Trust
Liquidity, VRDN*, 3.35, 3/01/27 ........................................................... 300,000
300,000 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank, VRDN*, 3.40, 9/01/15 .. 300,000
200,000 Illinois HFAR, West Suburban Hospital Medical Center, LOC First Chicago Bank, VRDN*,
3.35, 7/01/05 ............................................................................. 200,000
200,000+ Jasper County, IN, PCR, Northern Indiana Public Service Project, Series B, 3.80, 6/01/13 .... 200,000
300,000+ Jasper County, IN, PCR, Northern Indiana Public Service Project, Series C, 3.80, 4/01/19 .... 300,000
2,000,000 Los Angeles, CA, Regional Airports Improvement Corp, LOC Societe Generale, VRDN*,
3.65, 12/1/25 ............................................................................. 2,000,000
85,000 Maryland Department of Housing & Community Development, Single Family Program,
Putable Semiannually, 3.60, 4/01/17 ....................................................... 85,000
7,000,000 Massachusetts Health & Educational Facilities Authority, Capital Assist Project,
MBIA Insured, Credit Suisse Liquidity ..................................................... 7,000,000
200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp. VRDN*, 3.40, 12/01/03 ........... 200,000
7,000,000 Michigan Strategic Fund, Series 95C, Detroit Edison Project, LOC Barclays Bank,
VRDN*, 3.55, 9/01/30 ...................................................................... 7,000,000
6,625,000 Midland County, Ml, Economic Development Corp, Dow Chemical Project, VRDN*, 3.55,12/01/15 ... 6,625,000
200,000 Missouri, Third Street Building Project, VRDN*, 3.65, 8/01/99 ............................... 200,000
300,000 Missouri, PCR, Monsanto Project, VRDN*, 3.30, 2/01/09 ....................................... 300,000
300,000+ Montgomery, AL, Baptist Medical Center, Special Care Facilities Financing Authority,
AMBAC Insured, VRDN*, 3.35, 12/01/3 ....................................................... 300,000
200,000+ Nebraska Higher Education Loan Program, SLMA, MBIA Insured, VRDN*, SPA, 3.40, 12/01/15 ...... 200,000
5,050,000 New Hampshire HEHFA, VHA New England Inc. AMBAC Insured, Mellon Bank Liquidity, VRDN*,
3.35, 12/01/25 ............................................................................ 5,050,000
2,600,000 New York City, NY, GO, LOC Union Bank of Switzerland, VRDN*, 3.20, 2/15/12 .................. 2,600,000
1,500,000 New York City, NY, Municipal Water Finance Authority, FGIC Insured, VRDN*, 3.60, 6/15/23 .... 1,500,000
11,000,000 New York City, NY, Municipal Water Finance Authority, FGIC Insured, VRDN*, 3.55, 6/15/24 .... 11,000,000
2,600,000 New York City, NY, Municipal Water Finance Authority, FGIC Insured, VRDN*, 3.75, 6/15/25 .... 2,600,000
300,000 New York State Job Development Authority, State Guaranteed, Fuji Bank Liquidity, VRDN*,
3.85, 3/01/05 ............................................................................. 300,000
</TABLE>
2
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
STATEMENT OF INVESTMENTS (continued)
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Principal
Amount Issue(degree) Value
- --------- ------------- -----
<S> <C> <C>
$2,125,000 New York State Job Development Authority, State Guaranteed, LOC Sumitomo, VRDN*,
3.65, 3/01/07 ............................................................................. $ 2,125,000
4,400,000 North Central, TX, HFDC, YMCA Metro Dallas Project, LOC Bank of Tokyo/Mitsubishi Bank,
VRDN*, 3.60, 6/01/21 ...................................................................... 4,400,000
2,000,000 Peninsula, VA Port Authority, Shell Oil Company, VRDN*, 3.55, 12/01/15 ...................... 2,000,000
3,850,000 Phenix City, AL, Industrial Development Bond, Georgia Kraft Company Project, LOC
Deutsche Bank, VRDN*, 3.60,12/01/15 ....................................................... 3,850,000
200,000 Purdue University, IN, Student Fee Bonds, Series K, VRDN*, 3.30, 7/01/20 .................... 200,000
300,000 San Francisco, CA, City & County Unified School District, TRANS, 4.50, 7/29/96 .............. 300,112
7,015,000 Schuykill County, PA, Industrial Development Authority, Northwestern Power
Company, LOC Sumitomo, VRDN*, 3.60,12/01/11 ............................................... 7,015,000
125,000 Scioto County, OH, HFR, VHA Central Capital Project, AMBAC Insured, VRDN*, 3.25,12/01/25 .... 125,000
250,000 Texas State, TRANS, 4.75, 8/30/96 ........................................................... 250,277
100,000 Thorton, CO, Development Authority Tax Increment, RB, BIGI insured, 7.00, 12/01/96 .......... 101,325
5,300,000 Triborough Bridge & Tunnel Authority, NY, Special Obligation, FGIC Insured, VRDN*,
