As filed via EDGAR with the Securities and Exchange Commission on March 1, 1999.
File No. 33-12738
ICA No. 811-5063
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 20 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22 [X]
Fundamental Fixed Income Fund
(Exact name of registrant as specified in charter)
67 Wall Street
New York, New York 10005
(Address of principal executive office)
(212) 809-1855
(Area code and telephone number)
Copies to:
Stephen C. Lesie Carl Frischling, Esq.
Cornerstone Equity Advisors, Inc. Kramer Levin Naftalis & Frankel LLP
67 Wall Street 919 Third Avenue
New York, New York 10005 New York, New York 10022
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to
pursuant to paragraph (b) of paragraph (b)
[X] 60 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(1) of paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(2) of paragraph (a)(2) rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
The Fundamental U.S. Government Strategic Income Fund (the "Fund"), is
a no-load series of Fundamental Fixed-Income Fund (the "Trust").
Prospectus dated April 30, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
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Page
Risk/Return Summary............................................................
Financial Highlights...........................................................
Investment Objective and Policies..............................................
Investment Techniques..........................................................
Investment Risks...............................................................
Management ....................................................................
Pricing of Fund Shares.........................................................
Purchase of Shares.............................................................
Redemption of Shares...........................................................
Distribution Agreement and Marketing Plan......................................
Dividends and Tax Matters......................................................
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<PAGE>
RISK/RETURN SUMMARY
Investment Objective
The Fund seeks to provide a high level of current income with minimum risk of
principal and relatively stable share price.
Principal Investment Strategies
The Fund will attempt to achieve its objective by investing its assets in
securities issued by the U.S. Government.
Principal Risks of Investing in the Fund
There is no guarantee that the Fund will achieve its stated objective. In fact,
you could lose money by investing in the Fund. In making your investment
decision, you should understand that the Fund's net asset value (NAV), yield,
and total return may be adversely affected by any or all of the following
factors:
o Interest rate risk - Changes in interest rates cause the prices and yields
of debt securities to fluctuate;
o Credit risk - Certain issuers of securities may fail to make timely
payments of interest and principal on the Fund' investments;
o Concentration risk - Because the Fund will invest its assets mainly in the
government issuers, it is subject to greater losses arising from adverse
political or economic events affecting such securities; and
o Diversification risk - Because the Fund may invest a greater percentage of
its assets in a few issuers, there is an increased likelihood that a few
issuers of securities may cause losses to the Fund.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Fund.
The bar chart shows the performance of the Fund for each of the last 6 calendar
years (since the Fund's inception). The table shows how the Fund' average annual
return for 1, 5, and 7 years compare with those of a broad measure of market
performance.
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Bar Chart
The bar chart illustrates how the Fund' returns vary from year to year. As
always, past performance is no way to predict future performance.
1998 - (4.61)%
1997 - 5.51%
1996 - 5.02%
1995 - 15.43%
1994 - (25.57)%
1993 - 8.14%
The Fund' best performance for one quarter was 7.50% for the quarter ended
12/31/95. The Fund' worst performance for one quarter was (13.82)% for the
quarter ended 6/1/94.
Average Annual Total Returns Table
The table below shows the Fund' average annual total returns for the 1, 5, and 7
year periods of the Fund's existence in comparison to the Lehman Brothers 1-3
Year Government Bond Index for the same periods. The table provides some
indication of the risks of investing in the Fund by showing how the Fund's
average annual total returns for the periods noted compare with that of a broad
measure of market performance. As always, past performance is no way to predict
future performance.
Average Annual Returns as One Year 5 Years Since inception
of 12/31/98 on 03/02/92
Fundamental Fixed-Income (4.61)% (1.91)% 0.88%
Fund U.S. Government
Strategic Income Fund
Lehman Brothers 1-3 Year
Government Bond Index
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Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)............................................... __%
Maximum Deferred Sales Charge (Load) (as a percentage of __).................... __%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other Distributions]....................................................... __%
Redemption Fee (as a percentage of amount redeemed, if applicable).............. __%
Exchange Fee.................................................................... __%
Maximum Account Fee............................................................. __%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets).... __%
Management Fees................................................................. __%
Distribution [and/or Service] (12b-1) Fees...................................... __%
Other Expenses.................................................................. __%
------------------------------ --%
------------------------------ --%
------------------------------ --%
Total Annual Fund Operating Expenses............................................ __%
</TABLE>
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
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<PAGE>
The Example does no reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads) were
included, your costs would be higher.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following information is intended to assist in your understanding of
the Fund's performance for the time periods noted. The information has been
audited by McGladrey & Pullen, LLP, independent public accountants, in
connection with their audit of the Fund's financial statements. McGladrey &
Pullen's report on the Fund's financial statements for the year ended December
31, 1998 appears in the Fund's Annual Report which is available upon request
without charge.
[INSERT FINANCIALS]
INVESTMENT OBJECTIVE AND POLICIES
The Fund's objective is to provide high current income with minimum risk
of principal and relative stability of net asset value. The Fund's investment
objective is deemed fundamental and may not be changed without shareholder
approval. As used in this Prospectus, the phrase majority of the Fund's
outstanding shares means the vote of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy at such a meeting or (2)
more than 50% of the Fund's outstanding shares. There can, of course be no
assurance that the Fund will achieve its investment objective. In seeking its
objective, the Fund invests primarily in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities (collectively "Government
Securities"). Government Securities in which the Fund may invest include:
Direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
certificates of indebtedness, notes and bonds ("Direct Obligations"); and
obligations of U.S. Government agencies or instrumentalities, such as Federal
Home Loan Banks, Farmers Home Administration, Federal Farm Credit Banks, Federal
National Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA"), Resolution Funding Corp. ("RFCO"), Financing Corp. ("FICO") and
Federal Home Loan Mortgage Association ("FHLMC") (hereinafter collectively
referred to as "Agencies").
The obligations of Government Securities which the Fund may buy are
backed in a variety of ways by the U.S. Government or its agencies or
instrumentalities. While the U.S. Government provides financial support to such
agencies and instrumentalities, no assurance can be given that it will always do
so, since it is not obligated by law. The Fund will invest in such securities
only when it is satisfied that the credit risk with respect to the issuer is
minimal. Some of these obligations, such as GNMA mortgage-backed securities and
obligations of the Farmers Home Administration which represent part ownership in
a pool of mortgage loans, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury.
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<PAGE>
Obligations of Federal Home Loan Banks and the Farmers Home Administration are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities. Obligations of Federal Home Loan
Banks, Farmers Home Administration, Federal Farm Credit Banks, FNMA, RFCO, FICO
and FHLMC are backed by the credit of the agency or instrumentality issuing the
obligations.
The Fund intends to minimize the risk of principal and provide relative
stability of net asset value by limiting the average weighted duration of its
investment portfolio to three years or less. It is the policy of the Fund to
limit the duration by the use of hedging techniques, so that the average
weighted duration of the Fund's portfolio is three years or less. The Fund may
engage in certain options and futures transactions only as a defensive measure
(i.e., as a hedge and not for speculation) to improve the Fund's liquidity and
stabilize the value of its portfolio. The Fund is not a money market fund and
cannot guarantee that its share price will not fluctuate. Unlike bank deposits
and certificates of deposit, the Fund does not offer a fixed rate of return or
provide the same stability of principal. The value of your shares when you
redeem them may be more or less than your original cost.
The Fund may invest in repurchase agreements, cash or money market
instruments or such other high quality debt instruments as is consistent with
its investment objective. In addition, the Fund is authorized for the purpose of
increasing its return or hedging its interest rate exposure, to engage in any
one or more of the specialized investment techniques and strategies described
below under the caption "Certain Investment Techniques and Policies".
Securities issued by the U.S. Government differ with respect to maturity
and modality of payment. The two types of payment modes are coupon paying and
capital appreciation. Coupon paying bonds and notes pay a periodic interest
payment, usually semi-annually, and a final principal payment at maturity.
Capital appreciation bonds and Treasury bills accrue a daily amount of interest
income, and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payment. This is referred to as "stripping". The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon" bonds. Current Federal tax law
requires the Fund daily to accrue as income a portion of the original issue
discount at which each zero coupon bond was purchased. Amortization of this
discount has the effect of increasing the Fund's income, although it receives no
actual cash payments. The Fund distributes this income to its shareholders as
income dividends and such income is reflected in the Fund's quoted yield. See
below for additional discussion concerning the effects of the amortization of
the discount.
The U.S. Government facilitates the "stripping" of coupon bonds by
providing for the periodic coupon payments and the principal payment to be kept
separate in the Federal Reserve and Treasury bookkeeping systems, and allows
stripped bonds to be reconstituted into coupon bonds by delivering all of the
securities representing the coupons and principal payment to the system.
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<PAGE>
Since the value of debt securities owned by the Fund will fluctuate
depending upon market factors and generally inversely with prevailing interest
rate levels, the net asset value of the Fund will fluctuate. The Fund is not
limited as to the maturities of the securities in which it may invest. Debt
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities. The potential for such
fluctuation may be reduced, however, to the extent that the Fund engages in
hedging techniques. The Fund's current operating policy is to seek to achieve a
weighted portfolio duration of three years or less. Duration is expressed in
years and is that point in time representing the half-life of the present value
of all cash flows expected from a bond over its life (from coupon payments,
sinking fund, if any, principal at maturity, etc.). Duration provides a
yardstick to bond price volatility with respect to changes in rates. As maturity
lengthens or as the coupon rate or yield-to-maturity is reduced, volatility
increases. Duration captures all three factors and expresses them in a single
number.
It should be noted that there are several methods of calculating the
duration of a security or portfolio of securities. These methods may yield
different results. The Fund applies different hedging techniques resulting in
different outcomes depending on what duration is calculated. Any one method of
calculating a security's duration will in turn give different results as
interest rates change and the market value of the security changes. The duration
equivalent of derivatives such as bond futures contracts and options futures
contracts used by the Fund (see "Certain Investment Techniques and
Policies-Futures Contracts and Options on Futures Contracts") can vary
significantly with changes in interest rates and market prices. Such variation
can significantly affect the result of a portfolio duration calculation. For
example: the Fund's management might use one set of assumptions and method of
calculating duration that would indicate that the weighted average portfolio
duration of the Fund was less than three years at a particular point in time,
while other assumptions and/or methodology could indicate a substantially
greater duration implying different steps to be taken by Fund management. (See
"Basis Risk" and "Risks of Writing Options"). Certain U.S. Government securities
such as Collateralzied Mortgage Obligations ("CMOs") have cash flows which can
vary according to the rates of principal payments (including prepayments) on the
related underlying mortgage assets. The coupon and therefore the cash flows of
CMOs can also vary either directly or inversely according to moves of an
applicable index such as LIBOR, or a multiple of the applicable index. Since the
cash flows associated with CMOs can vary with principal payment speeds and
changes in the applicable index, the calculation of duration of a CMO depends on
the assumptions for future values of the index and/or speeds of principal
payments. A particular assumption by Fund management concerning future interest
rates and prepayment rates may cause it to calculate duration or employ a method
to calculate duration that would result in a significantly different amount of
futures and options being used for hedging purposes, than would be the case if
other assumptions concerning future interest rates were employed. (See "U.S.
Government Guaranteed Mortgage-Related Securities and the Risk Factors Relating
to such Investments".)
The Fund's current operating policy of attempting to achieve a weighted
portfolio duration of three years or less through the investment policies and
strategies described above and elsewhere involve risks which may not be incurred
by other mutual funds which do not follow
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<PAGE>
these policies or employ these strategies. Specifically, there may be other
mutual funds which attempt to minimize fluctuations in net asset value by
limiting the maturities of their portfolio securities, by not using leverage and
not engaging in futures and options transactions. The policies and strategies
employed by the Fund, including the various uncertainties associated with the
various methods and assumptions required for the calculation of portfolio
duration, may cause a decline in the Fund's net asset value greater than that of
other mutual funds in response to an unanticipated change in prevailing interest
rates.
At any given time, there is a relationship between the yield of a U.S.
Government obligation and its maturity. This is called the "yield curve." Since
U.S. Government debt securities are assumed to have negligible credit risk, the
main determinant of yield differential between individual securities is
maturity. When the yield curve is such that longer maturities correspond to
higher yields, the yield curve has a positive slope and is referred to as a
"normal" yield curve. At certain times shorter maturities have higher yields and
the yield curve is said to be "inverted." Even when the yield curve is "normal"
(i.e. has a positive slope), the relationship between yield and maturity for
some U.S. Government strip securities is such that yields increase with maturity
up to some point and then, after peaking, decline so that the longest maturities
are not the highest yielding. This is called a "humped" curve. The highest
yielding point on the yield curve for such securities is referred to as the
"strippers hump."
Zero coupon Treasury securities do not entitle the holder to any
periodic payments of interest prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and will be
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities which make periodic
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.
Current Federal tax law requires that a holder (such as the Fund) of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund received no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Manager will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
The Fund is diversified and, accordingly, may not purchase the
securities of any one issuer, other than obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, if, immediately after such
purchase, (i) more than 5% of the value of the Fund's total assets would be
invested in such issuer, or (ii) the Fund would own more than 10%
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<PAGE>
of the outstanding voting securities of such issuer; except that up to 25% of
the value of the Fund's total assets may be invested without regard to such
limitations.
INVESTMENT TECHNIQUES
Futures Contracts and Options on Futures Contracts
The Fund may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or contracts based on a financial index of
Government Securities ("futures contracts") and may purchase and write put and
call options to buy or sell futures contracts ("options on futures contracts").
A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities called for by the contract at a
specified date. The purchaser of a futures contract on an index agrees to take
or make delivery of an amount of cash equal to the difference between a
specified dollar multiple of the value of the index on the expiration date of
the contract ("current contract value") and the price at which the contract was
originally struck. Although most futures contracts call for actual delivery or
acceptance of debt securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Options on futures
contracts to be written or purchased by the Fund will be traded on an exchange
or over-the-counter. Unlike a futures contract, which requires the parties to
the contract to buy or sell a security on a set date, an option on a futures
contract, for example, merely entitles its holder to decide on or before a
future date whether to enter into such a contract. If the holder decides not to
enter into the contract, all that is lost is the premium paid for the option.
Because an option gives the buyer the right to enter into a contract at a set
price for a fixed period of time, its value will change daily. That change will
be reflected in the net asset value of the Fund. These investment techniques
will be used to hedge against anticipated future changes in interest rates which
otherwise might either adversely affect the value of the Fund's portfolio
securities or adversely affect the price of securities which the Fund intends to
purchase at a later date. Options and futures can be volatile investments and
involve certain risks. If the Fund's Manager applies a hedge at an inappropriate
time or judges interest rates incorrectly, options and futures strategies may
lower the Fund's return. The Fund could also experience losses if the prices of
its options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an illiquid
secondary market. See the Fund's Statement of Additional Information for further
discussion of the use, risks and costs of futures contracts and options on
futures contracts.
In order to hedge against anticipated changes in interest rates, the
Fund will engage in the use of futures contracts and related options solely for
bona fide hedging purposes, as defined by the Commodity Futures Trading
Commission, and not for speculation.
Options on Portfolio Securities
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<PAGE>
The Fund, in seeking to generate high current income, may write covered
call options on certain of its portfolio securities at such time and from time
to time as Fund management shall determine to be appropriate and consistent with
the investment objective of the Fund. A covered call option means that the Fund
owns the security on which the option is written. Generally, the Fund expects
that options written by it will be conducted on recognized securities exchanges.
In certain instances, however, the Fund may purchase and sell options in the
over-the-counter market ("OTC Options"). The Fund's ability to close options
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions will fail to meet their
obligations to the Fund. In addition, the staff of the Securities and Exchange
Commission has taken the position that OTC Options and the assets used as
"cover" should be treated as illiquid securities. Accordingly, there is a
current fixed limit of 10% of the Fund's assets upon which such options may be
written.
The Fund will receive a premium (less any commissions) from the writing
of such contracts, and it is believed that the total return to the Fund can be
increased through such premiums consistent with the Fund's investment objective.
The writing of option contracts is a highly specialized activity which involves
investment techniques and risks different from those ordinarily associated with
investment companies, although the Fund believes that the writing of covered
call options listed on an exchange or traded in the over-the-counter market,
where the Fund owns the underlying security, tends to reduce such risks. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions. Such
transactions involve the sale of Government Securities held by the Fund, with an
agreement that the Fund will repurchase such securities at an agreed upon price
and date. The Fund will employ reverse repurchase agreements when necessary to
meet unanticipated net redemptions so as to avoid liquidating other portfolio
investments during unfavorable market conditions, or as a technique to enhance
income. At the time it enters into a reverse repurchase agreement, the Fund will
place in a segregated custodial account high-quality liquid debt securities
having a dollar value equal to the repurchase price. The Fund will utilize
reverse repurchase agreements when the interest income to be earned from
portfolio investments is greater than the interest expense incurred as a result
of the reverse repurchase transactions.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities in an amount up to 33-1/3% of total assets to broker-dealers, major
banks or other recognized domestic institutional borrowers of securities not
affiliated with the Manager. The borrower at all times during the loan must
maintain cash or cash equivalent collateral or provide to the Fund an
irrevocable letter of credit equal in value to at least 100% of the value of the
securities
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<PAGE>
loaned. During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities, and the Fund may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit.
Borrowing.
The Fund may borrow from banks and enter into reverse repurchase
agreements up to 33-1/3% of the value of its total assets (computed at the time
the loan is made) to take advantage of investment opportunities and for
temporary, extraordinary or emergency purposes. See "Reverse Repurchase
Agreements" above. The Fund may pledge up to 33-1/3% of its total assets to
secure these borrowings. If the Fund's asset coverage for borrowings falls below
300%, the Fund will take prompt action to reduce its borrowings. If the Fund
borrows to invest in securities, any investment gains made on the securities in
excess of interest paid on the borrowing will cause the net asset value of the
Fund's shares to rise faster than would otherwise be the case. On the other
hand, if the investment performance of the additional securities purchased fails
to cover their cost (including any interest paid on the money borrowed) to the
Fund, the net asset value of the Fund's shares will decrease faster than would
otherwise be the case. This is the speculative characteristic known as
"leverage." As long as the interest rate paid by the Fund for borrowing via the
use of reverse repurchase agreements is less than the interest rate the Fund can
earn on its securities investments, these transactions will represent an
essential element of the Fund's objective of achieving relatively high current
income. As discussed above, this speculative characteristic known as leverage
increases the amount of fluctuation in the Fund's price given any particular
change in the value of its securities holdings. Thus, all of the sources of risk
inherent in the Fund's strategy of reducing interest rate risk by the use of
hedging with futures contracts (see the sub-heading "Basis Risk") to bring the
weighted duration of the Fund's portfolio to three years or less, will be
magnified to the extent that the borrowing done by the Fund results in leverage.
INVESTMENT RISKS
Special Risk Factors Relating to Futures and Options
There are certain risks in investing in options and interest rate
futures contracts. With respect to the use of futures contracts, although the
Fund intends to purchase or sell futures contracts only if there is an active
market for such contracts, no assurance can be given that a liquid market will
exist for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or the Fund determines not to close a
futures position in anticipation of
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<PAGE>
adverse price movements, the Fund will be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may offset partially or
completely losses on the futures contract.
In addition, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract. However, the risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
The Manager could also be incorrect in its expectations about the
direction or degree of various interest rate movements in the time span within
which the movements take place. Predicting interest rate direction involves
skills and techniques different from those used in most investment strategies,
and there is no guarantee that such predictions will be accurate.
The risk the Fund assumes when it buys an option is the loss of the
premium paid for the option. In order to benefit from buying an option, the
price of the underlying security must change sufficiently to cover the premium
paid, the commissions paid, both in the acquisition of the option and in a
closing transaction, or the exercise of the option and subsequent sale of the
underlying security. (The Fund could enter into a closing transaction by
purchasing an option if it had previously sold one, or by selling an option if
it had previously bought one, with the same terms as the option previously
acquired.) Nevertheless, the price change in the underlying security does not
assume a profit, because prices in the options market may not reflect such a
change.
The risk involved in writing options on futures contracts the Fund owns,
or on securities held in its portfolio, is that there could be an increase in
the market value of such contracts or securities. In such case, the option would
be exercised and the asset would be sold at a lower price than the cash market
price. To some extent, the risk of not realizing a gain could be reduced by
entering into a closing transaction. However, the cost of closing the option and
terminating the Fund's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Fund might not be
able to close the option because of insufficient activity in the options market.
The risk involved in writing options (or selling futures) is not limited to the
value of the options, since the maximum potential loss to the Fund is the cost
of closing out the short options (or futures) positions which theoretically has
no limit.
Finally, in deciding whether to use futures contracts or options,
consideration must be given to brokerage commission costs, which are normally
higher than those associated with general securities transactions.
Risks of Writing Options
The successful use of the foregoing investment techniques depends on the
ability of Fund management to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures or option
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contracts or may realize losses and be in a worse position than if such
strategies had not been used. The correlation between movements in the price of
such instruments and movements in the prices of the securities hedged or used
for cover will not be perfect and could produce unanticipated losses. The Fund's
ability to dispose of its positions in futures contracts and options will depend
on the availability of liquid markets in such instruments. Markets in options
and futures with respect to a number of Government Securities are relatively new
and still developing. It is impossible to predict the amount of trading interest
that may exist in various types of futures and options contracts. If a secondary
market does not exist with respect to an option purchased or written by the Fund
over-the-counter, it might not be possible to effect a closing transaction in
the option (i.e. dispose of the option) with the result that (i) an option
purchased by the Fund would have to be exercised in order for the Fund to
realize any profit and (ii) the Fund may not be able to sell portfolio
securities covering an option written by the Fund until the option expires or it
delivers the underlying futures contract upon exercise. Therefore, no assurance
can be given that the Fund will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, the Fund's ability to engage in
options and futures transactions may be limited by tax considerations. See "Tax
Matters".
Basis Risk
The use of futures contracts to shorten the weighted average duration of the
Fund's portfolio, while reducing the exposure of the Fund's portfolio to
interest rate risk does subject the Fund's portfolio to basis risk. Basis refers
to the relationship between a futures contract and the underlying security. In
the case of futures contracts on U.S. Treasury Bonds, the contract specifies
delivery of a "bench-mark" 8% 20 year U.S. Treasury Bond. Any outstanding
treasury with a maturity of more than 15 years is deliverable against the
contract, with the principal amount per contract adjusted according to a formula
which takes into account the coupon and maturity of the treasury bond being
delivered. This means that at any given time there is one treasury issue that is
"the cheapest to deliver" against the contract. The supply and demand of the
available float of treasury securities determines which treasury security is
cheapest to deliver at any given time. This, combined with the supply and demand
for futures relative to the underlying cash securities markets, causes the
relationship between the cash security markets and the futures markets to
exhibit perturbations of variance from an exact one-to-one correlation. The Fund
could experience losses if the value of the prices of the futures positions the
Fund has entered into are poorly correlated with the Fund's other investments.
For example, on a day that the price on a treasury bond deliverable
against the futures contract declined by ten points, the futures contract might
decline by nine or eleven points. In this example, a nine point decline in the
price of a futures contract would not fully offset the price decline in the cash
security price. This would cause a downward fluctuation in the value of the
Fund's portfolio. Likewise, a basis fluctuation whereby the futures prices fell
more or rose less than the cash securities prices due to basis change would
cause an upward fluctuation in the value of the Fund's portfolio.
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U.S. Government Guaranteed Mortgage-Related Securities and the Risk Factors
Relating to such Investments
Included in the U.S. Government securities the Fund may purchase are
pass-through sccurities, collateralized mortgage obligations, multi-class
pass-through securities and stripped mortgage-backed securities, all of which
are described below. Mortgages backing these securities purchased by the Fund
include, among others, conventional 30-year fixed rate mortgages, graduated
payment mortgages, 15-year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayment (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium (i.e., a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not have been fully amortized at the time the obligation is repaid. The
opposite is true for pass-throughs purchased at a discount. The Fund may
purchase mortgage-related securities at a premium or at a discount. Principal
and interest payments on the mortgage-related securities are Government
guaranteed to the extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or of the Fund's
shares.
(a) GNMA Pass-Through Securities. The Government National Mortgage
Association ("GNMA") issues mortgage-backed securities ("GNMA Certificates")
which evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that the Fund purchases are the "modified pass-through" type, which
entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment
of principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the United States. GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of
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principal investment long before the maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee, except to the extent that the Fund has purchased the certificates at
a premium in the secondary market.
(b) FHLMC Pass-Through Securities. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of Title III of the
Emergency Home Finance Act of 1970. Its purpose is to promote development of a
nationwide secondary market in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities ("FHLMC
Certificates"), mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FHLMC guarantees timely monthly payment of interest on
PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith and
credit of the United States.
(c) FNMA Pass-Through Securities. The Federal National Mortgage
Association ("FNMA") was established in 1938 to create a secondary market in
mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA Certificates
in that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FHMA guarantees timely
payment of interest and principal on FNMA Certificates. The FNMA guarantee is
not backed by the full faith and credit of the United States.
(d) Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities. Collateralized mortgage obligations ("CMOs") are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other mortgage-backed securities. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on underlying collateral provide
the funds to pay debt service on the CMO or make scheduled distributions on the
multi-class pass-through security. The Fund may invest in CMOs and multi-class
pass-through securities (collectively CMOs unless the context indicates
otherwise) issued by agencies or instrumentalities of the U.S. Government.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the underlying mortgages may be allocated among
the several
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classes of a series of a CMO in many ways. One or more tranches of a CMO may
have coupon rates which reset periodically at a specified increment over an
index such as the London Interbank Offered Rate ("LIBOR"). These floating rate
CMOs are typically issued with lifetime caps on the coupon rate thereon. The
Fund may also invest in inverse or reverse floating CMOs. Inverse or reverse
floating CMOs constitute a tranche of a CMO with a coupon rate that moves in the
reverse direction to an applicable index such as LIBOR. Accordingly, the coupon
rate thereon will increase as interest rates decrease. Inverse or reverse
floating CMOs are typically more volatile than fixed or floating rate tranches
of CMOs. Investments in inverse or reverse floating CMOs would be purchased by
the Fund to attempt to protect against a reduction in the income earned on the
Fund investments due to a decline in interest rates. The Fund would be adversely
affected by the purchase of such CMOs in the event of an increase in interest
rates since the coupon rate thereon will decrease as interest rates increase,
and, like other mortgage-related securities, the value will decrease as interest
rates increase.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of an applicable index such as LIBOR. The effect of the coupon varying
inversely to a multiple of an applicable index creates a leverage factor. This
leverage factor magnifies the extent to which the successful use of hedging
techniques depends on Fund management's ability to both correctly forecast
interest movements and the relationship between long and short-term interest
rates. An accurate estimate of the amount of futures and options required to
achieve a desired weighted average portfolio duration is also extremely
sensitive to management's ability to forecast interest rate movements and
relationships. Furthermore, the markets for inverse floating rate CMOs with
highly leveraged characteristics may at times be very thin. The Fund's ability
to dispose of its positions in such securities will depend on the degree of
liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity. It should be noted that inverse floaters based on
multiples of a stated index are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and loss of principal.
The Fund may also invest in two-tiered index floating rate bonds
("TTIBs"). The term two-tiered refers to the two coupon levels that a TTIB
bond'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 strike, the TTIB coupon resets to a formula similar to an inverse floating
rate note (see below for a discussion of the risk considerations which may be
associated with investing in inverse floating rate notes). This floating rate
coupon is referred to as the "second tier". The TTIB is designed for investors
who believe that the underlying index will stay at current levels or will
increase up to the strike level over the life of the security. The Fund would be
adversely affected by the purchase of such CMOs in the event of an increase in
interest rates above the strike level since the floating rate coupon will
decrease, possibly as low as zero, and, like other mortgage related securities,
the value will decrease. Investments in TTIBs would be purchased by the Fund to
increase the income earned by the Fund's investments in a stable interest rate
environment and to attempt to protect against a reduction in the income earned
due to a decline in interest rates. TTIBs are typically more volatile than fixed
rate tranches of CMOs.
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The Fund's objective of providing high current income from U.S.
Government securities while hedging with interest rate derivatives to limit
portfolio duration requires a current operating policy in which the Fund
maintains substantial short positions in interest rate futures and options on an
ongoing basis. The prices of such interest rate futures and options are
influenced by both current market conditions and expectations of future changes
in interest rates. When the preponderance of future expectations of interest
rate changes and the relationship between current and forward levels of the
interest rate derivatives market is in one direction, the performance of a
portfolio which is long only non-derivative fixed income securities and short
interest rate derivatives could be adversely affected by the unbalance created.
Management believes this imbalance may be mitigated by purchasing
securities that tend to benefit significantly when future movements in interest
rates are in the opposite direction of what price levels indicate is the
preponderance of fututre expectation. CMO derivatives, such as TTIBs and inverse
floating rate notes, are currently the only securities issued by the United
States Government or its agencies and instrumentalities which have coupon
setting mechanisms and other characteristics which can counter-balance the
impact of the preponderance of the expectations as to the direction of interest
rates. Thus, it can be anticipated that under certain market conditions, CMO
derivative securities, such as those mentioned above, will comprise a
substantial portion of the Fund's portfolio.
(e) Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed
Securities ("SMBS") are derivative multi-class mortgage securities. The Fund may
invest in SMBS issued by agencies or instrumentalities of the U.S. Government.
There are generally two classes of SMBS, one of which (the "IO class") entitles
the holders thereof to receive distributions consisting solely or primarily of
all or a portion of the interest on the underlying pool of mortgage loans or
mortgage-backed securities ("Mortgage Assets") and the other of which (the "PO
class") entitles the holders thereof to receive distributions consisting solely
or primarily of all or a portion of the principal of the underlying pool of
Mortgage Assets. The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the yield to maturity
of IOs or POs, respectively. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, an investor may incur
substantial losses. Conversely, if the underlying Mortgage Assets experience
slower than anticipated prepayments of principal, the yield on a PO class will
be affected more severely than would be the case with a traditional
mortgage-backed security.
Repurchase Agreements. The Fund may enter into repurchase agreements
involving Government Securities. Under a repurchase agreement, the Fund acquires
a debt instrument for a relatively short period (usually not more that one week)
subject to the obligation of the seller to repurchase and the Fund to resell
such debt instrument at a fixed price. The resale price is in excess of the
purchase price in that it reflects an agreed-upon market interest rate effective
for the period of time during which the Fund's money is invested. The Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to the purchase price including accrued interest earned on the
underlying Government Securities. The
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instruments held as collateral are valued daily, and as the value of instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss.
Special Risk Factors Relating to Zero Coupon Bonds
The Fund may invest in zero coupon bonds and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. Fund management anticipates that investments in zero
coupon securities and pay-in-kind bonds will not ordinarily exceed 25% of the
value of the Fund's total assets.
Special Risk Factors Relating to Inverse Floating Rate Instruments
Certain securities that may be purchased by the Fund, such as those with
interest rates that flucutate directly or indirectly (inverse floaters) based on
multiples of a stated index, are designed to be highly sensitive to changes in
interest rates. Changes in interest rates inversely affect the rate paid on
inverse floating rate instruments ("inverse floaters"). The inverse floaters'
price will be more volatile than that of a fixed rate bond. Additionally, some
inverse floaters contain a "leverage factor" whereby the interest rate moves
inversely by a "factor" to the benchmark. For example, the rates on the inverse
floating rate note may move inversely at three times the benchmark rate. Certain
interest rate movements and other market factors can substantially affect the
liquidity of inverse floaters. These instruments are designed to be highly
sensitive to interest rate changes and may subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
Other Considerations
It is expected that a substantial portion of the assets of the Fund will
be derived from professional money managers and investors who intend to invest
in the Fund as part of an asset-allocation or market-timing investment strategy.
These investors are likely to redeem or exchange their Fund shares frequently to
take advantage of anticipated changes in market conditions. The strategies
employed by investors in the Fund may result in considerable assets moving in
and out of the Fund. Consequently, the Trust expects that the Fund will
generally experience significant portfolio turnover, which will likely cause
higher expenses and additional costs.
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Portfolio Turnover
The Fund has no fixed policy with respect to portfolio turnover. The
Fund may engage in short-term trading to benefit from yield disparities among
different issues of Government Securities, to seek short-term profits during
periods of fluctuating interest rates, or for other reasons the Manager believes
would be beneficial to the Fund. The Manager expects that, under normal
circumstances, the Fund's annual portfolio turnover rate will not exceed 200%.
The portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Fund will pay commissions in connection
with its options and futures transactions, the other securities in which the
Fund invests are generally traded on a "net" basis with dealers acting as
principals for their own account without a stated commission. Nevertheless, high
portfolio turnover may involve correspondingly greater brokerage commissions and
other transaction costs which will be borne directly by the Fund.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone's advisory contract with the Fund was approved at a Special
Meeting shareholders held on March ___, 1999. At that meeting, shareholders also
ratified Cornerstone's advisory fees of $___________, which amounted to ____% of
the Fund's average net assets for the period from September 29, 1998 to December
31, 1998. Cornerstone's advisory fee was based on the following table:
Average Daily Net Asset Value Annual Fee Payable
- ----------------------------- ------------------
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
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The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and
Chief Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of High-Yield Series shares is based on the Fund's net asset
value. Each share of the High-Yield Series is sold at its net asset value next
determined after a purchase order becomes effective. The net asset value per
share of the High-Yield Series is determined at the close of trading on the New
York Stock Exchange (currently 4:00 P.M. New York time) on each day that both
the New York Stock Exchange and the Fund's custodian bank are open for business.
