As filed with the Securities and Exchange Commission on August 4, 1999
1933 Act File No. 2-98409
1940 Act File No. 811-4325
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. 25 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 [X]
FIRST INVESTORS LIFE SERIES FUND
(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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[x] 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 LIFE SERIES FUND
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Focused Equity Fund and the Target Maturity
2015 Fund, series of the First Investors Life Series Fund
Statement of Additional Information for the First Investors Life
Series Fund
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
[FIRST INVESTORS LOGO]
LIFE SERIES FUND
FOCUSED EQUITY
TARGET MATURITY 2015
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 ______, 1999
<PAGE>
CONTENTS
INTRODUCTION
FUND DESCRIPTIONS
Focused Equity Fund
Target Maturity 2015 Fund
FUND MANAGEMENT
BUYING AND SELLING SHARES
How and when do the Funds price their shares?
How do I buy and sell shares?
ACCOUNT POLICIES
What about dividends and capital gain distributions?
What about taxes?
APPENDIX
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INTRODUCTION
This prospectus describes two of the First Investors Funds that are used solely
as the underlying investment options for variable annuity contracts or variable
life insurance policies offered by First Investors Life Insurance Company
("FIL"). This means that you cannot purchase shares of the Funds directly, but
only through such a contract or policy as offered by FIL. Each individual Fund
description in this prospectus has an "Overview" which provides a brief
explanation of the Fund's objectives, its primary strategies, and its primary
risks. Each Fund description also contains a "Fund in Detail" section with more
information on the strategies and risks of the Fund.
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FUND DESCRIPTIONS
FOCUSED EQUITY FUND
OVERVIEW
OBJECTIVE: The Fund seeks capital appreciation.
PRIMARY
INVESTMENT
STRATEGIES: The Fund seeks to achieve its objective by focusing its
investments in the common stocks of approximately 20 to 30 U.S.
companies. Generally, not more than 12% of the Fund's assets will
be invested in the securities of a single issuer. The Fund uses
an event-driven approach in selecting investments. In making
investment decisions, the Fund looks for companies that appear to
be undervalued because they are undergoing corporate or other
events that appear likely to result in significant growth in the
companies' valuations. The Fund seeks to identify companies with
proven management, superior cash flow and outstanding franchise
values. The Fund usually will sell a stock when it shows
deteriorating fundamentals, reaches its target value, constitutes
12% or more of the total portfolio, or when the Fund identifies
better investment opportunities.
PRIMARY
RISKS: While there are substantial potential long-term rewards of
investing in a concentrated portfolio of securities that are
considered undervalued, there are also substantial risks. First,
the value of the portfolio will fluctuate with movements in the
overall securities markets, general economic conditions, and
changes in interest rates or investor sentiment. Second, because
the Fund is non-diversified and concentrates its investments in
the stocks of a small number of issuers, the Fund's performance
may be substantially impacted by the change in value of a single
holding. Third, there is a risk that the event that led the Fund
to make an investment may occur later than anticipated or not at
all. This may disappoint the market and cause a decline in the
value of the investment. Accordingly, the value of your
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.
What about performance?
Because the Fund was new when this prospectus was printed, it has no previous
operating history. However, the Fund has investment objectives and policies that
are substantially similar to those of another fund managed by the Fund's
investment subadviser, Arnhold and S. Bleichroeder, Inc. ("ASB" or
"Subadviser"). The other fund is an unregistered, offshore fund named First
Eagle Fund N.V. See the Appendix for information about the performance of this
similar fund.
THE FUND IN DETAIL
What are the Focused Equity Fund's objective, principal investment
strategies, and principal risks?
OBJECTIVE: The Fund seeks capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES: The Fund seeks to achieve its objective by
focusing its investments in the common stocks of approximately 20 to 30 U.S.
companies. The Fund is a non-diversified investment company. The Fund will
usually concentrate 80% of its portfolio in its top 15 holdings. It will
4
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frequently have more than 10% of its assets in the securities of a single
issuer. Although the Fund is not required to limit the amount of any investment
in the securities of any one issuer, it generally will not invest more than 12%
of its assets in the securities of a single issuer. The Fund's strategy is to
remain relatively fully invested, but at times the Fund may have cash positions
of 10% or more if the Fund cannot identify qualified investment opportunities or
it has a negative or "bearish" view of the stock market. However, under normal
market conditions, at least 65% of the Fund's total assets will be invested in
equity securities (including not only common stocks, but preferred stocks and
securities convertible into common and preferred stocks).
The Fund uses an event-driven approach in selecting investments. The Fund looks
for companies that appear to be undervalued because they are undergoing some
corporate or other event that the Fund believes can result in significant growth
in the companies' valuations. Examples of these events include: announced
mergers, acquisitions and divestitures; financial restructurings; management
reorganizations; stock buy-back programs; or industry transformations that can
affect competitiveness. The Fund then identifies companies with proven
management teams which maintain significant financial interest in the companies,
superior cash flows in excess of internal growth requirements and outstanding
franchise values. The Fund generally invests with a time horizon of two-to-five
years and seeks investments which offer the potential of appreciating at least
50% within the first two years of the investment.
The Fund actively monitors the companies in its portfolio through regular
meetings and teleconference calls with senior management and personal visits.
The Fund also actively monitors the industries and competitors of the companies
within its portfolio and checks whether the original investment thesis still
holds true. The Fund usually will sell a stock when it shows deteriorating
fundamentals, reaches its target value, constitutes 12% or more of the total
portfolio, or when the Fund identifies better investment opportunities.
The Fund may purchase and sell futures contracts and options on futures
contracts for hedging purposes. The Fund anticipates engaging in such
transactions relatively infrequently and over relatively short periods of time.
Any hedging strategy that the Fund may decide to employ will generally be
effected by buying puts on the overall market or an index, such as puts on the
Standard & Poor's 500 Composite Stock Price Index.
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 Focused Equity Fund:
MARKET RISK: Because the Fund primarily invests in stocks, it is subject to
market risk. Stock prices in general may decline over short or even extended
periods not only due to company specific developments but also due to an
economic downturn, a change in interest rates, or a change in investor
sentiment, regardless of the success or failure of an individual company's
operations. Stock markets tend to run in cycles with periods when prices
generally go up, known as "bull" markets, and periods when stock prices
generally go down, referred to as "bear" markets. Fluctuations in the prices of
stocks can be sudden and substantial. Accordingly, the value of your investment
in the Fund will go up and down, which means that you could lose money.
NON-DIVERSIFICATION RISK: The Fund is a non-diversified investment company and,
as such, its assets may be invested in a limited number of issuers. This means
that the Fund's performance may be substantially impacted by the change in value
of even a single holding. The price of a share of the Fund can therefore be
expected to fluctuate more than a comparable diversified fund. Moreover, the
Fund's share price may decline even when the overall market is increasing.
Accordingly, an investment in the Fund therefore may entail greater risks than
an investment in a diversified investment company.
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EVENT-DRIVEN STYLE RISK: The event-driven investment approach used by the Fund
carries the additional risk that the event anticipated may occur later than
expected or not at all or may not have the desired effect on the market price of
the security.
FUTURES AND OPTIONS RISKS: The Fund could suffer a loss if it fails to hedge its
portfolio prior to a market decline. Moreover, if the Fund engages in hedging
transactions using futures or options, the Fund could nevertheless suffer a loss
if the hedging is based upon an inaccurate prediction of movements in the
direction of the securities and interest rate markets or the hedging instrument
does not accurately reflect the Fund's portfolio. The Fund may experience
adverse consequences that leave it in a worse position than if such strategies
were not used. As a result, the Fund may not achieve its investment objective.
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 its losses by investing
up to 100% of its assets in short-term money market instruments. If the Fund
does so, it may not achieve its investment objective.
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TARGET MATURITY 2015 FUND
OVERVIEW
OBJECTIVE: The Fund seeks a predictable compounded investment return for
investors who hold their Fund shares until the Fund's maturity.
PRIMARY
INVESTMENT
STRATEGIES: The Fund primarily invests in non-callable zero coupon bonds that
mature on or around the maturity date of the Fund and are issued
or guaranteed by the U.S. government, its agencies and
instrumentalities. The Fund will mature and terminate at the end
of the year 2015. The Fund generally follows a buy and hold
strategy, but may sell an investment when the Fund identifies an
opportunity to increase its yield or to meet redemptions.
PRIMARY
RISKS: If an investment in the Fund is sold prior to the Fund's
maturity, there is substantial interest rate risk. Like other
bonds, zero coupon bonds are sensitive to changes in interest
rates. When interest rates rise, they tend to decline in price,
and when interest rates fall, they tend to increase in price.
Zero coupon bonds are more interest rate sensitive than other
bonds because zero coupon bonds pay no interest to their holders
until their maturities. This means that the market prices of zero
coupon bonds will fluctuate far more than those of bonds that pay
interest periodically. Accordingly, the value of an investment in
the Fund will go up and down, which means that you could lose
money if you liquidate your investment in the Fund prior to the
Fund's maturity.
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.
What about performance?
Because the Fund was new when this prospectus was printed, it has no previous
operating history.
THE FUND IN DETAIL
What are the Target Maturity 2015 Fund's objective, principal investment
strategies, and risks?
OBJECTIVE: The Fund seeks a predictable compounded investment return for
investors who hold their Fund shares until the Fund's maturity.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests at least 65% of its total
assets in zero coupon securities. The vast majority of the Fund's investments
consists of non-callable, zero coupon bonds that mature on or around the
maturity date of the Fund and are direct obligations of the U.S. Treasury. Zero
coupon securities are debt obligations that do not entitle holders to any
periodic payments of interest prior to maturity and therefore are issued and
traded at discounts from their face values. Zero coupon securities may be
created by separating the interest and principal components of securities issued
or guaranteed by the U.S. government or one of its agencies or
instrumentalities, or issued by private corporate issuers. The discounts from
face values at which zero coupon securities are purchased vary depending on the
times remaining until maturities, prevailing interest rates, and the liquidity
of the securities. Because the discounts from face values are known at the time
of investment, investors intending to hold zero coupon securities until maturity
know the value of their investment return at the time of investment, assuming
full payment is made by the issuer upon maturity.
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The Fund seeks zero coupon bonds that will mature on or about the Fund's
maturity date. As the Fund's zero coupon bonds mature, the proceeds will be
invested in short term U.S. government securities. The Fund generally follows a
buy and hold strategy consistent with attempting to provide a predictable
compounded investment return for investors who hold their Fund shares until the
Fund's maturity. On the Fund's maturity date, the Fund's assets will be
converted to cash and distributed, or reinvested in another Fund of Life Series
Fund, at your choice.
Although the Fund generally follows a buy and hold strategy, the Fund may sell
an investment when the Fund identifies an opportunity to increase its yield or
it needs cash to meet redemptions.
PRINCIPAL RISKS: Any investment carries with it some level of risk. In general,
the greater the potential reward of an investment, the greater the risk. Here
are the principal risks of investing in the Target Maturity 2015 Fund:
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.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities paying interest periodically and, accordingly, will
fluctuate far more in response to changes in interest rates than those of
non-zero coupon securities having similar maturities and yields. As a result,
the net asset value of shares of the Fund may fluctuate over a greater range
than shares of other funds that invest in securities that have similar
maturities and yields but that make current distributions of interest.
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.
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FUND MANAGEMENT
First Investors Management Company, Inc. ("FIMCO") is the investment adviser to
each of the Funds in the Life Series Fund. Its address is 95 Wall Street, New
York, NY 10005. It currently is investment adviser to 53 mutual funds or series
of funds with total net assets of approximately $5 billion. Except as noted
below, FIMCO supervises all aspects of each Fund's operations and determines
each Fund's portfolio transactions. For its services, FIMCO receives a fee at an
annual rate of 0.75% of the average daily net assets of each Fund up to and
including $250 million; 0.72% of the average daily net assets in excess of $250
million up to and including $500 million; 0.69% of the average daily net assets
in excess of $500 million up to and including $750 million; and 0.66% of the
average daily net assets over $750 million.
FIMCO and Life Series Fund have retained Arnhold and S. Bleichroeder, Inc. as
the Focused Equity Fund's investment subadviser. Subject to continuing oversight
and supervision by FIMCO and the Board of Trustees, ASB has discretionary
trading authority over all of the Focused Equity Fund's assets. ASB is located
at 1345 Avenue of the Americas, New York, NY 10105. ASB and its affiliates
currently provide investment advisory services to investment companies,
institutions and private clients. As of September 30, 1999, ASB and its
affiliates held investment management authority with respect to more than $____
billion of domestic and international assets. For its subadvisory services,
FIMCO will pay ASB an annualized fee.
The Focused Equity Fund is managed by Colin G. Morris, Senior Vice President of
ASB, who has been responsible for the management of various ASB clients since
January 1993. Prior to joining ASB in 1992, Mr. Morris was a partner at Mabon
Securities, with responsibility over arbitrage investments from 1988 to 1992.
Clark D. Wagner of FIMCO serves as Portfolio Manager of the Target Maturity 2015
Fund. Mr. Wagner also serves as Portfolio Manager of certain other First
Investors Funds. Mr. Wagner has been Chief Investment Officer of FIMCO since
1992.
In addition to the investment risks of the Year 2000 which are disclosed above,
the ability of FIMCO, ASB and their affiliates to price the Funds' 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, ASB and their 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 Funds. FIMCO, ASB and their 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 Funds' other service providers. However,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Funds. Nor can the Funds estimate the extent of any
impact.
BUYING AND SELLING SHARES
How and when do the Funds price their shares?
The share price (which is called "net asset value" or "NAV" per share) for each
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.
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To calculate the NAV, each 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, each 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 Trustees of the Funds.
How do I buy and sell shares?
Investments in each of the Funds may only be made through purchases of variable
annuity contracts or variable life insurance policies offered by FIL. Purchase
payments for variable annuity contracts, less applicable charges or expenses,
are paid into specified unit investment trusts, Separate Account C or Separate
Account D. Variable life insurance policy premiums, less certain expenses, are
paid into a unit investment trust, Separate Account B. The Separate Accounts
pool these proceeds to purchase shares of a Fund designated by purchases of the
variable annuity contracts or variable life insurance policies.
For information about how to buy or sell the variable annuity contracts and
variable life insurance policies, see the Separate Account prospectus which
accompanies this prospectus. It will describe not only the process for buying
and selling contracts and policies but also the fees and charges involved. This
prospectus must be accompanied by a Separate Account prospectus.
ACCOUNT POLICIES
What about dividends and capital gain distributions?
The Separate Accounts which own the shares of the Funds will receive all
dividends and distributions. As described in the attached Separate Account
prospectus, all dividends and distributions are then reinvested by the
appropriate Separate Account in additional shares of the applicable Fund.
To the extent that they have net investment income, each Fund will declare and
pay, on an annual basis, dividends from net investment income. Each Fund will
declare and distribute any net realized capital gains, on an annual basis,
usually after the end of each Fund's fiscal year. Each Fund may make an
additional distribution in any year if necessary to avoid a Federal excise tax
on certain undistributed income and capital gain.
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 Accounts. There are tax consequences associated with investing in the
variable annuity contracts and variable life insurance policies. These tax
consequences are discussed in the accompanying Separate Account prospectus.
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APPENDIX
--------
PERFORMANCE OF SIMILAR FUND MANAGED BY SUBADVISER
At the time this prospectus was printed, the Focused Equity Fund had no
operating history. However, the Focused Equity Fund has an investment objective,
policies and strategies that are substantially similar to those of another fund
managed by the Focused Equity Fund's Subadviser, the First Eagle Fund N.V.
("First Eagle"). First Eagle is organized in a foreign jurisdiction and offered
outside of the United States. ASB has managed First Eagle since its inception in
1967.
Set forth below is information regarding the prior performance of First Eagle,
NOT the performance of the Focused Equity Fund. This information reflects the
total returns of First Eagle during the periods indicated. Since First Eagle
does not pay dividends or make other distributions to its shareholders, the
returns are based upon changes in the value of an investment in First Eagle over
given periods. Total return is based on past results and is not an indication of
future performance. The performance information is provided in two ways: (1) net
of all advisory fees and other expenses, and (2) net of all advisory fees and
expenses except for performance fees. The methodology for calculating the
performance of First Eagle differs from that required to be employed by mutual
funds that are offered in the United States.
Although First Eagle has an investment objective, policies, and strategies that
are substantially similar to those of the Focused Equity Fund, First Eagle's
shares are sold through different distribution channels, it has a different
purchase and redemption cycle (monthly rather than daily), and it has different
expenses. In nine of the ten years for which the performance history of First
Eagle is provided, the total fees paid by First Eagle exceeded those projected
for the Focused Equity Fund. In 1994, the expenses of First Eagle were 1.66%.
First Eagle also is not subject to restrictions imposed by the Investment
Company Act of 1940, as amended, or the Internal Revenue Code of 1986, as
amended. These differences may adversely affect the performance of the Focused
Equity Fund and cause it to differ from the future performance of First Eagle.
The Focused Equity Fund's future performance may be greater or less than the
performance of First Eagle due to, among other things, differences in the sales
charges, expenses, asset sizes and cash flows of the Focused Equity Fund and
First Eagle.
Moreover, past performance is no guarantee of future results. You should not
interpret First Eagle's historical performance as indicative of its future
performance or that of the Focused Equity Fund.
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TEN YEAR PERFORMANCE HISTORY
FIRST EAGLE FUND CLASSES A, B AND C*
<TABLE>
Year Annual Return (Net of all Annual Return (without Standard & Poor's 500 Index
---- ------------------------- ---------------------- ---------------------------
fees and expenses) deducting performance fee**) (with dividends)
------------------ ---------------------------- ----------------
<S> <C> <C> <C>
12/31/89 28.82% 30.91% 31.65%
12/31/90 -11.72% -11.72% -3.14%
12/31/91 18.72% 19.69% 30.48%
12/31/92 18.66% 19.62% 7.64%
12/31/93 23.07% 24.52% 10.05%
12/31/94 -0.38% -0.38% 1.27%
12/31/95 30.69% 32.98% 37.53%
12/31/96 24.37% 25.96% 22.99%
12/31/97 27.84% 30.93% 33.35%
12/31/98 38.86% 43.18% 28.57%
</TABLE>
*Classes A, B and C have the same expense ratio and performance.
**This column shows performance net of all fees and expenses except for
performance fees. Prior to 1997, the management fee was 1.60% of net assets. In
1997 and 1998, the management fee was 1.50%. First Eagle Fund also pays a
performance fee which differs according to the class of shares. For Classes A, B
and C, First Eagle Fund has paid a performance fee in the amount of 10% of the
annual capital appreciation of the First Eagle Fund's share price since October
31, 1996. Prior to that date, the performance fee for Classes A, B and C was 10%
of the annual capital appreciation above a threshold of 10%.
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[FIRST INVESTORS LOGO]
LIFE SERIES FUND
FOCUSED EQUITY
TARGET MATURITY 2015
For investors who want more information about the Funds, the following document
is available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds and is incorporated by reference into this
prospectus.