3.05,1/01/24 .............................................................................. 5,300,000
5,000,000 Unita County, WY, PCR, Chevron Project, VRDN*, 3.50, 8/15/20 ................................ 5,000,000
200,000+ Wake County, NC, PCR, Carolina Power & Light Project,
LOC Sumitomo Bank, VRDN*, 3.35, 10/01/15 .................................................. 200,000
-----------
Total Investments (Cost $92,429,766**) .................................................... $92,429,766
===========
<FN>
*Variable Rate Demand Notes (VRDN) are instruments whose interest rate changes on a specific date and/or whose
interest rates vary with changes in a designated base rate. Coupons shown are as of June 30, 1996.
**Cost is the same for Federal income tax purposes.
+Approximately $1,028,000 market value of securities are segregated in whole or in part as collateral securing a line
of credit.
</FN>
</TABLE>
Legend
(degree)Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
BIGI Bond Insurance Guaranty Inc.
GO General Obligation
HEHFA Higher Education and Health Facilities Authority
HFA Housing Finance Authority
HFAR Health Facilities Authority Revenue
HFDC Health Facilities Development Corporation
HFR Hospital Facilities Revenue
IDR Industrial Development Revenue
LOC Letter of Credit
MBIA Municipal Bond Insurance Assurance Corporation
PCR Pollution Control Revenue
RB Revenue Bond
SLMA Student Loan Marketing Association
SPA Stand By Bond Purchase Agreement
SWDF Solid Waste Disposal Facility
TRANS Tax and Revenue Anticipation Note
VHA Voluntary Hospital of America
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
acts as a series company currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield Municipal Bond Series
and the U.S. Government Strategic Income Fund. Each series is considered a
separate entity for financial reporting and tax purposes. The Fund's investment
objective is to provide as high a level of current income exempt from federal
income tax as is consistent with the preservation of capital and liquidity. The
following is a summary of significant accounting policies followed in the
preparation of the Series' financial statements:
Valuation of Securities:
Investments are stated at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any premium or discount is
amortized on a constant basis to the maturity of the instrument.
Amortization of premium is charged to income, and accretion of market
discount is credited to unrealized gains. The maturity of investments is
deemed to be the longer of the period required before the Fund is entitled
to receive payment of the principal amount or the period remaining until the
next interest adjustment.
Federal Income Taxes:
It is the Series' policy to comply with the requirements of the Internal
Revenue Code applicable to "regulated investment companies" and to
distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment income and pays
such dividends on the last Wednesday of each month. Distributions of net
capital gains are made annually, as declared by the Fund's Board of
Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General:
Securities transactions are accounted for on a trade date basis. Interest
income is accrued as earned. Realized gains and losses from the sale of
securities are recorded on an identified cost basis.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ
from those estimates.
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- -------------------------------------------------------------------------------
2. Investment Advisory Fees and Other Transactions with Affiliates
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the Tax-Free Money Market Series and is responsible for the overall
management of the business affairs and assets of the Series subject to the
authority of the Fund's Board of Trustees. In compensation for the services
provided by the Manager the Series will pay an annual management fee in an
amount equal to 0.5% of the Series' average daily net assets up to $100 million
and decreasing by .02% for each $100 million increase in net assets down to 0.4%
of net assets in excess of $500 million. The Manager is required to reimburse
the Series on a monthly basis for its expenses (exclusive of interest, taxes,
brokerage fees and expenses paid pursuant to the Plan of Distribution, and
extraordinary expenses) to the extent that such expenses, including the
management fee, exceed the limits on investment company expenses prescribed in
any state in which the Series' shares are qualified for sale. No expense
reimbursement was required for the six months ended June 30, 1996.
