FUNDAMENTAL FIXED INCOME FUND
U.S. GOVERNMENT STRATEGIC INCOME FUND
Dear Fellow Shareholder:
The Net Asset Value of the U.S. Government Strategic Income Fund ended 1996 at
$1.43 per share, down modestly from the year end 1995 net asset value of $1.49
per share. However, a widening spread between short and long term interest rates
enabled the Fund to maintain a high yield. And for the full year its 5.02% total
return placed it in the top 3% of all government bond funds as measured by
Morningstar Inc.
1996 was a see-saw year for the bond market. Bond prices were at a peak and
interest rates were at a low early in the year, amidst high hopes for a balanced
budget agreement between the Clinton Administration and Congress. Additionally,
the Federal Reserve lowered interest rates in January. However, as the election
season progressed, a budget agreement became elusive. And no sooner had the
Federal Reserve lowered interest rates than economic activity seemed to rebound,
sending shudders through the bond market.
Bond prices fell sharply and interest rates rose into early summer, as fears of
an actual move toward credit restraint by the Federal Reserve began to emerge.
But inflation remained subdued through the period. With economic growth
moderating during the year's second half, bond prices recovered and yields fell.
Nevertheless, the rise in prices and consequent decline in yields did not match
the levels registered early in the year.
Toward year end renewed fears of credit restraint gripped the bond market after
Federal Reserve Chairman Greenspan warned that irrational exuberance may be
gripping financial markets. In our view, if indeed such euphoria was infecting
financial markets, it was concentrated in the equity area. After all, while bond
prices wobbled during 1996, the equity market posted a 26% rise as measured by
the Dow Jones Industrial Average.
Because short term interest rates were steady for most of the year while long
term interest rates rose, the Fund's leverage was beneficial and its yield was
higher than it otherwise would have been. Similarly, we were able to quickly
adjust the Fund's duration in line with changing market conditions through our
use of futures and options hedging strategies.
Heading into 1997 we expect continued moderate economic growth and low
inflation. Credit restraint by the Federal Reserve would not materialize in our
view, and a realization of a balanced budget agreement should help reduce the
entire structure of interest rates, thus raising bond prices. By most measures
equity values are high relative to fixed income security prices, so moderate
growth, low inflation, and a balanced budget deal should favorably affect the
fixed income market in 1997. We thank you for your continued support, and we
look forward to servicing you in the future.
Sincerely,
Dr. Vincent J. Malanga
President
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
$13,078
Lehman Brothers
1-3 Year Government
Bond Index*
$11,421
Consumer
Price Index
$10,549
Fundamental U.S.
Government
Strategic Income
Fund
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
- --------------------------------------------------------------------------------
The Fundamental
U.S. Government
Strategic Income Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
Ended on 12/31/96
- --------------------------------------------------------------------------------
Since Inception
1 Year (2/18/92)
- --------------------------------------------------------------------------------
5.02% 1.11%
- --------------------------------------------------------------------------------
Thousands ($)
2/18/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
Past performance is not predictive of future performance.
The above illustration compares a $10,000 investment made in The Fundamental
U.S. Government Strategic Income Fund on 2/18/92 (Inception Date) to a $10,000
investment made in the Lehman Brothers 1-3 Year Government Bond Index on that
date. For comparative purposes the value of the Index on 2/24/92 is used as the
beginning value on 2/18/92. All dividends and capital gain distributions are
reinvested.
The Fund invests primarily in U.S. Government securities and its performance
takes into account fees and expenses. Unlike the Fund, the Lehman Brothers 1-3
Year Government Bond Index is an unmanaged total return performance benchmark
for the short-term, U.S. Government bond market calculated by using bonds
selected to be representative of the market. The Index does not take into
account fees and expenses. Further information relating to Fund performance,
including expense reimbursements, if applicable, is contained in the Fund's
Prospectus and elsewhere in this report.
*Source:Lehman Brothers.
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
2
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(left column)
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investment in securities, at value (cost
$17,893,185) (Notes 5 and 6) ................. $19,826,580
Receivables:
Interest ..................................... 96,664
Variation margin ............................. 177,228
-----------
Total assets ............................. 20,100,472
-----------
LIABILITIES
Notes payable .................................. 257,247
Options written at value (premiums
received $53,488) (Note 5) ................... 45,000
Securities sold subject to repurchase
(Note 6) ..................................... 6,361,988
Payables:
Bank overdraft payable ....................... 17,941
Dividends declared ........................... 77,440
Accrued expenses ............................. 116,489
-----------
Total liabilities ........................ 6,876,105
-----------
NET ASSETS consisting of:
Accumulated net realized loss .................. $(17,904,575)
Unrealized appreciation of securities .......... 1,933,395
Unrealized appreciation of options
written ...................................... 8,488
Unrealized appreciation of open future
contracts .................................... 236,456
Paid-in-capital applicable to 9,257,028
shares of beneficial interest ................ 28,950,603
------------
$13,224,367
===========
NET ASSET VALUE PER SHARE ........................ $1.43
=====
(right column)
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income, net of $346,342 of
interest expense ............................ $ 1,746,175
EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ...................... $ 104,470
Custodian and accounting fees ................. 40,662
Transfer agent fees ........................... 58,766
Professional fees ............................. 490,685
Trustees' fees ................................ 6,000
Printing and postage .......................... 13,117
Interest on bank borrowing .................... 17,199
Distribution expenses ......................... 34,823
Other ......................................... 7,964
Fees waived ................................... (281,959)