The net asset value per share of the High-Yield Series is also determined on any
other day in which the level of trading in its portfolio securities is
sufficiently high that the current net asset value per share might be materially
affected by changes in the value of its portfolio securities. On any day on
which no purchase orders for the shares of the High-Yield Series become
effective and no shares are tendered for redemption, the net asset value per
share will not be determined. The High-Yield Series shares will not be priced on
the following days when the New York Stock Exchange is closed: New Year's Day,
Dr. Martin Luther King Jr.'s Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value per share of the High-Yield Series is computed by taking the amount of the
value of all of its assets, less its liabilities, and dividing it by the number
of outstanding shares. For purposes of determining net asset value, expenses of
the High-Yield Series are accrued daily and taken into account.
The High-Yield Series' portfolio securities are valued on the basis of
prices provided by an independent pricing service when, in the opinion of
persons designated by the Fund's trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market
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and short-term debt instruments with a remaining maturity of 60 days or less
will be valued on an amortized cost basis. Municipal daily or weekly variable
rate demand instruments will be priced at par value plus accrued interest.
Securities not priced in a manner described above and other assets are valued by
persons designated by the Fund's trustees using methods which the trustees
believe accurately reflects fair value. The prices realized from the sale of
these securities could be less than those originally paid by the High-Yield
Series or less than what may be considered the fair value of such securities.
PURCHASE OF SHARES
For your initial investment, there is a $2,500 minimum required. The
minimum initial investment for qualified pension plans (IRAs, Keoghs, etc.) is
$2,000. The minimum subsequent investment is $100. (The foregoing minimum
investments may be modified or waived at any time at our discretion). You may be
charged a fee for effecting transactions in the Fund's shares through securities
dealers, banks or other financial institutions. We charge no redemption fee when
you redeem your shares and there is no charge for reinvestment of dividends or
exchanges made between funds.
Conditions of Purchase. Shares of the Fund may be purchased either
directly from the Fund or through securities dealers, banks or other financial
institutions. The Fund has a minimum initial purchase requirement of $2,500 and
a minimum subsequent purchase requirement of $100. Subsequent purchases are made
in the same manner as initial purchases. After a purchase order becomes
effective, confirmation of the purchase is sent to the investor, and the
purchase is credited to the investor's account. The Fund reserves the right to
reject any purchase order, including purchases by exchange. Shares of the Fund
may be purchased only in states where the shares are qualified for sale.
Investors can purchase shares without a sales charge if they purchase
shares directly from the Fund. However, investors may be charged a fee if they
purchase shares through securities dealers, banks, or other financial
institutions. Investors opening a new account for the Fund must complete and
submit an account application along with payment of the purchase price for their
initial investment. Investors purchasing additional shares of the Fund should
include their account number with payment of the purchase price for additional
shares being purchased. Investors may reopen an account with a minimum
investment of $100 and without filing a new account application during the year
in which the account was closed or during the following calendar year if
information on the original application is still applicable. The Fund may
require the filing of a statement that all information on the original
application remains applicable.
Methods of Payment
Payment of the purchase price for shares of the Fund may be made in any
of the following manners:
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Payment by wire: An expeditious method of purchasing shares is the
transmittal of Federal Funds by bank wire to Firstar Bank Milwaukee, N.A. To
purchase shares by wire transfer, instruct a commercial bank to wire money to:
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Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Bank Milwaukee, N.A.
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
(Wired funds must be received prior to 4:00 p.m. Eastern time to be
eligible for same day pricing.)
The establishment of a new account or any additional purchases for an
existing account by wire transfer should be preceded by a phone call to Firstar
Mutual Fund Services, LLC, 1-800-322-6864 to provide information for the
account. A properly signed share purchase application marked "Follow Up" must be
sent for all new accounts opened by wire transfer. Applications are subject to
acceptance by the Fund, and are not binding until so accepted. The wire transfer
should be accompanied by the name, address, and social security number (in the
case of new investors) or account number (in the case of persons already owning
shares of the Fund).
Payment by check: Shares may also be purchased by check. Checks should
be made payable to Fundamental Family of Funds, and mailed to Firstar Mutual
Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI 53201-0701. If your check
does not clear, Firstar Mutual Fund Services, LLC will cancel your purchase and
charge you a $20 fee. Moreover, you could be liable for any losses incurred. The
Fund reserves the right to limit the number of checks processed at any one time
and will notify investors prior to exercising this right. The U.S. Postal
Service and other independent delivery services are not agents of the Fund.
Therefore, deposit of purchase requests in the mail or with such services does
not constitute receipt by Firstar Mutual Fund Services, LLC or the Fund. Please
do not mail letters by overnight courier to the post office box address.
Purchase requests sent by overnight or express mail should be directed to:
Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, Mutual Fund
Services, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Automatic Investment Program: The Fundamental Automatic Investment
Program offers a simple way to maintain a regular investment program. The Fund
has waived the initial investment minimum for you when you open a new account
and invest $100 or more per month through the Fundamental Automatic Investment
Program. The Program permits an existing shareholder to purchase additional
shares of any Fund (minimum $50 per transaction) at regular intervals. Under the
Automatic Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is
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not a business day, funds will be transferred the next business day thereafter.
Only an account maintained at a domestic financial institution which is an
Automated Clearing House member may be so designated. To establish an Automatic
Investment Account, complete and sign Section F of the Purchase Application and
send it to the Transfer Agent. Shareholders may cancel this privilege or change
the amount of purchase at any time by calling 1-800-322-6864 or by mailing
written notification to: Fundamental Family of Funds, c/o Firstar Mutual Fund
Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be
effective five business days following receipt of notification by the Transfer
Agent. A Fund may modify or terminate this privilege at any time or charge a
service fee, although no such fee currently is contemplated. However, a $20 fee
will be imposed by Firstar Mutual Fund Services, LLC if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, neither Fundamental Service Corporation nor the
Transfer Agent will monitor the amount of contributions to ensure that they do
not exceed the amount allowable for federal tax purposes. Firstar Mutual Fund
Services, LLC will assume that all retirement plan contributions are being made
for the tax year in which they are received.
REDEMPTION OF SHARES
Each investor in the Fund has the right to cause the Fund to redeem his
or her shares by making a request to Firstar Mutual Fund Services, LLC in
accordance with either the regular redemption procedure, the telephone
redemption privilege, the expedited redemption privilege, or the check
redemption privilege, as described below. If Firstar Mutual Fund Services, LLC
receives a redemption request before the close of trading on any day the New
York Stock Exchange is open for trading, the redemption will become effective on
that day and be made at the net asset value per share of the Fund, as determined
at the close of trading on that day, and payment will be made on the following
business day. If Firstar Mutual Fund Services, LLC receives a redemption request
following the close of trading on the New York Stock Exchange, or on any day the
New York Stock Exchange is not open for business, the redemption will become
effective on the next day the New York Stock Exchange is open for trading and be
made at the net asset value per share of the Fund, as determined at the close of
trading on that day, and payment will be made on the following business day.
Investors are entitled to receive all dividends on shares being redeemed
that are declared on or before the effective date of the redemption of such
shares. The net asset value per share of the Fund received by an investor on
redeeming shares may be more or less than the purchase price per share paid by
such investor, depending on the market value of the portfolio of the Fund at the
time of redemption.
Regular Redemption Procedure. Investors may redeem their shares by
sending a written redemption request to Firstar Mutual Fund Services, LLC, which
request must specify the number of shares to be redeemed and be signed by the
investor of record. For redemptions exceeding $50,000 (and for all written
redemptions, regardless of amount, made within 30 days
-26-
<PAGE>
following any change in account registration), the signature of the investor on
the redemption request must be guaranteed by an eligible guarantor institution
approved by Firstar Mutual Fund Services, LLC. Signature guarantees in proper
form generally will be accepted from domestic banks, a member of a national
securities exchange, credit unions and savings associations, as well as from
participants in the Securities Transfer Agents Medallion Program ("STAMP"). If
you have any questions with respect to signature guarantees, please call the
transfer agent at (800) 322-6864. Firstar Mutual Fund Services, LLC may, at its
option, request further documentation from corporations, executors,
administrators, trustees, or guardians. If a redemption request is sent to the
Fund, the Fund will forward it to Firstar Mutual Fund Services, LLC. Redemption
requests will not become effective until all proper documents have been received
by Firstar Mutual Fund Services, LLC. The U.S. Postal Service and other
independent delivery services are not agents of the Fund. Therefore, deposit of
purchase requests in the mail or with such services does not constitute receipt
by Firstar Mutual Fund Services, LLC or the Fund. Please do not mail letters by
overnight courier to the post office box address. Purchase requests sent by
overnight or express mail should be directed to: Fundamental Family of Funds,
c/o Firstar Mutual Fund Services, LLC, Mutual Fund Services, Third Floor, 615
East Michigan Street, Milwaukee, Wisconsin 53202. Requests for redemption that
are subject to any special condition or specify an effective date other than as
provided herein cannot be accepted and will be returned to the investor.
Telephone Redemption Privilege. An investor may, either by completing
the appropriate section of the purchase application or by making a later written
request to Firstar Mutual Fund Services, LLC containing his or her signature
guaranteed by an eligible guarantor (see above), obtain the telephone redemption
privilege for any of his or her accounts. (Available only if established on the
account application and if there has been no change of address by telephone
within the preceding 30 days.) An investor may redeem up to $150,000 worth of
shares per day from an account for which he or she has the telephone redemption
privilege by making a telephone redemption request to Firstar Mutual Fund
Services, LLC, at (800) 322-6864. Telephone calls will be recorded. A check for
the proceeds of such a redemption will be issued in the name of the investor of
record and mailed to the investor's address as it appears on the records of the
Fund. Both the Fund and Firstar Mutual Fund Services, LLC reserve the right to
refuse or limit a telephone redemption request, and may modify the telephone
redemption privilege upon the giving of 60 days' prior notice.
Neither the Fund nor the transfer agent will be liable for following
instructions communicated by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a written confirmation
statement of all telephone call transactions be mailed to shareholders at their
address of record within three business days after the telephone call
transaction. Since you will bear the risk of loss, you should verify the
accuracy of telephone transactions immediately upon receipt of your confirmation
statement.
Expedited Redemption Privilege. An investor in any series of the Trust
may, either by completing the appropriate section of the purchase application or
by later making a written request to Firstar Mutual Fund Services, LLC,
containing his or her signature guaranteed by an
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<PAGE>
eligible guarantor (see above), obtain the expedited redemption privilege for
any of his or her accounts. The expedited redemption privilege allows the
investor to have the proceeds from any redemption of shares in an amount of
$5,000 or more transferred by wiring Federal Funds to the commercial bank or
savings and loan institution specified in his or her purchase application or
written request for the expedited redemption privilege. The commercial bank or
savings and loan institution specified must be a member of the Federal Reserve
System. Firstar Mutual Fund Services, LLC charges a $12 service fee for each
payment of redemption proceeds made by Federal wire. This fee will be deducted
from your account. Expedited redemption requests may be made either by mail to
the address specified under the regular redemption procedure or by telephone to
the number specified under the telephone redemption privilege. The proceeds from
such a redemption may be subject to a deduction of the usual and customary
charge. An investor may change the account or commercial bank designated to
receive the redemption proceeds by sending a written request to Firstar Mutual
Fund Services, LLC, containing his or her signature guaranteed in the manner
described above. Both the Fund and Firstar Mutual Fund Services, LLC reserve the
right to refuse or limit an expedited redemption request and to modify the
expedited redemption privilege at any time.
Check Redemption Privilege. An investor may, either by completing the
appropriate section of the purchase application or by later making a written
request to the Fund, obtain redemption checks for any of his or her accounts.
These checks may be used by the investor in any lawful manner and may be payable
to the order of any person or company in an amount of $100 or more. When a check
is presented to Firstar Mutual Fund Services, LLC for payment, Firstar Mutual
Fund Services, LLC, as agent for the investor, will cause the Fund to redeem a
sufficient number of shares in the investor's account to cover the amount of the
check. Investors using the check redemption privilege will be subject to the
same rules and regulations that are applicable to other checking accounts at
Firstar Mutual Fund Services, LLC. There is no charge to the investor for using
the check redemption privilege, except that Firstar Mutual Fund Services, LLC
imposes a $20 charge, if an investor requests that it stop payment of a
Redemption Check or if it cannot honor a Redemption Check due to insufficient
funds or other valid reasons. The check redemption privilege may not be used to
close an account. The check redemption privilege may be modified or terminated
at any time by either the Fund or Firstar Mutual Fund Services, LLC.
At times, the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay, or cause to be delayed,
payment or redemption proceeds until such time as it has assured itself that
good payment has been received for the purchase of such shares, which may take
up to 15 days. In the case of payment by check, determination of whether the
check has been paid by the paying institution can generally be made within 7
days, but may take longer. Investors may avoid the possibility of any such delay
by purchasing shares by wire. In the event of delays in paying redemption
proceeds, the Fund will take all available steps to expedite collection of the
investment check.
If shares were purchased by check, you may write checks against such
shares only after 15 days from the date the purchase was executed. Shareholders
who draw against shares
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<PAGE>
purchased fewer than 15 days from the date of original purchase, will be charged
usual and customary bank fees.
The Fund reserves the right to suspend the right of redemption or
postpone the day of payment with respect to its shares (1) during any period
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings), (2) during any period when trading markets that the Fund
normally uses are restricted or an emergency exists as determined by the
Securities and Exchange Commission, so that disposing of the Fund's investments
or determining its net asset value is not reasonably practicable, or (3) for
such other periods as the Securities and Exchange Commission by order may permit
to protect investors.
If an investor's account has an aggregate net asset value of less than
$100, the Fund may redeem the shares held in such account if the net asset value
of such account has not been increased to at least $100 within 60 days of notice
by the Fund to such investor of its intention to redeem the shares in such
account. The Fund will not redeem the shares of an account with a net asset
value of less than $100 if the account was reduced from the initial minimum
investment to below $100 as a result of market activity.
Transfers. An investor may transfer shares of the Fund by submitting to
Firstar Mutual Fund Services, LLC a written request for transfer, signed by the
registered holder of the shares and indicating the name, social security or
taxpayer identification number of and distribution and redemption options
elected by the new registered holder. Such request must be signature guaranteed.
Firstar Mutual Fund Services, LLC may, at its option, request further
documentation from transferors that are corporations, executors, administrators,
trustees, or guardians.
Tax Sheltered Retirement Plans. We offer a Prototype Pension and Profit
Sharing Plan, including Keogh plans, IRAs, SEP-IRA Plans, IRA Rollover Accounts
and 403(b) plans. Check redemption and telephone redemption privileges are not
available to Retirement account holders. Plan support services are available by
calling us at (800) 322-6864.
Exchange Privilege. For your convenience, the Exchange Privilege permits
you to purchase shares in any of the other funds for which Fundamental Portfolio
Advisors, Inc. acts as the investment manager in exchange for shares of the Fund
at respective net asset values per share. Exchange instructions may be given in
writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
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<PAGE>
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
DISTRIBUTION AGREEMENT AND MARKETING PLAN
Distribution Agreement. Cresvale International (US) LLC, acts as
principal distributor of Fund shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers. The Distributor
is reimbursed for distribution expenses pursuant to a Distribution and Marketing
Plan (the "Marketing Plan"), adopted pursuant to Rule 12b-1 under the 1940 Act,
which allows it to finance activities that are primarily intended to result in
the sale of the Fund's shares, including but not limited to advertising,
commissions, and salaries paid to registered representatives and marketing
personnel of the Distributor, printing of prospectuses and reports for other
than existing shareholders, preparation and distribution of advertising material
and sales literature, and payments to dealers, banks and shareholder servicing
agents who enter into agreements with the Manager or the Distributor for
providing administrative and account maintenance services. Such services may
include, without limitation, some or all of the following: answering Fund
inquiries; assistance in changing dividend options, account registration and
addresses; performance of sub-accounting; maintenance of shareholder accounts
and records; assistance in processing purchase and redemption transactions;
providing periodic statements showing a shareholder's account balance and the
integration of such statements with those of other transactions and balances in
the shareholder's other accounts serviced by the Manager or the Distributor, if
any; and such other information and services as the Fund reasonably may request,
to the extent the Manager or Distributor is permitted by applicable statute,
rule or regulation to provide such information or services.
Marketing Plan. Pursuant to the Marketing Plan, the Fund may incur
distribution expenses not to exceed .25% per annum of its average daily net
assets. The Marketing Plan will only permit payments for expenses actually
incurred by the Distributor or the Manager. The Marketing Plan allows for the
carry-over of expenses from year to year and, if the Marketing Plan is
terminated or not continued in accordance with its terms, the Fund's obligation
to make payments to the Distributor (or Manager) pursuant to the Plan will cease
and the Fund will not be required to make any payments past the date the
Marketing Plan terminates. The Fund records all accruals made under the
Marketing Plan as expenses in the calculation of its net investment income. The
Fund may not accrue the amount of distribution expenses incurred by
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<PAGE>
the Distributor that may be paid pursuant to the Marketing Plan in future
periods as a liability, because it is believed that the standards for the
accrual of a liability under generally accepted accounting principles will not
have been satisfied. Such distribution expenses are recorded as an expense in
future periods as they are accrued. Certain overhead expenses of the Distributor
are also provided for under the Marketing Plan.
DIVIDENDS AND TAX MATTERS
The Fund intends to qualify as a regulated investment company, which
means that it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.
o Dividends from the Fund that are attributable to interest on
certain U.S. Government obligations may be exempt from certain
state and local income taxes. The extent to which ordinary
dividends are attributable to U.S. Government obligations will be
provided on the tax tax statements you receive from the Fund.
o Ordinary dividends from the Fund are taxable as ordinary income
and dividends from the Fund's long-term capital gains are taxable
as capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
o Certain dividends paid to you in January will be taxable as if
they had been paid the previous December.
o We will mail you tax statements annually showing the amounts and
tax status of the distributions you received.
o When you sell (redeem) or exchange shares of a Fund, you must
recognize any gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use
in determining your tax.
o You should review the more detailed discussion of federal income
tax considerations in the Statement of Additional Information.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in a
Fund.***
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<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Fundamental Fixed-Income Fund
U.S. Goverment Strategic Income Fund
67 Wall Street
New York NY 10005
1-800-___-____
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC- 0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(___-____)
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is _________.
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<PAGE>
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series
This Prospectus pertains to the High-Yield Municipal Bond Series ("High
- -Yield Series") of the Fundamental Fixed-Income Fund (the "Fund").
Prospectus
April 30, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION OR ANY
STATE SECURITIES AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Risk/Return Summary.....................................................
Financial Highlights....................................................
Investment Objective and Policies.......................................
Investment Techniques...................................................
Investment Risks........................................................
Management .............................................................
Pricing of Fund Shares..................................................
Purchase of Shares......................................................
Redemption of Shares....................................................
Distribution Expenses...................................................
Dividends and Tax Matters...............................................
Appendix Description of Municipal Bond Ratings A-1
- 2 -
<PAGE>
RISK/RETURN SUMMARY
Investment Objective
The High-Yield Series seeks to provide a high level of current income that is
exempt from federal income tax.
Principal Investment Strategies
The High-Yield Series will attempt to achieve its objective investing at least
80% of its total assets in lower quality municipal securities the interest from
which is exempt from federal income tax.
Principal Risks of Investing in the High-Yield Series
There is no guarantee that the High-Yield Series will achieve its stated
objective. In fact, you could lose money by investing in the High-Yield Series.
In making your investment decision, you should understand that the High-Yield
Series's net asset value (NAV), yield, and total return may be adversely
affected by any or all of the following factors:
o Interest rate risk - Changes in interest rates cause the prices and yields
of debt securities to fluctuate;
o Credit risk - Certain issuers of securities may fail to make timely
payments of interest and principal on the High-Yield Series' investments;
o Concentration risk - Because the High-Yield Series will invest its assets
mainly in the municipal issuers, it is subject to greater losses arising
from adverse political or economic events affecting municipal securities;
and
o Diversification risk - Because the High-Yield Series may invest a greater
percentage of its assets in a few issuers, there is an increased likelihood
that a few issuers of securities may cause losses to the High-Yield Series.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the
High-Yield Series. The bar chart shows the performance of the High-Yield Series
for each of the last 10 calendar years. The table shows how the High-Yield
Series' average annual return for 1, 5, and 10 years compare with those of a
broad measure of market performance.
- 3 -
<PAGE>
Bar Chart
The bar chart illustrates how the High-Yield Series' returns vary from year to
year. As always, past performance is no way to predict future performance.
1998 - 0.74%
1997 - 15.71%
1996 - 4.05%
1995 - 25.70%
1994 - (12.92)%
1993 - 5.12%
1992 - 6.26%
1991 - 10.14%
1990 - (5.85)%
1989 - 5.45%
The High-Yield Series' best performance for one quarter was 9.16% for the
quarter ended 12/31/95. The High-Yield Series' worst performance for one quarter
was (5.84)% for the quarter ended 3/31/94.
Average Annual Total Returns Table
The table below shows the High-Yield Series' average annual total returns for
the 1, 5, and 10 year periods of the High-Yield Series' existence in comparison
to the Lehman Brothers Municipal Bond Index for the same periods. The table
provides some indication of the risks of investing in the High-Yield Series by
showing how the Fund' average annual total returns for the periods noted compare
with that of a broad measure of market performance. As always, past performance
is no way to predict future performance.
Average Annual Returns as One Year 5 years 10 Years
of 12/31/98
Fundamental Fixed-Income 0.74% 5.83% 5.00%
Fund High-Yield Municipal
Bond Series
Lehman Brothers Municipal
Bond Index
Fees and Expenses of the High-Yield Series
This table describes the fees and expenses that you may pay if you buy and hold
shares of the
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<PAGE>
High-Yield Series.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)......................................... __%
Maximum Deferred Sales Charge (Load) (as a percentage of __).............. __%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other Distributions]................................................. __%
Redemption Fee (as a percentage of amount redeemed, if applicable)........ __%
Exchange Fee.............................................................. __%
Maximum Account Fee....................................................... __%
Annual Fund Operating Expenses (expenses that are deducted
from Fund assets)......................................................... __%
Management Fees........................................................... __%
Distribution [and/or Service] (12b-1) Fees................................ __%
Other Expenses............................................................ __%
_____________________________ __%
_____________________________ __%
_____________________________ __%
Total Annual Fund Operating Expenses...................................... __%
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
- 5 -
<PAGE>
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
The Example does no reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads) were
included, your costs would be higher.
Financial Highlights
The following information is intended to assist in your understanding
of the Fund's performance for the time periods noted. The information has been
audited by McGladrey & Pullen, LLP, independent public accountants, in
connection with their audit of the High-Yield Series' financial statements.
McGladrey & Pullen's report on the High-Yield Series' financial statements for
the year ended December 31, 1998 appears in the Fund's Annual Report which is
available upon request without charge.
[INSERT FINANCIALS]
- 6 -
<PAGE>
Investment Objective and Policies
The investment objective of the High-Yield Series is to provide a high
level of current income exempt from federal income taxes through the investment
in a portfolio of lower quality municipal bonds.
The policy of the High-Yield Series is to invest under normal
circumstances at least 80% of its assets in debt securities issued by, or on
behalf of, states, territories, and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, or
instrumentalities, the interest on which is exempt from federal income tax
(municipal bonds). As a temporary defensive measure under certain market
conditions, the High-Yield Series may invest up to 50% of its assets in
short-term taxable investments. See Temporary Defensive Investments below.
The High-Yield Series' investment objective is a fundamental policy
which may not be changed without the approval of a majority of the outstanding
shares of the High-Yield Series.
As used in this Prospectus, the phrase majority of the Fund's
outstanding shares means the vote of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy at such a meeting or (2)
more than 50% of the Fund's outstanding shares.
The High-Yield Series invests at least 65% of its assets in the lower
quality, high-yield municipal bonds that are rated BB or lower by Standard &
Poor's Corporation (S&P) or Ba or lower by Moody's Investors Service, Inc.
(Moody's) or are unrated but judged by the Fund's investment adviser to be of at
least comparable quality. The High-Yield Series may not invest any of its assets
in municipal bonds that are not currently paying income or in municipal bonds
that are rated lower than C by S&P or Moody's. There is no limit on the
percentage of its assets that the High-Yield Series may invest in unrated
securities that would otherwise qualify for purchase by the High-Yield Series.
Although the High-Yield Series invests its assets predominantly in the lower
quality municipal bonds described above due to the higher yield they provide,
the High-Yield Series may under certain conditions invest in higher quality
securities. For example, certain securities with higher risk characteristics
that the Fund invests in, such as inverse floaters and previously non-rated zero
coupon bonds that have been escrowed with government securities, may have
relatively high credit ratings, but still may have higher risk characteristics
that make them appropriate for high yield investors.
The High-Yield Series normally purchases long-term municipal bonds with
maturities of 20 years or greater because such municipal bonds generally produce
higher yields than short-term municipal bonds. Although the market value of all
fixed-income securities generally varies inversely with changes in interest
rates, long-term securities are more exposed to this variation than short-term
securities and thus more likely to cause some instability in the
- 7 -
<PAGE>
High-Yield Series' share price. The High-Yield Series reserves the right to vary
the average maturity of securities it holds. A large portion of the High-Yield
Series' assets may be invested in municipal bonds whose interest payments are
derived from revenues from similar projects or whose issuers share the same
geographic location. Consequently, the asset value and performance of the
High-Yield Series may be more susceptible to certain economic, political, or
regulatory developments than if the High-Yield Series had a more diversified
portfolio of investments. In making investments, the High-Yield Series considers
the advice of its investment adviser and uses the Fund's research facilities to
perform its own credit analysis, consisting of an examination of the economic
feasibility of revenue bond project financings and general purpose borrowings;
the financial condition of the issuer or guarantor with respect to liquidity;
cash flow and ability to meet anticipated debt service requirements; and various
economic, political, industrial, and geographic trends. Through credit analysis
and portfolio diversification, investment risk can be reduced; however, there
can be no assurances that losses will not occur. For the ratings of S&P and
Moody's for municipal bonds, see the Appendix to this Prospectus.
The High-Yield Series also invests, from time to time, a portion of its
assets in higher quality municipal bonds (those rated BBB or above by S&P or Baa
or above by Moody's), such as when there is an influx of assets and sufficient
suitable lower quality municipal bonds are not available, or during a period
when yield spreads among municipal bonds are narrow and the marginally higher
yields of lower quality municipal bonds do not justify, in the judgment of the
investment adviser of the High-Yield Series, the increased risk involved.
Securities rated BBB by S&P or Baa by Moody's are considered medium grade,
neither highly protected nor poorly secured, with some elements of uncertainty
over any great length of time and certain speculative characteristics as well.
Temporary Investments
The High-Yield Series anticipates that it may, from time to time, and
in response to adverse market conditions, invest a portion of its total assets
on a temporary basis in short-term fixed-income obligations, the interest on
which is subject to federal income taxes.
Participation Interests, Variable and Inverse Floating Rate Instruments
The Fund may purchase participation interests from financial
institutions. These participation interests give the purchaser an undivided
interest in one or more underlying municipal obligations. The Fund may also
invest in municipal obligations which have variable interest rates that are
readjusted periodically. Such readjustment may be based either upon a
predetermined standard, such as a bank prime rate or the U.S. Treasury bill
rate, or upon prevailing market conditions. Many variable instruments are
subject to redemption or repurchase at par on demand by the Fund (usually upon
no more than seven days' notice). All variable rate instruments must meet the
quality standards of the Fund. The Manager will monitor the pricing, quality and
liquidity of the variable rate municipal obligations held by the
- 8 -
<PAGE>
Fund. The Fund may purchase inverse floaters which are instruments whose
interest rates bear an inverse relationship to the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. For example, a
municipal issuer may decide to issue two variable rate instruments instead of a
single long-term, fixed-rate bond. The interest rate on one instrument reflects
short-term interest rates. Typically, this component pays an interest rate that
is reset periodically through an auction process, while the interest rate on the
other instrument (the inverse floater) pays a current residual interest rate
based on the total difference between the total interest paid by the issuer on
the municipal obligation and the auction rate paid on the auction component.
This reflects the approximate rate the issuer would have paid on a fixed-rate
bond multiplied by two, minus the interest rate paid on the short-term
instrument. Depending on market availability, the two portions may be recombined
to form a fixed-rate municipal bond. The Fund may purchase both the auction and
the residual components.
The Fund may invest in municipal obligations that pay interest at a
coupon rate equal to a base rate, plus additional interest for a certain period
of time if short-term interest rates rise above a predetermined level or "cap".
The amount of such an additional interest payment typically is calculated under
a formula based on a short-term interest rate index multiplied by a designated
factor.
The Fund may purchase various types of structured municipal bonds whose
interest rates fluctuate according to changes in other interest rates for some
period and then revert to a fixed rate. The relationship between the interest
rate on these bonds and the other interest rate or index may be direct or
inverse, or it may be based on the relationship between two other interest rates
such as the relationship between taxable and tax-exempt interest rates.
When-Issued Securities
The High-Yield Series purchases some municipal bonds on a when-issued
basis, which means that it may take as long as 60 days or more before they are
delivered and paid for. The commitment to purchase a security for which payment
will be made at a future date may be deemed a separate security. The purchase
price and interest rate of when-issued securities are fixed at the time the
commitment to purchase is entered into. Although the amount of municipal bonds
for which there may be purchase commitments on a when-issued basis is not
limited, it is expected that under normal circumstances not more than 50% of the
total assets of the High-Yield Series will be committed to such purchases. The
High-Yield Series does not start earning interest on when-issued securities
until settlement is made. In order to invest the assets of the High-Yield Series
immediately while awaiting delivery of securities purchased on a when-issued
basis, short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although short-term investments are normally in
tax-exempt securities, short-term taxable securities may be purchased if
suitable short-term tax-exempt securities are not available.
- 9 -
<PAGE>
Futures Contracts
A futures contract is an agreement between two parties to buy and sell
a security for a set price on a future date. They have been designed by boards
of trade that have been designated contracts markets by the Commodity Futures
Trading Commission (the CFTC). Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange, and through their
clearing corporations, the boards of trade guarantee performance of the
contracts. Presently, there are futures contracts based on such debt securities
as long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, three-month U.S.
Treasury bills, municipal bonds and bank certificates of deposit. While futures
contracts based on debt securities do provide for the delivery and acceptance of
securities, such deliveries and acceptances are very seldom made. Generally, the
futures contract is terminated by the execution of an offsetting transaction. An
offsetting transaction for a futures contract sale is effected by that party
entering into a futures contract purchase for the same aggregate amount of the
specified type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, that party is immediately
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, that party pays the difference and realizes a loss.
Similarly, closing out a futures contract purchase is effected by that party
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, that party realizes a gain; if the purchase price exceeds the
offsetting sale price, that party realizes a loss. At the time a futures
contract is made, a small good faith deposit called initial margin is required
from each party to the futures contract. The initial margin deposit is generally
1.5-5% of a contract's face value. Thereafter, the futures contract is valued
daily, and payment of variation margin is required, so that each day, each party
pays out cash in an amount equal to any decline in the contract's value or
receives cash equal to any increase.
The High-Yield Series enters into futures contracts involving debt
securities backed by the full faith and credit of the U.S. Government. The
High-Yield Series' purpose in entering into futures contracts is to protect the
High-Yield Series from the adverse effects of fluctuations in interest rates
without actually buy ing or selling long-term debt securities. For example,
because the High-Yield Series owns long-term bonds, if interest rates were
expected to increase, the High-Yield Series might enter into futures contracts
for the sale of debt securities. This would have much the same effect as selling
an equivalent value of the High-Yield Series' long-term bonds. If interest rates
did increase, the value of the debt securities in the High-Yield Series'
portfolio would decline, but the value of such futures contracts would increase
at approx imately the same rate, thereby preventing the net asset value of the
High-Yield Series from declining as much as it otherwise would have.
Similarly, when interest rates are expected to decline, the High-Yield
Series may enter into futures contracts as a hedge against the anticipated
increase in the price of long-term bonds. Because the value of such futures
contracts should vary directly with the price of long-term
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<PAGE>
bonds, the High-Yield Series could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, futures contracts could be liquidated and High-Yield
Series cash reserves could be used to buy long-term bonds on the cash market.
The High-Yield Series could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase. However, because the futures market is more liquid
than the cash market, using futures contracts as an investment technique allows
the High-Yield Series to maintain a defensive position without having to sell
its portfolio securities. This technique would be particularly appropriate when
the cash flow from the sale of new shares of the High-Yield Series could have
the effect of diluting dividend earnings.
Futures contracts may also be used to protect the High-Yield Series
portfolio from shifts in value due to overvaluation or undervaluation of the
municipal bond market as compared to the taxable bond market. For instance, if
the municipal bond market appeared to be overvalued relative to the U.S.
Government bond market, a hedge could be created by executing futures contracts
for the sale of municipal bonds and for the purchase of government bonds in like
amounts.
Investment by the High-Yield Series in futures contracts is subject to
a restriction because of CFTC regulations; the High-Yield Series may enter into
future contracts only as a temporary defensive measure for hedging purposes. If
the CFTC changes its regulations so that the High-Yield Series is permitted to
invest in futures contracts for income purposes without having to register with
the CFTC, the High- Yield Series may engage in transactions in futures contracts
for this purpose.
