FIRST INVESTORS
FIRST INVESTORS
SPECIAL BOND FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1997
The following appears at the bottom left of the first page:
First Investors Logo
A MEMBER OF THE
FIRST INVESTORS
FINANCIAL NETWORK
LIF007
Portfolio Manager's Letter
FIRST INVESTORS SPECIAL BOND FUND, INC.
Dear Investor:
1997 was a very good year for the U.S. economy and financial markets. The
economy grew at an annual pace of 3.8%, with the unemployment rate falling to
its lowest level since the 1970's. Despite faster economic growth, inflation,
as measured by the Consumer Price Index, rose less than 2%, its smallest
increase in over ten years. Reflecting the strong economy, the Federal budget
deficit declined substantially and had almost been eliminated by year-end.
Against this backdrop, the Federal Reserve held monetary policy steady after
one small increase in the benchmark Federal funds rate in March.
Although both the U.S. bond and stock markets suffered setbacks at times
during the year, the combination of moderate growth and low inflation
ultimately provided a rewarding environment for investors. Long-term bond
yields fell to their lowest level in two years, while the broad stock market
indices recorded their third consecutive year of substantial gains. While
many overseas markets were buffeted by the economic crisis in Southeast Asia,
U.S. markets remained relatively stable or -- in the case of the bond market
- -- benefited from a "flight to safety" as investors sought the security of
the world's largest and most efficient financial markets.
These conditions extended the favorable performance of the high yield bond
market. High yield bond financing is one of the tools available in the
American capital market which has been used effectively to support a rapid
pace of business change. Instead of being used to hedge inflation, as they
might have been a decade ago, below investment grade bonds now are
increasingly funding the consolidation or early development of many different
enterprises. As a group, junk bond issuers had enormous operating and
financial flexibility to work with. These prevailing conditions supported
credit sensitive bonds and the success of many aggressive business plans.
Starting with a record of attractive risk adjusted returns, many
crosscurrents within the high yield markets have kindled huge investor
demand. That demand led to record bond issuance of over $120 billion,
surpassing the previous record set in 1996, of $73 billion. The default rate
has remained low, reflecting generally strong fundamentals and wide credit
availability. Nevertheless, companies that did encounter serious difficulties
saw their securities punished swiftly and severely.
During 1997, First Investors Special Bond Fund returned 10.9% on a net asset
value basis compared to a return of 12.6% for the average high yield bond
funds as measured by Lipper Analytical Services, Inc. The Fund continued to
benefit from tenders and calls of portfolio holdings in addition to those
reported last year. In reinvesting proceeds, our choices fairly consistently
avoided the most aggressive risk profiles that the market presented, both in
terms of credit and interest rate risks. This precaution was ultimately
unnecessary during the year just ended, as the market generally rewarded
aggressive business plans and costly consolidation strategies. The Fund was
well positioned with holdings in the competitive local exchange carrier
segment of the telecommunications market as the importance of that business
became widely apparent. A comparatively low concentration in long maturity
deferred coupon bonds dampened returns because this bond structure, while
carrying risks, accentuates appreciation of bonds when interest rates decline
as they did last year. Also, these bonds were used extensively to fund the
types of growth, "buildout" and industry consolidation transactions that did
especially well in 1997.
The Fund avoided defaults and notable credit problems. The Fund's negligible
exposure to emerging markets held back returns in the year's first half, and
despite growing to only a very small level in the third quarter, widely
reported problems outside the U.S. did not have a material effect on the
Fund. In fact, because values of emerging markets bonds have been thrown into
disarray, we want to consider whether some opportunities might exist amid the
turmoil.
As the new year begins, we should acknowledge that uncertainties abound. We
believe that the domestic economy will be resilient but valuation levels,
especially of equities, will continue to influence the high yield bond
market. We expect to continue to see a large choice of new bond issues. In
our view, by avoiding extreme positions with regard to interest rates or
market momentum, the Fund has been positioned to prosper in a changeable
environment. The very success of most of the portfolio's investments creates
another challenge, that of replacing bonds which have met their objectives
with successor values. To do this, we focus our investment research on the
basics of current holdings and of investment prospects: big picture industry
trends, management capability, and the types of strategies/business plans
that will work for bondholders.
