As filed with the Securities and Exchange Commission on October 19, 2000
1933 Act File No. 33-10648
1940 Act File No. 811-4927
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 24 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 [X]
EXECUTIVE INVESTORS TRUST
(Exact name of Registrant as specified in charter)
95 Wall Street
New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (212) 858-8000
Ms. Concetta Durso
Secretary and Vice President
First Investors Series Fund
95 Wall Street
New York, New York 10005
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXECUTIVE INVESTORS TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Executive Investors Trust
Statement of Additional Information for the Executive Investors Trust
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
[FIRST INVESTORS LOGO]
INSURED TAX EXEMPT FUND II
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 DECEMBER __, 2000
<PAGE>
CONTENTS
OVERVIEW OF THE INSURED TAX EXEMPT FUND II
|X| What is the Insured Tax Exempt Fund II?
| | Objective
| | Primary Investment Strategies
| | Primary Risks
|X| Who should consider buying the Insured Tax Exempt Fund II?
|X| How has the Insured Tax Exempt Fund II performed?
|X| What are the fees and expenses of the Insured Tax Exempt Fund II?
THE INSURED TAX EXEMPT FUND II IN DETAIL
|X| What are the Insured Tax Exempt Fund II's objective, principal investment
strategies and principal risks?
|X| Who manages the Insured Tax Exempt Fund II?
BUYING AND SELLING SHARES
How and when does the Fund price its shares?
How do I buy shares?
Which class of shares is best for me?
How do I sell shares?
Can I exchange my shares for the shares of other First Investors Funds?
ACCOUNT POLICIES
What about dividends and capital gain distributions?
What about taxes?
How do I obtain a complete explanation of all account privileges and policies?
FINANCIAL HIGHLIGHTS
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OVERVIEW OF THE INSURED TAX EXEMPT FUND II
What is the Insured Tax Exempt Fund II?
OBJECTIVE: The Fund seeks a high level of interest income that is
exempt from federal income tax and is not a tax preference
item for purposes of the Alternative Minimum Tax ("AMT").
PRIMARY
INVESTMENT
STRATEGIES: The Fund invests in municipal bonds and other Municipal
Securities that pay interest that is exempt from federal
income tax, including the AMT. The Fund invests primarily
in municipal bonds that are insured as to timely payment
of interest and principal by independent insurance
companies that are rated in the top rating category by a
nationally recognized statistical rating organization,
such as Moody's Investors Service, Inc. ("Moody's"). The
Fund invests primarily in long-term bonds with maturities
of fifteen years or more.
RISKS: The most significant risk of investing in the Fund is
interest rate risk. As with other bonds, the market values
of municipal bonds fluctuate with changes in interest
rates. When interest rates rise, municipal bonds tend to
decline in price, and when interest rates fall, they tend
to increase in price. In general, long-term bonds pay
higher interest rates, but are more volatile in price than
short- or intermediate-term bonds. When interest rates
decline, the interest income received by the Fund may also
decline. To a lesser degree, an investment in the Fund is
subject to credit risk. This is the risk that an issuer of
the bonds held by the Fund may not be able to pay interest
or principal when due. The market prices of bonds are
affected by the credit quality of the issuerS. While the
Fund primarily invests in municipal bonds that are insured
against credit risk, the insurance does not eliminate
credit risk because the insurer may not be financially
able to pay claims. In addition, not all of the securities
held by the Fund are insured. Moreover, the insurance does
not apply in any way to the market prices of securities
owned by the Fund or the Fund's share price, both of which
will fluctuate. The Fund may, at times, engage in
short-term trading, which could produce higher brokerage
costs and taxable distributions and may result in a lower
total return for the Fund. 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.
Who should consider buying the Insured Tax Exempt Fund II?
The Insured Tax Exempt Fund II may be used by individuals
as a core holding for an investment portfolio or as a base
on which to build a portfolio. It may be appropriate for
you if you:
o Are seeking a relatively conservative investment which
provides a high degree of credit quality,
o Are seeking income that is exempt from federal income
tax, including the AMT,
o Are seeking a relatively high level of tax exempt
income and are willing to assume a moderate degree of
market volatility to achieve this goal, and
o Have a long-term investment horizon and are able to
ride out market cycles.
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The Insured Tax Exempt Fund II is generally not
appropriate for retirement accounts or investors in low
tax brackets, or corporate or similar business accounts.
Different tax rules apply to corporations and other
entities.
How has the Insured Tax Exempt Fund II performed?
The bar chart and table below show you how the Fund's performance has varied
from year to year and in comparison with a broad-based index. This information
gives you some indication of the risks of investing in the Fund.
Prior to December__, 2000, the Fund was known as the Executive Investors Insured
Tax Exempt Fund and had only one undesignated class of shares. The Fund now has
two classes of shares: Class A and Class B shares. The original Insured Tax
Exempt Fund shares are designated as Class A shares. Class B is a new class of
shares. The bar chart shows changes in the performance of the Fund's Class A
shares for each of the last nine calendar years. The bar chart does not reflect
sales charges that you may pay upon purchase or redemption of Fund shares. If
they were included, the returns would be less than those shown.
[FUND TO PROVIDE]
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INSURED TAX EXEMPT
1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
13.20% 11.03% 15.74% -3.95% 20.53% 4.11% 10.30% 7.39% -1.92%
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was 8.06% (for the
quarter ended March 31, 1995), and the lowest quarterly return was -5.64% (for
the quarter ended March 31, 1994). THE FUND'S PAST PERFORMANCE DOES NOT
NECESSARILY INDICATE HOW THE FUND WILL PERFORM IN THE FUTURE.
The following table shows how the average annual total returns for the Fund's
Class A shares compare to those of the Lehman Brothers Municipal Bond Index
("Lehman Index") as of December 31, 1999. This table assumes that the current
maximum sales charge or contingent deferred sales charge ("CDSC") was paid.
Prior to December ___, 2000, the sales charge on shares that are now designated
as Class A shares was lower. The Lehman Index is a total return performance
benchmark for the investment grade tax-exempt bond market. The Lehman Index does
not take into account fees and expenses that an investor would incur in holding
the securities in the Lehman Index. If it did so, the returns would be lower
than those shown.
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Inception
1 Year* 5 Years*
Class A Shares (6.61)% 6.79% 7.69%
Class B Shares N/A N/A N/A
Lehman Index (2.06)% % 6.93%**
*The annual returns are based upon calendar years.
**The average annual total return shown is for the period 7/31/90 to 12/31/99.
What are the fees and expenses of the Insured Tax Exempt Fund II?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Class A Class B
Shares Shares
------ ------
Shareholder Fees
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............. 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4.0%**
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Distribution Total Fee Waivers
and Service Annual Fund and
Management (12b-1) Other Operating Expense
Fees(1) Fees(2) Expenses Expenses(3) Assumption(1) Net Expenses(3)
---------- ------------ -------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 1.00% .30% .30% 1.60% .60% 1.00%
Class B Shares 1.00% 1.00% .30%*** 2.30% .55% 1.75%
</TABLE>
*A contingent deferred sales charge of 1% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge.
**4.0% in the first year; declining to 0% after the sixth year. Class B shares
convert to Class A shares after 8 years.
*** Expenses are based on estimated amounts for the current fiscal year.
(1) For the fiscal year ended December 31, 1999, the Adviser waived Management
Fees in excess of 0.40%. The Adviser has contractually agreed with the Fund
to waive Management Fees in excess of 0.55% for the fiscal year ending
December 31, 2000..
(2) Because the Fund pays Rule 12b-1 fees, long-term shareholders could pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
(3) The 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 Annual
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Fund Operating Expenses or Net Expenses.
Example
This example helps you to compare the costs of investing in the Fund with the
cost of investing in other mutual funds. The example assumes that (1) you invest
$10,000 in the Fund for the time periods indicated; (2) your investment has a 5%
return each year; and (3) the Fund's operating expenses remain the same, except
for year one which is net of fees waived and expenses assumed. Although your
actual costs may be higher or lower, under these assumptions your costs would
be:
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
If you redeem your shares:
Class A shares $721 $1,043 $1,388 $2,359
Class B shares $578 $966 $1,380 $2,417
If you do not redeem your shares:
Class A shares $721 $1,043 $1,388 $2,359
Class B shares $178 $666 $1,180 $2,417
*Assumes conversion to Class A shares eight years after purchase.
THE INSURED TAX-EXEMPT FUND II IN DETAIL
What are the Insured Tax Exempt Fund II's objective, principal investment
strategies, and principal risks?
OBJECTIVE: The Fund seeks a high level of interest income that is exempt
from federal income tax and is not a tax preference item
for purposes of the AMT.