Options
Options are the right to buy or sell securities, or futures contracts,
in the future. A put option gives the holder the right to sell a designated
security for a set price within a specified time period, and a call option gives
the holder the right to buy a designated security for a set price within a
specified time period. Currently, the market for options on tax-exempt
securities is very small. There are also options on futures contracts, which
entitle a holder to enter into a futures contract, on specified terms, within a
specified time period. Unlike a futures contract, which requires parties to the
contract to buy and sell a security for a set price on a set date, an option
merely entitles its holder to decide on or before a future date whether to
purchase or sell a security at a set price or to enter into a specified futures
contract. If the holder decides not to exercise an option, all that is lost is
the price, called the premium, paid for the option. Further, because the value
of the option is fixed at the point of sale, there are no daily payments of cash
to reflect the change in the value of the underlying transaction. However, since
an option gives the buyer the right to enter into a transaction or contract at a
set price for a fixed period of time, its value does change daily, and that
change is reflected in the net asset value of the High-Yield Series.
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<PAGE>
The High-Yield Series will buy only options listed on national
securities exchanges, except for agreements (sometimes called cash puts) that
may accompany the purchase of a new issue of bonds from a dealer.
Lending Portfolio Securities
The High-Yield Series may lend securities in its portfolio to brokers,
dealers, banks, or other institutional borrowers of securities for the purpose
of obtaining additional income, provided that the borrower maintains with the
High-Yield Series collateral in the form of cash or cash equivalents, such as
Treasury bills, equal to at least l00% of the fair market value of the
securities lent. Borrowers of portfolio securities of the High-Yield Series pay
to the High-Yield Series any income accruing on borrowed securities during the
time such securities are on loan and may also pay to the High-Yield Series a
specified amount of interest on the borrowed securities. In addition, the
High-Yield Series is entitled to earn additional income by investing the
collateral it holds. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
of any loaned securities fail financially. For this reason, the investment
adviser of the High-Yield Series will evaluate and monitor the creditworthiness
of firms that borrow securities from the High-Yield Series. The High-Yield
Series will not lend its portfolio securities if as a result more than 30% of
its total assets will be subject to such loans. In addition, because income
derived from lending its portfolio securities is not tax-exempt, the High-Yield
Series limits lending its securities in accordance with its investment
objective. Accordingly, it is not anticipated that the High-Yield Series will
normally engage in any material amount of portfolio lending.
Borrowings
The High-Yield Series may borrow money in an amount up to 33.33% of its
total assets. Borrowings are also subject to the restriction that the value of
the High-Yield Series' assets, less its liabilities other than borrowings, must
always be equal to or greater than 300% of all of its borrowings (including the
proposed borrowing). If this 300% coverage requirement is not met, the
High-Yield Series must, within three days, reduce its debt to the extent
necessary to meet such coverage requirement, and to do so, it may have to sell a
portion of its investments at a time when such a sale would otherwise be
unadvisable.
Interest on money borrowed is an expense of the High-Yield Series and
decreases its net earnings. While money borrowed may be used by the High-Yield
Series for investment in securities, the interest paid on borrowed money reduces
the amount of money available for investment by the High-Yield Series. The
interest paid by the High-Yield Series on borrowings may be more or less than
the yield on the securities purchased with borrowed funds.
The High-Yield Series may borrow in order to meet redemption requests
and for investment. Borrowing for investment increases both investment
opportunity and investment risk. Since the High-Yield Series' assets fluctuate
in value, and the obligation resulting from
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the borrowing is fixed, the net asset value per share of the High-Yield Series
will tend to increase more when the High-Yield Series' investments increase in
value and decrease more when the High-Yield Series' investments decrease in
value than would otherwise be the case. This is a speculative factor known as
leverage.
Portfolio Transactions and Turnover
The High-Yield Series is fully managed by purchasing and selling
securities as well as by holding selected securities to maturity. In purchasing
and selling portfolio securities, the High-Yield Series seeks to take advantage
of variations in the creditworthiness of issuers. For a description of the
strategies that may be used by the High-Yield Series in purchasing and selling
portfolio securities, see the Statement of Additional Information.
While it is not possible to predict accurately the rate of turnover of
the High-Yield Series' portfolio on an annual basis, it is anticipated that the
rate will not materially exceed 100%. A portfolio turnover of 100% would occur
if all of the securities in the portfolio were changed once in a 12-month
period. Computation of portfolio turnover excludes transactions in securities
having a maturity of one year or less at the time of acquisition. A high
turnover rate (over 100%) increases transaction costs and the possibility of
taxable short-term gains (see "Dividends and Tax Matters") which, in turn, will
reduce the Fund's return. Therefore, the Manager weighs the added costs of
short-term investment against anticipated gains.
Temporary Defensive Investments
The High-Yield Series anticipates that it may, from time to time, and
in response to adverse market conditions, invest a portion of its total assets,
on a temporary basis, in short-term fixed-income obligations whose interest is
subject to federal income tax.
SPECIAL RISKS
Special Risk Factors Relating to Non-Diversification
The Fund's portfolio is non-diversified and may have greater risk than
a diversified portfolio. As a non-diversified investment company, the Fund could
conceivably invest all of its assets in one issuer. However, in order to qualify
as a "regulated investment company" for Federal income tax purposes, the Fund
must comply with the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), which limit the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code), each of which
exceeds 5% of the Fund's total assets, to an aggregate amount of 50% of such
assets, and which further limit the holdings of a single issuer (with the same
exceptions) to 25% of the Fund's total assets. Therefore, for our purposes,
non-diversification means that, with regard to the Fund's
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<PAGE>
total assets, 50% of such assets may be invested in as few as two single
issuers. (These limits are measured at the end of each quarter.) In the event of
decline of creditworthiness or default on the obligations of one or more such
issuers exceeding 5%, an investment in the Fund will involve greater risk than
in a fund that has a policy of diversification.
Many of the Fund's portfolio securities will be obligations which are
related in such a way that an economic, business or political development or
change affecting one such security also would affect the other portfolio
securities (e.g., securities the interest on which is paid from revenues of
similar types of projects). As a result, the Fund's portfolio may be subject to
greater risk as compared to a portfolio composed of more varied obligations or
issuers. Furthermore, the relatively high degree of similarities among the
issuers of obligations in the Fund's portfolio may result in a greater degree of
fluctuation in the market value of the portfolio.
Special Risk Factors Relating to Futures and Options
There are certain risks in investing in options and interest rate
futures contracts. With respect to the use of futures contracts, although the
Fund intends to purchase or sell futures contracts only if there is an active
market for such contracts, no assurance can be given that a liquid market will
exist for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or the Fund determines not to close a
futures position in anticipation of adverse price movements, the Fund will be
required to make daily cash payments of variation margin. In such circumstances,
an increase in the value of the portion of the portfolio being hedged, if any,
may offset partially or completely losses on the futures contract.
In addition, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract. However, the risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
The Manager could also be incorrect in its expectations about the
direction or degree of various interest rate movements in the time span within
which the movements take place. Predicting interest rate direction involves
skills and techniques different from those used in most investment strategies,
and there is no guarantee that such predictions will be accurate.
The risk the Fund assumes when it buys an option is the loss of the
premium paid for the option. In order to benefit from buying an option, the
price of the underlying security must change sufficiently to cover the premium
paid, the commissions paid, both in the acquisition of the option and in a
closing transaction, or the exercise of the option and subsequent sale of the
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<PAGE>
underlying security. (The Fund could enter into a closing transaction by
purchasing an option if it had previously sold one, or by selling an option if
it had previously bought one, with the same terms as the option previously
acquired.) Nevertheless, the price change in the underlying security does not
assume a profit, because prices in the options market may not reflect such a
change.
The risk involved in writing options on futures contracts the Fund
owns, or on securities held in its portfolio, is that there could be an increase
in the market value of such contracts or securities. In such case, the option
would be exercised and the asset would be sold at a lower price than the cash
market price. To some extent, the risk of not realizing a gain could be reduced
by entering into a closing transaction. However, the cost of closing the option
and terminating the Fund's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Fund might not be
able to close the option because of insufficient activity in the options market.
The risk involved in writing options (or selling futures) is not limited to the
value of the options, since the maximum potential loss to the Fund is the cost
of closing out the short options (or futures) positions which theoretically has
no limit.
Finally, in deciding whether to use futures contracts or options,
consideration must be given to brokerage commission costs, which are normally
higher than those associated with general securities transactions.
Special Risk Factors Relating to Lower Rated Municipal Bonds
You should carefully consider the relative risks of investing in the
higher yielding (and, therefore, higher risk) securities in which the Fund may
invest. These are bonds such as those rated Ba to Caa by Moody's or BB to CC by
S&P, Fitch or Duff or, if unrated, are judged by Fund management to be of
comparable quality. They generally are not meant for short-term investing and
may be subject to certain risks with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Bonds rated Ba by Moody's are judged to have
speculative elements; their future cannot be considered as well assured and
often the protection of interest and principal payments may be very moderate.
Bonds rated BB by S&P, Fitch or Duff are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Bonds rated CC by S&P, Fitch or Duff are regarded as having
the highest degree of speculation; while such bonds may have some small degree
of quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Bonds rated as low
as Caa by Moody's may be in default or may present elements of danger with
respect to principal or interest. The Fund will not purchase bonds in default.
Investments in bonds rated Ba or lower by Moody's and BB or lower by
S&P, Fitch or
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<PAGE>
Duff, while generally providing greater income and opportunity for gain than
investments in higher rated bonds, usually entail greater risk of principal and
income (including the possibility of default or bankruptcy of the issuers of
such bonds), and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than investments in higher rated
bonds. However, since yields may vary over time, no specific level of income can
be assured. These lower rated, high yielding securities generally tend to
reflect economic changes and short-term corporate and industry developments to a
greater extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates. Lower rated securities will
also be affected by the market's perception of their credit quality (especially
during times of adverse publicity) and the outlook for economic growth. In the
past, economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, new Federal rules require
that savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such legislation may be to significantly depress the
prices of outstanding lower rated high yielding fixed-income securities. Factors
adversely affecting the market price and yield of these securities will
adversely affect the Fund's net asset value. In addition, the retail secondary
market for these securities may be less liquid than that of higher rated bonds;
adverse conditions could make it difficult at times for the Fund to sell certain
securities or could result in lower prices than those used in calculating the
Fund's net asset value. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed-income
securities, and it also may be more difficult during certain adverse market
conditions to sell these lower rated securities at their fair value to meet
redemption requests or to respond to changes in the market.
Special Risk Factors Relating to When Issued Securities
When a commitment to purchase a security on a when-issued basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the High-Yield Series' assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, cash or high-quality debt securities sufficient to cover
any commitments are always expected to be available. Although it is not intended
that such purchases would be made for speculative purposes and although the
High-Yield Series intends to adhere to provisions of the Securities and Exchange
Commission policy, purchases of securities on a when-issued basis may involve
more risk than other types of purchases. For example, when the time comes to pay
for a when-issued security, portfolio securities of the High-Yield Series may
have to he sold in order for the High-Yield Series to meet its payment
obligations, and a sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gain, which is not tax-exempt.
Also, if it is necessary to sell the when-issued security before delivery, the
High-Yield Series may incur a loss because of market fluctuations since the time
the commitment to purchase the when-issued security was made. Moreover, any gain
resulting from any such sale would not be tax-exempt. Additionally,
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<PAGE>
because of market fluctuations between the time of commitment to purchase and
the date of purchase, the when-issued security may have a lesser (or greater)
value at the time of purchase than the High-Yield Series' payment obligations
with respect to the security.
Special Risk Factors Relating to Zero Coupon Bonds
The Fund may invest in zero coupon bonds and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. Fund management anticipates that investments in zero
coupon securities and pay-in-kind bonds will not ordinarily exceed 25% of the
value of the Fund's total assets.
Special Risk Factors Relating to Inverse Floating Rate Instruments
Changes in interest rates inversely affect the rate paid on inverse
floating rate instruments ("inverse floaters"). The inverse floaters' price will
be more volatile than that of a fixed rate bond. Additionally, some inverse
floaters contain a "leverage factor" whereby the interest rate moves inversely
by a "factor" to the benchmark. For example, the rates on the inverse floating
rate note may move inversely at three times the benchmark rate. Certain interest
rate movements and other market factors can substantially affect the liquidity
of inverse floaters. These instruments are designed to be highly sensitive to
interest rate changes and may subject the holders thereof to extreme reductions
of yield and possibly loss of principal.
Special Risk Factors Relating to New York Issuers
You should carefully consider the special risks inherent in the Fund's
investment in municipal obligations of New York issuers. These risks result from
the financial condition of New York State and certain of its public bodies and
municipalities, including New York City. Beginning in early 1975, New York State
(the "State"), New York City (the "City") and other entities faced serious
financial difficulties which jeopardized the credit standing and impaired the
borrowing abilities of such entities and contributed to high interest rates on,
and lower market prices for, debt obligations issued by them. A recurrence of
such financial difficulties, as may be currently developing, or a failure of
certain financial recovery programs related thereto could result in defaults or
declines in the market values of various municipal obligations in which the Fund
may invest. If there should be a default or other financial crisis relating to
the State, the
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<PAGE>
City, a State or City agency, or other municipality, the market value and
marketability of outstanding municipal obligations of New York issuers in the
Fund's portfolio and the interest income to the Fund could be adversely
affected.
A number of pending court actions have been brought against or involve
the State, its agencies, or other municipal subdivisions of the State, which
actions relate to financing, the use of tax or other revenues for the payment of
obligations and claims that would require additional public expenditures.
Adverse decisions in such cases could require extraordinary appropriations or
expenditure reductions or both and might have a materially adverse effect on the
financial condition of the State and its agencies and municipal subdivisions.
Any such adverse effect could affect, to some extent, all municipal securities
issued by the State, its agencies, or municipal subdivisions.
To the extent that State agencies and local governments seek special
State assistance, the ability of the State to pay its obligations as they become
due or to obtain additional financing could be adversely affected, and the
marketability of notes and bonds issued by the State, its agencies, and other
governmental entities may be impaired.
Other Considerations
It is expected that a substantial portion of the assets of the Fund
will be derived from professional money managers and investors who intend to
invest in the Fund as part of an asset-allocation or market-timing investment
strategy. These investors are likely to redeem or exchange their Fund shares
frequently to take advantage of anticipated changes in market conditions. The
strategies employed by investors in the Fund may result in considerable assets
moving in and out of the Fund. Consequently, the Company expects that the Fund
will generally experience significant portfolio turnover, which will likely
cause higher expenses and additional costs and affect the Fund's performance.
Private Activity Bonds
Interest from certain municipal bonds (referred to as private activity
bonds) is treated as a tax preference item under the alternative minimum tax.
Thus, corporate and individual investors may incur an alternative minimum tax
liability as a result of receiving tax-exempt dividends from the High-Yield
Series to the extent such dividends are attributable to interest from private
activity bonds. The High-Yield Series invests in private activity bonds only
when it believes that the yield disparity between private activity bonds and
other municipal bonds makes an investment in private activity bonds attractive.
In addition, because all tax-exempt dividends are included in a corporate
shareholder's adjusted current earnings (which are used in computing a separate
preference item for corporate taxpayers), corporate shareholders may incur an
alternative minimum tax liability as a result of receiving any tax-exempt
dividends from the High-Yield Series. Tax-exempt interest and income referred to
throughout this Prospectus mean interest and income that is excluded from gross
income for federal income tax purposes
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<PAGE>
but that may be a tax preference item subject to the alternative minimum tax.
Further, such tax-exempt interest and income may be subject to taxation under
the tax laws of any state or local taxing authority. See Information about
Shares of the High-Yield Series--Dividends and Tax Matters.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
Management
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone's advisory contract with the Fund was approved at a Special Meeting
of shareholders held on March ___, 1999. At that meeting, shareholders also
ratified Cornerstone's advisory fees of $___________, which amounted to ____% of
the Fund's average net assets for the period from September 29, 1998 to December
31, 1998. Cornerstone's advisory fee was based on the following table:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000 or more but less than $200,000,000 .78%
Net asset value of $200,000,000 or more but less than $300,000,000 .76%
Net asset value of $300,000,000 or more but less than $400,000,000 .74%
Net asset value of $400,000,000 or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
==================================================================================================================
</TABLE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and Chief
Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment
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<PAGE>
Corp., a broker/dealer; he was a partner of Tucker Anthony Securities, a
broker/dealer; and he was a senior vice-president of Pryor McClendon Counts &
Co., a broker/dealer.
PRICING OF FUND SHARES
The price of High-Yield Series shares is based on the Fund's net asset
value. Each share of the High-Yield Series is sold at its net asset value next
determined after a purchase order becomes effective. The net asset value per
share of the High-Yield Series is determined at the close of trading on the New
York Stock Exchange (currently 4:00 P.M. New York time) on each day that both
the New York Stock Exchange and the Fund's custodian bank are open for business.
The net asset value per share of the High-Yield Series is also determined on any
other day in which the level of trading in its portfolio securities is
sufficiently high that the current net asset value per share might be materially
affected by changes in the value of its portfolio securities. On any day on
which no purchase orders for the shares of the High-Yield Series become
effective and no shares are tendered for redemption, the net asset value per
share will not be determined. The High-Yield Series shares will not be priced on
the following days when the New York Stock Exchange is closed: New Year's Day,
Dr. Martin Luther King Jr.'s Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value per share of the High-Yield Series is computed by taking the amount of the
value of all of its assets, less its liabilities, and dividing it by the number
of outstanding shares. For purposes of determining net asset value, expenses of
the High-Yield Series are accrued daily and taken into account.
The High-Yield Series' portfolio securities are valued on the basis of
prices provided by an independent pricing service when, in the opinion of
persons designated by the Fund's trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other assets are
valued by persons designated by the Fund's trustees using methods which the
trustees believe accurately reflects fair value. The prices realized from the
sale of these securities could be less than those originally paid by the
High-Yield Series or less than what may be considered the fair value of such
securities.
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PURCHASE OF SHARES
Shares of the High-Yield Series may be purchased either directly from
the Fund or through securities dealers, banks or other financial institutions.
The High-Yield Series has a minimum initial purchase requirement of $1000 and a
minimum subsequent purchase requirement of $100. Subsequent purchases are made
in the same manner as initial purchases.
Investors can purchase shares without a sales charge if they purchase
shares directly from the Fund. However, investors may be charged a fee if they
pur- chase shares through securities dealers, banks, or other financial
institutions. Investors opening a new account for the High-Yield Series must
complete and submit a purchase application along with payment of the purchase
price for their initial investment. Investors purchasing additional shares of
the High-Yield Series should include their account number with payment of the
purchase price for additional shares being purchased. Investors may reopen an
account with a minimum investment of $100 and without filing a purchase
application during the year in which the account was closed or during the
following calendar year if information on the original purchase application is
still applicable. The High-Yield Series may require filing a statement that all
information on the original purchase application remains applicable.
A purchase order becomes effective immediately on receipt by Firstar
Mutual Fund Services, LLC, as agent for the High-Yield Series, if it is received
before 4:00 P.M. Eastern Time on any business day. After a purchase order
becomes effective, confirmation of the purchase is sent to the investor, and the
purchase is credited to the investor's account. The Fund, or any series thereof,
reserves the right to reject any purchase order.
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Fundamental Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign Section F of the Purchase Application and send it to the Transfer Agent.
Shareholders may cancel this privilege or change the amount of purchase at any
time by calling 1-800-322-6864 or by mailing written notification to:
Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701. The change will be effective five business days
following receipt of notification by the Transfer Agent. A Fund may modify or
terminate this privilege at any
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time or charge a service fee, although no such fee currently is contemplated.
However, a $20 fee will be imposed by Firstar Mutual Fund Services, LLC if
sufficient funds are not available in the shareholder's account at the time of
the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that they do not exceed the amount allowable for
federal tax purposes. Firstar Mutual Fund Services, LLC will assume that all
retirement plan contributions are being made for the tax year in which they are
received.
Shares of the High-Yield Series may be purchased only in states where
the shares are qualified for sale.
Methods of Payment
Payment of the purchase price for shares of the High-Yield Series may
be made in any of the following manners:
Payment by wire: An expeditious method of purchasing shares is the
transmittal of federal funds by bank wire to Firstar Mutual Fund Services, LLC.
To purchase shares by wire transfer, instruct a commercial bank to wire money
to:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Bank Milwaukee, N.A.
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
(Wired funds must be received prior to 4:00 p.m. Eastern time to be eligible for
same day pricing.)
The establishment of a new account or any additional purchases for an
existing account by wire transfer should be preceded by a phone call to Firstar
Mutual Fund Services, LLC, 1-800-322-6864 to provide information for the
account. A properly signed share purchase application marked "Follow Up" must be
sent for all new accounts opened by wire transfer. Applications are subject to
acceptance by the Fund, and are not binding until so accepted. The wire transfer
should be accompanied by the name, address, and social security number (in the
case of new investors) or account number (in the case of persons already owning
shares of that series).
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Payment by check: Shares may also be purchased by check. Checks should
be made payable to Fundamental Family of Funds and mailed to Fundamental Family
of Funds, c/o Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee,
WI 53201-0701. The U.S. Postal Service and other independent delivery services
are not agents of the Fund. Therefore, deposit of purchase requests in the mail
or with such services does not constitute receipt by Firstar Mutual Fund
Services, LLC or the Fund. Please do not mail letters by overnight courier to
the post office box address. Purchase requests sent by overnight or express mail
should be directed to: Fundamental Family of Funds, c/o Firstar Mutual Fund
Services, LLC, Mutual Fund Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202. If your check does not clear, Firstar Mutual Fund
Services, LLC will cancel your purchase and charge you a $20 fee. Moreover, you
could be liable for any losses incurred. The Fund reserves the right to limit
the number of checks processed at any one time and will notify investors prior
to exercising this right.
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which the manager
acts as the investment manager in exchange for shares of the Fund at respective
net asset values per share. Exchange instructions may be given in writing to
Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
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REDEMPTIONS
Each investor in the High-Yield Series has the right to cause the
High-Yield Series to redeem his or her shares by making a request to Firstar
Mutual Fund Services, LLC in accordance with either the regular redemption
procedure, the telephone redemption privilege, the expedited redemption
privilege, or the check redemption privilege, as described below. If Firstar
Mutual Fund Services, LLC receives a redemption request before the close of
trading on any day the New York Stock Exchange is open for trading, the
redemption will become effective on that day and be made at the net asset value
per share of the High-Yield Series, as determined at the close of trading on
that day, and payment will be made on the following business day. If Firstar
Mutual Fund Services, LLC receives a redemption request following the close of
trading on the New York Stock Exchange, or on any day the New York Stock
Exchange is not open for business, the redemption will become effective on the
next day the New York Stock Exchange is open for trading and be made at the net
asset value per share of the High-Yield Series, as determined at the close of
trading on that day, and payment will be made on the following business day.
Investors are entitled to receive all dividends on shares being
redeemed that are declared on or before the effective date of the redemption of
such shares. The net asset value per share of the High-Yield Series received by
an investor on redeeming shares may be more or less than the purchase price per
share paid by such investor, depending on the market value of the portfolio of
the High-Yield Series at the time of redemption.
Regular Redemption Procedure. Investors may redeem their shares by
sending a written redemption request to Firstar Mutual Fund Services, LLC, which
request must specify the number of shares to be redeemed and be signed by the
investor of record. For redemptions exceeding $50,000 (and for all written
redemptions, regardless of amount, made within 30 days following any changes in
account registration), the signature of the investor on the redemption request
must be guaranteed by an eligible guarantor institution appointed by Firstar
Mutual Fund Services, LLC. Signature guarantees in proper form generally will be
accepted from domestic banks, a member of a national securities exchange, credit
unions and savings associations, as well as from participants in the Securities
Transfer Agents Medallion Program ("Stamp"). If you have any questions with
respect to signature guarantees, please call the transfer agent at (800)
322-6864. Firstar Mutual Fund Services, LLC may, at its option, request further
documentation from corporations, executors, administrators, trustees, or
guardians. If a redemption request is sent to the High-Yield Series, the
High-Yield Series will forward it to Firstar Mutual Fund Services, LLC. The U.S.
Postal Service and other independent delivery services are not agents of the
Fund. Therefore, deposit of redemption requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Redemption requests sent by overnight or express mail should be
directed to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC,
Mutual Fund Services, Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202. Redemption requests will not become effective until all proper
documents have been received by Firstar Mutual Fund Services, LLC. Requests for
redemption that are subject to any special condition or specify an effective
date
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other than as provided herein cannot be accepted and will be returned to the
investor.
Telephone Redemption Privilege. An investor may, either by completing
the appropriate section of the purchase application, or by making a later
written request to Firstar Mutual Fund Services, LLC containing his or her
signature guaranteed by an eligible guarantor (see above), obtain the telephone
redemption privilege for any of his or her accounts. Provided that your account
registration has not changed within the last 30 days, an investor may redeem up
to $150,000 worth of shares per day from an account for which he or she has the
telephone redemption privilege by making a telephone redemption request to
Firstar Mutual Fund Services, LLC, at (800) 322-6864. Telephone calls may be
recorded. A check for the proceeds of such a redemption will be issued in the
name of the investor of record and mailed to the investor's address as it
appears on the records of the High-Yield Series. Both the High-Yield Series and
Firstar Mutual Fund Services, LLC reserve the right to refuse or limit a
telephone redemption request and to modify the telephone redemption privilege at
any time.
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a written confirmation
statement of all telephone call transactions will be mailed to shareholders at
their address of record within three business days after the telephone call
transaction. Since you will bear the risk of loss, you should verifty the
accuracy of telephone transactions immediately upon receipt of your confirmation
statement.
Expedited Redemption Privilege. An investor in any series of the Fund
may, either by completing the appropriate section of the purchase application,
or by later making a written request to Firstar Mutual Fund Services, LLC
containing his or her signature guaranteed by an eligible guarantor (see above),
obtain the expedited redemption privilege for any of his or her accounts. The
expedited redemption privilege allows the inves tor to have the proceeds from
any redemption of shares in the amount of $5000 or more transferred by wiring
federal funds to the commercial bank or savings and loan institution specified
in his or her purchase application or written request for the expedited
redemption privilege. The commercial bank or savings and loan institution
specified must be a member of the Federal Reserve System. Expedited redemption
requests may be made either by mail to the address specified under regular
redemption procedure or by telephone to the number specified under telephone
redemption privilege. The proceeds from such a redemption may be subject to a
deduction of the usual and customary charge Firstar Mutual Fund Services, LLC
charges a $12 service fee for each payment of redemption proceeds made by
federal wire. This fee will be deducted from your account. An investor may
change the account or commercial bank designation to receive the redemption
proceeds by sending a written request to Firstar Mutual Fund Services, LLC
containing his or her signature guaranteed in the manner described above. Both
the High-Yield Series and Firstar Mutual Fund Services, LLC reserve the right to
refuse or limit an expedited redemption request and to modify the expedited
redemption privilege at any time.
Check Redemption Privilege. An investor in any series of the Fund may,
by either
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completing the appropriate section of the purchase application, or by later
making a written request to the High-Yield Series, obtain redemption checks for
any of his or her accounts. These checks may be used by the investor in any
lawful manner and may be payable to the order of any person or company in an
amount of $100 or more. When a check is presented to Firstar Mutual Fund
Services, LLC for payment, Firstar Mutual Fund Services, LLC, as agent for the
investor, will cause the High-Yield Series to redeem a sufficient number of
shares in the investor's account to cover the amount of the check. Investors
using the check redemption privilege will be subject to the same rules and
regulations that are applicable to other checking accounts at Firstar Mutual
Fund Services, LLC. There is currently no charge to the investor for using the
check redemption privilege, except that Firstar Mutual Fund Services, LLC
imposes a $20 fee if an investor requests that it stop payment of a Redemption
Check or if it cannot honor a Redemption Check due to insufficient funds or
other valid reasons. The check redemption privilege may not be used to close an
account. The check redemption privilege may be modified or terminated at any
time by either the High-Yield Series or Firstar Mutual Fund Services, LLC.
At times, the High-Yield Series may be requested to redeem shares for
which it has not yet received good payment. The High-Yield Series may delay, or
cause to be delayed payment of redemption proceeds until such time as it has
assured itself that good payment has been received for the purchase of such
shares, which may take up to 15 days. In the case of payment by check,
determination of whether the check has been paid by the paying institution can
generally be made within 7 days, but may take longer. Investors may avoid the
possibility of any such delay by purchasing shares by wire. In the event of
delays in paying redemption proceeds, the High-Yield Series will take all
available steps to expedite collection of the investment check.
If shares were purchased by check, you may write checks against such
shares only after 15 days from the date the purchase was executed. Shareholders
who draw against shares purchased fewer than 15 days from the date of original
purchase, will be charged usual and customary bank fees.
The High-Yield Series reserves the right to suspend the right of
redemption or postpone the day of payment with respect to its shares (1) during
any period when the New York Stock Exchange is closed (other than customary
weekend and holiday closings), (2) during any period when trading markets that
the High-Yield Series normally uses are restricted or an emergency exists as
determined by the Securities and Exchange Commission, so that disposing of the
High-Yield Series' investments or determining its net asset value is not
reasonably practicable, or (3) for such other periods as the Securities and
Exchange Commission by order may permit to protect investors.
If an investor's account has an aggregate net asset value of less than
$1000, the High-Yield Series may redeem the shares held in such account if the
net asset value of such account has not been increased to at least $100 within
60 days of notice by the High-Yield Series
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to such investor of its intention to redeem the shares in such account. The
High-Yield Series will not redeem the shares of an account with a net asset
value of less than $100 if the account was reduced from the initial minimum
investment of $1000 to below $100 as a result of market activity.
Exchangeability of Shares
Investors may exchange shares of the High-Yield Series having an
aggregate net asset value of $1000 or more for shares of any other series of the
Fund or any other mutual fund for which the Manager acts as the investment
adviser, by either (1) delivering a written request to Firstar Mutual Fund
Services, LLC, specifying the number of shares of the High-Yield Series to be
exchanged and the series of the Fund or the mutual fund in which they wish to
invest in connection with such an exchange or (2) by making such a request by
telephone. (See "Redemption-Telephone Redemption Privilege" for a discussion of
the Fund's policy with respect to losses resulting from unauthorized telephone
transactions). The exchange is effected by redeeming the investor's shares of
the High-Yield Series and issuing to the investor shares of the series or mutual
fund in which he or she is investing. The shares of both the High-Yield Series
and the series or mutual fund being invested in are valued for purposes of this
exchange at the net asset value per share of the High-Yield Series and such
other series or fund, respectively, as next determined after receipt by Firstar
Mutual Fund Services, LLC of the exchange request.
The exchange privilege is available in only those states where such
exchange can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers and is subject to the
suitability requirements, if any, for the series or fund for which an exchange
is proposed to be made. Prior to effecting an exchange, an investor should
consider the investment policies of the series or mutual fund he or she is
investing in. Any exchange is, in effect, a redemption of shares in one fund and
a purchase of the other fund. An exchange by an investor is a taxable event for
federal income tax purposes that may result in a capital gain or loss. Dividend
FLEXIVEST Option
Shareholders of the High-Yield Series may elect to have all dividends
and distributions paid by such Series automatically reinvested in shares of the
Fund's Tax-Free Money Market Series at its net asset value on the payment date
of such dividend or distribution, provided the shareholder has: (i) a minimum
opening account balance in the Tax-Free Money Market Series of at least $1,000;
and (ii) made appropriate selection of the FLEXIVEST option in the
"Distributions" section of the Account Application Form.
Transfers
An investor may transfer shares of the High-Yield Series by submitting
to Firstar Mutual Fund Services, LLC a written request for transfer, signed by
the registered holder of the shares and indicating the name, social security
number or taxpayer identification number of, and
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distribution and redemption options elected by, the new registered holder.
Firstar Mutual Fund Services, LLC may, at its option, request further
documentation from transferors that are corporations, executors, administrators,
trustees, or guardians.
DISTRIBUTION EXPENSES
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of
the 1940 Act (the plan), under which the High-Yield Series pays to
______________ a fee, which is accrued daily and paid monthly, at an annual rate
of .50% of the High-Yield Series' average daily net assets. Amounts paid under
the plan are paid to ________ to compensate it for services it provides and
expenses it bears in distributing the High-Yield Series' shares to investors,
including payment of compensation by ___________ to securities dealers and other
financial institutions and organizations, such as banks, trust companies,
savings and loan associations, and investment advisers to obtain various
distribution related and/or administrative services for the High-Yield Series.
Expenses of ___________ also include expenses of its employees, who engage in or
support distribution of shares or service shareholder accounts, including
overhead and telephone expenses; printing and distributing prospectuses and
reports used in connection with the offering of the High-Yield Series' shares;
and preparing, printing, and distributing sales literature and advertising
materials. Because these payments are paid out of the Fund's assets on a
continual basis over time, these fees will increase the cost of your investment
and may cost you more than other types of sales charges.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
The High-Yield Series declares, on each business day just prior to
calculating its net asset value, all of its net investment income (consisting of
earned interest income less expenses) as a dividend on shares of record as of
the close of business on the preceding business day. Dividends are distributed
on the last business day of each calendar month. The High-Yield Series normally
distributes capital gains, if any, before the end of its fiscal year. All
dividends and capital gains distributions by the High-Yield Series will be in
the form of additional shares unless the investor has made an election, either
on his or her purchase application or in a subsequent written request to Firstar
Trust Company, to receive such distributions in cash. An investor may change his
or her distribution election by filing a written request with Fundamental
Shareholder Services, Inc. at least four days prior to the date of a
distribution.