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, under which the Series
pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a
fee, which is accrued daily and paid monthly, at an annual rate of 0.5% of the
Series' average daily net assets. The amounts paid under the plan compensate FSC
for the services it provides and the expenses it bears in distributing the
Series' shares to investors. Distribution fees for the six months ended June 30,
1996 are set forth in the Statement of Operations.
The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of
the Manager, for the services it provides under a Transfer Agent and Service
Agreement. Transfer agent fees for the six months ended June 30, 1996 are set
forth in the Statement of Operations.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each Fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of June 30, 1996 there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid in amounted to $29,712,263.
Transactions in shares of beneficial interest, all at $1.00 per share were as
follows:
Six Months Year Ended
Ended December 31,
June 30, 1996 1995
-------------- ------------
Shares sold $1,714,179,666 $3,142,235,917
Shares issued on reinvestment of dividends 572,848 1,075,300
Shares redeemed (1,696,299,686) (3,141,064,218)
-------------- --------------
Net increase $ 18,452,828 $ 2,246,999
============== ==============
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- -------------------------------------------------------------------------------
5. Line of Credit
The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities for $500,000.
Borrowings under this agreement bear interest linked to the bank's prime rate.
6. Expense Offset Arrangement
The Fund has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to approximately $39,000 for the six months ended June
30, 1996.
7. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, -------------------------------------------------------
1996 1995 1994 1993 1992
----------- -------- -------- -------- --------
PER SHARE DATA AND RATIOS
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.011 0.026 0.017 0.014 0.028
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment income (0.011) (0.026) (0.017) (0.014) (0.028)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 1.07% 2.60% 1.69% 1.62% 2.79%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) 29,703 11,251 9,004 5,830 32,488
Ratios to Average Net Assets:
Expenses 1.49%#* 1.53%# 0.91%+ .95%+ .42%+
Net investment income 4.69%* 2.43% 1.55% 1.25% 2.76%
BANK LOANS
Amount outstanding at end of period (000 omitted) $ - $ - $ 451 $ 290 $ 20
Average amount of bank loans outstanding during
the period (000 omitted) $ - $ 41 $ 53 $ 111 $ 69
Average number of shares outstanding during
the period (000 omitted) 58,814 44,432 56,267 25,786 7,980
Average amount of debt per share during the period $ - $ .001 $ .001 $ .004 $ .009
<FN>
+These ratios are after expense reimbursements of .44%, .67%, 1.66%, and 1.57%, for each of the years ended December 31,
1994, 1993, 1992 and 1991, respectively.
#These ratios would have been 1.36%* net of expense offsets of .13%* for the six months ended June 30, 1996 and 1.35% net of
expense offsets of .18% for the year ended December 31, 1995, respectively.
**Annualized.
</FN>
</TABLE>
6
<PAGE>
(Left Column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(Right Column)
Semi-Annual Report
June 30, 1996
(Unaudited)
(LOGO) FUNDAMENTAL
FIXED-INCOME FUND
Tax-Free
Money Market Series
(LOGO) FUNDAMENTAL
Fundamental Family of Funds
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
- --------------------------------------------------------------------------------
Dear Fellow Shareholder:
Interest rates rose sharply in this year's first half, and bond prices
consequently fell. As a result, the Net Asset Value of Fundamental's High-Yield
Municipal Bond Series dropped from $7.07 per share at year end 1995 to $6.58 per
share on June 30, 1996. This was disappointing. However, municipal bonds
generally outperformed taxable bonds in the period. This reflected improving
credit conditions for municipals, favorable supply conditions, and diminished
expectations of tax reform legislation.
1996 began with a high degree of optimism in the global financial markets that
Congress and the Clinton Administration would reach a bipartisan agreement to
eliminate the federal budget deficit by the turn of the century. This hope
seemed to be shattered in mid-winter. At the same time, evidence began to
surface that economic activity was accelerating. This raised anxieties about a
possible credit tightening move by the Federal Reserve, which drove down bond
prices.
None of this seemed to concern the equity market. Srong money flows propelled
equity prices to new heights. By mid-year the Bond Buyer Municipal Bond Index
dropped by 6.7% from year end 1995, while the Dow Jones Industrial Average
posted a 10.5% advance. No doubt some investors shifted funds from bonds to
equities in the period. This weakened the entire fixed income market, and
eventually made equities become expensive relative to bonds by most measures.
