THE INSURED SERIES PLAN
LEVEL PREMIUM VARIABLE LIFE INSURANCE POLICIES ISSUED BY
FIRST INVESTORS LIFE INSURANCE COMPANY
95 Wall Street, New York, New York 10005/(212) 858-8200
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT CONTAINS
IMPORTANT INFORMATION THAT YOU SHOULD KNOW BEFORE BUYING OR TAKING ACTION UNDER
A POLICY. THIS PROSPECTUS IS VALID ONLY WHEN ATTACHED TO THE CURRENT PROSPECTUS
FOR FIRST INVESTORS LIFE SERIES FUND.
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 30, 1999
<PAGE>
OVERVIEW
THE POLICY
This Prospectus describes a Level Premium Variable Life Insurance Policy
(the "Policy") that is offered by First Investors Life Insurance Company
(referred to hereafter as "First Investors Life," "we," "us" or "our") through
our Separate Account B. The Policy provides you with life insurance coverage and
the opportunity to invest your net premiums (i.e., premiums less certain fees
and charges) in one or more investment options ("Subaccounts") of Separate
Account B. For marketing purposes, we call the Policy our Insured Series Plan.
You are required to pay premiums for only 12 years. After 12 years, you
never have to make another premium payment. The Policy stays in force for the
life of the insured unless you decide to surrender it. The premiums are level.
You decide how much you want to pay each year. Once this amount is set, you pay
the same amount each year. This amount can never be increased by us.
The Policy is "variable." This means that the amount of the insurance
coverage, the cash value and the loan value of your Policy may increase or
decrease depending on the investment performance of the Subaccount(s) that you
select. You bear the entire investment risk with respect to the Policy's cash
value, which could decline to zero. However, the death benefit will never be
less than the Guaranteed Insurance Amount (adjusted for loans and partial
surrenders), if you pay all your premiums.
We offer nine Subaccounts, from which you may select up to five. Each
Subaccount invests in shares of a corresponding "Fund" of First Investors Life
Series Fund ("Life Series Fund"), as shown below.
SEPARATE ACCOUNT CORRESPONDING
B SUBACCOUNT FUND
---------------- -------------
Blue Chip Subaccount Blue Chip Fund
Cash Management Subaccount Cash Management Fund
Discovery Subaccount Discovery Fund
Government Subaccount Government Fund
Growth Subaccount Growth Fund
High Yield Subaccount High Yield Fund
International Securities Subaccount International Securities Fund
Investment Grade Subaccount Investment Grade Fund
Utilities Income Subaccount Utilities Income Fund
For information on the investment objectives, investment strategies, and
investment risks of each Fund, see the Life Series Fund prospectus, which is
attached at the end of this prospectus.
You may also choose to add riders your Policy to increase the death benefit
and protect against the risk that you will not be able to make the premium
payments due to your own death or disability. These optional riders are
described in the section called "Optional Insurance Riders."
To help you understand how the values of a hypothetical Policy would change
over time, we have included some hypothetical illustrations based on certain
assumptions we have made. Because your circumstances may vary considerably from
our assumptions, your registered representative will also provide you with a
similar hypothetical illustration that is more tailored to your own
circumstances and wishes. You should keep in mind that replacing existing
insurance with the Policy may not benefit you because of, among other things,
the cost of the Policy during the first few years.
If you are not satisfied with your Policy, you may be able to cancel and
return it to us for a full refund of any premiums that you have paid. For more
details, see the section entitled "Cancellation Rights" in this prospectus.
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THE CHARGES AND EXPENSES
We describe below the fees and charges that you may be required to pay to
purchase and maintain the Policy. Immediately thereafter, we describe the fees
and expenses of each of the underlying mutual funds that are available as
investment options. We guarantee that once you have purchased your policy, we
will not increase the amount of your premium payments, the charges that we
deduct from your premiums, or the charges that we deduct from your Subaccount(s)
for mortality and expense risks.
Deductions from Premium Payments
--------------------------------
We deduct from your premiums for the Policy the fees and charges listed
below. We allocate the balance of your premium payments to the Subaccount(s)
that you have selected.
Annual Administrative Charge. We impose a $30 charge on your premium payment
each Policy year. The charge is for our annual administrative expenses,
including expenses for (1) premium billing and collection, (2) recordkeeping,
(3) processing death benefit claims, (4) cash surrenders, (5) Policy changes,
and (6) reporting and other communications to Policyowners.
Additional First Year Charge. We impose an additional charge in the first
Policy year at the rate of $5 per $1,000 of initial face amount of insurance.
The charge is for our administrative expenses in issuing the Policy, including
expenses for (1) medical examinations, (2) insurance underwriting costs, and (3)
processing applications and establishing permanent Policy records.
Sales Load. We impose a sales charge in issuing a Policy. The charge in any
year does not specifically correspond to our sales expenses for that year. The
charge will not exceed the following percentages of the annual premium:
YEARS MAXIMUM PERCENTAGES
----- -------------------
1..............................30%
2-4.............................10%
5 and later......................... 6%
Premiums For Optional Insurance Riders. We will deduct from your premiums
any premiums for any optional insurance riders that you have chosen.
State Premium Tax Charge. This charge varies from state to state. We expect
that the average state premium tax rate on premiums for the Policies will be 2%.
Risk Charge. We impose a maximum risk charge of 1.5% of the premium. The
charge insures that the death benefit will always at least equal the guaranteed
minimum death benefit.
Other Charges. We may also deduct two other charges from your premium: (1)
an extra premium if you are rated as having a high mortality risk, and (2) an
additional charge for premiums if you pay premiums on other than on an annual
basis.
We begin to accrue and deduct all of the above charges on a Policy's issue
date. For the fiscal year ended December 31, 1998, we received a total of
$5,461,000 for these charges.
Deductions from the Value of Your Policy
----------------------------------------
Mortality And Expense Risks Charges. We deduct from the value of your Policy
a daily charge for the mortality and expense risks that we assume. We compute
the charge at an effective annual rate of .50% of the value of Subaccount assets
attributable to your Policy.
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The mortality risk that we assume is that the person named as the insured
under the Policy will live for a shorter time than we have estimated. In that
case, we will not receive enough premium to compensate us for the death benefit
we must pay. The expense risk we assume is that the expenses we incur in issuing
and administering the Policies will be greater than we have estimated.
Cost Of Insurance Protection. We deduct a charge for the cost of insurance
protection. This amount is determined by the insurance rates applicable to your
Policy based upon your age, sex, and other factors as well as the net amount of
insurance that is at risk (see "Cost of Insurance Protection").
Charges For Income Taxes. We do not currently charge for our corporate
Federal income taxes that may be attributable to Separate Account B. However, we
may impose such a charge in the future. We may also impose charges for other
applicable taxes attributable to Separate Account B (see "FEDERAL INCOME TAX
INFORMATION").
Expenses Paid by the Funds
--------------------------
The Funds of Life Series Fund (singularly, "Fund," and collectively,
"Funds") bear the cost of investment advisory and subadvisory fees, brokerage
commissions, transfer taxes and other fees related to securities transactions.
While you will not be required to pay any such expenses directly, they are
indirectly passed on to you. They are reflected in the net asset value of each
Fund's shares.
The following table shows the fees and expenses for each Fund that is available
to you:
FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND FEE WAIVERS
MANAGEMENT OTHER OPERATING AND/OR EXPENSE NET
FEES(1) EXPENSES(2) EXPENSES(3) ASSUMPTION(1),(2) EXPENSES(3)
<S> <C> <C> <C> <C> <C>
Blue Chip Fund 0.75% 0.07% 0.82% N/A N/A
Cash Management Fund 0.75 0.24 0.99 0.29% 0.70
Discovery Fund 0.75 0.08 0.83 N/A N/A
Government Fund 0.75 0.12 0.87 0.15 0.72
Growth Fund 0.75 0.07 0.82 N/A N/A
High Yield Fund 0.75 0.08 0.83 N/A N/A
International Securities Fund 0.75 0.40 1.15 N/A N/A
Investment Grade Fund 0.75 0.10 0.85 0.15 0.70
Utilities Income Fund 0.75 0.13 0.88 0.15 0.73
</TABLE>
(1) For the fiscal year ended December 31, 1998, the Adviser waived Management
Fees in excess of 0.60% for Cash Management Fund, in excess of 0.60% for
Government Fund, in excess of 0.60% for Investment Grade Fund, and in
excess of 0.60% for Utilities Income Fund. The Adviser has contractually
agreed with Life Series Fund to waive Management Fees in excess of 0.60%
for Cash Management Fund, in excess of 0.60% for Government Fund, in
excess of 0.60% for Investment Grade Fund, in excess of 0.60% for
Utilities Income Fund for a period of twelve months commencing on May 1,
1999.
(2) For the fiscal year ended December 31, 1998, the Adviser assumed certain
Other Expenses in excess of 0.10% for Cash Management, in excess of 0.10%
for Government Fund, and in excess of 0.10% for Investment Grade Fund. The
Adviser has contractually agreed with Life Series Fund to assume Other
Expenses in excess of 0.10% for Cash Management Fund for a period of
twelve months commencing on May 1, 1999.
(3) Each Fund, other than International Securities Fund, has an expense offset
arrangement that may reduce the Fund's custodian fee based on the amount
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of cash maintained by the Fund with its custodian. Any such fee reductions
are not reflected under Total Fund Operating Expenses or Net Expenses.
WHO WE ARE
First Investors Life
--------------------
First Investors Life, 95 Wall Street, New York, New York 10005 , is a stock
life insurance company incorporated under the laws of the State of New York in
1962. We write life insurance, annuities, and accident and health insurance. We
assume all of the insurance risks under the Policy, and our assets support the
Policy's benefits. At December 31, 1998, we had over $1.017 billion of assets
and over $3.310 billion of life insurance in force. (See First Investors Life's
financial statements under "Financial Statements.")
First Investors Consolidated Corporation ("FICC") owns all of the
outstanding stock of First Investors Life, First Investors Corporation ("FIC"),
the underwriter of the policies sold by First Investors Life, and Administrative
Data Management Corp., the transfer agent for Life Series Fund ("Transfer
Agent"). FICC also owns all of the voting common stock of First Investors
Management Company, Inc. ("FIMCO"), the adviser of the Life Series Fund. Mr.
Glenn O. Head controls FICC and, therefore, controls First Investors Life and
the other companies which are owned by FICC.
We segregate the assets of Separate Account B from our other assets. The
assets fall into two categories: (1) assets equal to our reserves and other
liabilities under the Policies and (2) additional assets derived from expenses
that we charge to Separate Account B. The assets equal to our Policy reserves
and liabilities support the Policy. We cannot use these assets to satisfy any of
our other liabilities. The assets derived from our charges do not support the
Policy, and we can transfer these assets in cash to our General Account. Before
making a transfer, we will consider any possible adverse impact that the
transfer may have on Separate Account B.
Separate Account B
------------------
We established Separate Account B on June 4, 1985 under the provisions of
the New York Insurance Law. Separate Account B is a separate investment account.
Separate Account B has registered with the SEC as a unit investment trust under
the 1940 Act.
We allocate assets to Separate Account B to support the benefits under the
Policy. The assets are in turn invested by each Subaccount of Separate Account B
into a corresponding Fund at net asset value. Each Subaccount reinvests any
distributions it receives from a Fund by purchasing additional shares of the
distributing Fund at net asset value. Accordingly, we do not expect to pay you
any capital distributions from the Policies. We value shares of the Funds that
the Subaccounts hold at their net asset values.
Life Series Fund
----------------
Life Series Fund is a diversified open-end management investment company
registered under the 1940 Act. Life Series Fund consists of 11 separate Funds,
nine of which are available to Policyowners of Separate Account B. Target
Maturity 2007 Fund and Target Maturity 2010 Fund are the two Funds of Life
Series Fund that are not available to Policyowners of Separate Account B. The
Life Series Fund offers its shares only through the purchase of a Policy or a
variable annuity contract. It does not offer its shares directly to the general
public.
FIMCO is the investment adviser of each Fund. The Adviser is a New York
Corporation located at 95 Wall Street, New York, New York 10005. FIMCO and Life
Series Fund have retained Wellington Management Company, 75 State Street,
Boston, Massachusetts 02109 to serve as subadviser ("Subadviser") of the
International Securities Fund and the Growth Fund. See the Life Series Fund
Prospectus for more information about the Adviser and Subadviser.
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RISK AND REWARD CONSIDERATIONS
The Policy offers you not only insurance protection but also the opportunity
to accumulate assets on a tax deferred basis by investing in the underlying
investment options. However, there are several important factors that you should
consider before making a decision to purchase a Policy.
1. The Policy involves a long-term commitment on your part. Because most
of the fees and charges are paid during the early years, you will generally lose
money if you fail to make all premium payments required during the 12 year
period. This is illustrated in the hypotheticals that appear at the end of this
prospectus. Therefore, you should have the intention and financial ability to
complete the program.
2. With investment opportunity comes investment risk. Each Subaccount will
fluctuate in value on a daily basis. The investment objectives, primary
investment strategies, and primary risks of the underlying Funds are described
in the attached Life Series prospectus.
3. If you decide to take policy loans, you should be aware that they can
have adverse consequences. Among other things, they reduce the death benefit and
cash value of your Policy; they may undermine the growth potential of the cash
value of your Policy; and they may result in taxable distributions to you if
they exceed the cash value of a Policy as a result of a decline in the market
value of the underlying investments or for any other reason (see the discussion
on Policy Loans).
4. A surrender of your Policy prior to maturity may have tax implications.
You should carefully review the section on "FEDERAL INCOME TAX INFORMATION."
5. The ability of FIL and its affiliates to process policy-related requests,
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. (See "OTHER INFORMATION--Year 2000" for more information.) Additional
information on the risks of the Year 2000 may be found in the Life Series Fund
prospectus, which is attached at the end of this prospectus.
THE POLICY IN DETAIL
The following discussion summarizes important provisions of the Policy
offered by this Prospectus. The discussion generally assumes that premiums have
been duly paid and there have been no Policy loans. The death benefit and cash
value are affected if premiums are not duly paid or if a Policy loan is made.
YOUR PREMIUMS
The Amount of Your Premiums
---------------------------
Subject to our $600 minimum annual premium requirement (which does not
include additional premiums for any riders that you may select other than Waiver
of Premium), you decide how much you wish to pay in premiums. Once you have
decided how much you wish to pay, the premium remains level for all 12 years
that you are required to make premium payments. We can never increase the
amount. We allocate assets to our General Account to accumulate as a reserve for
the contingency that the insured will die when the Guaranteed Insurance Amount
exceeds the death benefit payable without such guarantee. In setting premium
rates, we took into consideration actuarial estimates of projected death and
surrender benefit payments, lapses, expenses, investment returns, and a
contribution to our surplus.
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The Frequency Of Payment
- ------------------------
You pay premiums under the Policy for only 12 years. You may choose to pay
these premiums on an annual, semi-annual, quarterly or monthly due date measured
from the date of issue of the Policy. Premium payments are due on or before the
due dates at our Home Office. If you pay early, we will place your premium
payment in our General Account and, on the day that it is due, we will allocate
the premium to the Subaccount(s) that you selected.
You will pay the lowest premium by paying annually. When you pay premiums on
other than an annual basis, the aggregate premium amounts for a Policy year are
higher, reflecting charges for loss of interest and additional billing and
collection expenses. The following table illustrates these premium amounts. We
deduct the additional charge from these premiums when we receive them.
PREMIUMS ON INSTALLMENT BASIS
(AS A PERCENTAGE OF AN ANNUAL PREMIUM)
AGGREGATE PREMIUMS
FREQUENCY EACH PREMIUM FOR POLICY YEAR
--------- ------------ ---------------
Annual................... 100.00% 100.00%
Semiannual............... 51.00 102.00
Quarterly................ 26.00 104.00
Pre-authorized Monthly... 8.83 105.96
Under the pre-authorized monthly plan ("Lifeline"), your bank automatically
makes an electronic funds transfer to us from your bank account to pay your
premiums.
Automatic Premium Loans to Pay Premiums
---------------------------------------
Under the Automatic Premium Loan provision, you pay any premium not paid
before the end of the grace period (see definition in "Other Provisions") by an
automatic loan against the Policy. The Automatic Premium Loan provision is
available only if:
. you elect the Automatic Premium Loan provision in your application for
the Policy or in a written request that we receive at our Home Office at
any time when no premium is in default, and
. the resulting Policy loan and loan interest to the next premium due date
do not exceed the maximum loan value of your Policy (see "Policy
Loans").
You may revoke the Automatic Premium Loan Provision at any time by written
request that we receive at our Home Office.
ALLOCATION OF YOUR NET PREMIUMS TO INVESTMENT OPTIONS
When you purchase a Policy, you select the allocation of the net premium
(premium less deductions) (see "The Charges And Expenses--Deductions from
Premium Payments") to not more than five of the Subaccounts of Separate Account
B. You must allocate at least 10% of the net premium to each Subaccount you
select. The actual allocation of net premium occurs on the Policy's issue date
and at the beginning of each Policy year after that.
We offer nine Subaccounts, from which you may select up to five. Each
Subaccount in turn invests in the corresponding Fund of Life Series Fund. For
information on the investment objectives, investment strategies, and investment
risks of the Funds, see the Life Series Fund prospectus which is attached at the
end of this prospectus.
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While your premium will never increase, the net amount which is invested in
the subaccounts you select will increase over time, as charges and expenses
decline. Thus, as time goes by, more of your premium will be invested. As an
example, based on the Policies illustrated on page 25 through 27, we would
allocate to the selected Subaccount(s) the following amounts for each Policy
year:
MALE ISSUE MALE ISSUE MALE ISSUE
AGE 10 AGE 25 AGE 40
BEGINNING $600 ANNUAL $1,200 ANNUAL $1,800 ANNUAL
OF POLICY PREMIUM FOR PREMIUM FOR PREMIUM FOR
YEAR STANDARD RISK STANDARD RISK STANDARD RISK
- --------- -------------- ------------- -------------
1....................... $170.81 $ 508.46 $ 927.23
2-4..................... 489.00 1,008.00 1,527.00
5 and later............. 513.00 1,056.00 1,599.00
THE DEATH BENEFIT
The death benefit is the amount we pay to your named beneficiary at the
death of the person whom you name as the insured. It is the sum of the
Guaranteed Insurance Amount (face amount of the Policy) plus, if positive, a
Variable Insurance Amount that is based upon the performance of the Subaccounts
that you have selected. We increase the death benefit to reflect (1) any
insurance on the life of the insured that you may have added by rider and (2)
any premium you have paid that applies to a period of time after the Insured's
death. We reduce the death benefit to reflect (1) any Policy loan and loan
interest and (2) any unpaid premium that applies to a period before the
insured's death.
Generally, we pay the death benefit within seven days after we receive all
claim requirements at our Home Office located at 95 Wall Street, New York, NY
10005. We pay interest on death benefit proceeds from the date of death until we
pay the death benefit. We pay this interest at the same annual rate that we pay
on death benefit proceeds you leave on deposit with us under a Settlement
Option. We may pay interest at a higher rate if the law requires.
The Guaranteed Insurance Amount
-------------------------------
We guarantee that the death benefit on your policy will never be less than
the Policy's face amount, which is the Guaranteed Insurance Amount. The Policy's
face amount is constant throughout the life of the Policy. During the first
Policy year, the death benefit is equal to the Guaranteed Insurance Amount.
Thereafter, we determine the death benefit on each Policy anniversary by adding
the Variable Insurance Amount, if positive, to the Guaranteed Insurance Amount.
The death benefit then remains level during the following Policy year. The death
benefit payable, therefore, depends on the Policy year in which the Insured
dies.
The Variable Insurance Amount
-----------------------------
The Variable Insurance Amount is based upon the investment results of the
Subaccounts that you have selected. During the first Policy year, the Variable
Insurance Amount is zero. On the first Policy anniversary, and on each
anniversary thereafter, we determine your Variable Insurance Amount by comparing
the Actual Rate of Return (the gross rate of return less all fees and charges)
on your Subaccounts with an assumed rate of return of 4%, which we call the
"Base Rate of Return."
Your Variable Insurance Amount does not change if the Actual Rate of Return
on all of your Subaccounts is exactly equal to the Base Rate of Return. Your
Variable Insurance Amount increases if the Actual Rate of Return is greater than
the Base Rate of Return. The Variable Insurance Amount decreases if the Actual
Rate of Return is less than the Base Rate of Return. The difference between
these rates of return, if any, is called the Differential Rate of Return. We set
the Variable Insurance Amount on each Policy anniversary and do not change it
until the next Policy anniversary.
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The amount by which your Variable Insurance Amount will increase or decrease
during any policy year is determined by dividing the Differential Investment
Return (the Differential Rate of Return times the Investment Base) for a policy
year by the applicable net single premium rate that is specified in your Policy.
Your policy includes a table of the applicable net single premium rates per
$1.00 from ages 0 to 99. The net single premium increases as the Insured grows
older, meaning that the insured will receive less Variable Insurance per dollar
of Differential Investment Return as the insured grows older. The net single
premium does not depend upon the risk classification of a Policy or any changes
in the insured's health after issue of a Policy. The net single premium will be
lower for a Policy that we issue to a female than for a Policy that we issue to
a male of the same age.
The Variable Insurance Amount is calculated on a cumulative basis. This
means that the amount reflects the accumulation of increases and decreases from
past Policy years. The cumulative amount may be positive or negative, depending
on the investment performance, while the Policy is in force, of the Subaccounts
that you have selected. If the Variable Insurance Amount is negative, the death
benefit is the Guaranteed Insurance Amount. In other words, the death benefit is
never less than the Guaranteed Insurance Amount.
The following example illustrates how the Variable Insurance Amount is
calculated. For this example, we use the Policy illustration on page 26 for a
male age 25, and assume an 8% hypothetical gross annual investment return
(equivalent to an Actual Rate of Return of approximately .064399). The
calculations are for policy years 6 and 12:
CALCULATION OF CHANGE IN
VARIABLE INSURANCE
AMOUNT AT END OF POLICY YEAR
6 12
----------------------------
(1) Cash Value at End of Prior Year..... $4,972.00 $14,529.00
(2) Net Premium......................... 1,056.00 1,056.00
(3) Investment Base at Beginning of
Current Policy Year: (1)+(2)........ 6,028.00 15,585.00
(4) Differential Rate of Return
(.064399 - .04)..................... .024399 .024399
(5) Differential Investment Return:
(3)x(4)............................. $147.08 $380.25
(6) Net Single Premium at
End of Current Year................. 0.22416 0.27338
(7) Change in Variable Insurance
Amount (to nearest dollar):
(5) divided by (6).................. $ 656 $ 1,391
If the hypothetical gross annual investment return in the year illustrated
had been 0% (equivalent to an Actual Rate of Return of approximately -1.445%),
the results in the calculation above would have been as follows: the death
benefit would have decreased by $1,464, and the death benefit for the end of
Policy year 6 would have been $51,934.
YOUR CASH VALUE
Determining Your Cash Value
---------------------------
The cash value you have in your Policy will vary daily depending on the
investment experience of the Subaccounts you have selected. (See "Valuation of
Assets.") The cash value on any day within the policy year equals the cash value
as of the end of the prior Policy year, plus the premiums that you have paid
since the Policy's last anniversary, adjusted to reflect the Actual Rates of
Return of the Subaccounts you have selected, less the cost of insurance
protection.
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Assuming no partial surrenders or Policy Loans have been taken, the
following example illustrates how the cash value of a Policy at the end of any
year is calculated. For this example, we use the Policy illustration for a male
issue age 25 on Page 26, and we assume an 8% hypothetical gross annual
investment return (equivalent to an Actual Rate of Return of approximately
6.4399%). The "Investment Base" is the value of your investments on all
Subaccounts you have selected. In this case, the cash value we show for the end
of Policy year 5 increases to the amount we show for the end of Policy year 6
for the Policy, as follows:
(1) Cash Value at End of Prior Year.................................. $4,972
(2) Net Premium Paid by You.......................................... 1,056
(3) Investment Base at Beginning of Current Policy Year 6: (1)+(2)... 6,028
(4) Actual Rate of Return............................................ .064399
(5) Investment Return: (3)x(4)....................................... 388
(6) Benefit Base at End of Policy Year 6: (3)+(5).................... 6,416
(7) Cost of Insurance Protection During Policy Year 6................ (84)
(8) Cash Value at End of Policy Year 6: (6)-(7)...................... 6,332
We do not guarantee that you will have any cash value in your Policy. The
Policy offers the possibility of increased cash value resulting from good
investment performance. However, there is no assurance that any increase will
occur. It is also possible, due to poor investment performance, for the cash
value to decline to the point of having no value or, in fact, a negative value.
In that case, we would credit subsequent net premium payments and investment
returns against the negative cash value. You bear all the investment risk.
Deduction of Cost of Insurance Protection from Cash Value
---------------------------------------------------------
Your cash value is reduced by an annual charge for the cost of insurance
protection. We issue variable life insurance policies to (1) persons with
standard mortality risks and (2) persons with higher mortality risks, as our
underwriting rules permit. We charge a higher gross premium for the person with
the higher mortality risk.
We use the 1980 Commissioners' Standard Ordinary Mortality Table to compute
the cost of insurance protection for each Policy, with one exception. For
mortality rates for extended term insurance, we use the Commissioners' 1980
Extended Term Table.