You can get free copies of the SAI, request other information and discuss your
questions about the Funds by contacting the Funds 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 Funds (including the Funds' 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.: 811-4325
First Investors Life Series Fund)
<PAGE>
FIRST INVESTORS LIFE SERIES FUND
95 WALL STREET (800) 342-7963
NEW YORK, NEW YORK 10005
STATEMENT OF ADDITIONAL INFORMATION
DATED ____________, 1999
This is a Statement of Additional Information ("SAI") for First Investors
Life Series Fund ("Life Series Fund") an open-end, management investment company
consisting of thirteen separate investment portfolios (each, a "Fund," and
collectively, the "Funds"). The objective(s) of each Fund are set forth in the
Life Series Fund's Prospectus. There can be no assurance that any Fund will
achieve its investment objective(s). Investments in the Funds are made through
purchases of the Level Premium Variable Life Insurance Policies ("Policies") or
the Individual Variable Annuity Contracts ("Contracts") offered by First
Investors Life Insurance Company ("First Investors Life"). Policy premiums, net
of certain expenses, are paid into a unit investment trust, First Investors Life
Insurance Company Separate Account B ("Separate Account B"). Purchase payments
for the Contracts, net of certain expenses, are paid into either of two unit
investment trusts, First Investors Life Variable Annuity Fund C ("Separate
Account C") and First Investors Life Variable Annuity Fund D ("Separate Account
D"). Separate Account B, Separate Account C and Separate Account D (the
"Separate Accounts") pool these proceeds to purchase shares of the Funds
designated by purchasers of the Policies or Contracts. TARGET MATURITY 2007
FUND, TARGET MATURITY 2010 FUND and TARGET MATURITY 2015 FUND are only offered
to Contractowners of Separate Account C and Separate Account D.
This SAI is not a prospectus. It should be read in connection with Life
Series Fund's Prospectus dated __________, 1999, which may be obtained free of
cost from the Funds at the address or telephone number noted above.
TABLE OF CONTENTS
PAGE
Investment Strategies and Risks................................ 2
Investment Policies............................................ 11
Portfolio Turnover............................................. 23
Futures and Options Strategies................................. 24
Investment Restrictions........................................ 33
Trustees and Officers.......................................... 34
Management..................................................... 36
Determination of Net Asset Value............................... 39
Allocation of Portfolio Brokerage.............................. 40
Taxes.......................................................... 42
Performance Information........................................ 45
General Information............................................ 49
Appendix A..................................................... 51
Appendix B..................................................... 52
Appendix C..................................................... 53
Appendix D..................................................... 56
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INVESTMENT STRATEGIES AND RISKS
BLUE CHIP FUND
BLUE CHIP FUND seeks to provide investors with high total investment return
consistent with the preservation of capital. The Fund seeks to achieve its
objective by investing, under normal market conditions, at least 65% of its
total assets in equity securities of "Blue Chip" companies, including common and
preferred stocks and securities convertible into common stock, that First
Investors Management Company, Inc. ("FIMCO" or "Adviser") believes have
potential earnings growth that is greater than the average company included in
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). The Fund also
may invest up to 35% of its total assets in the equity securities of non-Blue
Chip companies that the Adviser believes have significant potential for growth
of capital or future income consistent with the preservation of capital. When
market conditions warrant, or when the Adviser believes it is necessary to
achieve the Fund's objective, the Fund may invest up to 25% of its total assets
in fixed income securities. It is the Fund's policy to remain relatively fully
invested in equity securities under all market conditions rather than to attempt
to time the market by maintaining large cash or fixed-income securities
positions when market declines are anticipated. The Fund is appropriate for
investors who are comfortable with a fully invested stock portfolio.
The Fund defines Blue Chip companies as those companies that are included in
the S&P 500. Blue Chip companies are considered to be of relatively high quality
and generally exhibit superior fundamental characteristics, which may include:
potential for consistent earnings growth, a history of profitability and payment
of dividends, leadership position in their industries and markets, proprietary
products or services, experienced management, high return on equity and a strong
balance sheet. Blue Chip companies usually exhibit less investment risk and
share price volatility than smaller, less established companies. Examples of
Blue Chip companies are Microsoft Corp., General Electric Co., Pepsico Inc. and
Bristol-Myers Squibb Co.
The fixed-income securities in which the Fund may invest include money
market instruments (including prime commercial paper, certificates of deposit of
domestic branches of U.S. banks and bankers' acceptances), obligations issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations") (including mortgage-backed
securities) and corporate debt securities. However, no more than 5% of the
Fund's net assets may be invested in corporate debt securities rated below Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P"). The Fund may borrow money for temporary or emergency
purposes in amounts not exceeding 5% of its total assets. The Fund may also
invest up to 10% of its total assets in American Depository Receipts ("ADRs"),
enter into repurchase agreements and make loans of portfolio securities. See
"Investment Policies" for additional information concerning these securities.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
CASH MANAGEMENT FUND
CASH MANAGEMENT FUND seeks to earn a high rate of current income consistent
with the preservation of capital and maintenance of liquidity. The Fund
generally can invest only in securities that mature or are deemed to mature
within 397 days from the date of purchase. In addition, the Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less. In managing the
Fund's investment portfolio, the Adviser may employ various professional money
management techniques in order to respond to changing economic and money market
conditions and to shifts in fiscal and monetary policy. These techniques include
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varying the composition and the average-weighted maturity of the Fund's
portfolio based upon the Adviser's assessment of the relative values of various
money market instruments and future interest rate patterns. The Adviser also may
seek to improve the Fund's yield by purchasing or selling securities to take
advantage of yield disparities among money market instruments that regularly
occur in the money market.
The Fund invests primarily in (1) high quality marketable securities issued
or guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities, (2) bank certificates of deposit, bankers' acceptances,
time deposits and other short-term obligations issued by banks and (3) prime
commercial paper and high quality, U.S. dollar-denominated short-term corporate
bonds and notes. The U.S. Government securities in which the Fund may invest
include a variety of U.S. Treasury securities that differ in their interest
rates, maturities and dates of issue. Securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government may be supported by the
full faith and credit of the United States or by the right of the issuer to
borrow from the U.S. Treasury. See the SAI for additional information on U.S.
Government securities. The Fund may invest in domestic bank certificates of
deposit (insured up to $100,000) and bankers' acceptances (not insured) issued
by domestic banks and savings institutions which are insured by the Federal
Deposit Insurance Corporation ("FDIC") and that have total assets exceeding $500
million. The Fund also may invest in certificates of deposit issued by London
branches of domestic or foreign banks ("Eurodollar CDs"). The Fund may invest in
time deposits and other short-term obligations, including uninsured, direct
obligations bearing fixed, floating or variable interest rates, issued by
domestic banks, foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks. The Fund also
may invest in repurchase agreements with banks that are members of the Federal
Reserve System or securities dealers that are members of a national securities
exchange or are market makers in U.S. Government securities, and, in either
case, only where the debt instrument subject to the repurchase agreement is a
U.S. Treasury or agency obligation. Repurchase agreements maturing in over 7
days are deemed illiquid securities, and can constitute no more than 10% of the
Fund's net assets.
The Fund also may purchase high quality, U.S. dollar denominated short-term
bonds and notes, including variable rate and master demand notes issued by
domestic and foreign corporations (including banks). The Fund may invest in
floating and variable rate demand notes and bonds that permit the Fund, as the
holder, to demand payment of principal at any time, or at specified intervals
not exceeding 397 days, in each case upon not more than 30 days' notice. The
Fund may borrow money for temporary or emergency purposes in amounts not
exceeding 5% of its total assets. When market conditions warrant, the Fund may
purchase short-term, high quality fixed and variable rate instruments issued by
state and municipal governments and by public authorities. See "Investment
Policies" for additional information concerning these securities.
The Fund may purchase only obligations that (1) the Adviser determines
present minimal credit risks based on procedures adopted by the Life Series
Fund's Board of Trustees (the "Board"), and (2) are either (a) rated in one of
the top two rating categories by any two nationally recognized statistical
rating organizations ("NRSROs") (or one, if only one rated the security) or (b)
unrated securities that the Adviser determines are of comparable quality.
Securities qualify as being in the top rating category ("First Tier Securities")
if at least two NRSROs (or one, if only one rated the security) have given it
the highest rating, or unrated securities that the Adviser determines are of
comparable quality. The Fund's purchases of commercial paper are limited to
First Tier Securities. The Fund may not invest more than 5% of its total assets
in securities rated in the second highest rating category ("Second Tier
Securities"). Investments in Second Tier Securities of any one issuer are
limited to the greater of 1% of the Fund's total assets or $1 million. The Fund
generally may invest no more than 5% of its total assets in the securities of a
single issuer (other than securities issued by the U.S. Government, its agencies
or instrumentalities).
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In periods of declining interest rates, the Fund's yield will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates the opposite will be true. Also, when interest rates are falling, net cash
inflows from the continuous sale of the Fund's shares likely will be invested in
portfolio instruments producing lower yields than the balance of the Fund's
portfolio, thereby reducing the Fund's yield. In periods of rising interest
rates, the opposite may be true.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
DISCOVERY FUND
DISCOVERY FUND seeks long-term capital appreciation, without regard to
dividend or interest income. The Fund seeks to achieve its objective by
investing, under normal market conditions, in the common stock of companies with
small to medium market capitalization that the Adviser considers to be
undervalued or less well known in the current marketplace and to have potential
for capital growth.
The Fund seeks to invest in the common stock of companies that the Adviser
believes are undervalued in the current market in relation to fundamental
economic values such as earnings, sales, cash flow and tangible book value; that
are early in their corporate development (I.E., before they become widely
recognized and well known and while their reputations and track records are
still emerging); or that offer the possibility of greater earnings because of
revitalized management, new products or structural changes in the economy. Such
companies primarily are those with small to medium market capitalization, which
the Fund considers to be market capitalization of less than 90% of the weighted
market capitalization of the S&P 600 Smallcap Index (currently $1.5 billion).
The Adviser believes that, over time, these securities are more likely to
appreciate in price than securities whose market prices have already reached
their perceived economic value. In addition, the Fund intends to diversify its
holdings among as many companies and industries as the Adviser deems
appropriate.
Companies that are early in their corporate development may be dependent on
relatively few products or services, may lack adequate capital reserves, may be
dependent on one or two management individuals and may have less of a track
record or historical pattern of performance. In addition, there may be less
information available as to the issuers and their securities may not be well
known to the general public and may not yet have wide institutional ownership.
Securities of these companies may have more potential for growth but also
greater risk than that normally associated with larger, older or better-known
companies.
Investments in securities of companies with small to medium market
capitalization are generally considered to offer greater opportunity for
appreciation and to involve greater risk of depreciation than securities of
companies with larger market capitalization. These include the equity securities
of companies which represent new or changing industries and those which, in the
opinion of the Adviser, represent special situations, the potential future value
of which has not been fully recognized. Growth securities of companies with
small to medium market capitalization which represent a special situation bear
the risk that the special situation will not develop as favorably as expected,
or the situation may deteriorate. For example, a merger with favorable
implications may be blocked, an industrial development may not enjoy anticipated
market acceptance or a bankruptcy may not be as profitably resolved as had been
expected. Because the securities of most companies with small to medium market
capitalization are not as broadly traded as those of companies with larger
market capitalization, these securities are often subject to wider and more
abrupt fluctuations in market price. In the past, there have been prolonged
periods when these securities have substantially underperformed or outperformed
the securities of larger capitalization companies. In addition, smaller
capitalization companies generally have fewer assets available to cushion an
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unforeseen adverse occurrence and thus such an occurrence may have a
disproportionately negative impact on these companies.
The majority of the Fund's investments are expected to be securities listed
on the New York Stock Exchange ("NYSE") or other national securities exchanges,
or securities that have an established over-the-counter ("OTC") market, although
the depth and liquidity of the OTC market may vary from time to time and from
security to security.
The Fund may invest up to 15% of its total assets in common stocks issued by
foreign companies which are traded on a recognized domestic or foreign
securities exchange. In addition to the fundamental analysis of companies and
their industries which it performs for U.S. issuers, the Adviser evaluates the
economic and political climate of the country in which the company is located
and the principal securities markets in which such securities are traded.
Although the foreign stocks in which the Fund invests are primarily denominated
in foreign currencies, the Fund also may invest in ADRs. The Adviser does not
attempt to time actively either short-term market trends or short-term currency
trends in any market. See "Foreign Securities" and "American Depository Receipts
and Global Depository Receipts."
The Fund may borrow money for temporary or emergency purposes in amounts not
exceeding 5% of its total assets. The Fund also may enter into repurchase
agreements and make loans of portfolio securities. For temporary defensive
purposes, the Fund may invest all of its assets in U.S. Government Obligations,
prime commercial paper, certificates of deposit and bankers' acceptances. See
"Investment Policies" for more information regarding these securities.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
FOCUSED EQUITY FUND
FOCUSED EQUITY FUND seeks its objective of capital appreciation by
investing primarily in the equity securities of approximately 20 to 30 U.S.
companies. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in equity securities, including common stocks, preferred
stocks, convertible securities and warrants.
The Fund invests in the stocks of companies it believes to be undervalued
in the current market. The Fund generally seeks to buy stocks of companies that
are involved in corporate or other events such as mergers, acquisitions,
divestitures, financial restructurings, management reorganizations, stock
buy-back programs and industry changes. In addition, the Fund looks for
companies with proven management with a financial interest in the company under
consideration, strong cash flows in excess of internal growth requirements,
established franchises and the potential for at least 50% appreciation within
two years. An investment in a company based on the occurrence of a corporate
event is subject to the risk that the corporate event will not develop as
favorably as expected or that the situation may deteriorate. For example, a
merger with favorable implications may be blocked or an industrial development
may not enjoy anticipated market acceptance. The Fund invests with a two-to-five
year time horizon. It will generally sell a security even before this horizon
expires if it reaches its target valuation, if the company's franchise value
deteriorates to a point where it no longer generates superior cash flows, if an
investment position reaches more than 12% of the Fund's total portfolio value
through appreciation or if better investment opportunities are identified.
The majority of the Fund's investments are expected to be securities
listed on the New York Stock Exchange ("NYSE") or other national securities
exchanges, or securities that have an established over-the-counter ("OTC")
market, although the depth and liquidity of the OTC market may vary from time to
time and from security to security.
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The Fund may invest in the securities of foreign companies when they are
linked to the U.S. companies it has identified as having investment potential;
for example, it may invest in securities of foreign issuers that are involved in
mergers with U.S. companies that are held in the Fund's portfolio. Such foreign
investments usually will be in the form of American Depository Receipts ("ADRs")
or Global Depository Receipts ("GDRs"). See "Foreign Securities" and "American
Depository Receipts and Global Depository Receipts," below.
When market conditions warrant, or when the Fund's Subadviser, Arnhold and
S. Bleichroeder, Inc. ("ASB" or "Subadviser") believes it is necessary to
achieve the Fund's objective, the Fund may invest in fixed-income securities.
The fixed-income securities in which the Fund may invest include money market
instruments (including prime commercial paper, certificates of deposit of
domestic branches of U.S. banks and bankers' acceptances), U.S. Government
Obligations (including mortgage-backed securities) and corporate debt
securities. In addition, the Fund may invest in debt securities rated below Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P") (including debt securities that have been downgraded), or
in unrated debt securities that are of comparable quality as determined by the
Subadviser. Securities rated lower than BBB by S&P or Baa by Moody's, commonly
referred to as "junk bonds" or "high yield securities," are speculative and
generally involve a higher risk of loss of principal and income than
higher-rated securities. See "Debt Securities," "High Yield Securities," and
Appendix A for a description of debt security ratings.
Although the Fund may borrow money, it has no present intention of
borrowing other than for temporary or emergency purposes in amounts not
exceeding 5% of its total assets. The Fund may make loans of portfolio
securities, enter into repurchase agreements and invest in zero coupon
securities and securities issued on a "when-issued" or delayed delivery basis.
In any period of market weakness or of uncertain market or economic conditions,
the Fund may establish a temporary defensive position to preserve capital by
having all or part of its assets invested in short-term fixed-income securities
or retained in cash or cash equivalents.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
GOVERNMENT FUND
GOVERNMENT FUND seeks to achieve a significant level of current income which
is consistent with security and liquidity of principal by investing, under
normal market conditions, at least 65% of its assets in U.S. Government
Obligations (including mortgage-backed securities). The Fund has no fixed policy
with respect to the duration of U.S. Government Obligations it purchases.
Securities issued or guaranteed as to principal and interest (but not market
value) by the U.S. Government include a variety of Treasury securities, which
differ only in their interest rates, maturities and times of issuance. Although
the payment of interest and principal on a portfolio security may be guaranteed
by the U.S. Government or one of its agencies or instrumentalities, shares of
the Fund are not insured or guaranteed by the U.S. Government or any agency or
instrumentality. The net asset value of shares of the Fund generally will
fluctuate in response to interest rate levels. When interest rates rise, prices
of fixed income securities generally decline; when interest rates decline,
prices of fixed income securities generally rise. See "U.S.
Government Obligations" and "Debt Securities."
The Fund may invest in mortgage-backed securities, including Government
National Mortgage Association ("GNMA") certificates, Federal National Mortgage
Association ("FNMA") certificates and Federal Home Loan Mortgage Corporation
("FHLMC") certificates. The Fund also may invest in securities issued or
guaranteed by other U.S. Government agencies or instrumentalities, including:
the Federal Farm Credit System (which may not borrow from the U.S. Treasury and
the securities of which are not guaranteed by the U.S. Government); the Federal
Home Loan Bank (which may borrow from the U.S. Treasury to meet its obligations
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but the securities of which are not guaranteed by the U.S. Government); the
Tennessee Valley Authority and the U.S. Postal Service (each of which may borrow
from the U.S. Treasury to meet it obligations); and the Farmers Home
Administration and the Export-Import Bank (the securities of which are backed by
the full faith and credit of the United States). The Fund may invest in
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. See "Mortgage-Backed Securities."
The Fund may invest up to 35% of its assets in securities other than U.S.
Government Obligations and mortgage-backed securities. These may include: prime
commercial paper, certificates of deposit of domestic branches of U.S. banks,
bankers' acceptances, repurchase agreements (applicable to U.S. Government
Obligations), insured certificates of deposit and certificates representing
accrual on U.S. Treasury securities. The Fund also may make loans of portfolio
securities and invest in zero coupon securities. The Fund may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets
and may invest up to 35% of its net assets in securities issued on when-issued
or delayed delivery basis. See "Investment Policies" for a further discussion of
these securities.
For temporary defensive purposes, the Fund may invest all of its assets in
cash, cash equivalents and money market instruments, including bank certificates
of deposit, bankers' acceptances and commercial paper issued by domestic
corporations, short-term fixed income securities or U.S. Government Obligations.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
GROWTH FUND
The investment objective of GROWTH FUND is long-term capital appreciation.
Current income through the receipt of interest or dividends from investments
will merely be incidental to the Fund's efforts in pursuing its goal. It is the
policy of the Fund to invest, under normal market conditions, primarily in
common stocks and it is anticipated that the Fund will usually be so invested.
It also may invest to a limited degree in convertible securities and preferred
stocks. At least 75% of the value of the Fund's total assets (excluding
securities held for defensive purposes) shall be invested in securities of
companies in industries in which the Adviser, or the Fund's investment
subadviser, Wellington Management Company, LLP ("Subadviser" or "WMC"), believes
opportunities for capital growth exist. The Fund does not intend to concentrate
its investments in a particular industry, but it may invest up to 25% of the
value of its assets in a particular industry. The Fund may invest up to 5% of
its total assets in common stocks issued by foreign companies that are
denominated in U.S. currency; provided, however, that the Fund may invest
without limit in U.S. dollar denominated foreign securities listed on the NYSE.