-----------
Total expenses .......................... 491,727
-----------
Net investment income ................... 1,254,448
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on:
Investments ................................... 362,107
Future and options on futures ................. 71,066 433,173
-----------
Change in unrealized appreciation
(depreciation) of investments,
options and futures contracts
for the period:
Investments ............................... (1,529,967)
Open option contracts written ............. 39,523
Open futures contracts .................... 420,227 (1,070,217)
----------- -----------
Net loss on investments ......................... (637,044)
-----------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 617,404
===========
(bottom column)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December December
31, 1996 31, 1995
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ...................................................................... $ 1,254,448 $ 962,726
Net realized gain (loss) on investments .................................................... 433,173 (14,388,126)
Unrealized appreciation (depreciation) on investments, options and futures contracts ....... (1,070,217) 15,662,974
------------ -----------
Net increase in net assets from operations ........................................... 617,404 2,237,574
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income .......................................................................... (1,254,448) (962,726)
CAPITAL SHARE TRANSACTIONS (Note 4) .......................................................... (1,332,818) (5,170,959)
------------ -----------
Total decrease ....................................................................... (1,969,862) (3,896,111)
NET ASSETS
Beginning of year ......................................................................... 15,194,229 19,090,340
------------ -----------
End of year ............................................................................... $ 13,224,367 $ 15,194,229
============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF CASH FLOWS
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets from operations ................... $ 617,404
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities ........................... (2,620,894)
Proceeds on sale of securities .............................. 4,699,842
Premiums received for options written ....................... 761,447
Premiums paid to close options written ...................... (1,105,799)
Decrease in interest receivable ............................. 14,325
Increase in variation margin receivable ..................... (203,709)
Increase in accrued expenses ................................ 17,224
Net accretion of discount on securities ..................... (245,251)
Net realized (gain) loss:
Investments ............................................... (362,107)
Options written ........................................... 335,515
Unrealized depreciation on securities and options
written for the period .................................... 1,490,444
-----------
Total adjustments ......................................... 2,781,037
-----------
Net cash provided by operating activities ................. 3,398,441
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Net repayments on sale of securities sold subject
to repurchase ............................................... (1,069,057)
Net borrowings of note payable ................................ 212,188
Proceeds on shares sold ....................................... 1,721,466
Payment on shares repurchased ................................. (3,923,134)
Cash dividends paid ........................................... (339,904)
-----------
Net cash provided by financing activities ..................... (3,398,441)
-----------
Net increase in cash .......................................... 0
CASH AT BEGINNING OF YEAR ..................................... 0
-----------
CASH AT END OF YEAR ..........................................$ 0
===========
*Non-cash financing activities not included herein consist of reinvestment
of dividends of $860,888.
Cash payments for interest expense totaled $368,807 for the period.
STATEMENT OF OPTIONS WRITTEN
December 31, 1996
- --------------------------------------------------------------------------------
Number of Expiration
Contracts++ Options Written Month Value
- ----------- --------------- ---------- -----
40 U.S. Treasury Bonds, Call @ $114 ..... March 1997 $45,000
-------
$45,000
=======
++Each contract represents $100,000 face value of U.S. Treasury Bond Futures.
See Notes to Financial Statements.
4
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate@ Date Value
------ ------ ------ -----
United States Treasury Securities-43.39%
United States Treasury Bonds
85,000* 0.00% ZCS 11/15/03 $ 54,892
4,300,000* 0.00% PS 11/15/06 2,278,720
5,000,000 9.00% 11/15/18 6,268,755
-----------
(Cost $7,749,456) 8,602,367
-----------
United States Agency Backed Securities-56.61%
Federal Home Loan Mortgage Corporation
843,718+ 9.25% 08/15/23 893,936
267,228+ 6.50% Z-bond 12/15/23 220,971
588,235x 20.40% TTIB 09/15/26 579,258
249,010 14.80% IFRN 05/25/24 273,530
750,000 13.59% IFRN 05/15/24 804,157
FNMA-Federal National Mortgage Assoc.
3,671,204+x 15.33% TTIB 03/25/23 3,895,037
490,760x 14.49% TTIB 05/25/23 516,245
1,519,480+x 13.50% TTIB 11/25/23 1,360,831
980,392x 13.26% TTIB 11/25/23 912,588
356,450+x 15.50% TTIB 03/25/23 376,929
REFCO-Resolution Funding Corporation
600,000 0.00% ZCS 07/15/10 241,225
Department of Navy, FNMA Guaranteed
100,000+ 0.00% ZCS 04/01/09 42,208
-----------
Cost $9,311,440) 10,116,915
-----------
FICO-Financing Corporation (U.S. Government Agency) ZCS
100,000* 11/02/12 33,042
100,000* 05/02/14 29,546
125,000 05/02/15 34,250
148,000* 05/11/12 50,698
119,000* 11/11/14 33,827
281,000* 05/30/14 82,551
261,000* 11/30/15 68,511
164,000* 11/30/16 39,956
167,000* 08/08/17 38,669
100,000* 08/03/18 21,540
182,000* 06/06/15 49,523
109,000+ 12/06/17 24,658
5
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
STATEMENT OF INVESTMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate@ Date Value
------ ------ ------ -----
FICO-Financing Corporation (U.S. Government Agency) ZCS (continued)
137,000* 08/03/15 $ 36,856
208,000 02/03/16 53,916
138,000* 02/03/11 52,017
205,000+86* 04/06/17 48,722
259,000* 10/05/15 68,785
100,000+ 10/05/17 22,898
217,000+ 04/05/18 47,899
375,000* 04/05/19 76,931
240,000* 10/06/17 56,506
100,000+ 02/08/17 24,034
200,000* 04/06/17 47,534
100,000+ 02/03/12 34,961
118,000* 08/03/16 29,468
-----------
(Cost $832,289) 1,107,298
-----------
Total investments (Cost $17,893,185)(D) $19,826,580
===========
+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)
(D)Cost is the same for Federal income tax purposes
xThe Fund owns 100% of the security or tranche. See Note 5 to the financial
statements.
