As filed with the Securities and Exchange Commission on April 29, 1999
1933 Act File No. 2-66294
1940 Act File No. 811-2981
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. 19 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 [X]
FIRST INVESTORS SPECIAL BOND FUND, INC.
(Exact name of Registrant as specified in charter)
95 Wall Street
New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (212) 858-8000
Ms. Concetta Durso
Secretary and Vice President
First Investors Series Fund
95 Wall Street
New York, New York 10005
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on April 30, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of 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>
FIRST INVESTORS SPECIAL BOND FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the First Investors Special Bond Fund, Inc.
Statement of Additional Information for the First Investors Special
Bond Fund, Inc.
Part C of Form N-1A
Signature Page
Exhibits
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[GRAPHIC FIRST INVESTORS]
SPECIAL BOND FUND
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1999.
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Contents
INTRODUCTION...................................................................3
FUND DESCRIPTION...............................................................4
FUND MANAGEMENT................................................................7
BUYING AND SELLING SHARES......................................................8
o How and when does the Fund price its shares? .........................8
o How do I buy and sell shares? .......................................8
ACCOUNT POLICIES...............................................................8
o What about dividends and capital gain distributions? .................8
o What about taxes?.....................................................9
FINANCIAL HIGHLIGHTS..........................................................10
2
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INTRODUCTION
This prospectus describes the First Investors Fund that is used solely as the
underlying investment option for variable annuity contracts offered by First
Investors Life Insurance Company ("FIL"). This means that you cannot purchase
shares of the Fund directly, but only through such a contract as offered by FIL.
The Fund description in this prospectus has an "Overview" which provides a brief
explanation of the Fund's objectives, its primary strategies and primary risks,
how it has performed, and its fees and expenses. The Fund description also
contains a "Fund in Detail" section with more information on strategies and
risks of the Fund.
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FUND DESCRIPTION
SPECIAL BOND FUND
OVERVIEW
Objectives: The Fund primarily seeks high current income without undue
risk to principal and secondarily seeks growth of capital.
Primary
Investment
Strategies: The Fund primarily invests in a diversified portfolio of
high-yield, below-investment grade corporate bonds (commonly
known as "junk bonds"). These bonds provide a higher level of
income than investment grade bonds because they have a higher
risk of default. The Fund seeks to reduce the risk of a
default by selecting bonds through careful credit research and
analysis. The Fund seeks to reduce the impact of a potential
default by diversifying its investments among bonds of many
different companies and industries. While the Fund invests
primarily in domestic companies, it also invests in securities
of issuers domiciled in foreign countries. These securities
will generally be dollar-denominated and traded in the U.S.
The Fund seeks to achieve growth of capital by investing in
high-yield bonds with stable to improving credit conditions.
Primary
Risks: There are four primary risks of investing in the Fund. First,
the value of the Fund's shares could decline as a result of a
deterioration of the financial condition of an issuer of bonds
owned by the Fund or as a result of a default by the issuer.
This is known as credit risk. High yield bonds carry higher
credit risks than investment grade bonds because the companies
that issue them are not as strong financially as companies
with investment grade credit ratings. High yield bonds issued
by foreign companies are subject to additional risks including
political instability, government regulation, and differences
in financial reporting standards. Second, the value of the
Fund's shares could decline if the entire high yield bond
market were to decline, even if none of the Fund's bond
holdings were at risk of a default. The high yield market can
experience sharp declines at times as the result of a
deterioration in the overall economy, declines in the stock
market, a change of investor tolerance for risk, or other
factors. Third, high yield bonds tend to be less liquid than
other bonds, which means that they are more difficult to sell.
Fourth, while high yield bonds are generally less interest
rate sensitive than higher quality bonds, their values
generally will decline when interest rates rise. Fluctuations
in the prices of high yield bonds can be substantial.
Accordingly, the value of an investment in the Fund will go up
and down, which means that you could lose money.
AN INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
How has the Special Bond Fund performed?
The bar chart and table below show you how the Fund's performance has varied
from year to year and in comparison with a broad-based index. This information
gives you some indication of the risks of investing in the Fund.
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The bar chart shows changes in the performance of the Fund's shares for each of
the past ten calendar years. The bar chart does not reflect fees and expenses
that may be deducted by the variable annuity contract through which you invest.
If they were included, the returns would be less than those shown.
[GRAPHIC-BAR CHART]
During the periods shown, the highest quarterly return was 10.85% (for the
quarter ended March 31, 1991), and the lowest quarterly return was -7.24% (for
the quarter ended September 30, 1990). The Fund's past performance does not
necessarily indicate how the Fund will perform in the future.
The following table shows how the average annual total returns for the Fund's
shares compare to those of the Credit Suisse First Boston High Yield Index
("High Yield Index"). The High Yield Index is designed to measure the
performance of the high yield bond market. The High Yield Index does not take
into account fees and expenses that an investor would incur in holding the
securities in the Index. If it did so, the returns would be lower than those
shown.
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1 Year* 5 Years* 10 Years*
Special Bond (5.79)% 7.14% 8.80%
High Yield Index 0.58 8.16 10.74
*The annual returns are based upon calendar years.
THE FUND IN DETAIL
What are the Special Bond Fund's objectives, principal investment
strategies, and risks?
OBJECTIVES: The Fund primarily seeks high current income without undue risk to
principal and secondarily seeks growth of capital.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests at least 65% of its total
assets in a diversified portfolio of high-yield, below-investment grade
corporate bonds commonly known as "junk bonds" (those rated below Baa by Moody's
Investors Service, Inc. or below BBB by Standard & Poor's Ratings Group). High
yield bonds generally provide higher income than investment grade bonds to
compensate investors for their higher risk of default (i.e., failure to make
required interest or principal payments). High-yield bond issuers include small
or relatively new companies lacking the history or capital to merit investment
grade status, former blue chip companies downgraded because of financial
problems, companies using debt rather than equity to fund capital investment or
spending programs, companies electing to borrow heavily to finance or avoid a
takeover or buyout, and firms with heavy debt loads. The Fund's portfolio may
include zero coupon bonds and pay in kind bonds. While the Fund invests
primarily in domestic companies, it also invests in securities of issuers
domiciled in foreign countries. These securities will generally be
dollar-denominated and traded in the U.S. The Fund seeks to reduce the risk of a
default by selecting bonds through careful credit research and analysis. The
Fund seeks to reduce the impact of a potential default by diversifying its
investments among bonds of many different companies and industries.
To achieve its secondary objective of growth of capital, the Fund attempts to
invest in bonds that have stable to improving credit quality that could
appreciate in value because of a credit rating upgrade or an improvement in the
outlook for a particular company, industry or the economy as a whole.
Although the Fund will consider ratings assigned by ratings agencies in
selecting high yield bonds, it relies principally on its own research and
investment analysis. The Fund considers a variety of factors, including the
issuer's managerial strength, anticipated cash flow, debt maturity schedules,
borrowing requirements, interest or dividend coverage, asset coverage and
earnings prospects. The Fund will usually sell a bond when it shows
deteriorating fundamentals or falls short of the portfolio manager's
expectations. Information on the Fund's recent strategies and holdings can be
found in the most recent annual report (see back cover).
PRINCIPAL RISKS: Any investment carries with it some level of risk. In general,
the greater the potential reward of the investment, the greater the risk. Here
are the principal risks of investing in the Special Bond Fund:
CREDIT RISK: This is the risk that an issuer of bonds will be unable to pay
interest or principal when due. The prices of bonds are affected by the credit
quality of the issuer. High yield bonds are subject to greater credit risk than
higher quality bonds because the companies that issue them are not as
financially strong as companies with investment grade ratings. Changes in the
financial condition of an issuer, changes in general economic conditions, and
changes in specific economic conditions that affect a particular type of issuer
can impact the credit quality of an issuer. Such changes may weaken an issuer's
ability to make payments of principal or interest, or cause an issuer of bonds
to fail to make timely payments of interest or principal. Lower quality bonds
generally tend to be more sensitive to these changes than higher quality bonds.
While credit ratings may be available to assist in evaluating an issuer's credit
6
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quality, they may not accurately predict an issuer's ability to make timely
payments of principal and interest.
MARKET RISK: The entire junk bond market can experience sharp price swings due
to a variety of factors, including changes in economic forecasts, stock market
volatility, large sustained sales of junk bonds by major investors, high-profile
defaults, or changes in the market's psychology. This degree of volatility in
the high yield market is usually associated more with stocks than bonds. The
prices of high yield bonds held by the Fund could therefore decline, regardless
of the financial condition of the issuers of such bonds. Markets tend to run in
cycles with periods when prices generally go up, known as "bull" markets, and
periods when prices generally go down, referred to as "bear" markets.