Investors who buy bond funds--whether for income or total return--should be
aware that the value of their investment fluctuates as interest rates change.
In addition, the value of a fund can fluctuate based on changes in the credit
quality of the bonds it holds. In particular, high yield funds invest in
lower- rated debt obligations which are more sensitive than higher-rated
investments to adverse economic changes or individual corporate
developments, and thus can be subject to a higher incidence of default.
Investors should be aware of these risks and recognize that successful
investing generally requires a long- term commitment to the market.
Following 1997's strong performance, the outlook for U.S. financial markets
continues to be positive, although uncertainties do exist. In particular, we
believe that the economic problems in Southeast Asia will slow growth in the
U.S. However, it is unclear to what extent growth will be slowed and,
consequently, what the ultimate impact will be on the financial markets. On a
positive note, Southeast Asia's problems should result in lower inflation
worldwide. Uncertainty often leads to volatile markets. During such times,
investors are generally best served by focusing on long-term objectives and
maintaining a disciplined approach to investing.
As always, we appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ George V. Ganter
George V. Ganter
Vice President
and Portfolio Manager
January 30, 1998
Cumulative Performance Information
FIRST INVESTORS SPECIAL BOND FUND, INC.
Comparison of change in value of $10,000 investment in the First Investors
Special Bond Fund, Inc. and the Credit Suisse First Boston High Yield Index.
The following table is the source data for the line chart which appears at
this point in the printed document. This table is not part of the original
printed document and is shown for reference only. The same is also true for
this descriptive paragraph.
SPECIAL BOND FIRST BOSTON
FUND INDEX
Jan-88 $ 9,300 $10,000
Dec-88 10,571 11,365
Dec-89 10,416 11,408
Dec-90 9,467 10,680
Dec-91 12,853 15,353
Dec-92 14,724 17,911
Dec-93 17,411 21,298
Dec-94 17,222 21,091
Dec-95 20,797 24,757
Dec-96 23,521 27,832
Dec-97 26,094 31,347
BOXED INFORMATION INSIDE GRAPH:
Average Annual Total Return*
N.A.V. Only S.E.C. Standardized
One Year 10.94% 3.17%
Five Years 12.13% 10.50%
Ten Years 10.87% 10.07%
S.E.C. 30-Day Yield 6.89%
The graph compares a $10,000 investment in the First Investors Special Bond
Fund, Inc. beginning 1/1/88 with a theoretical investment in the First Boston
High Yield Index. The Credit Suisse First Boston High Yield Index is
designed to measure the performance of the high yield bond market. The Index
consists of 1,282 different issues, 1,089 of which are cash pay, 150 are
zero-coupon, 12 are step bonds, 21 are payment-in-kind bonds and the
remaining 10 are in default. The bonds included in the Index have an average
life of 8.2 years, an average maturity of 8.3 years, an average duration of
4.5 years and an average coupon of 10.4%. It is not possible to invest
directly in the Index. In addition, the Index does not take into account
fees and expenses. For purposes of the graph and the accompanying table,
unless otherwise indicated, it has been assumed that the maximum sales charge
was deducted from the initial $10,000 investment in the Fund and all
dividends and distributions were reinvested.
*Average Annual Total Return figures (for the period ended 12/31/97) include
the reinvestment of all dividends and distributions "N.A.V. Only" returns are
calculated without sales charges. The "S.E.C. Standardized" returns shown
are based on the maximum sales charge of 7%. Results represent past
performance and do not indicate future results. 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 the original cost. The
unusually high current yields offered reflect the substantial risks
associated with investments in high yield bonds. The issuers of the bonds
pay higher interest rates because they have a greater likelihood of financial
difficulty, which could result in their inability to repay the bonds fully
when due. Prices of high yield bonds are also subject to greater
fluctuations. Credit Suisse First Boston High Yield Index figures from
Credit Suisse First Boston Corporation and all other figures from First
Investors Management Company, Inc.