The Fund may also invest in ADRs and GDRs, purchase securities on a when-issued
or delayed delivery basis and make loans of portfolio securities. The Fund may
borrow money for temporary or emergency purposes in amounts not exceeding 5% of
its total assets and may invest up to 5% of its net assets in securities issued
on a when-issued or delayed delivery basis. For temporary defensive purposes,
the Fund may invest all of its assets in U.S. Government Obligations, investment
grade bonds, prime commercial paper, certificates of deposit, bankers'
acceptances, repurchase agreements and participation interests.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
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HIGH YIELD FUND
HIGH YIELD FUND primarily seeks high current income and secondarily seeks
growth of capital. The Fund actively seeks to achieve its secondary objective to
the extent consistent with its primary objective. The Fund seeks to achieve its
objectives by investing, under normal market conditions, at least 65% of its
total assets in high risk, high yield securities, commonly referred to as "junk
bonds" ("High Yield Securities"). 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 or below BBB by S&P,
or, if unrated, are deemed to be of comparable quality by the 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. See "High Yield Securities" and "Deep Discount Securities."
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 may borrow money for temporary or emergency
purposes in amounts not exceeding 5% of its total assets, make loans of
portfolio securities, enter into repurchase agreements and invest in zero coupon
and pay-in-kind securities. The Fund may also invest up to 5% of its net assets
in securities issued on a when-issued or delayed delivery basis. See "Investment
Policies" for more information concerning these securities.
The Fund may invest up to 35% of its total assets in securities other than
High Yield Securities including: dividend-paying common stocks; securities
convertible into, or exchangeable for, common stock; debt obligations of all
types (including bonds, debentures and notes) rated A or better by Moody's or
S&P; U.S. Government Obligations; warrants; and money market instruments
consisting of prime commercial paper, certificates of deposit of domestic
branches of U.S. banks, bankers' acceptances and repurchase agreements. The
Adviser continually monitors the investments in the Fund's portfolio and
carefully calculates on a case-by-case basis whether to dispose of or retain a
debt obligation that has been downgraded.
In any period of market weakness or of uncertain market or economic
conditions, the Fund may establish a temporary defensive position to preserve
capital by having all or part of its assets invested in investment grade debt
securities or retained in cash or cash equivalents, including bank certificates
of deposit, bankers' acceptances, U.S. Government Obligations and commercial
paper issued by domestic corporations.
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 Baa or BBB by Moody's or S&P, respectively, 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 does not affect the cash
income from the securities, but are reflected in 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 conversion or exercise of warrants and securities
remaining upon the break-up of units or detachment of warrants may be retained
to permit orderly disposition, to establish a long-term holding period for
Federal income tax purposes or to seek capital appreciation.
Because of the greater number of investment considerations involved in
investing in High Yield Securities, the achievement of the Fund's investment
objectives depends more on the Adviser's research abilities than would be the
case if the Fund were investing primarily in securities in the higher rated
categories. Because medium- to lower-rated securities generally involve greater
risks of loss of income and principal than higher-rated securities, investors
should consider carefully the relative risks associated with investments in
securities that carry medium to lower ratings or, if unrated, deemed to be of
comparable quality by the Adviser. See "High Yield Securities" and Appendix C
for a description of corporate bond ratings.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INTERNATIONAL SECURITIES FUND
INTERNATIONAL SECURITIES Fund primarily seeks long-term capital growth and
secondarily seeks to earn a reasonable level of current income. The Fund may
invest in all types of securities issued by companies and government
instrumentalities of any nation approved by the Board, subject only to industry
concentration and issuer diversification restrictions described below and in the
SAI. This investment flexibility permits the Fund to react to rapidly changing
economic conditions among countries which cause the relative attractiveness of
investments within national markets to be subject to frequent reappraisal. It is
a fundamental policy of the Fund that no more than 35% of its total assets will
be invested in securities issued by U.S. companies and U.S. Government
Obligations or cash and cash equivalents denominated in U.S. currency. In
addition, the Fund presently does not intend to invest more than 35% of its
total assets in any one particular country. Further, except for temporary
defensive purposes, the Fund's assets will be invested in securities of at least
three different countries outside the United States. See "Foreign Securities".
For defensive purposes, the Fund may temporarily invest in securities issued by
U.S. companies and the U.S. Government and its agencies and instrumentalities,
or cash equivalents denominated in U.S. currency, without limitation as to
amount.
The Fund may purchase securities traded on any foreign stock exchange. The
Fund may also purchase ADRs and GDRs. See "American Depository Receipts and
Global Depository Receipts." The Fund also may invest up to 25% of its total
assets in unlisted securities of foreign issuers; provided, however, that no
more than 15% of the value of its net assets may be invested in unlisted
securities with a limited trading market and other illiquid investments. The
investment standards for the selection of unlisted securities are the same as
those used in the purchase of securities traded on a stock exchange. The Fund
may also purchase stock index futures contracts and options thereon to maintain
a desired percentage of the Fund invested in stocks in the event of a large cash
flow into the Fund, or to generate additional income from cash held by the Fund.
Stock index futures and options thereon may also be used to adjust country
exposure. When the Fund purchases a stock index futures contract on foreign
stocks, a corresponding foreign currency forward or foreign currency futures
contract is executed to provide the same currency exposure that would result
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from directly owning the underlying foreign stocks. Failure to obtain such
currency exposure would constitute a hedge back into U.S. dollars with respect
to such index futures positions. The value of the Fund's futures positions shall
not exceed 5% of the total assets in the Fund's portfolio.
The Fund may invest in warrants, which may or may not be listed on a
recognized U. S. or foreign exchange. The Fund also may enter into repurchase
agreements, invest up to 5% of its net assets in securities issued on a
when-issued or delayed delivery basis and make loans of portfolio securities.
The Fund also may borrow money for temporary or emergency purposes in amounts
not exceeding 5% of its total assets. In addition, the Fund can engage in
hedging and options strategies.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INVESTMENT GRADE FUND
INVESTMENT GRADE FUND seeks to generate a maximum level of income consistent
with investment in investment grade debt securities. The Fund seeks to achieve
its objective by investing, under normal market conditions, at least 65% of its
total assets in debt securities of U.S. issuers that are rated in the four
highest rated categories by Moody's or S&P, or in unrated securities that are
deemed to be of comparable quality by the Adviser ("investment grade
securities"). The Fund may invest up to 35% of its total assets in U.S.
Government Obligations (including mortgage-backed securities) dividend-paying
common and preferred stocks, obligations convertible into common stocks,
repurchase agreements, debt securities rated below investment grade and money
market instruments. The Fund may invest up to 5% of its net assets in corporate
or government debt securities of foreign issuers which are U.S. dollar
denominated and traded in U.S. markets. The Fund may also borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets.
The Fund may invest up to 5% of its net assets in securities issued on a
when-issued or delayed delivery basis, make loans of portfolio securities and
invest in zero coupon or pay-in-kind securities. See "Investment Policies" for
additional information concerning these securities. For temporary defensive
purposes, the Fund may invest all of its assets in money market instruments,
short-term fixed income securities or U.S. Government Obligations.
The published reports of rating services are considered by the Adviser in
selecting rated securities for the Fund's portfolio. The Adviser also relies,
among other things, on its own credit analysis, which includes a study of the
existing debt's capital structure, the issuer's ability to service debt (or to
pay dividends, if investing in common or preferred stock) and the current trend
of earnings for the issuer. Although up to 100% of the Fund's total assets can
be invested in debt securities rated at least Baa by Moody's or at least BBB by
S&P, or unrated debt securities deemed to be of comparable quality by the
Adviser, no more than 5% of the Fund's net assets may be invested in debt
securities rated lower than Baa by Moody's or BBB by S&P (including securities
that have been downgraded) or, if unrated, deemed to be of comparable quality by
the Adviser, or in any equity securities of any issuer if a majority of the debt
securities of such issuer are rated lower than Baa by Moody's or BBB by S&P.
Securities rated BBB or Baa by S&P or Moody's, respectively, are considered to
be speculative with respect to the issuer's ability to make principal and
interest payments. The Adviser continually monitors the investments in the
Fund's portfolio and carefully evaluates on a case-by-case basis whether to
dispose of or retain a debt security which has been downgraded to a rating lower
than investment grade. See "Debt Securities" and Appendix C for a description of
corporate bond ratings.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
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TARGET MATURITY 2007 FUND
TARGET MATURITY 2010 FUND
TARGET MATURITY 2015 FUND
TARGET MATURITY 2007 FUND seeks to provide a predictable compounded
investment return for investors who hold their Fund shares until the Fund's
maturity, consistent with preservation of capital.
TARGET MATURITY 2010 FUND seeks to provide a predictable compounded
investment return for investors who hold their Fund shares until the Fund's
maturity, consistent with the preservation of capital.
TARGET MATURITY 2015 FUND seeks to provide a predictable compounded
investment return for investors who hold their Fund shares until the Fund's
maturity.
Each Fund seeks its objective by investing, under normal market conditions,
at least 65% of its total assets in zero coupon securities that are issued, or
created by third parties using securities issued by the U.S. Government and its
agencies and instrumentalities. With respect to TARGET MATURITY 2007 FUND, these
investments will mature no later than December 31, 2007, with respect to TARGET
MATURITY 2010 FUND, these investments will mature no later than December 31,
2010, and with respect to TARGET MATURITY 2015 FUND, these investments will
mature no later than December 31, 2015 (such dates being herein collectively
referred to as the "Maturity Date"). On its Maturity Date, a Fund's assets will
be converted to cash and the cash will be distributed or reinvested in another
Fund at the investor's choice.
Each Fund seeks to provide investors with a positive total return at the
Maturity Date which, together with the reinvestment of all dividends and other
distributions, exceeds their original investment in a Fund by a relatively
predictable amount. While the risk of fluctuation in the values of zero coupon
securities is greater when the period to maturity is longer, that risk tends to
diminish as the Maturity Date approaches. Although an investor can redeem shares
at the current net asset value at any time, any investor who redeems his or her
shares prior to the Maturity Date is likely to achieve a different investment
result than the return that was predicted on the date the investment was made,
and may even suffer a significant loss.
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. This discount varies depending on
the time remaining until maturity, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. When held to maturity,
the entire return of a zero coupon security, which consists of the accretion of
the discount, comes from the difference between its issue price and its maturity
value. This difference is known at the time of purchase, so investors holding
zero coupon securities until maturity know the amount of their investment return
at the time of their investment. The market values are subject to greater market
fluctuations from changing interest rates prior to maturity than the values of
debt obligations of comparable maturities that bear interest currently. See
"Zero Coupon Securities-Risk Factors."
A portion of the total realized return from conventional interest-paying
bonds comes from the reinvestment of periodic interest. Since the rate to be
earned on these reinvestments may be higher or lower than the rate quoted on the
interest-paying bonds at the time of the original purchase, the total return of
interest-paying bonds is uncertain even for investors holding the security to
its maturity. This uncertainty is commonly referred to as reinvestment risk and
can have a significant impact on total realized investment return. With zero
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coupon securities, however, there are no cash distributions to reinvest, so
investors bear no reinvestment risk if they hold the zero coupon securities to
maturity.
Each Fund primarily will purchase three types of zero coupon securities. (1)
U.S. Treasury STRIPS (Separately Traded Registered Interest and Principal
Securities), which are created when the coupon payments and the principal
payment are stripped from an outstanding Treasury security by the Federal
Reserve Bank. Bonds issued by the Resolution Funding Corporation (REFCORP) can
also be stripped in this fashion. (2) STRIPS which are created when a dealer
deposits a Treasury security or a Federal agency security with a custodian for
safekeeping and then sells the coupon payments and principal payment that will
be generated by this security. Bonds issued by the Financing Corporation (FICO)
can be stripped in this fashion. (3) Zero coupon securities of a federal agency
and instrumentality either issued directly by an agency in the form of a zero
coupon bond or created by stripping an outstanding security issued thereby.
Each Fund may invest up to 35% of its total assets in the following
instruments: interest- bearing obligations issued by the U.S. Government and its
agencies and instrumentalities (see "U.S. Government Obligations"), including,
for Target Maturity 2007 Fund, zero coupon securities maturing beyond 2007, for
Target Maturity 2010 Fund, zero coupon securities maturing beyond 2010, and for
Target Maturity 2015 Fund, zero coupon securities maturing beyond 2015;
corporate debt securities, including corporate zero coupon securities;
repurchase agreements; and money market instruments consisting of prime
commercial paper, certificates of deposit of domestic branches of U.S. banks and
bankers' acceptances. Each Fund may only invest in debt securities rated A or
better by Moody's or S&P or in unrated securities that are deemed to be of
comparable quality by the Adviser. Debt obligations rated A or better by Moody's
or S&P comprise what are known as high-grade bonds and are regarded as having a
strong capacity to repay principal and make interest payments. See Appendix A
for a description of corporate bond ratings. Each Fund may also invest in
restricted and illiquid securities, make loans of portfolio securities and
invest up to 5% of its net assets in securities issued on a when-issued or
delayed delivery basis. See "Investment Policies" for more information regarding
these types of investments.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
UTILITIES INCOME FUND
The primary investment objective of UTILITIES INCOME FUND is to seek high
current income. Long-term capital appreciation is a secondary objective. The
Fund seeks its objectives by investing, under normal market conditions, at least
65% of its total assets in equity and debt securities issued by companies
primarily engaged in the public utilities industry. Equity securities in which
the Fund may invest include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks, and warrants to purchase
common or preferred stocks. Debt securities in which the Fund may invest will be
rated at the time of investment at least A by Moody's or S&P or, if unrated,
will be deemed to be of comparable quality as determined by the Adviser. Debt
securities rated A or higher by Moody's or S&P or, if unrated, deemed to be of
comparable quality by the Adviser, are regarded as having a strong capacity to
pay principal and interest. The Fund's policy is to attempt to sell, within a
reasonable time period, a debt security in its portfolio which has been
downgraded below A, provided that such disposition is in the best interests of
the Fund and its shareholders. See Appendix A for a description of corporate
bond ratings. The portion of the Fund's assets invested in equity securities and
in debt securities will vary from time to time due to changes in interest rates
and economic and other factors.
The utilities companies in which the Fund invests include companies
primarily engaged in the ownership or operation of facilities used to provide
electricity, gas, water or telecommunications (including telephone, telegraph
and satellite, but not companies engaged in public broadcasting or cable
television). For these purposes, "primarily engaged" means that (1) more than
50% of the company's assets are devoted to the ownership or operation of one or
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more facilities as described above, or (2) more than 50% of the company's
operating revenues are derived from the business or combination of any of the
businesses described above. It should be noted that based on this definition,
the Fund may invest in companies which are also involved to a significant degree
in non-public utilities activities.
Utilities stocks generally offer dividend yields that exceed those of
industrial companies and their prices tend to be less volatile than stocks of
industrial companies. However, utilities stocks can still be affected by the
risks of the stock of industrial companies. Because the Fund concentrates its
investments in public utilities companies, the value of its shares will be
especially affected by factors peculiar to the utilities industry, and may
fluctuate more widely than the value of shares of a fund that invests in a
broader range of industries. See "Utilities Industries."
The Fund may invest up to 35% of its total assets in the following
instruments: debt securities (rated at least A by Moody's or S&P) and common and
preferred stocks of non-utilities companies; U.S. Government Obligations
(including mortgage-backed securities); cash; and money market instruments
consisting of prime commercial paper, bankers' acceptances, certificates of
deposit and repurchase agreements. The Fund may make loans of portfolio
securities and invest up to 5% of its net assets in securities issued on a
when-issued or delayed delivery basis. The Fund may invest up to 10% of its
total assets in ADRs. The Fund may borrow money for temporary or emergency
purposes in amounts not exceeding 5% of its net assets. The Fund also may invest
in zero coupon and pay-in-kind securities. In addition, in any period of market
weakness or of uncertain market or economic conditions, the Fund may establish a
temporary defensive position to preserve capital by having all of its assets
invested in short-term fixed income securities or retained in cash or cash
equivalents.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INVESTMENT POLICIES
AMERICAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECEIPTS. BLUE CHIP FUND,
INTERNATIONAL SECURITIES FUND, GROWTH FUND, UTILITIES INCOME FUND, DISCOVERY
FUND and FOCUSED EQUITY FUND may invest in sponsored and unsponsored ADRs. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities of foreign issuers, and other forms of
depository receipts for securities of foreign issuers. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets. Thus, these securities are not denominated in the same
currency as the securities into which they may be converted. In addition, the
issuers of the securities underlying unsponsored ADRs are not obligated to
disclose material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value to the ADRs. ADRs may
be purchased through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the underlying security and a
depository, whereas a depository may establish an unsponsored facility without
participation by the issuer of the depository security. Holders of unsponsored
depository receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts of the
deposited securities. ADRs are not necessarily denominated in the same currency
as the underlying securities to which they may be connected. Generally, ADRs in
registered form are designed for use in the U.S. securities market and ADRs in
bearer form are designed for use outside the United States.
INTERNATIONAL SECURITIES FUND, GROWTH FUND and FOCUSED EQUITY FUND may also
invest in sponsored and unsponsored GDRs. GDRs are issued globally and evidence
a similar ownership arrangement. Generally, GDRs are designed for trading in
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non-U.S. securities markets. GDRs are considered to be foreign securities by
INTERNATIONAL SECURITIES FUND, GROWTH FUND and FOCUSED EQUITY FUND.
BANKERS' ACCEPTANCES. Each 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 ACCRUAL ON U.S. TREASURY SECURITIES. GOVERNMENT FUND may
purchase certificates, not issued by the U.S. Treasury, which evidence ownership
of future interest, principal or interest and principal payments on obligations
issued by the U.S. Treasury. The actual U.S. Treasury securities will be held by
a custodian on behalf of the certificate holder. These certificates are
purchased with original issue discount and are subject to greater fluctuations
in market value, based upon changes in market interest rates, than
income-producing securities.
CERTIFICATES OF DEPOSIT. Each Fund may invest in bank certificates of
deposit. The FDIC 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.
COMMERCIAL PAPER. Commercial paper is a promissory note issued by a
corporation to finance short-term credit needs which may either be unsecured or
backed by a letter of credit. 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. See
Appendix A for a description of commercial paper ratings.
CONVERTIBLE SECURITIES. Each Fund, other than CASH MANAGEMENT FUND, TARGET
MATURITY 2007 FUND, TARGET MATURITY 2010 FUND and TARGET MATURITY 2015 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 or, for GROWTH FUND and INTERNATIONAL SECURITIES FUND, the
Subadviser 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.
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DEBT SECURITIES. BLUE CHIP FUND, FOCUSED EQUITY FUND, GOVERNMENT FUND,
GROWTH FUND, HIGH YIELD FUND, INVESTMENT GRADE FUND, TARGET MATURITY 2007 FUND,
TARGET MATURITY 2010 Fund, TARGET MATURITY 2015 FUND, and UTILITIES INCOME FUND
may invest in debt securities. The market value of debt securities is influenced
primarily by changes in the level of interest rates. Generally, as interest
rates rise, the market value of debt securities decreases. Conversely, as
interest rates fall, the market value of debt securities increases. Factors
which could result in a rise in interest rates, and a decrease in the market
value of debt securities, include an increase in inflation or inflation
expectations, an increase in the rate of U.S. economic growth, an expansion in
the Federal budget deficit or an increase in the price of commodities such as
oil. In addition, the market value of debt securities is influenced by
perceptions of the credit risks associated with such securities. Credit risk is
the risk that adverse changes in economic conditions can affect an issuer's
ability to pay principal and interest. Sale of debt securities prior to maturity
may result in a loss and the inability to replace the sold securities with debt
securities with a similar yield. Debt obligations rated lower than Baa by
Moody's or BBB by S&P, commonly referred to as "junk bonds," are speculative and
generally involve a higher risk of loss of principal and income than
higher-rated debt securities. See "High Yield Securities" and Appendix C for a
description of corporate bond ratings.