LIQUIDITY: High yield bonds tend to be less liquid than higher quality bonds,
meaning that it may be difficult to sell high yield bonds at a reasonable price,
particularly if there is a deterioration in the economy or in the financial
prospects of their issuers. As a result, the prices of high yield bonds may be
subject to wide price fluctuations due to liquidity concerns.
INTEREST RATE RISK: The market value of a bond is affected by changes in
interest rates. When interest rates rise, the market value of a bond declines;
when interest rates decline, the market value of a bond increases. The price
volatility of a bond also depends on its maturity and duration. Generally, the
longer the maturity and duration of a bond, the greater its sensitivity to
interest rates. To compensate investors for this higher risk, bonds with longer
maturities and durations generally offer higher yields than bonds with shorter
maturities and durations.
FOREIGN ISSUERS: Foreign investments involve additional risks, including
political instability, government regulation, differences in financial reporting
standards, and less stringent regulation of foreign securities markets.
YEAR 2000 RISKS: The values of securities owned by the Fund may be negatively
affected by Year 2000 problems. Many computer systems are not designed to
process correctly date-related information after January 1, 2000. The issuers of
securities held by the Fund may incur substantial costs in ensuring that
computer systems on which they rely are Year 2000 ready and may face business
and legal problems if these systems are not ready. If computer systems used by
exchanges, broker-dealers, and other market participants are not Year 2000
ready, valuing and trading securities could be difficult.
These problems could have a negative effect on the Fund's investments and
returns.
ALTERNATIVE STRATEGIES: At times the Fund may judge that market, economic or
political conditions make pursuing the Fund's investment strategies inconsistent
with the best interests of its shareholders. The Fund then may temporarily use
alternative strategies that are mainly designed to limit the Fund's losses.
FUND MANAGEMENT
First Investors Management Company, Inc. ("FIMCO") is the investment adviser to
the Fund. Its address is 95 Wall Street, New York, NY 10005. It currently is
investment adviser to 51 mutual funds or series of funds with total net assets
of approximately $5 billion. FIMCO supervises all aspects of the Fund's
operations and determines the Fund's portfolio transactions. For the fiscal year
ended December 31, 1998, FIMCO received advisory fees of 0.75% of the Fund's
average daily net assets.
George V. Ganter serves as Portfolio Manager of the Fund. Mr. Ganter also serves
as Portfolio Manager of certain other First Investors Funds. Mr. Ganter joined
FIMCO in 1985 as a Senior Investment Analyst.
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In addition to the investment risks of the Year 2000 which are discussed above,
the ability of FIMCO and its affiliates to price the Fund's shares, process
purchase and redemption orders, and render other services could be adversely
affected if the computers or other systems on which they rely are not properly
programmed to operate after January 1, 2000. Additionally, because the services
provided by FIMCO and its affiliates depend on the interaction of their computer
systems with the computer systems of brokers, information services and other
parties, any failure on the part of such third party computer systems to deal
with the Year 2000 may have a negative effect on the services provided to the
Fund. FIMCO and its affiliates are taking steps that they believe are reasonably
designed to address the Year 2000 problem for computer and other systems used by
them and are obtaining assurances that comparable steps are being taken by the
Fund's other service providers. However, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Fund. Nor can the
Fund estimate the extent of any impact.
BUYING AND SELLING SHARES
How and when does the Fund price its shares?
The share price (which is called "net asset value" or "NAV" per share) for the
Fund is calculated once each day as of 4 p.m., Eastern Time ("ET"), on each day
the New York Stock Exchange ("NYSE") is open for regular trading. In the event
that the NYSE closes early, the share price will be determined as of the time of
the closing.
To calculate the NAV, the Fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding.
In valuing its assets, the Fund uses the market value of securities for which
market quotations or last sale prices are readily available. If there are no
readily available quotations or last sale prices for an investment or the
available quotations are considered to be unreliable, the securities will be
valued at their fair value as determined in good faith pursuant to procedures
adopted by the Board of Directors of the Fund.
How do I buy and sell shares?
Investments in the Fund may only be made through purchases of variable annuity
contracts offered by FIL. Purchase payments for variable annuity contracts, less
applicable charges or expenses, are paid into Separate Account A, a unit
investment trust. The Separate Account pools the proceeds to purchase shares of
the Fund.
For information about how to buy or sell the variable annuity contracts, see the
Separate Account prospectus which is attached to this prospectus. It will
describe not only the process for buying and selling contracts, but also the
fees and charges involved. This prospectus is not valid unless a Separate
Account prospectus is attached hereto.
ACCOUNT POLICIES
What about dividends and capital gain distributions?
The Separate Account which owns the shares of the Fund will receive all
dividends and distributions. As described in the attached Separate Account
prospectus, all dividends and distributions are then reinvested by the Separate
Account in additional shares of the Fund.
To the extent that it has net investment income, the Fund will declare daily and
pay, on a quarterly basis, dividends from net investment income. Any net
realized capital gains will be declared and distributed on an annual basis,
usually after the end of the Fund's fiscal year. The Fund may make an additional
distribution in any year if necessary to avoid a Federal excise tax on certain
undistributed income and capital gain.
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What about taxes?
You will not be subject to taxes as the result of purchases or sales of Fund
shares by the Separate Account, or Fund dividends, or distributions to the
Separate Account. There are tax consequences associated with investing in the
variable annuity contracts. These are discussed in the attached Separate Account
prospectus.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information has been audited by Tait, Weller & Baker, whose report, along with
the Fund's financial statements, are included in the SAI, which is available
upon request.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---- ------ ------ ------ ------
Net Asset Value, Beginning of Year..... $12.89 $12.75 $12.23 $11.03 $12.18
------ ------ ------- ------ ------
Income from Investment Operations
Net investment income.................. 1.12 1.11 1.17 1.20 1.09
Net realized and unrealized
gain (loss) on investments............ (.95) .23 .37 1.02 (1.22)
----- --- ------ ------ -------
Total from Investment Operations.... .17 1.34 1.54 2.22 (.13)
--- ---- ------ ------ -------
Less Distributions from:
Net investment income............... 1.20 1.20 1.02 1.02 1.02
---- ---- ------- ------ -------
Net Asset Value, End of Year........... $11.86 $12.89 $12.75 $12.23 $11.03
====== ====== ======= ====== =======
Total Return(%)+....................... 1.29 10.94 13.10 20.76 (1.00)
- ----------------
Ratios/Supplemental Data
Net Assets, End of Year (in thousands). $32,260 $36,082 $36,948 $38,037 $36,725
Ratios to Average Net Assets (%)
Expenses............................... .89 .86 .86 .88 .87
Net investment income.................. 8.93 8.60 9.31 10.17 9.38
Portfolio Turnover Rate (%)............ 65 53 29 45 54
+ The effect of fees and charges incurred at the separate account level are not reflected in these performance figures.
</TABLE>
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[GRAPHIC - FIRST INVESTORS]
SPECIAL BOND FUND
For investors who want more information about the Fund, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
prospectus.
You can get free copies of reports and the SAI, request other information and
discuss your questions about the Fund by contacting the Fund at:
Administrative Data Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198
Telephone: 1-800-423-4026
You can review and copy information about the Fund (including the Fund's reports
and SAI) at the Public Reference Room of the Securities and Exchange Commission
("SEC") in Washington, D.C. You can also send your request for copies and a
duplicating fee to the Public Reference Room of the SEC, Washington, DC
20549-6009. You can obtain information on the operation of the Public Reference
Room by calling 1-800-SEC-0330. Text-only versions of Fund documents can be
viewed online or downloaded from the SEC's Internet website at
http://www.sec.gov.
(Investment Company Act File No. 811-2981
First Investors Special Bond Fund, Inc.)
<PAGE>
FIRST INVESTORS SPECIAL BOND FUND, INC.
Statement of Additional Information dated April 30, 1999
95 Wall Street New York, N.Y. 10005/(800) 342-7963
This is a Statement of Additional Information ("SAI") for First
Investors Special Bond Fund, Inc. ("Fund"), an open-end diversified management
investment company. Shares of the Fund may be purchased only through the
acquisition of a variable annuity contract issued by First Investors Life
Insurance Company ("First Investors Life").
This SAI is not a prospectus. It should be read in conjunction with the
Fund's Prospectus dated April 30, 1999, which may be obtained free of cost from
the Fund at the address or telephone number noted above.