Principal Investment Strategies: The Fund invests at least 80% of its total
assets in municipal bonds that pay interest that is exempt from federal income
tax, including the AMT. The Fund may also invest in other types of Municipal
Securities ("Municipal Securities"). Municipal Securities include private
activity bonds, industrial development bonds, certificates of participation,
municipal notes, municipal commercial paper, variable rate demand notes, and
floating rate demand notes. Municipal bonds and Municipal Securities are issued
by state and local governments, their agencies and authorities, the District of
Columbia and any commonwealths, territories or possessions of the United States
(including Guam, Puerto Rico and the U.S. Virgin Islands) or their respective
agencies, instrumentalities and authorities. The Fund diversifies its assets
among municipal bonds and securities of different states, municipalities, and
U.S. territories, rather than concentrating in bonds of a particular state or
municipality.
All municipal bonds in which the Fund invests are insured as to the timely
payment of interest and principal by independent insurance companies which are
rated in the top rating category by a nationally recognized statistical rating
organization, such as Moody's, Standard & Poor's Ratings Group and Fitch IBCA.
The Fund may purchase bonds and other Municipal Securities which have already
been insured by the issuer, underwriter, or some other party or it may purchase
uninsured bonds and insure them under a policy purchased by the Fund. While
every municipal bond purchased by the Fund must be insured, the Fund is allowed
to invest up to 20% of its assets in securities that are not insured. (In other
words, at least 80% of the Fund's assets must be insured.) In general, the
non-insured securities held by the Fund are limited to municipal commercial
paper and other short-term investments. In any event, as described below, the
insurance does not guarantee the market values of the bonds held by the Fund or
the Fund's share price.
7
<PAGE>
The Fund follows the strategy of investing in long-term municipal bonds, which
are generally more volatile in price but offer more yield than short- or
intermediate-term bonds. The Fund generally purchases bonds with maturities of
fifteen years or more. The Fund adjusts the duration of its portfolio based upon
its outlook on interest rates. Duration is a measurement of a bond's sensitivity
to changes in interest rates that takes into consideration not only the maturity
of the bond but also the time value of money that will be received from the bond
over its life. The Fund will generally adjust the duration of its portfolio by
buying or selling Municipal Securities, including zero coupon bonds. For
example, if the Fund believes that interest rates are likely to rise, it will
generally attempt to reduce its duration by purchasing Municipal Securities with
shorter maturities or selling Municipal Securities with longer maturities. The
Fund may at times, engage in short term trading in an effort to improve its
performance.
In selecting investments, the Fund considers maturity, coupon and yield,
relative value of an issue, the credit quality of the issuer, the cost of
insurance and the outlook for interest rates and the economy. Up to 20% of the
Fund's net assets may be invested in securities, the interest on which is
subject to Federal income tax, including the AMT. The Fund will usually sell an
investment when there are changes in the interest rate environment that are
adverse to the investment or it falls short of the portfolio manager's
expectations. The Fund will not necessarily sell an investment if its rating is
reduced or there is a default by the issuer. Information on the Fund's recent
strategies and holdings can be found in the most recent annual report (see back
cover).
Principal Risks: Any investment carries with it some level of risk. An
investment offering greater potential rewards generally carries greater risks.
Here are the principal risks of owning the Insured Tax Exempt Fund II:
Interest Rate Risk: The market value of Municipal Securities is affected by
changes in interest rates. When interest rates rise, the market values of
Municipal Securities decline, and when interest rates decline, the market values
of Municipal Securities increase. The price volatility of Municipal Securities
also depends on their maturities and durations. Generally, the longer the
maturity and duration of a municipal security, the greater its sensitivity to
interest rates. To compensate investors for this higher risk, Municipal
Securities with longer maturities and durations generally offer higher yields
than Municipal Securities with shorter maturities and durations.
Interest rate risk also includes the risk that the yields received by the Fund
on some of its investments will decline as interest rates decline. The Fund buys
investments with fixed maturities as well as investments that give the issuer
the option to "call" or redeem these investments before their maturity dates. If
investments mature or are "called" during a time of declining interest rates,
the Fund will have to reinvest the proceeds in investments offering lower
yields. The Fund also invests in floating rate and variable rate demand notes.
When interest rates decline, the rates paid on these securities may decline.
Credit Risk: This is the risk that an issuer of bonds will be unable to pay
interest or principal when due. Although all of the municipal bonds purchased by
the Fund are insured as to scheduled payments of interest and principal, the
insurance does not eliminate credit risk because the insurer may not be
financially able to pay interest and principal on the bonds and up to 20% of the
Fund's assets may be invested in securities that are not insured. It is also
important to note that, although insurance may increase the credit safety of
investments held by the Fund, it decreases the Fund's yield as the Fund must pay
for the insurance directly or indirectly. It is also important to emphasize that
the insurance does not protect against fluctuations in the market value of the
municipal bonds owned by the Fund or the share price of the Fund.
Market Risk: The Fund is subject to market risk. Bond prices in general may
decline over short or even extended periods primarily due to changes in interest
rates and the credit conditions of the issuers. This is another way of
8
<PAGE>
describing interest rate risk and credit risk. However, market prices also
fluctuate with the forces of supply and demand. Municipal bonds may decline in
value even if the overall market is doing well. Accordingly, the value of your
investment in the Fund will go up and down, which means that you could lose
money.
Frequent Trading Risk: The Fund may, at times, engage in short-term trading,
which could produce higher brokerage costs and taxable distributions and may
result in a lower total return for the Fund.
Who Manages the Insured Tax-Exempt Fund II
First Investors Management Company, Inc. ("FIMCO") is the investment adviser to
the Fund. Its address is 95 Wall Street, New York, NY 10005. It currently is
investment adviser to __ mutual funds or series of funds with total net assets
of over $6 billion. FIMCO supervises all aspects of the Fund's operations and
determines the Fund's portfolio transactions.
FIMCO assumed the responsibility of managing the Fund on December__, 2000. Prior
to that date, Executive Investors Management Company, Inc. ("EIMCO") served as
investment adviser to the Fund. FIMCO and EIMCO are both wholly owned
subsidiaries of First Investors Consolidated Corporation, and they share the
same relevant offices, employees, and resources. For the fiscal year ended
December 31, 1999, EIMCO received advisory fees of 0.30% of the Fund's average
daily net assets, net of waiver.
Clark D. Wagner has served as Portfolio Manager of the Fund since July 22, 1991.
Prior to December ___, 2000, Mr. Wagner managed the Fund as an employee of
EIMCO. He currently manages the Fund as a FIMCO employee. Mr. Wagner also serves
as Portfolio Manager of certain other First Investors Funds. Mr. Wagner has been
Chief Investment Officer of FIMCO since 1992.
How do I buy shares?
You may buy shares of the Fund through a First Investors registered
representative or through a registered representative of an authorized
broker-dealer ("Representative"). Your Representative will help you complete and
submit an application. Your initial investment must be at least $1,000. However,
we have lower initial investment requirements and offer automatic investment
plans that allow you to open a Fund account with as little as $50. Subsequent
investments may be made in any amount. You can also arrange to make systematic
investments electronically from your bank account or through payroll deduction.
All the various ways you can buy shares are explained in the Shareholder Manual.
For further information on the procedures for buying shares, please contact your
Representative or call Shareholder Services at 1-800-423-4026.
If we receive your application or order in our Woodbridge, N.J. offices in
correct form, as described in the Shareholder Manual, prior to the close of
regular trading on the NYSE, your transaction will be priced at that day's NAV.
If you place your order with your Representative prior to the close of regular
trading on the NYSE, your transaction will also be priced at that day's NAV
provided that your Representative transmits the order to our Woodbridge, N.J.
offices by 5 p.m., E.S.T. Orders placed after the close of regular trading on
the NYSE will be priced at the next business day's NAV. The procedures for
processing transactions are explained in more detail in our Shareholder Manual
which is available upon request.
The Fund reserves the right to refuse any order to buy shares if the Fund
determines that doing so would be in the best interest of the Fund and its
shareholders.
9
<PAGE>
Minimum Purchase Amount
Your initial investment must be at least $1,000. However, we offer automatic
investment plans that allow you to open a Fund account with as little as $50.
You also may open certain retirement plan accounts with as little as $500 even
without an automatic investment plan. Subsequent investments may be made in any
amount. You can arrange to make systematic investments electronically from your
bank account or through payroll deduction. All the various ways you can buy
shares are explained in the Shareholder Manual. For further information on the
procedures for buying shares, please contact your Representative or call
Shareholder Services at 1-800-423-4026.
Reservation of Rights
The Fund reserves the right to refuse any order to buy shares if the Fund
determines that doing so would be in the best interests of the Fund and its
shareholders.
Which class of shares is best for me?
The Fund has two classes of shares, Class A and Class B. While each class
invests in the same portfolio of securities, the classes have separate sales
charge and expense structures. Because of the different expense structures, each
class of shares generally will have different NAVs and dividends.
The principal advantages of Class A shares are the lower overall expenses, the
availability of quantity discounts on volume purchases and certain account
privileges that are available only on Class A shares. The principal advantage of
Class B shares is that all of your money is put to work from the outset.