In all cases, we base the cost of insurance protection on the net amount of
insurance at risk (the Policy's face amount, plus the Variable Insurance Amount,
minus the cash value) and the person's sex and attained age. The amount that we
deduct each year is different, because the probability of death generally
increases as a person's age increases. The net amount of insurance at risk may
decrease or increase each year depending on the investment experience of the
Subaccount(s) that you have selected.
Accessing Your Cash Value
-------------------------
FULL OR PARTIAL SURRENDERS. You may surrender the Policy for its cash
value at any time while the Insured is living. The amount payable will be the
cash value that we next compute after we receive the surrender request at our
Home Office. Surrender will be effective on the date that we receive both the
Policy and a written request in a form acceptable to us.
On any Policy anniversary, you may also make a partial surrender of the
Policy by reducing the premium amount. We permit a partial surrender only if you
(1) have no outstanding policy loan and (2) have paid the new premium due on the
Policy anniversary.
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We must receive all requirements for a partial surrender at our Home Office
on or before the Policy anniversary. The partial surrender will be effective on
the Policy anniversary. The amounts of the Guaranteed Insurance Amount (face
amount of the Policy), death benefit, and cash value for the reduced Policy will
be the same as they would have been had you paid the reduced premium from
inception. We will pay the portion of the cash value of the original Policy that
exceeds the cash value of the reduced Policy to you as a partial surrender. We
will allocate the cash value of the reduced Policy among the Subaccounts in the
same proportion as the allocation of the cash value of the original Policy.
We will usually pay the surrender value within seven days. However, we may
delay payment for the following reasons:
. a recent payment that you made by check has not yet cleared the bank,
. we are not able to determine the amount of the payment because the New
York Stock Exchange is closed for trading or the Commission determines
that a state of emergency exists, or
. for such other periods as the Commission may by order permit for the
protection of security holders.
We will pay interest if we delay payment of the surrender value beyond seven
days. Under Federal tax laws, we may deduct withholding taxes from the surrender
value.
POLICY LOANS. You may borrow up to 75% of the cash value during the first
three Policy years, or 90% of the cash value after the first three Policy years,
if you assign your Policy to us as sole security. We charge interest daily at an
effective annual rate of 6% compounded on each Policy anniversary. In general,
we send the loan amount within seven days of receipt of the request. We will not
permit a new loan unless it is at least $100, or unless you use it to pay
premiums. You may repay all or a portion of any loan and accrued interest while
the Insured is living and the Policy is in force.
When you take out a loan, we transfer a portion of the cash value equal to
the loan from the Subaccount(s) that you have selected to our General Account.
We charge the loan to each Subaccount in the proportion which the value of each
Subaccount bears to the cash value of the Policy as of the date of the loan. A
Policy loan does not affect the amount of the premiums due. A Policy loan does,
however, reduce the death benefit and cash value by the amount of the loan. A
Policy loan may also permanently affect the death benefit above the Guaranteed
Insurance Amount and the cash value, whether or not you repay the loan in whole
or in part. This occurs because we will not credit Net Investment Return that
the Subaccount(s) earn to the amount that we maintain in the General Account
during the period that the loan is outstanding. Instead, we credit the amount in
the General Account at the assumed interest rate of 4%, in accordance with the
tabular cash value calculations that we have filed with the state insurance
departments.
A Policy loan will have a negative impact on the growth of the cash value
during periods when the actual rates of return of the Subaccounts you have
selected exceed the assumed rate of 4%. Recall that the death benefit is made up
of two parts: the Guaranteed Insurance Amount and, if positive, the Variable
Insurance Amount (see "The Guaranteed Insurance Amount" and "The Variable
Insurance Amount"). The cash value and the Variable Insurance Amount, if any,
depend on the Actual Rate of Return of the Subaccount(s). Thus, during periods
of favorable investment return (an Actual Rate of Return greater than 4%), an
outstanding Policy loan results in lower investment return than would have
otherwise resulted in the absence of any indebtedness.
For example, use the Policy for a male issue age 25 illustrated on Page 26,
and assume a hypothetical 8% gross annual investment return and that you made a
$3,000 Policy loan at the end of Policy year 9. For the end of Policy year 10,
the death benefit and cash value would be $57,612 and $12,612, respectively. The
differences between these amounts and the $57,898 death benefit and $12,685 cash
11
<PAGE>
value that appear on Page 26 for Policy year 10 result because the portion of
the cash value equal to the indebtedness does not reflect the Subaccount(s)'
Actual Rate of Return of approximately 6.4399%.
Conversely, outstanding indebtedness will diminish the adverse effect on
cash value during a period of unfavorable investment return (an Actual Rate of
Return less than 4%). This is because the portion of the cash value that we
transfer from the Subaccount(s) to the General Account will grow at the assumed
rate of 4% even if Actual Rates of Return are below 4%. Thus, a Policy loan will
tend to protect the cash value and Variable Insurance Amount from decreasing if
the Actual Rate of Return is less than 4%.
If you do not pay loan interest when it is due, we increase your loan by the
amount of any unpaid interest, and we transfer an equivalent amount of cash
value from the Subaccount(s) to the General Account. We credit loan repayments
to each Subaccount in proportion to your allocation to each Subaccount as of the
date of repayment.
We subtract the amount of any outstanding loan plus interest from any death
benefit or any surrender value that we pay. If your outstanding loan with
accrued interest ever equals or exceeds the cash value, we will mail notice of
such event to you and any assignee at the assignee's last known address. The
Policy terminates 31 days after we mail such notice. The Policy does not
terminate if you make a repayment within that 31-day period.
Generally, on a Policy's termination or surrender, you pay income tax on the
following:
. the surrender value, plus
. any outstanding Policy loan plus interest, if applicable, minus
. the total premiums that you paid on the Policy.
Consult with your representative or tax adviser before taking Policy loans.
Transferring Your Cash Value Among Investment Options
-----------------------------------------------------
Twice each Policy year, you may transfer part or all of your cash value from
each Subaccount that you have selected to any other Subaccount or Subaccounts.
You may make these transfers only if
. you allocate the cash value to no more than five of the Subaccounts, and
. the allocation to any one Subaccount is not less than 10% of the cash
value.
SETTLEMENT OPTIONS
You or your named beneficiary may receive a single sum payment of Policy
proceeds on the death of the Insured or surrender of the Policy. Alternately,
you or your beneficiary may elect to apply all or a portion of the proceeds
under any one of the fixed benefit settlement options that the Policy provides.
Tax consequences may vary depending on the settlement option that the recipient
chooses. The options are as follows:
PROCEEDS LEFT AT INTEREST - Proceeds left on deposit with us to accumulate,
with interest payable at a rate of 2 1/2% per year, which may be increased by
additional interest.
PAYMENT OF A DESIGNATED AMOUNT - Payments in installments until proceeds
applied under the option and interest on unpaid balance at a rate of 2 1/2% per
year and any additional interest are exhausted.
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<PAGE>
PAYMENT FOR A DESIGNATED NUMBER OF YEARS - Payments in installments for up
to 25 years, including interest at a rate of 2 1/2% per year. Payments may
increase by additional interest, which we would pay at the end of each
installment year.
LIFE INCOME, GUARANTEED PERIOD - Payments guaranteed for 10 or 20 years, as
you elect, and for life thereafter. During the guaranteed period of 10 or 20
years, the payments may be increased by additional interest, which we would pay
at the end of each installment year.
LIFE INCOME, GUARANTEED RETURN - The sum of the payments made and any
payments due at the death of the person on whom the payments are based, never to
be less than the proceeds applied.
LIFE INCOME ONLY - Payments made only while the person on whom the payments
are based is alive.
OPTIONAL INSURANCE RIDERS
The following optional provisions may be included in a Policy, in States
where available, subject to the payment of an additional premium, certain age
and insurance underwriting requirements, and the restrictions and limitations
that apply to the Policy, as described above.
Accidental Death Benefit
------------------------
You may elect to obtain an Accidental Death Benefit rider if the Insured's
age is 0 to 60. The rider provides for an additional fixed amount of death
benefit in the event the Insured dies from accidental bodily injury while the
Policy is in force and before the Policy anniversary when the Insured attains
age 70. The premium is $1.75 per $1,000 of benefit and is payable for 12 years.
The amount of the benefit is equal to the face amount of the Policy, but cannot
exceed an amount equal to $200,000 minus the sum of the Insured's Accidental
Death Benefit coverage in all companies.
12 Year Level Term Rider
------------------------
You may elect to obtain a 12 Year Level Term Insurance rider where the
Insured is age 18 to 58 for an amount equal to (1) the Policy face amount or (2)
two times the Policy face amount. The rider is convertible, without evidence of
insurability, to a new Policy or other permanent plan of insurance. The amount
of the insurance under the new Policy may be any amount up to the face amount of
the rider. The conversion may occur at any time during the 12 years of rider
coverage, but not later than the Policy anniversary when the Insured reaches age
65.
Waiver Of Premium
-----------------
You can choose to obtain a Waiver of Premium rider where the Insured is age
15 to 55. Under the rider, the Company will waive all premiums falling due after
the date of commencement of the disability and for as long as the disability
continues. Disability, for this purpose, means the Insured's total disability
(1) commencing before the Policy anniversary when the Insured reaches age 60 and
(2) continuing for six months.
Payor Benefit
-------------
You can also choose to obtain a Payor Benefit rider where the Insured is age
0 to 14 and you are age 18 to 55. It provides insurance on the life of the
person who is responsible for paying the premiums. If you die or become disabled
before reaching age 60 and before the Insured is age 21, the Company waives all
premiums that become due before the Insured's age 21.
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<PAGE>
OTHER PROVISIONS
Age And Sex
-----------
If you have misstated the age or sex of the Insured, the benefits available
under the Policy are those that the premiums paid would have purchased for the
correct age and sex.
Assignment
----------
You may transfer ownership of your Policy from yourself to someone else.
However, the assignment is not binding on us, unless it is in writing and filed
with us at our Home Office. We assume no responsibility for the validity or
sufficiency of any assignment. Unless otherwise provided in the assignment, the
interest of any revocable beneficiary is subordinate to the interest of any
assignee, regardless of when you made the assignment. The assignee receives any
sum payable to the extent of his or her interest.
Beneficiary
-----------
This is the person you designate in the Policy to receive death benefits
upon the death of the Insured. You may change this designation, during the
Insured's lifetime, by filing a written request with our Home Office in a form
acceptable to us.
Cancellation Rights
-------------------
You have a limited right to cancel and return the Policy to us, or our
representative through whom you bought the Policy. You must submit a written
request for cancellation. You may examine and return the Policy within ten days
after you receive the Policy or notice of right of withdrawal. You may also
return the Policy within 45 days after completion of Part I of the application
for the Policy. In either case, you obtain a full refund of the premiums that
you paid.
Default And Options On Lapse
----------------------------
A premium is in default if you do not pay it on or before its due date. The
insurance continues in force during the 31-day grace period (see "Grace Period"
below). However, if the Insured dies during the grace period, we deduct from the
death benefit the portion of the premium applicable to the period from the
premium due date to the end of the Policy month in which death occurs.
We apply the Policy's cash value minus any loan and interest to purchase
continued insurance, if you do not surrender a Policy within 60 days after the
date of default. You may choose either reduced paid-up whole life insurance or
extended term insurance for the continued insurance. Under the Policy, you
automatically have the extended term insurance if you make no choice. However,
that option is available only in standard risk cases. If we rated the Policy for
extra mortality risks, the paid-up insurance is the automatic option. Both
options are for fixed life insurance, and neither option requires the further
payment of premiums.
The reduced paid-up whole life insurance option provides a fixed and level
amount of paid-up whole life insurance. The amount of coverage is the amount
that the surrender value purchases on the date the option becomes effective. The
extended term insurance option provides a fixed and level amount of term
insurance equal to the death benefit (minus any indebtedness) as of the date the
option becomes effective. The insurance coverage under this option continues for
as long a period as the surrender value on such date purchases.
For example, use the Policy for a male issue age 25 illustrated on Page 26
and assume the 0% and 8% hypothetical gross annual investment returns. If an
option became effective at the end of Policy year 5, the fixed insurance
coverage under these Policies would be as follows:
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<PAGE>
0% 8%
-------- --------
Cash Value........................... $ 3,992 $ 4,972
Reduced Paid-up Insurance............ 18,406 22,925
for life for life
Extended Term Insurance.............. 51,908 53,398
for 25 years for 28 years
You may surrender a Policy continued under either option for its cash value
while the Insured is living. You may make a loan under the reduced paid-up whole
life insurance option, but not under the extended term insurance option.
Exchange Privilege
------------------
The exchange privilege allows you to exchange the Policy for a permanent
fixed life insurance policy on the Insured's life. The exchange privilege is
available:
. within the first 24 months after the issue Policy's date, if you have
duly paid all premiums, or
. if any Fund changes its investment adviser or makes a material change in
its investment objectives or restrictions.
You do not need to provide evidence of insurability to exercise this
privilege. The new policy has a level face amount equal to the face amount of
the Policy. It also has the same benefit riders, issue dates, and risk
classification for the Insured as the Policy does. We base premiums for the new
policy on the premium rates for the new policy that were in effect on the Policy
date. You may elect either a continuous-premium policy or a limited-payment
policy for your exchanged policy.
In some cases, we may adjust the cash on exchange. The adjustment equals the
Policy's surrender value minus the new policy's tabular cash value. If the
result is positive, we pay that amount to you. If the result is negative, you
pay that amount to us. We will determine the amount of a cash adjustment as of
the date we receive the Policy and written request at our Home Office.
If we do not issue a Policy for any reason, we refund to the applicant the
amount of the premium without interest.
Grace Period
------------
With the exception of the first premium, we allow a Grace Period of 31 days
for payment of each premium after it is due. The Policy continues in force
during the Grace Period unless you surrender it.
Incontestability
----------------
Except for nonpayment of premiums, we do not contest the validity of the
Policy and its riders after it has been in force during the lifetime of the
Insured for two years from the Date of Issue.
Payment and Deferment
---------------------
We will usually pay the death benefit, surrender value, or loan proceeds
within seven days after we receive all documents required for such payments.
However, we may delay payment if (1) a recent payment by check has not yet
cleared the bank, (2) we cannot determine the amount because the New York Stock
Exchange is closed for trading, or (3) the Commission determines that a state of
emergency exists.
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<PAGE>
Under a Policy continued as paid-up or extended term insurance, we may defer
the payment of the surrender value or loan proceeds for up to six months. If we
postpone the payment more than 30 days, we will pay interest at a rate of not
less than 3% per year on the Surrender Value. We will pay the interest from the
date of surrender to the date we make payment.
Payment of Dividends
--------------------
The Policies do not provide for dividend payments. Therefore, they are
"non-participating" in the earnings of First Investors Life.
Policy Years and Anniversaries
------------------------------
We measure Policy years and anniversaries from the Date of Issue of the
Policy which will generally be the date on which we approve the application. The
Date of Issue may be backdated on your request to save age. However, the Date of
Issue cannot be earlier than either (1) the date you sign the application or (2)
a date 15 days before the date on which we approve the application. Each Policy
year will commence on the anniversary of the Date of Issue.
Reinstatement
-------------
You may reinstate a Policy that you did not surrender for its cash value
within five years from the date of default, in accordance with the Policy. To
reinstate, you must present evidence of insurability acceptable to us, and you
must pay to us the greater of:
(1) (a) all premiums from the date of default with interest to the date of
reinstatement, plus (b) any Policy debt (plus interest to the date of
reinstatement) in effect when you continued the Policy as paid up insurance
or extended term insurance; or
(2) 110% of the increase in cash value resulting from reinstatement.
To reinstate, you must also pay us any Policy debt that arose after the
continuation of the Policy as paid up insurance. We calculate interest on any
such debt at the rate of 6% per year compounded annually.
Suicide
-------
If the Insured commits suicide within two years from the Policy's date of
issue, our liability under the Policy is limited to all premiums paid less any
indebtedness.
Valuation Of Assets
-------------------
We determine the value of the assets of each Subaccount as of the close of
business on each business day. We value shares of the underlying Fund at the net
asset value per share as determined by the Fund. The Fund determines the net
asset value of a Fund's share as described in Life Series Fund's Prospectus.
FEDERAL INCOME TAX INFORMATION
We base this discussion on current federal income tax law and
interpretations. It assumes that the policyowner is a natural person who is a
U.S. citizen and U.S. resident. The tax effect on a corporate taxpayers,
non-U.S. citizens, and non-U.S. residents may be different. The law and
interpretations could change, possibly retroactively. The discussion is general
in nature. We do not intend it as tax advice, for which you should consult a
qualified tax adviser.
We believe that the Policy qualifies as a life insurance contract for
federal income tax purposes because the Policy meets the definition of life
16
<PAGE>
insurance in Section 7702(a) of the Internal Revenue Code of 1986, as amended
(the "Code") and the investments of the Subaccounts satisfy the investment
diversification requirements of Section 817(h) of the Code. Consequently:
. the death benefit will not be subject to federal income tax;
. you will generally not be taxed on the growth of the cash value of the
Policy, if any, that is attributable to the investments in the
underlying investment portfolios (this is known as the "inside
build-up"), unless or until there is a full or partial surrender of the
Policy; and
. transfers among the investment subaccounts will not be subject to
federal income tax, unless or until there is a full or partial surrender
of the Policy.
Qualification as a life insurance contract for Federal income tax purposes
depends, in part, upon the satisfaction by the Subaccounts of Separate Account B
of certain investment diversification requirements in Section 817(h) of the
Code. We expect that the Adviser will continue to manage the assets of the Funds
in a manner that complies with these diversification requirements. A Policy that
invests in a Fund that fails to meet diversification requirements will not
receive tax treatment as a life insurance contract for the period of such
diversification failure, and any subsequent period.
The Treasury Department has stated that it may issue guidelines that limit a
Policyowner's control of investments underlying a variable life insurance
policy. If a Policy failed to meet those guidelines, you would be taxed on the
Policy's current income. The Treasury Department has said informally that those
guidelines may limit the number of investment funds and the frequency of
transfers among those funds. The issuance of such guidelines may require us to
limit your right to control the investment. The guidelines may apply only
prospectively, although they could apply retroactively if they do not reflect a
new Treasury Department position.
We do not believe that any Policy will be a "modified endowment contract" at
issuance, within the meaning of Section 7702A of the Code. A modified endowment
contract is a life insurance policy under which the total premiums paid, at any
time during the first seven years of the policy, exceed the premiums that would
have been paid by that time under a similar fixed-benefit life insurance policy
designed to provide for paid-up future benefits after the payment of seven equal
annual premiums. This is called the "seven-pay" test.
Whenever there is a "material change" under a Policy, the Policy is
generally subject to a new seven-pay test during the next seven years to
determine whether it is a modified endowment contract. A material change for
these purposes could occur because of a change in death benefit, and because of
certain other changes.
If your Policy's benefits are reduced during its first seven years (or
within seven years after issuance or a material change), we will redetermine the
seven-pay test based on the reduced level of benefits and apply the new test to
all prior premium payments. Such a reduction in benefits could include a
decrease in face amount, a partial surrender, or a termination of additional
benefits under a rider. If the premiums that you previously paid are at any time
greater than the recalculated limit under the seven-pay test, we will treat the
Policy as a modified endowment contract from that time forward.
A Policy that you receive in exchange for a modified endowment contract will
also be a modified endowment contract.
Any distribution from a Policy that is a modified endowment contract will be
taxed on an "income-first" basis. A distribution, for this purpose, includes a
loan or surrender. "Income first" means that the distribution is taxed to the
extent that your cash value exceeds your basis in the Policy (premiums paid less
previous distributions that were not taxable). Premiums paid, for this purpose,
include loans that have been taxable as income because of the Policy's modified
17
<PAGE>
endowment contract status. An additional 10% tax will also be imposed on any
amount so taxed, subject to certain exceptions for distributions:
. before you reach age 59-1/2,
. in case of disability as defined in the Code, or
. received as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer or the joint lives (or
joint life expectancies) of the taxpayer and his or her beneficiary.
All modified endowment contracts that we (or our affiliates) issue to you
during any calendar year generally will be treated as one Policy under the
modified endowment contract rules. You should consult your tax adviser if you
have questions regarding the possible impact of the modified endowment contract
rules on your Policy.
If a Policy is not a modified endowment contract, Policy loans will be
treated as indebtedness, and no part of such loans will be subject to current
federal income tax. In addition, the interest on such loans generally will not
be deductible. If you surrender your Policy while a loan is outstanding, the
amount of the loan will be treated as a partial surrender. You should be aware
that if the cash value of your Policy falls below the aggregate amount of loans
outstanding, as the result of the fluctuation in the value of the underlying
portfolios or otherwise, the entire Policy may terminate. In that case, all
loans will be taxable to the extent they exceed premiums paid.
If you make a partial surrender after the first 15 Policy years, the
distribution will not be subject to federal income tax except to the extent that
it exceeds your basis in the Policy. During the first 15 Policy years, however,
the proceeds from a partial withdrawal could be subject to federal income tax,
under a complex formula, to the extent that your cash value exceeds your basis.
Upon surrender of a Policy, taxation of the Surrender Value depends on the
Payment Option that you have selected. If payment is in one sum, you are taxed
on the income in the Policy at the time payment is made. If payment is in
installments, you may be taxed:
. on all or a portion of each installment until the income in the Policy
has been paid,
. only after all your basis in the Policy has been paid, or
. on a portion of each payment.
You should consult your tax adviser if you have questions about the taxation
of a Policy surrender.
Under the Code, we must generally withhold income tax from the taxable
portion of the distribution that we pay upon surrender of a Policy. We will not
withhold, if you so request in writing, before the payment date. Failure to
withhold or withholding of an insufficient amount may subject you to taxation.
In addition, insufficient withholding and insufficient estimated tax payments
may subject you to penalties.
The Life Series Fund sells its shares to more than one separate account
funding variable annuity contracts or variable life insurance policies.
Consequently, violation of the Federal tax laws by another separate account
investing in Life Series Fund could cause the Policies funded through Separate
Account B to lose their tax-deferred status. Such a result might cause us to
take remedial action.
We are taxed as a "life insurance company" under Subchapter L of the Code.
Under the applicable provisions of the Code, we include our variable life
insurance operations in our Federal income tax return. Currently, we do not make
18
<PAGE>
any charge against the Subaccount(s) for our Federal income taxes attributable
to the Subaccount(s). However, we may make such charges in the future. Any such
charges against a Subaccount would reduce its Net Investment Return.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If we make any tax charges in the future, we will accumulate them daily and
transfer them from the Subaccount(s) to our General Account. We will retain any
investment earnings on tax charges accumulated in the Subaccount(s).
OUR OFFICERS AND DIRECTORS
NAME OFFICE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ---- ------ ----------------------------------------
Dori Allen Associate Associate Counsel, First Investors Life since
Counsel May 1998; Staff Attorney since February 1997;
and Staff Supervisor, Toxic Tort Unit, Claims
Attorney Administration Corporation, New York, prior
thereto.
Jay G. Baris Director Partner, Kramer, Levin, Naftalis & Frankel,
LLP, New York, Attorneys; Secretary and
Counsel, First Financial Savings Bank, S.L.A.,
New Jersey.
Glenn T. Dallas Director Retired since April 1996; Division President
and Senior Vice President, ADT Security
Systems, Parsippany, New Jersey, prior
thereto.
William H. First Vice First Vice President and Chief Actuary, First
Drinkwater President Investors Life.
and Chief
Actuary
Lawrence M. Senior Senior Vice President and Comptroller, First
Falcon Vice Investors Life.
President
and
Comptroller
Richard H. President President, First Investors Life.
Gaebler and
Director
George V. Ganter Director Vice President, First Investors Asset
Management Company, Inc., Portfolio Manager,
FIMCO.
Robert J. Grosso Director Director of Compliance, FIC since April 1997;
Assistant Counsel since January 1995; Business
Consultant from August 1994 to January 1995;
Assistant Vice President and Assistant General
Counsel, Alliance Fund Distributors, Inc. from
September 1993 to August 1994.
Glenn O. Head Chairman Chairman and Director, FICC, FIMCO and FIC.
and
Director
19
<PAGE>
OUR OFFICERS AND DIRECTORS
NAME OFFICE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ---- ------ ----------------------------------------
Kathryn S. Head Director President and Director, FICC and FIMCO; Vice
President and Director, FIC; Chairman,
President and Director, First Financial
Savings Bank, S.L.A.
Scott Hodes Director Partner, Ross & Hardies, Chicago, Illinois,
Attorneys.
Carol Lerner Secretary Assistant Secretary, FIC; Secretary, FIMCO and
Brown FICC.
William M. Vice Chief Financial Officer, FIC since December
Lipkus President 1997, FICC since June 1997; Vice President,
and Chief First Investors Life since May 1996; Chief
Financial Financial Officer since May 1998; Chief
Officer Accounting Officer since June 1992.
Jackson Ream Director Retired since January 1999; Senior Vice
President, NationsBank, NA , Dallas, Texas
prior hereto.
Nelson Schaenen Director Partner, Weiss, Peck & Greer, New York,
Jr. Investment Managers.
Martin A. Smith Vice Vice President, First Investors Life since
President February 1998; Vice President, The United
States Life Insurance Company, New York, prior
thereto.
Ada M. Suchow Vice Vice President, First Investors Life.
President
John T. Sullivan Director Director, FIMCO and FIC; Of Counsel to
Hawkins, Delafield & Wood, New York,
Attorneys.
Gulf Insurance Company has issued a fidelity bond for $5,000,000 covering
our officers and employees. Great American Insurance Companies has issued a
directors and officers liability policy for $3,000,000 covering our directors
and officers.