TABLE OF CONTENTS
Page
Investment Strategies and Risks.......................................... 2
Investment Policies...................................................... 3
Portfolio Turnover....................................................... 9
Investment Restrictions.................................................. 9
Directors and Officers................................................... 11
Management............................................................... 13
Determination of Net Asset Value......................................... 14
Allocation of Portfolio Brokerage........................................ 15
Taxes.................................................................... 16
General Information...................................................... 18
Appendix A............................................................... 19
Appendix B............................................................... 22
Financial Statements..................................................... 23
<PAGE>
INVESTMENT STRATEGIES AND RISKS
The Fund primarily seeks high current income without undue risk of
principal and secondarily seeks growth of capital by investing at least 65% of
its total assets in high yield, high risk securities, commonly referred to as
"junk bonds" ("High Yield Securities"). There can be no assurance that the Fund
will achieve its investment objectives.
High Yield Securities include the following instruments: fixed,
variable or floating rate debt obligations (including bonds, debentures and
notes) which are rated below Baa by Moody's Investors Services, Inc. ("Moody's")
or below BBB by Standard & Poor's Ratings Group ("S&P"), or are unrated and
deemed to be of comparable quality by First Investors Management Company, Inc.
("FIMCO" or "Adviser"); preferred stocks and dividend-paying common stocks that
have yields comparable to those of high yielding debt securities; any of the
foregoing securities of companies that are financially troubled, in default or
undergoing bankruptcy or reorganization ("Deep Discount Securities"); and any
securities convertible into any of the foregoing.
The Fund may invest up to 35% of its total assets in the following
instruments: common and preferred stocks, other than those considered to be High
Yield Securities; debt obligations of all types (including bonds, debentures and
notes) rated a or better by Moody's or S&P; securities issued by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Obligations");
warrants and money market instruments consisting of prime commercial paper,
certificates of deposit or domestic branches of U.S. banks, bankers' acceptances
and repurchase agreements.
The Fund may invest in debt securities issued by foreign governments
and companies and in foreign currencies for the purpose of purchasing such
securities. However, the Fund may not invest more than 5% of its total assets in
debt securities issued by foreign governments and companies that are denominated
in foreign currencies.
The Fund also may borrow money for temporary or emergency purposes in
amounts net exceeding 5% of its total assets, make loans of portfolio securities
and invest in zero coupon and pay-in-kind securities. The Fund may invest up to
10% of its net assets in securities issued on a when-issued or delayed delivery
basis.
The medium- to lower-rated, and certain of the unrated, securities in
which the Fund invests, tend to offer higher yields than higher-rated securities
with the same maturities because the historical financial condition of the
issuers of such securities may not be as strong as that of other issuers. Debt
obligations rated lower than A by Moody's or S&P tend to have speculative
characteristics or are speculative, and generally involve more risk of loss of
principal and income than higher-rated securities. Also, their yields and market
value tend to fluctuate more than higher quality securities. The greater risks
and fluctuations in yield and value occur because investors generally perceive
issuers of lower-rated and unrated securities to be less creditworthy. These
risks cannot be eliminated, but may be reduced by diversifying holdings to
minimize the portfolio impact of any single investment. In addition,
fluctuations in market value do not affect the cash income from the securities,
but are reflected in the computation of the Fund's net asset value. When
interest rates rise, the net asset value of the Fund tends to decrease. When
interest rates decline, the net asset value of the Fund tends to increase.
Variable or floating rate debt obligations in which the Fund may invest
periodically adjust their interest rates to reflect changing economic
conditions. Thus, changing economic conditions specified by the terms of the
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security would serve to change the interest rate and the return offered to the
investor. This reduces the effect of changing market conditions on the
security's underlying market value.
A High Yield Security may itself be convertible into or exchangeable
for equity securities, or may carry with it the right to acquire equity
securities evidenced by warrants attached to the security or acquired as part of
a unit with the security. Although the Fund invests primarily in High Yield
Securities, securities received upon conversation or exercise of warrants and
securities remaining upon the break-up of units or detachment of warrants may be
retained to permit orderly disposition, and to establish a long-term holding
basis.
INVESTMENT POLICIES
BANKERS' ACCEPTANCES. The Fund may invest in bankers' acceptances.
Bankers' acceptances are short-term credit instruments used to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of interest for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
CERTIFICATES OF DEPOSIT. The Fund may invest in bank certificates of
deposit ("CDs") subject to the restrictions set forth in the Prospectus. The
Federal Deposit Insurance Corporation is an agency of the U.S. Government which
insures the deposits of certain banks and savings and loan associations up to
$100,000 per deposit. The interest on such deposits may not be insured if this
limit is exceeded. Current Federal regulations also permit such institutions to
issue insured negotiable CDs in amounts of $100,000 or more, without regard to
the interest rate ceilings on other deposits. To remain fully insured, these
investments currently must be limited to $100,000 per insured bank or savings
and loan association.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income characteristics,
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
the issuer's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. The Adviser will decide to invest
based upon a fundamental analysis of the long-term attractiveness of the issuer
and the underlying common stock, the evaluation of the relative attractiveness
of the current price of the underlying common stock and the judgment of the
value of the convertible security relative to the common stock at current
prices.
DEEP DISCOUNT SECURITIES. The Fund may invest up to 15% of its total
assets in securities of companies that are financially troubled, in default or
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undergoing bankruptcy or reorganization. Such securities are usually available
at a deep discount from the face value of the instrument. The fund will invest
in Deep Discount Securities when the Adviser believes that there exist factors
that are likely to restore the company to a healthy financial condition. Such
factors include a restructuring of debt, management changes, existence of
adequate assets or other unusual circumstances. Debt instruments purchased at
deep discounts may pay very high effective yields. In addition, if the financial
condition of the issuer improves, the underlying value of the security may
increase, resulting in a capital gain. If the company defaults on its
obligations or remains in default, or if the plan of reorganization is
insufficient for debtholders, the Deep Discount Securities may stop paying
interest and lose value or become worthless. The Adviser will attempt to balance
the benefits of investing in Deep Discount Securities with their risks. While a
diversified portfolio may reduce the overall impact of a Deep Discount Security
that is in default or loses its value, the risk cannot be eliminated. See "High
Yield Securities," below.
FOREIGN GOVERNMENT OBLIGATIONS. The Fund may invest in foreign
government obligations, which generally consist of obligations supported by
national, state or provincial governments or similar political subdivisions.
Investments in foreign government debt obligations involve special risks. The
issuer of the debt may be unable or unwilling to pay interest or repay principal
when due in accordance with the terms of such debt, and the Fund may have
limited legal resources in the event of default. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance.
FOREIGN SECURITIES-RISK FACTORS. The Fund may sell a security
denominated in a foreign currency and retain the proceeds in that foreign
currency to use at a future date (to purchase other securities denominated in
that currency) or the Fund may buy foreign currency outright to purchase
securities denominated in that foreign currency at a future date. Investing in
foreign securities involves more risk than investing in securities of U.S.
companies. Because the Fund currently does not intend to hedge its foreign
investments against the risk of foreign currency fluctuations, changes in the
value of these currencies can significantly affect its share price. In addition,
the Fund will be affected by changes in exchange control regulations and
fluctuations in the relative rates of exchange between the currencies of
different nations, as well as by economic and political developments. Other
risks involved in foreign securities include the following: there may be less
publicly available information about foreign companies comparable to the reports
and ratings that are published about companies in the United States; foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies; some foreign stock markets have substantially less volume than
U.S. markets, and securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies; there may be less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than exist in the United States; and there may be the
possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments which could affect assets of the Fund
held in foreign countries.
HIGH YIELD SECURITIES. High Yield Securities are subject to certain
risks that may not be present with investments in higher grade debt securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. Debt obligations
rated lower than Baa by Moody's or BBB by S&P, commonly referred to as "junk
bonds," are speculative and generally involved a higher risk or loss of
principal and income than higher-rated debt securities. The prices of High Yield
Securities tend to be less sensitive to interest rate changes than higher-rated
investments, but may be more sensitive to adverse economic changes or individual
4
<PAGE>
corporate developments. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of High Yield
Securities and thus in the Fund's net asset value. A significant economic
downturn or a substantial period of rising interest rates could severely affect
the market for High Yield Securities. In these circumstances, highly leveraged
companies might have greater difficulty in making principal and interest
payments, meeting projected business goals and obtaining additional financing.