Tax Matters
The High-Yield Series intends to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders.
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o Exempt-interest dividends from the High-Yield Series will be exempt from
federal regular income tax.
o Ordinary dividends from the High-Yield Series are taxable as ordinary
income and dividends from the High-Yield Series' long-term capital gains
are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in the form of cash or additional shares. They may
also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they had
been paid the previous December.
o We will mail you tax statements annually showing the amounts and tax status
of the distributions you received.
o When you sell (redeem) or exchange shares of the High-Yield Series, you
must recognize any gain or loss.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
High-Yield Series.***
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APPENDIX
RATINGS OF MUNICIPAL BONDS
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Services, Inc.
rating symbols and their meanings is as follows:
Aaa-Bonds which are Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the Aaa securities or fluctuation of
protective elements may be of a greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than Aaa
securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
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Ca-Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
I. Con. (---)--Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by 1. earnings of projects under construction, 2. earnings of
projects unseasoned in operation experience, 3. rentals which begin when
facilities are completed, or 4. payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of condition.
Standard & Poor's Corporation
A brief description of the applicable S&P Corporation rating symbols
and their meanings is as follows:
AAA-This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to repay principal and interest is very strong, and in the majority of
instances they differ from AAA issues in only small degrees.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and
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protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C-The rating C is reserved for income bonds on which no interest is
being paid.
D-Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional Ratings: the letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
Fitch
Ratings
A brief description of the applicable Fitch Investors Service, Inc.
rating symbols and their meanings is as follows:
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of the very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be
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more vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
A-4
<PAGE>
DDD, DD AND D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months or the
DDD, DD or D categories.
DUFF & PHELPS, INC.
RATING DEFINITION
SCALE
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong.
AA- Risk is AA modest but may vary slightly from time to time
AA- because of economic conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods of
A- economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable variability
BBB- in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
BB- protection factors fluctuate according to industry conditions
or company fortunes. Overall quality may move up or down
frequently within this category.
B+ Below investment grade and possessing risk that obliga-
B tions will not be met when due. Financial protection
B- factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest
A-5
<PAGE>
or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
RATING DEFINITION
SCALE
High Grade
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
Issuer failed to meet scheduled principal and/or interest
payments.
A-6
<PAGE>
Ratings of Municipal Notes
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Service, Inc.
rating symbols for municipal notes and their meanings is as follows:
MIG-1 - This is the highest rating assigned by Moody's to municipal
notes and designates noted judged to be of the best quality.
MIG-2 - This rating designates notes of a high quality by all
standards. However, the margins of protection, although ample, are not as large
as in the preceding group.
MIG-3 - This rating designates notes which are of a favorable quality,
with all security elements accounted for. However, such notes are lacking the
undeniable strength of notes in the preceding two groups. Market access for
refinancing, in particular, is likely to be less well established.
Short-Term Ratings
Fitch
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
A-7
<PAGE>
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Short-Term Municipal Loans
Moody's highest rating for short-term municipal loans is MIG-1/VMIG-1.
Moody's states that short-term municipal securities rated MIG-1/VMIG-1 are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2 designation are
of high quality, with margins of protection ample although not so large as in
the MIG-1/VMIG-1 group.
S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those issues rated SP-1
which are determined to possess overwhelming safety characteristics will be
given a plus (+) designation. Issues rated SP-2 have satisfactory capacity to
pay principal and interest.
Other Municipal Securities and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for other
short-term municipal securities and commercial paper, and "A- 1+" and "A-1" are
the two highest ratings for commercial paper assigned by S&P (S&P does not rate
short-term tax-free obligations). Moody's uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of "Prime", while S&P uses
the number 1+, 1, 2 and 3 to denote relative strength within its highest
classification of "A". Issuers rated "Prime" by Moody's have the following
characteristics: their short-term debt obligations carry the smallest degree of
investment risk, margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured, current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations. Commercial paper
issuers rated "A" by S&P have the following characteristics: liquidity ratios
are better than industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of borrowing, and basic
earnings and cash flow are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior management.
A-8
<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Fundamental Fixed-Income Fund
High-Yield Municipal Series
67 Wall Street
New York NY 10005
1-800-___-____
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800- SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(___-____)
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is _________.
A-9
<PAGE>
Fundamental Fixed-Income Fund
Tax-Free Money Market Series
This Prospectus pertains to the Tax-Free Money Market Series ("Money Market
Series") of the Fundamental Fixed-Income Fund (the "Fund").
Prospectus
April 30, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION OR ANY
STATE SECURITIES AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Risk/Return Summary..........................................................
Financial Highlights.........................................................
Investment Objective and Policies............................................
Investment Techniques........................................................
Investment Risks.............................................................
Management ..................................................................
Pricing of Fund Shares.......................................................
Purchase of Shares...........................................................
Redemption of Shares.........................................................
Distribution Agreement and Marketing Plan....................................
Dividends and Tax Matters....................................................
- -----------------------------------------------------------------------------
- 2 -
<PAGE>
RISK/RETURN SUMMARY
Investment Objective
The Money Market Series is a money market fund that seeks to provide current
income that is exempt from federal income tax while preserving capital and
liquidity.
Principal Investment Strategies
The Money Market Series will attempt to achieve its objective investing at least
80% of its total assets in high quality municipal securities the interest from
which is exempt from federal income tax.
Principal Risks of Investing in the Money Market Series
There is no guarantee that the Money Market Series will achieve its stated
objective. In fact, you could lose money by investing in the Money Market
Series. In making your investment decision, you should understand that the Money
Market Series's net asset value (NAV), yield, and total return may be adversely
affected by any or all of the following factors:
o Interest rate risk - Changes in interest rates cause the prices and yields
of debt securities to fluctuate;
o Credit risk - Certain issuers of securities may fail to make timely
payments of interest and principal on the Money Market Series' investments;
o Diversification risk - Because the Money Market Series may invest a greater
percentage of its assets in a few issuers, there is an increased likelihood
that a few issuers of securities may cause losses to the Money Market
Series.
o AN INVESTMENT IN THE Money Market Series IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE Money Market Series SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE Money Market Series.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Money
Market Series. The bar chart shows the performance of the Money Market Series
for each of the last 10 calendar years. The table shows how the Money Market
Series' average annual return for 1,
- 3 -
<PAGE>
5, and 10 years compare with those of a broad measure of market performance.
Bar Chart
The bar chart illustrates how the Money Market Series' returns vary from year to
year. As always, past performance is no way to predict future performance.
1998 - 1.77%
1997 - 2.19%
1996 - 2.10%
1995 - 2.60%
1994 - 1.69%
1993 - 1.40%
1992 - 2.79%
1991 - 4.86%
1990 - 5.14%
1989 - 5.45%
The Money Market Series' best performance for one quarter was 1.42% for the
quarter ended 6/30/89. The Money Market Series' worst performance for one
quarter was 0.30% for the quarter ended 3/31/94.
Average Annual Total Returns Table
The table below shows the Money Market Series' average annual total returns for
the 1, 5, and 10 year periods of the Money Market Series' existence in
comparison to the _____________ Index for the same periods. The table provides
some indication of the risks of investing in the Money Market Series by showing
how the Fund' average annual total returns for the periods noted compare with
that of a broad measure of market performance. As always, past performance is no
way to predict future performance.
Average Annual Returns as One Year 5 Years 10 Years
of 12/31/98
Fundamental Fixed-Income 1.77% 2.07% 2.99%
Fund Tax-Free Money
Market Series
[INSERT INDEX]
Fees and Expenses of the Money Market Series
This table describes the fees and expenses that you may pay if you buy and hold
shares of the
- 4 -
<PAGE>
Money Market Series.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)...............................................__%
Maximum Deferred Sales Charge (Load) (as a percentage of __)....................__%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other Distributions].......................................................__%
Redemption Fee (as a percentage of amount redeemed, if applicable)..............__%
Exchange Fee....................................................................__%
Maximum Account Fee.............................................................__%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)....__%
Management Fees.................................................................__%
Distribution [and/or Service] (12b-1) Fees......................................__%
Other Expenses..................................................................__%
------------------------------ --%
------------------------------ --%
------------------------------ --%
Total Annual Fund Operating Expenses............................................__%
</TABLE>
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
- 5 -
<PAGE>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
The Example does no reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads) were
included, your costs would be higher.
- 6 -
<PAGE>
Financial Highlights
The following information has been audited by McGladrey & Pullen, LLP,
independent public accountants, in connection with their audit of the Money
Market Series' financial statements. McGladrey & Pullen's report on the Money
Market Series' financial statements for the year ended December 31, 1998 appears
at the end of the Statement of Additional Information. The information listed
below should be read in conjunction with the Money Market Series' full financial
statements.
Selected per share data-Money Market Series For the years ended
December 31, 1994, 1995, 1996 and 1997 for each share outstanding throughout the
period: [INSERT FINANCIAL HIGHLIGHTS]
- 7 -
<PAGE>
Investment Objective and Policies
The investment objective of the Money Market Series of the Fundamental
Fixed-Income Fund is to provide as high a level of current income exempt from
federal income tax as is consistent with the preservation of capital and
liquidity. The Money Market Series will seek to achieve its objective by
investing, under normal circumstances, at least 80% of its assets in a managed
portfolio of high-quality debt securities, including bonds other than private
activity bonds issued after August 7, 1986, issued by or on behalf of states,
territories, and possessions of the United States, the District of Columbia, and
their political subdivisions, agencies, and instrumentalities, the interest from
which is exempt from federal income tax (municipal bonds). The Money Market
Series' investment objective is a fundamental policy which may not be changed
without the approval of a majority of the outstanding shares of the Money Market
Series. There can be no assurance that the Money Market Series will achieve its
objective. As a defensive measure under certain market conditions, the Money
Market Series may invest up to 50% of its assets in short-term taxable
investments. See Temporary Defensive Investments.
As used in this Prospectus the phrase "majority of the Fund's
outstanding shares" means the vote of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy at such a meeting or (2)
more than 50% of the Fund's outstanding shares.
The Money Market Series invests only in U.S. dollar-denominated
securities which are rated in one of the two highest rating categories for debt
obligations by Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's"), two nationally recognized statistical rating
organizations ("NRSROs") (or one NRSRO if the instrument was rated by only one
such organization) or, if unrated, are of comparable quality as determined in
accordance with procedures established by the Board of Trustees of the Fund.
Under normal market circumstances the Money Market Series will invest
at least 80% of its assets in high-quality municipal bonds rated AA, SP-1, or
higher by S&P or MIG-1 or Prime-1 by Moody's or are unrated but judged by the
Fund's investment adviser to be of at least comparable quality in accordance
with procedures established by the Board of Trustees of the Fund. At least 80%
of the Money Market Series' assets will be invested in obligations with
remaining maturities of 13 months or less. Accordingly, the securities in which
the Money Market Series will invest may not yield as high a level of current
income as longer term or lower grade securities that generally have less
liquidity and greater fluctuation in value.
Investments in rated securities not rated in the highest category by
these two NRSROs (or one NRSRO if the instrument was rated by only one such
organization), and unrated securities not determined by the investment adviser,
in accordance with procedures established by the board of trustees, to be
comparable to those rated in the highest category, will be limited to 5% of the
Money Market Series' total assets, with the investment in any such issuer being
- 8 -
<PAGE>
limited to not more than the greater of 1% of the Money Market Series' total
assets or $1 million. The Money Market Series may invest in obligations issued
or guaranteed by the U.S. Government without any such limitation.
Municipal bonds include debt obligations issued to obtain funds for
various public purposes, including construction of public facilities, repayment
of outstanding obligations, and payment of general operating expenses. The Money
Market Series will hold two categories of municipal bonds: general obligation
bonds, which are backed by the faith, credit, and taxing power of the issuing
municipality and considered to be the safest type of municipal bond; and revenue
bonds, which are backed by the revenues of a specific project or facility or in
some cases, by the proceeds of special excise taxes, user fees, or other
specific revenue sources. Certain revenue bonds may be issued to obtain funding
for privately operated facilities. These bonds, known as private activity bonds,
are backed by the credit and security of a private user and therefore have more
potential risk.
Repurchase Agreements
The Money Market Series may enter into repurchase agreements with
commercial banks, brokers, or dealers pursuant to which the Money Market Series
acquires a money market instrument (generally a U.S. Government obligation
qualifying for purchase by the Money Market Series) that is subject to resale by
the Money Market Series on a specified date (generally within one week) at a
specified price (which price reflects an agreed-on interest rate effective for
the period of time the Money Market Series holds the investment and is unrelated
to the interest rate on the instrument). As a matter of fundamental policy, the
Money Market Series will not enter into repurchase agreements of more than one
week in length if as a result, more than 10% of the total assets of the Money
Market Series would be invested in such agreements or other restricted or
illiquid securities. The Money Market Series enters into repurchase agreements
for the purpose of making short-term cash investments. Risks involved in
entering into repurchase agreements include the possibility of default or
bankruptcy by the other party to the agreement. The Money Market Series'
investment adviser will monitor the creditworthiness of parties with which it
enters into repurchase agreements.
Variable Rate Securities
The Money Market Series may invest in variable rate municipal bonds
with or without demand features. Interest rates on such securities fluctuate
based on changes in specified market rates, such as the prime rate, or are
adjusted at predetermined intervals, at least every six months. A demand feature
allows the Money Market Series to demand prepayment of the principal amount of
the municipal bond prior to its maturity. Some demand obligations are guaranteed
by banks or other financial institutions, which may enhance the quality of the
underlying security.
- 9 -
<PAGE>
When-Issued Securities
The Money Market Series purchases some municipal bonds on a when-issued
basis, which means that it may take as long as 60 days or more before they are
delivered and paid for. The commitment to purchase a security for which payment
will be made at a future date may be deemed a separate security. The purchase
price and interest rate of when-issued securities is fixed at the time the
commitment to purchase is entered into. Although the amount of municipal bonds
for which there may be purchase commitments on a when-issued basis is not
limited, it is expected that under normal circumstances not more than 25% of the
total assets of the Money Market Series will be committed to such purchases. The
Money Market Series does not start earning interest on when-issued securities
until settlement is made. In order to invest the assets of the Money Market
Series immediately while awaiting delivery of securities purchased on a
when-issued basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased. Although short-term investments will
normally be made in tax-exempt securities, short-term taxable securities may be
purchased if suitable short-term tax-exempt securities are not available. See
"Temporary Investments."
When a commitment to purchase a security on a when-issued basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the Money Market Series'
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, cash or high-quality debt securities sufficient
to cover any commitments are always expected to be available. However, although
it is not intended that such purchases will be made for speculative purposes,
and although the Money Market Series intends to adhere to the provisions of the
Securities and Exchange Commission policy, purchases of securities on a
when-issued basis may involve more risk than other types of purchases. For
example, when the time comes to pay for a when-issued security, portfolio
securities of the Money Market Series may have to be sold in order for the Money
Market Series to meet its payment obligations, and a sale of securities to meet
such obligations carries with it a greater potential for the realization of
capital gain, which is not tax-exempt. Also, if it is necessary to sell the
when-issued security before delivery, the Money Market Series may incur a loss
because of market fluctuations since the time the commitment to purchase the
when-issued security was made. Moreover, any gain resulting from any such sale
would not be tax-exempt. Additionally, because of market fluctuations between
the time of commitment to purchase and the date of purchase, the when-issued
security may have a lesser (or greater) value at the time of purchase than the
Money Market Series' payment obligations with respect to the security.
Temporary Defensive Investments
The Money Market Series anticipates that it may, from time to time, and
in response to adverse market conditions, invest a portion of its total assets,
on a temporary basis, in short-term fixed-income obligations whose interest is
subject to federal income tax.
- 10 -
<PAGE>
Investment Risks and Restrictions
The Money Market Series provides investors with the ability to purchase
securities exempt from federal income tax in large denominations and to achieve
diversification of both investments and maturity schedule. However, these
advantages may be substantially reduced or eliminated during periods when
interest rates in general are declining or interest rates on the Money Market
Series' municipal bonds are lower than interest rates on municipal bonds with
maturities greater than those of the Money Market Series.
The high-quality municipal bonds in which the Money Market Series will
invest may not offer as high a yield as may be achieved from lower quality
instruments having less liquidity and greater fluctuation in value.
The ability of the Money Market Series to achieve its investment
objective depends partially on prompt payment by issuers of the interest on, and
principal of, municipal bonds held by the Money Market Series. A moratorium,
default, or other failure to pay interest or principal when due on any municipal
bond, in addition to affecting the market value and liquidity of that particular
security, could affect the market value and liquidity of other municipal bonds
held by the Money Market Series. The market for municipal bonds is smaller than
the market for taxable money market securities and can be temporarily affected
by large purchases and sales, including those by the Money Market Series.
Portfolio Turnover
Because the Money Market Series will invest in municipal bonds maturing
in not more than one year, portfolio turnover will be high. In addition, the
Money Market Series will attempt to increase yields by trading securities to
take advantage of short-term interest rate disparities. A high turnover rate
increases transaction costs and the possibility of taxable short-term gains, and
affects performance. Therefore the Money Market Series will carefully weigh the
added cost of short-term investments against anticipated gains. If the Money
Market Series disposes of a municipal bond prior to maturity, it may realize a
loss or a gain. The value of the Money Market Series will generally vary
inversely with the movement of interest rates.
Special Considerations
It is expected that a substantial portion of the assets of the Money
Market Series will be derived from professional money managers and investors who
intend to invest in the Money Market Series as part of an asset-allocation or
market-timing investment strategy. These investors are likely to redeem or
exchange their Fund shares frequently to take advantage of anticipated changes
in market conditions. The strategies employed by investors in the Fund may
result in considerable assets moving in and out of the Fund. Consequently, the
Trust expects that the Fund will generally experience significant portfolio
turnover, which will likely cause higher expenses and additional costs, and
adversely affect performance.
- 11 -
<PAGE>
Private Activity Bonds
The Internal Revenue Code of 1986, as amended (the "Code") treats
interest from certain municipal bonds (referred to as private activity bonds) as
a tax preference item under the alternative minimum tax. Thus, corporate and
individual shareholders may incur an alternative minimum tax liability as a
result of receiving tax-exempt dividends from the Money Market Series to the
extent such dividends are attributable to interest from private activity bonds.
The Money Market Series will invest in private activity bonds only when it
believes that the yield disparity between private activity bonds and other
municipal bonds makes an investment in private activity bonds attractive. In
addition, because all tax-exempt dividends are included in a corporate
shareholder's adjusted current earnings (which are used in computing a separate
preference item for corporations), corporate shareholders may incur an
alternative minimum tax liability as a result of receiving any tax-exempt
dividends from the Money Market Series. Tax-exempt interest and income referred
to throughout this Prospectus means interest and income that is excluded from
gross income for federal income tax purposes but may be a tax preference item
subject to the alternative minimum tax. Further, such tax-exempt interest and
income may be subject to taxation under the tax laws of any state or local
taxing authority. See "Information about Shares of the Money Market
Series--Dividends and Tax Matters."
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
Management
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone" or the
"Manager"). Cornerstone's principal business address is 67 Wall Street, New
York, New York 10005. Cornerstone is an investment adviser registered with the
Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone's advisory contract with the Fund was approved at a Special Meeting
of shareholders held on March ___, 1999. At that meeting, shareholders also
ratified Cornerstone's advisory fees of $___________, which amounted to ____% of
the Fund's average net assets for the period from September 29, 1998 to December
31, 1998. Cornerstone's advisory fee was based on the following table:
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and Chief
Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of Money Market Series shares is based on the Fund's net
asset value. Each share of the Money Market Series is sold at its net asset
value next determined after a purchase order becomes effective. It is the
intention of the Money Market Series to maintain a per share net asset value of
$1, although no such net asset value can be guaranteed. The net asset value per
share of the Money Market Series is determined as of the close of trading on the
New York Stock Exchange (currently 4:00 P.M. New York time) on each day that
both the New York Stock Exchange and the Fund's custodian bank are open for
business. The net asset value per share of the Money Market Series is also
determined on any other day that the level of trading in its portfolio
securities is sufficiently high that the current net asset value per share might
be materially affected by changes in the value of its portfolio securities. On
any day on which no purchase orders for the shares of the Money Market Series
become effective and no shares are tendered for redemption, the net asset value
per share will not be determined. The Money Market Series shares will not be
priced on the following days when the New York Stock Exchange is closed: New
Year's Day, Dr. Martin Luther King Jr.'s Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day.The net asset value per share of the Money Market Series is computed by
taking the amount of the value of all of its assets, less its liabilities, and
dividing it by the number of outstanding shares. For purposes of determining net
asset value, expenses of the Money Market Series are accrued daily and taken
into account.
The portfolio securities of the Money Market Series are valued on an
amortized cost basis. Under this valuation method, a portfolio instrument is
valued at cost and any premium or discount is amortized on a constant basis
until maturity. Other assets are valued at fair value as determined in good
faith by persons designated by the Fund's trustees using methods determined by
the trustees.
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<PAGE>
PURCHAES OF SHARES
Shares of the Money Market Series may be purchased either directly from
the Money Market Series or through securities dealers, banks, or other financial
institutions. The Money Market Series has a minimum initial purchase requirement
of $1000 and a minimum subsequent purchase requirement of $100. Subsequent
purchases are made in the same manner as initial purchases.
Investors can purchase shares without a sales charge if they purchase
the shares directly from the Money Market Series. However, investors may be
charged a fee if they purchase shares through securities dealers, banks, or
other financial institutions. Investors opening a new account for the Money
Market Series must complete and submit a purchase application along with payment
of the purchase price for their initial investment. Investors purchasing
additional shares of the Money Market Series should include their account number
along with payment of the purchase price for additional shares being purchased.
Investors may re-open an account with a minimum investment of $100 and without
filing a purchase application during the year in which the account was closed or
during the following calendar year if the information on the original purchase
application is still applicable. The Money Market Series may require the filing
of a statement that all information on the original purchase application remains
applicable.
For customers of certain financial institutions who offer the service,
investors may have their "free-credit" cash balances automatically invested in
shares of the Money Market Series. These investments are not subject to the
minimum purchase requirements described above.
A purchase order becomes effective immediately on receipt by Firstar
Mutual Fund Services, LLC, as agent for the Money Market Series, if it is
received before 4:00 P.M. (Eastern time) on any business day. After a purchase
order becomes effective, confirmation of the purchase is sent to the investor,
and the purchase is credited to the investor's account. The Fund, or any series
thereof, reserves the right to reject any purchase order.
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Fundamental Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign Section F of the Purchase Application and
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<PAGE>
send it to the Transfer Agent. Shareholders may cancel this privilege or change
the amount of purchase at any time by calling 1-800-322-6864 or by mailing
written notification to: Fundamental Family of Funds, c/o Firstar Mutual Fund
Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be
effective five business days following receipt of notification by the Transfer
Agent. A Fund may modify or terminate this privilege at any time or charge a
service fee, although no such fee currently is contemplated. However, a $20 fee
will be imposed by Firstar Mutual Fund Services, LLC if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that they do not exceed the amount allowable for
Federal tax purposes. Firstar Mutual Fund Services, LLC will assume that all
retirement plan contributions are being made for the tax year in which they are
received.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar [Bank Milwaukee, N.A.]
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar [Bank Milwaukee, N.A.]
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund. Failure to submit required
information may delay investment.
- 15 -
<PAGE>
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Fundamental Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Checks should be
made payable to Fundamental Family of Funds.
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at (800) 322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined (see "Determination of
Net Asset Value"); the specific method of determining the value will be provided
to you on request. The Fund reserves the right to refuse any such exchange, even
if the securities offered by an investor meet the general investment criteria of
the Fund. A capital gain or loss for Federal income tax purposes may be realized
by the investor following the exchange. Maturing bonds or detached coupons
submitted within five (5) business days of the payment date are credited on the
payment date.
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which Fund
management acts as the investment manager in exchange for shares of the Fund at
respective net asset values per share. Exchange instructions may be given in
writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
- 16 -
<PAGE>
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
REDEMPTIONS
Each investor in the Money Market Series has the right to cause the
Money Market Series to redeem his or her shares, by making a request to Firstar
Mutual Fund Services, LLC in accordance with the procedures of either the
regular redemption procedure, the telephone redemption privilege, the expedited
redemption privilege, or the check redemption privilege, as described in the
following paragraphs. If Firstar Mutual Fund Services, LLC receives a redemption
request before the close of trading on any day the New York Stock Exchange is
open for trading, the redemption will become effective on that day and be made
at the net asset value per share of the Money Market Series, as determined at
the close of trading on that day, and payment will be made on the following
business day. If Firstar Mutual Fund Services, LLC receives a redemption request
following the close of trading on the New York Stock Exchange, or on any day the
New York Stock Exchange is not open for business, the redemption will become
effective on the next day the New York Stock Exchange is open for trading and be
made at the net asset value per share of the Money Market Series, as determined
at the close of trading on that day, and payment will be made on the following
business day. Investors are entitled to receive all dividends on shares being
redeemed that are declared on or before the effective date of the redemption of
such shares. The net asset value per share of the Money Market Series received
by an investor on redeeming shares may be more or less than the purchase price
per share paid by such investor, depending on the market value of the portfolio
of the Money Market Series at the time of redemption.
Regular Redemption Procedure. Investors may redeem their shares by
sending a written redemption request to Firstar Mutual Fund Services, LLC, which
request must specify the number of shares to be redeemed and be signed by the
investor of record. For redemptions exceeding $50,000 (and for all written
redemptions, regardless of amount, made within 30 days following any change in
account registration), the signature of the investor on the redemption request
must be guaranteed by an eligible guarantor institution approved by Firstar
Trust Company. Signature guarantees in proper form generally will be accepted
from
- 17 -
<PAGE>
domestic banks, a member of a national securities exchange, credit unions and
savings associations, as well as from participants in the Securities Transfer
Agents Medallion Program ("STAMP"). If you have any questions with respect to
signature guarantees, please call the transfer agent at (800) 322-6864. Firstar
Trust Company may, at its option, request further documentation from
corporations, executors, administrators, trustees, or guardians. If a redemption
request is sent to the Money Market Series, the Money Market Series will forward
it to Firstar Mutual Fund Services, LLC. Redemption requests will not become
effective until all proper documents have been received by Firstar Trust
Company. The U.S. Postal Service and other independent delivery services are not
agents of the Fund. Therefore, deposit of redemption requests in the mail or
with such services does not constitute receipt by Firstar Trust Company or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Redemption requests sent by overnight or express mail should be
directed to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC,
Mutual Fund Services, Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202. Requests for redemption that are subject to any special
condition, or specify an effective date other than as provided herein, cannot be
accepted and will be returned to the investor.
Telephone Redemption Privilege. An investor may, by either completing
the appropriate section of the purchase application, or by later making a
written request to Firstar Mutual Fund Services, LLC, containing his or her
signature guaranteed by an eligible guarantor (see above), obtain the telephone
redemption privilege for any of his or her accounts. Provided that your account
registration has not changed within the last 30 days, an investor may redeem up
to $150,000 worth of shares from an account for which he or she has the
telephone redemption privilege by making a telephone redemption request to
Firstar Mutual Fund Services, LLC, at (800) 322-6864. Telephone calls will be
recorded. A check for the proceeds of such a redemption will be issued in the
name of the investor of record and mailed to the investor's address as it
appears on the records of the Money Market Series. Both the Money Market Series
and Firstar Trust Company reserve the right to refuse or limit a telephone
redemption request and to modify the telephone redemption privilege at any time.
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a written confirmation
statement of all telephone call transactions will be mailed to shareholders at
their address of record within 3 business days after the telephone call
transaction. Since you will bear the risk of loss, you should verify the
accuracy of telephone transactions immediately upon receipt of your confirmation
statement.
Expedited Redemption Privilege. An investor in any series of the Fund
may, either by completing the appropriate section of the purchase application,
or by later making a written request to Firstar Mutual Fund Services, LLC,
containing his or her signature guaranteed by an eligible guarantor (see above),
obtain the expedited redemption privilege for any of his or her accounts. The
expedited redemption privilege allows the investor to have the proceeds of any
redemption of shares in any amount of $5000 or more transferred by wiring
federal
- 18 -
<PAGE>
funds to the commercial bank or savings and loan institution specified in his or
her purchase application or written request for the expedited redemption
privilege. Expedited redemption requests may be made by either mail (to the
address specified under regular redemption procedure) or by telephone (to the
number specified under telephone redemption privilege). The proceeds of such a
redemption may be subject to a deduction of the usual and customary charge.
Firstar Mutual Fund Services, LLC charges a $12 service fee for each payment of
redemption proceeds made by federal wire. This fee will be deducted from your
account. An investor may change the account or commercial bank designated to
receive the redemption proceeds by sending a written request to Firstar Mutual
Fund Services, LLC, containing his or her signature guaranteed in the manner
just described. Both the Money Market Series and Firstar Trust Company reserve
the right to refuse or limit an expedited redemption request and to modify the
expedited redemption privilege at any time.
Check Redemption Privilege. An investor in any series of the Fund may,
by either completing the appropriate section of the purchase application, or by
later making a written request to the Money Market Series, obtain redemption
checks for any of his or her accounts. These checks may be used by the investor
in any lawful manner and may be payable to the order of any person or company in
an amount of $100 or more. When a check is presented to Firstar Mutual Fund
Services, LLC for payment, Firstar Mutual Fund Services, LLC, as agent for the
investor, will cause the Money Market Series to redeem a sufficient number of
shares in the investor's account to cover the amount of the check. Investors
using the check redemption privilege will be subject to the same rules and
regulations applicable to other checking accounts at Firstar Mutual Fund
Services, LLC. There is no charge to the investor for using the check redemption
privilege, except that Firstar Trust Company imposes a $20 charge if an investor
requests that it stop payment of a Redemption Check or if it cannot honor a
Redemption Check due to insufficient funds or other valid reasons. The check
redemption privilege may not be used to close an account. The check redemption
privilege may be modified or terminated at any time by either the Money Market
Series or Firstar Mutual Fund Services, LLC.
At times, the Money Market Series may be requested to redeem shares for
which it has not yet received good payment. The Money Market Series may delay,
or cause to be delayed, payment of redemption proceeds until such time as it has
assured itself that good payment has been received for the purchase of such
shares, which may take up to 15 days. In the case of payment by check, the
determination of whether the check has been paid by the paying institution can
generally be made within 7 days, but may take longer. Investors may avoid the
possibility of any such delay by purchasing shares by wire. In the event of
delays in paying redemption proceeds, the Money Market Series will take all
available steps to expedite collection of the investment check.
If shares are purchased by check, you may write checks against such
shares only after 15 days from the date the purchase was executed. Shareholders
who draw against shares purchased fewer than 15 days from the date of original
purchase, will be charged usual and customary bank fees.
- 19 -
<PAGE>
The Money Market Series reserves the right to suspend the right of
redemption or postpone the day of payment with respect to its shares (1) during
any period when the New York Stock Exchange is closed (other than customary
weekend and holiday closings); (2) during any period when trading markets that
the Money Market Series normally uses are restricted or an emergency exists as
determined by the Securities and Exchange Commission, so that disposal of the
Money Market Series' investments or determination of its net asset value is not
reasonably practicable; or (3) for such other periods as the Securities and
Exchange Commission by order may permit to protect investors.
If an investor's account has an aggregate net asset value of less than
$100, the Money Market Series may redeem the shares held in such account if the
net asset value of such account has not been increased to at least $100 within
60 days of notice by the Money Market Series to such investor of its intention
to redeem the shares in such account. The Money Market Series will not redeem
the shares of an account with a net asset value of less than $100 if the account
was reduced from the initial minimum investment of $1000 or more to below $100
as a result of market activity.
Exchange of Shares
Investors may exchange shares of the Money Market Series having an
aggregate net asset value of $1000 or more for shares of any other series of the
Fund or any other mutual fund for which the Manager acts as the investment
adviser by either (1) delivering to Firstar Mutual Fund Services, LLC a written
request specifying the number of shares of the Money Market Series to be
exchanged and the series of the Fund or the mutual fund in which they wish to
invest after such an exchange, or (2) in the case of those investors who have
the telephone redemption privilege, making such a request by telephone. (See
"Redemption-Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions). The exchange is effected by redeeming the investor's shares of
the Money Market Series and issuing to the investor shares of the series or
mutual fund in which he or she is investing. The shares of both the Money Market
Series and the series or mutual fund being invested in are valued for purposes
of this exchange at the net asset value per share of the Money Market Series and
such other series or fund, respectively, as next determined after receipt by
Firstar Mutual Fund Services, LLC of the exchange request.
The exchange privilege is available only in those states where such
exchange can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers and is subject to the
suitability requirements, if any, of the series or fund for which an exchange is
proposed to be made. Prior to effecting an exchange, an investor should consider
the investment policies of the series or mutual fund he or she is investing in.
Any exchange is, in effect, a redemption of shares in one fund and a purchase of
the other fund. Therefore, an investor may recognize a capital gain or loss for
federal income tax purposes on the exchange.
- 20 -
<PAGE>
Transfers
An investor may transfer shares of the Money Market Series by
submitting to Firstar Mutual Fund Services, LLC a writ ten request for transfer,
signed by the registered holder of the shares and indicating the name of, the
social security number or taxpayer identification number of, and the
distribution and redemption options elected by, the new registered holder.
Firstar Mutual Fund Services, LLC may, at its option, request further
documentation from transferors who are corporations, executors, administrators,
trustees, or guardians.