DEEP DISCOUNT SECURITIES. HIGH YIELD FUND may invest up to 15% of its total
assets in securities of companies that are financially troubled, in default or
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. High Yield Securities are subject to certain risks
that may not be present with investments in higher grade debt securities.
EURODOLLAR CERTIFICATES OF DEPOSIT. CASH MANAGEMENT FUND may invest in
Eurodollar CDs, which are issued by London branches of domestic or foreign
banks. Such securities involve risks that differ from certificates of deposit
issued by domestic branches of U.S. banks. These risks include future political
and economic developments, the possible imposition of United Kingdom withholding
taxes on interest income payable on the securities, the possible establishment
of exchange controls, the possible seizure or nationalization of foreign
deposits or the adoption of other foreign governmental restrictions that might
adversely affect the payment of principal and interest on such securities.
FOREIGN GOVERNMENT OBLIGATIONS. HIGH YIELD 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. INTERNATIONAL SECURITIES FUND, HIGH YIELD FUND,
DISCOVERY FUND and FOCUSED EQUITY 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 such
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a Fund may buy foreign currency outright to purchase securities denominated in
that foreign currency at a future date. GROWTH FUND may invest in securities
issued by foreign companies that are denominated in U.S. currency. The Funds
currently do not intend to hedge their foreign investments against the risk of
foreign currency fluctuations. Changes in the value of foreign currencies can
therefore significantly affect a Fund's share price. Investing in foreign
securities involves more risk than investing in securities of U.S. companies. A
Fund can be affected by changes in exchange control regulations, as well as by
economic and political developments. There may be less publicly available
information about foreign companies than comparable U.S. companies; foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards that are comparable to those applied to U.S.
companies; some foreign trading 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 a Fund held
in foreign countries.
INTERNATIONAL SECURITIES FUND'S, DISCOVERY FUND'S and FOCUSED EQUITY FUND'S
investments in emerging markets include investments in countries whose economies
or securities markets are not yet highly developed. Special considerations
associated with these emerging market investments (in addition to the
considerations regarding foreign investments generally) may include, among
others, greater political uncertainties, an economy's dependence on revenues
from particular commodities or on international aid or development assistance,
currency transfer restrictions, a limited number of potential buyers for such
securities and delays and disruptions in securities settlement procedures.
HIGH YIELD SECURITIES. BLUE CHIP FUND, FOCUSED EQUITY FUND, HIGH YIELD FUND
and INVESTMENT GRADE FUND may invest in High Yield Securities. High Yield
Securities are subject to certain risks that may not be present with investments
in higher grade securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. High Yield Securities rated
lower than Baa by Moody's or BBB by S&P, commonly referred to as "junk bonds,"
are speculative and generally involve a higher risk or loss of principal and
income than higher-rated 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 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 a 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 a higher incidence of default. This would affect the value of such securities
and thus a Fund's net asset value. Further, if the issuer of a security owned by
a Fund defaults, that Fund 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
exercises either provision in a declining interest rate market, a Fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if a Fund experiences 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 that
Fund. While it is impossible to protect entirely against this risk,
diversification of a Fund's portfolio and the Adviser's careful analysis of
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prospective portfolio securities helps to minimize the impact of a decrease in
value of a particular security or group of securities in a 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 a
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. HIGH YIELD 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 a Fund's portfolio and carefully
evaluates whether to dispose of or retain High Yield Securities whose credit
ratings have changed. See Appendix C 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 secondary market. To the 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 a 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 Life Series Fund's Board of Trustees to
value High Yield Securities becomes 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. Each Fund may loan securities to qualified
broker dealers or other institutional investors provided: the borrower pledges
to a Fund and agrees to maintain at all times with that 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 a Fund; a Fund pays only
reasonable custodian fees in connection with the loan; and the Adviser or the
Subadviser monitors the creditworthiness of the borrower throughout the life of
the loan. Such loans may be terminated by a Fund at any time and a 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 a Fund. The borrower
must add to the collateral whenever the market value of the securities rises
above the level of such collateral. A 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. Each Fund may make loans, together with illiquid
securities, not in excess of 10% of its total assets.
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MORTGAGE-BACKED SECURITIES. BLUE CHIP FUND, FOCUSED EQUITY FUND, GOVERNMENT
FUND, HIGH YIELD FUND, INVESTMENT GRADE FUND and UTILITIES INCOME FUND may
invest in mortgage-backed securities, including those representing an undivided
ownership interest in a pool of mortgage loans. Mortgage loans made by banks,
savings and loan institutions and other lenders are often assembled into pools,
the interests in which are issued and guaranteed by an agency or instrumentality
of the U.S. Government, though not necessarily by the U.S. Government itself.
Interests in such pools are referred to herein as "mortgage-backed securities."
The market value of these securities will fluctuate as interest rates and market
conditions change. In addition, prepayment of principal by the mortgagees, which
often occurs with mortgage-backed securities when interest rates decline, can
significantly change the realized yield of these securities.
Each of the certificates described below is characterized by monthly
payments to the security holder, reflecting the monthly payments made by the
mortgagees of the underlying mortgage loans. The payments to the security
holders (such as the Fund), like the payments on the underlying loans, represent
both principal and interest. Although the underlying mortgage loans are for
specified periods of time, such as twenty to thirty years, the borrowers can,
and typically do, repay them sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. Thus, in times of declining
interest rates, some higher yielding mortgages might be repaid, resulting in
larger cash payments to a Fund, and a Fund will be forced to accept lower
interest rates when that cash is used to purchase additional securities.
Interest rate fluctuations may significantly alter the average maturity
of mortgage-backed securities, due to the level of refinancing by homeowners.
When interest rates rise, prepayments often drop, which should increase the
average maturity of the mortgage-backed security. Conversely, when interest
rates fall, prepayments often rise, which should decrease the average maturity
of the mortgage-backed security.
GNMA CERTIFICATES. GNMA certificates ("GNMA Certificates") are
mortgage-backed securities, which evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from bonds in that principal is paid
back monthly by the borrower over the term of the loan rather than returned in a
lump sum at maturity. GNMA Certificates that the Fund purchases are the
"modified pass-through" type. "Modified pass-through" GNMA Certificates entitle
the holder to receive a share of all interest and principal payments paid and
owed on the mortgage pool net of fees paid to the "issuer" and GNMA, regardless
of whether or not the mortgagor actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Department of Veteran Affairs
("VA"). The GNMA guarantee is backed by the full faith and credit of the U.S.
Government. GNMA also is empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional mortgage-backed
securities of the types described above. Interest received by the Fund will,
however, be distributed to shareholders. Foreclosures impose no risk to
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principal investment because of the GNMA guarantee. As prepayment rates of the
individual mortgage pools vary widely, it is not possible to predict accurately
the average life of a particular issue of GNMA Certificates.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest
on GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates by the amount of the fees
paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield which will be earned on GNMA Certificates. First,
Certificates may trade in the secondary market at a premium or discount. Second,
interest is earned monthly, rather than semi-annually as with traditional bonds;
monthly compounding raises the effective yield earned. Finally, the actual yield
of a GNMA Certificate is influenced by the prepayment experience of the mortgage
pool underlying it. For example, if the higher-yielding mortgages from the pool
are prepaid, the yield on the remaining pool will be reduced.
FHLMC SECURITIES. FHLMC issues two types of mortgage pass-through
securities, mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC represents
a pro rata share of all interest and principal payments made and owed on the
underlying pool.
FNMA SECURITIES. FNMA issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA Certificates
in that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest on FNMA Certificates and the full return of principal.
GNMA certificates are backed as to the timely payment of principal and
interest by the full faith and credit of the U.S. Government. Payments of
principal and interest on FNMA certificates are guaranteed only by FNMA itself,
not by the full faith and credit of the U.S. Government. FHLMC certificates
represent mortgages for which FHLMC has guaranteed the timely payment of
principal and interest but, like a FNMA certificate, they are not guaranteed by
the full faith and credit of the U.S. Government. Risk of foreclosure of the
underlying mortgages is greater with FHLMC and FNMA securities because, unlike
GNMA Certificates, FHLMC and FNMA securities are not guaranteed by the full
faith and credit of the U.S. Government.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA
certificates or other government mortgage-backed securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Multiclass
pass-through securities are interests in trusts that are comprised of Mortgage
Assets. Unless the context indicates otherwise, references herein to CMOs
include multiclass pass-through securities. Payments of principal of, and
interest on, the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or to make scheduled distributions on
the multiclass pass-through securities. CMOs in which Government Fund may invest
are issued or guaranteed by U.S. Government agencies or instrumentalities, such
as FNMA and FHLMC. See the SAI for more information on CMOs.
STRIPPED MORTGAGE-BACKED SECURITIES. GOVERNMENT FUND, TARGET MATURITY 2007
FUND, TARGET MATURITY 2010 FUND and TARGET MATURITY 2015 FUND may invest in
stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities. SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest while the other class will receive all of the
principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
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investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually volatile in
response to changes in interest rates.
RISKS OF MORTGAGE-BACKED SECURITIES. Investments in mortgage-backed
securities entail market, prepayment and extension risk. Fixed-rate
mortgage-backed securities are priced to reflect, among other things, current
and perceived interest rate conditions. As conditions change, market values will
fluctuate. In addition, the mortgages underlying mortgage-backed securities
generally may be prepaid in whole or in part at the option of the individual
buyer. Prepayment generally increases when interest rates decline. Prepayments
of the underlying mortgages can affect the yield to maturity on mortgage-backed
securities and, if interest rates decline, the prepayment may only be invested
at the then prevailing lower interest rate. As a result, mortgage-backed
securities may have less potential for capital appreciation during periods of
declining interest rates as compared with other U.S. Government securities with
comparable stated maturities. Conversely, rising interest rates may cause
prepayment rates to occur at a slower than expected rate. This may effectively
lengthen the life of a security, which is known as extension risk. Longer term
securities generally fluctuate more widely in response to changes in interest
rates than shorter term securities. Changes in market conditions, particularly
during periods of rapid or unanticipated changes in market interest rates, may
result in volatility and reduced liquidity of the market value of certain
mortgage-backed securities.
PARTICIPATION INTERESTS. Participation interests which may be held by
GOVERNMENT FUND are pro rata interests in securities held either by banks which
are members of the Federal Reserve System or securities dealers who are members
of a national securities exchange or are market makers in government securities,
which are represented by an agreement in writing between the Fund and the entity
in whose name the security is issued, rather than possession by the Fund. The
Fund will purchase participation interests only in securities otherwise
permitted to be purchased by the Fund, and only when they are evidenced by
deposit, safekeeping receipts, or book-entry transfer, indicating the creation
of a security interest in favor of the Fund in the underlying security. However,
the issuer of the participation interests to the Fund will agree in writing,
among other things: to promptly remit all payments of principal, interest and
premium, if any, to the Fund once received by the issuer; to repurchase the
participation interest upon seven days' notice; and to otherwise service the
investment physically held by the issuer, a portion of which has been sold to
the Fund.
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's 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. A repurchase agreement essentially is a short-term
collateralized loan. The lender (a Fund) agrees to purchase a security from a
borrower (typically a broker-dealer) at a specified price. The borrower
simultaneously agrees to repurchase that same security at a higher price on a
future date (which typically is the next business day). The difference between
the purchase price and the repurchase price effectively constitutes the payment
of interest. In a standard repurchase agreement, the securities which serve as
collateral are transferred to a Fund's custodian bank. In a "tri-party"
repurchase agreement, these securities would be held by a different bank for the
benefit of the Fund as buyer and the broker-dealer as seller. In a "quad-party"
repurchase agreement, the Fund's custodian bank also is made a party to the
agreement. Each Fund may enter into repurchase agreements with banks which are
members of the Federal Reserve System or securities dealers who are members of a
national securities exchange or are market makers in government securities.
GOVERNMENT FUND may enter into repurchase agreements only where the debt
instrument subject to the agreement is a U.S. Government Obligation. The period
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of these repurchase agreements will usually be short, from overnight to one
week, and at no time will a 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. Each Fund will always receive, as
collateral, securities whose market value, including accrued interest, which
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
custodian. If the seller defaults, a 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 a Fund may be delayed or
limited.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS. No Fund, other than CASH
MANAGEMENT FUND, will 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. CASH MANAGEMENT
FUND may invest up to 10% of its net assets in illiquid securities. 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 or the
Adviser or a Fund Subadviser has determined under Board-approved guidelines are
liquid.
Under current guidelines of the staff of the Securities and Exchange
Commission ("SEC"), interest-only and principal-only classes of fixed-rate
mortgage-backed securities in which GOVERNMENT FUND may invest are considered
illiquid. However, such securities issued by the U.S. Government or one of its
agencies or instrumentalities will not be considered illiquid if the Adviser has
determined that they are liquid pursuant to guidelines established by the Board.
GOVERNMENT FUND, TARGET MATURITY 2007 FUND, TARGET MATURITY 2010 FUND and TARGET
MATURITY 2015 FUND may not be able to sell illiquid securities when the Adviser
considers it desirable to do so or may have to sell such securities at a price
lower than could be obtained if they were more liquid. Also the sale of illiquid
securities may require more time and may result in higher dealer discounts and
other selling expenses than does the sale of securities that are not illiquid.
Illiquid securities may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on these Fund's net asset value.
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, a 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, a 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
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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
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such portfolio securities and a Fund might be unable to dispose of such
securities promptly or at reasonable prices.
OTC options and their underlying collateral are also considered illiquid
investments. FOCUSED EQUITY FUND AND INTERNATIONAL SECURITIES FUND may invest in
OTC options. If either of those Funds did so, the assets used as cover for OTC
options written by the Fund would not be considered illiquid unless the OTC
options were sold to qualified dealers who agreed that the Fund may repurchase
any OTC option it wrote at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeded the intrinsic value of the option.
STRIPPED U.S. TREASURY SECURITIES. GOVERNMENT FUND, TARGET MATURITY 2007
FUND, TARGET MATURITY 2010 FUND and TARGET MATURITY 2015 FUND may invest in
separated or divided U.S. Treasury securities. These instruments represent a
single interest, or principal, payment on a U.S. Treasury bond which has been
separated from all the other interest payments as well as the bond itself. When
a Fund purchases such an instrument, it purchases the right to receive a single
payment of a set sum at a known date in the future. The interest rate on such an
instrument is determined by the price a Fund pays for the instrument when it
purchases the instrument at a discount under what the instrument entitles a Fund
to receive when the instrument matures. The amount of the discount a Fund will
receive will depend upon the length of time to maturity of the separated U.S.
Treasury security and prevailing market interest rates when the separated U.S.
Treasury security is purchased. Separated U.S. Treasury securities can be
considered a zero coupon investment because no payment is made to a Fund until
maturity. The market values of these securities are much more susceptible to
change in market interest rates than income-producing securities. These
securities are purchased with original issue discount and such discount is
includable as gross income to a Fund shareholder over the life of the security.
TIME DEPOSITS. CASH MANAGEMENT FUND may invest in time deposits. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. For the most part, time
deposits that may be held by the Fund would not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the FDIC.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in U.S. Government
Obligations. U.S. Government Obligations include (1) U.S. Treasury obligations
(which differ only in their interest rates, maturities and times of issuance),
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.
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UTILITIES INDUSTRIES. Many utilities companies, especially electric and gas
and other energy-related utilities companies, have historically been subject to
the risk of increases in fund and other operating costs, changes in interest
rates on borrowing for capital improvement programs, changes in applicable laws
and regulations, and costs and operating constraints associated with compliance
with environmental regulations.
In recent years, regulatory changes in the United States have increasingly
allowed utilities companies to provide services and products outside their
traditional geographical areas and line of business, creating new areas of
competition with the utilities industries. This trend towards deregulation and
the emergence of new entrants have caused non-regulated providers of utilities
services to become a significant part of the utilities industries. The Adviser
believes that the emergence of competition and deregulation will result in
certain utilities companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
business from increased competition and may be less profitable.
Certain utilities, especially gas and telephone utilities, have in recent
years been affected by increased competition, which could adversely affect the
profitability of such utilities companies. In addition, expansion by companies
engaged in telephone communication services of their non-regulated activities
into other businesses (such as cellular telephone services, data processing
equipment retailing, computer services and financial services) has provided the
opportunity for increases in earnings and dividends at faster rates than have
been allowed in traditional regulated businesses. However, technological
innovations and other structural changes also could adversely affect the
profitability of such companies. Although the Adviser seeks to take advantage of
favorable investment opportunities that may arise from these structural changes
there can be no assurance that the Fund will benefit from any such changes.
Foreign utilities companies may be more heavily regulated than U.S.
utilities companies, which may result in increased costs or otherwise adversely
affect the operations of such companies. The securities of foreign utilities
companies also have lower dividend yields than U.S. utilities companies. The
Fund's investments in foreign issuers may include recently privatized
enterprises, in which the Fund's participation may be limited or otherwise
affected by local law. There can be no assurance that governments with
privatization programs will continue such programs or that privatization will
succeed in such countries.
Because securities issued by utilities companies are particularly sensitive
to movement in interest rates, the equity securities of such companies are more
affected by movements in interest rates than are the equity securities of other
companies.
Each of these risks could adversely affect the ability and inclination of
public utilities companies to declare or pay dividends and the ability of
holders of common stock, such as UTILITIES INCOME FUND, to realize any value
from the assets of the company upon liquidation or bankruptcy.
VARIABLE RATE AND FLOATING RATE NOTES. CASH MANAGEMENT FUND may invest in
derivative variable rate and floating rate notes. Issuers of such notes include
corporations, banks, broker-dealers and finance companies. Variable rate notes
include master demand notes which are obligations permitting the holder to
invest fluctuating amounts, that may change daily without penalty, pursuant to
direct arrangements between the Fund, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such obligations
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the obligations plus accrued
interest upon a specified number of days' notice to the holders of such
obligations.
The interest rate on a floating rate obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate obligation is adjusted
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automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated that such instruments generally will be traded,
and there is generally no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
right of the Fund to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies. The Fund will invest in obligations that are unrated
only if the Adviser determines that, at the time of investment, the obligations
are of comparable quality to the other obligations in which the Fund may invest.
The Adviser, on behalf of the Fund, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate obligations in
the Fund's portfolio.
VARIABLE RATE DEMAND INSTRUMENTS. CASH MANAGEMENT FUND may invest in
variable rate demand instruments ("VRDIs"). VRDIs generally are revenue bonds,
issued primarily by or on behalf of public authorities, and are not backed by
the taxing power of the issuing authority. The interest on VRDIs is adjusted
periodically, and the holder of a VRDI can demand payment of all unpaid
principal plus accrued interest from the issuer on not more than seven calendar
days' notice. An unrated VRDI purchased by the Fund must be backed by a standby
letter of credit of a creditworthy financial institution or a similar obligation
of at least equal quality. The Fund periodically reevaluates the credit risks of
such unrated instruments. There is a recognized after-market for VRDIs. VRDIs
may include instruments where adjustments to interest rates are limited either
by state law or the instruments themselves. As a result, these instruments may
experience greater changes in value than would otherwise be the case. The
maturity of VRDIs is deemed to be the longer of the (a) demand period or (b)
time remaining until the next adjustment to the interest rate thereon,
regardless of the stated maturity on the instrument. Benefits of investing in
VRDIs may include reduced risk of capital depreciation and increased yield when
market interest rates rise. However, owners of such instruments forego the
opportunity for capital appreciation when market interest rates fall.