(degree)Legend-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. Rates shown are
at December 31, 1996.
TTIB: Two-Tiered Index Floating Rate Bonds are instruments with
two coupon levels. The "first tier" coupon is at a fixed
rate, effective as long as the underlying index is at or
below the strike level. At the strike level, the "second
tier" coupon resets the bond to an inverse floating rate
note. See discussion above. Coupons shown are at December
31, 1996.
ZCS: Zero Coupon Securities are instruments whose interest and
principal are paid at maturity.
Z Bond: A Z Bond is an instrument whose monthly interest coupon is
paid at a fixed rate in additional principal. Principal is
paid at maturity.
PS: Principal Stripped Bonds are instruments whose principle
and coupon have been separated and sold separately.
See Notes to Financial Statements.
6
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
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
7
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
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.
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. Discounts and
premiums are amortized over the life of the respective securities. Premiums
are charged against interest income and 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
8
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
expenses (excluding interest, taxes, brokerage fees and extraordinary expenses)
to the extent that such expense, including the management fees, exceed the
limits on investment company expenses prescribed in any state in which the
Series' shares are qualified for sale. The manager voluntarily waived fees and
reimbursed expenses of $247,136 for the year ended December 31, 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 year ended December 31, 1996 is set forth in
the statement of operations. FSC has waived fees in the amount of $34,823.
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 year ended December 31, 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 $1,535 for the year ended
December 31, 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.
4. Shares of Beneficial Interest
As of December 31, 1996 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid-in amounted to
$28,950,603. Transactions in shares of beneficial interest were as follows:
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 1,209,491 $1,721,466 1,300,415 $1,819,736
Shares issued on
reinvestment of dividends 605,897 860,888 554,101 779,070
Shares redeemed (2,749,791) (3,915,172) (5,559,992) (7,769,765)
---------- ---------- ---------- ----------
Net decrease (934,403) ($1,332,818) (3,705,476) ($5,170,959)
========== ========== ========== ==========
9
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
5. Complex Services, Off Balance Sheet Risks and Investment Transactions
Two-Tiered Index Floating Rate Bonds (TTIB):
The Fund invests in Two-Tiered Index Floating Rate Bonds. The term
two-tiered refers to the two coupon levels that the TTIB's coupon can reset to.
The "first tier" is the TTIB's fixed rate coupon, effective as long as the
underlying index is at or below the strike level. Above the stike, the TTIB
coupon resets to a formula similar to an inverse floating rate note. See
discussion of inverse floating rate notes below. Changes in interest rate on the
underlying 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.
Additionally the Fund owns 100% of several securities as indicated in the
Statement of Investments. As a result of its ownership position there is no
active market in these securities. Valuations of these securities are provided
by a pricing service and are believed by the Manager to reflect fair value. The
market value of securities owned 100% by the Fund was approximately $7,640,000
(or 58% of net assets) as of December 31, 1996.
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
10
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
consisting of US Treasury Bond Futures and Options on US Treasury Bond Futures.
Typically the Fund sells treasury bond futures contracts or writes treasury bond
option contracts. These activities create off balance sheet risk since the Fund
may be unable to enter into an offsetting position and under the terms of the
contract deliver the security at a specified time at a specified price. The cost
to the Fund of acquiring the security to deliver may be in excess of recorded
amounts and result in a loss to the Fund. For the year ended December 31, 1996,
the Fund had daily average notional amounts outstanding of approximately
$15,943,000 and $9,110,000 of short positions on US Treasury Bond Futures and
Options Written on US Treasury Bond Futures respectively. Realized gains and
losses from these transactions are stated separately in the Statement of
Operations.
The Fund had the following open futures contracts at December 31, 1996.
Principal Expiration Unrealized
Type Amount Position Month Gain
---- --------- -------- ---------- ----------
U.S. Treasury Bond .... $13,500,000 Short 3/97 $236,456
Portfolio securities with an aggregate value of approximately $1,836,419
have been segregated as initial margin as of December 31, 1996.
In addition, the following table summarizes option contracts written by the
Series for the year ended December 31, 1996:
Number of Premiums Realized
Contracts Received Cost Loss
--------- -------- ---- ------
Contracts outstanding
December 31, 1995 75 $62,325
Options written 810 761,447
Contracts closed or expired (845) (770,284) $1,105,799 ($335,515)
----- --------
Contracts outstanding
December 31, 1996 40 $ 53,488
===== ========
Other Investment Transactions
For the year ended December 31, 1996, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$2,620,894 and $3,726,943, respectively.
As of December 31, 1996, net unrealized appreciation of portfolio securities
amounted to $1,933,395 comprised entirely of unrealized appreciation. Net
unrealized depreciation of options written amounted to $8,488 composed of
unrealized appreciation of $9,869 and unrealized depreciation of $1,381.
11
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
The Fund has capital loss carryforwards to offset future capital gains as
follows:
Amount Expiration
------ ----------
$14,801,000 12/31/2002
637,000 12/31/2004
-----------
$15,438,000
===========
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 $6,968,000 have been
segregated as collateral for securities sold subject to repurchase as of
December 31, 1996.
The maximum month-end and the average amount of borrowing outstanding under
these arrangements during the year ended December 31, 1996 were approximately
$7,459,000 and $6,577,000.
7. Regulatory Matters
Management and the Fund's Trustees are cooperating in an investigation being
conducted by the Securities and Exchange Commission ("Commission") concerning
the Fund, the Fund's Trustees, the Manager and certain associated persons and
affiliated entities of the Manager. 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 1994, the method by which the Fund's portfolio securities were valued, the
calculation of the Fund's duration, 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. The
Commission's staff indicated an intention to recommend to the Commission the
commencement of certain proceedings (but not against the Fund). All parties
intend to vigorously contest any charges if the Commission authorizes any
proceedings.