DISTRIBUTION EXPENSES
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of
the 1940 Act (the plan), under which the Money Market Series pays to
______________ a fee, which is accrued daily and paid monthly, at an annual rate
of .50% of the Money Market Series' average daily net assets. Amounts paid under
the plan are paid to ________ to compensate it for services it provides and
expenses it bears in distributing the Money Market Series' shares to investors,
including payment of compensation by ___________ to securities dealers and other
financial institutions and organizations, such as banks, trust companies,
savings and loan associations, and investment advisers to obtain various
distribution related and/or administrative services for the Money Market Series.
Expenses of ___________ also include expenses of its employees, who engage in or
support distribution of shares or service shareholder accounts, including
overhead and telephone expenses; printing and distributing prospectuses and
reports used in connection with the offering of the Money Market Series' shares;
and preparing, printing, and distributing sales literature and advertising
materials. Because these payments are paid out of the Fund's assets on a
continual basis over time, these fees will increase the cost of your investment
and may cost you more than other types of sales charges.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
The Money Market Series will declare on each business day just prior to
the calculation of its net asset value all of its net investment income
(consisting of earned interest income less expenses) as a dividend on shares of
record at the close of business on the preceding business day. Dividends are
distributed on the last business day of each calendar month. The Money Market
Series normally distributes capital gains, if any, before the end of its fiscal
year. All dividends and capital gains distributions by the Money Market Series
will be in the form of additional shares unless the investor has made an
election, either on his or her purchase application or in a subsequent written
request to Firstar Mutual Fund Services, LLC, to receive such distributions in
cash. An investor may change his or her distribution election by filing a
written request with Firstar Mutual Fund Services, LLC, at least four days prior
to the date of a distribution.
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<PAGE>
Taxes
The Money Market Series intends to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders.
o Exempt-interest dividends from the Money Market Series will be exempt
from federal regular income tax.
o Ordinary dividends from the Money Market Series are taxable as
ordinary income and dividends from the Money Market Series' long-term
capital gains are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or additional
shares. They may also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they
had been paid the previous December.
o We will mail you tax statements annually showing the amounts and tax
status of the distributions you received.
o When you sell (redeem) or exchange shares of the Money Market Series,
you must recognize any gain or loss. However, as long as the Money
Market Series NAV per share does not deviate from $1.00, there will be
no gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
Money Market Series.***
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<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Fundamental Fixed-Income Fund
Tax-Free Money Market Series
67 Wall Street
New York NY 10005
1-800-___-____
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800- SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(___-____)
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is _________.
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<PAGE>
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus, a copy of which may be obtained
by writing to The Fund at (________________), or by calling (800) (_________).
Shareholder inquiries may also be placed through this number.
THIS STATEMENT IS DATED MAY 1, 1999 AND
SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY ................................................................
INVESTMENT OBJECTIVE AND POLICIES ...........................................
INVESTMENT LIMITATIONS ......................................................
MANAGEMENT OF THE FUND ......................................................
OWNERSHIP OF SECURITIES .....................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES ....................................
DISTRIBUTION PLAN ...........................................................
PORTFOLIO TRANSACTIONS.......................................................
TAXES........................................................................
DESCRIPTION OF SHARES........................................................
CERTAIN LIABILITIES..........................................................
PURCHASE OF SHARES ..........................................................
PRICING OF SHARES ...........................................................
CALCULATION OF YIELD.........................................................
FINANCIAL STATEMENTS.........................................................
- 2 -
<PAGE>
FUND HISTORY
The Fundamental-Fixed Income Fund (the "Fund") was organized as a
Massachusetts business trust on March 19, 1987. The Company has three series:
Tax-Free Money Market Series, High-Yield Municipal Bond Series, and Fundamental
U.S. Government Strategic Income Fund (the "U.S. Government Series"). This
Statement of Additional Information pertains to the U.S. Government Series,
which is an open-end, diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the U.S. Government Series dated April 30, 1999 (the
"Prospectus") identifies the investment objective and the principal investment
policies of the U.S. Government Series. Other investment policies, investment
limitations and a further description of certain of the policies described in
the Prospectus are set forth below.
Portfolio Turnover. Pursuit by the U.S. Government Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the U.S. Government Series of brokerage commissions, dealer
spreads and other transaction costs relating to the purchase and the sale of
securities. Portfolio turnover rate for a given fiscal year is calculated by
dividing
- 3 -
<PAGE>
the lesser of the amount of the purchases or the amount of the sales of
portfolio securities during the year by the monthly average of the value of the
portfolio securities during the year.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
Call and Put Options
Call and put options on various U.S. Treasury notes and U.S. Treasury
bonds are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on Agencies are currently written or
purchased only in over-the-counter transactions.
Writing Call and Put Options
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return can be expected to fluctuate
because premiums earned from an option writing program and interest income
yields on portfolio securities vary as economic and market conditions change.
Actively writing options on portfolio securities is likely to result in the U.S.
Government Series having a substantially higher portfolio turnover rate than
that of most other investment companies. Higher portfolio involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the U.S. Government Series.
- 4 -
<PAGE>
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The U.S. Government Series
writes call options either on a covered basis, or for cross-hedging purposes. A
call option is covered if the U.S. Government Series owns or has the right to
acquire the underlying securities subject to the call option at all times during
the option period. Thus the U.S. Government Series may write options on
Government Securities. An option is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a security which the U.S.
Government Series owns or has the right to acquire. In such circumstances, the
U.S. Government Series will collateralize the option by maintaining in a
segregated account with the U.S. Government Series' Custodian, cash or
Government Securities in an amount not less than the market value of the
underlying security, marked to market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The U.S. Government Series would write
put options only on a secured basis, which means that, at all times during the
option period, the U.S. Government Series would maintain in a segregated account
with its Custodian, cash, money market instruments or high grade liquid debt
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the U.S. Government
Series could enter
- 5 -
<PAGE>
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the U.S. Government Series. The
U.S. Government Series would realize a gain (loss) if the premium plus
commission paid in the closing purchase transaction is less (greater) than the
premium it received on the sale of the option. The U.S. Government Series would
also realize a gain if an option it has written lapses unexercised.
The U.S. Government Series can write options that are listed on an
Exchange as well as options which are privately negotiated in over-the-counter
transactions. The U.S. Government Series can close out its position as a writer
of an option only if a liquid secondary market exists for options of that
series, but there is no assurance that such a market will exist, particularly in
the case of over-the-counter options, since they can be closed out only with the
other party to the transaction. Alternatively, the U.S. Government Series could
purchase an offsetting option, which would not close out its position as a
writer, but would provide an asset of equal value to its obligation under the
option written. If the U.S. Government Series is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral securing the option until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the U.S. Government
Series loses the potential for gain on the underlying security above the
exercise price while the option
- 6 -
<PAGE>
is outstanding; by writing a put option, the U.S. Government Series might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.
Purchasing Call and Put Options
The U.S. Government Series may purchase either listed or
over-the-counter options. The U.S. Government Series may purchase call options
to protect (i.e., hedge) against anticipated increases in the price of
securities it wishes to acquire. Since the premium paid for a call option is
typically a small fraction of the price of the underlying security, a given
amount of funds will purchase call options covering a much larger quantity of
such security than could be purchased directly. By purchasing call options, the
U.S. Government Series could benefit from any significant increase in the price
of the underlying security to a greater extent than if it had invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the U.S. Government Series would bear a significant risk of
losing the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (i.e., hedge)
against anticipated declines in the market value of either specific portfolio
securities or of the U.S. Government Series' assets generally. The U.S.
Government Series will not purchase call or put options on securities if as a
result, more than ten percent of its net assets would be invested in premiums on
such options.
- 7 -
<PAGE>
Interest Rate Futures Contracts
The U.S. Government Series may engage in transactions involving futures
contracts and related options in accordance with the rules and interpretations
of the Commodity Futures Trading Commission ("CFTC") under which the U.S.
Government Series would be exempt from registering as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a
party agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA Certificates)
at a specified future time and at a specified price. Interest rate futures
contracts also include cash settlement contracts based upon a specified interest
rate such as the London Interbank Offering Rate for dollar deposits ("LIBOR").
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the U.S. Government Series will be required to deposit with
its Custodian in an account in the broker's name an amount of cash, money market
instruments or liquid high-grade debt securities equal to not more than five
percent of the contract amount. This amount is known as "initial margin." The
nature of initial margin in futures transactions is different from that of
margin in securities transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the U.S. Government Series
- 8 -
<PAGE>
upon termination of the futures contract and satisfaction of its contractual
obligations. Subsequent payments to and from the broker, called "variation
margin," will be made on a daily basis as the price of the underlying security
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking to market."
For example, when the U.S. Government Series has purchased a futures
contract and the price of the underlying security has risen, that position will
have increased in value, and the U.S. Government Series will receive from the
broker a variation margin payment equal to that increase in value. Conversely,
when the U.S. Government Series has purchased a futures contract and the value
of the underlying security has declined, the position would be less valuable,
and the U.S. Government Series would be required to make a variation payment to
the broker.
At any time prior to expiration of the futures contract, the U.S.
Government Series may elect to terminate the position by taking an opposite
position. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the U.S. Government Series, and
the U.S. Government Series realizes a loss or a gain.
Futures Strategies. When the U.S. Government Series anticipates a
significant market or market sector advance, the purchase of a futures contract
affords a hedge against not participating in the advance at a time when the U.S.
Government Series is not fully invested ("anticipatory hedge"). Such purchase of
a futures contract would serve as a temporary substitute for the purchase of
individual securities, which may be purchased in an orderly fashion
- 9 -
<PAGE>
once the market is established. As individual securities are purchased, an
equivalent amount of futures contracts can then be terminated by offsetting
sales. The U.S. Government Series may sell futures contracts in anticipation of,
or during, a general market or market sector decline that may adversely affect
the market value of the U.S. Government Series' securities ("defensive hedge").
To the extent that the U.S. Government Series' portfolio of securities changes
in value in correlation with the underlying security, the sale of futures
contracts would substantially reduce the risk to the U.S. Government Series of a
market decline and, by so doing, provide an alternative to the liquidation of
securities positions in the U.S. Government Series. Ordinarily, commissions on
futures transactions are lower than transaction costs incurred in the purchase
and sale of Government Securities.
Transactions will be entered into by the U.S. Government Series only
with brokers or financial institutions deemed creditworthy by the Manager.
However, in the event of the bankruptcy of a broker through which the U.S.
Government Series engages in transactions in listed options, futures or related
options, the U.S. Government Series might experience delays and/or losses in
liquidating open positions purchased and/or incur a loss of all or part of its
margin deposits with the broker.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
- 10 -
<PAGE>
There may be an imperfect correlation (or no correlation) between
movements in the price of the futures contracts and the securities being hedged.
The risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the U.S. Government Series could buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater than the historical volatility of the securities underlying
the futures contract. Conversely, the U.S. Government Series could buy or sell
futures contracts in a lesser dollar amount than the dollar amount of securities
being hedged if the historical volatility of the securities being hedged is less
than the historical volatility of the securities underlying the futures
contract. It is also possible that the value of futures contracts held by the
U.S. Government Series could decline at the same time as portfolio securities
being hedged; if this occurred, the U.S. Government Series would lose money on
the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of a futures contract may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract.
- 11 -
<PAGE>
Second, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the securities
markets. Therefore, increased participation by speculators in the futures
markets may cause temporary price distortions. Due to the possibility of price
distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Manager may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently
liquid. Futures contracts may be closed out only on an Exchange or board of
trade that provides a market for such futures contracts. Although the U.S.
Government Series intends to purchase or sell futures only on Exchanges and
boards of trade where there appears to be an active secondary market, there can
be no assurance that an active secondary market will exist for any particular
contract or at any particular time. In the event of such illiquidity, it may not
be possible to close a futures position and, in the event of adverse price
movement, the U.S. Government Series would continue to be required to make daily
payments of variation margin. Since the securities being hedged would not be
sold until the related futures contract is sold, an increase, if any, in the
price of the securities may to some extent offset losses on the related futures
contract. In such event, the U.S. Government Series would lose the benefit of
the appreciation in value of the securities.
Successful use of futures is also subject to the Manager's ability to
correctly predict the direction of movements in the market. For example, if the
U.S. Government Series
- 12 -
<PAGE>
hedges against a decline in the market and market prices instead advance, the
U.S. Government Series will lose part or all of the benefit of the increase in
value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the U.S. Government Series has insufficient
cash, it may have to sell portfolio securities at a time when it is
disadvantageous to do so in order to meet the daily variation margin.
The use of futures contracts to shorten the weighted average duration
of the U.S. Government Series' portfolio, while reducing the exposure of the
U.S. Government Series' portfolio to interest rate risk does subject the U.S.
Government Series' portfolio to basis risk. Basis refers to the relationship
between a futures contract and the underlying security. In the case of futures
contracts on U.S. Treasury Bonds, the contract specifies delivery of a
"bench-mark" 8% 20 year U.S. Treasury Bond. Any outstanding treasury with a
maturity of more than 15 years is deliverable against the contract, with the
principal amount per contract adjusted according to a formula which takes into
account the coupon and maturity of the treasury bond being delivered. This means
that at any given time there is one treasury issue that is "the cheapest to
deliver" against the contract. The supply and demand of the available float of
treasury securities determines which treasury security is cheapest to deliver at
any given time. This, combined with the supply and demand for futures relative
to the underlying cash securities markets, causes the relationship between the
cash security markets and the futures markets to exhibit perturbations of
variance from an exact one-to-one correlation. The U.S. Government Series could
experience losses if the value of the prices of the futures positions the U.S.
Government Series has entered into are poorly correlated with the U.S.
Government Series' other investments.
- 13 -
<PAGE>
For example, on a day that the price on a treasury bond deliverable
against the futures contract declined by ten points, the futures contract might
decline by nine or eleven points. In this example, a nine point decline in the
price of a futures contract would not fully offset the price decline in the cash
security price. This would cause a downward fluctuation in the value of the U.S.
Government Series' portfolio. Likewise, a basis fluctuation whereby the futures
prices fell more or rose less than the cash securities prices due to basis
change would cause an upward fluctuation in the value of the U.S. Government
Series' portfolio.
CFTC regulations require, among other things, (i) that futures and
related options be used solely for bona fide hedging purposes (or that the
underlying commodity value of the U.S. Government Series' long futures positions
not exceed the sum of certain identified liquid investments) and (ii) that the
U.S. Government Series not enter into futures and related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the U.S. Government Series' assets. In order to minimize leverage in
connection with the purchase of futures contracts by the U.S. Government Series,
an amount of cash, money market instruments or liquid high grade debt securities
equal to the market value of the obligations under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
Options on Futures Contracts
The U.S. Government Series may also purchase and write options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the
- 14 -
<PAGE>
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the U.S. Government Series would be subject to initial
margin and maintenance requirements similar to those applicable to futures
contracts. In addition, net option premiums received by the U.S. Government
Series are required to be included as initial margin deposits. When an option on
a futures contract is exercised, delivery of the futures position is accompanied
by cash representing the difference between the current market price of the
futures contract and the exercise price of the option. The U.S. Government
Series can purchase put options on futures contracts in lieu of, and for the
same purpose as selling a futures contract. The purchase of call options on
futures contracts would be intended to serve the same purpose as the actual
purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to
the risks described above which apply to all options transactions, there are
several special risks relating to options on futures. The Manager will not
purchase options on futures on any Exchange unless in the Manager's opinion, a
liquid secondary Exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
U.S. Government Series because the maximum amount at risk is the premium paid
for the options (plus transaction costs). However, there may be circumstances,
such as when there is no movement in the price of the underlying security, where
the use of an option on a future would result in a loss to the U.S. Government
Series whereas the use of a future would not.
- 15 -
<PAGE>
Additional Risks of Options and Futures Transactions
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Manager are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the U.S.
Government Series may write.
Although the U.S. Government Series intends to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that an active market will exist for the contracts at any particular
time. Most U.S. futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices would move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, and in
the event of adverse price movements, the U.S. Government Series would be
required to make daily cash payments of variation margin. In such circumstances,
an increase in the value of the portion of the portfolio being hedged, if any,
may partially or completely offset losses on the futures contract. However,
there is no guarantee that the
- 16 -
<PAGE>
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
Certain additional risks relate to the fact that the U.S. Government
Series might purchase and sell options on mortgage-related securities. Since the
remaining principal balance of mortgage-related securities declines each month
as a result of mortgage payments, if the U.S. Government Series has written a
call and is holding such securities as "cover" to satisfy its delivery
obligation in the event of exercise, it may find that the securities it holds no
longer have a sufficient remaining principal balance for this purpose. Should
this occur, the U.S. Government Series would purchase additional
mortgage-related securities from the same pool (if obtainable) or replacements
in the cash market in order to maintain its cover. A mortgage-related security
held by the U.S. Government Series to cover an option position in any but the
nearest expiration month may cease to represent cover for the option in the
event of a decrease in the coupon rate at which new pools are originated. If
this should occur, the option would no longer be covered, and the U.S.
Government Series would either enter into a closing purchase transaction or
replace the mortgage-related security with one which represents cover. In either
case, the U.S. Government Series may realize an unanticipated loss and incur
additional transactions costs.
INVESTMENT LIMITATIONS
The U.S. Government Series has adopted the following policies as
"fundamental policies," which cannot be changed without the approval of the
holders of a majority of the
- 17 -
<PAGE>
shares of the U.S. Government Series (which, as used in this Statement of
Additional Information, means the lesser of (i) more than 50% of the outstanding
shares, or (ii) 67% or more of the shares present at a meeting at which holders
of more than 50% of the outstanding shares are represented in person or by
proxy). The U.S. Government Series may not:
1. Purchase the securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, (i) more than 5% of
the value of its total assets would be invested in such issuer, or (ii) it
would own more than 10% of the outstanding voting securities of such
issuer; except that up to 25% of the value of its total assets may be
invested without regard to such limitations.
2. Invest 25% or more of its total assets in a single industry;
provided, however, that such limitation shall not be applicable to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
3. Issue senior securities, as defined in the Investment Company Act
of 1940 (the "1940 Act"), except to the extent such issuance might be
involved with borrowings described under subparagraph (4) below or with
respect to hedging and risk management transactions or the writing of
options within limits described in the U.S. Government Series' current
Prospectus.
4. Borrow money, except for temporary or emergency purposes, or by
engaging in reverse repurchase transactions, and then only in an amount not
exceeding one-third of the U.S. Government Series' total assets, including
the amount borrowed. The U.S. Government
- 18 -
<PAGE>
Series will not mortgage, pledge or hypothecate any assets except to secure
permitted borrowings and reverse repurchase transactions. Collateral
arrangements with respect to the U.S. Government Series' permissible
futures and options transactions, including initial and variation margin,
are not considered to be a pledge of assets for purposes of this
restriction.
5. Make loans of money or property to any person, other than by
entering into repurchase agreements, and except to the extent the
securities in which the U.S. Government Series may invest are considered to
be loans.
6. Buy any securities "on margin". Neither the deposit of initial or
variation margin in connection with hedging and risk management
transactions nor short-term credits as may be necessary for the clearance
of transactions is considered the purchase of a security on margin.
7. Sell any securities "short", write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except as described under the heading "Certain Investment Techniques and
Policies" in the U.S. Government Series' current Prospectus.
8. Act as an underwriter of securities, except to the extent the U.S.
Government Series may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
- 19 -
<PAGE>
9. Make investments for the purpose of exercising control or
participation in management.
10. Invest in securities of other investment companies in an amount
exceeding the limitations set forth in the 1940 Act and the rules
thereunder, except as part of a merger, consolidation or other acquisition.
11. Invest in equity interests in oil, gas or other mineral
exploration or development programs.
12. Purchase or sell real estate (but this shall not prevent
investments in securities secured by real estate or interests therein),
commodities or commodity contracts, except to the extent that financial
futures and related options that the U.S. Government Series may invest in
are considered to be commodities or commodities contracts.
13. Invest more than 10% of the U.S. Government Series' total assets
in illiquid securities and repurchase agreements with remaining maturities
in excess of seven days.
Operating Policies. The U.S. Government Series has adopted the
following operating policies which are not fundamental and which may be changed
without shareholder approval: To comply with certain state statutes, the U.S.
Government Series will not: (1) make investments in oil, gas or other mineral
leases; (2) make investments in real estate limited partnerships; (3) purchase
or retain securities of an issuer when one or more officers and trustees
- 20 -
<PAGE>
of the Fund or the Fund's Manager, or a person owning more than 10% of the
shares of either, own beneficially more than 1/2 of 1% of the securities of such
issuer and such persons owning more than 1/2 of 1% of such securities together
own beneficially more than 5% of the securities of such issuer; (4) purchase
securities of other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization, or by purchase in the open market
of securities of open-end or closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved; or (5) invest more than 15% of its total assets in the
securities of issuers which together with any predecessors have a record of less
than three years continuous operation or securities of issuers which are
restricted as to disposition.
Percentage Restrictions. If a percentage restriction on investment or
utilization of assets set forth above is adhered to at the time an investment is
made or assets are so utilized, a later change in percentage resulting from
changes in the value of the portfolio securities of the U.S. Government Series
will not be considered a violation of such policy.
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the Board
of Trustees. Specifically, the Board of Trustees is responsible for oversight of
the Fund by
- 21 -
<PAGE>
reviewing and approving necessary agreements with the Fund's service providers,
and mandating policies for the Fund's operations.
Trustees and officers of the Fund, together with information as to
their principal business occupations during the last five years, are shown
below. Each director who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March __, 1999.
- 22 -
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Director Vice President and Treasurer,
[Address] Ingersoll-Rand Company (5/86 -
Present); Trustee, Chase Vista
Age: 56 Funds.
- --------------------------------------------------------------------------------------------------
L. Greg Ferrone Director Senior Manager, ARC Partners (10/97 -
83 Ronald Court Present); Consultant, IntraNet, Inc.
Ramsey, New Jersey 07446 (4/90 - 10/97); Sales & Marketing
Age: 47 Director, RAV Communications (4/85 -
4/90); Vice President/Regional Manager,
National Westminster Bank USA (3/78 -
4/85).
- --------------------------------------------------------------------------------------------------
</TABLE>
- 23 -
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen C. Leslie* President Chairman and CEO,
67 Wall Street Cornerstone Equity Advisors,
New York, New York 10005 Inc. (6/97 - Present); Partner,
Age: 45 Wall Street Capital Group (3/97
- 6/97); Partner, Wall Street
Investment Corp. (11/95 -
3/97); Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- --------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
67 Wall Street Financial Officer Advisors, Inc. (4/97 - Present);
New York, New York 10005 Partner, Speer & Fulvio (3/87 -
Age: 4/97).
- --------------------------------------------------------------------------------------------------
</TABLE>
- 24 -
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Leroy E. Rodman Director Counsel, Morrison, Cohen,
[Address] Singer & Weinstein, LLP
(1996 - Present); Senior Partner,
Age: 85 Teitelbaum, Hiller, Rodman,
Paden & Hibsher, P.C. (1990 -
1996).
- --------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Director Executive Director and Chief
[Address] Operating Officer, Black
Leadership Forum, Inc.;
Age: 65 Director, Joint Center For
Political and Economic Studies
(1991 - Present).
==================================================================================================
</TABLE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the Treasurer
of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the Trustees of
the Fund are also Trustees of The California Muni Fund and Fundamental
Fixed-Income Fund.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Director of the Fund
who is not affiliated with the Fund's investment manager is compensated at the
rate of $6,500 per quarter prorated among the three funds based on their
respective net assets at the end of each quarter. Each such Director is also
reimbursed by the
- 25 -
<PAGE>
three funds, on the same basis, for actual out-of-pocket expenses relating to
his attendance at meetings. Some Trustees received additional compensation at a
rate of $125 per hour for services related to servicing on the Portfolio Review
Committee. As of the date of this Statement of Additional Information, Trustees
and officers of the Fund as a group owned beneficially less than 1% of the
Fund's outstanding shares.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
================================================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Director
================================================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
- 26 -
<PAGE>
OWNERSHIP OF SECURITIES
As of __________ except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the Fund. As
of that date, the officers and Board Members of the Fund beneficially owned less
than 1% of the shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors, Inc.
("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief Executive
Officer is Mr. Stephen C. Leslie, who is also President of the Fund. Mr. Leslie
is one of two individuals who may be considered a "control person" of
Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is the Treasurer and
Chief Financial Officer of the Fund. Mr. Fulvio is not considered a "control
person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following percentages
of the Fund's average daily net asset value:
- 27 -
<PAGE>
Average Daily Net Asset Value Annual Fee Payable
- ----------------------------- ------------------
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received an
aggregate advisory fee of $____________. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$____________. From January 1, 1998 to May 30, 1998 FPA received an aggregate
advisory fee of $____________. For the fiscal year ended December 31, 1997 FPA
received an aggregate advisory fee of $____________. For the fiscal year ended
December 31, 1996 FPA received an aggregate advisory fee of $787,962.
[CREDITS FOR THE ADVISORY FEE STATED SEPARATELY]. The investment
management agreement with FPA provided an expense limitation of 1.50% of the
Fund's average daily net assets. The agreement with Cornerstone also contains
such limitations, while the interim agreement with Tocqueville did not provide
such limitations.
- 28 -
<PAGE>
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53201-0701 currently acts as Administrator, Transfer Agent, and Accounting
Agent of the Fund.
[Description of Services and aggregate compensation for the
administration services.]
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan Street,
Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and securities.
______________, acts as independent certified public accountants for
the Fund, performing an annual audit of the Fund's financial statements and
preparing its tax returns.
-29-
<PAGE>
MARKETING PLAN
The Fund has entered into a Distribution Agreement with Cresvale
International (US) LLC ("Cresvale"). The Trustees who are not, and were not at
the time they voted, interested persons of the Fund, as defined in the 1940 Act
(the "Independent Trustees"), have approved the Distribution Agreement. The
Distribution Agreement provides that Cresvale will bear the distribution
expenses of the High-Yield Series not borne by the High-Yield Series. The
Distribution Agreement was approved by action of the Trustees of the Fund on
September 25, 1998. The Distribution Agreement will continue in effect from
year-to-year if it is specifically approved, at least annually, in the manner
required by the 1940 Act.
Cresvale bears all expenses it incurs in providing services under the
Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the
High-Yield Series. Cresvale also pays certain expenses in connection with the
distribution of the High-Yield Series' shares, including the cost of preparing,
printing and distributing advertising or promotional materials. The High-Yield
Series bears the cost of registering its shares under federal and state
securities law.
The Fund and Cresvale have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, Cresvale will use its best efforts in
rendering services to the Fund.
- 30 -
<PAGE>
The Fund has adopted a plan of distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan") pursuant to which the High-Yield Series pays
Cresvale compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the High-Yield Series' average daily net assets. The Plan was adopted
by a majority vote of the Board of Trustees, including all of the Independent
Trustees (none of whom had or have any direct or indirect financial interest in
the operation of the Plan), cast in person at a meeting called for the purpose
of voting on the Plan on September 29, 1987 by the then sole shareholders of the
High-Yield Series.
Pursuant to the Plan, Cresvale provides the Fund, for review by the
Trustees, and the Trustees review, at least quarterly, a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made.
No interested person of the Fund nor any Trustee of the Fund who is not
an interested person of the Fund, as defined in the 1940 Act, has any direct
financial interest in the operation of the Plan except to the extent that
Cresvale and certain of its employees may be deemed to have such an interest as
a result of receiving a portion of the amounts expended thereunder by the Fund.
The Plan has been approved and will continue in effect from
year-to-year thereafter, provided such continuance is approved annually by vote
of the Trustees in the manner described above. It may not be amended to increase
materially the amount to be spent for the
- 31 -
<PAGE>
services described therein without approval of the shareholders of the Fund, and
material amendments of the Plan must also be approved by the Trustees in the
manner described above. The Plan may be terminated at any time, without payment
of any penalty, by vote of the majority of the Trustees who are not interested
persons of the Fund, and with no direct or indirect financial interest in the
operations of the Plan, or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act). The Plan will automatically
terminate in the event of its assignment (as defined in the 1940 Act). So long
as the Plan is in effect, the election and nomination of the Independent
Trustees shall be committed to the discretion of the Independent Trustees. In
the Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
During the year ended December 31, 1998, the Fund paid $(_______) for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising --
$(______); printing and mailing of Prospectuses to other than current
shareholders -- $(______); and sales, and shareholder servicing support services
and other distribution services, -- $(______). Of the amount paid by the Fund
during last year, $(_______) was paid to (______________) for expenses incurred
and services rendered by it pursuant to the Plan.
- 32 -
<PAGE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the U.S. Government Series by the Manager pursuant to authority
contained in the Management Agreement (subject to the right of the Trustees to
reverse any such transaction). The Manager is and may in the future also be
responsible for the placement of transaction orders for the other series of the
Fund and for other investment companies for which the Manager acts as investment
advisor. Securities purchased and sold on behalf of the U.S. Government Series
will be traded in the over-the-counter market on a net basis (i.e. without
commission) through dealers acting for their own account and not as brokers or
otherwise involve transactions directly with the issuer of the instrument. In
selecting dealers, the Manager will consider various relevant factors,
including, but not limited to, the size and type of the transaction; the nature
and character of the markets for the security to be purchased or sold; the
execution efficiency, settlement capability, and financial condition of the
dealer; the dealer's execution services rendered on a continuing basis; and the
reasonableness of any dealer spreads and commissions (if any).
Dealers may be selected who provide brokerage and/or research services
to the Fund or U.S. Government Series and/or other investment companies over
which the Manager exercises investment discretion. Such services may include
advice concerning the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). The
Manager maintains a listing of dealers who provide such
- 33 -
<PAGE>
services on a regular basis. However, because it is anticipated that many
transactions on behalf of the U.S. Government Series, other series of the Fund
and other funds over which the Manager exercises investment discretion are
placed with dealers (including dealers on the list) without regard to the
furnishing of such services, it is not possible to estimate the proportion of
such transactions directed to such dealers solely because such services were
provided.
The receipt of research from dealers may be useful to the Manager in
rendering investment management services to the U.S. Government Series and/or
other series of the Fund and other funds over which the Manager exercises
investment discretion, and conversely, such information provided by brokers or
dealers who have executed transaction orders on behalf of such other clients of
the Manager may be useful to it in carrying out its obligations to the U.S.
Government Series. The receipt of such research has not reduced the Manager's
normal independent research activities; however, it enables the Manager to avoid
the additional expenses which might otherwise be incurred if it were to attempt
to develop comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the U.S.
Government Series may receive spreads or commissions which are in excess of the
amount of spreads or commissions which other brokers or dealers would have
charged for effecting such transactions. In order to cause the U.S. Government
Series to pay such higher spreads or commissions, the Manager must determine in
good faith that such spreads or commissions are reasonable in relation to the
value of the brokerage and/or research services provided by such executing
broker or dealers viewed in terms of a particular transaction or the Manager's
overall responsibilities
- 34 -
<PAGE>
to the U.S. Government Series, the Fund or the Manager's other clients. In
reaching this determination, the Manager will not attempt to place a specific
dollar value on the brokerage and/or research services provided or to determine
what portion of the compensation should be related to those services.
The Manager is authorized to place portfolio transactions with dealer
firms that have provided assistance in the distribution of shares of the U.S.
Government Series or shares of other series of the Fund or other funds for which
the Manager acts as investment advisor if it reasonably believes that the
quality of the transaction and the amount of the spread are comparable to what
they would be with other qualified dealers.
During the last three fiscal years from 1996-98, the Fund paid
$_______, $________, and $_________, respectively, in brokerage commissions.
The Funds' Trustees and brokerage allocation committee (comprised
solely of non-interested Trustees) periodically review the Manager's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the U.S. Government Series and the Fund and review the
dealer spreads paid by the U.S. Government Series and the Fund over
representative periods of time to determine if they are reasonable in relation
to the benefits to the Fund and its portfolios.
- 35 -
<PAGE>
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the U.S. Government Series and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the U.S. Government
Series or its shareholders, and the discussions here and in the Prospectus are
not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The U.S. Government Series has elected to be taxed as a regulated
investment company for federal income tax purposes under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, the U.S. Government Series is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the U.S. Government
Series made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will therefore count
toward satisfaction of the Distribution Requirement.
- 36 -
<PAGE>
If the Fund has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward up
to eight years and treated as a short-term capital loss which can be used to
offset capital gains in such years. As of December 31, 1997, the Fund has
capital loss carryforwards of $15,791,100 expiring through December 31, 2005.
Under Code Section 382, if the Fund has an "ownership change," the Fund's use of
its capital loss carryforwards in any year following the ownership change will
be limited to an amount equal to the net asset value of the Fund immediately
prior to the ownership change multiplied by the highest adjusted long-term
tax-exempt rate (which is published monthly by the Internal Revenue Service (the
"IRS")) in effect for any month in the 3-calendar-month period ending with the
calendar month in which the ownership change occurs (the rate for April 1998 is
5.04%). The Fund will use its best efforts to avoid having an ownership change.
However, because of circumstances which may be beyond the control of the Fund,
there can be no assurance that the Fund will not have, or has not already had,
an ownership change. If the Fund has or has had an ownership change, any capital
gain net income for any year following the ownership change in excess of the
annual limitation on the capital loss carryforwards will have to be distributed
by the Fund and will be taxable to shareholders as described under "Fund
Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
- 37 -
<PAGE>
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In general, gain or loss recognized by the U.S. Government Series on
the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation purchased by the U.S.