WARRANTS. FOCUSED EQUITY FUND, HIGH YIELD FUND, INTERNATIONAL SECURITIES
FUND and UTILITIES INCOME 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 a greater risk that warrants
might drop in value at a faster rate than the underlying stock. HIGH YIELD FUND
may invest up to 35% of its total assets in warrants. International Securities
Fund may invest up to 15% of its total assets in warrants. UTILITIES INCOME FUND
may invest up to 65% of its total assets in warrants.
WHEN-ISSUED SECURITIES. FOCUSED EQUITY FUND, GROWTH FUND, HIGH YIELD FUND,
INTERNATIONAL SECURITIES FUND, INVESTMENT GRADE FUND, TARGET MATURITY 2007 FUND,
TARGET MATURITY 2010 FUND, TARGET MATURITY 2015 FUND and UTILITIES INCOME FUND
may each invest up to 5%, and GOVERNMENT FUND may invest up to 25%, of its net
assets in securities issued on a when-issued or delayed delivery basis. A Fund
generally would not pay for such securities or start earning interest on them
until they are issued or received. However, when a 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 a Fund on a
when-issued basis may result in such Fund incurring a loss or missing an
opportunity to make an alternative investment. When a 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 a 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, a Fund will pay for the
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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 a Fund is committed to purchase. 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
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. Original issue discount earned
each year on zero coupon securities and the "interest" on pay-in-kind securities
must be accounted for by the Fund that holds the securities for purposes of
determining the amount it must distribute that year to continue to qualify for
tax treatment as a regulated investment company. Thus, a 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 a
Fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A Fund will not be able to purchase additional income-producing
securities with cash used to make such distributions, and its current income
ultimately could be reduced as a result.
ZERO COUPON SECURITIES-RISK FACTORS. Zero coupon securities are debt
securities and thus are subject to the same risk factors as all debt securities.
See "Debt Securities-Risk Factors." The market prices of zero coupon securities,
however, 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. As a result, the net asset value of
shares of the TARGET MATURITY 2007 FUND, TARGET MATURITY 2010 FUND and TARGET
MATURITY 2015 FUND may fluctuate over a greater range than shares of the other
Funds or mutual funds that invest in debt obligations having similar maturities
but that make current distributions of interest.
Zero coupon securities can be sold prior to their due date in the
secondary market at their then prevailing market value, which depends primarily
on the time remaining to maturity, prevailing levels of interest rates and the
perceived credit quality of the issuer. The prevailing market value may be more
or less than the securities' value at the time of purchase. While the objective
of the TARGET MATURITY 2007 FUND, TARGET MATURITY 2010 FUND and TARGET MATURITY
2015 FUND is to seek a predictable compounded investment return for investors
who hold their Fund shares until that Fund's maturity, a Fund cannot assure that
it will be able to achieve a certain level of return due to the possible
necessity of having to sell certain zero coupon securities to pay expenses,
dividends or to meet redemptions at times and at prices that might be
disadvantageous or, alternatively, the need to invest assets received from new
purchases at prevailing interest rates, which would expose a Fund to
reinvestment risk. In addition, no assurance can be given as to the liquidity of
the market for certain of these securities. Determination as to the liquidity of
such securities will be made in accordance with guidelines established by the
Board. In accordance with such guidelines, the Adviser will monitor each Fund's
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information.
PORTFOLIO TURNOVER
Although each Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold from time to time without regard to
the length of time they have been held when, in the opinion of the Fund's
Adviser or Subadviser, investment considerations warrant such action. Portfolio
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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 a 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."
The rate of portfolio turnover for the fiscal year ended December 31, 1997
for the BLUE CHIP FUND, DISCOVERY FUND, GROWTH FUND, HIGH YIELD FUND,
INTERNATIONAL SECURITIES FUND, INVESTMENT GRADE FUND, TARGET MATURITY 2007 FUND,
TARGET MATURITY 2010 FUND And UTILITIES INCOME FUND was 63%, 85%, 27%, 40%, 71%,
41%, 1%, 13% and 64%, respectively. The GOVERNMENT FUND was substantially
restructured during 1997 to improve its total return. In particular, the Fund
purchased seasoned, high coupon mortgage-backed bonds with very low prepayments;
and the Fund purchased U.S. Treasury and Agency securities to extend its
duration. In addition, the Fund occasionally bought or sold Treasury and Agency
securities to make incremental changes in the Fund's duration. This resulted in
a portfolio turnover rate for the fiscal year ended December 31, 1997 of 134%.
The rate of portfolio turnover for the fiscal year ended December 31, 1998 for
the BLUE CHIP FUND, DISCOVERY FUND, GROWTH FUND, HIGH YIELD FUND, INTERNATIONAL
SECURITIES FUND, INVESTMENT GRADE FUND, TARGET MATURITY 2007 FUND, TARGET
MATURITY 2010 FUND, UTILITIES INCOME FUND AND GOVERNMENT FUND was 91%, 121%,
26%, 42%, 109%, 60%, 1%, 0%, 105% and 107%, respectively.
FUTURES AND OPTIONS STRATEGIES
None of the Funds other than the FOCUSED EQUITY FUND and INTERNATIONAL
SECURITIES FUND currently intends to engage in futures and options trading. The
following discussion describes all of the futures and options strategies in
which a Fund could legally engage. The FOCUSED EQUITY FUND engages in such
strategies relatively infrequently and over relatively short periods of time.
Furthermore, it is anticipated that any hedging strategy that the FOCUSED EQUITY
FUND may decide to employ will most likely be effected by buying puts on the
overall market or an index, such as puts on the Standard & Poor's 500 Composite
Stock Price Index. INTERNATIONAL SECURITIES FUND has only been authorized to buy
futures contracts on foreign securities exchanges to gain exposure to a foreign
securities market in advance of making purchases of equity securities in that
market, to put cash at work while seeking equity securities to purchase, and to
adjust country weightings by gaining exposure to a country. INTERNATIONAL
SECURITIES FUND has not been authorized to take short positions in futures
contracts to hedge against a decline in a foreign securities market. The FOCUSED
EQUITY FUND and INTERNATIONAL SECURITIES FUND will only engage in strategies
that are also permitted by the Commodities Futures Trading Commission ("CFTC").
The instruments described below are sometimes referred to collectively as
"Hedging Instruments." Certain special characteristics of, and risks associated
with, using Hedging Instruments are discussed below. Use of these instruments is
subject to the applicable regulations of the SEC, the several options and
futures exchanges upon which options and futures contracts are traded and the
CFTC. The discussion of these strategies does not imply that the Fund will use
them to hedge against risks or for any other purpose.
Each Fund may buy and sell put and call options on stock indices in domestic
or foreign securities and foreign currencies that are traded on national
securities exchanges or in the OTC market to enhance income or to hedge the
Fund's portfolio. Each Fund also may write put and covered call options to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in the price of securities (or currencies) it intends to purchase. Each
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Fund also may purchase put and call options to offset previously written put and
call options of the same series. Each Fund also may write put and call options
to offset previously purchased put and call options of the same series. Other
than to offset closing transactions, each Fund will write only covered call
options, including options on futures contracts.
Each Fund may buy and sell financial futures contracts and options thereon
that are traded on a commodities exchange or board of trade for hedging
purposes. These futures contracts and related options may be on stock indices,
financial indices, debt securities or foreign currencies. Each Fund also may
enter into forward currency contracts.
Participation in the options or futures markets involves investment risks
and transaction costs to which a Fund would not be subject absent the use of
these strategies. If a Fund's Subadviser's prediction of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to a Fund may leave the Fund in a worse position than if
such strategies were not used. A Fund might not employ any of the strategies
described below, and there can be no assurance that any strategy will succeed.
The use of these strategies involve certain special risks, including (1)
dependence on a Fund's Subadviser's ability to predict correctly movements in
the direction of interest rates and securities prices, (2) imperfect correlation
between the price of options, futures contracts and options thereon and
movements in the prices of the securities being hedged, (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities, and (4) the possible absence of a liquid secondary market
for any particular instrument at any time.
COVER FOR HEDGING AND OPTION INCOME STRATEGIES. The Funds will not use
leverage in its hedging and option income strategies. The Funds will not enter
into a hedging or option income strategy that exposes a Fund to an obligation to
another party unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options or futures contracts or (2) cash and/or
liquid assets with a value sufficient at all times to cover its potential
obligations. The Funds will comply with guidelines established by the SEC with
respect to coverage of hedging and option income strategies by mutual funds and,
if required, will set aside cash and/or liquid assets in a segregated account
with its custodian in the prescribed amount. Securities, currencies or other
options or futures positions used for cover and securities held in a segregated
account cannot be sold or closed out while the hedging or option income strategy
is outstanding unless they are replaced with similar assets. As a result, there
is a possibility that the use of cover or segregation involving a large
percentage of a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.
OPTIONS STRATEGIES. Each Fund may purchase call options on securities that a
Fund's Subadviser intends to include in a Fund's portfolio in order to fix the
cost of a future purchase. Call options also may be used as a means of
participating in an anticipated price increase of a security. In the event of a
decline in the price of the underlying security, use of this strategy would
serve to limit a Fund's potential loss on the option strategy to the option
premium paid; conversely, if the market price of the underlying security
increases above the exercise price and each Fund either sells or exercises the
option, any profit eventually realized will be reduced by the premium. Each Fund
may purchase put options in order to hedge against a decline in the market value
of securities held in its portfolio. The put option enables a Fund to sell the
underlying security at the predetermined exercise price; thus the potential for
loss to a Fund below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise price
of the put option, any profit a Fund realizes on the sale of the security will
be reduced by the premium paid for the put option less any amount for which the
put option may be sold.
Each Fund may write covered call options on securities to increase income in
the form of premiums received from the purchasers of the options. Because it can
be expected that a call option will be exercised if the market value of the
underlying security increases to a level greater than the exercise price, the
Funds will write covered call options on securities generally when a Fund's
Subadviser believes that the premium received by a Fund, plus anticipated
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appreciation in the market price of the underlying security up to the exercise
price of the option, will be greater than the total appreciation in the price of
the security. The strategy may be used to provide limited protection against a
decrease in the market price of the security in an amount equal to the premium
received for writing the call option less any transaction costs. Thus, if the
market price of the underlying security held by a Fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by a Fund. If, however, there is an increase in the market price of the
underlying security and the option is exercised, a Fund will be obligated to
sell the security at less than its market value. Each Fund gives up the ability
to sell the portfolio securities used to cover the call option while the call
option is outstanding. Such securities may also be considered illiquid in the
case of OTC options written by a Fund, and therefore subject to a Fund's
limitation on investments in illiquid securities. See "Restricted Securities and
Illiquid Investments." In addition, the Funds could lose the ability to
participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely be offset by an
increase in the cost of closing out the call option (or could be negated if the
buyer chose to exercise the call option at an exercise price below the
securities' current market value).
Each Fund may purchase put and call options and write covered call options
on stock indices in much the same manner as the more traditional equity and debt
options discussed above, except that stock index options may serve as a hedge
against overall fluctuations in the securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a particular
security. A stock index assigns relative values to the stock included in the
index and fluctuates with changes in such values. Stock index options operate in
the same way as the more traditional equity options, except that settlements of
stock index options are effected with cash payments and do not involve delivery
of securities. Thus, upon settlement of a stock index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the stock index. The effectiveness of
hedging techniques using stock index options will depend on the extent to which
price movements in the stock index selected correlate with price movements of
the securities in which each Fund invests.
Each Fund may write put options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) the obligation to buy, the
underlying security at the exercise price during the option period. So long as
the obligation of the writer continues, the writer may be assigned an exercise
notice by the broker-dealer through which such option was sold, requiring it to
make payment of the exercise price against delivery of the underlying security.
The operation of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options. Each Fund may
write covered put options in circumstances when a Fund's Subadviser believes
that the market price of the securities will not decline below the exercise
price less the premiums received. If the put option is not exercised, a Fund
will realize income in the amount of the premium received. This technique could
be used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying security
would decline below the exercise price less the premiums received, in which case
a Fund would expect to suffer a loss.
Currently, many options on equity securities and options on currencies are
exchange-traded, whereas options on debt securities are primarily traded on the
OTC market. Although many options on currencies are exchange-traded, the
majority of such options are traded on the OTC market. Exchange-traded options
in the U.S. are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between a Fund and the opposite party with no clearing organization guarantee.
Thus, when a Fund purchases an OTC option, it relies on the dealer from which it
has purchased the OTC option to make or take delivery of the securities
underlying the option. Failure by the dealer to do so would result in the loss
of the premium paid by a Fund as well as the loss of the expected benefit of the
transaction.
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FOREIGN CURRENCY OPTIONS AND RELATED RISKS. A Fund may take positions in
options on foreign currencies in order to hedge against the risk of foreign
exchange rate fluctuations on foreign securities the Fund holds in its portfolio
or intends to purchase. For example, if the Fund enters into a contract to
purchase securities denominated in a foreign currency, it could effectively fix
the maximum U.S. dollar cost of the securities by purchasing call options on
that foreign currency. Similarly, if the Fund held securities denominated in a
foreign currency, and anticipated a decline in the value of that currency
against the U.S. dollar, the Fund could hedge against such a decline by
purchasing a put option on the currency involved. The Fund's ability to
establish and close out positions in such options is subject to the maintenance
of a liquid secondary market. Although the Fund will not purchase or write such
options unless and until, in the Subadviser's opinion, the market for them has
developed sufficiently to ensure that the risks in connection with such options
are not greater than the risks in connection with the underlying currency, there
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
where rates may be less favorable. The interbank market in foreign currencies is
a global, around-the-clock market. To the extent that the U.S. options markets
are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets until they reopen.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. Each Fund may
effectively terminate their right or obligation under an option by entering into
a closing transaction. If a Fund wishes to terminate its obligation to sell
securities or currencies under a put or call option it has written, the Fund may
purchase a put or call option of the same series (that is, an option identical
in its terms to the put or call option previously written); this is known as a
closing purchase transaction. Conversely, in order to terminate its right to
purchase or sell specified securities or currencies under a call or put option
it has purchased, a Fund may write an option of the same series, as the option
held; this is known as a closing sale transaction. Closing transactions
essentially permit a Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. Whether a profit or
loss is realized from a closing transaction depends on the price movement of the
underlying index, security or currency and the market value of the option.
The value of an option position will reflect, among other things, the
current market price of the underlying security, stock index or currency, the
time remaining until expiration, the relationship of the exercise price to the
market price, the historical price volatility of the underlying security, stock
index or currency and general market conditions. For this reason, the successful
use of options depends upon a Fund's Subadviser's ability to forecast the
direction of price fluctuations in the underlying securities or currency markets
or, in the case of stock index options, fluctuations in the market sector
represented by the index selected.
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Options normally have expiration dates of up to nine months. Unless an
option purchased by each Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the amount of
the premium paid and any transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. The ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market. Although each Fund intends to purchase or write
only those exchange-traded options for which there appears to be a liquid
secondary market, there is no assurance that a liquid secondary market will
exist for any particular option at any particular time. Closing transactions may
be effected with respect to options traded in the OTC markets (currently the
primary markets for options on debt securities) only by negotiating directly
with the other party to the option contract or in a secondary market for the
option if such market exists. Although each Fund will enter into OTC options
only with dealers that agree to enter into, and that are expected to be capable
of entering into, closing transactions with the Fund, there is no assurance that
the Fund will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. In the event of insolvency of the opposite party, a
Fund may be unable to liquidate an OTC option. Accordingly, it may not be
possible to effect closing transactions with respect to certain options, with
the result that a Fund would have to exercise those options that it has
purchased in order to realize any profit. With respect to options written by a
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because each Fund must maintain a covered
position with respect to any call option it writes, the Fund may not sell the
underlying assets used to cover an option during the period it is obligated
under the option. This requirement may impair each Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Stock index options are settled exclusively in cash. If a Fund purchases an
option on a stock index, the option is settled based on the closing value of the
index on the exercise date. Thus, a holder of a stock index option who exercises
it before the closing index value for that day is available runs the risk that
the level of the underlying index may subsequently change. For example, in the
case of a call option, if such a change causes the closing index value to fall
below the exercise price of the option on the index, the exercising holder will
be required to pay the difference between the closing index value and the
exercise price of the option.
Each Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, a Fund also may
save on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
FUTURES STRATEGIES. Each Fund may engage in futures strategies to attempt
to reduce the overall investment risk that would normally be expected to be
associated with ownership of the securities in which it invests. The Funds may
sell foreign currency futures contracts to hedge against possible variations in
the exchange rate of the foreign currency in relation to the U.S. dollar. In
addition, the Funds may sell foreign currency futures contracts when a Fund's
Subadviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market value of the Fund's foreign securities
holdings. In this case, the sale of futures contracts on the underlying currency
may reduce the risk to each Fund of a reduction in market value caused by
foreign currency variations and, by so doing, provide an alternative to the
liquidation of securities positions and resulting transaction costs. When a
Fund's Subadviser anticipates a significant foreign exchange rate increase while
intending to invest in a security denominated in that currency, each Fund may
purchase a foreign currency futures contract to hedge against that increase
pending completion of the anticipated transaction. Such a purchase would serve
as a temporary measure to protect a Fund against any rise in the foreign
exchange rate that may add additional costs to acquiring the foreign security
position. Each Fund also may purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. Each
Fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to
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invest in a security denominated in that currency. Each Fund may purchase put
options or write call options on foreign currency futures contracts as a partial
hedge against a decline in the foreign exchange rates or the value of its
foreign portfolio securities.
Each Fund may sell stock index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of each Fund's portfolio. To the extent that a portion of each Fund's
portfolio correlates with a given stock index, the sale of futures contracts on
that index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. Each Fund may
purchase a stock index futures contract if a significant market or market sector
advance is anticipated. Such a purchase would serve as a temporary substitute
for the purchase of individual stocks, which stocks may then be purchased in an
orderly fashion. This strategy may minimize the effect of all or part of an
increase in the market price of securities that a Fund intends to purchase. A
rise in the price of the securities should be partially or wholly offset by
gains in the futures position.
Each Fund may purchase call options on stock index futures to hedge against
a market advance in equity securities that each Fund plans to purchase at a
future date. Each Fund may write covered call options on stock index futures as
a partial hedge against a decline in the prices of stocks held in the Fund's
portfolio. Each Fund also may purchase put options on stock index futures
contracts.
Each Fund may use interest rate futures contracts and options thereon to
hedge the debt portion of its portfolio against changes in the general level of
interest rates. Each Fund may purchase an interest rate futures contract when it
intends to purchase debt securities but has not yet done so. This strategy may
minimize the effect of all or part of an increase in the market price of those
securities because a rise in the price of the securities prior to their purchase
may either be offset by an increase in the value of the futures contract
purchased by each Fund or avoided by taking delivery of the debt securities
under the futures contract. Conversely, a fall in the market price of the
underlying debt securities may result in a corresponding decrease in the value
of the futures position. Each Fund may sell an interest rate futures contract in
order to continue to receive the income from a debt security, while endeavoring
to avoid part or all of the decline in the market value of that security that
would accompany an increase in interest rates.