<TABLE>
<CAPTION>
Portfolio of Investments
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 1997
- -----------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS--92.8%
Aerospace/Defense--1.0%
$ 300M Moog, Inc., 10%, 2006 $ 321,000 $ 89
- -----------------------------------------------------------------------------------------------------
Apparel/Textiles--3.4%
500M Polymer Group, Inc. 9%, 2007 502,500 139
700M Westpoint Stevens, Inc., 9 3/8%, 2005 735,000 204
- -----------------------------------------------------------------------------------------------------
1,237,500 343
- -----------------------------------------------------------------------------------------------------
Automotive--7.0%
385M Aftermarket Technology Corp., 12%, 2004 429,275 119
700M Cambridge Industries, Inc., 10 1/4%, 2007 (Note 5) 731,500 203
500M Collins & Aikman Products Co., 11 1/2%, 2006 560,000 155
750M Exide Corp., 10%, 2005 791,250 219
- -----------------------------------------------------------------------------------------------------
2,512,025 696
- -----------------------------------------------------------------------------------------------------
Building Materials--4.4%
500M Falcon Building Products Corp., 9 1/2%, 2007 521,250 144
1,000M Interface, Inc., 9 1/2%, 2005 1,082,500 300
- -----------------------------------------------------------------------------------------------------
1,603,750 444
- -----------------------------------------------------------------------------------------------------
Chemicals--3.9%
475M Harris Chemical North America, Inc., 10 3/4%, 2003 507,063 141
800M Huntsman Polymers Corp., 11 3/4%, 2004 906,000 250
- -----------------------------------------------------------------------------------------------------
1,413,063 391
- -----------------------------------------------------------------------------------------------------
Consumer Products--2.1%
700M Hines Horticulture, Inc., 11 3/4%, 2005 770,000 213
- -----------------------------------------------------------------------------------------------------
Containers/Packaging--4.7%
400M Plastic Containers, Inc., 10%, 2006 424,000 118
500M Tekni-Plex, Inc., 11 1/4%, 2007 540,000 150
700M U.S. Can Corp., 10 1/8%, 2006 740,250 205
- -----------------------------------------------------------------------------------------------------
1,704,250 473
- -----------------------------------------------------------------------------------------------------
Electrical Equipment--3.8%
725M Essex Group, Inc., 10%, 2003 750,375 208
618M Thermadyne Holdings Corp., 10 3/4%, 2003 638,085 177
- -----------------------------------------------------------------------------------------------------
1,388,460 385
- -----------------------------------------------------------------------------------------------------
Energy--5.6%
1,000M Stone Energy Corp., 8.75%, 2007 1,026,250 284
900M United Meridian Corp., 10 3/8%, 2005 999,000 277
- -----------------------------------------------------------------------------------------------------
2,025,250 561
- -----------------------------------------------------------------------------------------------------
Food/Beverage/Tobacco--3.1%
250M Doane Products Co., 10 5/8%, 2006 267,500 74
750M Keebler Corp., 10 3/4%, 2006 847,500 235
- -----------------------------------------------------------------------------------------------------
1,115,000 309
- -----------------------------------------------------------------------------------------------------
Gaming/Lodging--2.4%
800M Showboat, Inc., 9 1/4%, 2008 856,000 237
- -----------------------------------------------------------------------------------------------------
Healthcare--7.8%
870M Abbey Healthcare Group, Inc., 9 1/2%, 2002 911,325 253
900M Integrated Health Services, Inc., 9 1/2%, 2007 (Note 5) 930,375 258
900M Tenet Healthcare Corp., 10 1/8%, 2005 981,000 272
- -----------------------------------------------------------------------------------------------------
2,822,700 783
- -----------------------------------------------------------------------------------------------------
Media (Cable TV/Broadcasting)--9.1%
500M Allbritton Communications Corp., 9 3/4%, 2007 515,000 143
500M Sinclair Broadcasting Group, Inc., 9%, 2007 510,000 141
1,400M Videotron Holdings PLC, 0%-11 1/8%, 2004 1,326,500 368
900M World Color Press, Inc., 9 1/8%, 2003 931,500 258
- -----------------------------------------------------------------------------------------------------
3,283,000 910
- -----------------------------------------------------------------------------------------------------
Media (Other)--4.0%
1,500M Affiliated Newspaper Investments, Inc., 0%-13 1/4%,
2006 1,432,500 397
- -----------------------------------------------------------------------------------------------------
Mining/Metals--5.8%
600M Commonwealth Aluminum Corp., 10 3/4%, 2006 645,000 179
800M CSN Iron, SA, 9 1/8%, 2007 (Note 5) 684,000 190
700M Euramax International PLC, 11 1/4%, 2006 760,375 211