In addition, the National Association of Securities Dealers, Inc. ("NASD")
is conducting an investigation concerning alleged violations of the NASD Rules
of Conduct by the Fund's Distributor and certain associated persons. Among other
things, the investigation concerns representations made in certain advertising
materials and sales literature for the Fund at various times between 1992 and
1994.The NASD's staff indicated an intention to recommend the commencement of
certain proceedings (but not against the Fund). All parties intend to vigorously
contest any charges if the NASD authorizes any proceedings.
12
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
8. Selected Financial Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Year Year Year February 18,
Ended Ended Ended Ended 1992* to
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Per share operating performance
(for a share outstanding throughout
the period)
Net asset value, beginning of period ....... $ 1.49 $ 1.37 $ 2.01 $ 2.02 $ 2.00
------ ------ ------ ------ ------
Income from investment operations
Net investment income ...................... 0.13 0.08 0.14 0.16 0.15
Net realized and unrealized gain/
(loss) on investments .................... (0.06) 0.12 (0.64) - 0.02
------ ------ ------ ------ ------
Total from investment operations .... 0.07 0.20 (0.50) 0.16 0.17
------ ------ ------ ------ ------
Less distributions
Dividends from net investment income ....... (0.13) (0.08) (0.14) (0.16) (0.15)
Dividends from net realized gains .......... - - - (0.01) -
------ ------ ------ ------ ------
Net asset value, end of period ............. $ 1.43 $ 1.49 $ 1.37 $ 2.01 $ 2.02
====== ====== ====== ====== ======
Total return ............................... 5.02% 15.43% (25.57%) 8.14% 10.76%**
Ratios/supplemental data:
Net assets, end of period (000 omitted) .... 13,224 15,194 19,020 63,182 40,500
------ ------ ------ ------ ------
Ratios to average net assets
Interest expense ........................... 0.12% 0.20% 0.12% 0.05% 0.09%
Operating expenses ......................... 3.41% 3.05% 2.16% 1.39% 0.96%
------ ------ ------ ------ ------
Total expenses+ ............................ 3.53% 3.25% 2.28% 1.44% 1.05%**
====== ====== ====== ====== ======
Net investment income+ ..................... 9.01% 5.91% 8.94% 7.85% 8.50%**
Portfolio turnover rate .................... 12.65% 114.36% 60.66% 90.59% 115.39%
Borrowings
Amount outstanding at end of period
(000 omitted) ............................ $6,610 $ 7,481 $ 9,674 $31,072 $19,666
Average amount of debt outstanding
during the period (000 omitted) .......... $6,577 $ 7,790 $16,592 $28,756 $13,779
Average number of shares outstanding
during the period (000 omitted) .......... 9,764 11,571 21,436 28,922 12,683
Average amount of debt per share
during the period ........................ $ .67 $ .67 $ .77 $ .99 $ 1.09
</TABLE>
*Commencement of operations.
**Annualized
+These ratios are after expense reimbursement of 2.02%, 1.0% and .13% for the
years ended December 31, 1996, 1995 and 1993, respectively, and 1.05% for the
period February 18, 1992 to December 31, 1992.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Fundamental U.S. Government Strategic Income Fund
We have audited the accompanying statement of assets and liabilities
including the statement of investments and statement of options written, of the
Fundamental U.S. Government Strategic Income Fund Series of Fundamental
Fixed-lncome Fund as of December 31, 1996 and the related statements of
operations and cash flows for the year then ended, and the statement of changes
in net assets for the two years then ended and selected financial information
for the four years then ended and the period from February 18, 1992 (date of
inception) to December 31, 1992. These financial statements and selected
financial information are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996 by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Fundamental U.S. Government Strategic Income Fund of Fundamental
Fixed-lncome Fund as of December 31, 1996, the results of its operations,
changes in its net assets, cash flows, and selected financial information for
the periods indicated, in conformity with generally accepted accounting
principles.
As discussed in Note 5 the Fund owns 100% of certain securities as of
December 31, 1996.