Government Series at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the U.S.
Government Series held the debt obligation.
In general, for purposes of determining whether capital gain or loss
recognized by the U.S. Government Series on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another asset
so used, (2) the asset is otherwise held by the U.S. Government Series as part
of a "straddle" (which term generally excludes a situation where the asset is
stock and the U.S. Government Series grants a qualified covered call option
(which, among other things, must not be deep-in-the-money) with respect thereto)
or (3) the asset is stock and the U.S. Government Series grants an in-the-money
qualified covered call option with respect thereto. In addition, the U.S.
Government Series may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
- 38 -
<PAGE>
Any gain recognized by the U.S. Government Series on the lapse of, or
any gain or loss recognized by the U.S. Government Series from a closing
transaction with respect to, an option written by the U.S. Government Series
will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by the U.S. Government
Series (such as regulated futures contracts and options on futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contracts have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is generally treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. The U.S. Government Series, however, may elect
not to have this special tax treatment apply to Section 1256 contracts that are
part of a "mixed straddle" with other investments of the U.S. Government Series
that are not Section 1256 contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital
- 39 -
<PAGE>
gain over net short-term capital loss) for any taxable year, to elect (unless it
made a taxable year election for excise tax purposes as discussed below) to
treat all or any part of any net capital loss, any net long-term capital loss or
any net foreign currency loss incurred after October 31 as if it had been
incurred in the succeeding year.
In addition to satisfying the requirements described above, the U.S.
Government Series must satisfy an asset diversification test in order to qualify
as a regulated investment company. Under this test, at the close of each quarter
of the U.S. Government Series' taxable year, at least 50% of the value of the
U.S. Government Series' assets must consist of cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to each of which the U.S. Government Series has
not invested more than 5% of the value of the U.S. Government Series' total
assets in securities of such issuer and does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the U.S. Government Series controls
and which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security, not the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan
- 40 -
<PAGE>
Mortgage Corporation, the Federal National Mortgage Association, the Government
National Mortgage Corporation, and the Student Loan Marketing Association are
treated as U.S. Government securities.
If for any taxable year the U.S. Government Series does not qualify as
a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the U.S.
Government Series' current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
- 41 -
<PAGE>
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The U.S. Government Series intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that the U.S. Government Series may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
U.S. Government Series Distributions
The U.S. Government Series anticipates distributing substantially all
of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and treated as
dividends for federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The U.S. Government Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The U.S. Government
Series currently intends to distribute
- 42 -
<PAGE>
any such amounts. Net capital gain that is distributed and designated as a
capital gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the U.S. Government Series prior to the date on
which the shareholder acquired his shares.
Distributions by the U.S. Government Series that do not constitute
ordinary income dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain realized from a sale of the
shares, as discussed below.
Distributions by the U.S. Government Series will be treated in the
manner described above regardless of whether such distributions are paid in cash
or reinvested in additional shares of the U.S. Government Series (or of another
fund). Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of
the U.S. Government Series reflects realized but undistributed income or gain,
or unrealized appreciation in the value of the assets held by the U.S.
Government Series, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the U.S.
Government Series into account in the year in which they are made. However,
dividends declared in
- 44 -
<PAGE>
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by the U.S. Government Series) on December 31 of such
calendar year provided such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) to them during
the year.
The U.S. Government Series will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of ordinary income dividends and
capital gain dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has failed to provide a correct taxpayer identification
number, (2) who is subject to backup withholding for failure properly to report
the receipt of interest or dividend income, or (3) who has failed to certify to
the U.S. Government Series that it is not subject to backup withholding or that
it is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the U.S. Government Series in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's adjusted
tax basis in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of the U.S. Government
Series within 30 days before or after the sale or redemption. In general, any
gain or loss arising from (or treated as arising from) the sale or redemption of
shares of the U.S.
- 44-
<PAGE>
Government Series will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. Long-term
capital gain recognized by an individual shareholder will be taxed at the lowest
rates applicable to capital gains if the holder has held such shares for more
than 18 months at the time of the sale. However, any capital loss arising from
the sale or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period rules of
Code Section 246(c)(3) and (4) generally will apply in determining the holding
period of shares. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the U.S. Government Series is "effectively connected" with a U.S. trade or
business carried on by such shareholder.
If the income from the U.S. Government Series is not effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
ordinary income dividends paid to the shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale or redemption
of shares
- 45-
<PAGE>
of the U.S. Government Series, capital gain dividends and amounts
retained by the U.S. Government Series that are designated as undistributed
capital gains.
If the income from the U.S. Government Series is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then ordinary
income and capital gain dividends received in respect of, and any gains realized
upon the sale of, shares of the U.S. Government Series will be subject to U.S.
federal income tax at the rates applicable to U.S. taxpayers.
In the case of a noncorporate foreign shareholder, the U.S. Government
Series may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding (or subject to
withholding at a reduced treaty rate), unless the shareholder furnishes the U.S.
Government Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the U.S.
Government Series, including the applicability of foreign taxes.
- 46 -
<PAGE>
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies may differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the U.S. Government Series.
DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees to
authorize the issuance of an unlimited number of full and fractional shares of
beneficial interest (without par value), which may be divided into such separate
series as the Trustees may establish. The Fund currently has three series of
shares: the Fundamental U.S. Government Series, the Tax-Free Money Market Series
and the High-Yield Municipal Bond Series. The Trustees may establish additional
series of shares, and may divide or combine the shares of a series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests of each series. Each share of a series represents an equal
proportionate interest in the series with each
- 47 -
<PAGE>
other share of such series. The shares of any additional series would
participate equally in the earnings, dividends and assets of the particular
series, and would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shareholders of all series
would vote together in the election and selection of Trustees and accountants.
Upon liquidation of the Fund, the shareholders of each series are entitled to
share pro rata in the net assets available for distribution to shareholders of
such series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are governed
by its Declaration of Trust dated March 19, 1987, a copy of which is on file
with the office of the Secretary of The Commonwealth of Massachusetts.
Theoretically, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Declaration of Trust contains an express disclaimer of
- 48 -
<PAGE>
shareholder liability for acts or obligations of the Fund or any series of the
Fund and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or its Trustees.
Moreover, the Declaration of Trust provides for the indemnification out of Fund
property of any shareholders held personally liable for any obligations of the
Fund or any series of the Fund. The Declaration of Trust also provides that the
Fund shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss beyond his or
her investment because of shareholder liability would be limited to
circumstances in which the Fund itself will be unable to meet its obligations.
In light of the nature of the Fund's business, the possibility of the Fund's
liabilities exceeding its assets, and therefore a shareholder's risk of personal
liability, is extremely remote.
The Declaration of Trust further provides that the Fund shall indemnify
each of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of the Fund. The Declaration of Trust does not authorize the Fund to indemnify
any Trustee or officer against any liability to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of such person's duties.
- 49 -
<PAGE>
PURCHASE OF SHARES
PRICING OF SHARES
The net asset value per share of the U.S. Government Series is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 P.M., New York time) on each day that both the New York Stock Exchange and
the Fund's custodian bank are open for business. The net asset value per share
of the U.S. Government Series is also determined on any other day in which the
level of trading in its portfolio securities is sufficiently high that the
current net asset value per share might be materially affected by changes in the
value of its portfolio securities. On any day in which no purchase orders for
the shares of the U.S. Government Series become effective and no shares are
tendered for redemption, the net asset value per share is not determined.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the U.S.
Government Series to that of other mutual funds and to stock or other relevant
indices in advertisements or in reports to shareholders, performance will be
stated both in terms of total return and in terms of yield. The total return
basis combines principal and dividend income changes for the periods
- 50 -
<PAGE>
shown. Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of dividends and
distributions paid by the U.S. Government Series. Dividends and distributions
are comprised of net investment income and net realized capital gains. Under the
rules of the Securities and Exchange Commission, funds advertising performance
must include total return quotes calculated according to the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the U.S. Government Series' registration
- 51 -
<PAGE>
statement. In calculating the ending redeemable value, the pro rata share of the
account opening fee is deducted from the initial $1,000 investment and all
dividends and distributions by the U.S. Government Series are assumed to have
been reinvested at net asset value as described in the prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the 1,
5 and 10 year periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value.
The U.S. Government Series' aggregate annualized total rate of return,
reflecting the initial investment and reinvestment of all dividends and
distributions, for the period from March 2, 1992 (commencement of public
offering of shares) to December 31, 1998, was ______%.
The U.S. Government Series may also from time to time include in such
advertising a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the U.S. Government
Series' performance with other measures of investment return. For example, in
comparing the U.S. Government Series's total return with data published by
Lipper Analytical Services, Inc. or similar independent services or financial
publications, the U.S. Government Series calculates its aggregate total return
for the specified periods of time by assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial net asset value of the
investment from the ending net asset value and by dividing the remainder by the
beginning net asset value. The U.S. Government Series does not, for these
- 52 -
<PAGE>
purporses, deduct the pro rata share of the account opening fee from the initial
value invested. The U.S. Government Series will, however, disclose the pro rata
share of the account opening fee and will disclose that the performance data
does not reflect such non-recurringcharge and that inclusion of such charge
would reduce the performance quoted. Such alternative total return information
will be given no greater prominence in such advertising than the information
prescribed under the Securities and Exchange Commission's rules.
In addition to the total return quotations discussed above, the U.S.
Government Series may advertise its yield based on a 30-day (or one month)
period ended on the date of the most recent balance sheet included in the U.S.
Government Series' Post-Effective Amendment to its Registration Statement,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Yield = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
- 53 -
<PAGE>
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the U.S. Government Series based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest), (2) dividing that
figure by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest as referred to above) to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the U.S. Government Series' portfolio (assuming a month of 30
days) and (3) computing the total of the interest earned on all debt obligations
and all dividends accrued on all equity securities during the 30-day or one
month period. In computing dividends accrued, dividend income is recognized by
accruing 1/360 of the stated dividend rate of a security each day that the
security is in the U.S. Government Series' portfolio. For purposes of "b" above,
Rule 12b-1 expenses are included among the expenses accrued for the period. Any
amounts representing sales charges will not be included among these expenses;
however, the U.S. Government Series will disclose the pro rata share of the
account opening fee. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
- 54-
<PAGE>
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Securities and
Exchange Commission's rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The U.S. Government Series' yield as of December 31, 1998, based on a
30-day period, was _______%.
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the year ended December
31, 1998 [WILL BE ATTACHED] hereto.
- 55-
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1999
AND
SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
This Statement of Additional Information provides certain detailed information
concerning the High-Yield Municipal Bond Series (the "High-Yield Series") of the
Fundamental Fixed Income Fund (the "Fund").
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Fund's current Prospectus, a copy of which may be
obtained by writing to The Fund at (________________), or by calling (800)
(_________). Shareholder inquiries may also be placed through this number.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY ...............................................................
INVESTMENT OBJECTIVE AND POLICIES ..........................................
INVESTMENT LIMITATIONS .....................................................
MANAGEMENT OF THE FUND .....................................................
OWNERSHIP OF SECURITIES ....................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES ...................................
DISTRIBUTION PLAN ..........................................................
PORTFOLIO TRANSACTIONS......................................................
TAXES.......................................................................
DESCRIPTION OF SHARES.......................................................
CERTAIN LIABILITIES.........................................................
PURCHASE OF SHARES .........................................................
PRICING OF SHARES ..........................................................
CALCULATION OF YIELD........................................................
FINANCIAL STATEMENTS........................................................
APPENDIX.................................................................... A-1
-2-
<PAGE>
FUND HISTORY
The Fundamental-Fixed Income Fund (the "Fund") was reorganized as a
Massachusetts business trust on March 19, 1987. The Company has three series:
Tax-Free Money Market Series, Fundamental U.S. Government Strategic Income Fund,
and High-Yield Municipal Bond Series (the "High-Yield Series"). This Statement
of Additional Information pertains to the High-Yield Series, which is an
open-end, non-diversified management investment company.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Prospectus of the High-Yield Series dated April 30, 1999 (the
"Prospectus") identifies the investment objective and the principal investment
policies of the High-Yield Series. Other investment policies and a further
description of certain of the policies described in the Prospectus are set forth
below.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the High-Yield Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
High-Yield Series' assets immediately, while awaiting delivery of securities
purchased on a
-3-
<PAGE>
"when-issued" basis, short-term obligations that offer same day settlement and
earnings will normally be purchased. Although short-term investments will
normally be in tax-exempt securities, short-term taxable securities may be
purchased if suitable short-term tax-exempt securities are not available. When a
commitment to purchase a security on a "when-issued" basis is made, procedures
are established consistent with the General Statement of Policy of the
Securities and Exchange Commission concerning such purchases. Because that
policy currently recommends that an amount of the assets of the High-Yield
Series equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, cash or high-quality debt securities sufficient
to cover any commitments are always expected to be available. Nonetheless, such
purchases may involve more risk than other types of purchases, as described in
the Prospectus.
Futures Contracts. The High-Yield Series may enter into contracts for
the future acquisition or delivery of fixed-income securities ("Futures
Contracts"). This investment technique is designed only to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of the High-Yield Series' securities or adversely
affect the prices of long-term bonds which the High-Yield Series intends to
purchase at a later date (although the High-Yield Series may engage in
transactions in futures contracts for income purposes if Commodity Futures
Trading Commission regulations on this issue change). If interest rates move in
an unexpected manner, the High-Yield Series will not achieve the anticipated
benefits of Futures Contracts or may realize a loss.
-4-
<PAGE>
Options. The High-Yield Series intends to both purchase and write
options on securities and Futures Contracts, within the limits described in the
Prospectus. The market for options on tax-exempt securities is a new and
developing one, and consequently the High-Yield Series faces the risk that such
options acquired by it may not be readily marketable. As the market for options
on tax-exempt securities expands, the High- Yield Series expects that its
activities with respect to options will expand also (subject to any applicable
investment restrictions).
Portfolio Management. The High-Yield Series intends to fully manage its
portfolio by buying and selling securities, as well as holding securities to
maturity. In managing its portfolio, the High-Yield Series seeks to take
advantage of market developments and yield disparities, which may include use of
the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation
of a decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the relative
values of each; and
-5-
<PAGE>
(4) changing from one debt security to an essentially similar debt
security when their respective yields appear distorted due to market factors.
The High-Yield Series engages in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in achieving
its investment objective.
Portfolio Turnover. Pursuit by the High-Yield Series of its investment
objective may lead to frequent changes in the securities held in its portfolio,
which is known as "portfolio turnover." Portfolio turnover may involve payments
by the High-Yield Series of broker commissions, dealer spreads and other
transaction costs relating to the purchase and the sale of securities. Portfolio
turnover rate for a given fiscal year is calculated by dividing the lesser of
the amount of the purchases or the amount of the sales of portfolio securities
during the year by the monthly average of the value of the portfolio securities
during the year. Securities with maturities or expiration dates of one year or
less at the time of acquisition by the High-Yield Series are excluded from this
calculation. A high portfolio turnover rate increases transactions costs of the
High-Yield Series and increases the likelihood of the distribution of taxable
capital gains to investors. For the fiscal years ended December 31, 1997 and
1996, the High-Yield Series' portfolio turnover rates were approximately 134%
and 139%, respectively.
Temporary Defensive Investments. The High-Yield Series may, from time
to time, take temporary defensive positions that are inconsistent with its
prinicpal investment
- 6 -
<PAGE>
strategies. Such investments are made only under conditions that, in the opinion
of the investment adviser of the High-Yield Series, make such investments
advisable. For example, the High-Yield Series may invest in taxable obligations
pending investment in municipal bonds of the proceeds from the sale of its
shares or investments, or to ensure the liquidity needed to satisfy redemptions
of shares and the day-to-day operating expenses of the High-Yield Series. The
High-Yield Series invests in only those taxable obligations that are (1) rated A
or higher by S&P or Moody's or unrated but judged by its investment adviser to
be of at least comparable quality; (2) obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities; or (3) obligations of
banks (including certificates of deposit, bankers' acceptances, and repurchase
agreements) with at least $1,000,000,000 of assets. No more than 50% of the
assets of the High-Yield Series may be invested in taxable obligations at any
one time, and the High-Yield Series anticipates that on a 12-month average,
taxable obligations will constitute less than 10% of the value of its total
investments.
Investment Restrictions
The High-Yield Series has adopted the following policies as
"fundamental policies", which cannot be changed without the approval of the
holders of a majority of the shares of the High-Yield Series (which, as used in
this Statement of Additional Information, means the lesser of (i) more than 50%
of the outstanding shares, or (ii) 67% or more of the
- 7 -
<PAGE>
shares present at a meeting at which holders of more than 50% of the outstanding
shares are represented in person or by proxy). The High-Yield Series may not:
(1) issue senior securities;
(2) borrow money in an amount not exceeding 33 1/3% of the value of its
total assets and subject to a 300% asset coverage requirement, or pledge
mortgage or hypothecate any of its assets, except to secure such permitted
borrowings;
(3) underwrite securities issued by other persons, except insofar as
the High-Yield Series may technically be deemed an underwriter under the
Securities Act of 1933 in selling a portfolio security;
(4) purchase or sell real estate (including limited partnership
interests but excluding Municipal Bonds secured by real estate or interests
therein) or interests in oil, gas or mineral leases;
(5) make loans to others except (i) through the use of repurchase
agreements, provided that not more than 10% of its total assets are invested at
any one time in repurchase agreements of more than one week in length or in
other restricted or illiquid securities, (ii) through the lending of its
portfolio securities in accordance with the limitations set forth in the
Prospectus under "INVESTMENT OBJECTIVE AND POLICIES - Lending
- 8 -
<PAGE>
of Portfolio Securities" and (iii) that the purchase of debt securities in
accordance with its investment policies shall not constitute loans for purposes
of this restriction;
(6) purchase or retain the securities of any issuer, if, to the
High-Yield Series' knowledge, those individual officers, directors or trustees
of the Fund, or of the investment advisor of the High-Yield Series, who own
beneficially own more than 1/2 of 1% of the outstanding securities of such
issuer, together own beneficially more than 5% of the outstanding securities of
such issuer;
(7) purchase securities, if, as a result of such purchase, 25% or more
of its total assets would be invested in non-governmental industrial revenue
bonds, the payment of the principal and interest on which are the responsibility
of issuers in the same industry, provided that it may invest more than 25% of
its total assets in industrial revenue bonds;
(8) make short sales of securities or purchase any securities or
evidences of interests therein on margin, except that the High-Yield Series may
obtain such short-term credit as may be necessary for the clearance of purchases
and sales of securities and except that the High-Yield Series may make deposits
on margin in connection with interest rate futures contracts;
- 9 -
<PAGE>
(9) purchase or sell commodities or commodities contracts except
financial futures and related options as described in the High-Yield Series'
Prospectus; or
(10) invest in securities which are restricted as to disposition under
federal securities laws or for which there is no readily available market (i.e.,
market makers do not exist or will not entertain bids or offers).
The above restrictions, along with the fundamental policies identified
in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES - Miscellaneous,"
constitute all of the fundamental policies of the High-Yield Series.
For the purposes of the High-Yield Series' investment restrictions, the
issuer of a tax-exempt security is deemed to be the entity (public or private)
ultimately responsible for the payment of the principal and interest on the
security.
Operating Policies. The High-Yield Series has adopted the following
operating policies which are not fundamental and which may be changed without
shareholder approval. The High-Yield Series may enter into repurchase agreements
(a purchase of and a simultaneous commitment to resell a security at an agreed
upon price on an agreed upon date) only with member banks of the Federal Reserve
System and only if collateralized by U.S. Government securities. If the vendor
of a repurchase agreement fails to pay the sum agreed to on the agreed upon
delivery date, the High-Yield Series would have the right to sell the
- 10 -
<PAGE>
U.S. Government securities, but might incur a loss in so doing and in certain
cases may not be permitted to sell the U.S. Government securities. As noted in
paragraph (5) on page 5, the High-Yield Series may not invest more than 10% of
its assets in repurchase agreements maturing in more than seven days. In
addition, in order to comply with certain state statutes, the High-Yield Series
will not pledge, mortgage or hypothecate its portfolio securities if at the time
the value of the securities so pledged, mortgaged or hypothecated would exceed
10% of the value of the High-Yield Series. For purposes of this restriction,
collateral arrangements with respect to the writing of stock options, financial
futures, options on financial futures and collateral arrangements with respect
to margin requirements are not deemed to be a pledge of assets, and for purposes
of the restriction in paragraph (1) above, neither such arrangements nor the
purchase or sale of futures or purchase of related options are deemed to be the
issuance of a senior security.
Percentage Restrictions. If a percentage restriction on investment or
utilization of assets set forth above is adhered to at the time an investment is
made or assets are so utilized, a later change in percentage resulting from
changes in the value of the portfolio securities of the High-Yield Series will
not be considered a violation of such policy.
Temporary Defensive Investments
The Fund may invest in the following temporary defensive investments:
- 11 -
<PAGE>
U.S. Government Obligations. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Short-Term Obligations. These include high quality, short-term obligations such
as domestic and foreign commercial paper (including variable-amount master
demand notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreign branches of U.S. banks and foreign banks, and
repurchase agreements.
[Portfolio Turnover]
- 12 -
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the Board
of Trustees. Specifically, the Board of Trustees is responsible for oversight of
the Fund by reviewing and approving necessary agreements with the Fund's service
providers, and mandating policies for the Fund's operations.
Trustees and officers of the Fund, together with information as to
their principal business occupations during the last five years, are shown
below. Each director who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March __, 1999.
- 13 -
<PAGE>
================================================================================
Position(s) Held Principal Occupation(s)
Name, Address, and Age with Fund During Past Five Years
- --------------------------------------------------------------------------------
William J. Armstrong Director Vice President and
[Address] Treasurer, Ingersoll-Rand
Company (5/86 - Present);
Age: 56 Trustee, Chase Vista
Funds.
- --------------------------------------------------------------------------------
L. Greg Ferrone Director Senior Manager, ARC
83 Ronald Court Partners (10/97 -
Ramsey, New Jersey 07446 Present); Consultant,
Age: 47 IntraNet, Inc. (4/90 -
10/97); Sales & Marketing
Director, RAV
Communications (4/85 -
4/90); Vice
President/Regional
Manager, National
Westminster Bank USA (3/78
- 4/85).
- --------------------------------------------------------------------------------
- 14 -
<PAGE>
- --------------------------------------------------------------------------------
Stephen C. Leslie* President Chairman and CEO,
67 Wall Street Cornerstone Equity
New York, New York 10005 Advisors, Inc. (6/97 -
Age: 45 Present); Partner, Wall
Street Capital Group (3/97
- 6/97); Partner, Wall
Street Investment Corp.
(11/95 - 3/97); Partner,
Tucker Anthony Securities
(8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co.
(5/94 - 8/95); Senior Vice
President, Siebert Capital
Markets (6/93 - 5/94).
- --------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone
67 Wall Street Financial Officer Equity Advisors, Inc.
New York, New York 10005 (4/97 - Present); Partner,
Age: Speer & Fulvio (3/87 -
4/97).
- --------------------------------------------------------------------------------
- 15 -
<PAGE>
- --------------------------------------------------------------------------------
Leroy E. Rodman Director Counsel, Morrison, Cohen,
[Address] Singer & Weinstein, LLP
(1996 - Present); Senior
Age: 85 Partner, Teitelbaum,
Hiller, Rodman, Paden &
Hibsher, P.C. (1990 -
1996).
- --------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Director Executive Director and
[Address] Chief Operating Officer,
Black Leadership Forum,
Age: 65 Inc.; Director, Joint
Center For Political and
Economic Studies (1991 -
Present).
================================================================================
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the Treasurer
of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the Trustees of
the Fund are also Trustees of The California Muni Fund and Fundamental
Fixed-Income Fund.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Director of the Fund
who is not affiliated with the Fund's
- 16 -
<PAGE>
investment manager is compensated at the rate of $6,500 per quarter prorated
among the three funds based on their respective net assets at the end of each
quarter. Each such Director is also reimbursed by the three funds, on the same
basis, for actual out-of-pocket expenses relating to his attendance at meetings.
Some Trustees received additional compensation at a rate of $125 per hour for
services related to servicing on the Portfolio Review Committee. As of the date
of this Statement of Additional Information, Trustees and officers of the Fund
as a group owned beneficially less than 1% of the Fund's outstanding shares.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
==============================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Director
==============================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
- 17 -
<PAGE>
OWNERSHIP OF SECURITIES
As of __________ except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the Fund. As
of that date, the officers and Board Members of the Fund beneficially owned less
than 1% of the shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors, Inc.
("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief Executive
Officer is Mr. Stephen C. Leslie, who is also President of the Fund. Mr. Leslie
is one of two individuals who may be considered a "control person" of
Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is the Treasurer and
Chief Financial Officer of the Fund. Mr. Fulvio is not considered a "control
person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following percentages
of the Fund's average daily net asset value:
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received an
aggregate advisory fee of $____________. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$____________. From January 1, 1998 to May 30, 1998 FPA received an aggregate
advisory fee of $____________. For the fiscal year ended December 31, 1997 FPA
received an aggregate advisory fee of $____________. For the fiscal year ended
December 31, 1996 FPA received an aggregate advisory fee of $787,962.
- 19 -
<PAGE>
[CREDITS FOR THE ADVISORY FEE STATED SEPARATELY]. The investment
management agreement with FPA provided an expense limitation of 1.50% of the
Fund's average daily net assets. The agreement with Cornerstone also contains
such limitations, while the interim agreement with Tocqueville did not provide
such limitations.
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53201-0701 currently acts as Administrator, Transfer Agent, and Accounting
Agent of the Fund.
[Description of Services and aggregate compensation for the
administration services.]
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan Street,
Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and securities.
______________, acts as independent certified public accountants for
the Fund, performing an annual audit of the Fund's financial statements and
preparing its tax returns.
- 20 -
<PAGE>
DISTRIBUTION PLAN
The Fund has entered into a Distribution Agreement with Cresvale
International (US) LLC ("Cresvale"). The Trustees who are not, and were not at
the time they voted, interested persons of the Fund, as defined in the 1940 Act
(the "Independent Trustees"), have approved the Distribution Agreement. The
Distribution Agreement provides that Cresvale will bear the distribution
expenses of the High-Yield Series not borne by the High-Yield Series. The
Distribution Agreement was approved by action of the Trustees of the Fund on
September 25, 1998. The Distribution Agreement will continue in effect from
year-to-year if it is specifically approved, at least annually, in the manner
required by the 1940 Act.
Cresvale bears all expenses it incurs in providing services under the
Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the
High-Yield Series. Cresvale also pays certain expenses in connection with the
distribution of the High-Yield Series' shares, including the cost of preparing,
printing and distributing advertising or promotional materials. The High-Yield
Series bears the cost of registering its shares under federal and state
securities law.
- 21 -
<PAGE>
The Fund and Cresvale have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, Cresvale will use its best efforts in
rendering services to the Fund.
The Fund has adopted a plan of distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan") pursuant to which the High-Yield Series pays
Cresvale compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the High-Yield Series' average daily net assets. The Plan was adopted
by a majority vote of the Board of Trustees, including all of the Independent
Trustees (none of whom had or have any direct or indirect financial interest in
the operation of the Plan), cast in person at a meeting called for the purpose
of voting on the Plan on September 29, 1987 by the then sole shareholders of the
High-Yield Series.
Pursuant to the Plan, Cresvale provides the Fund, for review by the
Trustees, and the Trustees review, at least quarterly, a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made.
No interested person of the Fund nor any Trustee of the Fund who is not
an interested person of the Fund, as defined in the 1940 Act, has any direct
financial interest in the operation of the Plan except to the extent that
Cresvale and certain of its employees may be deemed to have such an interest as
a result of receiving a portion of the amounts expended thereunder by the Fund.
- 22 -
<PAGE>
The Plan has been approved and will continue in effect from
year-to-year thereafter, provided such continuance is approved annually by vote
of the Trustees in the manner described above. It may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the Fund, and material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of the
majority of the Trustees who are not interested persons of the Fund, and with no
direct or indirect financial interest in the operations of the Plan, or by a
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act). The Plan will automatically terminate in the event of its
assignment (as defined in the 1940 Act). So long as the Plan is in effect, the
election and nomination of the Independent Trustees shall be committed to the
discretion of the Independent Trustees. In the Trustees' quarterly review of the
Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
During the year ended December 31, 1998, the Fund paid $(_______) for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising --
$(______); printing and mailing of Prospectuses to other than current
shareholders -- $(______); and sales, and shareholder servicing support services
and other distribution services, -- $(______). Of the amount paid by the Fund
during last year, $(_______) was paid to (______________) for expenses incurred
and services rendered by it pursuant to the Plan.
- 23 -
<PAGE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the High-Yield Series by the Manager pursuant to authority
contained in the Management Agreement (subject to the right of the Trustees to
reverse any such transaction). The Manager is and may in the future also be
responsible for the placement of transaction orders for the other series of the
Fund and for other investment companies for which the Manager acts as investment
advisor. Securities purchased and sold on behalf of the High-Yield Series will
be traded in the over-the-counter market on a net basis (i.e. without
commission) through dealers acting for their own account and not as brokers or
otherwise involve transactions directly with the issuer of the instrument. In
selecting dealers, the Manager will consider various relevant factors,
including, but not limited to, the size and type of the transaction; the nature
and character of the markets for the security to be purchased or sold; the
execution efficiency, settlement capability, and financial condition of the
dealer; the dealer's execution services rendered on a continuing basis; and the
reasonableness of any dealer spreads and commissions (if any).
- 24 -
<PAGE>
Dealers may be selected who provide brokerage and/or research services
to the Fund or High-Yield Series and/or other investment companies over which
the Manager exercises investment discretion. Such services may include advice
concerning the value of securities; the advisability of investing in, purchasing
or selling securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). The Manager
maintains a listing of dealers who provide such services on a regular basis.
However, because it is anticipated that many transactions on behalf of the
High-Yield Series, other series of the Fund and other funds over which the
Manager exercises investment discretion are placed with dealers (including
dealers on the list) without regard to the furnishing of such services, it is
not possible to estimate the proportion of such transactions directed to such
dealers solely because such services were provided.
The receipt of research from dealers may be useful to the Manager in
rendering investment management services to the High-Yield Series and/or other
series of the Fund and other funds over which the Manager exercises investment
discretion, and conversely, such information provided by brokers or dealers who
have executed transaction orders on behalf of such other clients of the Manager
may be useful to it in carrying out its obligations to the High-Yield Series.
The receipt of such research has not reduced the Manager's normal independent
research activities; however, it enables the Manager to avoid the additional
- 25 -
<PAGE>
expenses which might otherwise be incurred if it were to attempt to develop
comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the High-Yield
Series may receive spreads or commissions which are in excess of the amount of
spreads or commissions which other brokers or dealers would have charged for
effecting such transactions. In order to cause the High-Yield Series to pay such
higher spreads or commissions, the Manager must determine in good faith that
such spreads or commissions are reasonable in relation to the value of the
brokerage and/or research services provided by such executing broker or dealers
viewed in terms of a particular transaction or the Manager's overall
responsibilities to the High-Yield Series, the Fund or the Manager's other
clients. In reaching this determination, the Manager will not attempt to place a
specific dollar value on the brokerage and/or research services provided or to
determine what portion of the compensation should be related to those services.
The Manager is authorized to place portfolio transactions with dealer
firms that have provided assistance in the distribution of shares of the
High-Yield Series or shares of other series of the Fund or other funds for which
the Manager acts as investment advisor if it reasonably believes that the
quality of the transaction and the amount of the spread are comparable to what
they would be with other qualified dealers.
- 26 -
<PAGE>
During the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994,
1995, 1996 and 1997, the High-Yield Series did not pay any brokerage
commissions.
The Funds' Trustees and brokerage allocation committee (comprised
solely of non-interested Trustees) periodically review the Manager's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the High-Yield Series and the Fund and review the
dealer spreads paid by the High-Yield Series and the Fund over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Fund and its portfolios.
TAXES
The following is only a summary of certain additional federal income
tax considerations generally affecting the High-Yield Series and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the High-Yield Series or
its shareholders, and the discussions here and in the Prospectus are not
intended as substitutes for careful tax planning.
- 27 -
<PAGE>
Qualification as a Regulated Investment Company
The High-Yield Series has elected to be taxed as a regulated investment
company for federal income tax purposes under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, the High-Yield Series is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the High-Yield Series made
during the taxable year or, under specified circumstances, within twelve months
after the close of the taxable year, will be considered distributions of income
and gains of the taxable year and will therefore count toward satisfaction of
the Distribution Requirement.
If the High-Yield Series has a net capital loss (i.e., the excess of
capital losses over capital gains) for any year, the amount thereof may be
carried forward up to eight years and treated as a short-term capital loss which
can be used to offset capital gains in such years. As of December 31, 1997, the
High-Yield Series has capital loss carryforwards of approximately $160,500,
which expire in varying amounts between December 31, 1998 and December 31, 2003.