- -----------------------------------------------------------------------------------------------------
2,089,375 580
- -----------------------------------------------------------------------------------------------------
Miscellaneous--5.2%
900M Kindercare Learning Centers, Inc., 9 1/2%, 2009 895,500 248
600M Loomis Fargo & Co., 10%, 2004 603,000 167
336M Pierce-Leahy Corp., 11 1/8%, 2006 381,360 106
- -----------------------------------------------------------------------------------------------------
1,879,860 521
- -----------------------------------------------------------------------------------------------------
Paper/Forest Products--6.6%
500M Container Corp., 11 1/4%, 2004 545,000 151
1,000M Doman Industries, Inc., 8 3/4%, 2004 970,000 269
900M Fonda Group, Inc., 9 1/2%, 2007 859,500 238
- -----------------------------------------------------------------------------------------------------
2,374,500 658
- -----------------------------------------------------------------------------------------------------
Telecommunications--10.3%
850M Brooks Fiber Properties, Inc., 10%, 2007 979,625 271
600M Comcast Cellular Holdings, Inc., 9 1/2%, 2007 627,000 174
1,100M McCaw International, Ltd., 0%-13%, 2007 649,000 180
700M McLeodUSA, Inc., 9 1/4%, 2007 (Note 5) 735,875 204
450M Netia Holdings BV, 0%-11 1/4%, 2007 (Note 5) 255,375 71
700M Qwest Communications International, Inc., 0%-9.47%,
2007 (Note 5) 477,750 132
- -----------------------------------------------------------------------------------------------------
3,724,625 1,032
- -----------------------------------------------------------------------------------------------------
Transportation--2.6%
900M Eletson Holdings, Inc., 9 1/4%, 2003 924,750 256
- -----------------------------------------------------------------------------------------------------
Total Value of Corporate Bonds (cost $31,828,220) 33,477,608 9,278
- -----------------------------------------------------------------------------------------------------
COMMON STOCKS--.7%
Electrical Equipment--.1%
684 *Thermadyne Holdings Corp. 20,178 6
- -----------------------------------------------------------------------------------------------------
Media (Cable TV/Broadcasting)--.1%
1,300 *Echostar Communications Corp. - Class "A" 21,775 6
- -----------------------------------------------------------------------------------------------------
Media (Other)--.4%
1,500 *Affiliated Newspaper Investments, Inc. - Class "B" 165,000 46
- -----------------------------------------------------------------------------------------------------
Paper/Forest Products--.1%
5,594 *Gaylord Container Corp. - Class "A" 32,166 9
- -----------------------------------------------------------------------------------------------------
Total Value of Common Stocks (cost $55,479) 239,119 67
- -----------------------------------------------------------------------------------------------------
PREFERRED STOCKS--1.1%
Media (Cable TV/Broadcasting)
354 Time Warner Inc., 10 1/4%, PIK, Series "M"
(cost $358,660) 398,250 110
- -----------------------------------------------------------------------------------------------------
WARRANTS--.0%
Gaming/Lodging--.0%
850 *Goldriver Finance Corp., Liqudating Trust 850 --
- -----------------------------------------------------------------------------------------------------
Telecommunications--.0%
1,100 *McCaw International, Ltd. (expiring 4/15/07) (Note 5) 2,750 1
- -----------------------------------------------------------------------------------------------------
Total Value of Warrants (cost $0) 3,600 1
- -----------------------------------------------------------------------------------------------------
UNITS--1.4%
Media (Cable TV/Broadcasting)
500 Star Choice Communications (a) (Note 5) (cost $500,000) 517,500 143
- -----------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE NOTES--2.1%
$ 750M Lubrizol Corp., 6.35%, 1/5/98 cost ($749,470) 749,470 208
- -----------------------------------------------------------------------------------------------------
Total Value of Investments (cost $33,491,829) 98.1% 35,385,547 9,807
Other Assets, Less Liabilities 1.9 695,981 193
- -----------------------------------------------------------------------------------------------------
Net Assets 100.0% $36,081,528 $10,000
- -----------------------------------------------------------------------------------------------------
* Non-income producing
(a) Each unit consists of one 13% Senior Secured Note due 2005, and 23.16 Warrants (expiring 12/15/05) to
buy one share of common stock at $.01 per share
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in securities, at value (identified cost $33,491,829) (Note 1A) .......... $ 35,385,547
Cash ................................................................................. 126,883
Interest receivable.................................................................... 664,783