Thus, there could be higher incidence of default. This would affect the value of
such securities and thus the Fund's net asset value. Further, if the issuer of a
security owned by the Fund defaults, it might incur additional expenses to seek
recovery.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including High Yield Securities, tends to decrease; when interest
rates fall, the value of fixed rate debt obligations tends to increase. If an
issuer of a High Yield Security containing a redemption or call provision
exercised either provision in a declining interest rate market, the fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if the Fund experience unexpected net redemptions in a
rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which Fund expenses could be allocated and in a reduced rate of return for the
Fund. While it is impossible to protect entirely against this risk,
diversification of the Fund's portfolio and the Adviser's careful analysis of
prospective portfolio securities helps to minimize the impact of a decrease in
value of a particular security or group of securities in the Fund's portfolio.
THE HIGH YIELD SECURITIES MARKET. The market for below investment
grade bonds expanded rapidly in recent years and its growth paralleled a long
economic expansion. In the past, the prices of many lower-rated debt securities
declined substantially, reflecting an expectation that many issuers of such
securities might experience financial difficulties. As a result, the yields on
lower-rated debt securities rose dramatically. However, such higher yields did
not reflect the value of the income streams that holders of such securities
expected, but rather the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuers' financial
restructuring or default. There can be no assurance that such declines in the
below investment grade market will not reoccur. The market for below investment
grade bonds generally is thinner and less active than that for higher quality
bonds, which may limit the Fund's ability to sell such securities at fair value
in response to changes in the economy or the financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
CREDIT RATINGS. The credit ratings issued by credit rating
services may not fully reflect the true risks of an investment. For example,
credit ratings typically evaluate the safety of principal and interest payments,
not market value risk, of High Yield Securities. Also, credit rating agencies
may fail to change on a timely basis a credit rating to reflect changes in
economic or company conditions that affect a security's market value. The Fund
may invest in securities rated as low as D by S&P or C by Moody's or, if
unrated, deemed to be of comparable quality by the Adviser. Debt obligations
with these ratings either have defaulted or are in great danger of defaulting
and are considered to be highly speculative. See "Deep Discount Securities." The
Adviser continually monitors the investments in the Fund's portfolio and
carefully evaluates whether to dispose of or retain High Yield Securities whose
credit ratings have changed. See Appendix A for a description of corporate bond
ratings.
LIQUIDITY AND VALUATION. Lower-rated bonds are typically traded
among a smaller number of broker-dealers than in a broad secondary market.
Purchasers of High Yield Securities tend to be institutions, rather than
individuals, which is a factor that further limits the second market. To the
5
<PAGE>
extent that no established retail secondary market exists, many High Yield
Securities may not be as liquid as higher-grade bonds. A less active and thinner
market for High Yield Securities than that available for higher quality
securities may result in more volatile valuations of a Fund's holdings and more
difficulty in executing trades at favorable prices during unsettled market
conditions.
The ability of the Fund to value or sell High Yield Securities
will be adversely affected to the extent that such securities are thinly traded
or illiquid. During such periods, there may be less reliable objective
information available and thus the responsibility of the Fund's Board of
Directors to value High Yield Securities become more difficult, with judgment
playing a greater role. Further, adverse publicity about the economy or a
particular issuer may adversely affect the public's perception of the value, and
thus liquidity, of a High Yield Security, whether or not such perceptions are
based on a fundamental analysis.
LOANS OF PORTFOLIO SECURITIES. The Fund may loan securities to
qualified broker-dealers or other institutional investors provided: the borrower
pledges to the Fund and agrees to maintain at all times with the Fund collateral
equal to not less than 100% of the value of the securities loaned (plus accrued
interest or dividend, if any); the loan is terminable at will by the Fund; the
Fund pays only reasonable custodian fees in connection with the loan; and the
Adviser monitors the creditworthiness of the borrower throughout the life of the
loan. Such loans may be terminated by the Fund at any time and the Fund may vote
the proxies if a material event affecting the investment is to occur. The market
risk applicable to any security loaned remains a risk of the Fund. The borrower
must add to the collateral whenever the market value of the securities rises
above the level of such collateral. The Fund could incur a loss if the borrower
should fail financially at a time when the value of the loaned securities is
greater than the collateral. The Fund may not make loans of portfolio securities
in excess of 10% of its total assets.
MONEY MARKET INSTRUMENTS. Investments in commercial paper are limited
to obligations rated Prime-1 by Moody's or A-1 by S&P. Commercial paper includes
notes, drafts, or similar instruments payable on demand or having a maturity at
the time of issuance not exceeding nine months, exclusive of days of grace or
any renewal thereof. Investments in certificates of deposit will be made only
with domestic institutions with assets in excess of $500 million. See Appendix B
for a description of commercial paper ratings.
PREFERRED STOCK. A preferred stock is a blend of the characteristics of
a bond and common stock. It can offer the higher yield of a bond and has
priority over common stock in equity ownership, but does not have the seniority
of a bond and, unlike common stock, its participation in the issuer" growth may
be limited. Preferred stock has preference over common stock in the receipt of
dividends and in any residual assets after payment to creditors should the
issuer be dissolved. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with banks which are members of the Federal Reserve System or securities dealers
that are members of a national securities exchange or are market makers in
government securities. Repurchase agreements are transactions in which the Fund
purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. The Fund's risk is limited
primarily to the ability of the seller to repurchase the securities at the
agreed-upon price upon the deliver date. The period of these repurchase
6
<PAGE>
agreements will usually be short, from overnight to one week, and at no time
will the Fund invest in repurchase agreements with more than one year in time to
maturity. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of one year from the effective date of the
repurchase agreement. The Fund will always receive, as collateral, securities
whose market value, including accrued interest, will at all times be at least
equal to 100% of the dollar amount invested by the Fund in each agreement, and
the Fund will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of the Fund's custodian. If the
seller defaults, the Fund might incur a loss if the value of the collateral
securing the repurchase agreement declines, and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy or
similar proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. The Fund
may not enter into a repurchase agreement with more than seven days to maturity
if, as a result more than 15% of its net assets would be invested in such
repurchase agreements, together with any other illiquid investments.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS. The Fund may not
purchase or otherwise acquire any security if, as a result, more than 15% of its
net assets (taken at current value) would be invested in securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. This policy includes foreign issuers'
unlisted securities with a limited trading market and repurchase agreements
maturing in more than seven days. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended ("1933 Act"), which the Board of Directors or the Adviser has
determined under Board-approved guidelines are liquid.
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. Securities that are freely marketable in the country where they are
principally traded, but would not be freely marketable in the United States,
will not be subject to this 15% limit. Where registration is required, the Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
7
<PAGE>
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities and the Fund might be unable to dispose of such
securities promptly or at reasonable prices.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed as to
principal and interest by the U.S. Government include (1) U.S. Treasury
obligations which differ only in their interest rates, maturities and times of
issuance as follows: U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years), and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities that are backed by
the full faith and credit of the United States, such as securities issued by the
Federal Housing Administration, Government National Mortgage Association, the
Department of Housing and Urban Development, the Export-Import Bank, the General
Services Administration and the Maritime Administration and certain securities
issued by the Farmers Home Administration and the Small Business Administration.
The range of maturities of U.S. Government Obligations is usually three months
to thirty years.
WARRANTS. The Fund may purchase warrants, which are instruments that
permit the Fund to acquire, by subscription, the capital stock of a corporation
at a set price, regardless of the market price for such stock. Warrants may be
either perpetual or of limited duration. There is greater risk that warrants
might drop in value at a faster rate than the underlying stock.
WHEN-ISSUED SECURITIES. Although it has no intention of doing so in the
coming year, the Fund many invest up to 10% of its net assets in securities
issued on a when-issued or delayed delivery basis at the time the purchase is
made. The Fund generally would not pay for such securities or start earning
interest on them until they are issued or received. However, when the Fund
purchases debt obligations on a when-issued basis, it assumes the risks of
ownership, including the risk of price fluctuation, at the time of purchase, not
at the time of receipt. Failure of the issuer to deliver a security purchased by
the Fund on a when-issued basis may result in the Fund incurring a loss or
missing an opportunity to make an alternative investment. When the Fund enters
into a commitment to purchase securities on a when-issued basis, it establishes
a separate account on its books and records or with its custodian consisting of
cash or liquid high-grade debt securities equal to the amount of the Fund's
commitment, which are valued at their fair market value. If on any day the
market value of this segregated account falls below the value of the Fund's
commitment, the Fund will be required to deposit additional cash or qualified
securities into the account until equal to the value of the Fund's commitment.
When the securities to be purchased are issued, the Fund will pay for the
securities from available cash, the sale of securities in the segregated
account, sales of other securities and, if necessary, from sale of the
when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities the Fund is committed to purchase. After the
Fund is committed to purchase when-issued securities, but prior to the issuance
of the securities, it is subject to adverse changes in the value of these
securities based upon changes in interest rates, as well as changes based upon
the public's perception of the issuer and its creditworthiness. When-issued
securities' market prices move inversely with respect to changes in interest
rates. Sale of securities in the segregated account or sale of the when-issued
securities may cause the realization of a capital gain or loss.