Class A shares of the Fund are sold at the public offering price which includes
a front-end sales load. The sales charge declines with the size of your
purchase, as illustrated below.
Class A Shares
Your investment Sales Charge as a percentage of
-------------------------------
offering price net amount invested
Less than $25,000 6.25% 6.67%
$25,000-$49,999 5.75 6.10
$50,000-$99,999 5.50 5.82
$100,000-$249,999 4.50 4.71
$250,000-$499,999 3.50 3.63
$500,000-$999,999 2.50 2.56
$1,000,000 or more 0* 0*
*If you invest $1,000,000 or more in Class A shares, you will not pay a
front-end sales charge. However, if you make such an investment and then sell
your shares within 24 months of purchase, you will pay a contingent deferred
sales charge ("CDSC") of 1.00%.
If you were a shareholder of the Fund prior to December ___, 2000, you will
continue to be able to purchase additional Class A shares of the Fund at the
lower sales charge which was then in effect for as long as you maintain an
investment in the Fund. The following shows the sales charges that were
applicable prior to December __, 2000.
10
<PAGE>
Your investment Sales Charge as a percentage of
-------------------------------
offering price net amount invested
Less than $100,000 4.75% 4.99%
$100,000-$249,999 3.90 4.06
$250,000-$499,999 2.90 2.99
$500,000-$999,999 2.40 2.46
$1,000,000 or more 0* 0*
*If you invest $1,000,000 or more, you will not pay a sales charge. However, if
you make such an investment and then sell your shares within 24 months of
purchase, you will pay a contingent deferred sales charge ("CDSC") of 1.00%.
Sales charges may be reduced or waived under certain circumstances and for
certain groups. Consult your Representative or call us directly at
1-800-423-4026 for details.
Class B shares are sold at net asset value, without any initial sales charge.
However, you may pay a CDSC when you sell your shares. The CDSC declines the
longer you hold your shares, as illustrated below. Class B shares convert to
Class A shares after eight years.
Class B Shares
Year of Redemption CDSC as a Percentage of Purchase Price or NAV at Redemption
------------------ -------------------------------------------------------------
Within the 1st or 2nd year............... 4%
Within the 3rd or 4th year............... 3
In the 5th year ....................... 2
In the 6th year ....................... 1
Within the 7th year and 8th year......... 0
There is no CDSC on Class B shares which are acquired through reinvestment of
dividends or other distributions. The CDSC is imposed on the lower of the
original purchase price or the net asset value of the shares being sold. For
purposes of determining the CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month at the average cost
of all purchases made during that month.
To keep your CDSC as low as possible, each time you place a request to sell
shares, we will first sell any shares in your account that carry no CDSC. If
there is an insufficient number of these shares to meet your request in full, we
will then sell those shares that have the lowest CDSC.
Sales charges and CDSCs may be reduced or waived under certain circumstances and
for certain groups. Consult your Representative or call us directly at
1-800-423-4026 for details.
The Fund has adopted a plan pursuant to Rule 12b-1 that allows the Fund to pay
distribution fees for the sale and distribution of its shares. Each class of
shares pays Rule 12b-1 fees for the marketing of fund shares and for services
provided to shareholders. The plans provide for payments at annual rates (based
on average daily net assets) of up to 0.30% on Class A shares and 1.00% on Class
B shares. No more than 0.25% of these payments may be for service fees. These
fees are paid monthly in arrears. Because these fees are paid out of the Fund's
assets on an ongoing basis, the higher fees for Class B shares will increase the
cost of your investment. Rule 12b-1 fees may cost you more over time than paying
other types of sales charges.
Because of the lower overall expenses on Class A shares, we recommend Class A
shares for purchases in excess of $250,000. If you are investing in excess of
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$1,000,000, we will only sell Class A shares to you. For purchases below
$250,000, the class that is best for you generally depends upon the amount you
invest, your time horizon, and your preference for paying the sales charge
initially or later. If you fail to tell us what Class of shares you want, we
will purchase Class A shares for you.
How do I sell shares?
You may redeem your Fund shares on any day the Fund is open for business by:
o Contacting your Representative who will place a redemption order for
you;
o Sending a written redemption request to Administrative Data
Management Corp., ("ADM") at 581 Main Street, Woodbridge, NJ
07095-1198;
o Telephoning the Special Services Department of ADM at 1-800-342-6221
(if you have elected to have telephone privileges); or
o Instructing us to make an electronic transfer to a predesignated bank
(if you have completed an application authorizing such transfers).
Shares that you have owned for less than 15 days may only be redeemed by written
request. Your redemption request will be processed at the price next computed
after we receive the request in good order, as described in the Shareholder
Manual. For all requests, have your account number available.
Payment of redemption proceeds generally will be made within 7 days. If you are
redeeming shares which you recently purchased by check, payment may be delayed
to verify that your check has cleared (which may take longer than 7 days).
If your account falls below the minimum account balance for any reason other
than market fluctuation, the Fund reserves the right to redeem your account
without your consent or to impose a low balance account fee of $15 annually on
60 days prior notice. The Fund may also redeem your account or impose a low
balance account fee if you have established your account under a systematic
investment program and discontinue the program before you meet the minimum
account balance. You may avoid redemption or imposition of a fee by purchasing
additional Fund shares during this 60-day period to bring your account balance
to the required minimum. If you own Class B shares, you will not be charged a
CDSC on a low balance redemption.
The Fund reserves the right to make in-kind redemptions. This means that it
could respond to a redemption request by distributing shares of the Fund's
underlying investments rather than distributing cash.
Can I exchange my shares for the shares of other First Investors Funds?
You may exchange shares of the Fund for shares of other First Investors Funds
without paying any additional sales charge. You can only exchange within the
same class of shares (i.e., Class A to Class A). Consult your Representative or
call ADM at 1-800-423-4026 for details.
The Fund reserves the right to reject any exchange request that appears to be
part of a market timing strategy based upon the holding period of the initial
investment, the amount of the investment being exchanged, the funds involved,
and the background of the shareholder or dealer involved. The Fund is designed
for long-term investment purposes. It is not intended to provide a vehicle for
short-term market timing.
ACCOUNT POLICIES
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What about dividends and capital gain distributions?
To the extent that it has net investment income and capital gains, the Fund will
declare and pay dividends from its net investment income and any realized
capital gains on an annual basis, usually at the end of its fiscal year. The
Fund may make an additional distribution in any year if necessary to avoid a
federal excise tax on certain undistributed income and capital gain.
Dividends and other distributions paid on both classes of the Fund's shares are
calculated at the same time and in the same manner. Dividends on Class B shares
of the Fund are expected to be lower than those for its Class A shares because
of the higher distribution fees borne by the Class B shares. Dividends on each
class also might be affected differently by the allocation of other
class-specific expenses. In order to be eligible to receive a dividend or other
distribution, you must own Fund shares as of the close of business on the record
date of the distribution.
You may choose to reinvest all dividends and other distributions at NAV in
additional shares of the same class of the Fund or certain other First Investors
Funds, or receive all dividends and other distributions in cash. If you do not
select an option when you open your account, all dividends and other
distributions will be reinvested in additional Fund shares. If you do not cash a
distribution check and do not notify ADM to issue a new check within 12 months,
the distribution may be reinvested in additional Fund shares. If any
correspondence sent by the Fund is returned as "undeliverable," dividends and
other distributions automatically will be reinvested in additional Fund shares.
No interest will be paid to you while a distribution remains uninvested.
A dividend or other distribution paid on a class of shares will be paid in
additional shares of the distributing class if the total amount of the
distribution is under $5 or the Fund has received notice of your death (until
written alternate payment instructions and other necessary documents are
provided by your legal representative).
What about taxes?
Any dividends and capital gain distributions paid by the Fund are taxable to you
unless you hold your shares in an individual retirement account ("IRA"), 403(b)
account, 401(k) account, or other tax-deferred account. Dividends (including
distributions of net short-term capital gains) paid by the Fund are taxable to
you as ordinary income. Capital gain distributions (essentially, distributions
of net long-term capital gains) by the Fund are taxed to you as long-term
capital gain, regardless of how long you owned your Fund shares. You are taxed
in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares. Your sale or
exchange of Fund shares will be a taxable event for you. Depending on the
purchase price and the sale price of the shares you sell or exchange, you may
have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transactions.
How do I obtain a complete explanation of all account privileges and policies?
The Fund offers a full range of special privileges, including special investment
programs for group retirement plans, systematic investment programs, automatic
payroll investment programs, telephone privileges, and expedited redemptions by
wire order or Automated Clearing House transfer. The full range of privileges,
and related policies, are described in a special Shareholder Manual, which you
may obtain on request. For more information on the full range of services
available, please contact us directly at 1-800-423-4026.
13
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the tables
represent the rates that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information has been audited by Tait, Weller & Baker, whose
report, along with the Fund's financial statements, are included in the SAI,
which is available upon request.