Under Code Section 382, if the High-Yield Series has an "ownership change," the
High-Yield Series' use of its capital loss carryforwards in any year following
- 28 -
<PAGE>
the ownership change will be limited to an amount equal to the net asset value
of the High-Yield Series immediately prior to the ownership change multiplied by
the highest adjusted long-term tax-exempt rate (which is published monthly by
the Internal Revenue Service (the "IRS")) in effect for any month in the
3-calendar-month period ending with the calendar month of change occurs (the
rate for April 1998 is 5.04%). The High-Yield will use its best efforts to avoid
having an ownership change. However, because of circumstances which may be
beyond the control or knowledge of the High-Yield Series, there can be no
assurance that the High-Yield Series will not have, or has not already had, an
ownership change. If the High-Yield Series has or has had an ownership change,
any capital gain net income for any year following the ownership change in
excess of the annual limitation on the capital loss carryforwards will have to
be distributed by the High-Yield Series and will be taxable to shareholders as
described under "High-Yield Series Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
- 29 -
<PAGE>
In general, gain or loss recognized by the High-Yield Series on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation (including municipal obligations)
purchased by the High-Yield Series at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent
of the portion of the market discount which accrued during the period of time
the High-Yield Series held the debt obligation.
In general, for purposes of determining whether capital gain or loss
recognized by the High-Yield Series on the disposition of an asset is long-term
or short-term, the holding period of the asset may be affected if (1) the asset
is used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, or (2) the asset is otherwise held by the High-Yield Series as part of a
"straddle" (which term generally excludes a situation where the asset is stock
and the High-Yield Series grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto). In addition,
the High-Yield Series may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position. Any gain recognized by the
High-Yield Series on the lapse of, or any gain or loss recognized by the
High-Yield Series from a closing transaction with respect to, an option written
by the High-Yield Series will be treated as a short-term capital gain or loss.
- 30 -
<PAGE>
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the High-Yield Series' net
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the High-Yield Series and a contemporaneous contract
to sell substantially identical property in the future; (2) the transaction is a
straddle within the meaning of section 1092 of the Code; (3) the transaction is
one that was marketed or sold to the High-Yield Series on the basis that it
would have the economic characteristics of a loan but the interest-like return
would be taxed as capital gain; or (4) the transaction is described as a
conversion transaction in the Treasury Regulations. The amount of the gain
recharacterized generally will not exceed the amount of the interest that would
have accrued on the net investment for the relevant period at a yield equal to
120% of the federal long-term, mid-term, or short-term rate, depending upon the
type of instrument at issue, reduced by an amount equal to: (1) prior inclusions
of ordinary income items from the conversion transaction and (2) the capital
interest on acquisition indebtedness under Code section 263(g). Built-in losses
will be preserved where the High-Yield Series has a built-in loss with respect
to property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to the High-Yield Series' shareholders.
- 31 -
<PAGE>
Certain transactions that may be engaged in by the High-Yield Series
(such as regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The High-Yield Series, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the High-Yield Series that are not Section 1256
contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
- 32 -
<PAGE>
In addition to satisfying the requirements described above, the
High-Yield Series must satisfy an asset diversification test in order to qualify
as a regulated investment company. Under this test, at the close of each quarter
of the High-Yield Series' taxable year, at least 50% of the value of the
High-Yield Series' assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the High-Yield Series has not invested more than
5% of the value of the High-Yield Series' total assets in securities of such
issuer and as to which the High-Yield Series does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the High-Yield Series controls and
which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security, not the issuer of the option.
If for any taxable year the High-Yield Series does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
High-Yield Series' current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
- 33 -
<PAGE>
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")).
(Tax-exempt interest on municipal obligations is not subject to the excise tax.)
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
- 34 -
<PAGE>
The High-Yield Series intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that the High-Yield Series may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
High-Yield Series Distributions
The High-Yield Series anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The High-Yield Series may either retain or distribute to shareholders
its net capital gain for each taxable year. The High-Yield Series currently
intends to distribute any such amounts. Net capital gain that is distributed and
designated as a capital gain dividend will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder has
held his shares or whether such gain was recognized by the High-Yield Series
prior to the date on which the shareholder acquired his shares.
- 35 -
<PAGE>
The High-Yield Series intends to qualify to pay exempt- interest
dividends by satisfying the requirement that at the close of each quarter of the
High-Yield Series' taxable year at least 50% of the High-Yield Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
High-Yield Series will constitute exempt-interest dividends to the extent of the
High-Yield Series' tax-exempt interest income (net of expenses and amortized
bond premium). Exempt-interest dividends distributed to shareholders of the
High-Yield Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file federal income tax returns will
be required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the High-Yield Series of any investment
company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986, generally will constitute an item of
tax preference includable in AMTI for both corporate and noncorporate taxpayers.
In addition, exempt-interest dividends derived from all municipal obligations,
regardless of
- 36 -
<PAGE>
the date of issue, must be included in adjusted current earnings, which are used
in computing an additional corporate preference item (i.e., 75% of the excess of
a corporate taxpayer's adjusted current earnings over its AMTI (determined
without regard to this item and the AMT net operating loss deduction))
includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of the High-Yield Series is denied a
deduction for interest on indebtedness incurred or continued to purchase or
carry shares of the High-Yield Series. Moreover, a shareholder who is (or is
related to) a "substantial user" of a facility financed by industrial
development bonds held by the High-Yield Series will likely be subject to tax on
dividends paid by the High-Yield Series which are derived from interest on such
bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the High-Yield Series that do not constitute ordinary
income dividends, exempt-interest dividends or capital gain dividends will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his shares; any excess will be treated as gain
realized from the sale of the shares, as discussed below.
- 37 -
<PAGE>
Distributions by the High-Yield Series will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the High-Yield Series (or of another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the High-Yield
Series reflects realized but undistributed income or gain, or unrealized
appreciation in the value of assets held by the High-Yield Series, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the
High-Yield Series into account in the year in which they are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the High-Yield Series) on
December 31 of such calendar year provided such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to the
U.S. federal income tax consequences of distributions made (or deemed made)
during the year.
The High-Yield Series will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of ordinary income and capital gain dividends,
and the proceeds
- 38 -
<PAGE>
of redemption of shares, paid to any shareholder (1) who has failed to provide a
correct taxpayer identification number, (2) who is subject to backup withholding
by the IRS for failure properly to report the receipt of interest or dividend
income, or (3) who has failed to certify to the High-Yield Series that it is not
subject to backup withholding or that it is an "exempt recipient" (such as a
corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the High-Yield Series in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the High-Yield Series within 30 days
before or after the sale or redemption. In general, any gain or loss arising
from (or treated as arising from) the sale or redemption of shares of the
High-Yield Series will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale or redemption of shares held for six
months or less will be disallowed to the extent of the amount of exempt-interest
dividends received on such shares and (to the extent not disallowed) will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code section 246(c)(3) and (4) generally will apply in determining the
holding period of shares. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
- 39 -
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the High-Yield Series is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the High-Yield Series is not effectively connected
with a U.S. trade or business carried on by a foreign shareholder, ordinary
income dividends paid to a the shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower applicable treaty rate) on the gross amount of
the dividend. Such a foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale or redemption of shares of the
High-Yield Series, capital gain dividends and exempt-interest dividends and
amounts retained by the High-Yield Series that are designated as undistributed
capital gains.
If the income from the High-Yield Series is effectively connected with
a U.S. trade or business carried on by a foreign shareholder, then ordinary
income and capital gain dividends received in respect of, and any gains realized
upon the sale of, shares of the High-
- 40 -
<PAGE>
Yield Series will be subject to U.S. federal income tax at the rates applicable
to U.S. taxpayers.
In the case of a foreign noncorporate shareholder, the High-Yield
Series may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding (or subject to
withholding at a reduced treaty rate), unless the shareholder furnishes the
High-Yield Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
High-Yield Series, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, perhaps with retroactive effect.
- 41 -
<PAGE>
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the High-Yield Series.
DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees to
authorize the issuance of an unlimited number of full and fractional shares of
beneficial interest (without par value), which may be divided into such separate
series as the Trustees may establish. The Fund currently has three series of
shares: the High-Yield Series, the Tax-Free Money Market Series and the
Fundamental U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares into
a greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an equal proportionate
interest in the Fund with each other share. The shares of any additional series
would participate equally in the earnings, dividends and assets of the
particular series, and would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series would vote together in the election and selection of
Trustees and
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<PAGE>
accountants. Upon liquidation of the High-Yield Series, each series' shareholder
is entitled to share pro rata in the net assets available for distribution to
shareholders from such series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are governed
by its Declaration of Trust dated March 19, 1987, a copy of which is on file
with the office of The Secretary of the Commonwealth of Massachusetts.
Theoretically, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund or any series of the Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument
- 43 -
<PAGE>
entered into or executed by the Fund or its Trustees. Moreover, the Declaration
of Trust provides for the indemnification out of Fund property of any
shareholders held personally liable for any obligations of the Fund or any
series of the Fund. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss beyond his or her investment
because of shareholder liability would be limited to circumstances in which the
Fund itself will be unable to meet its obligations. In light of the nature of
the Fund's business, the possibility of the Fund's liabilities exceeding its
assets, and therefore a shareholder's risk of personal liability, is extremely
remote.
The Declaration of Trust further provides that the Fund shall indemnify
each of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of the Fund. The Declaration of Trust does not authorize the Fund to indemnify
any Trustee or officer against any liability to which he or she would otherwise
be subject by reason of or for willful misfeasance, bad faith, gross negligence
or reckless disregard of such person's duties.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of the High-Yield Series is determined as
of the close of trading on the New York Stock Exchange (currently 4:00 P.M., New
York time) on each day that both the New York Stock Exchange and the Fund's
custodian bank are open for business. This determination is made once during
each such day as of the close of the New York Stock Exchange by deducting the
amount of the High-Yield Series' liabilities from the value of its assets and
dividing the difference by the number of its shares outstanding. Debt securities
(other than short-term obligations), including listed issues, are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which take
into account appropriate factors such as institution-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices, because such valuations are believed to
reflect more accurately the fair value of such securities. Use of the pricing
service has been approved by the Board of Trustees. Short-term obligations are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio securities for which there are no such valuations
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees.
- 45 -
<PAGE>
CALCULATION OF YIELD AND AVERAGE
ANNUAL TOTAL RETURN
The High-Yield Series' yield quotations and average annual total return
quotations as they may appear in the Prospectus, this Statement of Additional
Information or in advertising and sales material are calculated by standard
methods prescribed by the Securities and Exchange Commission.
The High-Yield Series' yield is computed by dividing the High-Yield
Series' net investment income per share during a base period of 30 days, or one
month, by the net asset value per share of the High-Yield Series on the last day
of such base period in accordance with the following formula:
Yield = 2[( a-b +1)6 -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
- 46 -
<PAGE>
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the High-Yield
Series is computed based on the market value of the obligation (including actual
accrued interest, if any) at the close of business on the last day of each
month, or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest, if any).
(ii) The yield to maturity of each obligation is then divided by 360
and the resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest income on
the obligation for each day of the subsequent month that the obligation is in
the portfolio. For these purposes it is assumed that each month has 30 days.
(iii) Interest earned on all debt obligations during the 30-day or one
month period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
(v) In the case of a tax-exempt obligation issued without original
issue discount and having a current market discount, the coupon rate of interest
of the obligation
- 47 -
<PAGE>
is used in lieu of yield to maturity to determine interest income earned on the
obligation. In the case of a tax-exempt obligation with original issue discount
where the discount based on the current market value of the obligation exceeds
the then remaining portion of original issue discount (i.e. market discount),
the yield to maturity used to determine interest income earned on the obligation
is the imputed rate based on the original issue discount calculation. In the
case of a tax-exempt obligation with original issue discount where the discount
based on the current market value of the obligation is less than the then
remaining portion of the original issue discount (market premium), the yield to
maturity used to determine interest income earned on the obligation is based on
the market value of the obligation.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the High-Yield Series accounts
for gain or loss attributable to actual monthly pay downs as an increase or
decrease to interest income during the period. In addition, the High-Yield
Series may elect (i) to amortize the discount or premium on a remaining
security, based on the cost of the security, to the weighted average maturity
date, if such information is available, or to the remaining term of the
security, if the weighted average maturity date is not available, or (ii) not to
amortize the discount or premium on a remaining security.
- 48 -
<PAGE>
For purposes of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of each obligation in the High-Yield
Series' portfolio each day that the obligation is in the portfolio. The
High-Yield Series does not use equalization accounting in the calculation of
yield. Expenses accrued during any base period, if any, pursuant to the
Distribution Plan are included among the expenses accrued during the base
period. Any reimbursement accrued pursuant to the Distribution Plan during a
base period, if any, will reduce expenses accrued pursuant to such Plan, but
only to the extent the reimbursement does not exceed the accrued expenses for
the base period.
The High-Yield Series' yield for the one-month period ended December
31, 1997 determined in accordance with the above formula is 3.99%.
Average annual total return quotations are computed by finding the
average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at
the end of a designated period (or fractional portion thereof)
- 49 -
<PAGE>
For purposes of the above computation, it is assumed that all dividends
and distributions made by the High-Yield Series are reinvested at net asset
value during the designated period. The average annual total return quotation is
determined to the nearest 1/100 of 1%. The average annual total return for the
High-Yield Series for the year ended December 31, 1998 was ____%. The average
annual total return for the High Yield Series for the 5 year period ended
December 31, 1998 was ____%. The average annual total return was ___% for the
ten year period ended December 31, 1998.
In determining the average annual total return (calculated as provided
above), recurring fees, if any, that are charged to all shareholder accounts are
taken into consideration. For any account fees that vary with the size of the
account, the account fee used for purposes of the above computation is assumed
to be the fee that would be charged to the High-Yield Series' mean account size.
- 50 -
<PAGE>
The High-Yield Series may also from time-to-time advertise its taxable
equivalent yield. The High-Yield Series' taxable equivalent yield is determined
by dividing that portion of the High-Yield Series' yield (calculated as
described above) that is tax-exempt by one minus the stated marginal federal
income tax rate and adding the product to that portion, if any,of the yield of
the High-Yield Series that is not tax-exempt. The taxable equivalent yield of
the High-Yield Series for the one-month period ended December 31, 1998 was ____%
for a taxpayer whose income was subject to the then highest marginal federal
income tax rate of ____%.
The High-Yield Series' yield and average annual total return will vary
from time-to-time depending on market conditions, the composition of the
High-Yield Series' portfolio and operating expenses of the High-Yield Series.
These factors and possible differences in the methods used in calculating yields
and returns should be considered when comparing performance information
regarding the High-Yield Series' to information published for other investment
companies and other investment vehicles. Yields and return quotations should
also be considered relative to changes in the value of the High-Yield Series'
shares and the risk associated with the High-Yield Series' investment objective
and policies. At any time in the future, yields and return quotations may be
higher or lower than past yields or return quotations and there can be no
assurance that any historical yield or return quotation will continue in the
future. In addition, the yield and average annual total return figures set forth
above in this Statement of Additional Information should be evaluated in light
of the limited operating history of the High-Yield Series.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Fund's management provides the Fund with investment advice and
recommendations for the purchase and sale of portfolio securities. Newly issued
securities are usually purchased from the issuer or an underwriter, at prices
including underwriting fees; other purchases and sales are usually placed with
those dealers from whom it appears that the best price or execution will be
obtained. All orders for the purchase and sale of portfolio securities are
placed by the Fund's management, subject to the general control of the Fund's
Directors. The Fund's management may sell portfolio securities prior to their
maturity if market conditions and other considerations indicate, in the opinion
of the Fund's management, that such sale would be advisable. In addition, the
Fund's management may engage in short-term trading when it believes it is
consistent with the Fund's investment objective. Also, a security may be sold
and another of comparable quality may be simultaneously purchased to take
advantage of what the Fund's management believes to be a temporary disparity in
the normal yield relationships of two securities. The Fund's management is
generally responsible for the implementation, or supervision of the
implementation, of investment decisions, including the allocation of principal
business and portfolio brokerage, and the negotiation of commissions.
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<PAGE>
It is the Fund's policy to seek execution of its purchases and sales at
the most favorable prices through responsible broker-dealers and in agency
transactions, at competitive commission rates. When considering broker-dealers,
the Fund will take into account such factors as the price of the security, the
size and difficulty of the order, the rate of commission, if any, the
reliability, financial condition, integrity and general execution and
operational capabilities of competing broker-dealers, and the brokerage and
research services which they provide to the Fund's management.
During the last three fiscal years from 1996-98, the Fund paid
$_______, $________, and $_________, respectively, in brokerage commissions.
The Board of Directors of the Fund is authorized to adopt a brokerage
allocation policy pursuant to the Securities Exchange Act of 1934 which would
permit the Fund to pay a broker-dealer which furnishes research services a
higher commission than that which might be charged by another broker-dealer
which does not furnish research services, or which furnishes research services
deemed to be of a lesser value, provided that such commission is deemed
reasonable in relation to the value of the brokerage and research services
provided by the broker-dealer.
Section 28(e)(3) of the Securities Exchange Act of 1934 defines
"Brokerage and Research Services" as including, among other things, advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities
- 53 -
<PAGE>
or purchasers or sellers of securities, furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts, and offering securities
transactions and performing functions incidental thereto (such as clearance and
settlement).
It is not the Fund's practice to allocate principal business or
brokerage on the basis of sales of Fund shares which may be made through brokers
or dealers, although broker-dealers effecting purchases of Fund shares for their
customers may participate in principal transactions of brokerage allocation as
described above.
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<PAGE>
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the year ended December
31, 1998 [WILL BE ATTACHED] hereto.
- 55 -
<PAGE>
APPENDIX
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses, and obtaining funds to loan to other public
institutions. In addition, certain types of private activity bonds are issued by
or on behalf of public authorities to obtain funds to provide privately operated
housing facilities, airport, mass transit, port facilities, and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term Municipal Bonds if the interest
paid thereon qualifies as exempt from federal income tax. Other types of private
activity bonds, the proceeds of which are used for the construction, equipment,
repair or improvement of privately operated industrial or commercial facilities,
may constitute Municipal Bonds, although the current federal tax laws place
substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
A-1
<PAGE>
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand and general
conditions of the Municipal Bond market, size of a particular offering, the
maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Bonds of the same maturity and coupon with different ratings may
have the same yield.
A-2
<PAGE>
FUNDAMENTAL FIXED INCOME FUND
TAX-FREE MONEY MARKET SERIES
THIS STATEMENT IS DATED MAY 1, 1999 AND
SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus, a copy of which may be obtained
by writing to The Fund at (________________), or by calling (800) (_________).
Shareholder inquiries may also be placed through this number.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY ...................................................................
INVESTMENT OBJECTIVE AND POLICIES ..............................................
INVESTMENT LIMITATIONS .........................................................
MANAGEMENT OF THE FUND .........................................................
OWNERSHIP OF SECURITIES ........................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES .......................................
DISTRIBUTION PLAN ..............................................................
PORTFOLIO TRANSACTIONS..........................................................
TAXES...........................................................................
DESCRIPTION OF SHARES...........................................................
CERTAIN LIABILITIES.............................................................
PURCHASE OF SHARES .............................................................
PRICING OF SHARES ..............................................................
CALCULATION OF YIELD............................................................
FINANCIAL STATEMENTS............................................................
APPENDIX.....................................................................A-1
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<PAGE>
FUND HISTORY
The Fundamental-Fixed Income Fund (the "Fund") was organized as a
Massachusetts business trust on March 19, 1987. The Company has three series:
High-Yield Municipal Bond Series, Fundamental U.S. Government Strategic Income
Fund, and Tax-Free Money Market Series (the "Money Market Series"). This
Statement of Additional Information pertains to the Money Market Series, which
is an open-end, diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the Money Market Series dated April 30, 1999 (the
"Prospectus") identifies the investment objective and the principal investment
policies of the Money Market Series. Other investment policies and a further
description of certain of the policies described in the Prospectus are set forth
below.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the Money Market Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
Money Market Series' assets immediately, while awaiting delivery of securities
purchased on a "when-issued" basis, short-term obligations that offer same day
settlement and earnings will normally be purchased. Although short-term
investments will normally be in tax-exempt securities, short-term taxable
securities may be purchased if suitable short-term tax-exempt securities are not
available. When a commitment to purchase a security on a "when-issued" basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the assets of the Money
Market Series equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, cash or high-quality debt securities
sufficient to cover any commitments are always expected to be available.
Nonetheless, such purchases may involve more risk than other types of purchases,
as described in the Prospectus.
Standby Commitments. The Money Market Series may acquire standby
commitments with respect to Municipal Bonds held in its portfolio. A standby
commitment is an agreement in which a dealer agrees to purchase, at the Money
Market Series' option, specified Municipal Bonds at specified prices. The total
amount paid by the Money Market Series for outstanding standby commitments it
holds will not exceed 1/2 of 1% of the Money Market Series' total assets
calculated immediately after each standby commitment is acquired. The
acquisition of a standby commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. See "DETERMINATION OF NET ASSET VALUE" below. The actual
standby commitment will be valued at zero in determining net asset value. The
cost of the standby commitment will be reflected as an unrealized loss for the
period during which the commitment is held by the Money
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<PAGE>
Market Series and will be reflected in realized gain or loss when the commitment
is exercised or expires.
Temporary Defensive Investments. The Money Market Series may, from time
to time, take temporary defensive positions that are inconsistent with its
prinicpal investment strategies. Such investments are made only under conditions
that in the opinion of the investment adviser of the Money Market Series make
such investments advisable. For example, the Money Market Series may invest in
taxable obligations pending investment in municipal bonds of proceeds from the
sale of its shares or investments or to ensure the liquidity needed to satisfy
redemptions of shares and the day-to-day operating expenses of the Money Market
Series. The Money Market Series invests in only those taxable obligations that
are (1) rated AA or higher by S&P or Aa or higher by Moody's or unrated but
judged by its investment adviser to be of at least comparable quality, (2)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or (3) obligations of banks (including certificates of
deposit, bankers' acceptances, and repurchase agreements) with at least
$1,000,000,000 of assets. No more than 50% of the assets of the Money Market
Series may be invested in taxable obligations at any one time, and the Money
Market Series anticipates that on a 12-month average, taxable obligations will
constitute less than 10% of the value of its total investments.
Portfolio Turnover. Pursuit by the Money Market Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the Money Market Series of broker commissions, dealer
spreads and other transaction costs relating to the purchase and the sale of
securities. Portfolio turnover rate for a given fiscal year is calculated by
dividing the lesser of the amount of the purchases or the amount of the sales of
portfolio securities during the year by the monthly average of the value of the
portfolio securities during the year.
INVESTMENT LIMITATIONS
The Money Market Series has adopted the following policies as
"fundamental policies," which cannot be changed without the approval of the
holders of a majority of the shares of the Money Market Series (which, as used
in this Statement of Additional Information, means the lesser of (i) more than
50% of the outstanding shares, or (ii) 67% or more of the shares present at a
meeting at which holders of more than 50% of the outstanding shares are
represented in person or by proxy). The Money Market Series may not:
1. purchase the securities of any issuer, if, as a result of such
purchase, more than 25% of its total assets would be invested in
non-governmental industrial revenue bonds, the payment of the principal and
interest on which are the responsibility of issuers in the same industry,
provided that it may invest more than 25% of its total assets in industrial
revenue bonds, in banks or in U.S. government securities;
-4-
<PAGE>
2. borrow money, except to meet redemptions in amounts not exceeding 33
1/3% (taken at the lower of cost or current value) of its total assets
(including the amount borrowed);
3. commit more than 10% of its assets to illiquid securities, including
repurchase agreements that mature in more than seven days;
4. make short sales of securities;
5. purchase securities on margin;
6. write, purchase or otherwise invest in any put (except for standby
commitments, as described in the Prospectus), call, straddle or spread option or
buy or sell real estate, commodities or commodity futures contracts or invest in
oil, gas or mineral exploration or development programs;
7. make loans to any person, except by (a) the purchase of a debt
obligation in which the Money Market Series is permitted to invest and (b)
engaging in repurchase agreements;
8. knowingly purchase any security that is subject to legal or
contractual restrictions on resale or for which there is no readily available
market;
9. purchase the securities of other investment companies or investment
trusts, except as they may be acquired as part of a merger, consolidation or
acquisition of assets;
10. purchase or retain the securities of any issuer if any officer or
Trustee of the Fund or of the Fund's investment advisor is an officer or
director of such issuer and owns beneficially more than 1/2 of 1% of the
securities of such issuer and all of the officers and Trustees of the Fund and
of the Fund's investment advisor together own more than 5% of the securities of
such issuer;
11. act as an underwriter, except as it may be deemed to be an
underwriter in a sale of restricted securities;
12. invest in companies for the purpose of exercising control or
management; or
13. issue senior securities.
For the purposes of the Money Market Series' investment restrictions,
the issuer of a tax-exempt security is deemed to be the entity (public or
private) ultimately responsible for the payment of the principal and interest on
the security.
-5-
<PAGE>
Operating Policies. The Money Market Series has adopted the following
operating policy which is not fundamental and which may be changed without
shareholder approval: To comply with certain state statutes, the Money Market
Series will not pledge, mortgage or hypothecate its portfolio securities if at
the time the value of the securities so pledged, mortgaged or hypothecated would
exceed 10% of the value of the Money Market Series.
Percentage Restrictions. If a percentage restriction on investment or
utilization of assets set forth above is adhered to at the time an investment is
made or assets are so utilized, a later change in percentage resulting from
changes in the value of the portfolio securities of the Money Market Series will
not be considered a violation of such policy.
The Money Market Series has adopted a number of investment restrictions and
policies that may help to reduce risk:
* The Money Market Series will not purchase a municipal bond if as
a result more than 25% of the assets of the Money Market Series
would be invested in the securities of a particular industry.
This limitation does not apply to the investment of its assets in
banks, U.S. Government securities, or federal agency obligations.
* The Money Market Series will not borrow money except to meet
redemptions, and then in amounts not exceeding 33.33% (taken at
the lower of cost or current value) of its total assets
(including the amount borrowed) or mortgage, pledge or
hypothecate its assets except in connection with any such
borrowing and in amounts not in excess of the dollar amounts
borrowed.
* At no time will the Money Market Series commit more than 10% of
its assets to illiquid securities, including repurchase
agreements that mature in more than seven days.
Borrowings are subject to the additional restriction that the value of
the Money Market Series' assets, less its liabilities other than borrowings,
must always be equal to or greater than 300% of all of its borrowings (including
the proposed borrowing). If this 300% coverage requirement is not met, the Money
Market Series must, within three days, reduce its debt to the extent necessary
to meet such coverage requirement, and to do so, it may have to sell a portion
of its investments at a time when such a sale would otherwise be inadvisable.
Interest on money borrowed is an expense of the Money Market Series.
-6-
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the Board
of Trustees. Specifically, the Board of Trustees is responsible for oversight of
the Fund by reviewing and approving necessary agreements with the Fund's service
providers, and mandating policies for the Fund's operations.
Trustees and officers of the Fund, together with information as to
their principal business occupations during the last five years, are shown
below. Each director who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March __, 1999.
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<TABLE>
<CAPTION>
===============================================================================================================
Position(s) Held Principal
Occupation(s) During Name,
Address, and Age with Fund Past
Five Years
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Trustee Vice President and Treasurer,
[Address] Ingersoll-Rand Company (5/86 -
Present); Trustee, Chase Vista
Age: 56 Funds.
- ---------------------------------------------------------------------------------------------------------------
L. Greg Ferrone Trustee Senior Manager, ARC Partners
83 Ronald Court (10/97 - Present); Consultant,
Ramsey, New Jersey 07446 IntraNet, Inc. (4/90 - 10/97);
Age: 47 Sales & Marketing Director, RAV
Communications (4/85 - 4/90);
Vice President/Regional Manager,
National Westminster Bank USA
(3/78 - 4/85).
- ---------------------------------------------------------------------------------------------------------------
Stephen C. Leslie* President Chairman and CEO,
67 Wall Street Cornerstone Equity Advisors,
New York, New York 10005 Inc. (6/97 - Present); Partner,
Age: 45 Wall Street Capital Group (3/97
- 6/97); Partner, Wall Street
Investment Corp. (11/95 -
3/97); Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- ---------------------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
67 Wall Street Financial Officer Advisors, Inc. (4/97 - Present);
New York, New York 10005 Partner, Speer & Fulvio (3/87 -
Age: 4/97).
- ---------------------------------------------------------------------------------------------------------------
Leroy E. Rodman Trustee Counsel, Morrison, Cohen,
[Address] Singer & Weinstein, LLP
(1996 - Present); Senior Partner,
Age: 85 Teitelbaum, Hiller, Rodman,
Paden & Hibsher, P.C. (1990 -
1996).
- ---------------------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Trustee Executive Director and Chief
[Address] Operating Officer, Black
Leadership Forum, Inc.;
Age: 65 Director, Joint Center For
Political and Economic Studies
(1991 - Present).
===============================================================================================================
</TABLE>
-8-
<PAGE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the Treasurer
of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the Trustees of
the Fund are also Trustees of The California Muni Fund and Fundamental
Fixed-Income Fund.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Trustee of the Fund who
is not affiliated with the Fund's investment manager is compensated at the rate
of $6,500 per quarter prorated among the three funds based on their respective
net assets at the end of each quarter. Each such Trustee is also reimbursed by
the three funds, on the same basis, for actual out-of-pocket expenses relating
to his attendance at meetings. Some Trustees received additional compensation at
a rate of $125 per hour for services related to servicing on the Portfolio
Review Committee. As of the date of this Statement of Additional Information,
Trustees and officers of the Fund as a group owned beneficially less than 1% of
the Fund's outstanding shares.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
================================================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Trustee
================================================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
-9-
<PAGE>
OWNERSHIP OF SECURITIES
As of __________ except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the Fund. As
of that date, the officers and Board Members of the Fund beneficially owned less
than 1% of the shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors, Inc.
("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief Executive
Officer is Mr. Stephen C. Leslie, who is also President of the Fund. Mr. Leslie
is one of two individuals who may be considered a "control person" of
Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is the Treasurer and
Chief Financial Officer of the Fund. Mr. Fulvio is not considered a "control
person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following percentages
of the Fund's average daily net asset value:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
- ----------------------------- ------------------
<S> <C>
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
</TABLE>
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received an
aggregate advisory fee of $____________. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$____________. From January 1, 1998 to May 30, 1998 FPA received an aggregate
advisory fee of $____________. For the fiscal year ended December 31, 1997 FPA
received an aggregate advisory fee of $____________. For the fiscal year ended
December 31, 1996 FPA received an aggregate advisory fee of $787,962.
[CREDITS FOR THE ADVISORY FEE STATED SEPARATELY]. The investment
management agreement with FPA provided an expense limitation of 1.50% of the
-10-
<PAGE>
Fund's average daily net assets. The agreement with Cornerstone also contains
such limitations, while the interim agreement with Tocqueville did not provide
such limitations.
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53201-0701 currently acts as Administrator, Transfer Agent, and Accounting
Agent of the Fund.
[Description of Services and aggregate compensation for the
administration services.]
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan Street,
Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and securities.
______________, acts as independent certified public accountants for
the Fund, performing an annual audit of the Fund's financial statements and
preparing its tax returns.
DISTRIBUTION PLAN
The Fund has entered into a Distribution Agreement with Cresvale
International (US) LLC ("Cresvale"). The Trustees who are not, and were not at
the time they voted, interested persons of the Fund, as defined in the 1940 Act
(the "Independent Trustees"), have approved the Distribution Agreement. The
Distribution Agreement provides that Cresvale will bear the distribution
expenses of the High-Yield Series not borne by the High-Yield Series. The
Distribution Agreement was approved by action of the Trustees of the Fund on
September 25, 1998. The Distribution Agreement will continue in effect from
year-to-year if it is specifically approved, at least annually, in the manner
required by the 1940 Act.
Cresvale bears all expenses it incurs in providing services under the
Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the
High-Yield Series. Cresvale also pays certain expenses in connection with the
distribution of the High-Yield Series' shares, including the cost of preparing,
printing and distributing advertising or promotional materials. The High-Yield
Series bears the cost of registering its shares under federal and state
securities law.
The Fund and Cresvale have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, Cresvale will use its best efforts in
rendering services to the Fund.
-11-
<PAGE>
The Fund has adopted a plan of distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan") pursuant to which the High-Yield Series pays
Cresvale compensation accrued daily and paid monthly at the annual rate of 1/2
of 1.0% of the High-Yield Series' average daily net assets. The Plan was adopted
by a majority vote of the Board of Trustees, including all of the Independent
Trustees (none of whom had or have any direct or indirect financial interest in
the operation of the Plan), cast in person at a meeting called for the purpose
of voting on the Plan on September 29, 1987 by the then sole shareholders of the
High-Yield Series.
Pursuant to the Plan, Cresvale provides the Fund, for review by the
Trustees, and the Trustees review, at least quarterly, a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made.
No interested person of the Fund nor any Trustee of the Fund who is not
an interested person of the Fund, as defined in the 1940 Act, has any direct
financial interest in the operation of the Plan except to the extent that
Cresvale and certain of its employees may be deemed to have such an interest as
a result of receiving a portion of the amounts expended thereunder by the Fund.
The Plan has been approved and will continue in effect from
year-to-year thereafter, provided such continuance is approved annually by vote
of the Trustees in the manner described above. It may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the Fund, and material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of the
majority of the Trustees who are not interested persons of the Fund, and with no
direct or indirect financial interest in the operations of the Plan, or by a
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act). The Plan will automatically terminate in the event of its
assignment (as defined in the 1940 Act). So long as the Plan is in effect, the
election and nomination of the Independent Trustees shall be committed to the
discretion of the Independent Trustees. In the Trustees' quarterly review of the
Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
During the year ended December 31, 1998, the Fund paid $(_______) for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising --
$(______); printing and mailing of Prospectuses to other than current
shareholders -- $(______); and sales, and shareholder servicing support services
and other distribution services, -- $(______). Of the amount paid by the Fund
during last year, $(_______) was paid to (______________) for expenses incurred
and services rendered by it pursuant to the Plan.