We were disappointed by the collapse of budget negotiations, but view this as a
buying opportunity in the fixed income markets. After all, despite the political
stalemate, policies toward deficit reduction remain firmly entrenched, and the
deficit continues to shrink both absolutely and as a share of the economy.
Meanwhile, although the economy is continuing to grow, this growth is moderate
and noninflationary. For these reasons we have not thought the Federal Reserve
would tighten credit by raising short term interest rates. But even if the Fed
were so inclined, any tightening is likely to be minor, and not indicative of a
trend.
Given this, the Fund's portfolio was positioned to benefit from a decline in
municipal bond interest rates in 1996. A large portion of the Fund's assets,
relative to other Funds with similar investment objectives, were in municipal
bonds having a high degree of sensitivity to interest rates.
This approach worked well in 1995. However, it was disadvantageous in the first
half of this year. Our expectation is it will be beneficial going forward if the
bond market climate improves as we expect. Moreover, municipals face an
extremely favorable net supply conditions going forward as bond calls,
redemptions, prepayments, and coupon payments will exceed the amount of new
municipal bond issuance in the next year. Thus, if there is any rechanneling of
funds out of equities and into fixed income securities, a dramatic improvement
in municipal bond prices could be expected.
We thank you for your continued trust, and we look forward to continue serving
you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
<PAGE>
(left column)
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value (Note 5)
(cost $2,014,350) .............................................. $1,878,203
Receivables:
Interest ......................................................... 38,145
Capital shares sold .............................................. 100
----------
Total assets ............................................... 1,916,448
----------
LIABILITIES
Notes payable .................................................... 172,318
Dividend payable ................................................. 1,734
Accrued expenses ................................................. 19,040
----------
Total liabilities .......................................... 193,092
----------
NET ASSETS consisting of:
Accumulated net realized
loss ........................................... $ (201,668)
Unrealized depreciation
of securities .................................. (136,147)
Paid-in-capital applicable to
261,864 shares of
beneficial interest ............................ 2,061,171
----------
$1,723,356
==========
NET ASSET VALUE PER SHARE .................................. $ 6.58
==========
(right column)
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ...................................... $ 68,981
EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ............................. $ 6,055
Custodian and accounting fees ........................ 15,208
Transfer agent fees .................................. 3,556
Trustees' fees ....................................... 314
Distribution fees .................................... 3,785
Professional fees .................................... 20,757
Postage and printing ................................. 5,829
Other ................................................ 1,643
--------
57,147
Less: Expenses waived or reimbursed
by the manager and affiliates ...................... (38,215)
--------
Total expenses 18,932
--------
Net investment income .......................... 50,049
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized loss on investments ..................... (2,769)
Change in unrealized depreciation of
investments for the year ........................... (84,835)
--------
Net (loss) on investments ...................... (87,604)
--------
NET DECREASE IN NET ASSETS FROM
OPERATIONS ........................................... $(37,555)
========
(bottom)
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, 1996 December 31,
(Unaudited) 1995
---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income ........................................................ $ 50,049 $ 61,591
Net realized (loss) on investments .......................................... (2,769) (39,968)
Unrealized (depreciation) of investments for the period ..................... (84,835) 253,452
---------- ----------
Net increase (decrease) in net assets from operations .................. (37,555) 275,075
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ............................................................ (50,049) (61,591)
CAPITAL SHARE TRANSACTIONS (Note 4) ............................................ 353,525 264,793
---------- ----------
Total increase ......................................................... 265,921 478,277
NET ASSETS:
Beginning of period .......................................................... 1,457,435 979,158
---------- ----------
End of period ................................................................ $1,723,356 $1,457,435
========== ==========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issueo Value
------ ------ -----
<S> <C> <C>
$ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc., 8.87, 3/01/21 ......................................... $ 41,280
40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.75, 3/01/23 .......................................... 40,996
95,000 California Health Facilities Authority, Valley Presbyterian Hospital Project, RB, Series A,
9.00, 5/01/12 ................................................................................... 96,064
35,000 Cass County, MO, IDA, 7.37, 10/01/22 .............................................................. 36,195