Other assets ......................................................................... 4,373
------------
Total Assets ......................................................................... 36,181,586
Liabilities
Payable for capital stock redeemed .................................................. $ 61,264
Accrued advisory fee ................................................................ 22,049
Accrued expenses .................................................................... 16,745
-----------
Total Liabilities ................................................................... 100,058
------------
Net Assets ........................................................................... $ 36,081,528
============
Net Assets Consist of:
Capital paid in ..................................................................... $ 52,432,446
Undistributed net investment income ................................................. 945,587
Accumulated net realized loss on investment transactions ............................ (19,190,223)
Net unrealized appreciation in value of investments ................................. 1,893,718
============
Total ............................................................................... $ 36,081,528
============
Net Asset Value, Offering Price and Redemption Price Per Share
($36,081,528 divided by 2,800,087 shares outstanding),
25,000,000 shares authorized, $1.00 par value (Note 2) .............................. $12.89
============
See notes for financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
FIRST INVESTORS SPECIAL BOND FUND, INC.
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Investment Income
Income:
Interest......................................... $ 3,250,755
Dividends........................................ 116,810
Consent fees and other income.................... 31,718
----------
Total income....................................... $ 3,399,283
Expenses (Notes 1 and 4):
Advisory fee .................................... 269,748
Professional fees................................ 22,204
Custodian fees .................................. 7,761
Reports and notices to shareholders.............. 1,311
Other expenses................................... 7,855
----------
Total expenses..................................... 308,879
Less: Custodian fees paid indirectly............... (4,086)
----------
Net expenses....................................... 304,793
-----------
Net investment income.............................. 3,094,490
Realized and Unrealized Gain (Loss) on Investments
(Note 3):
Net realized gain on investments................... 972,414
Net unrealized depreciation of investments......... (313,134)
----------
Net gain on investments............................ 659,280
-----------
Net Increase in Net Assets Resulting
from Operations ................................. $ 3,753,770
===========
See notes for financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
FIRST INVESTORS SPECIAL BOND FUND, INC.
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets from Operations
Net investment income ........................................ $ 3,094,490 $ 3,371,184
Net realized gain (loss) on investments........................ 972,414 (253,500)
Net unrealized appreciation (depreciation) of investments...... (313,134) 1,368,848
---------------- --------------
Net increase in net assets resulting from operations........... 3,753,770 4,486,532
---------------- --------------
Dividends to Shareholders
Net investment income ........................................ (3,378,374) (2,988,275)
---------------- --------------
Capital Share Transactions (a)
Proceeds from shares sold ..................................... 163,124 779,652
Value of dividends reinvested ................................. 3,378,373 2,988,275
Cost of shares redeemed ....................................... (4,783,216) (6,355,337)
---------------- --------------
Net decrease in net assets resulting from share transactions .. (1,241,719) (2,587,410)
---------------- --------------
Net decrease in net assets .................................... (866,323) (1,089,153)
Net Assets
Beginning of year ............................................ 36,947,851 38,037,004
---------------- --------------
End of year (including undistributed net investment income of
$945,587 and $1,229,471, respectively) ..................... $ 36,081,528 $ 36,947,851
================ ==============
(a) Capital Shares Issued and Redeemed
Sold ......................................................... 12,765 63,299
Issued for dividends reinvested................................ 264,653 241,157
Redeemed ..................................................... (374,153) (516,532)
---------------- --------------
Net decrease in capital shares ............................... (96,735) (212,076)
================ ==============
See notes for financial statements
</TABLE>
Notes to Financial Statements
FIRST INVESTORS SPECIAL BOND FUND, INC.