14
<PAGE>
[UPDATE]
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
--------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
----------------------------------------- ------------------
NET ASSET
VALUE NET NET REALIZED NET
------ INVEST- AND UNREALIZED TOTAL FROM INVEST- NET TOTAL
BEGINNING MENT GAIN (LOSS) INVESTMENT MENT REALIZED DISTRI-
OF YEAR INCOME ON INVESTMENTS OPERATIONS INCOME GAINS BUTIONS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INSURED TAX EXEMPT
------------------
FUND II
-------
1995................. $12.53 $.72 $1.80 $2.52 $.73 $.28 $1.01
1996................. 14.04 .66 (.10) .56 .67 .11 .78
1997................. 13.82 .67 .71 1.38 .67 .12 .79
1998................. 14.41 .66 .39 1.05 .66 .24 .90
1999................. 14.56 .67 (.94) (.27) .65 .03 .68
2000*a............... 13.61 .33 .38 .71 .34 - .34
* Calculated without sales charges
+ Net of expenses waived or assumed
a Based on the semi-annual report for Executive Investors Trust Insured Tax Exempt Fund, dated June 30, 2000
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
----------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS + WAIVED OR ASSUMED
---------------- ----------------------
NET ASSET
VALUE
----- TOTAL NET ASSETS NET NET PORTFOLIO
END RETURN* END OF YEAR EXPENSES INVESTMENT EXPENSES INVESTMENT TURNOVER
OF YEAR (%) (IN MILLIONS) (%) INCOME (%) (%) INCOME (%) RATE (%)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$14.04 20.53 $13 .50 5.35 1.74 4.11 147
13.82 4.11 15 .75 4.85 1.71 3.89 116
14.41 10.30 16 .75 4.80 1.71 3.84 126
14.56 7.39 17 .80 4.50 1.73 3.57 172
13.61 (1.92) 16 .80 4.72 1.73 3.79 205
</TABLE>
16
<PAGE>
[FIRST INVESTORS LOGO]
INSURED TAX EXEMPT FUND II
For investors who want more information about the Fund, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about the Fund investments is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
prospectus.
Shareholder manual: The Shareholder Manual provides more detailed information
about the purchase, redemption and sale of the Fund's shares.
You can get free copies of reports, the SAI and the Shareholder Manual, request
other information and discuss your questions about the Fund by contacting the
Fund at:
Administrative Data Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198 Telephone: 1-800-423-4026
You can review and copy Fund documents (including reports, Shareholder Manuals
and SAIs) at the Public Reference Room of the SEC in Washington, D.C. You can
also obtain copies of Fund documents after paying a duplicating fee (i) by
writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102
or (ii) by electronic request at [email protected]. You can obtain information
on the operation of the Public Reference Room, including information about
duplicating fee charges, by calling (202) 942-8090. Text-only versions of Fund
documents can be viewed online or downloaded from the EDGAR database on the
SEC's Internet website at http://www.sec.gov.
(Investment Company Act File No.: Insured Tax
Exempt Fund II 811-4927)
<PAGE>
FIRST INVESTORS INSURED TAX EXEMPT FUND II
95 Wall Street
New York, New York 10005 1-800-423-4026
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER __, 2000
This is a Statement of Additional Information ("SAI") for the First
Investors Insured Tax Exempt Fund II (the "Fund" or the "Trust"), an open-end
diversified management investment company. Prior to ________, 2000, the Fund was
known as the Executive Investors Insured Tax Exempt Fund.
This SAI is not a prospectus. It should be read in conjunction with the
Fund's prospectus dated December __, 2000 which may be obtained free of cost
from the Fund at the address or telephone number noted above. Information
regarding the purchase, redemption, sale and exchange of your Fund shares is
contained in the Shareholder Manual, a separate section of the SAI that is a
distinct document and may also be obtained free of charge by contacting your
Fund at the address or telephone number noted above.
TABLE OF CONTENTS
PAGE
INVESTMENT STRATEGIES AND RISKS...............................................
INVESTMENT POLICIES...........................................................
FUTURES AND OPTIONS STRATEGIES................................................
PORTFOLIO TURNOVER............................................................
INVESTMENT RESTRICTIONS.......................................................
TRUSTEES AND OFFICERS.........................................................
MANAGEMENT....................................................................
UNDERWRITER...................................................................
DISTRIBUTION PLANS............................................................
DETERMINATION OF NET ASSET VALUE..............................................
ALLOCATION OF PORTFOLIO BROKERAGE.............................................
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES...................................
TAXES.........................................................................
PERFORMANCE INFORMATION.......................................................
GENERAL INFORMATION...........................................................
APPENDIX A DESCRIPTION OF COMMERCIAL PAPER RATINGS............................
APPENDIX B DESCRIPTION OF MUNICIPAL NOTE RATINGS..............................
APPENDIX C....................................................................
Shareholder Manual: A Guide to your First Investors Mutual Fund Account.......
<PAGE>
INVESTMENT STRATEGIES AND RISKS
Insured Tax Exempt Fund II
The Fund seeks to achieve its objective by investing at least 80% of its
total assets in municipal bonds issued by or on behalf of various states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is exempt from Federal income tax and is not a tax preference item for
purposes of the Federal alternative minimum tax ("AMT") ("Tax Preference Item").
Up to 20% of the Fund's net assets may be invested in securities, the interest
of which is subject to Federal income tax, including the AMT. The Fund also may
invest up to 20% of its total assets in certificates of participation, municipal
notes, municipal commercial paper and variable rate demand instruments
(collectively, with municipal bonds, "Municipal Instruments"). The Fund
generally invests in bonds with maturities of over fifteen years. See "Municipal
Instruments," below.
While the Fund diversifies its assets among municipal issuers in different
states, municipalities and territories, from time to time it may invest more
than 25% of its total assets in a particular segment of the municipal bond
market, such as hospital revenue bonds, housing agency bonds, airport bonds or
electric utility bonds. Such a possible concentration of the Fund's assets could
result in its being invested in securities that are related in such a way that
economic, business, political or other developments that would affect one
security would probably likewise affect the other securities within that
particular segment of the bond market.
The Fund may make loans of portfolio securities and invest in zero coupon
municipal securities. The Fund may invest up to 25% of its net assets in
securities on a "when issued" basis, which involves an arrangement whereby
delivery of, and payment for, the instruments occur up to 45 days after it makes
the agreement to purchase the instruments. The Fund also may invest up to 20% of
its assets, on a temporary basis, in high quality fixed income obligations, the
interest on which is subject to Federal and state or local income taxes. In
addition, the Fund may invest up to 10% of its total assets in municipal
obligations on which the rate of interest varies inversely with interest rates
on other municipal obligations or an index (commonly referred to as inverse
floaters). The Fund may borrow money for temporary or emergency purposes in
amounts not exceeding 5% of its total assets. See "Investment Policies," below.
Although the Fund generally invests in municipal bonds rated Baa or higher
by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard &
Poor's ("S&P"), the Fund may invest up to 5% of its net assets in lower rated
municipal bonds or in unrated municipal bonds deemed to be of comparable quality
by First Investors Management Company, Inc. ("FIMCO" or "Adviser"). See "Debt
Securities," below. However, in each instance those municipal bonds will be
covered by the insurance feature and thus will be considered to be of higher
quality than lower rated municipal bonds without an insurance feature. See
"Insurance" for a discussion of the insurance feature. The Adviser will
carefully evaluate on a case-by-case basis whether to dispose of or retain a
municipal bond that has been downgraded in rating subsequent to its purchase by
the Fund.
There can be no assurances that future national, regional or state-wide
economic developments will not adversely affect the market value of Municipal
Securities held by the Fund or the ability of particular obligors to make timely
payments of debt service on (or lease payments relating to) those obligations.
There is also the risk that some or all of the interest income that the Fund
receives might become taxable or be determined to be taxable by the Internal
Revenue Service, applicable state tax authorities or a judicial body. See the
discussion on "Taxes." In addition, there can be no assurances that future court
decisions or legislative actions will not affect the ability of the issuer of a
Municipal Security to repay its obligations.
2
<PAGE>
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INVESTMENT POLICIES
BANKERS' ACCEPTANCES. The Fund may invest in bankers' acceptances. Bankers'
acceptances are short-term credit instruments used to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of interest for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
BOND MARKET CONCENTRATION. The Fund may invest more than 25% of its total
assets in a particular segment of the bond market, such as hospital revenue
bonds, housing agency bonds, industrial development bonds, airport bonds and
university dormitory bonds. Such concentration may occur in periods when one or
more of these segments offer higher yields and/or profit potential. The Fund has
no fixed policy as to concentrating its investments in a particular segment of
the bond market, because bonds are selected for investment based on appraisal of
their individual value and income. This possible concentration of the assets of
the Fund may result in the Fund being invested in securities which are related
in such a way that economic, business, political developments or other changes
which would affect one security would probably likewise affect the other
securities within that particular segment of the bond market. Such concentration
of the Fund's investments could increase market risks, but risk of non-payment
of interest when due, or default of principal, are covered by the insurance
obtained by the Fund.