45,000 Cheboygan County, Ml, Economic Development Corp, K-M1 Association Project, K-Mart
Corp, 10.00, 6/01/05 ............................................................................ 44,810
250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 7/15/24 ............. 36,495
100,000 Corona, CA, COP, Vista Hospital System, Series C, 8.37, 7/01/11 ................................... 99,745
75,000 Florence County, SC, IDA, RB, Stone Container Project, 7.37, 2/01/07 .............................. 76,736
500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 1/01/26 ........................................... 66,975
50,000++ Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste
Tire Project, 7.87, 4/01/11 ..................................................................... 19,048
45,000 Illinois Health Facilities Authority, Midwest Physician Group Ltd Project, RB, 8.12,
1/15/19 ......................................................................................... 46,817
35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.62, 10/01/22 ................................... 37,354
50,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.25, 12/15/14 ............... 51,395
75,000 Liberty, MO, IDA, K-Mart Corp Project, 6.80, 11/01/04 ............................................. 69,287
50,000 Los Angeles, CA, Regional Airport, Continental Airlines, AMT, 9.25, 8/01/24 ....................... 55,363
35,000 Maine Finance Authority, Solid Waste RFR, Bowater Inc Project, 7.75, 10/01/22 ..................... 37,628
75,000 Minot, ND, IDA, RB, K-Mart Corp Project, 8.87, 1/15/06 ............................................ 71,531
35,000 Montgomery County, PA, HEHA, Hospital Revenue, Series A, 8.37, 11/01/11 ........................... 39,818
95,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical
Center, 8.85, 8/15/14 ........................................................................... 102,579
100,000+ Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00, 5/01/99 ...................... 49,336
50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.25, 7/01/22 ................ 51,631
30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.25, 7/01/18 ............................ 30,972
100,000 Port Authority of NY & NJ, Special Obligation, RB, K1AC Partners Project, AMT, 6.75,
10/01/19 ........................................................................................ 100,336
60,000 Port Chester, NY, IDA, Nadel Industries Inc Project, AMT, 7.00, 2/01/16 ........................... 57,652
75,000 San Bernardino, CA, San Bernardino Community Hospital, RB, 7.87, 12/01/19 ......................... 75,058
100,000 San Bernardino County, CA, COP, IFRN*, 13.91, 7/01/16 ............................................. 80,578
40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue, 7.00, 1/01/30 ...................................... 41,742
60,000 San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN*, MBIA Insured,
9.15, 8/01/16 ................................................................................... 41,294
250,000 Savannah, GA, Economic Development Authority Revenue, ETM, CAB, 12/01/21 .......................... 45,775
45,000 Schuylkill County, PA, IDA Resouce Recovery, Schuylkill Energy Resource Inc., AMT,
6.50, 1/01/10 ................................................................................... 45,120
20,000++ Tri-State Health Care Corp., PA, First Humanics Corp., Henry Clay Project, 13.75,
12/01/14 ........................................................................................ 4,021
</TABLE>
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issueo Value
------ ------ -----
<S> <C> <C>
$ 15,000+ Troy, NY, IDA, Hudson River Project, 11.00, 12/01/94 .............................................. $ 11,250
75,000++ Villages at Castle Rock, CO, Metropolitan District #4, 8.50, 6/01/31 .............................. 26,306
100,000 Wayne MI, AFR, Northwest Airlines Inc. 6.75, 12/01/15 ............................................. 100,319
50,000 Wisconsin Health & Educational Facilities Authority, National Agency of New Berlin
Project, RB, 8.00, 8/15/25 ...................................................................... 46,700
----------
Total Investments (Cost $2,014,350**) ............................................................. $1,878,203
==========
<FN>
**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. Coupons shown are as of June 30, 1996.
+The value of this non-income producing security has been estimated by
persons designated by the Fund's Board of Trustees using methods the Trustees
believe reflect fair value. See note 5 to the financial statements.
++Non-income producing security.
</FN>
</TABLE>
Legend
oIssue 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
HEHA Higher Education and Health Authority
IDA Industrial Development Authority
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
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
operates as a series company currently issuing three classes of shares of
beneficial interest, the Tax-Free Money Market Series, the High-Yield Municipal
Bond Series and the U.S. Government Strategic Income Fund (the Series). Each
series is considered a separate entity for financial reporting and tax purposes.
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 higher rated bonds.
The following is a summary of significant accounting policies followed in the
preparation of the Series' financial statements:
Valuation of Securities: The Fund's 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. 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.
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.
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
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.
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 $34,430 for the six months
ended June 30, 1996.