1. Significant Accounting Policies - The Fund is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, open-end
management investment company. The investment objective of the Fund is to
seek high current income without undue risk to principal and secondarily to
seek growth of capital.
A. Security Valuation - Except as provided below, a security listed or traded
on an exchange or the Nasdaq Stock Market is valued at its last sale price on
the exchange where the security is principally traded, and lacking any sales,
the security is valued at the mean between the closing bid and asked prices.
Securities traded in the over-the-counter market (including securities listed
on exchanges whose primary market is believed to be over-the-counter) are
valued at the mean between the last bid and asked prices based upon quotes
furnished by a market maker for such securities. Securities may also be
priced by a pricing service. The pricing service uses quotations obtained
from investment dealers or brokers and other available information in
determining value. Short-term corporate notes which are purchased at a
discount are valued at amortized cost. Securities for which market quotations
are not readily available are valued on a consistent basis at fair value as
determined in good faith by or under the supervision of the Fund's officers
in a manner specifically authorized by the Board of Directors.
B. Federal Income Taxes - No provision has been made for federal income taxes
on net income or capital gains, since it is the policy of the Fund to
continue to comply with the special provisions of the Internal Revenue Code
applicable to investment companies and to make sufficient distributions of
income and capital gains (in excess of any available capital loss carryovers)
to relieve it from all, or substantially all, such taxes. At December 31,
1997, the Fund had capital loss carryovers of $19,190,223, of which
$15,626,948 expires in 1998, $3,021,871 in 1999, $287,903 in 2003 and
$253,501 in 2004.
C. Distributions to Shareholders - Dividends to shareholders from net
investment income are declared daily and paid quarterly. Distributions from
net realized capital gains, if any, are normally declared and paid annually.
Income dividends and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for capital loss carryforwards and post-October capital losses.
D. Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting period. Actual results
could differ from those estimates.
E. Other - Security transactions are accounted for on the date the securities
are purchased or sold. Cost is determined, and gains and losses are based,
on the identified cost basis for both financial statement and federal income
tax purposes. Dividend income is recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. The Fund's custodian has
provided credits in the amount of $4,086 against custodian charges based on
the uninvested cash balances of the Fund.
2. Capital Stock - Shares of the Fund are sold only through the purchase of
annuity contracts issued by First Investors Life Variable Annuity Fund A.
3. Security Transactions - For the year ended December 31, 1997, purchases
and sales of investment securities, other than United States Government
obligations and short-term corporate notes, aggregated $18,038,976 and
$18,758,818, respectively.
At December 31, 1997, the cost of investments for federal income tax purposes
was $33,491,829. Accumulated net unrealized appreciation on investments was
$1,893,718, consisting of $2,119,749 gross unrealized appreciation and
$226,031 gross unrealized depreciation.
4. Advisory Fee and Other Transactions With Affiliates - Certain officers
and directors of the Fund are officers and directors of its investment
adviser, First Investors Management Company, Inc. ("FIMCO") and its transfer
agent, Administrative Data Management Corp. Officers and directors of the
Fund received no remuneration from the Fund for serving in such capacities.
Their remuneration (together with certain other expenses of the Fund) was
paid by FIMCO or First Investors Corporation. Effective January 1, 1998,
independent directors will be remunerated by the Fund.
The Investment Advisory Agreement provides as compensation to FIMCO an annual
fee, payable monthly, at the rate of .75% on the first $250 million of the
Fund's average daily net assets, declining by .03% on each $250 million
thereafter, down to .66% on average daily net assets over $750 million.