Each Fund may purchase a call option on an interest rate futures contract to
hedge against a market advance in debt securities that each Fund plans to
acquire at a future date. Each Fund also may write covered call options on
interest rate futures contracts as a partial hedge against a decline in the
price of debt securities held in the Fund's portfolio or purchase put options on
interest rate futures contracts in order to hedge against a decline in the value
of debt securities held in the Fund's portfolio.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described above. Further, settlement of a foreign currency futures contract must
occur within the country issuing the underlying currency. Thus, a Fund must
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to pay any
fees, taxes or charges associated with such delivery that are assessed in the
issuing country.
Options on foreign currency futures contracts may involve certain additional
risks. Trading of such options is relatively new. The ability to establish and
close out positions on such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, a Fund will not purchase or write options
on foreign currency futures contracts unless and until, in the Subadviser's
opinion, the market for such options has developed sufficiently that the risks
in connection with such options are not greater than the risks in connection
with transactions in the underlying futures contracts. Compared to the purchase
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or sale of foreign currency futures contracts, the purchase of call or put
options thereon involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a foreign currency futures contract would result in a loss, such as when there
is no movement in the price of the underlying currency or futures contract.
FUTURES GUIDELINES. To the extent that the Funds enter into futures
contracts or options thereon other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums required to
establish these positions (excluding the in-the-money amount for options that
are in-the-money at the time of purchase) will not exceed 5% of a Fund's
liquidation value, after taking into account unrealized profits and losses on
any contracts into which a Fund has entered. This does not limit a Fund's assets
at risk to 5%. In addition, the value of all futures sold will not exceed the
total market value of a Fund's portfolio.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES TRADING. No price is paid upon
entering into futures contracts. Instead, upon entering into a futures contract,
each Fund is required to deposit with its respective custodian in a segregated
account in the name of the futures broker through which the transaction is
effected an amount of cash, U.S. Government securities or other liquid,
high-grade debt instruments generally equal to 3%-5% or less of the contract
value. This amount is known as "initial margin." When writing a call or put
option on a futures contract, margin also must be deposited in accordance with
applicable exchange rules. Initial margin on futures contracts is in the nature
of a performance bond or good-faith deposit that is returned to a Fund upon
termination of the transaction, assuming all obligations have been satisfied.
Under certain circumstances, such as periods of high volatility, a Fund may be
required by an exchange to increase the level of its initial margin payment.
Additionally, initial margin requirements may be increased generally in the
future by regulatory action. Subsequent payments, called "variation margin," to
and from the broker, are made on a daily basis as the value of the futures
position varies, a process known as "marking to market." Variation margin does
not involve borrowing to finance the futures transactions, but rather represents
a daily settlement of a Fund's obligation to or from a clearing organization. A
Fund is also obligated to make initial and variation margin payments when it
writes options on futures contracts.
Holders and writers of futures positions and options thereon can enter into
offsetting closing transactions, similar to closing transactions on options on
securities, by selling or purchasing, respectively, a futures position or
options position with the same terms as the position or option held or written.
Positions in futures contracts and options thereon may be closed only on an
exchange or board of trade providing a secondary market for such futures or
options.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a futures contract or related option may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
prices could move to the daily limit for several consecutive trading days with
little or no trading and thereby prevent prompt liquidation of unfavorable
positions. In such event, it may not be possible for a Fund to close a position
and, in the event of adverse price movements a Fund would have to make daily
cash payments of variation margin (except in the case of purchased options).
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
Successful use by a Fund of futures contracts and related options will
depend upon the respective Fund's Subadviser's ability to predict movements in
the direction of the overall securities, currency and interest rate markets,
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which requires different skills and techniques than predicting changes in the
prices of individual securities. Moreover, futures contracts relate not to the
current price level of the underlying instrument but to the anticipated levels
at some point in the future. There is, in addition, the risk that the movements
in the price of the futures contract or related option will not correlate with
the movements in prices of the securities or currencies being hedged. In
addition, if a Fund has insufficient cash, it may have to sell assets from its
portfolio to meet daily variation margin requirements. Any such sale of assets
may or may not be made at prices that reflect the rising market. Consequently, a
Fund may need to sell assets at a time when such sales are disadvantageous to a
Fund. If the price of the futures contract or related option moves more than the
price of the underlying securities or currencies, a Fund will experience either
a loss or a gain on the futures contract or related option that may or may not
be completely offset by movements in the price of the securities or currencies
that are the subject of the hedge.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between price movements in the futures or related
option position and the securities or currencies being hedged, movements in the
prices of futures contracts and related options may not correlate perfectly with
movements in the prices of the hedged securities or currencies because of price
distortions in the futures market. As a result, a correct forecast of general
market trends may not result in successful hedging through the use of futures
contracts and related options over the short term.
Positions in futures contracts and related options may be closed out only on
an exchange or board of trade that provides a secondary market for such futures
contracts or related options. Although each Fund intends to purchase or sell
futures contracts and related options only on exchanges or boards of trade where
there appears to be a liquid secondary market, there is no assurance that such a
market will exist for any particular contract or option at any particular time.
In such event, it may not be possible to close a futures or option position and,
in the event of adverse price movements, each Fund would continue to be required
to make variation margin payments.
Like options on securities and currencies, options on futures contracts have
a limited life. The ability to establish and close out options on futures will
be subject to the development and maintenance of liquid secondary markets on the
relevant exchanges or boards of trade. There can be no certainty that liquid
secondary markets for all options on futures contracts will develop.
Purchasers of options on futures contracts pay a premium in cash at the time
of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on a futures contract, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when a
Fund purchases an option is the premium paid for the option and the transaction
costs, there may be circumstances when the purchase of an option on a futures
contract would result in a loss to a Fund when the use of a futures contract
would not, such as when there is no movement in the level of the underlying
stock index or the value of the securities or currencies being hedged.
Each Fund's activities in the futures and related options markets may result
in a higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, each Fund also may save on commissions
by using futures and related options as a hedge rather than buying or selling
individual securities or currencies in anticipation or as a result of market
movements.
FORWARD CURRENCY CONTRACTS. A Fund may use forward currency contracts to
protect against uncertainty in the level of future exchange rates. The Fund will
not speculate with forward currency contracts or foreign currency exchange
rates.
A Fund may enter into forward currency contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
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on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. The Fund will thereby be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the payment is
declared, and the date of which such payments are made or received.
A Fund also may use forward currency contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that its Subadviser believes may rise in
value relative to the U.S. dollar or to shift the Fund's exposure to foreign
currency fluctuations from one country to another. This investment practice
generally is referred to as "cross-hedging" when another foreign currency is
used.
The precise matching of the forward currency contract amounts and the value
of the securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
(I.E., cash) market and bear the expense of such purchase if the market value of
the security is less than the amount of foreign currency the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward currency contracts involve the risk that anticipated
currency movements will not be accurately predicted, causing the Fund to sustain
losses on these contracts and transactions costs. Unless the Fund's obligations
under a forward contract are covered, the Fund will enter into a forward
contract only if the Fund maintains cash assets in a segregated account in an
amount not less than the value of the Fund's total assets committed to the
consummation of the contract, as marked to market daily.
At or before the maturity date of a forward contract requiring a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, the Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract. There can be no assurance that new forward
contracts or offsets always will be available for the Fund. Forward currency
contracts also involve a risk that the other party to the contract may fail to
deliver currency or pay for currency when due, which could result in substantial
losses to the Fund. The cost to the Fund of engaging in forward currency
contracts varies with factors such as the currencies involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Life
Series Fund and, unless identified as non-fundamental policies, may not be
changed without the affirmative vote of a majority of the outstanding voting
securities of Life Series Fund. As provided in the Investment Company Act of
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1940, as amended ("1940 Act"), a "vote of a majority of the outstanding voting
securities 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
of the Fund present at a meeting, if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. Except with respect to
borrowing, changes in values of a particular Fund's assets will not cause a
violation of the following investment restrictions so long as percentage
restrictions are observed by that Fund at the time it purchases any security.
The investment restrictions provide that, among other things, a Fund will
not:
(1) Borrow money, except as a temporary or emergency measure in an amount
not to exceed 5% of the value of its total assets.
(2) Pledge assets, except that a Fund may pledge its assets to secure
borrowings made in accordance with paragraph (1) above, provided the Fund
maintains asset coverage of at least 300% for pledged assets; provided, however,
this limitation will not prohibit escrow, collateral or margin arrangements in
connection with the FOCUSED EQUITY FUND and INTERNATIONAL SECURITIES FUND's use
of options, futures contracts or options on futures contracts.
(3) Make loans, except by purchase of debt obligations and through
repurchase agreements. However, Life Series Fund's Board of Trustees may, on the
request of broker-dealers or other unaffiliated institutional investors which
they deem qualified, authorize a Fund to loan securities to cover the borrower's
short position; provided, however, the borrower pledges to the Fund and agrees
to maintain at all times with the Fund cash collateral equal to not less than
100% of the value of the securities loaned, the loan is terminable at will by
the Fund, the Fund receives interest on the loan as well as any distributions
upon the securities loaned, the Fund retains voting rights associated with the
securities, the Fund pays only reasonable custodian fees in connection with the
loan, and the Adviser or Subadviser monitors the creditworthiness of the
borrower throughout the life of the loan; provided further, that such loans will
not be made if the value of all loans is greater than an amount equal to 10% of
the Fund's total assets.
(4) Purchase, with respect to only 75% of a Fund's assets, the securities of
any issuer (other than the U.S. Government) if, as a result thereof, (a) more
than 5% of the Fund's total assets (taken at current value) would be invested in
the securities of such issuer; provided that this limitation in (4) (a) does not
apply to the FOCUSED EQUITY FUND; or (b) the Fund would hold more than 10% of
any class of securities (including any class of voting securities) of such
issuer (for this purpose, all debt obligations of an issuer maturing in less
than one year are treated as a single class of securities).
(5) Purchase securities on margin (but a Fund may obtain such credits as may
be necessary for the clearance of purchases and sales of securities); provided,
however, that FOCUSED EQUITY FUND and INTERNATIONAL SECURITIES FUND may make
margin deposits in connection with the use of options, futures contracts and
options on futures contracts.
(6) Make short sales of securities.
(7) Buy or sell puts, calls, straddles or spreads, except, as to FOCUSED
EQUITY FUND and INTERNATIONAL SECURITIES FUND, with respect to options on
securities, securities indices and foreign currencies or on futures contracts.
(8) Purchase the securities of other investment companies or investment
trusts, except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
(9) Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under Federal securities laws.
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(10) Buy or sell real estate, commodities, or commodity contracts (unless
acquired as a result of ownership of securities) or interests in oil, gas or
mineral explorations; provided, however, a Fund may invest in securities secured
by real estate or interests in real estate, and FOCUSED EQUITY FUND and
INTERNATIONAL SECURITIES FUND may purchase or sell options on securities,
securities indices and foreign currencies, stock index futures, interest rate
futures and foreign currency futures, as well as options on such futures
contracts.
(11) Purchase the securities of an issuer if such purchase, at the time
thereof, would cause more than 5% of the value of a Fund's total assets to be
invested in securities of issuers which, including predecessors, have a record
of less than three years' continuous operation.
(12) Concentrate investments in any particular industry, except that
UTILITIES INCOME FUND may concentrate its investments in securities of companies
in the public utilities industry.
(13) Purchase or retain securities issued by an issuer any of whose
officers, directors or security-holders is an officer or director, or Trustee of
the Trust or of its investment adviser if or so long as the officers, directors
and Trustees of the Trust and of its investment adviser, together, own
beneficially more than 5% of any class of the securities of such issuer.
The following investment restriction is not fundamental and can be changed
without prior shareholder approval:
1. A Fund will not purchase any security if, as a result, more than 15% (10%
for CASH MANAGEMENT FUND) 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 Trustees, or the Funds' investment adviser acting
pursuant to authority delegated by the Trustees, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
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.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of Life Series
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 Trustee, 90 Buell Land, East Hampton, NY 11937.
Retired; formerly Senior Vice President, James Talcott, Inc. (financial
institution).
GLENN O. HEAD*+ (73), President and Trustee. 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), Trustee, 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), Trustee. Assistant Secretary, ADM, EIC, EIMCO, FICC, and
FIMCO; Secretary and General Counsel, FIC.
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REX R. REED** (76), Trustee, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN** (77), Trustee, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
NANCY SCHAENEN** (67), Trustee, 56 Midwood Terrace, Madison, NJ 07940. Trustee,
Drew University and DePauw University.
JAMES M. SRYGLEY** (66), Trustee, 33 Hampton Road, Chatham, NJ 07982. Principal,
Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (66), Trustee and Chairman of the Board; Director, FIMCO, FIC,
FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (69), Trustee, 217 Upland Downs Road, Manchester Center,
VT 05255. Retired; formerly financial and planning executive with American
Telephone & Telegraph Company.
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.
* These Trustees may be deemed to be "interested persons," as defined in the
1940 Act.
** These Trustees are members of the Board's Audit Committee.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
The Trustees and officers, as a group, owned less than 1% of shares of any
Fund.
All of the officers and Trustees 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.
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The following table lists compensation paid to the Trustees of Life Series
Fund for the fiscal year ended December 31, 1998.
TOTAL
COMPENSATION
FROM FIRST
AGGREGATE INVESTORS FAMILY
COMPENSATION OF FUNDS PAID TO
TRUSTEE FROM FUND* TRUSTEE*+
------- ---------- ---------
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 $-- $--
Herbert Rubinstein $-- $--
James M. Srygley $-- $--
John T. Sullivan $-0- $-0-
Robert F. Wentworth $-- $--
Nancy Schaenen(1) $-- $--
- ---------------------
* Compensation to officers and interested Trustees of Life Series Fund is paid
by the Adviser.
** On March 27, 1997, Mr. Coy resigned as a Trustee of Life Series Fund. Mr.
Coy currently serves as an Emeritus Trustee. Mr. Coy is paid by the Adviser.
*** On August 20, 1998, Mr. Grayson resigned as a Trustee of the Fund.
****On September 17, 1998, Mr. Lavoie was elected by the Board of Trustees to
serve as a Trustee.
+ The First Investors Family of Funds consists of 15 separate registered
investment companies.
(1) The dollar compensation shown for Ms. Schaenen is lower than that for the
other Trustees because Ms. Schaenen was absent from one Board Meeting and did
not receive compensation for that Board Meeting.
MANAGEMENT
ADVISER. Investment advisory services to the Funds 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 Trustees of Life Series Fund, including a majority of the
Trustees who are not parties to the Advisory Agreement or "interested persons"
(as defined in the 1940 Act) of any such party ("Independent Trustees"), in
person at a meeting called for such purpose and by a majority of the
shareholders of each Fund. The Board of Trustees is responsible for overseeing
the management of the Funds.
Pursuant to the Advisory Agreement, FIMCO shall supervise and manage each
Fund's investments, determine each Fund's portfolio transactions and supervise
all aspects of each Fund's operations, subject to review by the Trustees. The
Advisory Agreement also provides that FIMCO shall provide Life Series Fund and
each Fund with certain executive, administrative and clerical personnel, office
facilities and supplies, conduct the business and details of the operation of
Life Series Fund and each Fund and assume certain expenses thereof, other than
obligations or liabilities of the Funds. The Advisory Agreement may be
terminated at any time without penalty by the Trustees or by a majority of the
outstanding voting securities of the applicable 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, with respect
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to a Fund, for a period of over two years only if such continuance is approved
annually either by the Trustees or by a majority of the outstanding voting
securities of that Fund, and, in either case, by a vote of a majority of the
Independent Trustees voting in person at a meeting called for the purpose of
voting on such approval.
Under the Advisory Agreement, each 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
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 stock of First Investors
Corporation and the Funds' transfer agent. Mr. Glenn O. Head controls FICC and,
therefore, controls the Adviser.
Each Fund bears all expenses of its operations other than those incurred by
the Adviser under the terms of its advisory agreement. Fund expenses include,
but are not limited to: the advisory fee; shareholder servicing fees and
expenses; custodian fees and expenses; legal and auditing fees; expenses of
communicating to existing shareholders, including preparing, printing and
mailing prospectuses and shareholder reports to such shareholders; and proxy and
shareholder meeting expenses.
For the fiscal year ended December 31, 1996, BLUE CHIP FUND's advisory fees
were $611,681, CASH MANAGEMENT FUND's advisory fees were $23,439, net of a
waiver of $5,860, DISCOVERY FUND's advisory fees were $450,910, GOVERNMENT
FUND's advisory fees were $54,997, net of a waiver of $13,749, GROWTH FUND's
advisory fees were $475,966, HIGH YIELD FUND's advisory fees were $338,303,
INTERNATIONAL SECURITIES FUND's advisory fees were $364,115, INVESTMENT GRADE
FUND's advisory fees were $96,305, net of a waiver of $24,076, TARGET MATURITY
2007 FUND's advisory fees were $73,502, net of a waiver of $18,376; TARGET
MATURITY 2010 FUND's advisory fees were $5,014, net of a waiver of $1,254 and
UTILITIES INCOME FUND's advisory fees were $119,506, net of a waiver of $29,876.
For the fiscal year ended December 31, 1997, BLUE CHIP FUND's advisory fees
were $965,995, CASH MANAGEMENT FUND's advisory fees were $27,384, net of a
waiver of $6,846, DISCOVERY FUND's advisory fees were $640,895, GOVERNMENT
FUND's advisory fees were $54,162, net of a waiver of $13,541, GROWTH FUND's
advisory fees were $777,312, HIGH YIELD FUND's advisory fees were $407,953,
INTERNATIONAL SECURITIES FUND's advisory fees were $512,589, INVESTMENT GRADE
FUND's advisory fees were $98,694, net of a waiver of $24,674, TARGET MATURITY
2007 FUND's advisory fees were $101,588, net of a waiver of $25,397; TARGET
MATURITY 2010 FUND's advisory fees were $21,425, net of a waiver of $5,356 and
UTILITIES INCOME FUND's advisory fees were $162,992, net of a waiver of $40,748.
For the fiscal year ended December 31, 1997, the Adviser voluntarily reimbursed
expenses for CASH MANAGEMENT FUND, GOVERNMENT FUND, INVESTMENT GRADE FUND,
TARGET MATURITY 2007 FUND, TARGET MATURITY 2010 FUND and UTILITIES INCOME FUND
in the amounts of $10,586, $12,100, $15,884, $10,255, $3,617 and $7,919,
respectively.
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For the fiscal year ended December 31, 1998, BLUE CHIP FUND's advisory fees
were $1,332,265, CASH MANAGEMENT FUND's advisory fees were $30,973, net of a
waiver of $7,743, DISCOVERY FUND's advisory fees were $775,442, GOVERNMENT
FUND's advisory fees were $60,097, net of a waiver of $15,024, GROWTH FUND's
advisory fees were $1,156,103, HIGH YIELD FUND's advisory fees were $476,199,
INTERNATIONAL SECURITIES FUND's advisory fees were $630,772, INVESTMENT GRADE
FUND's advisory fees were $115,165, net of a waiver of $28,791, TARGET MATURITY
2007 FUND's advisory fees were $138,611, net of a waiver of $34,652; TARGET
MATURITY 2010 FUND's advisory fees were $42,953, net of a waiver of $10,738 and
UTILITIES INCOME FUND's advisory fees were $246,125, net of a waiver of $61,531.
For the fiscal year ended December 31, 1997, the Adviser voluntarily reimbursed
expenses for CASH MANAGEMENT FUND, GOVERNMENT FUND, INVESTMENT GRADE FUND,
TARGET MATURITY 2007 FUND, and TARGET MATURITY 2010 FUND in the amounts of
$7,391, $2,425, $3,625, $5,370, and $1,042 respectively.