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, under which the Series
pays to Fundamental Service Corporation (FSC), an affiliate of the Manager, a
fee, which is accrued daily and paid monthly, at an annual rate of 0.5% of the
Series' average daily net assets. Amounts paid under the plan are to compensate
FSC for the services it provides and the expenses it bears in distributing the
Series' shares to investors. FSC has waived all fees in the amount of $3,785 for
the six months ended June 30, 1996.
The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of
the Manager, for the services it provides under a Transfer Agent and Service
Agreement. Transfer agent fees are set forth in the Statement of Operations.
6
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of June 30, 1996, there were an unlimited number of shares of beneficial
interest (no par value) authorized and capital paid in amounted to $2,061,171.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
----------------- ------------------
Shares Amount Shares Amount
------- ---------- ------- --------
<S> <C> <C> <C> <C>
Shares sold .................................... 738,206 $4,929,566 137,251 $921,557
Shares issued on reinvestment of dividends ..... 6,175 41,541 8,305 54,195
Shares redeemed ................................ (688,751) (4,617,582) (104,760) (710,959)
------- ---------- ------- --------
Net increase ................................. 55,630 $ 353,525 40,796 $264,793
======= ========== ======= ========
</TABLE>
5. Investment Transactions
The Fund invests in variable rate securities commonly called "inverse
floaters." The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in
interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed-rate bond.
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
$60,625 at June 30, 1996 (3.5% of net assets). A bond with a par value of
$15,000 and a value of $11,250 at June 30, 1996 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 49.33% of face value at June 30, 1996 under methods determined
by the Board of Trustees.
During the six months ended June 30, 1996, the cost of purchases and
proceeds from sales of investment securities, other than short-term obligations,
were $948,191 and $773,682, respectively.
As of June 30, 1996 net unrealized depreciation of portfolio securities
amounted to $136,147, composed of unrealized appreciation
of $60,519 and unrealized depreciation of $196,666.
7
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
6. Selected Financial Information
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1996 Years Ended December 31,
----------------------------------
(unaudited) 1995 1994 1993 1992
----------- ----- ----- ----- -----
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................ $7.07 $5.92 $7.27 $7.30 $7.29
----- ----- ----- ----- -----
Income from investment operations:
Net investment income ............................................. 0.23 0.34 0.43 0.39 0.43
Net realized and unrealized gains (losses) on investments ......... (0.49) 1.15 (1.35) (0.03) 0.01
----- ----- ----- ----- -----
Total from investment operations (0.26) 1.49 (0.92) 0.36 0.44
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income ................................ (0.23) (0.34) (0.43) (0.39) (0.43)
----- ----- ----- ----- -----
Net asset value, end of period ...................................... $6.58 $7.07 $5.92 $7.27 $7.30
===== ===== ===== ===== =====
Total Return ........................................................ (3.76%) 25.70% (12.92%) 5.11% 6.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) ............................. 1,723 1,457 979 1,087 1,050
Ratios to average net assets:
Expenses ........................................................ 2.50%+* 2.50%* 2.50%* 2.50%* 2.87%*
Net investment income ........................................... 6.61%+* 5.15%* 6.70%* 5.40%* 5.89%*
Portfolio turnover rate ............................................. 48.66% 43.51% 75.31% 84.89 100.21%
BANK LOANS
Amount outstanding at end of period (000 omitted) ................... $ - $ 379 $ - $ - $ 20
Average amount of bank loans outstanding during the period
(000 omitted) ..................................................... $ - $ 61 $ - $ - $ 57
Average number of shares outstanding during the period
(000 omitted) ..................................................... 156 183 156 145 144
Average amount of debt per share during the period .................. $ - $0.33 $ - $ - $0.40
<FN>
*These ratios are after expense reimbursements of 5.05%+ for the six months
ended June 30, 1996 and 6.22%, 6.20%, 5.76% and 4.83%, for each of the years
ended December 31, 1995, 1994, 1993 and 1992, respectively.
+Annualized.
</FN>
</TABLE>
8
<PAGE>
(left column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
The financial statements contained herein are
submitted for the general information of the
shareholders of the Fund. The report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(right column)
Semi-Annual Report
June 30, 1996
(Unaudited)
FUNDAMENTAL
FIXED-INCOME FUND
High-Yield
Municipal Bond Series
FUNDAMENTAL
Fundamental Family of Funds