ZERO COUPON AND PAY-IN-KIND SECURITIES. Zero coupon securities are debt
obligations that do not entitle the holder to any periodic payment of interest
prior to maturity or a specified date when the securities begin paying current
interest. They are issued and traded at a discount from their face amount or par
value, which discount varies depending on the time remaining until cash payments
8
<PAGE>
begin, prevailing interest rates, liquidity of the security and the perceived
credit quality of the issuer. Pay-in-kind securities are those that pay
"interest" through the issuance of additional securities. The market prices of
zero coupon and pay-in-kind securities generally are more volatile than the
prices of securities that pay interest periodically and in cash and are likely
to respond to changes in interest rates to a greater degree than do other types
of debt securities having similar maturities and credit quality. Original issue
discount earned each year on zero coupon securities and the "interest" on
pay-in-kind securities must be included in gross income and thus must be
accounted for by the Fund for purposes of determining the amount it must
distribute that year to continue to qualify for tax treatment as a regulated
investment company. Thus, the Fund may be required to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
See "Taxes." These distributions must be made from the Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The Fund will not
be able to purchase additional income-producing securities with case used to
make such distributions, and its current income ultimately could be reduced as a
result.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Adviser, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Allocation of Portfolio Brokerage."
For the fiscal years ended December 31, 1997 and 1998, the Fund's portfolio
turnover rate was 53% and 65%, respectively.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, and,
unless identified as non-fundamental policies, may not be changed without the
approval of a vote of a majority of the outstanding shares of the Fund. As
provided in the Investment Company Act of 1940, as amended ("1940 Act"), a "vote
of a majority of the outstanding shares of the Fund" means the affirmative vote
of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2)
67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
The investment restrictions provide that, among other things, the Fund
will not:
(1) Borrow money except from banks and only for temporary or emergency
purposes and then in amounts not in excess of 5% of its total assets taken at
cost or value, whichever is the lesser.
(2) Make loans to other persons except that the Fund's Board of
Directors may, on the request of broker-dealers or other institutional
investors, which it deems qualified, authorize the Fund to lend securities for
the purpose of covering short positions of the borrower, but only when the
borrower pledges cash collateral to the Fund and agrees to maintain such
collateral so that it amounts at all times to at least 100% of the value of the
securities. Such security loans will not be made if as a result the aggregate of
9
<PAGE>
such loans exceeds 10% of the value of the Fund's total assets. The Fund may
terminate such loans at any time and vote the proxies if a material event
affecting the investment is to occur. The market risk applicable to any security
loaned remains a risk of the Fund. The investment risk is that the borrower will
fail financially when the collateral is in its possession. The borrower must add
to collateral whenever the market value of the securities rises above the level
of such collateral. The primary objectives of such loaning function is to
supplement the Fund's income through investment of the cash collateral in
short-term interest bearing obligations. The purchase of a portion of an issue
of publicly distributed debt securities is not considered the making of a loan.
(3) With respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
(4) Invest more than 5% of the value of its total assets in securities
of issuers that have been in business for less than three years.
(5) Underwrite securities of other issuers.
(6) Purchase or sell real estate or commodities or commodity contracts.
However, the Fund may purchase interests in real estate investment trusts whose
securities are registered under the Securities Act of 1933, as amended, and are
readily marketable.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Invest in securities of other investment companies, except in
connection with a merger of another investment company.
(9) Purchase any securities on margin or sell any securities short.
(10) Purchase or retain securities of any issuer if any officer or
director of the Fund or the Adviser owns beneficially more than 1/2 of 1% of the
securities of such issuer and together own more than 5% of the securities of
such issuer.
(11) Invest more than 25% of the value of its total assets in a
particular industry at any one time.
(12) Purchase or sell portfolio securities from or to the Adviser or
any director or officer thereof or of the Fund, as principals.
The Fund has adopted the following non-fundamental investment
restrictions which may be changed without shareholder approval:
(1) The Fund will not purchase any security if, as a result, more than
15% of its net assets would be invested in illiquid securities, including
repurchase agreements not entitling the holder to payment of principal and
interest within seven days and any securities that are illiquid by virtue of
legal or contractual restrictions on resale or the absence of a readily
available market. The Directors, or the Fund's investment adviser acting
pursuant to authority delegated by the Directors, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
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<PAGE>
under the Securities Act of 1933, as amended, or any other applicable rule, and
therefore that such securities are not subject to the foregoing limitation.
(2) The Fund will not pledge, mortgage or hypothecate any of its
assets, except that the Fund may pledge its assets to secure borrowings made in
accordance with fundamental investment restriction (1) above, provided the Fund
maintains asset coverage of at least 300% for all such borrowings.
DIRECTORS AND OFFICERS
The following table lists the Directors and executive officers of the
Fund, their age, business address and principal occupations during the past five
years. Unless otherwise noted, an individual's business address is 95 Wall
Street, New York, New York 10005.
JAMES J. COY (84), Emeritus Director, 90 Buell Land, East Hampton, NY 11937.
Retired; formerly Senior Vice President, James Talcott, Inc. (financial
institution).
GLENN O. HEAD*+ (73), President and Director. Chairman of the Board and
Director, Administrative Data Management Corp. ("ADM"), FIMCO, Executive
Investors Management Company, Inc. ("EIMCO"), First Investors Corporation
("FIC"), Executive Investors Corporation ("EIC") and First Investors
Consolidated Corporation ("FICC").
KATHRYN S. HEAD*+ (43), Director, 581 Main Street, Woodbridge, NJ 07095.
President and Director, FICC, ADM and FIMCO; Vice President and Director, FIC
and EIC; President EIMCO; Chairman, President and Director, First Financial
Savings Bank, S.L.A. Larry R. Lavoie* (51), Director. Assisted Secretary, ADM,
EIC, EIMCO, FICC and FIMCO; Secretary and General Counsel, FIC.
REX R. REED** (76), Director, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN** (77), Director, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
NANCY SCHAENEN** (67), Director, 56 Midwood Terrace, Madison, NJ 07940. Trustee,
Drew University and DePauw University.
JAMES M. SRYGLEY** (66), Director, 33 Hampton Road, Chatham, NJ 07982.
Principal, Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (66), Director and Chairman of the Board; Director, FIMCO,
FIC, FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (69), Director, RR1, Box 217, Upland Downs Road,
Manchester Center, VT 05255. Retired; formerly financial and planning executive
with American Telephone & Telegraph Company.
11
<PAGE>
JOSEPH I. BENEDEK (41), Treasurer and Principal Accounting Officer, 581 Main
Street, Woodbridge, NJ 07095. Treasurer, FIC, FIMCO, EIMCO and EIC; Comptroller
and Treasurer, FICC.
CONCETTA DURSO (63), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
GEORGE V. GANTER (46), Vice President. Vice President, First Investors Asset
Management Company, Inc., First Investors High Yield, Inc. and Executive
Investors Trust; Portfolio Manager, FIMCO.
- ------------
* These Directors may be deemed to be "interested persons," as defined in the
1940 Act.
** These Directors are members of the Board's Audit Committee.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
The Directors and officers, as a group, owed less than 1% of either
Class A or Class B shares of the Fund.
All of the officers and Directors, except for Mr. Ganter, hold
identical or similar positions with 14 other registered investment companies in
the First Investors Family of Funds. Mr. Head is also an officer and/or Director
of First Investors Asset Management Company, Inc., First Investors Credit
Funding Corporation, First Investors Leverage Corporation, First Investors
Realty Company, Inc., First Investors Resources, Inc., N.A.K. Realty
Corporation, Real Property Development Corporation, Route 33 Realty Corporation,
First Investors Life Insurance Company, First Financial Savings Bank, S.L.A.,
First Investors Credit Corporation and School Financial Management Services,
Inc. Ms. Head is also an officer and/or Director of First Investors Life
Insurance Company, First Investors Credit Corporation, School Financial
Management Services, Inc., First Investors Credit Funding Corporation, N.A.K.
Realty Corporation, Real Property Development Corporation, First Investors
Leverage Corporation and Route 33 Realty Corporation.
12
<PAGE>
The following table lists compensation paid to the Directors of the
Fund for the fiscal year ended December 31, 1998.