In addition to Separate Account B, First Investors Life also maintains First
Investors Life Variable Annuity Fund A, First Investors Life Variable Annuity
Fund C and First Investors Life Variable Annuity Fund D. We offer variable
annuity contracts supported by Variable Annuity Fund A through its own
prospectus and by Variable Annuity Funds C and D through a combined prospectus.
OTHER INFORMATION
VOTING RIGHTS
Because the Life Series Fund is not required to have annual shareholder
meetings, policyowners generally will not have an occasion to vote on matters
that pertain to the Life Series Fund. In certain circumstances, the Fund may be
required to hold a shareholders meeting or may choose to hold one voluntarily.
For example, a Fund may not change fundamental investment objectives or
investment policies without the approval of a majority vote of that Fund's
20
<PAGE>
shareholders in accordance with the 1940 Act. Thus, if the Fund sought to change
a fundamental investment objective or policy, policyowners would have an
opportunity to provide voting instructions for shares of a Fund held by a
Subaccount in which their Policy invests.
We will vote the shares of any Fund held in a corresponding Subaccount or
directly, at any Fund shareholders meeting as follows:
. shares attributable to Policyowners for which we have received
instructions, in accordance with the instructions;
. shares attributable to Policyowners for which we have not received
instructions, in the same proportion that we voted shares held in the
Subaccount for which we received instructions; and
. shares not attributable to Policyowners, in the same proportion that we
have voted shares held in the Subaccount attributable to Policyowners
for which we have received instructions.
We will vote Fund shares that we hold directly in the same proportion that
we vote shares held in any corresponding Subaccounts that are attributable to
Policyowners and for which we receive instructions. However, we will vote our
own shares as we deem appropriate where there are no shares held in any
Subaccount. We will present all the shares of any Fund that we hold through a
Subaccount or directly at any Fund shareholders meeting for purposes of
determining a quorum.
We will determine the number of Fund shares held in a corresponding
Subaccount that is attributable to each Policyowner by dividing the value of the
Subaccount by the net asset value of one Fund share. We will determine the
number of votes that a Policyowner has the right to cast as of the record date
established by Life Series Fund.
We will solicit instructions by written communication before the date of the
meeting at which votes will be cast. We will send meeting and other materials
relating to the Fund to each Policyowner having a voting interest in a
Subaccount.
The voting rights that we describe in this Prospectus are created under
applicable laws. If the laws eliminate the necessity to submit such matters for
approval by persons having voting rights in separate accounts of insurance
companies or restrict such voting rights, we reserve the right to proceed in
accordance with any such changed laws or regulations. We specifically reserve
the right to vote shares of any Fund in our own right, to the extent permitted
by law.
RESERVATION OF RIGHTS
We also reserve the following rights, subject to compliance with applicable
law, including any required approval of Policyowners:
. to invest the assets of Separate Account B in the shares of any
investment company or series thereof or any investment permitted by law;
. to transfer assets from Separate Account B to another separate account,
with appropriate adjustments to avoid odd lots and fractions;
. to operate Separate Account B as a "management company" under the 1940
Act, or in any other form permitted by law (we or our affiliate would
serve as investment adviser);
. to deregister Separate Account B under the 1940 Act; and
. to operate Separate Account B under the general supervision of a
committee any or all of whose members may be interested persons (as
defined in the 1940 Act) of First Investors Life or an affiliate, or to
discharge the committee.
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<PAGE>
DISTRIBUTION OF POLICIES
First Investors Life and Separate Account B have entered into an
Underwriting Agreement with their affiliate, FIC, 95 Wall Street, New York, New
York 10005 to sell the policies through FIC's agents. For the fiscal years ended
December 31, 1996, 1997, and 1998, FIC received fees of $5,207,230, $4,487,918
and $5,121,393, respectively, in connection with the distribution of Policies in
a continuous offering. First Investors Life has reserved the right in the
Underwriting Agreement to sell the Policies directly. Insurance agents licensed
to sell variable life insurance policies sell the Policies. These agents are
registered representatives of the Underwriter or of the broker-dealers who have
sales agreements with the Underwriter. We pay these agents a commission of
28.55% of the first year premium payment and 1% of the premium payments for
years 2 through 12.
We offer the Policies for sale in Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Iowa,
Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan,
Minnesota, Missouri, Mississippi, North Carolina, Nebraska, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin
and Wyoming.
CUSTODIAN
Subject to applicable laws and regulations, we are the custodian of the
securities of the Subaccounts. We maintain the records and accounts of Separate
Account B.
REPORTS
At least once each Policy year, we mail a report to the Policyowner within
31 days after the Policy anniversary. We mail the report to the last address
known to us. The report shows (1) the death benefit, (2) the cash value, (3) the
policy debt on the anniversary and (4) any loan interest for the prior year. The
report also shows your allocation among the Subaccounts on that anniversary. We
will not send a report if the Policy is continued as reduced paid-up or extended
term insurance.
STATE REGULATION
We are subject to the laws of the State of New York governing insurance
companies and to regulations of the New York State Insurance Department. We file
an annual statement in a prescribed form with the Department of Insurance each
year covering our operations for the preceding year and our financial condition
as of the end of such year.
Our books and accounts are subject to review by the Insurance Department at
any time. The Department conducts a full examination of our operations
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies except to determine compliance
with the requirements of the New York Insurance Law. In addition, we are subject
to regulation under the insurance laws of other jurisdictions in which we may
operate.
EXPERTS
Tait, Weller & Baker, independent certified public accountants have examined
the financial statements included in this Prospectus. We include the financial
statements in reliance upon the authority of said firm as experts in accounting
and auditing.
22
<PAGE>
RELEVANCE OF FINANCIAL STATEMENTS
You should consider our financial statements, which appear in this
Prospectus, only as bearing on our ability to meet our obligations to
Policyowners under the Policies. You should not consider our financial
statements as bearing on the investment performance of the Subaccount(s). Only
the investment results of the Subaccount(s) affect the values of Policyowner
interests under the Policies.
YEAR 2000
On and after January 1, 2000, computer date-related errors could adversely
affect Separate Account B, as they could other separate accounts. These errors
could occur in the computer and other information processing systems used by
First Investors Life, the underlying Funds, the Adviser, Subadviser, Transfer
Agent and other service providers. Typically, these systems use a two-digit
number to represent the year for any date. Consequently, computer systems could
incorrectly identify "00" as 1900, rather than 2000, and make related mistakes
when performing operations. First Investors Life, the Funds, the Adviser,
Subadviser, and Transfer Agent are taking steps that they believe are reasonable
to address the Year 2000 problem for computer and other systems used by them.
They are also obtaining assurances from other service providers that the service
providers are taking comparable steps. However, there can be no assurance that
these steps will avoid any adverse impact on Separate Account B. Nor can
Separate Account B estimate the extent of any adverse impact.
ILLUSTRATIONS OF DEATH BENEFITS,
CASH VALUES AND ACCUMULATED PREMIUMS
The tables on Pages 25 to 30 illustrate the way the Policy operates. They
show how the death benefit and the cash value may vary over an extended period
of years. The tables are based on assumed annual premiums of $600 for a 10 year
old male, $1,200 for a 25 year old male, and $1,800 for a 40 year old male. The
tables assume that premiums are paid in one lump sum promptly at the beginning
of each year. The tables assume a standard risk classification. There are two
sets of illustrations for each age. The first set of tables assumes that each
Subaccount will experience hypothetical rates of investment return (I.E.,
investment income and capital gains and losses, realized or unrealized)
equivalent to constant hypothetical gross annual investment returns of 0%, 4%
and 8%. The second set of tables assumes constant hypothetical gross annual
investment returns of 0%, 6% and 12%.
The death benefit and cash value for the Policy would be different from those
shown:
. if you spread the payment of premiums over the year, or
. if the gross annual rates of return applicable to the Policy average 0%,
4%, 6%, 8% and 12% over a period of years, but nevertheless fluctuate
above or below that average for individual Policy years.
The cash values and death benefits shown in the illustrations assume the
deduction of all fees and charges. When we take all fees and charges into
account, the hypothetical gross annual investment returns of 0%, 4%, 6%, 8%, and
12% correspond to Actual Rates of Return of approximately -1.445%, 2.4975%,
4.4687%, 6.4399%, and 10.3823%, respectively.
For purposes of the illustration, we have assumed:
. a daily charge to the Subaccount(s) for mortality and expense risks
equivalent to an annual charge of 0.50% at the beginning of each year,
. a premium tax of 2.00% on each premium payment,
. an investment advisory fee of 0.75% of each Fund's average daily net
assets, and
23
<PAGE>
. other expenses of 0.20% of each Fund's average daily net assets.
The assumed other expenses of 0.20% exceed the average of the actual other
expenses of all of the Funds combined. Certain of the Funds had actual expenses
greater than 0.20%. As of December 31, 1998, International Securities Fund had
other expenses of 0.40%. Absent reimbursement of a portion of the other expenses
by the Adviser, Cash Management Fund would have had other expenses of 0.24%.
There is no assurance that the Adviser will continue to reimburse other expenses
for Cash Management Fund, or any other Fund, in the future. Without these
reimbursements, the corresponding Actual Rates of Return would be lower.
The tables also reflect that we currently make no charge to the
Subaccount(s) for our corporate Federal income taxes. However, we may make such
charges in the future. If we do, a Policy would need higher hypothetical gross
annual investment returns greater than 0%, 4%, 6%, 8% and 12% to produce, on an
after tax basis, the results shown.
We have included a column captioned "Total Premiums Paid Plus Interest at
5%" in each table to show you the amount that would accumulate if the annual
premium (gross amount) that you allocated to the Subaccounts earned interest,
after taxes, at 5% compounded annually.
----------------------------
We will furnish, upon request, a comparable illustration using the proposed
Insured's age and the face amount or premium amount that you request. The
illustration will assume that you pay premiums on an annual basis and that the
proposed Insured is a standard risk. In addition, we will include a comparable
illustration, reflecting the Insured's risk classification if other than
standard, at the delivery of the Policy, if you make a purchase.
24
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 10
$600 ANNUAL PREMIUM FOR STANDARD RISK
$39,638 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 4% 8% 0% 4% 8%
- -------- --------- -------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $600 $ 630 $39,638 $39,638 $ 39,673 $ 138 $ 145 $ 152
2 600 1,291 39,638 39,638 39,798 586 617 650
3 600 1,986 39,638 39,638 40,014 1,023 1,098 1,176
4 600 2,715 39,638 39,638 40,321 1,450 1,585 1,730
5 600 3,481 39,638 39,638 40,720 1,889 2,104 2,339
6 600 4,285 39,638 39,638 41,213 2,316 2,629 2,981
7 600 5,129 39,638 39,638 41,799 2,734 3,163 3,658
8 600 6,016 39,638 39,638 42,479 3,143 3,707 4,374
9 600 6,947 39,638 39,638 43,253 3,547 4,263 5,132
10 600 7,924 39,638 39,638 44,120 3,946 4,832 5,936
15 0 11,608 39,638 39,638 49,496 4,473 6,382 9,133
20 0 14,816 39,638 39,638 55,625 4,010 6,971 12,064
25 0 18,909 39,638 39,638 62,507 3,610 7,646 15,998
30 0 24,133 39,638 39,638 70,244 3,244 8,369 21,173
Attained Age
65 0 81,723 39,638 39,638 126,226 1,685 11,721 76,980
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
25
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 25
$1,200 ANNUAL PREMIUM FOR STANDARD RISK
$51,908 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 4% 8% 0% 4% 8%
- -------- --------- -------------- ----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,200 $ 1,260 $51,908 $51,908 $ 51,973 $ 409 $ 429 $ 449
2 1,200 2,583 51,908 51,908 52,154 1,308 1,385 1,462
3 1,200 3,972 51,908 51,908 52,451 2,197 2,366 2,543
4 1,200 5,431 51,908 51,908 52,864 3,076 3,375 3,695
5 1,200 6,962 51,908 51,908 53,398 3,992 4,459 4,972
6 1,200 8,570 51,908 51,908 54,054 4,897 5,572 6,332
7 1,200 10,259 51,908 51,908 54,832 5,791 6,713 7,778
8 1,200 12,032 51,908 51,908 55,732 6,673 7,882 9,315
9 1,200 13,893 51,908 51,908 56,754 7,544 9,080 10,949
10 1,200 15,848 51,908 51,908 57,898 8,404 10,308 12,685
15 0 23,217 51,908 51,908 64,950 9,524 13,635 19,577
20 0 29,631 51,908 51,908 72,999 8,504 14,836 25,762
25 0 37,818 51,908 51,908 82,058 7,539 16,033 33,680
30 0 48,266 51,908 51,908 92,259 6,628 17,185 43,687
Attained Age
65 0 78,620 51,908 51,908 116,712 4,947 19,096 71,178
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
26
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 40
$1,800 ANNUAL PREMIUM FOR STANDARD RISK
$47,954 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 4% 8% 0% 4% 8%
- -------- --------- -------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,800 $ 1,890 $47,954 $47,954 $48,027 $ 762 $ 799 $ 835
2 1,800 3,874 47,954 47,954 48,206 2,097 2,225 2,355
3 1,800 5,958 47,954 47,954 48,492 3,406 3,678 3,964
4 1,800 8,146 47,954 47,954 48,883 4,689 5,161 5,667
5 1,800 10,443 47,954 47,954 49,386 6,020 6,747 7,549
6 1,800 12,856 47,954 47,954 49,999 7,328 8,367 9,543
7 1,800 15,388 47,954 47,954 50,724 8,615 10,023 11,656
8 1,800 18,048 47,954 47,954 51,560 9,884 11,717 13,898
9 1,800 20,840 47,954 47,954 52,509 11,137 13,450 16,276
10 1,800 23,772 47,954 47,954 53,571 12,375 15,225 18,798
15 0 34,825 47,954 47,954 60,126 13,764 19,765 28,471
20 0 44,447 47,954 47,954 67,618 11,963 20,956 36,545
25 0 56,727 47,954 47,954 76,062 10,274 21,963 46,387
30 0 72,399 47,954 47,954 85,589 8,695 22,699 58,095
Attained Age
65 0 56,727 47,954 47,954 76,062 10,274 21,963 46,387
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
27
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 10
$600 ANNUAL PREMIUM FOR STANDARD RISK
$39,638 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATES OF RETURN OF ANNUAL RATES OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 6% 12% 0% 6% 12%
- --------- --------- -------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $600 $ 630 $39,638 $39,645 $ 39,729 $ 138 $ 148 $ 158
2 600 1,291 39,638 39,669 40,061 586 633 682
3 600 1,986 39,638 39,710 40,642 1,023 1,136 1,256
4 600 2,715 39,638 39,767 41,482 1,450 1,656 1,884
5 600 3,481 39,638 39,841 42,599 1,889 2,219 2,597
6 600 4,285 39,638 39,932 44,005 2,316 2,800 3,375
7 600 5,129 39,638 40,039 45,711 2,734 3,402 4,227
8 600 6,016 39,638 40,161 47,732 3,143 4,026 5,160
9 600 6,947 39,638 40,299 50,081 3,547 4,676 6,184
10 600 7,924 39,638 40,453 52,774 3,946 5,354 7,309
15 0 11,608 39,638 41,363 70,965 4,473 7,632 13,094
20 0 14,816 39,638 42,310 95,773 4,010 9,176 20,771
25 0 18,909 39,638 43,278 129,224 3,610 11,076 33,073
30 0 24,133 39,638 44,269 174,378 3,244 13,343 52,561
Attained Age
65 0 81,723 39,638 49,597 785,431 1,685 30,247 479,001
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
28
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 25
$1,200 ANNUAL PREMIUM FOR STANDARD RISK
$51,908 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATES OF RETURN OF ANNUAL RATES OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 6% 12% 0% 6% 12%
- -------- --------- -------------- ------------ -------- ------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,200 $ 1,260 $51,908 $51,921 $ 52,078 $ 409 $ 439 $ 469
2 1,200 2,583 51,908 51,955 52,558 1,308 1,423 1,542
3 1,200 3,972 51,908 52,011 53,359 2,197 2,454 2,727
4 1,200 5,431 51,908 52,088 54,495 3,076 3,532 4,037
5 1,200 6,962 51,908 52,188 55,994 3,992 4,710 5,535
6 1,200 8,570 51,908 52,308 57,870 4,897 5,941 7,187
7 1,200 10,259 51,908 52,450 60,141 5,791 7,226 9,008
8 1,200 12,032 51,908 52,612 62,823 6,673 8,568 11,014
9 1,200 13,893 51,908 52,794 65,934 7,544 9,969 13,222
10 1,200 15,848 51,908 52,996 69,495 8,404 11,430 15,653
15 0 23,217 51,908 54,188 93,429 9,524 16,333 28,161
20 0 29,631 51,908 55,430 126,119 8,504 19,562 44,508
25 0 37,818 51,908 56,702 170,313 7,539 23,273 69,903
30 0 48,266 51,908 58,005 230,101 6,628 27,467 108,958
Attained Age
65 0 78,620 51,908 60,711 420,822 4,947 37,025 256,641
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
29
<PAGE>
<TABLE>
<CAPTION>
MALE ISSUE AGE 40
$1,800 ANNUAL PREMIUM FOR STANDARD RISK
$47,954 FACE AMOUNT (GUARANTEED INSURANCE AMOUNT)
TOTAL DEATH BENEFIT CASH VALUES
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
POLICY PREMIUM PAID PLUS ANNUAL RATES OF RETURN OF ANNUAL RATES OF RETURN OF
YEAR DUE INTEREST AT 5% 0% 6% 12% 0% 6% 12%
- -------- --------- -------------- --------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,800 $ 1,890 $47,954 $47,968 $ 48,144 $ 762 $ 817 $ 872
2 1,800 3,874 47,954 48,002 48,621 2,097 2,289 2,488
3 1,800 5,958 47,954 48,056 49,393 3,406 3,819 4,263
4 1,800 8,146 47,954 48,129 50,473 4,689 5,409 6,211
5 1,800 10,443 47,954 48,222 51,886 6,020 7,138 8,431
6 1,800 12,856 47,954 48,335 53,645 7,328 8,937 10,869
7 1,800 15,388 47,954 48,467 55,766 8,615 10,809 13,548
8 1,800 18,048 47,954 48,617 58,266 9,884 12,760 16,491
9 1,800 20,840 47,954 48,786 61,164 11,137 14,792 19,724
10 1,800 23,772 47,954 48,973 64,480 12,375 16,911 23,276
15 0 34,825 47,954 50,080 86,798 13,764 23,714 41,101
20 0 44,447 47,954 51,233 117,342 11,963 27,690 63,419
25 0 56,727 47,954 52,416 158,741 10,274 31,966 96,809
30 0 72,399 47,954 53,630 214,919 8,695 36,402 145,879
Attained Age
65 0 56,727 47,954 52,416 158,741 10,274 31,966 96,809
</TABLE>
The hypothetical gross annual rates of return shown in the illustration and
elsewhere in the prospectus are illustrative only and are not representations of
past or future rates of return. The cash values and death benefits shown in the
illustration assume the deduction of all fees and charges and that no Policy
Loans have been taken. Actual rates may be higher or lower than hypothetical
rates and will depend on a number of factors, including the investment
allocations made by a policy owner, the frequency of premium payments chosen and
the investment experience of the Policy's Subaccounts. The death benefits and
cash values would be different from those shown if the average of the actual
gross annual rates of return over a period of years equaled those shown, but the
rates varied from year to year. They would also be different if any Policy Loan
were made during the period. No representations can be made that those
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Investors Life Insurance Company
New York, New York
We have audited the accompanying balance sheets of First Investors Life
Insurance Company as of December 31, 1998 and 1997, and the related statements
of income, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Investors Life
Insurance Company as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 17, 1999
<PAGE>
<TABLE>
<CAPTION>
FIRST INVESTORS LIFE INSURANCE COMPANY
BALANCE SHEET
ASSETS
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Investments (note 2):
Available-for-sale securities....................................... $131,031,939 $125,380,627
Held-to-maturity securities......................................... 5,491,598 5,529,687
Short term investments.............................................. 3,982,209 3,083,769
Policy loans........................................................ 24,961,708 21,527,810
-------------- ------------
Total investments................................................ 165,467,454 155,521,893
Cash ................................................................. 113,094 1,145,215
Premiums and other receivables, net of allowances of
$30,000 in 1998 and 1997............................................ 6,297,635 4,749,099
Accrued investment income............................................. 3,473,067 3,180,924
Deferred policy acquisition costs (note 6)............................ 20,873,233 18,446,716
Deferred Federal income taxes (note 7) ........................... 473,000 1,039,000
Furniture, fixtures and equipment, at cost, less accumulated
depreciation of $1,110,857 in 1998 and $1,036,604 in 1997........... 102,448 97,379
Other assets.......................................................... 82,822 120,044
Separate account assets............................................... 821,105,059 642,453,414
-------------- ------------
Total assets..................................................... $1,017,987,812 $826,753,684
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Policyholder account balances (note 6)................................ $118,786,854 $115,281,318
Claims and other contract liabilities................................. 13,934,636 12,548,096
Accounts payable and accrued liabilities.............................. 3,796,503 4,426,355
Separate account liabilities.......................................... 821,105,059 642,453,314
--------------- ------------
Total liabilities................................................ 957,623,052 774,709,083
--------------- ------------
STOCKHOLDER'S EQUITY:
Common Stock, par value $4.75; authorized,
issued and outstanding 534,350 shares............................... 2,538,163 2,538,163
Additional paid in capital............................................ 6,496,180 6,496,180
Accumulated other comprehensive income (note 2)....................... 2,193,000 1,608,000
Retained earnings .................................................... 49,137,417 41,402,258
--------------- ------------
Total stockholder's equity....................................... 60,364,760 52,044,601
--------------- ------------
Total liabilities and stockholder's equity....................... $1,017,987,812 $826,753,684
=============== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST INVESTORS LIFE INSURANCE COMPANY
STATEMENT OF INCOME
Year Ended Year Ended Year Ended
December 31, 1998 December 31,1997 December 31,1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES
Policyholder fees................................... $25,393,372 $24,826,454 $22,955,165
Premiums.............................................. 6,091,731 6,279,137 6,725,329
Investment income (note 2).......................... 10,501,572 10,259,601 9,771,389
Realized gain (loss) on investments................. 914,891 158,874 (221,025)
Other income........................................ 893,181 702,644 704,678
----------- ------------ -----------
Total income..................................... 43,794,747 42,226,710 39,935,536
----------- ------------ -----------
BENEFITS AND EXPENSES
Benefits and increases in contract liabilities...... 13,803,921 14,370,510 12,912,810
Dividends to policyholders.......................... 1,749,579 1,033,663 964,913
Amortization of deferred acquisition costs (note 6). 1,005,483 663,200 1,454,408
Commissions and general expenses.................... 15,553,605 15,445,888 16,287,498
----------- ------------ -----------
Total benefits and expenses...................... 32,112,588 31,513,261 31,619,629
----------- ------------ -----------
Income before Federal income tax ..................... 11,682,159 10,713,449 8,315,907
Federal income tax (note 7):
Current............................................. 3,682,000 4,285,000 3,099,000
Deferred............................................ 265,000 (603,000) (286,000)
----------- ------------ -----------
3,947,000 3,682,000 2,813,000
----------- ------------ -----------
Net Income............................................ $ 7,735,159 $ 7,031,449 $ 5,502,907
=========== ============ ===========
Income per share, based on 534,350 shares outstanding
$14.48 $13.16 $10.30
=========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST INVESTORS LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
Year Ended Year Ended Year Ended
December 31,1998 December 31,1997 December 31, 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Balance at beginning of year............................. $52,044,601 $ 44,049,152 $ 39,780,245
------------ ------------ ------------
Net income............................................... 7,735,159 7,031,449 5,502,907
Other comprehensive income
Increase (decrease) in unrealized holding gains on
available-for-sale securities.......................... 585,000 964,000 (1,234,000)
------------ ------------- ------------
Comprehensive income..................................... 8,320,159 7,995,449 4,268,907
------------ ------------- ------------
Balance at end of year................................... $ 60,364,760 $ 52,044,601 $ 44,049,152
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31,1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Policyholder fees received.......................... $ 25,010,611 $ 24,587,113 $ 22,925,131
Premiums received................................... 5,433,211 6,088,582 6,413,009
Amounts received on policyholder accounts........... 132,528,386 125,818,334 105,489,481
Investment income received.......................... 10,630,564 10,263,095 9,964,169
Other receipts...................................... 91,864 57,287 55,779
Benefits and contract liabilities paid.............. (142,124,914) (138,420,373) (117,321,389)
Commissions and general expenses paid............... (24,138,476) (20,899,476) (20,857,687)
------------ ------------ -------------
Net cash provided by operating activities........... 7,431 246 7,494,562 6,668,493
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment securities......... 42,655,632 38,900,851 39,062,702
Purchase of investment securities................... (47,605,879) (44,021,791) (44,134,604)
Purchase of furniture, equipment and other assets... (79,322) (62,170) (34,485)
Net increase in policy loans........................ (3,433,898) (2,662,162) (1,848,956)
Investment in Separate Account ..................... 100 593,945 (200)
------------ ------------ ------------
Net cash used for investing activities.............. (8,463,367) (7,251,327) (6,955,543)
------------ ------------ ------------
Net increase (decrease) in cash..................... (1,032,121) 243,235 (287,050)
Cash
Beginning of year ..................................... 1,145,215 901,980 1,189,030
------------ ------------- ------------
End of year ........................................... $ 113,094 $ 1,145,215 $ 901,980
============ ============ ============
</TABLE>
The Company received a refund of Federal income tax of $79,000 in 1997 and
$102,000 in 1996 and paid Federal income tax of $4,400,000 in 1998, $4,358,000
in 1997 and $3,243,000 in 1996.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST INVESTORS LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
Year ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income........................................ $ 7,735,159 $ 7,031,449 $ 5,502,907
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 82,342 117,804 130,924
Amortization of deferred policy acquisition costs 1,005,483 663,200 1,454,408
Realized investment (gains) losses............. (914,891) (158,874) 221,025
Amortization of premiums and discounts on
investments.................................. 421,135 280,852 262,785
Deferred Federal income taxes.................. 265,000 (603,000) (286,000)
Other items not requiring cash - net........... (660) 9,771 6,794
(Increase) decrease in:
Premiums and other receivables, net............ (1,548,536) (750,889) 336,385
Accrued investment income...................... (292,143) (277,358) (70,005)
Deferred policy acquisition costs, exclusive
of amortization.............................. (3,613,000) (1,866,787) (1,275,323)
Other assets................................... 29,133 9,323 (18,574)
Increase (decrease) in:
Policyholder account balances.................. 3,505,536 1,985,844 (78,699)
Claims and other contract liabilities.......... 1,386,540 357,815 901,173
Accounts payable and accrued liabilities....... (629,852) 695,412 (419,307)
------------ ----------- -----------
$ 7,431,246 $ 7,494,562 $ 6,668,493
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). Such basis of presentation
differs from statutory accounting practices permitted or prescribed by insurance
regulatory authorities primarily in that:
(a) policy reserves are computed according to the Company's estimates
of mortality, investment yields, withdrawals and other benefits and
expenses, rather than on the statutory valuation basis;
(b) certain expenditures, principally for furniture and equipment and
agents' debit balances, are recognized as assets rather than being
non-admitted and therefore charged to retained earnings;
(c) commissions and other costs of acquiring new business are
recognized as deferred acquisition costs and are amortized over the premium
paying period of policies and contracts, rather than charged to current
operations when incurred;
(d) income tax effects of temporary differences, relating primarily to
policy reserves and acquisition costs, are provided;
(e) the statutory asset valuation and interest maintenance reserves are
reported as retained earnings rather than as liabilities;
NOTE 2 -- OTHER SIGNIFICANT ACCOUNTING PRACTICES
(a) ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities, at the date
of the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates.