CERTIFICATES OF DEPOSIT. The Fund may invest in bank certificates of deposit
("CDs"). The Federal Deposit Insurance Corporation is an agency of the U.S.
Government which insures the deposits of certain banks and savings and loan
associations up to $100,000 per deposit. The interest on such deposits may not
be insured if this limit is exceeded. Current Federal regulations also permit
such institutions to issue insured negotiable CDs in amounts of $100,000 or
more, without regard to the interest rate ceilings on other deposits. To remain
fully insured, these investments currently must be limited to $100,000 per
insured bank or savings and loan association.
COMMERCIAL PAPER. The Fund may invest in commercial paper. Commercial paper
is a promissory note issued by a corporation to finance short-term 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. The Fund's investments in commercial paper are
limited to obligations rated Prime-l by Moody's or A-l by S&P. See Appendix A
for a description of commercial paper ratings.
INSURANCE. The municipal bonds in the Fund's portfolio will be insured as
to their scheduled payments of principal and interest at the time of purchase
either (1) under a Mutual Fund Insurance Policy written by an independent
insurance company; (2) under an insurance policy obtained subsequent to a
municipal bond's original issue (a "Secondary Market Insurance Policy"); or (3)
under an insurance policy obtained by the issuer or underwriter of such
municipal bond at the time of original issuance (a "New Issue Insurance
Policy"). An insured municipal bond in the Fund's portfolio typically will be
covered by only one of the three policies. For instance, if a municipal bond is
already covered by a New Issue Insurance Policy or a Secondary Market Insurance
Policy, then that security will not be additionally insured under the Mutual
Fund Insurance Policy.
3
<PAGE>
The Fund has purchased a Mutual Fund Insurance Policy ("Policy") from AMBAC
Assurance Corporation ("AMBAC"), a Wisconsin stock insurance company, with its
principal executive offices in New York City. The Policy guarantees the payment
of principal and interest on municipal bonds purchased by the Fund which are
eligible for insurance under the Policy. Municipal bonds are eligible for
insurance if they are approved by AMBAC prior to their purchase by the Fund.
AMBAC furnished the Fund with an approved list of municipal bonds at the time
the Policy was issued and subsequently provides amended and modified lists of
this type at periodic intervals. AMBAC may withdraw particular securities from
the approved list and may limit the aggregate amount of each issue or category
of municipal bonds therein, in each case by notice to the Fund prior to the
entry by the Fund of an order to purchase a specific amount of a particular
security otherwise eligible for insurance under the Policy. The approved list
merely identifies issuers whose issues may be eligible for insurance and does
not constitute approval of, or a commitment by, AMBAC to insure such securities.
In determining eligibility for insurance, AMBAC has applied its own standards
which correspond generally to the standard it normally uses in establishing the
insurability of new issues of municipal bonds and which are not necessarily the
criteria which would be used in regard to the purchase of municipal bonds by the
Fund. The Policy does not insure: (1) obligations of, or securities guaranteed
by, the United States of America or any agency or instrumentality thereof; (2)
municipal bonds which were insured as to payment of principal and interest at
the time of their issuance; (3) municipal bonds purchased by the Fund at a time
when they were ineligible for insurance; (4) municipal bonds which are insured
by insurers other than AMBAC; and (5) municipal bonds which are no longer owned
by the Fund. AMBAC has reserved the right at any time, upon 90 days' prior
written notice to the Fund, to refuse to insure any additional municipal bonds
purchased by the Fund, on or after the effective date of such notice. If AMBAC
so notifies the Fund, the Fund will attempt to replace AMBAC with another
insurer. If another insurer cannot be found to replace AMBAC, the Fund may ask
its shareholders to approve continuation of its business without insurance.
In the event of nonpayment of interest or principal when due, in respect of
an insured municipal bond, AMBAC is obligated under the Policy to make such
payment not later than 30 days after it has been notified by the Fund that such
nonpayment has occurred (but not earlier than the date such payment is due).
AMBAC, as regards insurance payments it may make, will succeed to the rights of
the Fund. Under the Policy, a payment of principal on an insured municipal bond
is due for payment when the stated maturity date has been reached, which does
not include any earlier due date by reason of redemption, acceleration or other
advancement of maturity or extension or delay in payment by reason of
governmental action.
The Policy does not guarantee the market value or yield of the insured
municipal bonds or the net asset value or yield of the Fund's shares. The Policy
will be effective only as to insured municipal bonds owned by the Fund. In the
event of a sale by the Fund of a municipal bond insured under the Policy, the
insurance terminates as to such municipal bond on the date of sale. If an
insured municipal bond in default is sold by the Fund, AMBAC is liable only for
those payments of interest and principal which are then due and owing and, after
making such payments, AMBAC will have no further obligations to the Fund in
respect of such municipal bond. It is the intention of the Fund, however, to
retain any insured securities which are in default or in significant risk of
default and to place a value on the defaulted securities equal to the value of
similar insured securities which are not in default. While a defaulted bond is
held by the Fund, the Fund continues to pay the insurance premium thereon but
also collects interest payments from the insurer and retains the right to
collect the full amount of principal from the insurer when the municipal bond
comes due. See "Determination of Net Asset Value" for a more complete
description of the Fund's method of valuing securities in default and securities
which have a significant risk of default.
The Fund may purchase a Secondary Market Insurance Policy from an
independent insurance company rated in the top rating category by S&P, Moody's,
Fitch IBCA, Inc. ("Fitch") or any other nationally recognized rating
organization which insures a particular bond for the remainder of its term at a
4
<PAGE>
premium rate fixed at the time such bond is purchased by the Fund. It is
expected that these premiums will range from 1% to 5% of par value. Such
insurance coverage will be noncancellable and will continue in force so long as
such bond so insured is outstanding. The Fund may also purchase municipal bonds
which are already insured under a Secondary Market Insurance Policy. A Secondary
Market Insurance Policy could enable the Fund to sell a municipal bond to a
third party as an AAA/Aaa rated insured municipal bond at a market price higher
than what otherwise might be obtainable if the security were sold without the
insurance coverage. (Such rating is not automatic, however, and must
specifically be requested for each bond.) Any difference between the excess of a
bond's market value as an AAA/Aaa rated bond over its market value without such
rating and the single premium payment would inure to the Fund in determining the
net capital gain or loss realized by the Fund upon the sale of the bond.
In addition to the contract of insurance relating to the Fund, there is a
contract of insurance between AMBAC and First Investors Multi-State Insured Tax
Free Fund, between AMBAC and First Investors Series Fund, between AMBAC and
First Investors New York Insured Tax Free Fund, Inc. and between AMBAC and First
Investors Insured Tax Exempt Fund II, Inc. Otherwise, neither AMBAC or any
affiliate thereof, has any material business relationship, direct or indirect,
with the Funds.
AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia, the Territory of Guam and
the Commonwealth of Puerto Rico, with admitted assets of $4,013,000,000
(unaudited) and statutory capital of approximately $2,402,000,000 (unaudited) as
of December 31, 1999. Statutory capital consists of AMBAC's policyholders'
surplus and statutory contingency reserve. S&P, Moody's and Fitch have each
assigned a triple-A financial strength rating to AMBAC.
AMBAC has obtained a private letter ruling from the Internal Revenue Service
to the effect that AMBAC's insuring an obligation will not affect the treatment
for Federal income tax purposes of interest on the obligation and that payment
of insurance proceeds representing maturing interest paid by AMBAC under policy
provisions substantially identical to those contained in its municipal bond
insurance policy will be treated for Federal income tax purposes in the same
manner as if the payments were made by the issuer of the municipal bonds.
Investors should understand that a private letter ruling may not be cited as
precedent by persons other than the taxpayer to whom it is addressed;
nevertheless, those rulings may be viewed as generally indicative of the
Internal Revenue Service's views on the proper interpretation of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations thereunder.
AMBAC makes no representation regarding the municipal bonds included in the
investment portfolio of the Fund or the advisability of investing in such
municipal bonds and makes no representation regarding, nor has it participated
in the preparation of, the Prospectus and this SAI.
The information relating to AMBAC contained above has been furnished by
AMBAC. No representation is made herein as to the accuracy or adequacy of such
information, or as to the existence of any adverse changes in such information,
subsequent to the date hereof.
INVERSE FLOATERS. The Fund may invest in derivative securities on which
the rate of interest varies inversely with interest rates on similar securities
or the value of an index. For example, an inverse floating rate security may pay
interest at a rate that increases as a specified interest rate index decreases
but decreases as that index increases. The secondary market for inverse floaters
may be limited. The market value of such securities generally is more volatile
than that of a fixed rate obligation and, like most debt obligations, will vary
inversely with changes in interest rates. The interest rates on inverse floaters
may be significantly reduced, even to zero, if interest rates rise. The Fund may
invest up to 10% of its net assets in inverse floaters.