SUBADVISERS. Wellington Management Company, LLP has been retained by the
Adviser and Life Series Fund as the investment subadviser to INTERNATIONAL
SECURITIES FUND and GROWTH FUND under a subadvisory agreement dated June 13,
1994. Arnhold and S. Bleichroeder, Inc. has been retained by the Adviser and
Life Series Fund as the investment Subadviser to FOCUSED EQUITY FUND under a
subadvisory agreement dated _____, 1999. (The subadvisory agreements with WMC
and ASB shall collectively be referred to as the "Subadvisory Agreements".)
The Subadvisory Agreements provide that they will continue, with respect to
a Fund, for a period of more than two years from the date of execution only so
long as such continuance is approved annually by either the Board of Trustees or
a majority of the outstanding voting securities of that Fund and, in either
case, by a vote of a majority of the Independent Trustees voting in person at a
meeting called for the purpose of voting on such approval. The Subadvisory
Agreements provide that they will terminate automatically, with respect to a
Fund, if assigned or upon the termination of the Advisory Agreement, and that it
may be terminated without penalty by the Board of Trustees or a vote of a
majority of the outstanding voting securities of that Fund, upon not more than
60 days' written notice, or by the Adviser or Subadviser on not more than 30
days' written notice. The Subadvisory Agreements provide that WMC and ASB will
not be liable for any error of judgment or for any loss suffered by a Fund or
the Adviser in connection with the matters to which the Subadvisory Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation or from willful misfeasance, bad faith, gross
negligence (with respect to the Subadvisory Agreement with ASB, negligence) or
reckless disregard of duty.
Under the Subadvisory Agreement with WMC, the Adviser will pay to WMC a fee
at an annual rate of 0.400% of the average daily net assets of the INTERNATIONAL
SECURITIES FUND and GROWTH FUND, respectively, up to and including $50 million;
0.275% of the average daily net assets in excess of $50 million up to and
including $150 million, 0.225% of the average daily net assets in excess of $150
million up to and including $500 million; and 0.200% of the average daily net
assets in excess of $500 million. This fee is calculated separately for each
Fund. WMC voluntarily has agreed to waive its fees on the first $50 million of
the daily net assets of GROWTH FUND to an annual rate of 0.325%. The Adviser
will retain the portion of those fees waived by WMC.
For the fiscal year ended December 31, 1996, WMC received $192,042 for its
services with respect to INTERNATIONAL SECURITIES FUND and $199,147 for its
services with respect to GROWTH FUND. For the fiscal year ended December 31,
1997, WMC received $250,449 for its services with respect to the INTERNATIONAL
SECURITIES FUND and $310,010 for its services with respect to GROWTH FUND. For
the fiscal year ended December 31, 1998, WMC received $293,747 for its services
with respect to the INTERNATIONAL SECURITIES FUND and $449,133 for its services
with respect to GROWTH FUND.
Under the Subadvisory Agreement with ASB, the Adviser will pay to ASB a
fee at an annual rate of 0.400% of the average daily net assets of the FOCUSED
EQUITY FUND up to and including $100 million; 0.275% of the average daily net
assets in excess of $100 million up to and including $500 million, and 0.200% of
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<PAGE>
the average daily net assets in excess of $500 million. This fee will be
computed daily and paid monthly.
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, a
Fund may determine the value of debt securities based upon prices furnished by
an outside pricing service. The pricing services use 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. Interactive Data Corporation provides pricing
services for corporate debt securities and foreign equity securities. 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 Life
Series Fund's officers in a manner specifically authorized by the Board of
Trustees.
"When-issued securities" are reflected in the assets of a Fund as of the
date the securities are purchased. Such investments are valued thereafter at the
mean between the most recent bid and asked prices obtained from recognized
dealers in such securities or by 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 CASH MANAGEMENT FUND values its portfolio securities in accordance with
the amortized cost method of valuation under Rule 2a-7 under the 1940 Act. To
use amortized cost to value its portfolio securities, a Fund must adhere to
certain conditions under that Rule relating to the Fund's investments, some of
which are discussed in the Prospectus. Amortized cost is an approximation of
market value of an instrument, whereby the difference between its acquisition
cost and value at maturity is amortized on a straight-line basis over the
remaining life of the instrument. The effect of changes in the market value of a
security as a result of fluctuating interest rates is not taken into account and
thus the amortized cost method of valuation may result in the value of a
security being higher or lower than its actual market value. In the event that a
large number of redemptions take place at a time when interest rates have
increased, a Fund might have to sell portfolio securities prior to maturity and
at a price that might not be desirable.
The Board of Trustees of Life Series Fund has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share, which
include a review of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1%, the Board of Trustees will promptly
consider whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to shareholders. Such action may include
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund maintains a dollar weighted average
portfolio maturity of 90 days or less and does not purchase any instrument with
a remaining maturity greater than 13 months, limits portfolio investments,
including repurchase agreements, to those U.S. dollar-denominated instruments
that are of high quality and that the Trustees determine present minimal credit
risks as advised by the Adviser, and complies with certain reporting and
recordkeeping procedures. There is no assurance that a constant net asset value
per share will be maintained. In the event amortized cost ceases to represent
fair value per share, the Board will take appropriate action.
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EMERGENCY PRICING PROCEDURES. In the event that the Funds must halt
operations during any day that they would normally be required to price under
Rule 22c-1 under the 1940 Act due to an emergency ("Emergency Closed Day"), the
Funds will apply the following procedures:
1. The Funds 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 Funds on an Emergency Closed Day, even if neither the Funds 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 a Fund when the postal service has delivered it to FIC's offices in
Woodbridge, New Jersey prior to the close of regular trading on the NYSE, or at
such other time as may be prescribed in its 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 its prospectus.
3. If the Funds are unable to segregate orders received on the Emergency
Closed Day from those received on the next day the Funds are open for business,
the Funds 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 Funds may determine not to price their
portfolio securities if such prices would lead to a distortion of the net asset
value for the Funds and their shareholders.
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser, WMC or ASB, as applicable, may purchase or sell portfolio
securities on behalf of a Fund in agency or principal transactions with other
dealers or underwriters. In agency transactions, a Fund generally pays brokerage
commissions. In principal transactions, a 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, WMC or ASB
normally purchases fixed-income securities on a net basis from primary market
makers acting as principals for the securities. The Adviser, WMC or ASB may
purchase certain money market instruments directly from an issuer without paying
commissions or discounts. The Adviser, WMC or ASB may also purchase securities
traded in the OTC market. As a general practice, OTC securities are usually
purchased from market makers without paying commissions, although the price of
the security usually will include undisclosed compensation. However, when it is
advantageous to a Fund the Adviser, WMC or ASB may utilize a broker to purchase
OTC securities and pay a commission.
In purchasing and selling portfolio securities on behalf of a Fund, the
Adviser, WMC or ASB will seek to obtain best execution. A Fund may pay more than
the lowest available commission in return for brokerage and research services.
Additionally, upon instruction by the Board, the Adviser, WMC or ASB may use
commissions or 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
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Directors' Analytical Data concerning Fund performance and fees. The Adviser may
use the research and other services to service any or 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 or Subadvisers and the Fund's Board to analyze a fund's
performance relative to other comparable funds. The Subadvisers may use research
obtained with commissions to service their other clients.
In selecting the broker-dealers to execute a Fund's portfolio transactions,
the Adviser, WMC or ASB 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 and WMC do 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 or WMC participates in commissions
generated by portfolio orders placed on behalf of a Fund. ASB or an affiliate of
ASB may execute brokerage transactions on behalf of the FOCUSED EQUITY FUND. The
Board has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to
ensure that all brokerage commissions paid to ASB or any affiliate of ASB are
reasonable and fair in the context of the market in which they are operating.
Any such transactions will be effected and related compensation paid only in
accordance with applicable SEC regulations.
The Adviser and Subadvisers may combine transaction orders placed on behalf
of any of the Funds with the orders of their other advisory clients 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
Trustees. In addition, some securities considered for investment by a Fund may
also be appropriate for other Funds and/or clients served by WMC or ASB. If the
purchase or sale of securities consistent with the investment policies of a Fund
and one or more of these other funds or clients serviced by a Subadviser are
considered at or about the same time, transactions in such securities will be
allocated among the several funds and clients in a manner deemed equitable by
WMC or ASB, as applicable.
Brokerage commissions for the fiscal year ended December 31, 1996 are as
follows: BLUE CHIP FUND paid $107,473 in brokerage commissions. Of that amount,
$46,425 was paid in brokerage commissions to brokers who furnished research
services on portfolio transactions in the amount of $26,460,832. INTERNATIONAL
SECURITIES FUND paid $192,286 in brokerage commissions. Of that amount, $4,302
was paid in brokerage commissions to brokers who furnished research services on
portfolio transactions in the amount of $2,972,468. DISCOVERY FUND paid $98,732
in brokerage commissions. Of that amount, $50,064 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $19,630,693. GROWTH FUND paid $70,083 in brokerage commissions.
Of that amount, $10,277 was paid in brokerage commissions to brokers who
furnished research services on portfolio transactions in the amount of
$8,999,871. HIGH YIELD FUND paid $418 in brokerage commissions, all of which was
in brokerage commissions to brokers who furnished research services on portfolio
transactions in the amount of $125,354. UTILITIES INCOME FUND paid $55,051 in
brokerage commissions. Of that amount, $13,900 was paid in brokerage commissions
to brokers who furnished research services on portfolio transactions in the
amount of $5,966,660. For the same period, all other Funds of Life Series Fund
did not pay brokerage commissions.
Brokerage commissions for the fiscal year ended December 31, 1997 are as
follows: BLUE CHIP FUND paid $194,635 in brokerage commissions. Of that amount,
$108,092 was paid in brokerage commissions to brokers who furnished research
services on portfolio transactions in the amount of $87,860,801. INTERNATIONAL
SECURITIES FUND paid $231,957 in brokerage commissions. Of that amount, $10,203
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was paid in brokerage commissions to brokers who furnished research services on
portfolio transactions in the amount of $10,445,470. DISCOVERY FUND paid
$136,562 in brokerage commissions. Of that amount, $60,163 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $23,951,040. GROWTH FUND paid $68,509 in brokerage commissions.
Of that amount, $11,029 was paid in brokerage commissions to brokers who
furnished research services on portfolio transactions in the amount of
$9,446,682. HIGH YIELD FUND paid $158 in brokerage commissions. Of that amount,
$44 was paid in brokerage commissions to brokers who furnished research services
on portfolio transactions in the amount of $10,929. UTILITIES INCOME FUND paid
$68,591 in brokerage commissions. Of that amount, $8,562 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $3,767,423. For the same period, all other Funds of Life Series
Fund did not pay brokerage commissions.
Brokerage commissions for the fiscal year ended December 31, 1998 are as
follows: BLUE CHIP FUND paid $379,563 in brokerage commissions. Of that amount,
$22,481 was paid in brokerage commissions to brokers who furnished research
services on portfolio transactions in the amount of $20,830,218. INTERNATIONAL
SECURITIES FUND paid $392,248 in brokerage commissions. Of that amount, $7,375
was paid in brokerage commissions to brokers who furnished research services on
portfolio transactions in the amount of $7,052,426. DISCOVERY FUND paid $232,266
in brokerage commissions. Of that amount, $13,667 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $5,380,076. GROWTH FUND paid $89,395 in brokerage commissions.
Of that amount, $17,916 was paid in brokerage commissions to brokers who
furnished research services on portfolio transactions in the amount of
$14,375,011. UTILITIES INCOME FUND paid $125,967 in brokerage commissions. Of
that amount, $12,540 was paid in brokerage commissions to brokers who furnished
research services on portfolio transactions in the amount of $9,302,550. For the
same period, all other Funds of Life Series Fund did not pay brokerage
commissions.
TAXES
Shares of the Funds are offered only to the Separate Accounts that fund the
Policies and Contracts. See the applicable Separate Account Prospectus for a
discussion of the special taxation of First Investors Life with respect to those
accounts and of the Policyowners and Contractholders.
To qualify or continue to qualify for treatment as a registered investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"), a Fund - each Fund being treated as a separate corporation for these
purposes-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, for INTERNATIONAL SECURITIES FUND,
FOCUSED EQUITY FUND, DISCOVERY FUND and HIGH YIELD FUND (each a "Foreign Fund"),
net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. For each Fund 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, for a Foreign Fund, foreign currencies, or other income (including, for
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or, for a Foreign Fund, those
currencies ("Income Requirement"); (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.
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If any 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, each Separate Account invested therein would fail to satisfy the
diversification requirements of section 817(h) of the Code (see below), with the
result that the Contracts and Policies supported by those accounts 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.
Each 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 each Separate Account -- and of each Fund, because
section 817(h) and those regulations treat the assets of a Fund as assets of the
related Separate Account -- 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 a 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 are 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, U.S. Government securities and
securities of other RICs. Failure of a Fund to satisfy the section 817(h)
requirements would result in taxation of First Investors Life and treatment of
the Contractholders and Policyowners other than as described in the Prospectuses
of the Separate Accounts.
Dividends and interest received by a Foreign Fund, and gains realized by a
Foreign 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 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.
Each of INTERNATIONAL SECURITIES FUND, FOCUSED EQUITY FUND and DISCOVERY
FUND may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation - other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which such a Fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, if either Fund
holds stock of a PFIC, it will be subject to Federal income tax on a portion of
any "excess distribution" received on the stock or of any gain on disposition of
the stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If INTERNATIONAL SECURITIES FUND, FOCUSED EQUITY FUND or DISCOVERY FUND
invests in a PFIC and elects to treat the PFIC as a "qualified electing fund"
("QEF"), then in lieu of the foregoing tax and interest obligation, the Fund
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would be required to include in income each year its pro rata share of the QEF's
annual ordinary earnings and net capital gain -which the Fund probably would
have to distribute to satisfy the Distribution Requirement -- even if those
earnings and gain were not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Each of INTERNATIONAL SECURITIES FUND, FOCUSED EQUITY FUND and DISCOVERY
FUND may elect to "mark-to-market" its stock in any PFICs. "Marking-to-market,"
in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of the PFIC's stock over a Fund's
adjusted basis in that stock as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. A Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election would be adjusted to reflect the amounts of
income included and deductions taken under the election (and under regulations
proposed in 1992 that provided a similar election with respect to the stock of
certain PFICs).
FOCUSED EQUITY FUND, HIGH YIELD FUND, GOVERNMENT FUND, INVESTMENT GRADE
FUND, TARGET MATURITY 2007 FUND, TARGET MATURITY 2010 FUND, TARGET MATURITY 2015
FUND and UTILITIES INCOME FUND may acquire zero coupon or other securities
issued with original issue discount. As a holder of those securities, each such
Fund must include in its income the portion of the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on them during the year. Similarly, each such Fund must
include in its gross income securities it receives as "interest" on pay-in-kind
securities. Because each 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, a 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 a Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. A 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.
FOCUSED EQUITY FUND'S and INTERNATIONAL SECURITIES FUND'S use of hedging
strategies, such as writing (selling) and purchasing options and futures
contracts and entering into forward currency contracts, involves complex rules
that will determine for income tax purposes the amount, character and timing of
recognition of the gains and losses the FOCUSED EQUITY FUND and INTERNATIONAL
SECURITIES FUND will realize in connection therewith. Gains from a Foreign
Fund's disposition of foreign currencies (except gains that may be excluded by
future regulations), and in the case of Focused Equity Fund and International
Securities Fund gains from options, futures and forward currency contracts it
derives with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or forward currency contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis - and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by a
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale by a Fund if the transaction is closed within
30 days after the end of that year and the Fund holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
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60-day period is the Fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
PERFORMANCE INFORMATION
A Fund may advertise its top holdings from time to time. A Fund may
advertise its performance in various ways.
Each Fund's "average annual total return" ("T") is an average annual
compounded rate of return. The calculation produces an average annual total
return for the number of years measured. It is the rate of return based on
factors which include a hypothetical initial investment of $1,000 ("P") over a
number of years ("n") with an Ending Redeemable Value ("ERV") of that
investment, according to the following formula:
T=[(ERV/P)^(1/n)]-1
The "total return" uses the same factors, but does not average the rate of
return on an annual basis. Total return is determined as follows:
(ERV-P)/P = TOTAL RETURN
Total return is calculated by finding the average annual change in the value
of an initial $1,000 investment over the period. All dividends and other
distributions are assumed to have been reinvested at net asset value on the
initial investment ("P").
Return information may be useful to investors in reviewing a Fund's
performance. However, certain factors should be taken into account before using
this information as a basis for comparison with alternative investments. No
adjustment is made for taxes payable on distributions. Return will fluctuate
over time and return for any given past period is not an indication or
representation by a Fund of future rates of return on its shares. At times, the
Adviser may reduce its compensation or assume expenses of a Fund in order to
reduce the Fund's expenses. Any such waiver or reimbursement would increase the
Fund's return during the period of the waiver or reimbursement.
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Average annual total return and total return computed at net asset value for
the periods ended December 31, 1998 are set forth in the following tables:
AVERAGE ANNUAL TOTAL RETURN1
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND(2)
-------- ---------- --------- ---------------
BLUE CHIP
DISCOVERY
GOVERNMENT
GROWTH
HIGH YIELD
INTERNATIONAL
INVESTMENT
GRADE
TARGET 2007
TARGET 2010
UTILITIES
INCOME
- -----------------------
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through December 31, 1998. Accordingly, return
figures are higher than they would have been had such expenses not been
waived or reimbursed.
2 The inception dates for the Funds are as follows: BLUE CHIP - March 8, 1990;
DISCOVERY - November 9, 1987; GOVERNMENT - January 7, 1992; GROWTH -
November 9, 1987; HIGH YIELD - November 9, 1987; INTERNATIONAL SECURITIES -
April 16, 1990; INVESTMENT GRADE - January 7, 1992; TARGET 2007 - April 26,
1995; TARGET 2010 - April 30, 1996; and UTILITIES INCOME - November 15,1993.
TOTAL RETURN1
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND(2)
-------- ---------- --------- ---------------
BLUE CHIP
DISCOVERY
GOVERNMENT
GROWTH
HIGH YIELD
INTERNATIONAL
INVESTMENT GRADE
TARGET 2007
TARGET 2010
UTILITIES INCOME
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through December 31, 1998. Accordingly, return
figures are higher than they would have been had such expenses not been
waived or reimbursed.
2 The inception dates for the Funds are as follows: BLUE CHIP - March 8, 1990;
DISCOVERY - November 9, 1987; GOVERNMENT - January 7, 1992; GROWTH -
November 9, 1987; HIGH YIELD - November 9, 1987; INTERNATIONAL SECURITIES -
April 16, 1990; INVESTMENT GRADE - January 7, 1992; TARGET 2007 - April 26,
1995; TARGET 2010 - April 30, 1996; and UTILITIES INCOME - November 15,1993.
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Each Fund may include in advertisements and sales literature, information,
examples and statistics to illustrate the effect of compounding income at a
fixed rate of return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and capital gain
distributions in additional shares. These examples may also include hypothetical
returns comparing taxable versus tax-deferred growth which would pertain to an
IRA, section 403(b)(7) Custodial Account or other qualified retirement program.
The examples used will be for illustrative purposes only and are not
representations by the Funds of past or future yield or return. Examples of
typical graphs and charts depicting such historical performances, compounding
and hypothetical returns are included in Appendix D.