(b) DEPRECIATION. Depreciation is computed on the useful service life
of the depreciable asset using the straight line method of depreciation over
three to seven years.
(c) INVESTMENTS. Investments in equity securities that have readily
determinable fair values and all investments in debt securities are classified
in separate categories and accounted for as follows:
HELD-TO-MATURITY SECURITIES
Debt securities in which the Company has the positive intent and
ability to hold to maturity are recorded at amortized cost.
AVAILABLE-FOR-SALE SECURITIES
Debt securities not classified as held to maturity securities and
equity securities are recorded at fair value with unrealized gains
and losses excluded from earnings and reported as "accumulated
other comprehensive income" in stockholder's equity.
Short term investments are reported at market value which approximates
cost.
Gains and losses on sales of investments are determined using the
specific identification method. Investment income for the years indicated
consists of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1998 December 31, 1997 December 31,1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest on fixed maturities............... $ 9,276,036 $ 9,029,979 $ 8,559,429
Interest on short term investments......... 226,544 307,656 410,930
Interest on policy loans................... 1,465,497 1,268,834 1,151,681
Dividends on equity securities............. -- -- 43,756
----------- ------------ -----------
Total investment income............... 10,968,077 10,606,469 10,165,796
Investment expense.................... 466,505 346,868 394,407
----------- ------------ -----------
Net investment income...................... $10,501,572 $ 10,259,601 $ 9,771,389
=========== ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated market values of investments at December 31, 1998 and 1997 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-For-Sale Securities
December 31, 1998
U.S. Treasury Securities and obligations
of U.S. Government Corporations
and Agencies............................... $ 28,353,391 $ 1,703,441 $ 912 $ 30,055,920
Debt Securities issued by
States of the U.S.......................... 13,964,587 261,109 8,696 14,217,000
Corporate Debt Securities................... 77,938,088 2,148,113 378,682 79,707,519
Other Debt Securities ...................... 6,676,873 374,627 -- 7,051,500
------------ ------------ ------------ ------------
$126,932,939 $ 4,487,290 $ 388,290 $131,031,939
============ ============ ============ ============
December 31,1997
U.S. Treasury Securities and obligations
of U.S. Government Corporations
and Agencies............................... $ 39,532,729 $ 975,819 $ -- $ 40,508,548
Debt Securities issued by
States of the U.S.......................... 7,309,135 92,015 -- 7,401,150
Corporate Debt Securities................... 67,900,325 1,739,318 75,913 69,563,730
Other Debt Securities....................... 7,606,438 300,761 -- 7,907,199
------------ ------------ ----------- ------------
$122,348,627 $ 3,107,913 $ 75,913 $125,380,627
============ ============ =========== ============
At December 31, 1998 and 1997, the Company had "Unrealized Holding Gains on
Available-For-Sale Securities" of $2,193,000 and $1,608,000, net of applicable
deferred income taxes and amortization of deferred acquisition costs. The change
in the Unrealized Holding Gains of $585,000, $964,000 and ($1,234,000) for 1998,
1997 and 1996, respectively is reported as other comprehensive income in
stockholders' equity.
Held-To-Maturity Securities
December 31,1998
U.S. Treasury Securities and obligations
of U.S. Government Corporations
and Agencies*.............................. $ 3,381,598 $ 223,647 $ -- $ 3,605,245
Corporate Debt Securities................... 2,000,000 125,400 -- 2,125,400
Other Debt Securities....................... 110,000 -- -- 110,000
------------ ----------- ----------- -----------
$ 5,491,598 $ 349,047 $ -- $ 5,840,645
============ =========== =========== ===========
December 31,1997
U.S. Treasury Securities and obligations
of U.S. Government Corporations
and Agencies*.............................. $ 3,419,687 $ 90,126 $ 700 $ 3,509,113
Corporate Debt Securities................... 2,000,000 109,000 -- 2,109,000
Other Debt Securities....................... 110,000 -- -- 110,000
-------------- --------- --------- -----------
$ 5,529,687 $ 199,126 $ 700 $ 5,728,113
============ ========= ========= ===========
</TABLE>
*These securities are on deposit for various state insurance departments and are
therefore restricted as to sale.
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available For Sale
-----------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 10,000 $ 10,000 $ 1,255,531 $ 1,256,810
Due after one year through five years......... 2,954,022 3,142,745 33,385,925 34,635,479
Due after five years through ten years........ 527,576 562,500 55,672,616 57,463,964
Due after ten years........................... 2,000,000 2,125,400 36,618,867 37,675,686
---------- ---------- ------------ ------------
$5,491,598 $5,840,645 $126,932,939 $131,031,939
========== ========== ============ ============
</TABLE>
Proceeds from sales of investments in fixed maturities were $42,655,632,
$38,900,851 and $39,046,422 in 1998, 1997 and 1996, respectively. Gross gains of
$977,442 and gross losses of $62,551 were realized on those sales in 1998. Gross
gains of $374,583 and gross losses of $215,709 were realized on those sales in
1997. Gross gains of $185,708 and gross losses of $406,733 were realized on
those sales in 1996.
(d) RECOGNITION OF REVENUE, POLICYHOLDER ACCOUNT BALANCES AND POLICY
BENEFITS
TRADITIONAL ORDINARY LIFE AND HEALTH
Revenues from the traditional life insurance policies represent
premiums that are recognized as earned when due. Health insurance
premiums are recognized as revenue over the time period to which the
premiums relate. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the lives of
the contracts. This association is accomplished by means of the
provision for liabilities for future policy benefits and the deferral
and amortization of policy acquisition costs.
UNIVERSAL LIFE AND VARIABLE LIFE
Revenues from universal life and variable life policies
represent amounts assessed against policyholders. Included in such
assessments are mortality charges, surrender charges and policy
service fees.
Policyholder account balances on universal life consist of the
premiums received plus credited interest, less accumulated
policyholder assessments. Amounts included in expense represent
benefits in excess of policyholder account balances. The value of
policyholder accounts on variable life are included in separate
account liabilities as discussed below.
ANNUITIES
Revenues from annuity contracts represent amounts assessed
against contractholders. Such assessments are principally sales
charges, administrative fees, and in the case of variable annuities,
mortality and expense risk charges. The carrying value and fair value
of fixed annuities are equal to the policyholder account balances,
which represent the net premiums received plus accumulated interest.
(e) SEPARATE ACCOUNTS. Separate account assets and the related
liabilities, both of which are valued at market, represent segregated variable
annuity and variable life contracts maintained in accounts with individual
investment objectives. All investment income (gains and losses of these
accounts) accrues directly to the contractholders and therefore does not affect
net income of the Company.
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(f) COMPREHENSIVE INCOME. For 1998, the Company adopted Statement of
Financial Accounting Standards No, 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's financial statements. Total comprehensive
income includes net income and unrealized gains and losses on available-for-sale
securities. Accumulated other comprehensive income, a component of stockholders'
equity, was formerly reported as unrealized gains and losses on
available-for-sale securities. There was no impact on previously reported net
income from the adoption of SFAS 130.
Note 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, short-term investments and policy loans as
reported in the accompanying balance sheet approximate their fair values. The
fair values for fixed maturity and equity-securities are based upon quoted
market prices, where available or are estimated using values from independent
pricing services.
The carrying amounts for the Company's liabilities under investment - type
contracts approximate their fair values because interest rates credited to
account balances approximate current rates paid on similar investments and are
generally not guaranteed beyond one year. Fair values for the Company's
insurance contracts other than investment - type contracts are not required to
be disclosed. However, the fair values of liabilities for all insurance
contracts are taken into consideration in the overall management of interest
rate risk, which minimizes exposure to changing interest rates.
NOTE 4 -- RETIREMENT PLANS
The Company participates in a non-contributory profit sharing plan for the
benefit of its employees and those of other wholly-owned subsidiaries of its
parent. The Plan provides for retirement benefits based upon earnings. Vesting
of benefits is based upon years of service. For the years ended December 31,
1998, 1997 and 1996, the Company charged operations approximately $79,000,
$70,000 and $100,000 respectively for its portion of the contribution.
The Company also has a non-contributory retirement plan for the benefit of
its sales agents. The plan provides for retirement benefits based upon
commission on first-year premiums and length of service. The plan is unfunded.
Vesting of benefits is based upon graduated percentages dependent upon the
number of allocations made in accordance with the plan by the Company for each
participant. The Company charged to operations pension expenses of approximately
$475,000 in 1998, $419,000 in 1997 and $414,000 in 1996. The accrued liability
of approximately $3,251,000 in 1998 and $2,913,000 in 1997 was sufficient to
cover the value of benefits provided by the plan.
In addition, the Company participates in a 401(k) savings plan covering
all of its eligible employees and those of other wholly-owned subsidiaries of
its parent whereby employees may voluntarily contribute a percentage of their
compensation with the Company matching a portion of the contributions of certain
employees. Contributions to this plan were not material.
NOTE 5 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company has agreements with affiliates and non-affiliates as follows:
(a) The Company's maximum retention on any one life is $100,000. The
Company reinsures a portion of its risk with other insurance companies and
reserves are reduced by the amount of reserves for such reinsured risks. The
Company is liable for any obligations that any reinsurance company may be unable
to meet. The Company had reinsured approximately 10% of its net life insurance
in force at December 31, 1998, 1997 and 1996. The Company also had assumed
reinsurance amounting to approximately 20%, 20% and 21% of its net life
insurance in force at the respective year ends. None of these transactions had
any material effect on the Company's operating results.
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(b) The Company and certain affiliates share office space, data processing
facilities and management personnel. Charges for these services are based upon
the Company's proportionate share of: space occupied, usage of data processing
facilities and time allocated to management. During the years ended December 31,
1998, 1997 and 1996, the Company paid approximately $1,440,000, $1,114,000 and
$1,222,000, respectively, for these services. In addition, the Company
reimbursed an affiliate approximately $10,799,000 in 1998, $9,814,000 in
1997,and $9,709,000 in 1996 for commissions relating to the sale of its
products.
The Company maintains a checking account with a financial
institution, which is also a wholly-owned subsidiary of its parent. The balance
in this account was approximately $387,000 at December 31, 1998 and $332,000 at
December 31, 1997.
(c) The Company is subject to certain claims and lawsuits arising in the
ordinary course of business. In the opinion of management, all such claims
currently pending will not have a material adverse effect on the financial
position of the Company or its results of operations.
NOTE 6 -- ADJUSTMENTS MADE TO STATUTORY ACCOUNTING PRACTICES
Note 1 describes some of the common differences between statutory practices
and generally accepted accounting principles. The effects of these differences
for the years ended December 31, 1998, 1997 and 1996 are shown in the following
table in which net income and capital shares and surplus reported therein on a
statutory basis are adjusted to a GAAP basis.
<TABLE>
<CAPTION>
NET INCOME CAPITAL SHARES AND SURPLUS
YEAR ENDED DECEMBER 31 AT DECEMBER 31
---------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reported on a statutory basis.......... $6,191,762 $5,809,629 $5,002,533 $37,991,708 $32,159,721 $26,580,877
---------- ---------- ---------- ----------- ----------- -----------
Adjustments:
Deferred policy acquisition costs (b) 2,607,517 351,239 (179,085) 20,873,233 18,446,716 17,547,129
Future policy benefits (a).......... (1,259,673) 133,848 514,086 (4,260,262) (3,000,589) (2,398,397)
Deferred income taxes............... (265,000) 603,000 286,000 473,000 1,039,000 934,000
Premiums due and deferred (e)....... 85,385 84,291 85,461 (1,189,428) (1,274,816) (1,359,107)
Cost of colletion and other statutory
liabilities....................... (6,185) (924) (12,283) 29,874 36,060 36,984
Non-admitted assets................. -- -- -- 218,959 224,411 298,731
Asset valuation reserve............. -- -- -- 1,691,873 1,325,986 1,136,664
Interest maintenance reserve........ (223,136) (55,019) (48,542) 436,803 56,112 6,271
Gross unrealized holding gains on
available-for-sale securities... -- -- -- 4,099,000 3,032,000 1,266,000
Net realized capital gains (losses). 914,891 158,874 (221,025) -- -- --
Other............................... (310,402) (53,489) 75,762 -- --
---------- ---------- ---------- ----------- ----------- -----------
1,543,397 1,221,820 500,374 22,373,052 19,884,880 17,468,275
---------- ---------- ---------- ---------- ---------- ----------
In accordance with generally accepted
accounting principles............... $7,735,159 $7,031,449 $5,502,907 $60,364,760 $52,044,601 $44,049,152
========== ========== ========== =========== =========== ===========
Per share, based on 534,350 shares
outstanding......................... $14.48 $13.16 $10.30 $112.97 $97.40 $82.44
========== ========== ========== =========== ========== ===========
</TABLE>
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
The following is a description of the significant policies used to adjust
the net income and capital shares and surplus from a statutory to a GAAP basis.
(a) Liabilities for future policy benefits have been computed primarily by
the net level premium method with assumptions as to anticipated mortality,
withdrawals and investment yields. The composition of the policy liabilities and
the more significant assumptions pertinent thereto are presented below:
<TABLE>
<CAPTION>
DISTRIBUTION OF LIABILITIES* BASIS OF ASSUMPTIONS
- ----------------------------------------------------------------------------------
YEARS
1998 1997 OF ISSUE INTEREST MORTALITY TABLE WITHDRAWAL
---- ---- -------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Non-par:
$1,458,458 $ 1,505,551 1962-1967 4 1/2% 1955-60 Basic Select plus Ultimate Linton B
5,021,949 5,310,394 1968-1988 5 1/2% 1955-60 Basic Select plus Ultimate Linton B
2,403,257 2,433,724 1984-1988 7 1/2% 85% of 1965-70 Basic Select Modified
plus Ultimate Linton B
116,030 101,775 1989-Present 7 1/2% 1975-80 Basic Select plus Ultimate Linton B
63,482 108,985 1989-Present 7 1/2% 1975-80 Basic Select plus Ultimate Actual
26,682 28,971 1989-Present 8% 1975-80 Basic Select plus Ultimate Actual
33,158,902 32,412,007 1985-Present 6% Accumulation of Funds --
Par:
216,096 224,913 1966-1967 4 1/2% 1955-60 Basic Select plus Ultimate Linton A
13,141,191 13,273,949 1968-1988 5 1/2% 1955-60 Basic Select plus Ultimate Linton A
907,950 899,407 1981-1984 7 1/4% 90% of 1965-70 Basic Select
plus Ultimate Linton B
4,791,142 4,699,324 1983-1988 9 1/2% 80% of 1965-70 Basic Select
plus Ultimate Linton B
17,805,284 15,977,808 1990-Present 8% 66% of 1975-80 Basic Select
plus Ultimate Linton B
Annuities:
16,075,327 19,581,382 1976-Present 5 1/2% Accumulation of Funds --
Miscellaneous:
24,418,452 19,604,218 1962-Present 2 1/2%-3 1/2% 1958-CSO None
</TABLE>
* The above amounts are before deduction of deferred premiums of $817,348 in
1998 and $881,090 in 1997.
(b) The costs of acquiring new business, principally commissions and
related agency expenses, and certain costs of issuing policies, such as medical
examinations and inspection reports, all of which vary with and are primarily
related to the production of new business, have been deferred. Costs deferred on
universal life and variable life are amortized as a level percentage of the
present value of anticipated gross profits resulting from investment yields,
mortality and surrender charges. Costs deferred on traditional ordinary life and
health are amortized over the premium-paying period of the related policies in
proportion to the ratio of the annual premium revenue to the total anticipated
premium revenue. Anticipated premium revenue was estimated using the same
assumptions that were used for computing liabilities for future policy benefits.
Amortization of $1,005,483 in 1998 and $663,200 in 1997, $1,454,408 in 1996 was
charged to operations.
(c) Participating business represented 8.8% and 9.5% of individual life
insurance in force at December 31, 1998 and 1997, respectively.
The Board of Directors annually approves a dividend formula for
calculation of dividends to be distributed to participating policyholders.
The portion of earnings of participating policies that can inure to the
benefit of shareholders is limited to the larger of 10% of such earnings or $.50
per thousand dollars of participating insurance in force. Earnings in excess of
that limit must be excluded from shareholders' equity by a charge against
operations. No such charge has been made, since participating business has
operated at a loss to date on a statutory basis. It is anticipated, however,
that the participating lines will be profitable over the lives of the policies.
(d) New York State insurance law prohibits the payment of dividends to
stockholders from any source other than the statutory unassigned surplus. The
amount of said surplus was $28,207,166, $22,374,879 and $16,796,135 at December
31, 1998, 1997 and 1996, respectively.
(e) Statutory due and deferred premiums are adjusted to conform to the
expected premium revenue used in computing future benefits and deferred policy
acquisition costs. In this regard, the GAAP due premium is recorded as an asset
and the GAAP deferred premium is applied against future policy benefits.
<PAGE>
FIRST INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 7 -- FEDERAL INCOME TAXES
The Company joins with its parent company and other affiliated companies
in filing a consolidated Federal income tax return. The provision for Federal
income taxes is determined on a separate company basis.
Retained earnings at December 31, 1998 included approximately $146,000
which is defined as "policyholders' surplus" and may be subject to Federal
income tax at ordinary corporate rates under certain future conditions,
including distributions to stockholders.
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Policyholder dividend provision........................................ $ (448,300) $ (357,200)
Non-qualified agents' pension plan reserve............................. (1,262,900) (1,161,300)
Deferred policy acquisition costs...................................... 2,956,800 2,215,900
Future policy benefits................................................. (2,835,100) (2,575,400)
Bond discount.......................................................... 35,900 39,200
Unrealized holding gains on Available-For-Sale Securities............. 1,130,000 829,000
Other.................................................................. (49,400) (29,200)
------------ --------------
$ (473,000) $ (1,039,000)
============ ==============
</TABLE>
The currently payable Federal Income tax provision of $3,099,000 for 1996
is net of a $75,000 Federal tax benefit resulting from a capital loss carryback
of $221,025.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Investors Life Insurance Company
New York, New York
We have audited the statement of assets and liabilities of First Investors
Life Level Premium Variable Life Insurance (a separate account of First
Investors Life Insurance Company, registered as a unit investment trust under
the Investment Company Act of 1940), as of December 31, 1998, and the related
statement of operations for the year then ended and changes in net assets for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Investors Life Level
Premium Variable Life Insurance as of December 31, 1998, and the results of its
operations for the year then ended and the changes in its net assets for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 17, 1999
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investments at net asset value (Note 3):
First Investors Life Series Fund.............................$214,155,664
LIABILITIES
Payable to First Investors Life Insurance Company............ 3,141,177
------------
NET ASSETS......................................................$211,014,487
============
Net assets represented by Contracts.............................$211,014,487
============
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Income:
Dividends....................................................$ 11,381,018
------------
Total income.............................................. 11,381,018
------------
Expenses:
Cost of insurance charges (Note 4)........................... 3,722,098
Mortality and expense risks (Note 4)......................... 953,562
-----------
Total expenses............................................ 4,675,660
-----------
NET INVESTMENT INCOME........................................... 6,705,358
-----------
UNREALIZED APPRECIATION ON INVESTMENTS
Beginning of year.............................................. 48,303,546
End of year.................................................... 62,632,266
Change in unrealized appreciation on investments................ 14,328,720
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............$21,034,078
===========
See accompanying notes to financial statements.
34
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations
Net investment income................................................. $ 6,705,358 $ 6,135,321
Change in unrealized appreciation on investments...................... 14,328,720 16,231,615
------------- -------------
Net increase in net assets resulting from operations.................. 21,034,078 22,366,936
-------------- -------------
From Unit Transactions
Net insurance premiums................................................ 32,896,170 30,069,380
Contract payments..................................................... (15,071,523) (13,435,961)
-------------- --------------
Net increase in net assets derived from unit transactions............. 17,824,647 16,633,419
-------------- --------------
Net increase in net assets............................................ 38,858,725 39,000,355
Net Assets
Beginning of year....................................................... 172,155,762 133,155,407
------------- --------------
End of year............................................................. $211,014,487 $172,155,762
============ =============
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
FIRST INVETORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- ORGANIZATION
First Investors Life Level Premium Variable Life Insurance (Separate Account
B), a unit investment trust registered under the Investment Company Act of 1940
(the 1940 Act), is a segregated investment account established by First
Investors Life Insurance Company (FIL). Assets of the Separate Account B have
been used to purchase shares of First Investors Life Series Fund (The Fund), an
open-end diversified management investment company registered under the 1940
Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Shares of the Fund held by Separate Account B are valued at net asset
value per share. All distributions received from the Fund are reinvested to
purchase additional shares of the Fund at net asset value.
NET ASSETS REPRESENTED BY CONTRACTS
The net assets represented by contracts represents the cash value of the
policyholder accounts which is the estimated liability for future policy
benefits. The liability for future policy benefits is computed based upon
assumptions as to anticipated mortality, withdrawals and investment yields.
The mortality assumption is based upon the 1975-80 Basic Select plus
Ultimate mortality table.
FEDERAL INCOME TAXES
Separate Account B is not taxed separately because its operations are
part of the total operations of FIL, which is taxed as a life insurance
company under the Internal Revenue Code. Separate Account B will not be
taxed as a regulated investment company under Subchapter M of the Code.
Under existing Federal income tax law, no taxes are payable on the
investment income or on the capital gains of Separate Account B.
NOTE 3 -- INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
NET ASSET MARKET
SHARES VALUE VALUE COST
------ --------- ------ ----
<S> <C> <C> <C> <C>
First Investors Life
Series Fund
Cash Management.................................. 1,232,598 $ 1.00 $ 1,232,598 $ 1,232,598
High Yield....................................... 3,076,907 11.70 36,001,354 33,131,839
Growth........................................... 1,401,591 35.78 50,145,861 27,668,428
Discovery........................................ 1,409,785 26.74 37,697,283 29,978,530
Blue Chip........................................ 1,774,663 26.25 46,582,619 27,793,401
International Securities......................... 1,764,647 18.88 33,321,641 24,199,648
Government....................................... 103,688 10.41 1,079,314 1,066,529
Investment Grade................................. 217,715 11.97 2,605,307 2,316,602
Utility Income................................... 346,741 15.83 5,489,687 4,135,823
-------------- --------------
$214,155,664 $151,523,398
============ ============
</TABLE>
The High Yield Series' investments in high yield securities whether rated or
unrated may be considered speculative and subject to greater market fluctuations
and risks of loss of income and principal than lower yielding, higher rated,
fixed income securities.
NOTE 4 -- MORTALITY AND EXPENSE RISKS AND DEDUCTIONS
In consideration for its assumption of the mortality and expense risks
connected with the Variable Life Contracts, FIL deducts an amount equal on an
annual basis to .50% of the daily net asset value of Separate Account B. The
deduction for the year ended December 31, 1998 was $953,562.
A monthly charge is also made to Separate Account B for the cost of
insurance protection. This amount varies with the age and sex of the insured and
the net amount of insurance at risk. For further discussion, see "Cost of
Insurance Protection" in the Prospectus. For the year ended December 31, 1998
cost of insurance charges amounted to $3,722,098.