5
<PAGE>
LOANS OF PORTFOLIO SECURITIES. The Fund may loan securities to qualified
broker-dealers or other institutional investors provided: the borrower pledges
to the Fund and agrees to maintain at all times with the Fund collateral equal
to not less than 100% of the value of the securities loaned (plus accrued
interest or dividend, if any); the loan is terminable at will by the Fund; the
Fund pays only reasonable custodian fees in connection with the loan; and the
Adviser monitors the creditworthiness of the borrower throughout the life of the
loan. Such loans may be terminated by the Fund at any time and the Fund may vote
the proxies if a material event affecting the investment is to occur. The market
risk applicable to any security loaned remains a risk of the Fund. The borrower
must add to the collateral whenever the market value of the securities rises
above the level of such collateral. The Fund could incur a loss if the borrower
should fail financially at a time when the value of the loaned securities is
greater than the collateral. The Fund may make loans not in excess of 10% of its
total assets.
MUNICIPAL INSTRUMENTS. As used in this SAI, "Municipal Instruments"
include the following: (1) municipal bonds; (2) private activity bonds or
industrial development bonds, (3) certificates of participation ("COPS"), (4)
municipal commercial paper; (5) municipal notes; and (6) variable rate demand
instruments (`VRDIs"). Generally, the value of Municipal Instruments varies
inversely with changes in interest rates.
MUNICIPAL BONDS. Municipal bonds are debt obligations that generally are
issued to obtain funds for various public purposes and have a time to maturity,
at issuance, of more than one year. The two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith and credit for the
payment of principal and interest. Revenue bonds generally are payable only from
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special tax or other specific revenue source.
There are variations in the security of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors. The yields on municipal bonds depend on, among other things, general
money market conditions, condition of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issuer.
Generally, the value of municipal bonds varies inversely to changes in interest
rates.
PRIVATE ACTIVITY BONDS. Certain types of revenue bonds, referred to as
private activity bonds ("PABs"), are issued by or on behalf of public
authorities to obtain funds to provide for various privately operated
facilities, such as airports or mass transportation facilities. Most PABs are
pure revenue bonds and are not backed by the taxing power of the issuing agency
or authority. See "Taxes" for a discussion of special tax consequences to
"substantial users," or persons related thereto, of facilities financed by PABs.
CERTIFICATES OF PARTICIPATION. COPs provide participation interests in
lease revenues and each certificate represents a proportionate interest in or
right to the lease-purchase payment made under municipal lease obligations or
installment sales contracts. In certain states, COPs constitute a majority of
new municipal financing issues. The possibility that a municipality will not
appropriate funds for lease payments is a risk of investing in COPS, although
this risk is mitigated by the fact that each COP will be covered by the
insurance feature.
The Board has established guidelines for determining the liquidity of
COPs in the Fund's portfolio and, subject to its review, has delegated that
responsibility to the Adviser. Under these guidelines, the Adviser will consider
(1) the frequency of trades and quotes for the security, (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers, (3) the willingness of dealers to undertake to make a market
in the security, (4) the nature of the marketplace, namely, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer, (5) the coverage of the obligation by new issue insurance, (6) the
likelihood that the marketability of the obligation will be maintained through
the time the security is held by the Fund, and (7) for unrated COPs, the COPs'
6
<PAGE>
credit status analyzed by the Adviser according to the factors reviewed by
rating agencies.
MUNICIPAL COMMERCIAL PAPER. Issues of municipal commercial paper which the
Fund may purchase are rated P-1 by Moody's or A-1 by S&P or have insurance
through the issuer or an independent insurance company and include unsecured,
short-term, negotiable promissory notes. Municipal commercial paper is issued
usually to meet temporary capital needs of the issuer or to serve as a source of
temporary construction financing. These obligations are paid from general
revenues of the issuer or are refinanced with long-term debt. A description of
commercial paper ratings is contained in Appendix A.
MUNICIPAL NOTES. Municipal notes which the Fund may purchase will be
principally tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes. The obligations are sold by an issuer
prior to the occurrence of another revenue producing event to bridge a financial
gap for such issuer. Municipal notes are usually general obligations of the
issuing municipality. Project notes are issued by housing agencies, but are
guaranteed by the U.S. Department of Housing and Urban Development and are
secured by the full faith and credit of the United States. Such municipal notes
must be rated MIG-1 by Moody's or SP-1 by S&P or have insurance through the
issuer or an independent insurance company. A description of municipal note
ratings is contained in Appendix B.
VARIABLE RATE DEMAND INSTRUMENTS. VRDIs are Municipal Instruments, the
interest on which is adjusted periodically, which allow the holder to demand
payment of all unpaid principal plus accrued interest from the issuer. A VRDI
that the Fund may purchase will be selected if it meets criteria established and
designed by the Board to minimize risk to the Fund. In addition, a VRDI must be
rated MIG-1 by Moody's or SP-1 by S&P or insured by the issuer or an independent
insurance company. There is a recognized after-market for VRDIs.
PREFERRED STOCK. The Fund may invest in preferred stock. A preferred stock
is a blend of the characteristics of a bond and common stock. It can offer the
higher yield of a bond and has priority over common stock in equity ownership,
but does not have the seniority of a bond and, unlike common stock, its
participation in the issuer's growth may be limited. Preferred stock has
preference over common stock in the receipt of dividends and in any residual
assets after payment to creditors should the issuer be dissolved. Although the
dividend is set at a fixed annual rate, in some circumstances it can be changed
or omitted by the issuer.
REPURCHASE AGREEMENTS. A repurchase agreement essentially is a short-term
collateralized loan. The lender (a Fund) agrees to purchase a security from a
borrower (typically a broker-dealer) at a specified price. The borrower
simultaneously agrees to repurchase that same security at a higher price on a
future date (which typically is the next business day). The difference between
the purchase price and the repurchase price effectively constitutes the payment
of interest. In a standard repurchase agreement, the securities which serve as
collateral are transferred to a Fund's custodian bank. In a "tri-party"
repurchase agreement, these securities would be held by a different bank for the
benefit of the Fund as buyer and the broker-dealer as seller. In a "quad-party"
repurchase agreement, the Fund's custodian bank also is made a party to the
agreement. Each Fund may enter into repurchase agreements with banks which are
members of the Federal Reserve System or securities dealers who are members of a
national securities exchange or are market makers in government securities. 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
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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. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the Fund's net assets
would be invested in such repurchase agreements and other illiquid investments.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS. The Fund may not purchase or
otherwise acquire any security if, as a result, more than 15% of its net assets
(taken at current value) would be invested in securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale. This policy includes foreign issuers' unlisted
securities with a limited trading market and repurchase agreements maturing in
more than seven days. This policy does not include restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended ("1933 Act"), which the Board or the Adviser has determined under
Board-approved guidelines are liquid.
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. Securities that are freely marketable in the country where they are
principally traded, but would not be freely marketable in the United States,
will not be subject to this 15% limit. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
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.
WHEN-ISSUED SECURITIES. The Fund may each invest up to 25% of its net assets
in securities issued on a when-issued or delayed delivery basis at the time the
purchase is made. The Fund generally would not pay for such securities or start
earning interest on them until they are issued or received. However, when the
Fund purchases debt obligations on a when-issued basis, it assumes the risks of
ownership, including the risk of price fluctuation, at the time of purchase, not
at the time of receipt. Failure of the issuer to deliver a security purchased by
a Fund on a when-issued basis may result in the Fund's incurring a loss or
missing an opportunity to make an alternative investment. When the Fund enters
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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 that Fund's
commitment, which are valued at their fair market value. If on any day the
market value of this segregated account falls below the value of the Fund's
commitment, the Fund will be required to deposit additional cash or qualified
securities into the account until equal to the value of that Fund's commitment.
When the securities to be purchased are issued, the Fund will pay for the
securities from available cash, the sale of securities in the segregated
account, sales of other securities and, if necessary, from sale of the
when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities the Fund is committed to purchase. 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. The market prices of zero coupon
and pay-in-kind securities generally are more volatile than the prices of
securities that pay interest periodically and in cash and are likely to respond
to changes in interest rates to a greater degree than do other types of debt
securities having similar maturities and credit quality. Original issue discount
earned each year on zero coupon securities (including zero coupon Municipal
Securities) and the "interest" on pay-in-kind securities must be accounted for
by a 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, the Fund may be required to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. See "Taxes". These distributions must be made from a Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions, and its current income ultimately could be
reduced as a result.
FUTURES AND OPTIONS STRATEGIES
Although it does not intend to engage in such strategies in the coming year,
the Fund has the legal authority to engage in certain futures strategies to
hedge its portfolio, and in other circumstances permitted by the Commodities
Futures Trading Commission ("CFTC"). In addition, the Fund may engage in certain
options strategies to enhance income. The Fund may sell covered listed put and
call options and buy call and put on its portfolio securities and may enter into
closing transactions with respect to such options. The Fund also may buy and
sell financial futures contracts and buy and sell call and put options thereon
traded on a U.S. exchange or board of trade and enter into closing transactions
with respect to such options.