Total
Compensation
From First
Aggregate Investors Family
Compensation of Funds Paid to
Director From Fund* Director*+
- -------- ------------ -------------------
James J. Coy** $0 $0
Roger L. Grayson*** $0 $0
Glenn O. Head $0 $0
Kathryn S. Head $0 $0
Larry R. Lavoie**** $0 $0
Rex R. Reed $600 $20,045
Herbert Rubinstein $600 $20,045
James M. Srygley $600 $20,045
John T. Sullivan $0 $0
Robert F. Wentworth $600 $20,045
Nancy Schaenen++ $550 $18,350
* Compensation to officers and interested Directors of the Fund is paid by
the Adviser.
** On March 27, 1997, Mr. Coy resigned as a Director of the Fund. Mr. Coy
currently serves as an emeritus Director. Mr. Coy is paid by the Adviser.
*** On August 20, 1998, Mr. Grayson resigned as a Director of the Fund.
**** On September 17, 1998, Mr. Lavoie was elected by the Board of Directors to
serve as a Director.
+ The First Investors Family of Funds consists of 15 separate registered
investment companies.
++ The dollar compensation shown for Ms. Schaenen is lower than that for the
other Directors because Ms. Schaenen was absent from one Board Meeting and
did not receive compensation for that Board Meeting.
MANAGEMENT
Investment advisory services to the Fund are provided by First
Investors Management Company, Inc. pursuant to an Investment Advisory Agreement
("Advisory Agreement") dated June 13, 1994. The Advisory Agreement was approved
by the Board of Directors of the Fund, including a majority of the Directors who
are not parties to the Advisory Agreement or "interested persons" (as defined in
the 1940 Act) of any such party ("Independent Directors"), in person at a
meeting called for such purpose and by a majority of the shareholders of the
Fund. The Board of Directors is responsible for overseeing the management of the
Fund.
Pursuant to the Advisory Agreement, FIMCO shall supervise and manage
the Fund's investments, determine the Fund's portfolio transactions and
supervise all aspects of its operations, subject to review by the Directors. The
Advisory Agreement also provides that FIMCO shall provide the Fund with certain
executive, administrative and clerical personnel, office facilities and
supplies, conduct the business and details of the operation of the Fund and
assume certain expenses thereof, other than obligations or liabilities of the
Fund. The Advisory Agreement may be terminated at any time without penalty by
the Directors or by a majority of the outstanding voting securities of the Fund,
or by FIMCO, in each instance on not less than 60 days' written notice, and
shall automatically terminate in the event of its assignment (as defined in the
1940 Act). The Advisory Agreement also provides that it will continue in effect
for a period of over two years only if such continuance is approved annually
either by the Directors or by a majority of the outstanding voting securities of
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<PAGE>
the Fund, and, in either case, by a vote of a majority of the Independent
Directors voting in person at a meeting called for the purpose of voting on such
approval.
Under the Advisory Agreement, the Fund pays the Adviser an annual fee,
paid monthly, according to the following schedule:
Annual
Average Daily Net Assets Rate
- ------------------------ ------
Up to $250 million......................................................0.75%
In excess of $250 million up to $500 million............................0.72
In excess of $500 million up to $750 million............................0.69
Over $750 million.......................................................0.66
For the fiscal years ended December 31, 1996, 1997 and 1998, the Fund
paid the Adviser $271,569, $269,748 and $254,508, respectively, in advisory
fees.
The Adviser has an Investment Committee composed of Dennis T.
Fitzpatrick, George V. Ganter, Richard Guinnessey, David Hanover, Glenn O. Head,
Kathryn S. Head, Nancy W. Jones, Michael O'Keefe, Patricia D. Poitra, Clark D.
Wagner and Matthew Wright. The Committee usually meets weekly to discuss the
composition of the portfolio of each Fund and to review additions to and
deletions from the portfolios.
First Investors Consolidated Corporation ("FICC") owns all of the
voting common stock of the Adviser and all of the outstanding shares of First
Investors Corporation and the Fund's transfer agent. Mr. Glenn O. Head controls
FICC and, therefore, controls the Adviser.
DETERMINATION OF NET ASSET VALUE
Except as provided herein, a security listed or traded on an exchange
or the Nasdaq Stock Market is valued at its last sale price on the exchange or
market where the security is principally traded, and lacking any sales on a
particular day, the security is valued at the mean between the closing bid and
asked prices. Securities traded in the OTC market (including securities listed
on exchanges whose primary market is believed to be OTC) are valued at the mean
between the last bid and asked prices prior to the time when assets are valued
based upon quotes furnished by market makers for such securities. However, the
Fund may determine the value of debt securities based upon prices furnished by
Interactive Data Corporation, an outside pricing service. The pricing service
uses quotations obtained from investment dealers or brokers for the particular
securities being evaluated, information with respect to market transactions in
comparable securities and consider security type, rating, market condition,
yield data and other available information in determining value. Short-term debt
securities that mature in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued on
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 Fund's Board of
Directors.
"When-issued securities" are reflected in the assets of the Fund as of
the date the securities are purchased. Such investments are valued thereafter at
the mean between the last bid and asked prices obtained from recognized dealers
14
<PAGE>
in such securities or the pricing service. For valuation purposes, quotations of
foreign securities in foreign currencies are converted into U.S. dollar
equivalents using the foreign exchange equivalents in effect.
The Fund's Board of Directors may suspend the determination of the
Fund's net asset value for the whole or any part of any period (1) during which
trading on the New York Stock Exchange ("NYSE") is restricted as determined by
the SEC or the NYSE is closed for other than weekend and holiday closings, (2)
when an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its net assets, or (3) for such other period as the SEC
has by order permitted.
EMERGENCY PRICING PROCEDURES. In the event that the Fund must halt
operations during any day that it would normally be required to price under Rule
22c-1 under the 1940 Act due to an emergency ("Emergency Closed Day"), the Fund
will apply the following procedures:
1. The Fund will make every reasonable effort to segregate orders
received on the Emergency Closed Day and give them the price that they would
have received but for the closing. The Emergency Closed Day price will be
calculated as soon as practicable after operations have resumed and will be
applied equally to sales, redemptions and repurchases that were in fact received
in the mail or otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Fund on an Emergency Closed Day, even if neither the Fund nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order, the order will be considered
received by the Fund when the postal service has delivered it to FIC's
Woodbridge offices prior to the close of regular trading on the NYSE; or such
other time as may be prescribed in the Fund's Prospectus; and
(b) In the case of a wire order, including a Fund/SERV order, the
order will be considered received when it is received in good form by a FIC
branch office or an authorized dealer prior to the close of regular trading on
the NYSE, or such other time as may be prescribed in the Fund's Prospectus.
3. If the Fund is unable to segregate orders received on the Emergency
Closed Day from those received on the next day the Fund is open for business,
the Fund may give all orders the next price calculated after operations resume.
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Fund may determine not to price its portfolio
securities if such prices would lead to a distortion of the net asset value for
the Fund and its shareholders.
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser may purchase or sell portfolio securities on behalf of the
Fund in agency or principal transactions. In agency transactions, the Fund
generally pays brokerage commissions. In principal transactions, the Fund
generally does not pay commissions, however the price paid for the security may
include an undisclosed dealer commission or "mark-up" or selling concessions.
The Adviser normally purchases fixed-income securities on a net basis from
primary market makers acting as principals for the securities. The Adviser may
purchase certain money market instruments directly from an issuer without paying
commissions or discounts. The Adviser may also purchase securities traded in the
OTC market. As a general practice, OTC securities are usually purchased from
15
<PAGE>
market makers without paying commissions, although the price of the security
usually will include undisclosed compensation. However, when it is advantageous
to the Fund the Adviser may utilize a broker to purchase OTC securities and pay
a commission.
In purchasing and selling portfolio securities on behalf of the Fund,
the Adviser will seek to obtain best execution. The Fund may pay more than the
lowest available commission in return for brokerage and research services.
Additionally, upon instruction by the Board, the Adviser may use dealer
concessions available in fixed-priced underwritings to pay for research and
other services. Research and other services may include information as to the
availability of securities for purchase or sale, statistical or factual
information or opinions pertaining to securities, reports and analysis
concerning issuers and their creditworthiness, and Lipper's Directors'
Analytical Data concerning Fund performance and fees. The Adviser generally uses
the research and other services to service all the funds in the First Investors
Family of Funds, rather than the particular Funds whose commissions may pay for
research or other services. In other words, a Fund's brokerage may be used to
pay for a research service that is used in managing another Fund within the
First Investor Fund Family. The Lipper's Directors' Analytical Data is used by
the Adviser and the Fund Board to analyze a fund's performance relative to other
comparable funds.