-12-
<PAGE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the Money Market Series by the Manager pursuant to authority
contained in the Management Agreement (subject to the right of the Trustees to
reverse any such transaction). The Manager is and may in the future also be
responsible for the placement of transaction orders for the other series of the
Fund and other funds for which the Manager acts as investment advisor.
Securities purchased and sold on behalf of the Money Market Series will be
traded on a net basis (i.e. without commission) through dealers acting for their
own account and not as brokers or otherwise involve transactions directly with
the issuer of the instrument. In selecting brokers or dealers, the Manager will
consider various relevant factors, including, but not limited to, the size and
type of the transaction; the nature and character of the markets for the
security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the dealer; the dealer's execution
services rendered on a continuing basis; and the reasonableness of any dealer
spreads.
Dealers may be selected who provide brokerage and/or research services
to the Fund or Money Market Series and/or other investment companies over which
the Manager exercises investment discretion. Such services may include advice
concerning the value of securities; the advisability of investing in, purchasing
or selling securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). The Manager
maintains a listing of dealers who provide such services on a regular basis.
However, because it is anticipated that many transactions on behalf of the Money
Market Series, other series of the Fund and other funds over which the Manager
exercises investment discretion are placed with dealers (including dealers on
the list) without regard to the furnishing of such services, it is not possible
to estimate the proportion of such transactions directed to such dealers solely
because such services were provided.
The receipt of research from dealers may be useful to the Manager in
rendering investment management services to the Money Market Series and/or other
series of the Fund and other funds over which the Manager exercises investment
discretion, and conversely, such information provided by brokers or dealers who
have executed transaction orders on behalf of such other clients of the Manager
may be useful to the Manager in carrying out its obligations to the Money Market
Series. The receipt of such research has not reduced the Manager's normal
independent research activities; however, it enables the Manager to avoid the
additional expenses which might otherwise be incurred if it were to attempt to
develop comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the Money
Market Series may receive spreads or commissions which are in excess of the
amount of spreads or commissions which other brokers or dealers would have
charged for effecting such transactions. In order to cause the Money Market
Series to pay such higher spreads or commissions, the Manager must determine in
good faith that such spreads or commissions are reasonable in relation to the
value of the brokerage and/or research services provided by such executing
broker
-13-
<PAGE>
or dealers viewed in terms of a particular transaction or the Manager's overall
responsibilities to the Money Market Series, the Fund or the Manager's other
clients. In reaching this determination, the Manager will not attempt to place a
specific dollar value on the brokerage and/or research services provided or to
determine what portion of the compensation should be related to those services.
The Manager is authorized to place portfolio transactions with dealer
firms that have provided assistance in the distribution of shares of the Money
Market Series or shares of other series of the Fund or other funds for which the
Manager acts as investment advisor if it reasonably believes that the quality of
the transaction and the amount of the spread are comparable to what they would
be with other qualified dealers.
During the years ended December 31, 1989 through 1998[??] the Money
Market Series did not pay any brokerage commissions.
The Funds' Trustees and brokerage allocation committee (comprised
solely of non-interested Trustees) periodically review the Manager's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the Money Market Series and the Fund and review the
dealer spreads paid by the Money Market Series and the Fund over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Fund and its portfolios.
TAXES
The following is only a summary of certain additional federal income
tax considerations generally affecting the Money Market Series and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the Money Market Series
or its shareholders, and the discussions here and in the Prospectus are not
intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Money Market Series has elected to be taxed as a regulated
investment company for federal income tax purposes under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, the Money Market Series is not subject to federal income tax
on the portion of its net investment income (i.e., taxable interest, dividends
and other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are
-14-
<PAGE>
described below. Distributions by the Money Market Series made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will therefore count toward satisfaction of the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In general, gain or loss recognized by the Money Market Series on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation (including municipal obligations)
purchased by the Money Market Series at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent
of the portion of the market discount which accrued during the period of time
the Money Market Series held the debt obligation.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Money
Market Series must satisfy an asset diversification test in order to qualify as
a regulated investment company. Under this test, at the close of each quarter of
the Money Market Series' taxable year, at least 50% of the value of the Money
Market Series' assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to each of which the Money Market Series has not invested
more than 5% of the value of the Money Market Series' total assets in securities
of such issuer and does not hold more than 10% of the outstanding voting
securities of such issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies),
or in two or more issuers which the Money Market Series controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the Money Market Series does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such
-15-
<PAGE>
distributions will be taxable to the shareholders as ordinary dividends to the
extent of the Money Market Series' current and accumulated earnings and profits.
Such distributions generally will be eligible for the dividends-received
deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")).
(Tax-exempt interest on municipal obligations is not subject to the excise tax.)
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Money Market Series intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that the Money Market Series may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
Money Market Series Distributions
The Money Market Series anticipates distributing substantially all of
its investment company taxable income for each taxable year. Such distributions
will be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The Money Market Series may either retain or distribute to shareholders
its net capital gain for each taxable year. The Money Market Series currently
intends to distribute any such amounts. Net capital gain that is distributed and
designated as a capital gain dividend, will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder has
held his shares or whether such gain was recognized by the Money Market Series
prior to the date on which the shareholder acquired his shares.
-16-
<PAGE>
The Money Market Series intends to qualify to pay exempt-interest
dividends by satisfying the requirement that at the close of each quarter of the
Money Market Series' taxable year at least 50% of the Money Market Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
Money Market Series will constitute exempt-interest dividends to the extent of
the Money Market Series' tax-exempt interest income (net of expenses and
amortized bond premium). Exempt-interest dividends distributed to shareholders
of the Money Market Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file federal income tax returns will
be required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the Money Market Series of any investment
company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of the Money Market Series is denied a
deduction for interest on indebtedness incurred or continued to purchase or
carry shares of the Money Market Series. Moreover, a shareholder who is (or is
related to) a "substantial user" of a facility financed by industrial
development bonds held by the Money Market Series will likely be subject to tax
on dividends paid by the Money Market Series which are derived from interest on
such bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the Money Market Series that do not constitute
ordinary income dividends, exempt-interest dividends or capital gain dividends
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any excess will be treated as gain
realized from the sale of the shares, as discussed below.
-17-
<PAGE>
Distributions by the Money Market Series will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Money Market Series (or of another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the Money
Market Series reflects realized but undistributed income or gain, or unrealized
appreciation in the value of the assets held by the Money Market Series,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although such distributions economically constitute a return of
capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the
Money Market Series into account in the year in which the distributions are
made. However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month will
be deemed to have been received by the shareholders (and made by the Money
Market Series) on December 31 of such calendar year provided such dividends are
actually paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions made
(or deemed made) during the year.
The Money Market Series will be required in certain cases to withhold
and remit to the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any shareholder (1)
who has failed to provide a correct taxpayer identification number, (2) who is
subject to backup withholding for failure properly to report the receipt of
interest or dividend income, or (3) who has failed to certify to the Money
Market Series that it is not subject to backup withholding or that it is an
"exempt recipient" (such as a corporation).
Sale or Redemption of Shares
The Money Market Series seeks to maintain a stable net asset value of
$1.00 per share; however, there can be no assurance that the Money Market Series
will do this. If the net asset value varies from $1.00 per share, a shareholder
will recognize gain or loss on the sale or redemption of shares of the Money
Market Series in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares. All
or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Money Market Series within 30 days before or after
the sale or redemption. In general, any gain or loss arising from (or treated as
arising from) the sale or redemption of shares of the Money Market Series will
be considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
disallowed to the extent of the amount of exempt-interest dividends received on
such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital
-18-
<PAGE>
gain dividends received on such shares. For this purpose, the special holding
period rules of Code Section 246(c)(3) and (4) generally will apply in
determining the holding period of shares. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Money Market Series is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the Money Market Series is not effectively connected
with a U.S. trade or business carried on by a foreign shareholder, ordinary
income dividends paid to the shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) on the gross amount of the
dividend. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale or redemption of shares of the Money
Market Series, capital gain dividends and exempt-interest dividends and amounts
retained by the Money Market Series that are designated as undistributed capital
gains.
If the income from the Money Market Series is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then ordinary
income and capital gain dividends received in respect of, and any gains realized
on the sale of shares of, the Money Market Series will be subject to U.S.
federal income tax at the rates applicable to U.S. taxpayers.
In the case of a foreign noncorporate shareholder, the Money Market
Series may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or subject to
withholding at a reduced treaty rate) unless the shareholder furnishes the Money
Market Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Money
Market Series, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court
-19-
<PAGE>
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Money Market Series.
DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees to
authorize the issuance of an unlimited number of full and fractional shares of
beneficial interest (without par value), which may be divided into such separate
series as the Trustees may establish. The Fund currently has three series of
shares: the Money Market Series, the High-Yield Municipal Bond Series and the
Fundamental U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares of a
series into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the series. Each share represents an equal
proportionate interest in the relevant series with each other share of such
series. The shares of any additional series would participate equally in the
earnings, dividends and assets of the particular series, and would be entitled
to vote separately to approve investment advisory agreements or changes in
investment restrictions, but shareholders of all series would vote together in
the election and selection of Trustees and accountants. Upon liquidation of the
Fund, the Fund's shareholders are entitled to share pro rata in the Fund's net
assets available for distribution to shareholders.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are governed
by its Declaration of Trust dated March 19, 1987, a copy of which is on file
with the office of the Secretary of The Commonwealth of Massachusetts.
Theoretically, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund or any series of the Fund and
requires
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<PAGE>
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or its Trustees. Moreover, the
Declaration of Trust provides for the indemnification out of Fund property of
any shareholders held personally liable for any obligations of the Fund or any
series of the Fund. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss beyond his or her investment
because of shareholder liability would be limited to circumstances in which the
Fund itself will be unable to meet its obligations. In light of the nature of
the Fund's business, the possibility of the Fund's liabilities exceeding its
assets, and therefore a shareholder's risk of personal liability, is extremely
remote.
The Declaration of Trust further provides that the Fund shall indemnify
each of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of the Fund. The Declaration of Trust does not authorize the Fund to indemnify
any Trustee or officer against any liability to which he or she would otherwise
be subject by reason of or for willful misfeasance, bad faith, gross negligence
or reckless disregard of such person's duties.
PURCHASE OF SHARES
Shares of the Money Market Series may be purchased either directly from
the Money Market Series or through securities dealers, banks, or other financial
institutions. The Money Market Series has a minimum initial purchase requirement
of $1000 and a minimum subsequent purchase requirement of $100. Subsequent
purchases are made in the same manner as initial purchases.
Investors can purchase shares without a sales charge if they purchase
the shares directly from the Money Market Series. However, investors may be
charged a fee if they purchase shares through securities dealers, banks, or
other financial institutions. Investors opening a new account for the Money
Market Series must complete and submit a purchase application along with payment
of the purchase price for their initial investment. Investors purchasing
additional shares of the Money Market Series should include their account number
along with payment of the purchase price for additional shares being purchased.
Investors may re-open an account with a minimum investment of $100 and without
filing a purchase application during the year in which the account was closed or
during the following calendar year if the information on the original purchase
application is still applicable. The Money Market Series may require the filing
of a statement that all information on the original purchase application remains
applicable.
For customers of certain financial institutions who offer the service,
investors may have their "free-credit" cash balances automatically invested in
shares of the Money Market Series. These investments are not subject to the
minimum purchase requirements described above.
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<PAGE>
A purchase order becomes effective immediately on receipt by Firstar
Mutual Fund Services, LLC, as agent for the Money Market Series, if it is
received before 4:00 P.M. (Eastern time) on any business day. After a purchase
order becomes effective, confirmation of the purchase is sent to the investor,
and the purchase is credited to the investor's account. The Fund, or any series
thereof, reserves the right to reject any purchase order.
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Fundamental Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign Section F of the Purchase Application and send it to the Transfer Agent.
Shareholders may cancel this privilege or change the amount of purchase at any
time by calling 1-800-322-6864 or by mailing written notification to:
Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701. The change will be effective five business days
following receipt of notification by the Transfer Agent. A Fund may modify or
terminate this privilege at any time or charge a service fee, although no such
fee currently is contemplated. However, a $20 fee will be imposed by Firstar
Mutual Fund Services, LLC if sufficient funds are not available in the
shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that they do not exceed the amount allowable for
Federal tax purposes. Firstar Mutual Fund Services, LLC will assume that all
retirement plan contributions are being made for the tax year in which they are
received.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
-22-
<PAGE>
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar [Bank Milwaukee, N.A.]
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar [Bank Milwaukee, N.A.]
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund.
Failure to submit required information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Fundamental Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Checks should be
made payable to Fundamental Family of Funds.
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at (800) 322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined (see "Determination of
Net Asset Value"); the specific method of determining the value will be
-23-
<PAGE>
provided to you on request. The Fund reserves the right to refuse any such
exchange, even if the securities offered by an investor meet the general
investment criteria of the Fund. A capital gain or loss for Federal income tax
purposes may be realized by the investor following the exchange. Maturing bonds
or detached coupons submitted within five (5) business days of the payment date
are credited on the payment date.
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which Fund
management acts as the investment manager in exchange for shares of the Fund at
respective net asset values per share. Exchange instructions may be given in
writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI
53201-0701, the Fund's transfer agent, and must specify the number of shares of
the Fund to be exchanged and the fund into which the exchange is being made. The
telephone exchange privilege will be made available to shareholders
automatically. You may telephone exchange instructions by calling Firstar Mutual
Fund Services, LLC at (800) 322-6864. Before any exchange, you must obtain, and
should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
PRICING OF SHARES
The net asset value per share of the Money Market Series is determined
as of the close of trading on the New York Stock Exchange (currently 4:00 P.M.,
New York time) on each day that both the New York Stock Exchange and the Fund's
custodian bank are open for business. The net asset value per share of the Money
Market Series is also determined on any other day in which the level of trading
in its portfolio securities is sufficiently high that the current net asset
value per share might be materially affected by changes in the value of its
portfolio securities. On any day in which no purchase orders for the shares of
the Money Market Series become effective and no shares are tendered for
redemption, the net asset value per share is not determined.
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<PAGE>
Except as set forth in the following paragraph, the Money Market
Series' portfolio instruments are valued on each business day on the basis of
amortized cost. This technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of the
Money Market Series computed as described above may tend to be higher than a
like computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Money Market
Series resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Money Market Series would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values and existing investors in the Money Market Series would
receive less investment income. The converse would apply in a period of rising
interest rates.
Standby commitments will be valued at zero in determining net asset
value. "When-issued" securities will be valued at the value of the security at
the time the commitment to purchase is entered into.
The valuation of the Money Market Series' portfolio instruments based
upon their amortized cost and the concomitant maintenance of the Money Market
Series' per share net asset value of $1.00 is permitted in accordance with Rule
2a-7 under the Investment Company Act of 1940, pursuant to which the Money
Market Series must adhere to certain conditions. The Money Market Series must
maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 13 months or less and
invest only in securities determined by the Trustees to present minimal credit
risks. (See the Prospectus for additional information). The maturities of
variable rate demand instruments held in the Money Market Series' portfolio will
be deemed to be the longer of the demand period, or the period remaining until
the next interest rate adjustment, although stated maturities may be in excess
of one year. The Trustees must establish procedures designed to stabilize, to
the extent reasonably possible, the Money Market Series' price per share as
computed for the purpose of sales and redemptions at a single value. It is the
intention of the Money Market Series to maintain a per-share net asset value of
$1.00 but there can be no assurance of this. Such procedures will include review
of the Money Market Series' portfolio holdings by the Trustees, at such
intervals as they may deem appropriate, to determine whether the Money Market
Series' net asset value calculated by using available market quotations deviates
from $1.00 per share and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders. In the event the
Trustees determine that such a deviation exists, they have agreed to take such
corrective action as they regard as necessary and appropriate, including the
sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; or establishing a net asset value per share by using
available market quotations.
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<PAGE>
CALCULATION OF YIELD
The Money Market Series' yield quotations as they may appear in the
Prospectus, this Statement of Additional Information or in advertising and sales
material are calculated by a standard method prescribed by the Securities and
Exchange Commission. Under this method, the yield quotation is based on a
hypothetical account having a balance of exactly one share at the beginning of a
seven-day period.
The yield quotation is computed as follows: The net change, exclusive
of capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by subtracting a hypothetical charge reflecting expense
deductions from the hypothetical account, and dividing the net change in value
by the value of the share at the beginning of the base period. This base period
return is then multiplied by 365/7 with the resulting yield figure carried to
the nearest 100th of 1%. The determination of net change in account value
reflects the value of additional shares purchased with dividends from the
original share, dividends declared on both the original share and any such
additional shares, and all fees that are charged to the Money Market Series, in
proportion to the length of the base period and the Money Market Series' average
account size (with respect to any fees that vary with the size of an account).
The Money Market Series also may advertise a quotation of effective
yield. Effective yield is computed by compounding the unannualized base period
return determined as in the preceding paragraph by adding 1 to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] - 1.
The Money Market Series' taxable equivalent yield is determined by
dividing that portion of the Money Market Series' yield (calculated as described
above) that is tax-exempt by one minus a stated marginal federal income tax rate
and adding the product to that portion, if any, of the yield of the Money Market
Series that is not tax-exempt. The Money Market Series' taxable equivalent
effective yield is determined by dividing that portion of the Money Market
Series' effective yield (calculated as described above) that is tax-exempt by
one minus a stated marginal federal income tax rate and adding the product to
that portion, if any, of the effective yield of the Money Market Series that is
not tax-exempt. The Money Market Series' taxable equivalent yield and taxable
equivalent effective yield assume that the proportion of income of the Money
Market Series that is tax-exempt over the seven-day period used in determining
the yield and effective yield quotations is constant over the 52-week period
over which such yield quotations are annualized.
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<PAGE>
The yield and effective yield of the Money Market Series for the
seven-day period ended December 31, 1998 was ____% and ____%, respectively.
The taxable equivalent yield and taxable equivalent effective yield of
the Money Market Series for the seven-day period ended December 31, 1998 was
____% and ____%, respectively, for a taxpayer whose income was subject to the
then highest marginal federal income tax rate of ____%.
FINANCIAL STATEMENTS
Audited financial statements of the Money Market Series for the year ended
December 31, 1998 [WILL BE ATTACHED] hereto.
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<PAGE>
APPENDIX
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses, and obtaining funds to loan to other public
institutions. In addition, certain types of private activity bonds are issued by
or on behalf of public authorities to obtain funds to provide privately operated
housing facilities, airport, mass transit, port facilities, and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term Municipal Bonds if the interest
paid thereon qualifies as exempt from federal income tax. Other types of private
activity bonds, the proceeds of which are used for the construction, equipment,
repair or improvement of privately operated industrial or commercial facilities,
may constitute Municipal Bonds, although the current federal tax laws place
substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand and general
conditions of the Municipal Bond market, size of a particular offering, the
maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Bonds of the same maturity and coupon with different ratings may
have the same yield.
A-1
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
- -------- --------
(a) Declaration of Trust*
(b) By-Laws of Registrant*
(c) None
(d) Form of Advisory Agreement with Cornerstone
Equity Advisors, Inc.
(e) Inapplicable
(f) Form of Distribution Agreement*
(g) Form of Custody Agreement*
(h) Inapplicable
(i) (a) Opinion of Counsel as to the legality of
securities being issued*
(b) Consent of Counsel
(j) Consent of Accountants**
(k) None
(l) Form of Stock Purchase Agreement*
(m) Form of Marketing Plan pursuant to Rule 12b-1*
(n) Financial Data Schedules**
(o) Inapplicable
Item 24. Persons Controlled by or under Common Control with
Registrant
None.
Item 25. Indemnification
Except pursuant to the Declaration of Trust, dated March 13, 1987,
establishing the Registrant as a Trust under Massachusetts law, there is no
contract, arrangement or statute under which any Trustee, director, officer,
underwriter, distributor or affiliated person of the Registrant is insured or
indemnified. The Declaration of Trust provides that no Trustee or officer will
be indemnified against any liability to which the Registrant would otherwise be
subject by reason of or for willful misfeasance, bad faith, gross negligence or
reckless disregard of such person's duties. See the Registrant's undertaking
with respect to indemnification in Item 30 below.
Item 26. Business and other Connections of Investment Advisor
All of the information required by this item is set forth in the Forms
ADV, as amended, of Cornerstone Equity Advisors, Inc.
- -------------
* Previously filed.
** To be filed by amendment.
<PAGE>
The following sections of such Forms ADV are incorporated herein by reference:
(a) Items 1 and 2 of Part 2; and
(b) Item 6, Business Background, of each Schedule D.
Item 27. Principal Underwriters
(a) Cresvale International (US) LLC is the distributor of shares of the
Fundamental U.S. Government Strategic Income Fund Series, the
High-Yield Municipal Bond Series and the Tax-Free Money Market Series
of the Registrant.
(b)
Positions and Positions and
Offices with Offices with
Name* Distributor Registrant
- ----- ----------- ----------
James F. Curley Chairman/Chief None
Executive Officer
Joseph R. Randazzo Executive Vice None
President
Jerry Marer Executive Vice None
President
Henry Edwards First Vice President None
Jim Burke Vice President None
Kevin Chan Vice President None
Item 28. Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant, 67 Wall Street, New York, N.Y.
10005 and Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee, WI
53202, the Registrant's Custodian and Firstar Mutual Fund Services, LLC, 615
East Michigan Street, Milwaukee, WI 53202, the Registrant's Administrator and
Transfer Agent.
Item 29. Management Services
Inapplicable.
- ---------------
* Address of each person listed above is 55 Broadway, New York, New York
10006.
<PAGE>
Item 30. Undertakings
The Registrant undertakes to limit indemnification of officers and
Trustees as follows:
Indemnification
Section 1. The Registrant shall indemnify each of its Trustees and
officers (including persons who serve at the Registrant's request as directors,
trustees or officers of another organization in which the Registrant has any
interest as a shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or been threatened, while in office or thereafter, by reason of being
or having been such a Covered Person except with respect to any matter as to
which such Covered Person shall have been finally adjudicated in any such
action, suit or other proceeding (a) not to have acted in good faith in the
reasonable belief that such Covered Persons action was in the best interest of
the Registrant or (b) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
("disabling conduct"). Expenses, including counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compliance or as fines or penalties) shall be paid from time to time by the
Registrant in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Covered Person
to repay amounts so paid to the Registrant if it is ultimately determined that
indemnification of such expenses is not authorized under Sections 1, 2 and 3
hereof, provided, however, that either (a) such Covered Person shall have
provided appropriate security of such undertaking, (b) the Registrant shall be
insured against losses arising from any such advance payments or (c) either a
majority of the disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the matter), or
independent legal counsel in a written opinion shall have determined, based upon
a review of readily available facts (as opposed to a full trial type inquiry)
that there is reason to believe that such Covered Person will be found entitled
to indemnification under Sections 1 and 2 hereof.
<PAGE>
Compromise Payment
Section 2. Its to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication to a
court, or by any body before which the proceeding was brought, that such Covered
Person either (a) did not act in good faith in the reasonable belief that his or
her action was in the best interests of the Registrant or (b) is liable to the
Registrant or its shareholders by reason of disabling conduct, indemnification
shall be proved if (a) it is approved as in the best interests of the
Registrant, after notice that it involves such indemnification, by at least a
majority of the disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the matter) upon a
determination, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that such Covered Person acted in good faith in the
reasonable belief that his or her action was in the best interests of the
Registrant and is not liable to the Registrant or its shareholders Iq reasons of
disabling conduct, or (b) there has been obtained an opinion in writing of
independent legal counsel, based upon a review of readily available facts (as
opposed to a full trial type inquiry) to the effect that such Covered Person
appears to have acted in good faith in the reasonable belief that his or her
action was in the best interests of the Registrant and that such indemnification
would not protect such Covered Person against any liability to the Registrant to
which he or she would otherwise be subject by reason of disabling conduct. Any
approval pursuant to this Section shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently adjudicated by
a court of competent jurisdiction not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Registrant or to have been liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct or such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in Sections 1, 2 and 3 hereof, the term "Covered Persons"
shall include such person's heirs, executors and administrators, and a
"disinterested Trustee" is a Trustee who is not an "interested person" of the
Registrant as defined in Section 2(a)(19) of the 1940 Act, as amended (or who
has been exempt from being an "interested person" by any rule, regulation or
order of the Commission and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been
<PAGE>
pending). Nothing contained in Sections 1, 2 and 3 hereof shall affect any
rights to indemnification to which personnel of the Registrant, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Registrant to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Registrant
shall not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation the 1940 Act, and the rules and
regulations thereunder.
Registrant undertakes to furnish to each person to whom a prospectus
relating to its Fundamental U.S. Government Strategic Income Fund Series,
Tax-Free Money Market Series or High-Yield Municipal Bond Series is delivered, a
copy of the Fund's latest annual report to shareholders, upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 1st day of March, 1999.
Registrant: FUNDAMENTAL FIXED INCOME FUND
By: /s/ Stephen C. Leslie
Stephen C. Leslie
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Stephen C. Leslie President (Principal March 1, 1999
- ---------------------------- Executive Officer)
Stephen C. Lesie
*/s/L. Greg Ferrone Trustee
- ----------------------------
L. Greg Ferrone March 1, 1999
/s/G. John Fulvio Treasurer (Principal
- ---------------------------- Financial and Accounting
G. John Fulvio Officer) March 1, 1999
*By: /s/Jules Buchwald
---------------------------------
Jules Buchwald, Attorney-in-Fact,
pursuant to a power of attorney
dated April 24, 1991, previously
filed with the Securities and
Exchange Commission
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Index to Exhibit
Ex. 99.B5 Form of Advisory Agreement with Cornerstone Equity Advisors,
Inc.
Ex. 99.B10 Consent of Kramer Levin Naftalis & Frankel LLP
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this ___ day of ______ , by and between
(_______), (the "Fund") and (_______) (the "Investment Adviser");
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, the Investment Adviser has a pending registration as an
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"), and engages in the business of acting as an
investment adviser; and
WHEREAS, the Fund and the Investment Adviser desire to enter into
an agreement to provide for the management of the assets of the Fund on the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
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1. Management. The Investment Adviser shall act as investment
adviser for the Fund and shall, in such capacity, supervise the investment and
reinvestment of the cash, securities or other properties comprising the Fund's
assets, subject at all times to the policies and control of the Fund's Board of
Directors/Trustees. The Investment Adviser shall give the Fund the benefit of
its best judgment, efforts and facilities in rendering its services as
investment adviser.
2. Duties of Investment Adviser. In carrying out its obligation
under paragraph 1 hereof, the Investment Adviser shall, subject at all times to
the policies and control of the Fund's Board of Directors/Trustees:
(a) supervise and manage all aspects of the Fund's
operations;
(b) provide the Fund or obtain for it, and thereafter
supervise, such executive, administrative, clerical
and shareholder servicing services as are deemed advisable by the Fund's Board
of Directors/Trustees;
(c) arrange, but not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material, tax returns, reports to
the Fund's shareholders and reports to and filings with the Securities and
Exchange Commission and state Blue Sky authorities;
(d) provide the Fund with, or obtain for it, adequate
office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items for
the Fund's principal office;
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(e) provide the Board of Directors/Trustees of the Fund on
a regular basis with financial reports and analyses on the Fund's operations and
the operations of comparable investment companies;
(f) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Fund, and
whether concerning the individual issuers whose securities are included in the
Fund or the activities in which they engage, or with respect to securities which
the Investment Adviser considers desirable for inclusion in the Fund;
(g) determine what issuers and securities shall be
represented in the Fund's portfolio and regularly report them to the Board of
Directors/Trustees of the Fund;
(h) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly report
thereon to the Board of Directors/Trustees of the Fund; and
(i) take, on behalf of the Fund, all actions which
appear to the Fund necessary to carry into effect such purchase and sale
programs and supervisory functions as aforesaid, including the placing of orders
for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Adviser is
responsible for decisions to buy and sell securities for the Fund, broker-dealer
selection, and negotiation of brokerage commission rates. The Investment
Adviser's primary consideration in effecting a security transaction will be
execution at a price that is reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
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<PAGE>
with comparable transactions, including similar securities being purchased or
sold on a securities exchange during a comparable period of time.
In selecting a broker-dealer to execute each particular
transaction, the Investment Adviser will take the following into consideration:
the best net price available; the reliability, integrity and financial condition
of the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to the
Fund in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies and procedures as
the Board of Directors/Trustees may determine, the Investment Adviser shall not
be deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Fund to pay a
broker or dealer that provides brokerage and research services to the Investment
Adviser for the Fund's use an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Investment
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Investment Adviser's overall responsibilities with respect to the Fund. The
Investment Adviser is further authorized to allocate the orders placed by it on
behalf of the Fund to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Adviser
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for the Fund's use. Such allocation shall be in such amounts and proportions as
the Investment Adviser shall determine and the Investment Adviser will report on
said allocations regularly to the Board of Directors/Trustees of the Fund
indicating the brokers to whom such allocations have been made and the basis
therefor.
4. Control by Board of Directors/Trustees. Any investment program
undertaken by the Investment Adviser pursuant to this Agreement, as well as any
other activities undertaken by the Investment Adviser on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board
of Directors/Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Adviser shall at all times
conform to:
(a) all applicable provisions of the Investment
Company Act and the Investment Advisers Act and any rules and regulations
adopted thereunder as amended; and
(b) the provisions of the Registration Statements of the
Fund under the Securities Act of 1933, as amended, and the Investment Company
Act; and
(c) the provisions of the Articles of Incorporation of
the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended;
and (e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Investment Adviser as follows:
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(a) The Investment Adviser shall furnish, at its expense
and without cost to the Fund, the services of a President, Chief Financial
Officer, Secretary and to the extent necessary, such additional officers as may
be required by the Fund for the proper conduct of its affairs.
(b) The Investment Adviser shall further maintain, at its
expense and without cost to the Fund, a trading function in order to carry out
its obligations under subparagraph (i) of paragraph 2 hereof to place orders for
the purchase and sale of portfolio securities for the Fund.
(c) All of the ordinary business expenses incurred in the
operations of the Fund and the offering of its shares shall be borne by the Fund
unless specifically provided otherwise in this paragraph 6. These expenses
include but are not limited to brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder service agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and directors if available) of the Fund which inure to its
benefit, expenses relating to trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Fund in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders.
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7. Compensation. The Fund shall pay the Investment Adviser a
portfolio management fee with respect to the Fund, which fee shall be computed
on the basis of the average net asset value of the Fund as ascertained at the
close of each business day and which fee shall be paid monthly in accordance
with the following schedule:
Fundamental U.S. Government Strategic Income Fund:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
High-Yield Municipal Bond Series:
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000 or more but less than $200,000,000 .78%
Net asset value of $200,000,000 or more but less than $300,000,000 .76%
Net asset value of $300,000,000 or more but less than $400,000,000 .74%
Net asset value of $400,000,000 or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
Tax-Free Money Market Series; The California Muni Fund; New York Muni Fund:
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
8. Non-Exclusivity. The services of the Investment Adviser to the
Fund are not to be deemed to be exclusive, and the Investment Adviser shall be
free to render investment advisory and corporate administrative or other
services to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers or directors of the
Investment Adviser may serve as officers or directors of the Fund, and that
officers or directors of the Fund may serve as officers or directors of the
Investment Adviser to the extent permitted by law; and that the officers and
directors of the Investment Adviser are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers, directors or trustees of any other firm or
corporation, including other investment companies.
9. Term and Approval. This Agreement shall become effective at
the close of business on the date hereof and shall remain in force and affect
for two years and thereafter from year to year, provided that such continuance
is specifically approved at least annually.
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10. Termination. This Agreement may be terminated upon sixty (60)
days' written notice to the Investment Adviser by vote of the Fund's Board of
Directors/Trustees or by vote of a majority of the Fund's outstanding voting
securities. This Agreement may be terminated by the Investment Adviser on sixty
(60) days' written notice to the Fund. The notice provided for herein may be
waived by either party to this Agreement. This Agreement shall automatically
terminate in the event of its assignment, the term "assignment" for the purpose
having the meaning defined in Section 2(a)(4) of the Investment Company Act.
11. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Fund and that of the Investment Adviser shall be 67 Wall Street, New York, New
York 10005. If to the Fund, an additional copy of any notice under this
Agreement shall be provided to Kramer Levin Naftalis & Frankel LLP, 919 Third
Avenue, New York, New York 10022, attention to Carl Frischling, Esq.
12. Questions of Interpretation. Any question of interpretation
of any term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Investment Company Act shall be resolved
by reference to such term or provision of the Act and to interpretations
thereof, if any, by the United States Courts or in the absence of any
controlling decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission issued pursuant to said Act. In addition,
where the effect of a requirement of the Investment Company Act reflected in any
provision of this Agreement
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is released by rules, regulation or order of the Securities and Exchange
Commission, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and year
first above written.
(FUND)
Attest: By:
----------------------------------------
- ----------------------
(INVESTMENT ADVISER)
Attest:
By:
----------------------------------------
- ----------------------
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[KRAMER LEVIN LETTERHEAD]
March 1, 1999
Fundamental Fixed Income Fund
67 Wall Street
New York, New York 10005
Re: Registration No. 33-12738
Gentlemen:
We hereby consent to the reference to our firm as counsel in
Post-Effective Amendment No. 20 to Registration Statement No. 33-12738.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