From time to time, in reports and promotional literature, the Funds may
compare their performance to, or cite the historical performance of, Overnight
Government repurchase agreements, U.S. Treasury bills, notes and bonds,
certificates of deposit, and six-month money market certificates or indices of
broad groups of unmanaged securities considered to be representative of, or
similar to, a Fund's portfolio holdings, such as:
Lipper Analytical Services, Inc. ("Lipper") is a widely-recognized
independent service that monitors and ranks the performance of regulated
investment companies. The Lipper performance analysis includes the
reinvestment of capital gain distributions and income dividends but does not
take sales charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend dates
accumulated for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication of
Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds with
at least three years of performance history are assigned ratings from one
star (lowest) to five stars (highest). Morningstar ratings are calculated
from the Fund's three-, five-, and ten-year average annual returns (when
available) and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are adjusted for
fees and sales loads. Ten percent of the funds in an investment category
receive five stars, 22.5% receive four stars, 35% receive three stars, 22.5%
receive two stars, and the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad Investment-Grade Bond Index and the components of the Index.
Telerate Systems, Inc., a computer system to which the Adviser subscribes
which daily tracks the rates on money market instruments, public corporate
debt obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
THE WALL STREET JOURNAL, a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in addition to
indices prepared by the research departments of such financial organizations
as Lehman Bros., Merrill Lynch, Pierce, Fenner and Smith, Inc., First
Boston, Salomon Brothers, Morgan Stanley, Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette, Value Line, Datastream International, James Capel, S.G.
Warburg Securities, County Natwest and UBS UK Limited, including information
provided by the Federal Reserve Board, Moody's, and the Federal Reserve
Bank.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices," a
monthly corporate government index publication which lists principal, coupon
and total return on over 100 different taxable bond indices which Merrill
Lynch tracks. They also list the par weighted characteristics of each Index.
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<PAGE>
Lehman Brothers, Inc., "The Bond Market Report," a monthly publication which
tracks principal, coupon and total return on the Lehman Govt./Corp. Index
and Lehman Aggregate Bond Index, as well as all the components of these
Indices.
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average of 30 stocks are unmanaged lists of common stocks
frequently used as general measures of stock market performance. Their
performance figures reflect changes of market prices and quarterly
reinvestment of all distributions but are not adjusted for commissions or
other costs.
The Consumer Price Index, prepared by the U.S. Bureau of Labor Statistics,
is a commonly used measure of inflation. The Index shows changes in the cost
of selected consumer goods and does not represent a return on an investment
vehicle.
Credit Suisse First Boston High Yield Index is designed to measure the
performance of the high yield bond market.
Lehman Brothers Aggregate Index is an unmanaged index which generally covers
the U.S. investment grade fixed rate bond market, including government and
corporate securities, agency mortgage pass-through securities, and
asset-backed securities.
Lehman Brothers Corporate Bond Index includes all publicly issued, fixed
rate, non-convertible investment grade dollar-denominated, corporate debt
which have at least one year to maturity and an outstanding par value of at
least $100 million.
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
Moody's Stock Index, an unmanaged index of utility stock performance.
Morgan Stanley All Country World Free Index is designed to measure the
performance of stock markets in the United States, Europe, Canada,
Australia, New Zealand and the developed and emerging markets of Eastern
Europe, Latin America, Asia and the Far East. The index consists of
approximately 60% of the aggregate market value of the covered stock
exchanges and is calculated to exclude companies and share classes which
cannot be freely purchased by foreigners.
Morgan Stanley World Index is designed to measure the performance of stock
markets in the United States, Europe, Canada, Australia, New Zealand and the
Far East. The index consists of approximately 60% of the aggregate market
value of the covered stock exchanges.
Reuters, a wire service that frequently reports on global business.
Russell 2000 Index, prepared by the Frank Russell Company, consists of U.S.
publicly traded stocks of domestic companies that rank from 1000 to 3000 by
market capitalization. The Russell 2000 tracks the return on these stocks
based on price appreciation or depreciation and does not include dividends
and income or changes in market values caused by other kinds of corporate
changes.
Russell 2500 Index, prepared by the Frank Russell Company, consists of U.S.
publicly traded stocks of domestic companies that rank from 500 to 3000 by
market capitalization. The Russell 2500 tracks the return on these stocks
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based on price appreciation or depreciation and does not include dividends
and income or changes in market values caused by other kinds of corporate
changes.
Salomon Brothers Government Index is a market capitalization-weighted index
that consists of debt issued by the U.S. Treasury and U.S. Government
sponsored agencies.
Salomon Brothers Mortgage Index is a market capitalization-weighted index
that consists of all agency pass-throughs and FHA and GNMA project notes.
Standard & Poor's 400 Midcap Index is an unmanaged capitalization-weighted
index that is generally representative of the U.S. market for medium cap
stocks.
Standard & Poor's Smallcap 600 Index is a capitalization-weighted index that
measures the performance of selected U.S. stocks with a small market
capitalization.
Standard & Poor's Utilities Index is an unmanaged capitalization weighted
index comprising common stock in approximately 40 electric, natural gas
distributors and pipelines, and telephone companies. The Index assumes the
reinvestment of dividends.
From time to time, in reports and promotional literature, performance
rankings and ratings reported periodically in national financial publications
such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may
also be used. In addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL STREET
JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be cited.
GENERAL INFORMATION
ORGANIZATION. Life Series Fund is a Massachusetts business trust organized
on June 12, 1985. The Board of Trustees of Life Series Fund has authority to
issue an unlimited number of shares of beneficial interest of separate series,
no par value, of Life Series Fund. The shares of beneficial interest of Life
Series Fund are presently divided into thirteen separate and distinct series.
Life Series Fund does not hold annual shareholder meetings. If requested to do
so by the holders of at least 10% of Life Series Fund's outstanding shares, the
Board of Trustees will call a special meeting of shareholders for any purpose,
including the removal of Trustees.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of each Fund, except the INTERNATIONAL
SECURITIES FUND. Brown Brothers Harriman & Co., 40 Water Street, Boston, MA
02109, is custodian of the securities and cash of the INTERNATIONAL SECURITIES
FUND and employs foreign sub-custodians to provide custody of the Fund's foreign
assets.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of FIMCO and FIC, acts as transfer agent
for each Fund and as redemption agent for regular redemptions.
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 receive semi-annual and annual
reports of the Fund, 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.
51
<PAGE>
SHAREHOLDER LIABILITY. Life Series Fund is organized as an entity known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable for the
obligations of Life Series Fund. The Declaration of Trust however, contains, an
express disclaimer of shareholder liability for acts or obligations of Life
Series Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by Life Series Fund
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of Life Series Fund of any shareholder held personally liable for
the obligations of Life Series Fund. The Declaration of Trust also provides that
Life Series Fund shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of Life Series Fund and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which Life Series Fund itself would be unable to meet its obligations. The
Adviser believes that, in view of the above, the risk of personal liability to
shareholders is immaterial and extremely remote. The Declaration of Trust
further provides that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Life Series Fund may have an
obligation to indemnify Trustees and officers with respect to litigation.
5% SHAREHOLDERS. As of September 30, 1999 the following owned of record or
beneficially 5% or more of the outstanding shares of the Fund listed below:
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to Section
17(j) of the 1940 Act and Rule 17j-1 thereunder, the Life Series Fund and the
Adviser have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Funds. Among other things,
such persons, except the Trustees: (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.
52
<PAGE>
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
- -------------------------------
Standard & Poor's Rating Group ("S&P") 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 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.
53
<PAGE>
APPENDIX B
DESCRIPTION OF MUNICIPAL NOTE RATINGS
STANDARD & POOR'S
- -----------------
S&P's note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the difference between short-term credit risk and long-term risk.
MIG-1. Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
54
<PAGE>
APPENDIX C
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.
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
55
<PAGE>
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.
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
56
<PAGE>
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.
57
<PAGE>
APPENDIX D
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference. This assumes a hypothetical investment of $10,000.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate. this assumes monthly installment with a constant hypothetical
return rate of 8%.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
58
<PAGE>
[The following table is represented as a graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a difference of
$331,215.
25 years old .............. 573,443
35 years old .............. 242,228
45 years old .............. 103,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
59
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1996.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
1996 .................. 6,000.00
The performance of the Dow Jones Industrial Average is not indicative of
the performance of any particular investment. It does not take into account fees
and expenses associated with purchasing mutual fund shares. Individuals cannot
invest directly in any index. Please note that past performance does not
guarantee future results.
60
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1996 ....................... 20.16135
1996 ....................... 100.00
1997 ....................... 103.00
1998 ....................... 106.00
1999 ....................... 109.00
2000 ....................... 113.00
2001 ....................... 116.00
2002 ....................... 119.00
2003 ....................... 123.00
2004 ....................... 127.00
2005 ....................... 130.00
2006 ....................... 134.00
2007 ....................... 138.00
2008 ....................... 143.00
2009 ....................... 147.00
2010 ....................... 151.00
2011 ....................... 156.00
2012 ....................... 160.00
2013 ....................... 165.00
2014 ....................... 170.00
2015 ....................... 175.00
2016 ....................... 181.00
2017 ....................... 186.00
2018 ....................... 192.00
2019 ....................... 197.00
2020 ....................... 203.00
2021 ....................... 209.00
2022 ....................... 216.00
2023 ....................... 222.00
2024 ....................... 229.00
2025 ....................... 236.00
2026 ....................... 243.00
Inflation erodes your buying power. $100 in 1966, could purchase five times the
goods and service as in 1996 ($100 vs. $20).* Projecting inflation at 3%, goods
and services costing $100 today will cost $243 in the year 2026.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
61
<PAGE>
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1996*
Total Number of Percentage of
Number of Positive Positive
Rolling Period Periods Periods Periods
-------------- ------- ------- -------
1-Year 71 51 72%
5-Year 67 60 90%
10-Year 62 60 97%
15-Year 57 57 100%
20-Year 52 52 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. **
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Large Company Stocks .......... 16.79
The following chart illustrates for the period shown that long-term corporate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Long-Term Corp. bonds ......... 13.66
* Source: Used with permission. (c)1997 Ibbotson Associates, Inc. All rights
reserved. [Certain provisions of this work were derived from copyrighted
works of Roger G. Ibbotson and Rex Sinquefield.]
** Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, returns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
62
<PAGE>
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal Tax Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
63
<PAGE>
[The following table is represented as a graph in the printed document.]
The following graph illustrates how income has affected the gains from stock
investments since 1965.
S&P 500 Dividends Reinvested S&P 500 Principal Only
12/31/64 10,000 10,000
12/31/65 11,269 10,906
12/31/66 10,115 9,478
12/31/67 12,550 11,383
12/31/68 13,948 12,255
12/31/69 12,795 10,863
12/31/70 13,299 10,873
12/31/71 15,200 12,046
12/31/72 18,088 13,929
12/31/73 15,431 11,510
12/31/74 11,346 8,090
12/31/75 15,570 10,642
12/31/76 19,296 12,680
12/31/77 17,915 11,221
12/31/78 19,092 11,340
12/31/79 22,645 12,736
12/31/80 30,004 16,019
12/31/81 28,528 14,460
12/31/82 34,674 16,595
12/31/83 42,496 19,461
12/31/84 45,161 19,733
12/31/85 59,489 24,930
12/31/86 70,594 28,575
12/31/87 74,301 29,154
12/31/88 86,641 32,769
12/31/89 114,093 41,699
12/31/90 110,549 38,964
12/31/91 144,230 49,214
12/31/92 155,218 51,411
12/31/93 170,863 55,039
12/31/94 173,120 54,191
12/31/95 238,175 72,676
12/31/96 292,863 87,403
11/30/97 383,977 112,732
Source: First Investors Management Company, Inc. Standard & Poor's is a
registered trademark. The S&P 500 is an unmanaged index comprising 500 common
stocks spread across a variety of industries. The total returns represented
above compare the impact of reinvestment of dividends and illustrates past
performance of the index. The performance of any index is not indicative of the
performance of a particular investment and does not take into account the
effects of inflation or the fees and expenses associated with purchasing mutual
fund shares. Individuals cannot invest directly in any index. Mutual fund shares
will fluctuate in value, therefore, the value of your original investment and
your return may vary. Moreover, past performance is no guarantee of future
results.
64
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
--------
(a) Declaration of Trust(2)
(b) By-laws(2)
(c) Shareholders' rights are contained in (a) Articles III, VIII,
X, XI and XII of Registrant's Declaration of Trust dated June
12, 1985, previously filed as Exhibit 99.B1 to Registrant's
Registration Statement and (b) Articles III and V of
Registrant's By-laws, previously filed as Exhibit 99.B2 to
Registrant's Registration Statement.
(d)(i) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc., including form of Schedule
A relating to Zero Coupon 2007 Series(1)
(d)(ii) Subadvisory Agreement relating to International Securities Fund
and Growth Fund(1)
(d)(iii) Subadisory Agreement relating to Focused Equity Fund(5)
(e) Underwriting Agreement - none
(f) Bonus, profit sharing or pension plans - none
(g)(i) Custodian Agreement between Registrant and Irving Trust
Company(3)
(ii) Custodian Agreement between Registrant and Brown Brothers
Harriman & Co. relating to International Securities Fund(3)
(iii) Supplement to Custodian Agreement between Registrant and The
Bank of New York(3)
(h)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.(3)
(i) Opinion and Consent of Counsel(5)
(j)(i) Consent of Independent Accountants(5)
(ii) Powers of Attorney(2)
(k) Financial statements omitted from prospectus -none
(l) Initial capital agreements(4)
(m) Distribution Plan - none
(n) Financial Data Schedules - none
(o) 18f-3 Plan - none
- ----------
1 Incorporated by reference from Post-Effective Amendment No. 15 to
Registrant's Registration Statement (File No. 2-98409) filed on February
15, 1995.
<PAGE>
2 Incorporated by reference from Post-Effective Amendment No. 17 to
Registrant's Registration Statement (File No. 2-98409) filed on
October 2, 1995.
3 Incorporated by reference from Post-Effective Amendment No. 18 to
Registrant's Registration Statement (File No. 2-98409) filed on
February 14, 1996.
4 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 2-98409) filed on
October 21, 1996.
5 To be filed subsequently.
Item 24. Persons Controlled by or Under Common Control with Registrant
--------------------------------------------------------------
There are no persons controlled by or under common control with the
Registrant.
Item 25. Indemnification
---------------
Article XI, Section 2 of Registrant's Declaration of Trust provides
as follows:
"Section 2.
(a) Subject to the exceptions and limitations contained in Section (b)
below:
(i) every person who is, or has been, a Trustee or officer of the Trust
(a "Covered Person") shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding which he
becomes involved as a party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) Who shall have been adjudicated by a court or body before which the
proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office,
(A) by the court or other body approving the settlement; or
(B) by at least a majority or those Trustees who are neither
interested persons of the Trust nor are parties to the matter
based upon a review of readily available facts (as opposed to
a full trial-type inquiry); or
<PAGE>
(C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full
trial-type inquiry); provided, however, that any Shareholder
may, by appropriate legal proceedings, challenge any such
determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under the
law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the Trust from time to time prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him to the Trust if it
is ultimately determined that he is not entitled to indemnification under this
Section 2; provided, however, that either (a) such Covered Person shall have
provided appropriate security for such undertaking, (b) the Trust is insured
against losses arising out of any such advance payments or (c) either a majority
of the Trustees who are neither interested persons of the Trust nor are parties
to the matter, or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is a reason to believe that such Covered Person
will be found entitled to indemnification under this Section 2."
The general effect of this Indemnification will be to indemnify the
officers and Trustees 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 Trustee or officer of the Registrant, except 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 Trustee's or officer's office.
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.
Item 26. (a) 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."
<PAGE>
(b) Business and Other Connections of Subadvisers
(i) Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 26 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).
(ii) Arnhold and S. Bleichroeder, Inc. ("ASB") is an investment adviser
registered under the Advisers Act. The list required by this Item 26 of officers
and directors of ASB, together with any information as to any business
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV filed by ASB pursuant to the Advisers Act (SEC
File No. 801-02114).
Item 27. 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 has duly
caused this Post-Effective Amendment No. 25 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 22nd day of July, 1999.
FIRST INVESTORS LIFE SERIES FUND
By: /s/ Glenn O. Head
-----------------
Glenn O. Head
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 25 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 July 22, 1999
- ---------------------------------- Officer and Trustee
Glenn O. Head
/s/ Joseph I. Benedek Principal Financial July 22, 1999
- ---------------------------------- and Accounting Officer
Joseph I. Benedek
Kathryn S. Head* Trustee July 22, 1999
- ----------------------------------
Kathryn S. Head
/s/ Larry R. Lavoie Trustee July 22, 1999
- ----------------------------------
Larry R. Lavoie
Herbert Rubinstein* Trustee July 22, 1999
- ----------------------------------
Herbert Rubinstein
Nancy Schaenen* Trustee July 22, 1999
- ----------------------------------
Nancy Schaenen
James M. Srygley* Trustee July 22, 1999
- ----------------------------------
James M. Srygley
John T. Sullivan* Trustee July 22, 1999
- ----------------------------------
John T. Sullivan
<PAGE>
Rex R. Reed* Trustee July 22, 1999
- ----------------------------------
Rex R. Reed
Robert F. Wentworth* Trustee July 22, 1999
- ----------------------------------
Robert F. Wentworth
*By: /s/ Larry R. Lavoie
-------------------
Larry R. Lavoie
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
23(a) Declaration of Trust(2)
23(b) By-laws(2)
23(c) Shareholders' rights are contained in (a) Articles III,
VIII, X, XI and XII of Registrant's Declaration of
Trust dated June 12, 1985, previously filed as Exhibit
99.B1 to Registrant's Registration Statement and (b)
Articles III and V of Registrant's By-laws, previously
filed as Exhibit 99.B2 to Registrant's Registration
Statement.
23(d)(i) Investment Advisory Agreement between Registrant and
First Investors Management Company, Inc., including
form of Schedule A relating to Zero Coupon 2007
Series(1)
23(d)(ii) Subadvisory Agreement relating to International
Securities Fund and Growth Fund(1)
23(d)(iii) Subadvisory Agreement relating to Focused Equity
Fund(5)
23(e) Underwriting Agreement - none
23(f) Bonus or Profit Sharing Contracts--None
23(g)(i) Custodian Agreement between Registrant and Irving Trust
Company(3)
23(g)(ii) Custodian Agreement between Registrant and Brown
Brothers Harriman & Co. relating to International
Securities Fund(3)
23(g)(iii) Supplement to Custodian Agreement between Registrant
and The Bank of New York(3)
23(h)(i) Administration Agreement between Registrant, First
Investors Management Company, Inc., First Investors
Corporation and Administrative Data Management Corp.(1)
23(i) Opinion and Consent of Counsel(5)
23(j)(i) Consent of independent accountants(5)
23(j)(ii) Powers of Attorney(2)
23(k) Omitted Financial Statements -- None
<PAGE>
23(l) Initial Capital Agreements(4)
23(m) Distribution Plan - none
23(n) Financial Data Schedules - none
23(o) Rule 18f-3 Plan - none
- ---------------
1 Incorporated by reference from Post-Effective Amendment No. 15 to
Registrant's Registration Statement (File No. 2-98409) filed on February
15, 1995.
2 Incorporated by reference from Post-Effective Amendment No. 17 to
Registrant's Registration Statement (File No. 2-98409) filed on October 2,
1995.
3 Incorporated by reference from Post-Effective Amendment No. 18 to
Registrant's Registration Statement (File No. 2-98409) filed on February
14, 1996.
4 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 2-98409) filed on October
21, 1996.
5 To be filed subsequently.