S I G N A T U R E
New York, New York
February 21, 1997
14
<PAGE>
FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND
90 Washington Street
New York NY 10006
1-800-322-6864
Independent Auditors
McGladrey & Pullen, LLP
New York, New York 10017
Legal Counsel
Kramer, Levin, Naftails,
Nessen, Kamin & Frankel
919 Third Avenue
New York, New York 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 column)
Annual Report
December 31, 1996
FUNDAMENTAL
logo 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
December 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value
(cost $5,052,321) .............................................. $5,052,321
Receivables:
Interest ....................................................... 28,905
----------
Total assets ............................................... 5,081,226
----------
LIABILITIES
Payables:
Bank overdraft payable ......................................... 218,168
Dividends ...................................................... 108,593
Accrued expenses ................................................. 133,701
----------
Total liabilities .......................................... 460,462
----------
NET ASSETS equivalent to $1.00 per share on
4,629,652 shares of beneficial interest
outstanding (Note 4) ............................................. $4,620,764
==========
(right column)
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ............................ $1,877,969
EXPENSES (Notes 2 and 3)
Investment advisory fees ................... $282,772
Custodian and accounting fees .............. 81,582
Transfer agent fees ........................ 63,391
Trustees' fees ............................. 38,132
Professional fees .......................... 31,518
Distribution fees .......................... 282,772
Postage and printing ....................... 14,185
Other ...................................... 382
--------
794,734
Less: Expenses offset (Note 6) ............. (78,000)
--------
Total expenses ...................... 716,734
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ................................. $1,161,235
==========
(bottom column)
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ........................................ $ 1,161,235 $ 1,078,563
----------- -----------
Net increase in net assets from operations ............. 1,161,235 1,078,563
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income ............................................ (1,161,235) (1,078,563)
CAPITAL SHARE TRANSACTIONS (Note 4) ............................ (6,629,783) 2,246,999
----------- -----------
Total (decrease) increase .............................. (6,629,783) 2,246,999
NET ASSETS:
Beginning of year ............................................ 11,250,547 9,003,548
----------- -----------
End of year .................................................. $ 4,620,764 $11,250,547
=========== ===========
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Issue(degree) Value
- --------- ------------- -----
<C> <C> <C>
$200,000 Alameda County, CA, TRANS, 4.50%, 6/30/97 ................................................. $ 200,521
235,000 Austin, TX, Electric Light & Power, Waterworks & Sewer, ETM, 3.00%, 10/1/97 ............... 233,402
100,000 Burke County, GA, Development Authority, Georgia Power Company, Vogtle
Project, VRDN*, 5.00%, 9/1/26 ........................................................... 100,000
87,000 Clermont County, OH, HFR Mercy Health Care Project, MBIA Insured, VRDN*,
4.20%,12/1/15 ........................................................................... 87,000
200,000 Columbia AL, IDB, PCR Alabama Power Company Project, VRDN*, 4.90%,
10/1/22 ................................................................................. 200,000
80,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Wells Fargo
Bank, 3.75%, 12/1/09 .................................................................... 80,000
200,000 Delaware County, PA, SWDF, Scott Paper Project, Kimberly-Clark Corp
Guaranty, VRDN*, 4.05%, 12/1/18 ......................................................... 200,000
200,000 Detroit, Ml, City School District, State School Aid Notes 4.50%, 5/1/97 ................... 200,350
200,000 District of Columbia, General Recovery Fund, LOC Westduetsche Landesbank,
VRDN*, 5.10%, 6/1/03 .................................................................... 200,000
200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 4.30%, 4/1/10 ...................... 200,000
125,000 Genesee County, NY, IDR, Orson Industries, AMT, LOC Fleet Bank, VRDN*,
4.25%,12/1/98 ........................................................................... 125,000
300,000 Illinois Educational Facility Authority, RB, Art Institute of Chicago, Northern Trust
Liquidity, VRDN*, 4.25%, 3/1/27 ......................................................... 300,000
300,000 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank, VRDN*,
4.15%, 9/1/15 ........................................................................... 300,000
200,000 Illinois HFAR, West Suburban Hospital Medical Center, LOC First Chicago Bank,
VRDN*, 4.20%, 7/1/05 .................................................................... 200,000
300,000 Los Angeles, CA, Regional Airports Improvement Corp, LOC Societe Generale,
VRDN*, 4.95%, 12/1/25 ................................................................... 300,000
200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp. VRDN*, 4.15%,
12/1/03 ................................................................................. 200,000
200,000 Midland County, Ml, Economic Development Corp, Dow Chemical Project, AMT,
VRDN*, 5.30%, 12/1/23 ................................................................... 200,000
200,000 Missouri, Third Street Building Project, SPA First Chicago, VRDN*, 4.50%,
8/1/99 .................................................................................. 200,000
300,000 Missouri, PCR, Monsanto Project, VRDN*, 4.15%, 2/1/09 ..................................... 300,000
300,000 Montgomery, AL, Baptist Medical Center, Special Care Facilities Financing
Authority, AMBAC Insured, VRDN*, 4.00%, 12/1/3 .......................................... 300,000
200,000 Nebraska Higher Education Loan Program, SPA, SLMA, MBIA Insured, VRDN*,
4.15%, 12/1/15 .......................................................................... 200,000
200,000 New York City, NY, GO, LOC Chemical Bank, VRDN*, 5.00%, 8/1/23 ............................ 200,000
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Issue(degree) Value
- --------- ------------- -----
<C> <C> <C>
$125,000 Scioto County, OH, HFR, VHA Central Capital Project, AMBAC Insured, VRDN*,
3.90%, 12/1/25 .......................................................................... $ 125,000
200,000 Texas State, TRANS, 4.75%, 8/29/97 ........................................................ 201,048
200,000 Wake County, NC, PCR, Carolina Power & Light Project, LOC Sumitomo Bank,
VRDN*, 4.20%, 10/1/15 ................................................................... 200,000
Total Investments (Cost $5,052,321)** ..................................................... $5,052,321
==========
<FN>
*Variable Rate Demand Notes (VRDN) are instruments whose interest rate changes
on a specific date and/or whose interest rates vary with changes in a
designated base rate.
**Cost is the same for Federal income tax purposes.
</FN>
</TABLE>
Legend
(degree)Issue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
GO General Obligation
ETM Escrowed to Maturity
HFAR Health Facilities Authority Revenue
HFR Hospital Facilities Revenue
IDB Industrial Development Board
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 Revenue Anticipation Notes
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
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 preservaton of capital and liquidity. The
following is a summary of significant accounting policies followed in the
preparation of the Series' financial statements:
Valuation of Securities:
Investments are stated at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any premium or discount is
amortized on a constant basis to the maturity of the instrument.
Amortization of premium is charged to income, and accretion of market
discount is credited to unrealized gains. The maturity of investments is
deemed to be the longer of the period required before the Fund is entitled
to receive payment of the principal amount or the period remaining until
the next interest adjustment.
Federal Income Taxes:
It is the Series' policy to comply with the requirements of the Internal
Revenue Code applicable to "regulated investment companies" and to
distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.
Distributions:
The Series declares dividends daily from its net investment income and
pays such dividends on the last business day of each month. Distributions
of net capital gains are made annually, as declared by the Fund's Board of
Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.