36
[FIRST INVESTORS LOGO]
INSURED SERIES PLAN
This booklet contains two prospectuses. The first prospectus is for our Level
Premium Variable Life Insurance Policy, which we call our Insured Series Plan
("ISP"). The second prospectus is for the First Investors Life Series Fund,
which serves as the underlying investment options for our variable life
insurance policy.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1999.
<PAGE>
CONTENTS*
LEVEL PREMIUM VARIABLE LIFE INSURANCE POLICIES PROSPECTUS
OVERVIEW.......................................................2
The Policy..................................................2
The Charges and Expenses....................................3
Who We Are..................................................5
Risk and Reward Considerations..............................6
THE POLICY IN DETAIL...........................................6
Your Premiums...............................................6
Allocation of Your Net Premium to Investment Options........7
The Death Benefit...........................................8
Your Cash Value.............................................9
Settlement Options..........................................12
Optional Insurance Riders...................................13
Other Provisions............................................14
FEDERAL INCOME TAX INFORMATION.................................16
OUR OFFICERS AND DIRECTORS.....................................19
OTHER INFORMATION..............................................20
Voting Rights...............................................20
Reservation of Rights.......................................21
Distribution of Policies....................................22
Custodian...................................................22
Reports.....................................................22
State Regulation............................................22
Experts.....................................................22
Relevance of Financial Statements...........................23
Year 2000...................................................23
ILLUSTRATIONS OF DEATH BENEFITS,
CASH VALUES AND ACCUMULATED PREMIUMS........................23
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS.........................
FINANCIAL STATEMENTS OF FIRST INVESTORS LIFE...................
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS.........................
FINANCIAL STATEMENTS OF SEPARATE ACCOUNT B.....................
- -----------------------------
*A Table of Contents for the Life Series Fund prospectus can be found on page 1
of that prospectus.
i
<PAGE>
[FIRST INVESTORS LOGO]
95 Wall Street
New York, New York 10005
(212) 858-8200
i
<PAGE>
[FIRST INVESTORS LOGO]
SUPPLEMENT TO THE PROSPECTUS FOR
THE INSURED SERIES PLAN
This booklet contains two documents. The first document is a supplement to the
Insured Series Plan prospectus. The second document is the prospectus for First
Investors Life Focused Equity Fund and First Investors Life Target Maturity 2015
Fund, each of which is a series of First Investors Life Series Fund. First
Investors Life Target Maturity 2015 Fund is not offered to Insured Series Plan
Policyholders.
This supplement is not valid unless accompanied or preceded by the current
prospectus for Insured Series Plan, dated April 30, 1999, and should be read
together with the Insured Series Plan prospectus and the attached Life Series
Fund prospectus for the other series of Life Series Fund. This supplement and
the prospectuses should be read and retained for further reference.
The date of this supplement is November 8, 1999.
<PAGE>
LEVEL PREMIUM VARIABLE LIFE INSURANCE POLICIES
SUPPLEMENT DATED NOVEMBER 8, 1999 TO
PROSPECTUS DATED APRIL 30, 1999
1. All references in the prospectus to the "nine" Subaccounts of Separate
Account B should read "ten" Subaccounts.
2. The following Subaccount and Fund should be added to the lists of Separate
Account B Subaccounts and Corresponding Funds on the bottom of page 1:
SEPARATE ACCOUNT CORRESPONDING
B SUBACCOUNT FUND
Focused Equity Subaccount Focused Equity Fund
3. The following should be added to the Fund Annual Expenses table appearing on
page 4:
<TABLE>
<CAPTION>
TOTAL FUND FEE WAIVERS
MANAGEMENT OTHER OPERATING AND/OR EXPENSE NET
FEES(1) EXPENSES(2) EXPENSES(3) ASSUMPTION(1),(2) EXPENSES(3)
<S> <C> <C> <C> <C> <C>
Focused Equity Fund* 0.75% 0.08% 0.83% N/A N/A
</TABLE>
* Because the Fund had no operating history when this supplement to the
prospectus was printed, these annual expenses are estimated for the current
fiscal year.
4. The following paragraphs should replace the two paragraphs on page 5-6 under
the section "Who We Are - Life Series Fund":
Life Series Fund is an open-end management investment company registered
under the 1940 Act. Life Series Fund consists of 13 separate Funds, ten of
which are available to Policyowners of Separate Account B. Target Maturity
2007 Fund, Target Maturity 2010 Fund and Target Maturity 2015 Fund are the
three Funds of Life Series Fund that are not available to Policyowners of
Separate Account B. The Life Series Fund offers its shares only through
the purchase of a Policy or a variable annuity contract. It does not offer
its shares directly to the general public.
FIMCO is the investment adviser of each Fund. The Adviser is a New York
Corporation located at 95 Wall Street, New York, New York 10005. FIMCO and
Life Series Fund have retained Wellington Management Company, 75 State
Street, Boston, Massachusetts 02109 to serve as subadviser ("WMC" or
"Subadviser") of the International Securities Fund and the Growth Fund,
and Arnhold and S. Bleichroeder, Inc., 1345 Avenue of the Americas, New
York, New York 10105 ("ASB" or "Subadviser") to serve as the subadviser of
<PAGE>
the Focused Equity Fund. See the Life Series Fund prospectus for more
information about the Adviser and Subadvisers.
5. The table in the section "Our Officers and Directors" appearing on pages
23-24 is amended as follows:
Add "Director" to the list of offices held by William H. Drinkwater. Add Clark
D. Wagner as a Director. Mr. Wagner's principal occupation for the last five
years is as follows: Chief Investment Officer, First Investors Management
Company, Inc. and Executive Investors Management Company, Inc.; Vice President,
First Investors Multi-State Insured Tax Free Fund, First Investors New York
Insured Tax Free Fund, Inc., Executive Investors Trust, First Investors
Government Fund, Inc., First Investors Series Fund and First Investors Insured
Tax Exempt Fund, Inc. All references to George V. Ganter and Robert J. Grosso
are deleted.
6. The following paragraph should precede the Financial Statements of First
Investors Life which began on page 37:
The most current financial statements of First Investors Life are those as
of December 31, 1998. First Investors Life does not prepare financial
statements for publication more often than annually and believes that any
incremental benefit to investors that may result from preparing and
delivering more current financial statements, though unaudited, would not
justify the additional cost that would be incurred. In addition, First
Investors Life represents that there have been no material adverse changes
in its financial condition or operations between December 31, 1998 and the
date of this supplement to the prospectus.
7. The following financial statements (as of September 30, 1999) are
supplemental to the "Financial Statements of Separate Account B" on page 52-55:
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
SEPTEMBER 30, 1999
ASSETS
Investments at net asset value (Note 3):
First Investors Life Series Fund.................................$236,145,036
LIABILITIES
Payable to First Investors Life Insurance Company................ 4,123,066
------------
NET ASSETS..........................................................$232,021,970
============
Net assets represented by Contracts.................................$232,021,970
============
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
INVESTMENT INCOME
Income:
Dividends........................................................$ 7,837,666
------------
Total income.................................................. 7,837,666
------------
Expenses:
Cost of insurance charges (Note 4)............................... 3,077,446
Mortality and expense risks (Note 4)............................. 858,873
------------
Total expenses................................................ 3,936,319
------------
NET INVESTMENT INCOME............................................... 3,901,347
------------
UNREALIZED APPRECIATION ON INVESTMENTS
Beginning of period................................................ 2,632,266
End of period...................................................... 65,789,044
------------
Change in unrealized appreciation on investments.................... 3,156,778
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................$ 7,058,125
============
See accompanying notes to financial statements.
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Increase (Decrease) in Net Assets
From Operations
Net investment income...................................... $ 3,901,347
Change in unrealized appreciation on investments............. 3,156,778
------------
Net increase in net assets resulting from operations....... 7,058,125
------------
From Unit Transactions
Net insurance premiums..................................... 25,915,483
Contract payments.......................................... (11,966,125)
------------
Net increase in net assets derived from unit transactions.. 13,949,358
------------
Net increase in net assets................................. 21,007,483
Net Assets
Beginning of period......................................... 211,014,487
------------
End of period............................................... $232,021,970
============
See accompanying notes to financial statements.
<PAGE>
FIRST INVESTORS LIFE
LEVEL PREMIUM VARIABLE LIFE INSURANCE
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 -- ORGANIZATION
First Investors Life Level Premium Variable Life Insurance (Separate Account
B), a unit investment trust registered under the Investment Company Act of 1940
(the 1940 Act), is a segregated investment account established by First
Investors Life Insurance Company (FIL). Assets of the Separate Account B have
been used to purchase shares of First Investors Life Series Fund (The Fund), an
open-end management investment company registered under the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Shares of the Fund held by Separate Account B are valued at net asset
value per share. All distributions received from the Fund are reinvested to
purchase additional shares of the Fund at net asset value.
NET ASSETS REPRESENTED BY CONTRACTS
The net assets represented by contracts represents the cash value of the
policyholder accounts which is the estimated liability for future policy
benefits. The liability for future policy benefits is computed based upon
assumptions as to anticipated mortality, withdrawals and investment yields.
The mortality assumption is based upon the 1975-80 Basic Select plus
Ultimate mortality table.
FEDERAL INCOME TAXES
Separate Account B is not taxed separately because its operations are
part of the total operations of FIL, which is taxed as a life insurance
company under the Internal Revenue Code. Separate Account B will not be
taxed as a regulated investment company under Subchapter M of the Code.
Under existing Federal income tax law, no taxes are payable on the
investment income or on the capital gains of Separate Account B.
NOTE 3 -- INVESTMENTS
Investments consist of the following:
NET ASSET MARKET
SHARES VALUE VALUE COST
First Investors Life
Series Fund
Cash Management............... 1,604,102 $ 1.00 $ 1,604,102 $ 1,604,102
High Yield.................... 3,262,319 10.67 35,452,209 35,061,904
Growth........................ 1,585,499 36.06 57,168,865 34,235,620
Discovery..................... 1,495,831 27.66 41,369,843 32,235,091
Blue Chip..................... 1,949,639 26.82 52,293,102 32,478,519
International Securities...... 1,836,676 20.60 37,835,462 25,629,086
Government.................... 119,154 9.94 1,183,840 1,220,843
Investment Grade.............. 237,109 11.01 2,609,740 2,537,374
Utilities Income.............. 426,279 15.55 6,627,873 5,353,453
------------ ------------
$236,145,036 $170,355,992
============ ============
The High Yield Series' investments in high yield securities whether rated or
unrated may be considered speculative and subject to greater market fluctuations
and risks of loss of income and principal than lower yielding, higher rated,
fixed income securities.
NOTE 4 -- MORTALITY AND EXPENSE RISKS AND DEDUCTIONS
In consideration for its assumption of the mortality and expense risks
connected with the Variable Life Contracts, FIL deducts an amount equal on an
annual basis to .50% of the daily net asset value of Separate Account B. The
deduction for the nine months ended September 30, 1999 was $858,873.
A monthly charge is also made to Separate Account B for the cost of
insurance protection. This amount varies with the age and sex of the insured and
the net amount of insurance at risk. For further discussion, see "Cost of
Insurance Protection" in the Prospectus. For the nine months ended September 30,
1999 cost of insurance charges amounted to $3,077,446.
<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 NOVEMBER 8, 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?
2
<PAGE>
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.
3
<PAGE>
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.
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
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
4
<PAGE>
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. An
investment in the Fund therefore may entail greater risks than an investment in
a diversified investment company.
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.
5
<PAGE>
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.
6
<PAGE>
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,
consistent with the preservation of capital.
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, consistent with
the preservation of capital.
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
7
<PAGE>
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.
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.
8
<PAGE>
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.
("ASB" or "Subadviser") 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 $4 billion of domestic and international assets.
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.
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.
9
<PAGE>
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. Purchases and
redemptions of shares of a Fund by the Separate Accounts are effected at NAV per
share next determined after the order is placed.
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.
10
<PAGE>
[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.: First
Investors Life Series Fund 811-4325)
<PAGE>
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
OFFERED BY
FIRST INVESTORS LIFE INSURANCE COMPANY
("FIRST INVESTORS LIFE")
THROUGH
FIRST INVESTORS LIFE VARIABLE ANNUITY FUND C (SEPARATE ACCOUNT C)
FIRST INVESTORS LIFE VARIABLE ANNUITY FUND D (SEPARATE ACCOUNT D)
95 Wall Street, New York, New York 10005/(212) 858-8200
This Prospectus describes deferred Variable Annuity Contracts (the
"Contracts") that First Investors Life Insurance Company is offering you the
opportunity to accumulate capital, on a tax-deferred basis, for retirement or
other long-term purposes and thereafter to annuitize your accumulated cash value
if you so elect. If you elect to annuitize, the Contracts offer several options
under which you can receive annuity payments for life.
The Contracts invest in the same underlying investment portfolios. Whether
you invest in a Separate Account C or Separate Account D Contract, you allocate
your purchase payments (less certain charges) to one of the eleven
"Subaccounts." Each of these Subaccounts invests in a corresponding "Fund" of
First Investors Life Series Fund. The amount you accumulate depends upon the
performance of the Subaccounts in which you invest. You bear all of the
investment risk, which means that you could lose money.
The Contracts differ in that they have (a) different sales charge
structures (b) different death benefits and (c) different expenses. The
Contracts also have different minimum investments. The Separate Account C
Contract may be purchased with as little as $2,000. The Separate Account D
Contracts require a minimum investment of $25,000.
THE INTERNAL REVENUE SERVICE MAY ASSESS A PENALTY ON EARLY WITHDRAWAL. THE
CONTRACTS PROVIDE YOU WITH A 10-DAY REVOCATION RIGHT.
Please read this Prospectus and keep it for future reference. It contains
important information that you should know before buying a Contract. We filed a
Statement of Additional Information ("SAI"), dated April 30, 1999, with the
Securities and Exchange Commission. We incorporate the SAI by reference into
this Prospectus. See page 26 of this Prospectus for the SAI Table of Contents.
You can get a free SAI by contacting us at the address or telephone number shown
above.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed on the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
This Prospectus is valid only if attached to the current prospectus for First
Investors Life Series Fund ("Life Series Fund").
The date of this Prospectus is April 30, 1999.
<PAGE>
GLOSSARY OF SPECIAL TERMS
ACCUMULATED VALUE - The value of all the Accumulation Units credited to the
Contract.
ACCUMULATION PERIOD - The period between the date of issue of a Contract
and the Annuity Commencement Date.
ACCUMULATION UNIT - A unit that measures the value of a Contractowner's
interest in a Subaccount of Separate Account C or Separate Account D before the
Annuity Commencement Date.
ADDITIONAL PAYMENT - A purchase payment made to First Investors Life after
issuance of a Contract.
ANNUITANT - The person who is designated to receive annuity payments or who
is actually receiving annuity payments.
ANNUITY COMMENCEMENT DATE - The date on which we begin making annuity
payments.
ANNUITY UNIT - A unit that determines the amount of each annuity payment
after the first annuity payment.
BENEFICIARY - The person who is designated to receive any benefits under a
Contract upon the death of the Annuitant or the Contractowners.
CONTRACT - An individual variable annuity contract offered by this
Prospectus.
CONTRACTOWNER - The person or entity with legal rights of ownership of the
Contract.
FIXED ANNUITY - An annuity with annuity payments that remain fixed as to
dollar amount throughout the payment period.
GENERAL ACCOUNT - All assets of First Investors Life other than those
allocated to Separate Account C, Separate Account D and other segregated
investment accounts of First Investors Life.
JOINT ANNUITANT - The designated second person under a joint and survivor
life annuity.
PURCHASE PAYMENT - A payment made to First Investors Life to purchase a
Contract.
SEPARATE ACCOUNT C - The segregated investment account entitled "First
Investors Life Variable Annuity Fund C," established by First Investors Life
pursuant to applicable law and registered as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act").
SEPARATE ACCOUNT D - The segregated investment account entitled "First
Investors Life Variable Annuity Fund D," established by First Investors Life
pursuant to applicable law and registered as a unit investment trust under the
1940 Act.
SUBACCOUNT - A segregated investment subaccount under Separate Account C or
Separate Account D that corresponds to a fund of the Life Series Fund. The
assets of a Subaccount are invested in shares of the corresponding fund of the
Life Series Fund.
VALUATION DATE - Any date on which the New York Stock Exchange ("NYSE") is
open for regular trading. Each Valuation Date ends as of the close of regular
trading on the NYSE (normally 4:00 P.M., Eastern Time). The NYSE currently
observes the following holidays: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
VALUATION PERIOD - The period beginning at the end of any Valuation Date
and extending to the end of the next Valuation Date.
VARIABLE ANNUITY - An annuity with annuity payments that vary in dollar
amount, in accordance with the net investment experience of the Subaccounts,
throughout the payment period.
WE (AND OUR) - First Investors Life Insurance Company.
YOU (AND YOUR) - The prospective contractowner.
2
<PAGE>
FEE TABLES
The two tables below are provided to help you understand the various
charges and expenses you will directly or indirectly bear in purchasing a
contract. The tables show how the charges and expenses for the Contract funded
through Separate Account C ("Separate Account C Contracts") differ from those of
the Contract funded through Separate Account D ("Separate Account D Contracts").
The following table reflects the charges and expenses of the relevant Separate
Account. The table on the next page reflects the fees and expenses of the series
(each a "Fund" and collectively "Funds") of the Life Series Fund in which the
Separate Accounts invest. The Fee Tables reflect expenses expected to be
incurred in 1999.
SEPARATE ACCOUNT EXPENSES
SEPARATE ACCOUNT C (FRONT-LOADED SEPARATE ACCOUNT D (BACK-LOADED
CONTRACT) CONTRACT)
CONTRACTOWNER TRANSACTION EXPENSES CONTRACTOWNER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Maximum Sales Load Imposed on
Purchases (as a percentage of Purchases (as a percentage of
purchase payment)............7.00% purchase payments).............None
Maximum Contingent Deferred Sales Maximum Contingent Deferred Sales
Charge.........................None Charge.......................7.00%*
Annual Contract Maintenance Charge Annual Contract Maintenance
...............................None Charge.....................$30.00**
SEPARATE ACCOUNT C ANNUAL EXPENSES SEPARATE ACCOUNT D ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT (AS A PERCENTAGE OF AVERAGE ACCOUNT
VALUE) VALUE)
Mortality and Expense Risk Mortality and Expense Risk
Charges.......................1.00% Charges.......................1.25%
Other Charges................0.00%+ Administrative Charge......... 15%
Total Separate Account Annual =====
Expenses......................1.00% Total Separate Account Annual
Expenses......................1.40%
* The maximum contingent deferred sales charge ("CDSC") is a percentage of the
value of the Accumulation Units surrendered (not to exceed the aggregate amount
of the purchase payments made for the Units). The charge decreases 1% each year
so that there is no charge after seven years. Each year you may withdraw
("surrender") up to 10% of total purchase payments without a CDSC. For purposes
of computing the CDSC, Units are considered to be redeemed in the order in which
they were purchased (i.e., first-in, first-out).
** We deduct the Contract Maintenance Charge of $30 from the Accumulated Value,
except that this charge will not exceed 2% of that value. For more information,
see "Contract Maintenance Charge."
+ We may deduct an administrative charge if the Accumulated Value of a Contract
is less than $1,500 (see "Administrative Charge").
For more complete descriptions of the various charges and expenses shown,
please refer to "THE CONTRACTS IN DETAIL -- Sales Charge, Mortality and Expense
Risk Charges, and Other Charges." In addition, Premium taxes may apply (see
"Other Charges").
3
<PAGE>
FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
These expenses are the same whether you invest in a Separate Account C or
Separate Account D Contract.
<TABLE>
<CAPTION>
FEE WAIVERS
TOTAL FUND AND/OR
MANAGEMENT OTHER OPERATING EXPENSE NET
FEES(1) EXPENSES(2) EXPENSES(3) ASSUMPTIONS EXPENSES(3)
------- ---------- ----------- (1),(2) -----------
-------
<S> <C> <C> <C> <C> <C>
Blue Chip Fund 0.75% 0.07% 0.82% N/A N/A
Cash Management Fund 0.75 0.24 0.99 0.29% 0.70%
Discovery Fund 0.75 0.08 0.83 N/A N/A
Government Fund 0.75 0.12 0.87 0.15 0.72
Growth Fund 0.75 0.07 0.82 N/A N/A
High Yield Fund 0.75 0.08 0.83 N/A N/A
International Securities Fund 0.75 0.40 1.15 N/A N/A
Investment Grade Fund 0.75 0.10 0.85 0.15 0.70
Target Maturity 2007 Fund 0.75 0.09 0.84 0.15 0.69
Target Maturity 2010 Fund 0.75 0.09 0.84 0.15 0.69
Utilities Income Fund 0.75 0.13 0.88 0.15 0.73
</TABLE>
(1) For the fiscal year ended December 31, 1998, the Adviser waived Management
Fees in excess of 0.60% for Cash Management Fund, in excess of 0.60% for
Government Fund, in excess of 0.60% for Investment Grade Fund, in excess
of 0.60% for Target Maturity 2007 Fund, in excess of 0.60% for Target
Maturity 2010 Fund, and in excess of 0.60% for Utilities Income Fund. The
Adviser has contractually agreed with Life Series Fund to waive Management
Fees in excess of 0.60% for Cash Management Fund, in excess of 0.60% for
Government Fund, in excess of 0.60% for Investment Grade Fund, in excess
of 0.60% for Target Maturity 2007 Fund, in excess of 0.60% for Target
Maturity 2010 Fund, and in excess of 0.60% for Utilities Income Fund for a
period of twelve months commencing on May 1, 1999.
(2) For the fiscal year ended December 31, 1998, the Adviser assumed certain
Other Expenses in excess of 0.10% for Cash Management Fund, in excess of
0.10% for Government Fund, in excess of 0.10% for Investment Grade Fund,
in excess of 0.10% for Target Maturity 2007 Fund, and in excess of 0.10%
for Target Maturity 2010 Fund. The Adviser has contractually agreed with
Life Series Fund to assume Other Expenses in excess of 0.10% for Cash
Management Fund for a period of twelve months commencing on May 1, 1999.
(3) Each Fund, other than International Securities Fund, has an expense offset
arrangement that may reduce the Fund's custodian fee based on the amount
of cash maintained by the Fund with its custodian. Any such fee reductions
are not reflected under Total Fund Operating Expenses or Net Expenses.
4
<PAGE>
EXAMPLE (SEPARATE ACCOUNT C CONTRACT)
If you surrender your Contract (or if you annuitize) for the number of years
shown, you would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Blue Chip Subaccount......................... $87 $123 $162 $269
Cash Management Subaccount................... 86 120 156 257
Discovery Subaccount......................... 87 124 162 270
Government Subaccount........................ 86 120 157 259
Growth Subaccount............................ 87 123 162 269
High Yield Subaccount........................ 87 124 162 270
International Securities Subaccount.......... 90 133 177 301
Investment Grade Subaccount.................. 86 120 156 257
Target Maturity 2007 Subaccount.............. 86 120 155 256
Target Maturity 2010 Subaccount.............. 86 120 155 256
Utilities Income Subaccount.................. 86 121 157 260
</TABLE>
EXAMPLE (SEPARATE ACCOUNT D CONTRACT)
The expenses you incur in purchasing a Separate Account D Contract would depend
upon whether or not you surrender your contract. If you surrender your Contract
at the end of the period shown, you would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Blue Chip Subaccount......................... $123 $209 $299 $555
Cash Management Subaccount................... 121 206 293 543
Discovery Subaccount......................... 123 210 299 556
Government Subaccount........................ 122 206 294 545
Growth Subaccount............................ 123 209 299 555
High Yield Subaccount........................ 123 210 299 556
International Securities Subaccount.......... 126 219 316 589
Investment Grade Subaccount.................. 121 206 293 543
Target Maturity 2007 Subaccount.............. 121 205 292 542
Target Maturity 2010 Subaccount.............. 121 205 292 542
Utilities Income Subaccount.................. 122 207 294 546
</TABLE>
If you do not surrender your contract (or if you annuitize) at the end of the
period shown, you would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Blue Chip Subaccount......................... $53 $159 $269 $555
Cash Management Subaccount................... 51 156 263 543
Discovery Subaccount......................... 53 160 269 556
Government Subaccount........................ 52 156 264 545
Growth Subaccount............................ 53 159 269 555
High Yield Subaccount........................ 53 160 269 556
International Securities Subaccount.......... 56 169 286 589
Investment Grade Subaccount.................. 51 156 263 543
Target Maturity 2007 Subaccount.............. 51 155 262 542
Target Maturity 2010 Subaccount.............. 51 155 262 542
Utilities Income Subaccount.................. 52 157 264 546
</TABLE>
YOU SHOULD NOT CONSIDER THE EXPENSES IN THE EXAMPLES AS A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS
THAN THOSE SHOWN.
5
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE 1: SEPARATE ACCOUNT C
This table shows the accumulation unit values and the number of accumulation
units outstanding for each Subaccount of Separate Account C, at the dates shown.
The accumulation unit value for each Subaccount was initially set at $10.00 on
October 16, 1990, except as follows: Investment Subaccount and Government
Subaccount, January 7, 1992; Utilities Income Subaccount, November 16, 1993;
Target Maturity 2007 Subaccount, April 24, 1995; and Target Maturity 2010
Subaccount, April 29, 1996.