Certain special characteristics of, and risks associated with, using these
instruments and strategies are discussed below. Use of these instruments is
subject to the applicable regulations of the Securities and Exchange Commission
("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.
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 the Adviser's prediction of movements in the direction of
the securities and interest rate markets are inaccurate, the adverse
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consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. The 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 the Adviser'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 Fund will not use
leverage in its hedging and option income strategies. The Fund will not enter
into a hedging or option income strategy that exposes the Fund to an obligation
to another party unless it owns either (1) an offsetting ("covered") position in
securities 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.
Each Fund 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 or other options or futures
positions used for cover and assets 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 the Fund's ability to meet redemption
requests or other current obligations.
OPTIONS STRATEGIES. The Fund may purchase call options on securities that
the Adviser intends to include in its 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 the Fund's
potential loss to the option premium paid; conversely, if the market price of
the underlying security increases above the exercise price and the Fund either
sells or exercises the option, any profit eventually realized will be reduced by
the premium. The 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 the Fund to sell the underlying security at the predetermined exercise
price; thus the potential for loss to the 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 the
Fund realizes on the sale of the security will be reduced by the premium paid
for the put option less any amount for which the put option may be sold.
The 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
Fund will write covered call options on securities generally when the Adviser
believes that the premium received by the 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 the Fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by the Fund. If, however, there is an increase in the market price of
the underlying security and the option is exercised, the Fund will be obligated
to sell the security at less than its market value. The 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 the Fund, to the extent described under
"Investment Policies--Restricted Securities and Illiquid Investments" and
therefore subject to the Fund's limitation on investments in illiquid
securities. In addition, the Fund could lose the ability to participate in an
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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).
The 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. The Fund may
write covered put options in circumstances when the Adviser 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, the 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 the
Fund would expect to suffer a loss.
Currently, many options on equity securities are exchange-traded, whereas
options on debt securities are primarily traded on the OTC market.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
guarantees completion of every exchange-traded option transaction. In contrast,
OTC options are contracts between a Fund and the opposite party with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the dealer from which it has purchased the OTC option to make or take delivery
of the securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as the loss of the
expected benefit of the transaction.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to sell
securities 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 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 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 or security
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 or stock index, the time
remaining until expiration, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security or stock index
and general market conditions. For this reason, the successful use of options
depends upon the Adviser's ability to forecast the direction of price
fluctuations in the underlying securities market 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 a 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.
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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 the 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 the 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 a 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 a Fund must maintain a covered position with respect to any
call option it writes, that 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 the Fund's ability to sell a portfolio security or make
an investment at a time when such a sale or investment might be advantageous.
The 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. The 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 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. The 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 a 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. A 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.
The Fund may purchase a call option on a financial futures contract to hedge
against a market advance in debt securities that the Fund plans to acquire at a
future date. The Fund also may write covered call options on financial 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 financial futures
contracts in order to hedge against a decline in the value of debt securities
held in the Fund's portfolio.
The Fund will use futures contracts and options thereon solely in bona fide
hedging transactions or under other circumstances permitted by the CFTC and will
not enter into such investments for which the aggregate initial margin and
premiums exceed 5% of the Fund's total assets. This does not limit the Fund's
assets at risk to 5%. The Fund has represented the foregoing to the CFTC.
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FUTURES GUIDELINES. To the extent that the Fund enters into futures
contracts or options thereon other than for bona fide hedging purposes (as
defined by the CFTC), (1) 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 the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
losses on any contracts into which the Fund has entered. This policy does not
limit a Fund's assets at risk to 5%. The value of all futures sold will not
exceed the total market value of a Fund's portfolio. In addition, the Fund may
not purchase interest rate futures contracts if immediately thereafter more than
30% of its total assets would be so invested.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES TRADING. No price is paid upon
entering into futures contracts. Instead, upon entering into a futures contract,
the Fund is required to deposit with their 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% of the contract value. This amount is known
as "initial margin." When writing a put or call 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. The
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 such Fund would have to make daily
cash payments of variation margin (except in the case of purchased options).
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
Successful use by the Fund of futures contracts and related options will
depend upon the Adviser's ability to predict movements in the direction of the
overall securities 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
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contract or related option will not correlate with the movements in prices of
the securities 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 that Fund. If the price of the
futures contract or related option moves more than the price of the underlying
securities, 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 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 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 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 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 the Fund intends to purchase or sell futures 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, a Fund would continue to be required to make variation
margin payments.
Like options on securities, 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
the 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 the 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 being hedged.
The 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, the Fund also may save on commissions
by using futures and related options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading purposes,
portfolio securities may be sold without regard to the length of time they have
been held when, in the opinion of the Adviser, investment considerations warrant
such action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in 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
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within one year. A high rate of portfolio turnover (100% or more) generally
leads to transaction costs and may result in a greater number of taxable
transactions. See "Allocation of Portfolio Brokerage."
For the fiscal years ended December 31, 1998 and 1999, the portfolio
turnover rate for the Fund was 172% and 205%, respectively.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the 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 the
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 the Fund's assets will not cause a violation of the following
investment restrictions so long as percentage restrictions are observed by the
Fund at the time it purchases any security.
INSURED TAX EXEMPT FUND II will not:
(1) Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 5% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed 5% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced within three
business days to the extent necessary to comply with the 5% limitation. This
policy shall not prohibit deposits of assets to provide margin or guarantee
positions in connection with transactions in options, futures contracts, swaps,
forward contracts, and other derivative instruments or the segregation of assets
in connection with such transactions.
(2) Issue senior securities.
(3) Make loans, except loans of portfolio securities (limited to 10% of the
Fund's total assets), provided such loans are at all times secured by cash or
equivalent collateral of no less than 100% by marking to market daily.
(4) With respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer. With respect to pre-refunded bonds, the Adviser considers an escrow
account to be the issuer of such bonds when the escrow account consists solely
of U.S. Government obligations fully substituted for the obligation of the
issuing municipality.
(5) Invest in any municipal bonds unless they will be insured municipal
bonds or unless they are already insured under an insurance policy obtained by
the issuer or underwriter thereof.
(6) Invest more than 25% of the Fund's total assets (taken at current value)
in the obligations of one or more issuers having their principal business
activities in the same industry.
(7) Buy or sell real estate or interests in real estate limited
partnerships, although it may purchase and sell securities which are secured by
real estate or interests therein.
15
<PAGE>
(8) Underwrite any issue of securities, although the Fund may purchase
municipal bonds directly from the issuer thereof for investment in accordance
with the Fund's investment objective, policy and limitations.
(9) Make investments for the purpose of exercising control or management.
(10) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of the Trust, as principals.
(11) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer, director or Trustee of the Trust or of the Adviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers,
directors or Trustees who own more than 1/2 of 1% own in the aggregate more than
5% of the outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be changed
without shareholder approval. These investment restrictions provide that the
Fund will not:
(1) Purchase any security if, as a result, more than 15% of its net assets
would be invested in illiquid securities, including repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
any securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees, or the
Fund's 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.
(2) Purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this restriction shall not prevent the Fund from
purchasing or selling options, futures contracts, caps, floors and other
derivative instruments, engaging in swap transactions or investing in securities
or other instruments backed by physical commodities).
(3) Enter into futures contracts or options on futures contracts other than
for bona fide hedging purposes (as defined by the CFTC) if the aggregate initial
margin and premiums required to establish these positions (excluding the amount
by which options are "in-the-money" at the time of purchase) may not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into.
(4) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
provided the Fund maintains asset coverage of at least 300% for pledged assets;
provided, however, this limitation will not prohibit escrow, collateral or
margin arrangements in connection with the Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
16
<PAGE>
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Fund,
their age, business address and principal occupations during the past five
years. Unless otherwise noted, an individual's business address is 95 Wall
Street, New York, New York 10005.
GLENN O. HEAD*+ (74), President andTrustee. Chairman of the Board and Director,
Administrative Data Management Corp. ("ADM"), First Investors Management
Company, Inc. ("FIMCO"), Executive Investors Management Company, Inc. ("EIMCO"),
First Investors Corporation ("FIC"), Executive Investors Corporation ("EIC") and
First Investors Consolidated Corporation ("FICC").
KATHRYN S. HEAD*+ (44), Trustee, 581 Main Street, Woodbridge, NJ 07095.
President and Director, FICC, ADM and FIMCO; Vice President and Director, FIC;
President and Chief Executive Officer, EIC; President and Director, EIMCO.
LARRY R. LAVOIE* (53), Trustee. Assistant Secretary, ADM, EIC, EIMCO, FIAMCO,
FICC and FIMCO; President, FIAMCO; Secretary and General Counsel, FIC.