In selecting the broker-dealers to execute the Fund's portfolio
transactions, the Adviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order, the
trading characteristics of the security involved, the difficulty in executing
the order, the research and other services provided, the expertise, reputation
and reliability of the broker-dealer, access to new offerings, and other factors
bearing upon the quality of the execution. The Adviser does not place portfolio
orders with an affiliated broker, or allocate brokerage commission business to
any broker-dealer for distributing fund shares. Moreover, no broker-dealer
affiliated with the Adviser participates in commissions generated by portfolio
orders placed on behalf of the Fund.
The Adviser may combine transaction orders placed on behalf of the Fund
and any other Fund in the First Investors Group of Funds, any series of
Executive Investors Trust and First Investors Life for the purpose of
negotiating brokerage commissions or obtaining a more favorable transaction
price; and where appropriate, securities purchased or sold may be allocated in
accordance with written procedures approved by the Board of Directors.
For the fiscal year ended December 31, 1996, the Fund paid $1,408 in
brokerage commissions. Of that amount $1,149 was paid in brokerage commissions
to brokers who furnished research services on portfolio transactions in the
amount of $209,005. For the fiscal year ended December 31, 1997, the Fund paid
$1,170 in brokerage commissions. Of that amount $1,104 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $190,813. For the fiscal year ended December 31, 1998, the Fund
paid $335 in brokerage commissions. Of that amount $335 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $31,092.
TAXES
Fund shares are offered only to a separate account of First Investors
Life that funds individual variable annuity contracts. See the separate
account's prospectus for a discussion of the special taxation of First Investors
Life with respect to the account and of the contractholders.
16
<PAGE>
To continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), the
Fund must distribute to its shareholders for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income derived with
respect to its business of investing in securities or those currencies; (2) at
the close of each quarter of the Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (3) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
If the Fund failed to qualify for treatment as a RIC for any taxable
year, (1) it would be taxed at corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders, (2) the shareholders would treat all those distributions,
including distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the Fund's earnings and profits, and (3) most
importantly, Separate Account A would fail to satisfy the diversification
requirements of section 817(h) of the Code (see below), with the result that the
Contracts supported by that account would no longer be eligible for tax
deferral. In addition, the Fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
The Fund intends to comply with the diversification requirements
imposed by section 817(h) of the Code, and the regulations thereunder. These
requirements, which are in addition to the diversification requirements imposed
on the Fund by the 1940 Act and Subchapter M of the Code (described above),
place certain limitations on the assets of Separate Account A -- and of the
Fund, because section 817(h) and those regulations treat its assets as assets of
Separate Account A -- that may be invested in securities of a single issuer.
Specifically, the regulations provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter (or within 30
days thereafter) no more than 55% of the Fund's total assets may be represented
by one investment, no more than 70% by any two investments, no more than 80% by
any three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and while each U.S. Government agency and instrumentality is considered a
separate issuer, a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered the same
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities and
securities of other RICs. Failure of the Fund to satisfy the section 817(h)
requirements would result in taxation of First Investors Life and treatment of
the Contractholders other than as described in the Prospectus of Separate
Account A.
Dividends and interest received by the Fund, and gains realized by the
Fund, may be subject to income, withholding or other taxes imposed by foreign
countries that would reduce the yield and/or total return on its securities. Tax
17
<PAGE>
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not impose
taxes on capital gains in respect of investments by foreign investors.
The Fund may acquire zero coupon securities issued with original issue
discount. As a holder of those securities, the Fund must include in its income
the portion of the original issue discount that accrues on the securities during
the taxable year, even if it receives no corresponding payment on them during
the year. Similarly, the Fund must include in its gross income securities it
receives as "interest" on pay-in-kind securities. Because the Fund annually must
distribute substantially all of its investment company taxable income, including
any original issue discount and other non-cash income, to satisfy the
Distribution Requirement, the Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated in the State of Maryland on
November 14, 1979. The Fund is organized to issue 25 million shares of common
stock, $1.00 par value per share. Shares of the Fund have equal dividend,
voting, liquidation and redemption rights. The Fund does not hold annual
shareholder meetings. If requested to do so by the holders of at least 10% of
the Fund's outstanding shares, the Board of Directors will call a special
meeting of shareholders for any purpose, including the removal of Directors.
CUSTODIAN. The Fund has retained The Bank of New York, 48 Wall Street,
New York, New York 10286, to act as custodian of the securities and cash of the
Fund.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of the Adviser and First Investors Life,
acts as transfer agent for the Fund and as dividend disbursing agent.
AUDITS AND REPORTS. The accounts of the Fund are audited twice a year
by Tait, Weller & Baker, independent certified public accountants, 8 Penn Center
Plaza, Philadelphia, PA, 19103. Shareholders of the Fund receive semi-annual and
annual reports, including audited financial statements, and a list of securities
owned.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue.,
N.W., Washington, D.C. 20036 serves as counsel to the Fund.
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to
Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Fund and the
Adviser have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Fund. Among other things,
such persons, except the Directors: (a) must have all non-exempt trades
pre-cleared; (b) are restricted from short-term trading; (c) must provide
duplicate statements and transactions confirmations to a compliance officer; and
(d) are prohibited from purchasing securities of initial public offerings.
As of March 31, 1999, First Investors Life Insurance Company owned of
record or beneficially 100% of the outstanding shares of SPECIAL BOND FUND.
18
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
- -------------------------------
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated "BB," "B," "CCC," "CC" and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces 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. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
19
<PAGE>
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat greater than the 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 some time in the future.
20
<PAGE>
Baa Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
21
<PAGE>
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Prime-1 Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation. Well-established access to a range of
financial markets and assured sources of alternate liquidity.
22
<PAGE>
Financial Statements as of
December 31, 1998
Registrant incorporates by reference the financial statements and report of
independent auditors contained in the Annual Report to shareholders for the
fiscal year ended December 31, 1998 electronically filed with the Securities and
Exchange Commission on March 5, 1999 (Accession Number: 0000928816-99-000066).
23
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a)(i) Articles of Restatement1
(b) Amended and Restated By-laws1
(c) Shareholders' rights are contained in Article II of Registrant's
Amended and Restated Bylaws, previously filed as Exhibit 99.B2 to
Registrant's Registration Statement.
(d) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc.1
(e) Underwriting Agreement - none
(f) Bonus, profit sharing or pension plans - none
(g)(i) Custodian Agreement between Registrant and Irving Trust Company2
(ii) Supplement to Custodian Agreement between Registrant and The Bank
of New York2
(h)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.2
(i) Opinion and Consent of Counsel - filed herewith
(j)(i) Consent of Independent Accountants - filed herewith
(ii) Powers of Attorney1
(k) Financial statements omitted from prospectus -none
(l) Initial capital agreements - none
(m) Distribution Plans - none
(n) Financial Data Schedules - filed herewith
(o) 18f-3 Plan - none
- ------------
1 Incorporated by reference from Post-Effective Amendment No. 14 to
Registrant's Registration Statement (File No. 2-66294) filed on April 24,
1995.
2 Incorporated by reference from Post-Effective Amendment No. 15 to
Registrant's Registration Statement (File No. 2-66294) filed on April 19,
1996.
Item 24. Persons Controlled by or Under Common Control with Registrant
--------------------------------------------------------------
There are no persons controlled by or under common control with
the Registrant.
<PAGE>
Item 25. Indemnification
---------------
Article X, Section 1 of the By-Laws of Registrant provides as
follows:
Section 1. Every person who is or was an officer or director of
the Corporation (and his heirs, executors and administrators) shall be
indemnified by the Corporation against reasonable costs and expenses incurred by
him in connection with any action, suit or proceeding to which he may be made a
party by reason of his being or having been a director or officer of the
Corporation, except in relation to any action, suit or proceeding in which he
has been adjudged liable because of negligence or misconduct, which shall be
deemed to include willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. In the absence of
an adjudication which expressly absolves the director or officer of liability to
the Corporation or its stockholders for negligence or misconduct, within the
meaning thereof as used herein, or in the event of a settlement, each director
or officer (and his heirs, executors and administrators) shall be indemnified by
the Corporation against payments made, including reasonable costs and expenses,
provided that such indemnity shall be conditioned upon the prior determination
by a resolution of two-thirds of the Board of Directors, who are not involved in
the action, suit or proceeding that the director or officer has no liability by
reason of negligence or misconduct within the meaning thereof as used herein,
and provided further that if a majority of the members of the Board of Directors
of the Corporation are involved in the action, suit or proceeding, such
determination shall have been made by a written opinion of independent counsel.