5. Rule 144A Securities - Under Rule 144A, certain restricted securities are
exempt from the registration requirements of the Securities Act of 1933 and
may only be resold to qualified institutional investors. At December 31,
1997, the Fund held eight 144A securities with an aggregate value of
$4,335,125 representing 12.0% of the Fund's net assets. These securities are
valued as set forth in Note 1A.
6. Concentration of Credit Risk - The Fund's investment in high yield
securities, whether rated or unrated, may be considered speculative and
subject to greater market fluctuations and risk of loss of income and
principal than lower yielding, higher rated, fixed income securities. The
risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities, because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer.
Independent Auditors' Report
To the Shareholders and Board of Directors of
First Investors Special Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities of First
Investors Special Bond Fund, Inc., including the portfolio of investments, as
of December 31, 1997 and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
First Investors Special Bond Fund, Inc. as of December 31, 1997, and the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
January 30, 1998
<TABLE>
<CAPTION>
Financial Highlights
FIRST INVESTORS SPECIAL BOND FUND, INC.
The following table sets forth the operating performance data for a share of capital stock outstanding,
total return, ratios to average net assets and other supplemental data for each year indicated.
------------------------------------------------------
Year Ended December 31
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Data
- --------------
Net Asset Value, Beginning of Year...... $12.75 $12.23 $11.03 $12.18 $11.38
--------- --------- -------- -------- --------
Income from Investment Operations
Net investment income.................. 1.11 1.17 1.20 1.09 1.14
Net realized and unrealized
gain (loss) on investments............ .23 .37 1.02 (1.22) .86
--------- --------- -------- -------- --------
Total from Investment Operations..... 1.34 1.54 2.22 (.13) 2.00
--------- --------- -------- -------- --------
Less Distributions from
Net Investment Income.................. 1.20 1.02 1.02 1.02 1.20
--------- --------- -------- -------- --------
Net Asset Value, End of Year............ $12.89 $12.75 $12.23 $11.03 $12.18
========= ========= ======== ======== ========
Total Return(%)+ 10.94 13.10 20.76 (1.00) 18.15
- ----------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Year (in thousands).. $36,082 $36,948 $38,037 $36,725 $43,056
Ratio to Average Net Assets:(%)
Expenses............................... .86 .86 .88 .87 .85
Net investment income.................. 8.60 9.31 10.17 9.38 9.54
Portfolio Turnover Rate(%).............. 53 29 45 54 79
+ The effect of fees and charges incurred at the separate account level are not reflected in these
performance figures.
See notes for financial statements
</TABLE>
FIRST INVESTORS SPECIAL BOND FUND, INC.
Directors
- ---------------------------------------
James J. Coy (Emeritus)
Roger L. Grayson
Glenn O. Head
Kathryn S. Head
Rex R. Reed
Herbert Rubinstein
Nancy S. Schaenen
James M. Srygley
John T. Sullivan
Robert F. Wentworth
Officers
- ---------------------------------------
Glenn O. Head
President
George V. Ganter
Vice President
Concetta Durso
Vice President and Secretary
Joseph I. Benedek
Treasurer
Carol Lerner Brown
Assistant Secretary
Gregory R. Kingston
Assistant Treasurer
Mark S. Spencer
Assistant Treasurer
Shareholder Information
- ---------------------------------------
Investment Adviser
First Investors
Management Company, Inc.
95 Wall Street
New York, NY 10005
Custodian
The Bank of New York
48 Wall Street
New York, NY 10286
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036
Auditors
Tait, Weller & Baker
Eight Penn Center Plaza
Philadelphia, PA 19103
It is the Fund's practice to mail only one copy of its annual and semi-annual
reports to any address at which more than one shareholder with the same last
name has indicated that mail is to be delivered. Additional copies of the
reports will be mailed if requested by any shareholder in writing or by
calling 800-423-4026. The Fund will ensure that separate reports are sent to
any shareholder who subsequently changes his or her mailing address.
This report is authorized for distribution only to existing shareholders, and,
if given to prospective shareholders, must be accompanied or preceded by the
Fund's prospectus.