General:
Securities transactions are accounted for on a trade date basis. Interest
income is accrued as earned. Realized gains and losses from the sale of
securities are recorded on an identified cost basis.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
2. Investment Advisory Fees and Other Transactions with Affiliates
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the Tax-Free Money Market Series and is responsible for the overall
management of the business affairs and assets of the Series subject to the
authority of
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
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 and the Fund's Trustees are cooperating in an investigation
being conducted by the Securities and Exchange Commission concerning an
affiliated fund. The Commission's staff indicated an intention to recommend to
the Commission the commencement of certain proceedings.
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 year ended December 31,
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 year ended December 31, 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 December 31, 1996 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$4,629,652. Transactions in shares of beneficial interest, all at $1.00 per
share were as follows:
Year ended Year ended
December 31, December 31,
1996 1995
-------------- --------------
Shares sold .................................. $3,547,580,681 $3,142,235,917
Shares issued on reinvestment of dividends ... 1,042,865 1,075,300
Shares redeemed .............................. (3,555,253,329) (3,141,064,218)
-------------- --------------
Net (decrease) increase ...................... $ (6,629,783) $ 2,246,999
============== ==============
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. Borrowings
outstanding at December 31, 1996 amounted to $218,168.
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
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 $78,000 for the year ended December 31,
1996.
7. Selected Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA AND RATIOS
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Year ................................. $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
Income from investment operations:
Net investment income .............................................. 0.023 0.026 0.017 0.014 0.028
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income ............................... (0.023) (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 ....................................................... 2.28% 2.60% 1.69% 1.62% 2.79%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000 omitted) .............................. 4,621 11,251 9,004 5,830 32,488
Ratios to Average Net Assets
Expenses ......................................................... 1.54%++ 1.53%++ 0.91%+ .95%+ .42%+
Net investment income ............................................ 2.04% 2.43% 1.55% 1.25% 2.76%
BANK LOANS
Amount outstanding at end of period
(000 omitted) .................................................... $ 218 $ - $ 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) .................................................... 56,876 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 reimbursement of .44%, .67% and 1.66%, for each
of the years ended December 31, 1994, 1993 and 1992, respectively.
++These ratios would have been 1.40% and 1.26% net of expense offsets of .14%
and .18% for the years ended December 1996 and 1995 respectively.
</FN>
</TABLE>
6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of the Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund as of December 31, 1996 and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presenation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statement and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Tax-Free Money Market Series of Fundamental Fixed-Income Fund as
of December 31, 1996, 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.
SIGNATURE
New York, New York
February 21, 1997
7
<PAGE>
(right column)
Annual Report
December 31, 1996
(Unaudited)
FUNDAMENTAL
FIXED-INCOME FUND
Tax-Free
Money Market Series
FUNDAMENTAL
Fundamental Family of Funds
(left column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York, NY 10006
1-800-322-6864
Independent Auditors
McGladrey & Pullen, LLP
New York, NY 10017
Legal Counsel
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.
<PAGE>
Dear Fellow Shareholder:
The Net Asset Value of Fundamental's High Yield Muni Fund ended 1996 at $6.86
per share, with a 4.05% total return. This placed the Fund well within the top
one-third of all high yield municipal funds as measured by Morningstar Inc.
1996 was a see-saw year for the bond market. Bond prices were at a peak and
interest rates were at a low early in the year amidst high hopes for a balanced
budget agreement between the Clinton Administration and Congress. Additionally,
sluggish growth and low inflation caused the Federal Reserve to lower interest
rates in January.
But as the election season got into full swing, a budget agreement became
elusive, and economic activity gained momentum. Bond prices fell sharply and
interest rates rose into early summer, but high yielding instruments fared
better than Treasuries and other high quality instruments because risk premiums
narrowed as economic activity strengthened. Those issues that are sensitive to
improving economic conditions benefited and our holdings of such bonds helped
cushion the blow from an uptick in the general level of interest rates.
By mid-summer it became evident that economic growth was moderating. And with
inflation remaining subdued, the general tone of the bond market improved,
further bolstering the Fund's performance. This lasted until December when the
bond market again became jittery over a pick up in economic activity. So the
year ended on a moderately sour note.
Nevertheless, heading into 1997 we expect continued moderate economic growth and
low inflation. Once again hopes are high for a balanced budget agreement, and in
this environment we would expect a steady policy by the Federal Reserve. By most
measures equity values are high relative to fixed income security prices, so
continued moderate growth and low inflation should favorably affect the overall
bond market in 1997.
In the coming year our goal is to continue to search for special situations that
will be favorably affected by noninflationary economic growth. We thank you for
your continued support, and we are looking forward to continue serving you in
the future.
Sincerely,
Dr. Vincent J. Malanga
President
<PAGE>
(Chart Material)
Fundamental Fixed Income Fund
High Yield Municipal Bond Series
- ----------------------------------------------------------
FFIF High Yield Municipal Bond Series
Avg Annual Total Return Thru 12/31/96
- ----------------------------------------------------------
1 Year 5 Year Since Inception (10/1/87)
4.05% 4.93% 2.89%
- ----------------------------------------------------------
$25,000
$20,000
$15,000
$10,000
$5,000
Lehman Bros
Index $21,791
Consumer Price
Index $13,822
FFIF High Yield
Series $13,014
9/30/87
12/31/87
12/31/88
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
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.