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION ACCUMULATION
SUBACCOUNT AT UNIT VALUE($) UNITS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Subaccount...................... December 31, 1990 10.74931759 144,049.8
December 31, 1991 13.42731580 561,758.4
December 31, 1992 14.18287684 1,085,254.0
December 31, 1993 15.23373431 1,529,348.1
December 31, 1994 14.86290782 1,959,841.2
December 31, 1995 19.71773603 2,413,509.3
December 31, 1996 23.72148089 3,116,839.9
December 31, 1997 29.75982140 3,812,804.5
December 31, 1998 34.96033275 4,012,212.4
Cash Management Subaccount................ December 31, 1990 10.07542807 571,856.9
December 31, 1991 10.52748985 571,891.0
December 31, 1992 10.73770189 437,185.0
December 31, 1993 10.91847727 253,743.1
December 31, 1994 11.21833852 235,919.5
December 31, 1995 11.71983145 252,407.7
December 31, 1996 12.18484038 246,553.2
December 31, 1997 12.67719681 256,188.6
December 31, 1998 13.18253046 364,729.9
Discovery Subaccount...................... December 31, 1990 10.91349031 8,362.1
December 31, 1991 16.53848277 130,585.7
December 31, 1992 18.93150000 307,107.8
December 31, 1993 22.89932001 563,070.0
December 31, 1994 22.07727850 867,303.8
December 31, 1995 27.37355380 1,203,507.8
December 31, 1996 30.48354883 1,523,777.2
December 31, 1997 35.26286749 1,838,056.5
December 31, 1998 35.97570267 1,911,584.8
Government Subaccount..................... December 31, 1992 10.87670909 437,095.3
December 31, 1993 11.44920392 674,512.1
December 31, 1994 10.85941183 672,797.1
December 31, 1995 12.43183229 705,348.4
December 31, 1996 12.74903390 643,378.3
December 31, 1997 13.70958126 588,697.3
December 31, 1998 14.59671768 601,159.8
6
<PAGE>
NUMBER OF
ACCUMULATION ACCUMULATION
SUBACCOUNT AT UNIT VALUE($) UNITS
- -------------------------------------------------------------------------------------------------------------------
Growth Subaccount......................... December 31, 1990 10.75804081 24,176.8
December 31, 1991 14.34498476 204,821.5
December 31, 1992 15.59155937 567,241.7
December 31, 1993 16.35977780 958,529.1
December 31, 1994 15.73131059 1,347,003.7
December 31, 1995 19.48689883 1,729,637
December 31, 1996 24.01011967 2,241,867.6
December 31, 1997 30.73197657 2,862,521.1
December 31, 1998 38.74794069 3,085,019.4
High Yield Subaccount..................... December 31, 1990 10.00101048 69,585.9
December 31, 1991 13.25243640 220,366.3
December 31, 1992 14.86894995 279,777.4
December 31, 1993 17.38280181 391,036.8
December 31, 1994 16.93482626 513,297.7
December 31, 1995 20.09026188 671,849.9
December 31, 1996 22.38760536 799,626.6
December 31, 1997 24.92887084 950,571.7
December 31, 1998 25.45748200 1,016,074.5
International Securities Subaccount....... December 31, 1990 10.26630533 118,091.2
December 31, 1991 11.73276972 269,273.6
December 31, 1992 11.46589494 463,523.6
December 31, 1993 13.86795475 792,294.1
December 31, 1994 13.55233761 1,383,676.5
December 31, 1995 15.92618862 1,502,998.2
December 31, 1996 18.16949900 1,956,014.4
December 31, 1997 19.62431480 2,329,410.5
December 31, 1998 22.96087882 2,307,046.6
Investment Grade Subaccount............... December 31, 1992 10.77845214 395,839.5
December 31, 1993 11.82065978 784,651.0
December 31, 1994 11.28602521 923,445.3
December 31, 1995 13.37384783 1,076,644.3
December 31, 1996 13.61638687 1,050,200.1
December 31, 1997 14.80366272 988,996.1
December 31, 1998 15.99733761 1,071,756.2
Target Maturity 2007 Subaccount........... December 31, 1995 11.90553994 775,738.1
December 31, 1996 11.53266965 1,252,102.1
December 31, 1997 12.94581989 1,515,226.0
December 31, 1998 14.73597183 1,547,831.2
Target Maturity 2010 Subaccount........... December 31, 1996 10.81913243 170,708.7
December 31, 1997 12.41073564 381,345.1
December 31, 1998 14.05135661 478,329.7
Utilities Income Subaccount............... December 31, 1993 9.92774964 45,091.7
December 31, 1994 9.11659215 473,447.1
December 31, 1995 11.75759954 1,129,455.9
December 31, 1996 12.75464824 1,689,626.3
December 31, 1997 15.79406311 1,878,396.6
December 31, 1998 17.60340941 2,219,597.9
</TABLE>
7
<PAGE>
TABLE 2: SEPARATE ACCOUNT D
This table shows the accumulation unit values and the number of accumulation
units outstanding for each Subaccount of Separate Account D, on the dates shown.
The accumulation unit value for each Subaccount was initially set at $10.00 on
July 28, 1997.
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION ACCUMULATION
SUBACCOUNT AT UNIT VALUE($) UNITS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Subaccount........................... December 31, 1997 10.18519950 426,185.6
December 31, 1998 11.91730629 1,531,169.8
Cash Management Subaccount..................... December 31, 1997 10.15474840 28,344.4
December 31, 1998 10.51737952 82,526.4
Discovery Subaccount........................... December 31, 1997 10.23140687 205,814.9
December 31, 1998 10.39655938 701,595.6
Government Subaccount.......................... December 31, 1997 10.28895863 13,321.1
December 31, 1998 10.91102057 103,476.8
Growth Subaccount.............................. December 31, 1997 10.33626489 346,768.7
December 31, 1998 12.98031991 1,316,750.1
High Yield Subaccount.......................... December 31, 1997 10.42338850 60,209.4
December 31, 1998 10.60191952 325,195.4
International Securities Subaccount............ December 31, 1997 9.30734342 196,448.9
December 31, 1998 10.84633615 536,298.4
Investment Grade Subaccount.................... December 31, 1997 10.33902780 22,448.4
December 31, 1998 11.12810542 156,868.9
Target Maturity 2007 Subaccount................ December 31, 1997 10.62155299 62,839.0
December 31, 1998 12.04205143 302,580.8
Target Maturity 2010 Subaccount................ December 31, 1997 10.79920122 43,680.6
December 31, 1998 12.17798882 188,719.4
Utilities Income Subaccount.................... December 31, 1997 11.67391319 33,306.9
December 31, 1998 12.95932846 449,163.0
</TABLE>
8
<PAGE>
OVERVIEW
This overview highlights some basic information about the two Variable
Annuity Contracts offered by First Investors Life Insurance Company ("First
Investors Life", "We", "Us", or "Our") in this Prospectus. They invest in the
same underlying investment portfolios but have different sales charge and
expense structures and different death benefit features. Separate Account C
Contracts are contracts that are sold with a front-end sales charge. They invest
in Separate Account C. Separate Account D Contracts are contracts which are sold
with a contingent deferred sales charge. They invest in Separate Account D. We
will not accept a purchase of a Separate Account D Contract with the proceeds
from a surrender of a Separate Account C Contract. You will find more
information about the Contracts beginning on page 11 of this Prospectus.
HOW THE CONTRACTS WORK
Like all variable annuity contracts, the Contracts have two phases: an
accumulation period and an annuity income period. During the accumulation
period, earnings on your investment accumulate on a tax-deferred basis. The
annuity income period begins when you start to receive annuity income payments.
You can select one of several annuity income payment options. The amount of your
annuity payments will vary with the performance of the investment options you
have selected as well as the type of annuity option you choose.
During the accumulation period, you invest in investment options or
Subaccounts which, like mutual funds, have different investment objectives. You
can gain or lose money if you invest in these Subaccounts. The amount of money
you accumulate in your contract depends on the performance of the Subaccounts in
which you invest. The Contracts currently offer 11 Subaccounts. Each Subaccount
invests at net asset value in shares of a corresponding "Fund" of First
Investors Life Series Fund ("Life Series Fund"), as shown in the following
table.
SUBACCOUNTS FUND
----------- ----
Blue Chip Subaccount Blue Chip Fund
Cash Management Subaccount Cash Management Fund
Discovery Subaccount Discovery Fund
Government Subaccount Government Fund
Growth Subaccount Growth Fund
High Yield Subaccount High Yield Fund
International Securities Subaccount International Securities Fund
Investment Grade Subaccount Investment Grade Fund
Target Maturity 2007 Subaccount Target Maturity 2007 Fund
Target Maturity 2010 Subaccount Target Maturity 2010 Fund
Utilities Income Subaccount Utilities Income Fund
Each Contract provides a guaranteed death benefit that is payable to a
designated beneficiary when the Annuitant dies. The Separate Account C Contract
guarantees that the beneficiary will receive the greater of (i) the total
purchase payments less any withdrawals or (ii) the Accumulated Value of the
Contract on the date of receipt of written notification of death at our Home
Office or other designated office. The Separate Account D guarantees that the
beneficiary will receive the greater of (i) the total purchase payments less any
withdrawals, (ii) the Accumulated Value of the Contract on the date of receipt
of Due Proof of Death at our Home Office or other designated office, or (iii)
the Accumulated Value on the immediately preceding Specified Contract
Anniversary date (these Anniversary dates occur every 7 years after you purchase
your Contract) plus any additional purchase payments and less any withdrawals.
9
<PAGE>
WHO WE ARE
First Investors Life Insurance Company
--------------------------------------
First Investors Life, 95 Wall Street, New York, New York 10005 is a stock
life insurance company incorporated in New York in 1962. We write life
insurance, annuities and accident and health insurance. First Investors
Consolidated Corporation ("FICC"), a holding company, owns all of the voting
common stock of First Investors Management Company, Inc. and all of the
outstanding stock of First Investors Life, First Investors Corporation ("FIC" or
"Underwriter") and Administrative Data Management Corp., the transfer agent for
the Life Series Fund. Mr. Glenn O. Head, Chairman of FICC, controls FICC and,
therefore, controls First Investors Management Company, Inc. and First Investors
Life.
Separate Accounts C & D
-----------------------
First Investors Life Variable Annuity Fund C is also called the "Tax Tamer"
("Separate Account C"). It was established on December 21, 1989 under New York
Insurance Law. First Investors Life Variable Annuity Fund D is also called the
"Tax Tamer II" ("Separate Account D"). It was established on April 8, 1997 under
New York Insurance Law.
Separate Account C and Separate Account D (each an "Account") are
registered unit investment trusts with the Securities and Exchange Commission
("SEC"). Such registration does not involve SEC supervision of the management or
investment practices or policies of either Account.
We segregate the assets of each Account from our other assets. We cannot
charge liabilities arising out of our other businesses against that portion of
each Account's assets that is approximately equal to the amount that is
necessary to support the Contracts. We credit to, or charge against, the
Subaccounts of each Account realized and unrealized income, gains and losses
without regard to our other income, gains and losses. The obligations under the
Contracts are our obligations.
Each Subaccount invests its assets in a corresponding Fund of the Life
Series Fund at net asset value. Each Subaccount reinvests all distributions
received from a Fund in additional shares of that Fund at net asset value. So,
none of the Subaccounts make cash distributions to Contractowners. Each
Subaccount may make deductions for charges and expenses by redeeming the number
of equivalent Fund shares at net asset value. We value shares of the Funds that
we hold in the Subaccounts at their net asset values.
The Life Series Fund
--------------------
First Investors Life Series Fund is a diversified open-end management
investment company (commonly known as a "mutual fund") registered with the SEC
under the 1940 Act. Registration of the Life Series Fund does not involve
supervision by the SEC of the management or investment practices or policies of
the Life Series Fund. The Life Series Fund offers its shares only through the
purchase of our variable annuity contracts or variable life insurance policies.
It does not offer its shares directly to the general public. The Life Series
Fund reserves the right to offer its shares to other separate accounts of ours
or directly to us.
First Investors Management Company, Inc. (the "Adviser") is the investment
adviser of each Fund. The Adviser is a New York Corporation located at 95 Wall
Street, New York, New York 10005. The Adviser and Life Series Fund have retained
Wellington Management Company, 75 State Street, Boston, Massachusetts 02109
("WMC" or "Subadviser"), to serve as the subadviser of the International
Securities Fund and Growth Fund. See the Life Series Fund Prospectus for more
information about the Adviser and Subadviser as well as the fees that each Fund
paid for the fiscal year ended December 31, 1998.
The Life Series Fund sells its shares to more than one separate account
funding variable annuity contracts or variable life insurance policies.
Consequently, the possibility arises that violation of the federal tax laws by
another separate account investing in the Life Series Fund could cause the
Contracts funded through Separate Account C or Separate Account D to lose their
tax-deferred status, unless remedial action were taken.
10
<PAGE>
WHO SHOULD CONSIDER PURCHASING A CONTRACT
The Contract allows you to accumulate money on a tax-deferred basis for
retirement or other long-term goals and thereafter to annuitize the accumulated
value of your Contract if you wish. Generally, the higher your tax bracket, the
more you will benefit from the tax-deferred feature of the Contract. You should
not purchase a Contract if you are looking for a short-term investment or if you
cannot take the risk of receiving less money than you paid for the Contract. You
may want to consult a tax advisor or other professional before you purchase a
Contract.
RISK AND REWARD CONSIDERATIONS
The Contracts offer you the opportunity to benefit on a tax-deferred basis
from the performance of the underlying investment options that you choose.
However, there are several important factors that you should consider before
making a decision to purchase a Contract:
1. You bear all of the investment risk of the underlying investment options
you choose. You should therefore carefully review the prospectus for the
underlying Life Series Fund before choosing your underlying investments. It
explains the Funds' investment objectives, primary investment strategies, and
primary risks.
2. The Contracts are generally not appropriate choices for the investment
of money that you will need in the short term. You should therefore only invest
money that you will not need in the short term.
3. Generally, it is not advisable to switch from one variable insurance
contract to another because each contract will have a sales charge. For this
reason, we do not allow switches from Separate Account C to Separate Account D.
4. If you are considering purchasing a Contract inside of an individual
retirement account or qualified retirement plan, you should know that the same
tax benefits are available whether you invest in mutual funds or variable
annuities and that variable annuities generally have higher cost structures than
those of mutual funds. The variable annuity's death benefit should be an
important factor if you select a variable annuity.
5. Like other financial services organizations, First Investors Life and
its affiliates could experience problems in processing policy-related requests
and rendering other services if the computers or other systems on which they
rely are not properly programmed to operate after January 1, 2000. (See "OTHER
INFORMATION--Year 2000" for more information.)
THE CONTRACTS IN DETAIL
The Contracts are variable annuity contracts which provide you with the
opportunity to accumulate capital on a tax deferred basis by investing in
underlying subaccounts and thereafter annuitizing your accumulated cash value if
you wish. We offer the Contracts in states where we have the authority to issue
the Contracts. We designed the Contracts to offer lifetime annuity payments to
Annuitants according to several annuity options. The amount of annuity payments
will vary with the investment performance of the Subaccounts as well as the type
of annuity you select. The Contracts obligate us to make payments for the
lifetime of the Annuitant in accordance with the annuity rates in the Contract,
regardless of actual mortality experience (see "Annuity Period"). On the death
of the Annuitant before the Annuity Commencement Date, we pay a death benefit to
the Beneficiary whom you designate. For a discussion of the amount and manner of
payment of this benefit, see "Death of Annuitant During the Accumulation
Period."
You may surrender all or a portion of the Accumulated Value during the
Accumulation Period. For a discussion on withdrawals during the Accumulation
Period, see "Full and Partial Surrenders During the Accumulation Period." For
Federal income tax consequences of a withdrawal, see "Tax Information." The
exercise of any Contract right, including the right to make a withdrawal during
the Accumulation Period, is subject to the terms and conditions of any qualified
trust or plan under which the Contracts are purchased. This Prospectus contains
no information concerning such trust or plan.
11
<PAGE>
We reserve the right to amend the Contracts to meet the requirements of the
1940 Act or other applicable Federal or state laws or regulations.
Contractowners with any inquiries concerning their account should write to
us at our Home Office, 95 Wall Street, New York, New York 10005.
PURCHASE PAYMENTS
Your initial purchase payment must be at least (a) $2,000 for a Contract
under Separate Account C and (b) $25,000 for a Contract under Subaccount D. You
may make an Additional Payment under a Contract of at least $200 at any time
after Contract issuance under Separate Account C or Separate Account D. We will
not accept a purchase of a Separate Account D Contract with the proceeds from a
surrender of a Separate Account C Contract.
We credit an initial purchase payment (less any charges) to a
Contractowner's Account on the Valuation Date that we receive it, provided that
we have received a properly completed application. We credit an Additional
Payment to a Contractowner's Account on the Valuation Date that we receive it.
If we receive an incomplete application from you, you must provide us with all
required information not later than five business days following the receipt of
such application. Otherwise, we will return the purchase payment to you at the
end of the five-day period.
Your purchase payments buy Accumulation Units of the Subaccounts and not
shares of the Funds in which the Subaccounts invest. We allocate purchase
payments to the appropriate Subaccount or Subaccounts based on the next computed
value of an Accumulation Unit following receipt at our Home Office or other
designated office. For Separate Account C, we make these allocations after
deductions for sales expenses (SEE "Separate Account C-Sales Charge Deducted
from Purchase Payments"). We value Accumulation Units at the end of each
Valuation Date (I.E., as of the close of regular trading on the NYSE, normally
4:00 P.M., Eastern Time).
ALLOCATION OF NET PURCHASE PAYMENTS TO SUBACCOUNT(S)
When you purchase a Contract, you allocate (a) your net purchase payment
and (b) any additional purchase payments (less any charges) to at least one
Subaccount of an Account.
You may:
. choose up to five Subaccounts,
. allocate no less than 10% of a purchase payment (less any charges) to
any Subaccount (we reserve the right to adjust your allocation to
eliminate fractional percentages), and
. transfer part or all of your cash value in a Subaccount to one or
more other Subaccounts (subject to the two limitations immediately
above) twice during a Contract year in Separate Account C (six times
in certain states) and 12 times during a Contract year in Separate
Account D.
Each Subaccount invests its assets at net asset value in shares of the
corresponding Fund of Life Series Fund. For example, the Blue Chip Subaccount
invests in the Blue Chip Fund, the Government Subaccount invests in the
Government Fund, and so on.
The Funds of the Life Series Fund have different investment objectives,
investment strategies, and investment risks. The Funds also have different
expenses. The Life Series Fund's Prospectus describes each Fund in detail. There
is no assurance that any Fund will realize its investment objective. The cash
value of your Contract may increase or decrease depending on the investment
performance of the Subaccounts that you choose.
SALES CHARGE
We impose a sales charge for both Separate Account C and Separate Account
D. For Separate Account C, the sales charge is an initial sales charge that we
deduct from your purchase payments. For Separate Account D, the sales charge is
12
<PAGE>
a contingent deferred sales charge ("CDSC") that may be deducted from the
proceeds that we pay you on a full or partial surrender.
SEPARATE ACCOUNT C - SALES CHARGE DEDUCTED FROM PURCHASE PAYMENTS. We
intend the sales charge to cover expenses relating to the sale of the Contracts,
including commissions paid to persons distributing the Contracts. Discounts are
available on larger purchases. Moreover, when you make Additional Payments after
the issuance of the Contract you are entitled to a credit for all prior payments
in computing the sales charge percentage. In other words, you pay the sales
charge percentage that reflects (a) the total amount of all purchase payments
previously made plus (b) the amount of the Additional Payment being made.
DEDUCTION TABLE
SALES CHARGE AS % OF AMOUNT TO
PURCHASE NET AMOUNT DEALERS AS % OF
AMOUNT OF PURCHASE PAYMENT(S) PAYMENTS* INVESTED PURCHASE PAYMENTS
Less than $25,000...................... 7.00% 7.53% 5.75%
$25,000 but under $50,000.............. 6.25 6.67 5.17
$50,000 but under $100,000............. 4.75 4.99 3.93
$100,000 but under $250,000............ 3.50 3.63 2.90
$250,000 but under $500,000............ 2.50 2.56 2.19
$500,000 but under $1,000,000.......... 2.00 2.04 1.67
$1,000,000 or over..................... 1.50 1.52 1.24
* Assumes that we have deducted no Premium taxes.
We do not impose a sales charge for Contracts sold to (a) officers and
full-time employees of First Investors Life or its affiliates who have been
employed for at least one year, (b) our agents who have been under contract for
at least one year, or (c) Contractowners of First Investors Life Variable
Annuity Fund A ("Separate Account A") who exchange their Separate Account A
Contracts for Separate Account C Contracts at the next computed values of their
Accumulation Units. We require Contractowners who exchange from Separate Account
A to Separate Account C to execute a change of contract form. This form states
that we deduct a daily charge equal to an annual rate of 1.00% of the daily
Accumulation Unit value of any Subaccount as a charge for mortality and expense
risks. We may modify or terminate this exchange privilege at any time.
SEPARATE ACCOUNT D - SALES CHARGE DEDUCTED FROM SURRENDER PROCEEDS. For
Separate Account D, we sell the Contracts without an initial sales charge.
However, we deduct a contingent deferred sales charge ("CDSC") from the proceeds
that we pay you on a full or partial surrender. The CDSC is a percentage of the
amount that you surrender (not to exceed the aggregate amount of your purchase
payments). The CDSC percentage declines, in accordance with the Table below,
from 7% to 0% over a seven-year period from the date purchase payments are
received to the date of their surrender. If you have made purchase payments at
different times, the CDSC on any one purchase payment will depend upon the
length of time from our receipt of the payment to the time of its surrender.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE TABLE
----------------------------------------------------------------------------------------------------------
Contingent Deferred Sales Charge
as a Percentage of Purchase Payments Length of Time from Purchase Payment in Years
Surrendered
<S> <C>
7% Less than 1
6% 1-2
5% 2-3
4% 3-4
3% 4-5
2% 5-6
1% 6-7
0% More than 7
----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
You will not be charged a CDSC on partial surrenders during any Contract
Year up to the annual Withdrawal Privilege Amount of 10% of Purchase Payments.
You will be subject to a CDSC on any excess over this Amount at the applicable
CDSC percentage in the Table. And, of course, this Withdrawal Privilege does not
apply to full surrenders. In calculating such a CDSC, we will assume that amount
on which you are paying the CDSC is coming first from surrenders of purchase
payments (i.e., your cost basis in your contract) and thereafter from any
Accumulated Value other than purchase payments (i.e., your gain). If you have
made purchase payments at different times, your purchase payments will be
treated as being surrendered in the order that we have received them (i.e.,
first-in, first-out).
We will also not assess a CDSC:
. in the event of the death of the Annuitant or the Contractowner,
. if you apply the Accumulated Value to an annuity option under the
contract, or
. for surrenders used to pay Premium taxes.
For information concerning the Annuity Options and the Withdrawal
Privilege, see "Annuity Options" and "Full and Partial Surrenders During the
Accumulation Period."
MORTALITY AND EXPENSE RISK CHARGES
We impose mortality and expense risk charges for both Separate Account C
and Separate Account D. The charges are different for each of these Separate
Accounts reflecting the difference in the death benefits offered by the two
Contracts.
The mortality risk that we assume arises from our obligation to continue to
make Fixed or Variable Annuity payments, determined in accordance with the
provisions of the Contracts, to each Annuitant regardless of (a) how long that
person lives and (b) how long all payees as a group live. This assures an
Annuitant that neither the Annuitant's own longevity nor an improvement in life
expectancy generally will have any adverse effect on the variable annuity
payments the Annuitant will receive under the Contract. Moreover, these factors
may reduce the risk that the Annuitant will outlive the funds that the Annuitant
has accumulated for retirement. We also assume mortality risk as a result of our
guarantee of a minimum payment in the event of the death prior to the Annuity
Commencement Date of the Annuitant under Separate Account C and the Annuitant or
the Contractowner named in the original application for the Contract under
Separate Account D.
In addition, we assume the risk that the charges for administrative
expenses may not be adequate to cover such expenses. We will not increase the
amount we charge for administrative expenses. In consideration for our
assumption of these mortality and expense risks, we deduct an amount equal on an
annual basis to the following percentage of the daily Accumulation Unit value of
the Subaccounts:
. For Separate Account C, 1.00%, of which approximately 0.60% is for
assuming the mortality risk and 0.40% is for assuming the expense
risk.
. For Separate Account D, 1.25%, of which approximately 0.85% is for
assuming the mortality risk and 0.40% is for assuming the expense
risk.
We guarantee that we will not increase the mortality and expense risk
charges during the term of any Contract. If the charges are insufficient to
cover the actual cost of the mortality and expense risks, the loss will fall on
us. Conversely, if the deductions prove more than sufficient, the excess will be
a profit to us. We can use any profits resulting to us from over-estimates of
the actual costs of the mortality and expense risks for any business purpose,
including the payment of expenses of distributing the Contracts. These profits
will not remain in Separate Account C or Separate Account D.
14
<PAGE>
Other Charges
Administrative Charge
---------------------
For Separate Account C, we may deduct an administrative charge of $7.50
annually from the Accumulated Value of Contracts that have an Accumulated Value
of less than $1,500 because of partial surrenders. These charges are to
compensate us for expenses involved in administering small accounts. If the
actual expenses exceed charges, we will bear the loss. For Separate Account D,
we deduct an amount equal annually to 0.15% of the daily net asset value of the
Subaccounts for the expense of administering the Contract. We guarantee that we
will not increase the administrative charges during the term of any Contract.