Amounts paid in settlement shall not exceed costs, fees and expenses which would
have been reasonably incurred if the action, suit or proceeding had been
litigated to a conclusion. Such a determination by the Board of Directors or by
independent counsel, and the payment of amounts by the Corporation on the basis
thereof, shall not prevent a stockholder from challenging such indemnification
by appropriate legal proceedings on the grounds that the person indemnified was
liable to the Corporation or its security holders by reason of negligence or
misconduct within the meaning thereof as used herein. The foregoing rights and
indemnification shall not be exclusive of any other rights to which any officer
or director (or his heirs, executors and administrators) may be entitled to
according to law.
The Registrant's Investment Advisory Agreement provides as
follows:
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company or any Series in
connection with the matters to which this Agreement relate except a loss
resulting from the willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, partner, employee, or agent of the Manager, who may be or become an
officer, Board member, employee or agent of the Company shall be deemed, when
rendering services to the Company or acting in any business of the Company, to
be rendering such services to or acting solely for the Company and not as an
officer, partner, employee, or agent or one under the control or direction of
the Manager even though paid by it.
Reference is hereby made to the Maryland Corporations and
Associations Annotated Code, Sections 2-417, 2-418 (1986).
The general effect of this Indemnification will be to indemnify
the officers and directors of the Registrant from costs and expenses arising
from any action, suit or proceeding to which they may be made a party by reason
of their being or having been a director or officer of the Registrant, except
<PAGE>
where such action is determined to have arisen out of the willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the director's or officer's office.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the Registrant
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable. See Item 30 herein.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
First Investors Management Company, Inc. offers investment
management services and is a registered investment adviser. Affiliations of the
officers and directors of the Investment Adviser are set forth in Part B,
Statement of Additional Information, under "Directors or Trustees and Officers."
Item 27. Principal Underwriters
----------------------
Not applicable.
Item 28. Location of Accounts and Records
--------------------------------
Physical possession of the books, accounts and records of the
Registrant are held by First Investors Management Company, Inc. and its
affiliated companies, First Investors Corporation and Administrative Data
Management Corp., at their corporate headquarters, 95 Wall Street, New York, NY
10005 and administrative offices, 581 Main Street, Woodbridge, NJ 07095, except
for those maintained by the Registrant's Custodian, The Bank of New York, 48
Wall Street, New York, NY 10286.
Item 29. Management Services
-------------------
Not Applicable.
Item 30. Undertakings
------------
The Registrant undertakes to carry out all indemnification
provisions of its Declaration of Trust, Advisory Agreement and Underwriting
Agreement in accordance with Investment Company Act Release No. 11330 (September
4, 1980) and successor releases.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions under Item 27 herein, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
The Registrant hereby undertakes to furnish a copy of its latest
annual report to shareholders, upon request and without charge, to each person
to whom a prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant represents
that this Post-Effective Amendment No. 19 meets all the requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, and has
duly caused this Post-Effective Amendment No. 19 to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 20th day of April, 1999.
FIRST INVESTORS SPECIAL BOND FUND, INC.
By: /s/ Glenn O. Head
------------------
Glenn O. Head
President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 19 to this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
/s/ Glenn O. Head Principal Executive April 20, 1999
- ---------------------------------- Officer and Director
Glenn O. Head
/s/ Joseph I. Benedek Principal Financial April 20, 1999
- ---------------------------------- and Accounting Officer
Joseph I. Benedek
Kathryn S. Head* Director April 20, 1999
- ----------------------------------
Kathryn S. Head
/s/ Larry R. Lavoie Director April 20, 1999
- ----------------------------------
Larry R. Lavoie
Herbert Rubinstein* Director April 20, 1999
- ----------------------------------
Herbert Rubinstein
Nancy Schaenen* Director April 20, 1999
- ----------------------------------
Nancy Schaenen
James M. Srygley* Director April 20, 1999
- ----------------------------------
James M. Srygley
John T. Sullivan* Director April 20, 1999
- ----------------------------------
John T. Sullivan
<PAGE>
Rex R. Reed* Director April 20, 1999
- ----------------------------------
Rex R. Reed
Robert F. Wentworth* Director April 20, 1999
- ----------------------------------
Robert F. Wentworth
*By: /s/ Larry R. Lavoie
-------------------
Larry R. Lavoie
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
23(a)(i) Articles of Restatement1
23(b) Amended and Restated By-laws1
23(c) Shareholders' rights are contained in Article II of
Registrant's Amended and Restated By-laws, previously filed
as Exhibit 99.B2 to Registrant's Registration Statement.
23(d) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc.1
23(e) Underwriting Agreement - none
23(f) Bonus or Profit Sharing Contracts--None
23(g)(i) Custodian Agreement between Registrant and Irving Trust
Company2
23(g)(ii) Supplement to Custodian Agreement between Registrant and The
Bank of New York2
23(h)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.2
23(i) Opinion and Consent of Counsel - filed herewith
23(j)(i) Consent of independent accountants - filed herewith
23(j)(ii) Powers of Attorney1
23(k) Omitted Financial Statements -- None
23(l) Initial Capital Agreements -- None
23(m) Distribution Plan - none
23(n) Financial Data Schedules - filed herewith
23(o) Rule 18f-3 Plan - none
<PAGE>
- --------------
1 Incorporated by reference from Post-Effective Amendment No. 14 to
Registrant's Registration Statement (File No. 2-66294) filed on April 23,
1996.
2 Incorporated by reference from Post-Effective Amendment No. 15 to
Registrant's Registration Statement (File No. 2-66294) filed on April 19,
1996.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000314480
<NAME> FIRST INVESTORS SPECIAL BOND FUND, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 32888
<INVESTMENTS-AT-VALUE> 31410
<RECEIVABLES> 673
<ASSETS-OTHER> 226
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32309
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50
<TOTAL-LIABILITIES> 50
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51364
<SHARES-COMMON-STOCK> 2720
<SHARES-COMMON-PRIOR> 2800
<ACCUMULATED-NII-CURRENT> 705
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (18333)
<ACCUM-APPREC-OR-DEPREC> (1477)
<NET-ASSETS> 32260
<DIVIDEND-INCOME> 46
<INTEREST-INCOME> 3243
<OTHER-INCOME> 42
<EXPENSES-NET> (302)
<NET-INVESTMENT-INCOME> 3029
<REALIZED-GAINS-CURRENT> 858
<APPREC-INCREASE-CURRENT> (3371)
<NET-CHANGE-FROM-OPS> 516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3270)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19
<NUMBER-OF-SHARES-REDEEMED> 364
<SHARES-REINVESTED> 265
<NET-CHANGE-IN-ASSETS> (3822)
<ACCUMULATED-NII-PRIOR> 946
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (19190)
<GROSS-ADVISORY-FEES> (255)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (304)
<AVERAGE-NET-ASSETS> 33934
<PER-SHARE-NAV-BEGIN> 12.89
<PER-SHARE-NII> 1.120
<PER-SHARE-GAIN-APPREC> (.950)
<PER-SHARE-DIVIDEND> (1.200)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.86
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
April 29, 1999
First Investors Special Bond Fund, Inc.
95 Wall Street
New York, New York 10005
Ladies and Gentlemen:
You have requested our opinion, as counsel to First Investors Special
Bond Fund, Inc. (the "Company"), as to certain matters regarding the issuance of
Shares of the Company. As used in this letter, the term "Shares" means the Class
A shares of beneficial interest of the Company.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Company's Articles of Incorporation and by-laws and
such resolutions and minutes of meetings of the Company's Board of Directors as
we have deemed relevant to our opinion, as set forth herein. Our opinion is
limited to the laws and facts in existence on the date hereof, and it is further
limited to the laws (other than the conflict of law rules) in the State of
Maryland that in our experience are normally applicable to the issuance of
shares by corporations and to the Securities Act of 1933 ("1933 Act"), the
Investment Company Act of 1940 ("1940 Act") and the regulations of the
Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the
issuance of the Shares has been duly authorized by the Company and that, when
sold in accordance with the terms contemplated by the Post-Effective Amendment
No. 19 to the Companys Registration Statement on Form N-1A ("PEA"), including
receipt by the Company of full payment for the Shares and compliance with the
1933 Act and the 1940 Act, the Shares will have been validly issued, fully paid
and non-assessable.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
-----------------------
Robert J. Zutz
Consent of Independent Certified Public Accountants
First Investors Special Bond Fund, Inc.
95 Wall Street
New York, New York 10005
We consent to the use in Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-66294) of our report dated
January 29, 1999 relating to the December 31, 1998 financial statements of First
Investors Special Bond Fund, Inc., which are included in said Registration
Statement.
/s/ TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 14, 1999