2
<PAGE>
(left column)
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investment in securities at value (Note 5)
(cost $2,064,319) ..................................... $1,990,274
Interest receivable ..................................... 39,603
Receivable for investment securities sold ............... 105,225
----------
Total assets ............................... 2,135,102
----------
LIABILITIES
Bank overdraft payable .................................. 227,851
Dividend payable ........................................ 9,101
Accrued expenses ........................................ 39,938
----------
Total liabilities .......................... 276,890
----------
NET ASSETS consisting of:
Accumulated net realized
loss ..................................... $(176,605)
Unrealized depreciation
of securities ............................ (74,045)
Paid-in-capital applicable to
270,819 shares of
beneficial interest
(Note 4) ................................. 2,108,862
---------
$1,858,212
==========
NET ASSET VALUE PER SHARE ................................. $ 66.86
==========
(right columnn)
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income ............................... $148,214
EXPENSES (Notes 2 and 3)
Investment advisory fees ...................... $ 12,656
Custodian and accounting fees ................. 29,656
Transfer agent fees ........................... 6,956
Trustee fees .................................. 534
Distribution fees ............................. 7,910
Professional fees ............................. 36,000
Postage and printing .......................... 12,474
Registration fees ............................. 1,643
Other ......................................... 4,483
112,312
Less: Expenses waived or reimbursed
by the manager and affiliates .............. (72,768)
Total expenses ..................... 39,544
Net investment income .............. 108,670
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments .............. 22,294
Change in unrealized depreciation of
investments for the year .................... (22,733)
Net loss on investments ............ (439)
NET INCREASE IN NET ASSETS FROM
OPERATIONS .................................... $108,231
(center column)
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM: 1996 1995
OPERATIONS ---------- ----------
Net investment income ............................ $ 108,670 $ 61,591
Net realized gain (loss) on investments .......... 22,294 (39,968)
Unrealized (depreciation) appreciation of
investments for the year ....................... (22,733) 253,452
---------- ----------
Net increase in net assets from operations . 108,231 275,075
DIVIDENDS PAID TO SHAREHOLDERS FROM
Net investment income ............................ (108,670) (61,591)
CAPITAL SHARE TRANSACTIONS (Note 4) ................ 401,216 264,793
---------- ----------
Total increase ............................. 400,777 478,277
NET ASSETS:
Beginning of year ................................ 1,457,435 979,158
---------- ----------
End of year ...................................... $1,858,212 $1,457,435
========== ==========
See Notes to Financial Statements.
3
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue(degree) Value
------ ------------- -----
<S> <C> <C>
$ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc., 8.88%, 3/1/21 .................................... $ 42,044
40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.75%, 3/1/23 ..................................... 41,753
95,000 California Health Facilities Authority, Valley Presbyterian Hospital Project, RB, Series A,
9.00%, 5/1/12 .............................................................................. 96,383
35,000 Cass County, MO, IDA, 7.38%, 10/1/22 ......................................................... 36,935
250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 7/15/24 ........ 38,705
100,000 Corona, CA, COP, Vista Hospital Systems Inc. 8.38%, 7/1/11 ................................... 102,451
100,000 Dekalb County, GA, Housing Authority, Multi Family Housing, RB, Regency Woods
Project, Junior Subordinate Lein, 10.00%, 1/1/26 ........................................... 97,515
45,000 Escambia, FL, Housing Corporation, Wellington Arms Project, Series B, 9.00%, 9/1/16 .......... 39,519
75,000 Florence County, SC, IDA, RB, Stone Container Corporation, 7.38%, 2/1/07 ..................... 79,192
500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 1/1/26 ....................................... 80,455
75,000 Hildago County, TX, Health Services, Mission Hospital Inc Project, 6.88%, 8/15/26 ............ 76,740
50,000(dd)Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste
Tire Project, 7.88%, 4/1/11 ................................................................. 19,163
45,000 Illinois Health Facilities Authority, Midwest Physician Group Ltd Project, RB, 8.13%,
11/15/19 ................................................................................... 47,203
35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.63%, 10/1/22 .............................. 37,949
50,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.25%, 12/15/14 ......... 52,497
50,000 Los Angeles, CA, Regional Airport, Continental Airlines, AMT, 9.25%, 8/1/24 .................. 55,527
630,000 Marengo County, AL, Port Authority Facilities, RB, CAB, Series A, 3/1/19 ..................... 134,467
75,000 Maryland Economic Development Corporation, Nursing Facilities Mortgage RB,
Ravenwood Healthcare, Series A, 8.38%, 8/1/26 .............................................. 73,624
90,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical
Center, 8.85%, 8/15/14 ..................................................................... 97,078
100,000(d) Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00%, 5/1/09 .................. 49,336
50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.25%, 7/1/22 ............ 52,533
75,000 Perdido, FL, Housing Corporation, RB, Series B. 9.25%, 11/1/16 ................................ 75,050
30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.25%, 7/1/18 ........................ 30,925
60,000 Port Chester, NY, IDA, Nadal Industries Inc Project, 7.00%, 2/1/16 ............................ 59,558
75,000 San Antonio, TX, HFC, Multi Family Housing, RB, Agape Metro Housing Project, Series A,
8.63%, 12/1/26 .............................................................................. 74,910
75,000 San Bernardino, CA, San Bernardino Community Hospital, RB, 7.88%, 12/1/19 ..................... 76,331
100,000 San Bernardino County, CA, COP, Series PA-38, MBIA Insured IFRN*, 9.66%, 7/1/16, Rule 144A
Security (restricted as to resale except to qualified institutions) ......................... 96,028
40,000 San Joaquin Hills, CA, TCA, Toll Road Revenue, 7.00%, 1/1/30 .................................. 42,866
60,000 San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN*, MBIA insured,
5.72%, 8/1/16, Rule 144A Security (restricted as to resale except to qualified institutions). 49,886
150,000 Savannah, GA Economic Development Authority Revenue, ETM, CAB, 12/1/21 ........................ 27,939
</TABLE>
4
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
STATEMENT OF INVESTMENTS
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Issue(degree) Value
------ ------------- -----
<S> <C> <C>
$ 45,000 Schuylkill County, PA, IDA Resouce Recovery, Schuylkill Energy Res Inc. AMT, 6.50%,
1/1/10 ..................................................................................... $ 43,211
15,000(D) Troy, NY, IDA, Hudson River Project, 11.00%, 12/1/14 .......................................... 6,150
75,000(DD)Villages at Castle Rock, CO, Metropolitan District #4, 8.50%, 6/1/31 .......................... 30,811
25,000 Wayne Ml, AFR, Northwest Airlines Inc. 6.75%, 12/1/15 ......................................... 25,540
----------
Total Investments (Cost $2,064,319**) ......................................................... $1,990,274
==========
</TABLE>
*Cost is approximately the same for income tax purposes.
**Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear
an inverse relationship to the interest rate on another security or the
value of an index. Rates shown are at December 31, 1996.
(d)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.
(dd)Non-income producing security.
Legend
(degree)Issue 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
RB Revenue Bond
TCA Transportation Corridor Agency
URA Urban Renewal Agency
See Notes to Financial Statements.
5
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANVIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
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.
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.
6
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANVIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
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 voluntarily waived fees and
reimbursed expenses of $64,859 for the year ended December 31, 1996.
The Manager and the Fund's Trustees are cooperating in an investigation
being conducted by the Securities and Exchange Commission concerning an
affiliated fund. The Commission's staff indicated an intention to recommend to
the Commission the commencement of certain proceedings.
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 $7,909 for
the year ended December 31, 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.
3. Trustees' Fees
All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets.
4. Shares of Beneficial Interest
As of December 31, 1996, there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$2,108,862. Transactions in shares of beneficial interest were as follows:
7
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANVIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------ ------------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold ................... 1,912,593 $12,834,095 137,251 $921,557
Shares issued on reinvestment
of dividends ................ 11,925 80,347 8,305 54,195
Shares redeemed ...............(1,859,933) (12,513,226) (104,760) (710,959)
--------- ----------- ------- --------
Net increase .............. 64,585 $ 401,216 40,796 $264,793
========= =========== ======= ========
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. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.
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
$105,460 at December 31, 1996 (5.7% of net 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 $6,150 at December 31, 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.
Subsequent to year-end the Fund was party to an agreement whereby certain
related bonds owned by an affiliate are subject to repayment under a debt
assumption agreement. The agreement allows the affiliate to allocate a portion
of the debt services it receives to the URA Bond. In exchange the Fund forfeits
certain rights it had as holder of the URA bond. There is uncertainty as to the
timing and amounts of debt assumption payments. The value of this bond was
$49,336. The bond is valued at 49.34% of face value at December 31, 1996 under
methods determined by the Board of Trustees.
During the year ended December 31, 1996, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$2,873,219 and $2,720,760, respectively.
As of December 31, 1996 net unrealized depreciation of portfolio securities
amounted to $74,045, composed of unrealized appreciation of $81,329 and
unrealized depreciation of $155,374.
The Fund has capital loss carryforwards to offset future capital gains as
follows:
Amount Expiration
------ ----------
$33,500 12/31/1998
17,500 12/31/1999
33,100 12/31/2000
54,300 12/31/2002
40,000 12/31/2003
-------
$178,400
========
8
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
NOTES TO FINANVIAL STATEMENTS (continued)
December 31, 1996
- --------------------------------------------------------------------------------
6. Selected Financial Information
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $7.07 $5.92 $7.27 $7.30 $7.29
Income from investment operations:
Net investment income ................................... 0.47 0.34 0.43 0.39 0.43
Net realized and unrealized gains (losses) on
investments ........................................... (0.21) 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 ...................... (0.47) (0.34) (0.43) (0.39) (0.43)
----- ----- ----- ----- -----
Net asset value, end of period ............................ $6.86 $7.07 $5.92 $7.27 $7.30
===== ===== ===== ===== =====
Total Return .............................................. 4.05% 25.70% (12.92%) 5.11% 6.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) ................... 1,858 1,457 979 1,087 1,050
Ratios to average net assets:
Expenses .............................................. 2.49%* 2.50%* 2.50%* 2.50%* 2.87%*
Net investment income ................................. 6.85%* 5.15%* 6.70%* 5.40%* 5.89%*
Portfolio turnover rate ................................... 139.26% 43.51% 75.31% 84.89% 100.21%
BANK LOANS
Amount outstanding at end of period (000 omitted) ......... $ 228 $ 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) ........................................... 237 183 156 145 144
Average amount of debt per share during the period ........ $ - $0.33 $ - $ - $ 0.40
*These ratios are after expense reimbursements of 4.59%, 6.22%, 6.20%, 5.76% and
4.83%, for each of the years ended December 31, 1996, 1995, 1994, 1993 and
1992, respectively.
</TABLE>
9
<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
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, 1996, 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 in the period then ended. These financial statements and
selected financial information are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements 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. Our procedures included
confirmation of securities owned as of December 31, 1996 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement 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, 1996, 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 21, 1997
10
<PAGE>
(left column)
FUNDAMENTAL FIXED-INCOME FUND
90 Washington Street
New York, New York 10006
1-800-322-6864
Independent Auditors
McGladrey & Pullen, LLP
New York, New York 10017
Legal Counsel
Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
919 Third Avenue
New York, New York 10022
This report and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. This report is not
authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an
effective prospectus.
(right column)
Annual Report
December 31, 1996
FUNDAMENTAL
FIXED-INCOME FUND
High-Yield
Municipal Bond Series
(LOGO) FUNDAMENTAL
Fundamental Family of Funds