Contract Maintenance Charge
---------------------------
For Separate Account D, we deduct a $30.00 Contract Maintenance Charge from
the Accumulated Value, on (a) the last business day of each Contract Year or (b)
the date of surrender of the Contract, if earlier. This charge will not exceed
2% of the Accumulated Value. We make the charge against the Accumulated Value by
proportionately reducing the number of Accumulation Units held in each of your
Subaccounts of Separate Account D. We guarantee that we will not increase this
charge during the term of any Contract.
Premium Tax Charge
------------------
Some states assess Premium taxes at the time you:
. make purchase payments,
. surrender, or
. begin receiving annuity payments.
We currently advance any Premium taxes due at the time you make purchase
payments and then deduct Premium taxes from the Accumulated Value of the
Contract at the time of surrender, on death of the Annuitant or when annuity
payments begin. However, we reserve the right to deduct Premium taxes when
incurred. See "Appendix I" for Premium tax table.
Expenses
--------
Total Separate Account expenses for the fiscal year ended December 31, 1998
amounted to $4,598,846 or 1.00% of average net assets for Separate Account C and
$555,026 or 1.42% of average net assets for Separate Account D. The Funds have
expenses that they pay out of their assets.
THE ACCUMULATION PERIOD
Crediting Accumulation Units
----------------------------
During the Accumulation Period, we credit purchase payments on the
Contracts to the Contractowner's Individual Account in the form of Accumulation
Units. We determine the number of Accumulation Units that we credit to a
Contractowner for the Subaccounts by dividing (a) the purchase payment (less any
charges) by (b) the value of an Accumulation Unit for the Subaccount. We make
this valuation after we receive the purchase payment at our Home Office or other
designated office.
The value of the Contractowner's Individual Account varies with the value
of the assets of the Subaccounts. The investment performance of the Subaccounts,
expenses, and deduction of certain charges affect the value of an Accumulation
Unit. There is no assurance that the value of your Individual Account will equal
or exceed purchase payments. We determine your Individual Account for a
Valuation Period by multiplying (a) the total number of Accumulation Units we
credit to the Subaccount by (b) the value of an Accumulation Unit for the
Subaccount for the Valuation Period.
15
<PAGE>
Death of Annuitant During the Accumulation Period
-------------------------------------------------
If the Annuitant dies prior to the Annuity Commencement Date, we pay a
Death Benefit to the Beneficiary you have designated. We make this payment when
we receive (a) a death certificate or similar proof of the death of the
Annuitant ("Due Proof of Death") and (b) a First Investors Life Claimant's
Statement that includes notification of the Beneficiary's election to receive
payment in either a single sum settlement or an Annuity Option. We determine the
value of the Death Benefit as of the next computed value of the Accumulation
Units following our receipt at our Home Office or other designated office of
written notification of death, in the case of Separate Account C, or Due Proof
of Death in the case of Separate Account D.
If you do not elect payment of the Death Benefit under one of the Annuity
Options before the Annuitant's death, the Beneficiary may elect to have the
Death Benefit (a) paid in a single sum or (b) applied to provide an annuity
under one of the Annuity Options or (c) as we otherwise permit. If the
Beneficiary elects a single sum settlement, we pay the amount of the Death
Benefit within seven days of receipt of Due Proof of Death and a Claimant's
Statement.
If the Beneficiary wants an Annuity Option, the Beneficiary has up to 60
days commencing with the date of our receipt of Due Proof of Death to select an
Annuity Option. If the Beneficiary does not make a selection by the end of the
60-day period, we pay a single sum settlement to the Beneficiary. If the
Beneficiary selects any Annuity Option, the Annuity Commencement Date is the
date specified in the election. That date may be no later than 60 days after
receipt by us of Due Proof of Death.
The amount of the Death Benefit payable on the death of the Annuitant is as
follows:
. For Separate Account C, the greater of (a) the total purchase
payments less withdrawals or (b) the Accumulated Value on the date of
receipt of written notification of death at our Home Office, or other
designated office.
. For Separate Account D, the greatest of (a) the total purchase
payments less any withdrawals; (b) the Accumulated Value on the date
of receipt of Due Proof of Death at our Home Office or other
designated office; or (c) the Accumulated Value on the immediately
preceding Specified Contract Anniversary, increased by any additional
purchase payments and decreased by any partial surrenders since that
anniversary. The Specified Contract Anniversary is every seventh
contract anniversary (i.e., 7th, 14th, 21st, etc.).
The following example demonstrates how the amount of Death Benefit payable
would be determined for a Separate Account D Contract assuming (1) the Purchase
Payment is $50,000; (2) no additional Purchase Payments or Partial Surrenders
have been made; (3) the Annuitant's death occurs in Policy year 9 when the
Accumulated Value is $70,000; and (4) the Accumulated Value on the 7th Contract
Anniversary (the immediately preceding Specified Contract Anniversary) is
$80,000.
The amount of Death Benefit payable would therefore be $80,000, which is
the greater of (a) (b) or (c) as shown below.
(a) (b) (c)
Total Purchase Payments Accumulated Value of Accumulated Value on
less any withdrawals Contract on the date of 7th Contract
receipt Anniversary
of Due Proof of Death
$50,000 $70,000 $80,000
Death of Contractowner During the Accumulation Period
-----------------------------------------------------
If the Contractowner dies before we have distributed the entire interest in
the Contract, we must distribute the value of the Contract to the Beneficiary as
provided below. Otherwise, the Contract will not qualify as an annuity under
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Section 72 of the Internal Revenue Code of 1986, as amended (the "Code"). Under
Separate Account C, the entire interest of the Contractowner who dies is the
Accumulated Value of the Contract. Under Separate Account D, if the
Contractowner who dies is the one named in the original application for the
Contract, the entire interest of that Contractowner in the Contract is the same
as if the Contractowner had been the Annuitant; if the Contractowner who dies is
not the one named in the original application for the Contract, the entire
interest of that Contractowner is the Accumulated Value of the Contract.
If the death of the Contractowner occurs prior to the Annuity Commencement
Date, we will distribute the entire interest in the Contract to the Beneficiary
(a) within five years, or (b) beginning within one year of death, under an
Annuity Option that provides that we will make annuity payments over a period
not longer than the life or life expectancy of the Beneficiary. If the Contract
is payable to (or for the benefit of) the Contractowner's surviving spouse, we
need not make any distribution. The surviving spouse may continue the Contract
as the new Contractowner. If the Contractowner is also the Annuitant, the spouse
has the right to become the Annuitant under the Contract. Likewise, if the
Annuitant dies and the Contractowner is not a natural person, the Annuitant's
surviving spouse has the right to become the Contractowner and the Annuitant.
Full and Partial Surrenders During the Accumulation Period
----------------------------------------------------------
You may by written request make a full or partial surrender of your
Contract, at any time before the earlier of the Annuity Commencement Date or the
death of the Annuitant or Contractowner. You will be entitled to receive:
. For Separate Account C, the net Accumulated Value of the Contract or,
in the case of a partial surrender, the portion surrendered.
. For Separate Account D, the Accumulated Value of the Contract or, in
the case of a partial surrender, the portion surrendered less (a) any
applicable CDSC, (b) the Contract Maintenance Charge and (c) any
applicable Premium taxes not previously deducted.
A surrender request is effective on the date it is received in writing at
our Home Office or other designated office. Your Accumulated Value will be
determined based on the next computed value of Accumulation Units following our
receipt of your written request. We may defer payment of the amount of the
surrender for a period of not more than seven days. We may also postpone such
payment during any period when:
. trading on the NYSE is restricted as the SEC determines or the NYSE
is closed for other than weekends and holidays;
. the SEC has by order permitted such suspension; or
. any emergency, as defined by SEC rules, exists when the sale of
portfolio securities or calculation of securities is not reasonably
practicable.
In the case of a partial surrender, unless you direct us otherwise, the
amount you request will be deducted from your Subaccounts on a pro rata basis in
the proportions to which their values bear to the Accumulated Value of your
Contract. For Separate Account D, the amount remaining must be at least equal to
our minimum balance requirement (currently $5,000). For Separate Account C,
there is no minimum balance requirement. However, we may deduct an
administrative charge of $7.50 annually if the surrender causes the value of
your Contract to fall below $1,500. As noted previously, on a non-cumulative
basis, you may make partial surrenders of a Separate Account D Contract during
any Contract Year up to the annual Withdrawal Privilege Amount of 10% of
Purchase Payments without incurring a CDSC. Amounts surrendered under the
Withdrawal Privilege are treated as being from Accumulated Values other than
Purchase Payments.
For more information on fees, charges, and tax consequences on surrenders,
see "THE CONTRACTS IN DETAIL -- Sales Charge, Mortality and Expense Risk
Charges, and Other Charges"; "Tax Information"; and "Other Charges."
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Annuity Commencement Date Exchange Privilege (for Separate Account C only)
- --------------------------------------------------------------------------
If you fully surrender this Contract during the one-year period preceding
its Annuity Commencement Date, you can use the proceeds to purchase Class A
shares of First Investors mutual funds without incurring a sales charge.
THE ANNUITY PERIOD
Commencement Date
-----------------
Annuity payments begin on the Annuity Commencement Date you select when you
buy a Contract. You may elect in writing to advance or defer the Annuity
Commencement Date, not later than 30 days before the Annuity Commencement Date.
You may defer the Annuity Commencement Date until the first day of the calendar
month after -
. for Separate Account C, the Annuitant's 85th birthday or, if state
law permits, 90th birthday.
. for Separate Account D, the Annuitant's 90th birthday.
If you elect no other date, annuity payments will commence on the Contract
anniversary date after -
. for Separate Account C, the Annuitant's 85th birthday, or, if state
law permits, 90th birthday.
. for Separate Account D, the Annuitant's 90th birthday.
If the net Accumulated Value on the Annuity Commencement Date is less than
$2,000, we may pay such value in one sum in lieu of annuity payments. If the net
Accumulated Value is $2,000 or more, but the variable annuity payments are less
than $20, we may change the frequency of annuity payments to intervals that will
result in payments of at least $20.
Assumed Investment Rate
-----------------------
We build a 3.5% assumed investment rate into the Contract's Annuity Tables,
which are used to determine the amount of the monthly annuity payments. A higher
rate would mean a higher initial payment but more slowly rising and more rapidly
falling subsequent Variable Annuity payments. A lower rate would have the
opposite effect. If the actual net investment rate of the Subaccounts is at the
annual rate of 3.5%, the Variable Annuity payments will be level. A Fixed
Annuity features annuity payments that remain fixed as to dollar amount
throughout the payment period and an assumed interest rate of 3.5% per year
built into the Annuity Tables in the Contract.
Annuity Options
---------------
You may elect to receive payments under any one of the Annuity Options in
the Contract. You may make this election at any time at least 30 days before the
Annuity Commencement Date on written notice to us at our Home Office or other
designated office. If no election is in effect on the Annuity Commencement Date,
we will make annuity payments on a variable basis only under Annuity Option 3
below, Life Annuity with 120 Monthly Payments Guaranteed. This is the Basic
Annuity.
The material factors that determine the level of your annuity benefits are:
. the value of your Individual Account, as described in this
Prospectus, before the Annuity Commencement Date;
. the Annuity Option you select;
. the frequency and duration of annuity payments;
. the sex and adjusted age of the Annuitant and any Joint Annuitant at
the Annuity Commencement Date; and
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. in the case of a variable annuity, the investment performance of the
Subaccounts you select.
We apply the Accumulated Value on the Annuity Commencement Date, reduced by
any applicable Premium taxes not previously deducted, to provide (a) the Basic
Annuity or (b) if you have elected an Annuity Option, one of the Annuity Options
we describe below.
The Contracts provide for the six Annuity Options described below:
Option 1 - LIFE ANNUITY. An annuity payable monthly during the lifetime of
the Annuitant, ceasing with the last payment due before the death of the
Annuitant. If you elect this Option, annuity payments terminate automatically
and immediately on the death of the Annuitant without regard to the number or
total amount of payments received.
Option 2a - JOINT AND SURVIVOR LIFE ANNUITY. An annuity payable monthly
during the joint lifetime of the Annuitant and the Joint Annuitant and
continuing thereafter during the lifetime of the survivor, ceasing with the last
payment due before the death of the survivor.
Option 2b - JOINT AND TWO-THIRDS TO SURVIVOR LIFE ANNUITY. An annuity
payable monthly during the joint lifetime of the Annuitant and the Joint
Annuitant and continuing thereafter during the lifetime of the survivor at an
amount equal to two-thirds of the joint annuity payment, ceasing with the last
payment due before the death of the survivor.
Option 2c - JOINT AND ONE-HALF TO SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Annuitant and the Joint Annuitant and
continuing thereafter during the lifetime of the survivor at an amount equal to
one-half of the joint annuity payment, ceasing with the last payment due before
the death of the survivor.
Under Annuity Options 2a, 2b and 2c, annuity payments terminate
automatically and immediately on the deaths of both the Annuitant and the Joint
Annuitant without regard to the number or total amount of payments received.
Option 3 - LIFE ANNUITY WITH 60, 120 OR 240 MONTHLY PAYMENTS GUARANTEED. An
annuity payable monthly during the lifetime of the Annuitant, with the guarantee
that if, at his or her death, payments have been made for less than 60, 120 or
240 monthly periods, as elected, we will continue to pay to the Beneficiary any
guaranteed payments during the remainder of the selected period and, if the
Beneficiary dies after the Annuitant, we will pay the Beneficiary's estate the
present value of the remainder of the guaranteed payments. The present value of
the remaining payments is the discounted (or reduced) amount which would produce
the total of the remaining payments assuming that the discounted amount grew at
the effective annual interest rate assumed in the Annuity Tables of the
Contract. Pursuant to the 1940 Act, the Beneficiary may also, at any time he or
she is receiving guaranteed payments, elect to have us pay him or her the
present value of the remaining guaranteed payments in a lump sum.
Option 4 - UNIT REFUND LIFE ANNUITY. An annuity payable monthly during the
lifetime of the Annuitant, terminating with the last payment due before the
death of the Annuitant. We make an additional annuity payment to the Beneficiary
equal to the following. We take the Annuity Unit value of the Subaccount or
Subaccounts as of the date that we receive notice of death in writing at our
Home Office or other designated office. We multiply that value by the excess, if
any, of (a) over (b). For this purpose, (a) is (i) the net Accumulated Value we
allocate to each Subaccount and apply under the option at the Annuity
Commencement Date, divided by (ii) the corresponding Annuity Unit Value as of
the Annuity Commencement Date, and (b) is the product of (i) the number of
Annuity Units applicable under the Subaccount represented by each annuity
payment and (ii) the number of annuity payments made. (For an illustration of
this calculation, see Appendix II, Example A, in the Statement of Additional
Information.)
Annuity Election
----------------
You may elect to have the net Accumulated Value applied at the Annuity
Commencement Date to provide a Fixed Annuity, a Variable Annuity, or any
combination thereof. After the Annuity Commencement Date, we allow no transfers
or redemptions where we are making payments based upon life contingencies. You
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<PAGE>
must make these elections in writing to us at our Home Office or other
designated office at least 30 days before the Annuity Commencement Date. In the
absence of an election, we make annuity payments on a variable basis only under
Annuity Option 3 above. Option 3 is the Basic Annuity, a Life Annuity with 120
Monthly Payments Guaranteed.
Death of Contractowner During Annuity Period
--------------------------------------------
If the death of the Contractowner occurs on or after the Annuity
Commencement Date, we will distribute the entire interest in the Contract at
least as rapidly as under the Annuity Option in effect on the date of death.
Death of Annuitant
------------------
On receipt of Due Proof of Death of the Annuitant after annuity payments
have begun under an Annuity Option, we make any remaining payments under the
Option to the Beneficiary as provided by the Option.
Unless otherwise provided in the Beneficiary designation, if no Beneficiary
survives the Annuitant, the proceeds will be paid in one sum to the
Contractowner, if living; otherwise, to the Contractowner's estate.
TEN-DAY REVOCATION RIGHT
You may elect to cancel your Contract (a) within ten days from the date
your Contract is delivered to you or (b) longer as applicable state law
requires. We will cancel the Contract after we receive from you (a) the Contract
and (b) a written request for cancellation, at our Home Office or other
designated office. We will pay you an amount equal to the following:
. for Separate Account C, the sum of (a) the Accumulated Value of the
Contract on the date of surrender and (b) the amount of any sales
charges deducted from the initial purchase payment; and
. for Separate Account D, the sum of (a) the difference between the
purchase payments made under the Contract and the amount allocated to
Separate Account D under the Contract and (b) the Accumulated Value
of the Contract on the date of surrender.
Whether you are canceling a Separate Account C or D Contract, the amount we
refund to you may be more or less than your initial purchase payment depending
on the investment results of the Subaccount or Subaccounts to which you
allocated purchase payments. However, in states that require a full refund of
premiums, if you elect to exercise to cancel the Contract under the ten-day
revocation right, on cancellation, you receive a full refund of the Purchase
Payment.
TAX INFORMATION
GENERAL
We base this discussion on our understanding of the federal income tax law
and interpretations in effect on the date of this Prospectus. The discussion
assumes that the contractowner is a natural person who is a U.S. citizen and
U.S. resident. The tax effect on corporate taxpayers, non-U.S. citizens, and
non-U.S. residents may be different. That law and interpretations could change,
possibly retroactively. The discussion is general in nature. We do not intend it
as tax advice, for which you should consult a qualified tax adviser.
We discuss only federal income taxes and not state or other taxes.
Taxation of the Contracts will depend, in part, on whether the Contract is
purchased outside of a qualified retirement plan or an individual retirement
account ("Non-Qualified Contracts") or as part of an individual retirement
account or qualified plan ("Qualified Contracts").
20
<PAGE>
NON-QUALIFIED CONTRACTS
Purchase Payments
-----------------
Your purchase payments under a Non-Qualified Contract are not deductible
from your gross income for tax purposes.
Increases in Accumulated Value Before Distribution from Contract
----------------------------------------------------------------
Generally, there is no tax on increases in your Contract's Accumulated
Value until there is a distribution from a Non-Qualified Contract. A
distribution could include a surrender or an annuity payment. However, the
Contractowner is subject to tax on such increases, even before a distribution,
in the following two situations:
. The Contractowner is not a natural person, subject to exceptions.
. The investments of the Separate Accounts do not meet certain
diversification or "investor controls" tests, discussed below.
Annuity Payments
----------------
Once annuity payments begin, a portion of each payment is taxable as
ordinary income. The remaining portion is a nontaxable recovery of your
investment in the contract. Generally, your investment in the Contract equals
the purchase payments you made, less any amounts you previously withdrew that
were not taxable.
For fixed annuity payments, the tax-free portion of each payment is
determined by:
. dividing your investment in the Contract by the total amount you
expect to receive out of the Contract and
. multiplying the result by the amount of the payment.
For Variable Annuity payments, the tax-free portion of each payment is (a)
your investment in the Contract divided by (b) the number of expected payments.
The remaining portion of each payment, and all of the payments you receive
after you recover your investment in the Contract, are fully taxable. If
payments under a life annuity stop because the Annuitant dies, there is an
income tax deduction for any unrecovered investment in the contract.
Distributions Other than Annuity Payments
-----------------------------------------
Before annuity payments begin, the Code taxes distributions from
Non-Qualified Contracts as follows:
. a total or partial surrender is taxed in the year of receipt to the
extent that the Contract's Accumulated Value exceeds the investment
in the Contract;
. a loan under, or an assignment or pledge of, a Contract is taxed in
the same manner as a partial or total surrender;
. a penalty equal to 10% of the taxable distribution applies to
distributions before the taxpayer's age 59-1/2, subject to certain
exceptions; and
. the Code treats all Contracts that we issue to you in the same
calendar year as a single Contract. Consequently, you should consult
your tax advisor before buying more than one Contract in any calendar
year.
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<PAGE>
Diversification and Control Tests
---------------------------------
The Subaccounts of Separate Account C and Separate Account D must meet the
Code's investment diversification test. Each Subaccount meets the test if:
. the investments of the Fund in which the Subaccount invests are
diversified according to certain limits;
. the Fund in which the Subaccount invests is a regulated investment
company under the Code;
. all shares of the Fund are owned only by (a) Separate Account C,
Separate Account D, or similar accounts of First Investors Life or
other insurance companies, (b) a life insurance company general
account, or (c) the Adviser, in starting or managing the Fund (in the
case of (b) and (c) of this paragraph, there must be no intention to
sell shares to the general public); (d) the trustee of a qualified
pension or retirement plan; and
. access to the Fund is available only through the purchase of
Contracts, or other Variable Annuity or life insurance products of
First Investors Life or other insurance companies.
If Separate Account C or Separate Account D failed the diversification
test, you would be taxed on increases in the value of any Contract you own that
is supported by the Separate Account that failed the test. The tax would apply
from the first quarter of the failure, until we corrected the failure in
conformity with a Treasury Department procedure.
The Contracts must also meet an "investor control" test, which the Treasury
Department has said it may address in guidelines through regulations or rulings.
This test could specify that your control over allocation of values among
different investments may cause you to be treated as the owner of Separate
Account C or Separate Account D assets, as applicable, for tax purposes. We
reserve the right to amend the Contracts in any way necessary to avoid this
result. As of the date of this prospectus, the Treasury Department has issued no
guidelines on the subject. However, the Department has informally indicated that
guidelines could limit the number of underlying funds or the frequency of
transfers among those funds. The guidelines may apply only prospectively,
although retroactive effect is possible if the guidelines do not embody a new
position. Failure of the "control test" would result in current taxation to you
of increases in your Contract value.
QUALIFIED PLAN CONTRACTS
Taxation of a Contract depends, in part, on the provisions of the
applicable plan where the Contract is issued to:
. a qualified individual retirement account;
. a qualified corporate employee pension and profit-sharing plan; or
. a retirement or deferred compensation plan that does not meet the
requirements applicable to a qualified plan.
Some of tax rules applicable to such Contracts are similar to tax rules
applicable to Non-Qualified Contracts, including: (a) deferral of the taxation
until you receive a distribution, (b) taxation of a part of each distribution or
annuity payment, and (c) the 10% penalty on early distributions.
WITHHOLDING
The Code generally requires us to withhold income tax from any Contract
distribution, including a total or partial surrender or an annuity payment. The
amount of withholding depends, in part, on whether the payment is "periodic" or
"non-periodic."
For periodic payments (E.G., annuity payments), we withhold from the
taxable portion of each payment based on a payroll withholding schedule that
assumes a married recipient claiming three withholding exemptions. If you want
us to withhold on a different basis, you must file an appropriate withholding
22
<PAGE>
certificate with us. For non-periodic payments (E.G., distributions such as
partial surrenders), we generally withhold 10% of the taxable portion of each
payment.
You may elect not to have the withholding rules apply. For periodic
payments, that election is effective for the calendar year for which you file it
with us, and for each subsequent year until you amend or modify it. For
non-periodic payments, an election is effective when you file it with us, but
only for the payment to which it is applicable. We have to notify your
recipients of your right to elect not to have taxes withheld.
The Code generally requires us to report all payments to the Internal
Revenue Service.
OUR TAX STATUS
The Code taxes us as a life insurance company. The Code taxes Separate
Account C and Separate Account D as part of our overall operation. Currently, we
do not charge Separate Account C and Separate Account D for an allocable portion
of our federal income taxes. However, we do reserve the right to impose such a
charge if it becomes necessary in the future.
PERFORMANCE INFORMATION
From time to time, Separate Account C and Separate Account D may advertise
several types of performance information for the Subaccounts. Each Subaccount
(other than the Cash Management Subaccount) may advertise "average annual total
return" and "total return." The Cash Management Subaccount may advertise "yield"
and "effective yield." The High Yield Subaccount, Investment Grade Subaccount
and Government Subaccount may also advertise "yield." These figures are based on
historical results. They are not intended to indicate future performance. For
Separate Account C, the yield and effective yield figures include the payment of
the Mortality and Expense Risk Charge of 1.00%, but do not include the maximum
sales charge of 7.00%.
The "total return" of a Subaccount is the total change in value of an
investment in the Subaccount over a period of time, expressed as a percentage.
"Average annual total return" is the rate of return that would produce that
change in value over the specified period, if compounded annually. For Separate
Account C, average annual total return and total return figures include the
deduction of all expenses and fees, including the payment of the Mortality and
Expense Risk Charge of 1.00% and the maximum sales charge of 7.00%. We may also
advertise these figures without any sales charges, but assuming the payment of
all recurring Separate Account charges, including the Mortality and Expense Risk
Charge of 1.00% (non-standardized performance information).
For Separate Account D, average annual total return figures may reflect the
effect of the CDSC (pursuant to a standardized formula prescribed by the SEC),
or may not reflect the effect of the CDSC (non-standardized performance
information). For Separate Account D, we may also advertise total return figures
on the same basis as average annual total return figures (with or without
showing the effect of the CDSC). Quotations of return not reflecting the CDSC
will be greater than those reflecting the CDSC.
The "yield" of a Subaccount refers to the income that an investment in the
Subaccount generates over a one-month or 30-day period (seven-day period for the
Cash Management Account), excluding realized and unrealized capital gains and
losses in the corresponding Fund's investments. We then "annualize" this income
and show it as a percentage of the value of the Subaccount's Accumulation Units.
We calculate the "effective yield" of the Cash Management Subaccount similarly,
but, when we annualize it, we assume the reinvestment in that Subaccount of any
income earned by that Subaccount. The Cash Management Subaccount's effective
yield will be slightly higher than its yield due to the compounding effect of
this assumed reinvestment.
Neither the total return nor the yield figures reflect deductions for
Premium taxes, since most states do not impose those taxes.
For further information on performance calculations, see "Performance
Information" in the Statement of Additional Information.
23
<PAGE>
OTHER INFORMATION
VOTING RIGHTS
Because the Life Series Fund is not required to have annual shareholder
meetings, Contractowners generally will not have an occasion to vote on matters
that pertain to the Life Series Fund. In certain circumstances, the Fund may be
required to hold a shareholders meeting or may choose to hold one voluntarily.
For example, a Fund may not change fundamental investment objectives or
investment policies without the approval of a majority vote of that Fund's
shareholders in accordance with the 1940 Act. Thus, if the Fund sought to change
fundamental investment objectives or investment policies, contractowners would
have an opportunity to provide voting instructions for shares of a Fund held by
a Subaccount in which their Contract invests.
We would vote the shares of any Fund held in a corresponding Subaccount or
directly, at any Fund shareholders meeting as follows:
. shares attributable to Contractowners for which we received
instructions, would be voted in accordance with the instructions;
. shares attributable to Contractowners for which we did not receive
instructions, would be voted in the same proportion that we voted
shares held in the Subaccount for which we received instructions; and
. shares not attributable to Contractowners, would be voted in the same
proportion that we voted shares held in the Subaccount attributable
to Contractowners for which we received instructions.
We will vote Fund shares that we hold directly in the same proportion that
we vote shares held in any corresponding Subaccounts that are attributable to
Contractowners and for which we receive instructions. However, we will vote our
own shares as we deem appropriate where there are no shares held in any
Subaccount. We will present all the shares of any Fund that we held through a
Subaccount or directly at any Fund shareholders meeting for purposes of
determining a quorum.
We will determine the number of Fund shares held in a corresponding
Subaccount that is attributable to each Contractowner as follows:
. before the Annuity Commencement Date, we divide the Subaccount's
Accumulated Value by the net asset value of one Fund share, and
. after the Annuity Commencement Date, we divide the reserve held in
the Subaccount for the variable annuity payment under the Contracts
by the net asset value of one Fund share. As this reserve fluctuates,
the number of votes fluctuates.
We will determine the number of votes that a Contractowner has the right to
cast as of the record date that the Life Series Fund establishes.
We will solicit instructions by written communication before the date of
the meeting at which votes will be cast. We will send meeting and other
materials relating to the Fund to each Contractowner having a voting interest in
a Subaccount.
The voting rights that we describe in this Prospectus are created under
applicable laws. If the laws eliminate the necessity to submit such matters for
approval by persons having voting rights in separate accounts of insurance
companies or restrict such voting rights, we reserve the right to proceed in
accordance with any such changed laws or regulations. Specifically, we reserve
the right to vote shares of any Fund in our own right, to the extent the law
permits.
RESERVATION OF RIGHTS
We also reserve the right to make certain changes if we believe they would
(a) best serve the interests of the Contractowners and Annuitants or (b) be
appropriate in carrying out the purposes of the Contracts. We will make a change
24
<PAGE>
only as the law permits. We will (a) obtain, when required, the necessary
Contractowner or regulatory approval for any change and (b) provide, when
required, notification to Contractowners before making a change.
For example, we may:
. operate either Account in any form permitted under the 1940 Act or in
any other form permitted by law,
. add, delete, combine, or modify Subaccounts of either Account,
. add, delete, or substitute for the Fund shares held in any
Subaccount, the shares of any investment company or series thereof,
or any investment permitted by law, or
. amend the Contracts if required to comply with the Internal Revenue
Code or any other applicable federal or state law.
DISTRIBUTION OF CONTRACTS
Separate Account C and Separate Account D, along with First Investors Life,
have each entered into an Underwriting Agreement with their affiliate, FIC, 95
Wall Street, New York, New York 10005 to sell the Contracts. First Investors
Life has reserved the right in the Underwriting Agreement to sell the Contracts
directly. Insurance agents licensed to sell variable annuities sell the
Contracts. These agents are registered representatives of the Underwriter or
broker-dealers who have sales agreements with the Underwriter.
FINANCIAL STATEMENTS
The Statement of Additional Information, dated April 30, 1999, includes:
. the financial statements for First Investors Life and the
accompanying Report of Independent Certified Public Accountants; and
. the financial statements for Separate Account C and for Separate
Account D and the accompanying Report of Independent Certified Public
Accountants for each.
You can get the Statement of Additional Information at no charge on request
to First Investors Life at the address or telephone number on the cover page of
this Prospectus.
YEAR 2000
On and after January 1, 2000, computer date-related errors could adversely
affect Separate Account C and Separate Account D, as they could other separate
accounts. These errors could occur in the computer and other information
processing systems used by First Investors Life, the underlying Funds, the
Adviser, the Subadviser, Transfer Agent and other service providers. Typically
these systems use a two-digit number to represent the year for any date.
Consequently, computer systems could incorrectly misidentify "00" as 1900,
rather than 2000, and make related mistakes when performing operations. First
Investors Life, the Funds, the Adviser, the Subadviser and Transfer Agent are
taking steps that they believe are reasonably designed to address the Year 2000
problem for computer and other systems used by them. They are obtaining
assurances from other service providers that the service providers are taking
comparable steps. However, there can be no assurance that these steps will avoid
any adverse impact on Separate Account C or Separate Account D, nor can either
Account estimate the extent of any impact.
25
<PAGE>
TABLE OF CONTENTS
OF THE STATEMENTS OF ADDITIONAL
INFORMATION
Item Page
---- ----
General Description.............................................2
Services........................................................2
Annuity Payments................................................3
Other Information...............................................4
Performance Information.........................................5
Relevance of Financial Statements...............................9
Appendices.....................................................10
Financial Statements...........................................15
APPENDIX I
STATE AND LOCAL TAXES*
Alabama.....................-- Mississippi...................--
Alaska......................-- Missouri......................--
Arizona.....................-- Nebraska......................--
Arkansas....................-- New Jersey....................--
California..................2.35% New Mexico....................--
Colorado....................-- New York .....................--
Connecticut.................-- North Carolina ...............--
Delaware....................-- Ohio..........................--
District of Columbia........2.25% Oklahoma......................--
Florida.....................1.00% Oregon........................--
Georgia.....................-- Pennsylvania..................--
Illinois....................-- Rhode Island..................--
Indiana.....................-- South Carolina................--
Iowa........................2.00% Tennessee.....................--
Kentucky....................2.00% Texas.........................--
Louisiana...................-- Utah..........................--
Maryland....................-- Virginia......................--
Massachusetts...............-- Washington....................--
Michigan....................-- West Virginia.................1.00%
Minnesota...................-- Wisconsin.....................--
Wyoming.......................1.00%
Note: State legislation could change the rates above. State insurance
regulation could change the applicability of the rates above.
* Includes local annuity Premium taxation.
26
<PAGE>
[FIRST INVESTORS LOGO]
TAX TAMER I
AND
TAX TAMER II
This booklet contains two prospectuses. The first prospectus is for Individual
Variable Annuity Fund C (Separate Account C) and Fund D (Separate Account D)
Contracts, which we call Tax Tamer I and Tax Tamer II, respectively. The second
prospectus is for the Life Series Fund, which provides the underlying investment
options for the Individual Variable Annuity Contracts offered through Separate
Accounts C and D.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1999.
<PAGE>
CONTENTS*
VARIABLE ANNUITY FUND C AND FUND D PROSPECTUS
GLOSSARY OF SPECIAL TERMS.......................................2
FEE TABLES......................................................3
CONDENSED FINANCIAL INFORMATION.................................6
OVERVIEW........................................................9
How the Contracts Work.......................................9
Who We Are..................................................10
Who Should Consider Purchasing a Contract...................11
Risk and Reward Considerations..............................11
THE CONTRACTS IN DETAIL........................................11
Purchase Payments...........................................12
Allocation of Net Purchase Payments to Subaccount(s)........12
Sales Charge................................................12
Mortality and Expense Risk Charges..........................14
Other Charges...............................................14
The Accumulation Period.....................................15
The Annuity Period..........................................17
Ten-Day Revocation Right....................................20
TAX INFORMATION................................................20
General.....................................................20
Non-Qualified Contracts.....................................20
Qualified Plan Contracts....................................22
Withholding.................................................22
Our Tax Status..............................................22
PERFORMANCE INFORMATION........................................22
OTHER INFORMATION..............................................23
Voting Rights...............................................23
Reservation of Rights.......................................24
Distribution of Contracts...................................24
Financial Statements........................................25
Year 2000...................................................25
TABLE OF CONTENTS OF THE STATEMENTS OF ADDITIONAL INFORMATION..26
APPENDIX I.....................................................26
- -----------------------------
*A Table of Contents for the Life Series Fund prospectus can be found at page ii
of that prospectus.
<PAGE>
[FIRST INVESTORS LOGO]
95 Wall Street
New York, New York 10005
(212) 858-8200
<PAGE>
[FIRST INVESTORS LOGO]
SUPPLEMENT TO THE PROSPECTUS FOR
TAX TAMER I AND TAX TAMER II
This booklet contains two documents. The first document is a supplement to the
Tax Tamer I and Tax Tamer II prospectus. The second document is the prospectus
for First Investors Life Focused Equity Fund and First Investors Life Target
Maturity 2015 Fund, each of which is a series of First Investors Life Series
Fund.
This supplement is not valid unless accompanied or preceded by the current
prospectus for Tax Tamer I and Tax Tamer II, dated April 30, 1999, and should be
read together with the Tax Tamer I and Tax Tamer II prospectus and the attached
Life Series Fund prospectus for the other series of Life Series Fund. This
supplement and the prospectuses should be read and retained for further
reference.
The date of this supplement is November 8, 1999.
<PAGE>
FIRST INVESTORS LIFE VARIABLE ANNUITY FUND C
(SEPARATE ACCOUNT C)
FIRST INVESTORS LIFE VARIABLE ANNUITY FUND D
(SEPARATE ACCOUNT D)
SUPPLEMENT DATED NOVEMBER 8, 1999 TO
PROSPECTUS DATED APRIL 30, 1999
1. All references in the prospectus to the "eleven" Subaccounts of Separate
Account C or Separate Account D should read "thirteen" Subaccounts.
2. The following should be added to the Fund Annual Expenses table appearing
on page 5:
<TABLE>
<CAPTION>
FEE WAIVERS
TOTAL FUND AND/OR
MANAGEMENT OTHER OPERATING EXPENSE NET
FEES(1) EXPENSES(2) EXPENSES(3) ASSUMPTIONS EXPENSES(3)
------- ----------- ----------- (1),(2) -----------
-----------
<S> <C> <C> <C> <C> <C>
Focused Equity Fund* 0.75% 0.08% 0.83% N/A N/A
Target Maturity 2015 Fund* 0.75% 0.09% 0.84% 0.15% 0.69%
</TABLE>
* Because the Fund had no operating history when this supplement to the
prospectus was printed, these annual expenses are estimated for the current
fiscal year.
3. The following should be added to footnote (1) to the Fund Annual Expenses
table on page 5:
The Adviser has contractually agreed with Life Series Fund to waive
Management Fees in excess of 0.60% for Target Maturity 2015 Fund for
the period covering commencement of operations to December 31, 1999.
<PAGE>
4. The following paragraph and table replaces the paragraph and table
appearing on page 6 labeled "Example (Separate Account C Contract)":
EXAMPLE (SEPARATE ACCOUNT C CONTRACT)+
If you surrender your Contract (or if you annuitize) for the number of years
shown, you would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
Blue Chip Subaccount......................... $87 $123 $162 $269
Cash Management Subaccount................... 86 120 156 257
Discovery Subaccount......................... 87 124 162 270
Focused Equity Subaccount................... 87 124 N/A N/A
Government Subaccount........................ 86 120 157 259
Growth Subaccount............................ 87 123 162 269
High Yield Subaccount........................ 87 124 162 270
International Securities Subaccount.......... 90 133 177 301
Investment Grade Subaccount.................. 86 120 156 257
Target Maturity 2007 Subaccount.............. 86 120 155 256
Target Maturity 2010 Subaccount.............. 86 120 155 256
Target Maturity 2015 Subaccount.............. 86 120 N/A N/A
Utilities Income Subaccount.................. 86 121 157 260
+ In this Example, "N/A" indicates that SEC rules require that the Focused
Equity Subaccount and Target Maturity 2015 Subaccount complete the Example for
only the one and three year periods.
5. The following paragraph and table replaces the paragraph and table labeled
"Example (Separate Account D Contract)" at the top of page 7:
EXAMPLE (SEPARATE ACCOUNT D CONTRACT)+
The expenses you incur in purchasing a Separate Account D Contract would depend
upon whether or not you surrender your Contract. If you surrender your Contract
at the end of the period shown, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Blue Chip Subaccount......................... $123 $209 $299 $555
Cash Management Subaccount................... 121 206 293 543
Discovery Subaccount......................... 123 210 299 556
Focused Equity Subaccount.................... 123 210 N/A N/A
Government Subaccount........................ 122 206 294 545
Growth Subaccount............................ 123 209 299 555
High Yield Subaccount........................ 123 210 299 556
International Securities Subaccount.......... 126 219 316 589
Investment Grade Subaccount.................. 121 206 293 543
Target Maturity 2007 Subaccount.............. 121 205 292 542
Target Maturity 2010 Subaccount.............. 121 205 292 542
Target Maturity 2015 Subaccount.............. 121 205 N/A N/A
Utilities Income Subaccount.................. 122 207 294 546
<PAGE>
+ In these Examples, "N/A" indicates that SEC rules require that the Focused
Equity Subaccount and Target Maturity 2015 Subaccount complete the Examples for
only the one and three year periods.
6. The following paragraph and table replaces the paragraph and table at the
bottom of page 7:
If you do not surrender your contract (or if you annuitize) at the end of the
period shown, you would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Blue Chip Subaccount......................... $53 $159 $269 $555
Cash Management Subaccount................... 51 156 263 543
Discovery Subaccount......................... 53 160 269 556
Focused Equity Subaccount.................... 53 160 N/A N/A
Government Subaccount........................ 52 156 264 545
Growth Subaccount............................ 53 159 269 555
High Yield Subaccount........................ 53 160 269 556
International Securities Subaccount.......... 56 169 286 589
Investment Grade Subaccount.................. 51 156 263 543
Target Maturity 2007 Subaccount.............. 51 155 262 542
Target Maturity 2010 Subaccount.............. 51 155 262 542
Target Maturity 2015 Subaccount.............. 51 155 N/A N/A
Utilities Income Subaccount.................. 52 157 264 546
7. The following Subaccounts and Funds should be added to the lists of
Subaccounts and Funds appearing at the bottom of page 12:
SUBACCOUNTS FUND
- ----------- ----
Focused Equity Subaccount Focused Equity Fund
Target Maturity 2015 Subaccount Target Maturity 2015 Fund
8. The following paragraphs should replace the first two paragraphs on page
14 under the section "Who We Are - The Life Series Fund":
First Investors Life Series Fund is an open-end management investment
company (commonly known as a "mutual fund") registered with the SEC
under the 1940 Act. Registration of the Life Series Fund does not
involve supervision by the SEC of the management or investment
practices or policies of the Life Series Fund. The Life Series Fund
offers its shares only through the purchase of our variable annuity
contracts or variable life insurance policies. It does not offer its
shares directly to the general public. The Life Series Fund reserves
the right to offer its shares to other separate accounts of ours or
directly to us.
First Investors Management Company, Inc. (the "Adviser") is the
investment adviser of each Fund. The Adviser is a New York Corporation
<PAGE>
located at 95 Wall Street, New York, New York 10005. The Adviser and
Life Series Fund have retained Wellington Management Company, 75 State
Street, Boston, Massachusetts 02109 ("WMC" or "Subadviser"), to serve
as the subadviser of the International Securities Fund and Growth Fund,
and Arnhold and S. Bleichroeder, Inc., 1345 Avenue of the Americas, New
York, New York 10105 ("ASB" or "Subadviser"), to serve as the
subadviser of the Focused Equity Fund. See the Life Series Fund
prospectus for more information about the Adviser and Subadvisers as
well as the fees that each Fund paid for the fiscal year ended December
31, 1998.
<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 NOVEMBER 8, 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?
2
<PAGE>
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.
3
<PAGE>
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.
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
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
4
<PAGE>
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. An
investment in the Fund therefore may entail greater risks than an investment in
a diversified investment company.
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.
5
<PAGE>
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.
6
<PAGE>
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,
consistent with the preservation of capital.
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, consistent with
the preservation of capital.
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
7
<PAGE>
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.
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.
8
<PAGE>
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.
("ASB" or "Subadviser") 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 $4 billion of domestic and international assets.
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.
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.
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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. Purchases and
redemptions of shares of a Fund by the Separate Accounts are effected at NAV per
share next determined after the order is placed.
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.
10
<PAGE>
[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.: First
Investors Life Series Fund 811-4325)
<PAGE>
FIRST INVESTORS LIFE SERIES FUND
95 WALL STREET (800) 342-7963
NEW YORK, NEW YORK 10005
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 8, 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
two prospectuses for Life Series Fund. 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 the two
prospectuses for Life Series Fund dated April 30, 1999 and November 8, 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............................................ 13
Portfolio Turnover............................................. 26
Futures and Options Strategies................................. 26
Investment Restrictions........................................ 35
Trustees and Officers.......................................... 36
Management..................................................... 38
Determination of Net Asset Value............................... 41
Allocation of Portfolio Brokerage.............................. 42
Taxes.......................................................... 44
Performance Information........................................ 47
General Information............................................ 52
Appendix A..................................................... 54
Appendix B..................................................... 55
Appendix C..................................................... 56
Appendix D..................................................... 59
Financial Statements........................................... 65
<PAGE>
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
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<PAGE>
conditions and to shifts in fiscal and monetary policy. These techniques include
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. 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).
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
3
<PAGE>
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
unforeseen adverse occurrence and thus such an occurrence may have a
disproportionately negative impact on these companies.
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<PAGE>
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 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 in the securities of foreign companies when they are
linked to the U.S. companies it has identified as having investment potential;
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<PAGE>
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
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
6
<PAGE>
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 25% 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.
7
<PAGE>
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
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conditions. Thus, changing economic conditions specified by the terms of the
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, consistent with the preservation of capital.
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
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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
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.
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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
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.
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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
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
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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
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
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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.
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
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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
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
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principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
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
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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
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
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transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
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
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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.
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.
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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
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
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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
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.
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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
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.
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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
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
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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
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
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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.
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
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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.
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, International Securities 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
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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
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.
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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
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.
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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,
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.
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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
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.
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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
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.
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(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.
(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").
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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.
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, 39 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, FIMCO, EIMCO and FIAMCO.
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
COMPENSATION FAMILY OF
FROM FUNDS PAID
TRUSTEE FUND* TO 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 $8,885 $20,045
Herbert Rubinstein $8,885 $20,045
James M. Srygley $8,885 $20,045
John T. Sullivan $-0- $-0-
Robert F. Wentworth $8,885 $20,045
Nancy Schaenen(1) $8,120 $18,350
- ------------------
* 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
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
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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, Michael Deneka, 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 October 14, 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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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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<PAGE>
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 regulated 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
International Securities Fund and Focused Equity Fund, 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
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more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
If 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 any foreign corporation (with certain exceptions) 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
any 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
would be required to include in income each year its PRO RATA share of the QEF's
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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 in income by the
Fund for prior taxable years under the election (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
PFICs). 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 thereunder.
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, with respect to INTERNATIONAL SECURITIES FUND, 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 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 each 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 International Securities Fund or Focused Equity 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 position, the Funds 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 the
Funds or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical 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 the Funds if the transaction is closed
within 30 days after the end of that year and the Funds hold the appreciated
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financial position unhedged for 60 days after that closing (i.e., at no time
during that 60-day period is the Funds' risk of loss regarding that position
reduced by reason of certain specified transactions with respect to
substantially identical 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
The CASH MANAGEMENT FUND provides current yield quotations based on its
daily dividends. To the extent it has net investment income, the CASH MANAGEMENT
FUND declares dividends daily and pays dividends monthly from net investment
income.
For purposes of current yield quotations, dividends per share for a
seven-day period are annualized (using a 365-day year basis) and divided by the
CASH MANAGEMENT FUND'S average net asset value per share for the seven-day
period. The current yield quoted will be for a recent seven day period. Current
yields will fluctuate from time to time and are not necessarily representative
of future results. You should remember that yield is a function of the type and
quality of the instruments in the portfolio, portfolio maturity and operating
expenses. Current yield information is useful in reviewing the Fund's
performance but, because current yield will fluctuate, such information may not
provide a basis for comparison with bank deposits or other investments which may
pay a fixed yield for a stated period of time, or other investment companies,
which may use a different method of calculating yield.
In addition to providing current yield quotations, the CASH MANAGEMENT FUND
provides effective yield quotations for a base period return of seven days. The
CASH MANAGEMENT FUND may also advertise yield for periods other than seven days,
such as thirty days or twelve months. In such cases, the formula for calculating
seven-day effective yield will be used, except that the base period will be
thirty days or 365 days rather than seven days. An effective yield quotation is
determined by a formula that requires the compounding of the unannualized base
period return. Compounding is computed by adding 1 to the annualized base period
return, raising the sum to a power equal to 365 divided by 7 and subtracting 1
from the result.
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The following is an example, for purposes of illustration only, of the
current and effective yield calculation for CASH MANAGEMENT FUND for the seven
day period ended June 30, 1999.
Dividends per share from net
investment income (seven
calendar days ended June 30, $0.000858399
1999) (Base Period)
Annualized (365 day basis)* $0.044759374
Average net asset value per
share of the seven calendar
days ended June 30, 1999 $1.00
Annualized historical yield
per share for the seven
calendar days ended June 30,
1999 4.48%
Effective Yield** 4.57%
Weighted average life
to maturity of the portfolio
on June 30, 1999 was 57 days
- ------------
* This represents the average of annualized net investment income per share
for the seven calendar days ended June 30, 1999.
** Effective Yield = [(Base Period Return+1)365/7] - 1
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 June 30, 1999 are set forth in the following tables. The
average annual total return and total return figures do not reflect fees and
expenses that may be deducted by the variable annuity contract or variable life
insurance policy through which an investor may invest. If they were included,
the returns would be less than those shown.
AVERAGE ANNUAL TOTAL RETURN1,3
ONE FIVE TEN LIFE OF
YEAR YEARS YEARS FUND(2)
---- ----- ----- -------
BLUE CHIP 15.36% 22.39% N/A 15.72%
DISCOVERY 3.54% 14.04% 14.54% N/A
FOCUSED EQUITY N/A N/A N/A N/A
GOVERNMENT 4.14% 7.02% N/A 6.24%
GROWTH 23.50% 24.75% 16.62% N/A
HIGH YIELD 0.94% 10.02% 9.63% N/A
INTERNATIONAL 10.96% 14.63% N/A 11.70%
INVESTMENT 1.98% 7.75% N/A 7.10%
GRADE
TARGET 2007 0.83% N/A N/A 9.28%
TARGET 2010 ( 1.55%) N/A N/A 10.91%
TARGET 2015 N/A N/A N/A N/A
UTILITIES 16.89% 17.34% N/A 13.42%
INCOME
- -----------------------
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through June 30, 1999. 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.
3 Because FOCUSED EQUITY and TARGET 2015 had no operating history when this
SAI was printed, the average annual total return and total return tables
indicate "N/A".
TOTAL RETURN 1,3
ONE FIVE TEN LIFE OF
YEAR YEARS YEARS FUND(2)
---- ----- ----- -------
BLUE CHIP 15.36% 174.59% N/A 289.64%
DISCOVERY 3.54% 92.88% 288.57% N/A
FOCUSED EQUITY N/A N/A N/A N/A
GOVERNMENT 4.14% 40.38% N/A 57.24%
GROWTH 23.50% 202.17% 365.20% N/A
HIGH YIELD 0.94% 61.18% 150.67% N/A
INTERNATIONAL 10.96% 97.90% N/A 177.16%
INVESTMENT GRADE 1.98% 45.22% N/A 67.09%
TARGET 2007 0.83% N/A N/A 44.90%
TARGET 2010 (1.55%) N/A N/A 35.26%
TARGET 2015 N/A N/A N/A N/A
UTILITIES INCOME 16.89% 122.41% N/A 103.06%
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through June 30, 1999. Accordingly, return
49
<PAGE>
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.
3 Because FOCUSED EQUITY and TARGET 2015 had no operating history when this
SAI was printed, the average annual total return and total return tables
indicate "N/A".
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
50
<PAGE>
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.
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
51
<PAGE>
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
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.
52
<PAGE>
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.
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
- ---- ----------- -----------
Cash Management 7.0 Valerie Pleva
George Washington Rm 1718
23 Lexington Avenue
New York, NY 10010
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.
53
<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.
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<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.
55
<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
56
<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
57
<PAGE>
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
58
<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
59
<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.
60
<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.
61
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[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.
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<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.
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<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.
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<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.
65
<PAGE>
Financial Statements
as of June 30, 1999
Registrant incorporates by reference the financial statements and report of
independent auditors contained in the Annual Report to shareholders for the
semi-annual period ended June 30, 1999 electronically filed with the Securities
and Exchange Commission on September 1, 1999 (Accession Number:
0001047469-99-034370).
66