REX R. REED** (78), Trustee, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN** (78), Trustee, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
ROBERT GROHOL** (68), Trustee, 263 Woodland Road, Madison, NJ 07940. Retired;
formerly Senior Vice President-Operating of Beneficial Management Corporation of
America's Gulf Coast, Northwest and Southern groups.
JAMES M. SRYGLEY** (67), Trustee, 39 Hampton Road, Chatham, NJ 07928. Principal,
Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (67), Trustee and Chairman of the Board; Director, FIMCO, FIC,
FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (70), Trustee, 217 Upland Downs Road, Manchester Center,
VT 05255. Retired; formerly financial and planning executive with American
Telephone & Telegraph Company.
JOSEPH I. BENEDEK (42), Treasurer and Principal Accounting Officer, 581 Main
Street, Woodbridge, NJ 07095. Treasurer, FIMCO, EIMCO and FIAMCO.
CONCETTA DURSO (64), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
CLARK D. WAGNER (40), Vice President. Vice President, First Investors Series
Fund, First Investors Insured Tax Exempt Fund II, Inc., First Investors
Multi-State Insured Tax Free Fund, First Investors New York Insured Tax Free
Fund, Inc., Executive Investors Trust and First Investors Government Fund, Inc.;
Chief Investment Officer, FIMCO.
-------------------
* 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.
17
<PAGE>
The Trustees and officers, as a group, owned less than 1% of shares of any
Fund.
All of the officers and Trustees, except for Mr. Wagner, hold identical or
similar positions with the 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, First Financial Savings Bank, S.L.A., 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.
The following table lists compensation paid to the Trustees of the Trust for
the fiscal year ended December 31, 1999.
Aggregate Total Compensation
Compensation From First
From Trust for Investors Family
Trustee the Fund* of Funds Paid to
------- -------- Trustee* +
----------
James J. Coy** $-0- $-0-
Glenn O. Head $-0- $-0-
Kathryn S. Head $-0- $-0-
Larry R. Lavoie $-0- $-0-
Rex R. Reed $60 $42,950
Herbert Rubinstein $60 $42,950
James M. Srygley $60 $42,950
John T. Sullivan $-0- $-0-
Robert F. Wentworth $60 $42,950
Robert Grohol*** $0 $0
* Compensation to officers and interested Trustees of the Trust is paid by the
Adviser.
** On March 27, 1997, Mr. Coy resigned as a Trustee of the Trust. Mr. Coy
currently serves as an Emeritus Trustee. Mr. Coy is paid by the Adviser.
*** Mr. Grohol was appointed as a Trustee on __________, 2000.
+ The First Investors Family of Funds consists of 15 separate registered
investment companies. The total compensation shown in this column is for the
twelve month period ended December 31, 1999.
MANAGEMENT
Investment advisory services to the Fund are provided by First Investors
Management Company, Inc. ("FIMCO") pursuant to an Investment Advisory Agreement
("Advisory Agreement") dated __________, 2000. The Advisory Agreement was
approved by the Board of the Trust, including a majority of the Trustees who are
not parties to the Fund's 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. The Board of Trustees is responsible for
overseeing the management of the Fund.
Pursuant to the Advisory Agreement, FIMCO shall supervise and manage the
Fund's investments, determine the Fund's portfolio transactions and supervise
all aspects of the Fund's operations, subject to review by the Trust's Trustees.
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<PAGE>
The Advisory Agreement also provides that FIMCO shall provide the Fund with
certain executive, administrative and clerical personnel, office facilities and
supplies, conduct the business and details of the operation of the Trust and the
Fund and assume certain expenses thereof, other than obligations or liabilities
of the Fund. The Advisory Agreement may be terminated at any time, with respect
to the Fund, without penalty by the Trust's Trustees or by a majority of the
outstanding voting securities of the Fund, or by FIMCO, in each instance on not
less than 60 days' written notice, and shall automatically terminate in the
event of its assignment (as defined in the 1940 Act). The Advisory Agreement
also provides that it will continue in effect, with respect to the Fund, for a
period of over two years only if such continuance is approved annually either by
the Trust's Trustees or by a majority of the outstanding voting securities of
the Fund, and, in either case, by a vote of a majority of the Trust's
Independent Trustees voting in person at a meeting called for the purpose of
voting on such approval.
Under the Advisory Agreement, the Fund pays the Adviser an annual fee, paid
monthly, according to the following schedules:
Annual
Average Daily Net Assets Rate
------------------------ ------
Up to $200 million................................................... 1.00%
In excess of $200 million up to $500 million......................... 0.75
In excess of $500 million up to $750 million......................... 0.72
In excess of $750 million up to $1.0 billion......................... 0.69
Over $1.0 billion.................................................... 0.66
Prior to ________, 2000, Executive Investors Management Company, Inc.
("EIMCO") served as investment adviser to the Fund. FIMCO and EIMCO are both
wholly owned subsidiaries of First Investors Consolidated Corporation, and their
address is also 95 Wall Street, New York, NY 10005.
For the fiscal years ended December 31, 1997, 1998 and 1999, EIMCO received
advisory fees for its services of $156,479, $167,864 and $167,999, respectively.
Of such amounts, EIMCO voluntarily waived $117,359, $120,222 and $117,599,
respectively. For the fiscal years ended December 31, 1998 and 1999, EIMCO
voluntarily assumed expenses for the Fund in the amounts of $21,698 and $22,985,
respectively.
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 the Fund and to review additions to and deletions from the
portfolio.
The Fund bears all expenses of its operations other than those incurred by
the Adviser or Underwriter under the terms of its advisory or underwriting
agreements. 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.
First Investors Consolidated Corporation ("FICC") owns all of the
outstanding stock of the Adviser, First Investors Corporation, and the Fund's
transfer agent. Mr. Glenn O. Head controls FICC and, therefore, controls the
Adviser.
19
<PAGE>
UNDERWRITER
The Trust has entered into an Underwriting Agreement ("Underwriting
Agreement") with First Investors Corporation ("Underwriter" or "FIC") which
requires the Underwriter to use its best efforts to sell shares of the Fund. The
Underwriting Agreement was approved by the Trust's Board, including a majority
of the Independent Trustees. The Underwriting Agreement provides that it will
continue in effect from year to year, with respect to the Fund, only so long as
such continuance is specifically approved at least annually by the Trust's Board
or by a vote of a majority of the outstanding voting securities of such Fund,
and in either case by the vote of a majority of the Trust's Independent
Trustees, voting in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement will terminate automatically in the event
of its assignment.
Prior to ________, 2000, Executive Investors Corporation ("EIC") served as
the principal underwriter for the Fund. EIC is an affiliate of FIC. For the
fiscal year ended December 31, 1997, the Fund paid EIC underwriting commissions
of $6,680. For the same period, EIC reallowed an additional $28,463 to
unaffiliated dealers and $5,596 to FIC. For the fiscal year ended December 31,
1998, the Fund paid EIC underwriting commissions of $9,625. For the same period,
EIC reallowed an additional $76,513 to unaffiliated dealers and $1,494 to FIC.
For the fiscal year ended December 31, 1999, the Fund paid EIC underwriting
commissions of $6,072. For the same period, EIC reallowed an additional $31,856
to unaffiliated dealers and $6,388 to FIC.
DISTRIBUTION PLANS
As stated in the Fund's Prospectus, pursuant to a separate plan of
distribution for each class of shares adopted by the Trust pursuant to Rule
12b-1 under the 1940 Act ("Class A Plan" and "Class B Plan" and, collectively,
"Plans"), the Fund is authorized to compensate the Underwriter for certain
expenses incurred in the distribution of the Fund's shares and the servicing or
maintenance of existing Fund shareholder accounts.
The Plan was approved by the Fund's Board, including a majority of the
Independent Trustees, and by a majority of the outstanding voting securities of
the relevant class of the Fund. The Plan will continue in effect from year to
year, as long as its continuance is approved annually by either the Board or by
a vote of a majority of the outstanding voting securities of the relevant class
of shares of the Fund. In either case, to continue, each Plan must be approved
by the vote of a majority of the Independent Trustees. The Board reviews
quarterly and annually a written report provided by the Treasurer of the amounts
expended under the applicable Plan and the purposes for which such expenditures
were made. While each Plan is in effect, the selection and nomination of the
Independent Directors will be committed to the discretion of such Independent
Trustees then in office.
Each Plan can be terminated at any time by a vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of the Fund. Any change to any Plan
that would materially increase the costs to that class of shares of the Fund may
not be instituted without the approval of the outstanding voting securities of
the class of shares of the Fund as well as any class of shares that converts
into that class. Such changes also require approval by a majority of the
Independent Trustees.
In adopting each Plan, the Board considered all relevant information and
determined that there is a reasonable likelihood that each Plan will benefit the
Fund and its class of shareholders. The Board believes that the amounts spent
pursuant to each Plan will assist the Fund in providing ongoing servicing to
shareholders, in competing with other providers of financial services and in
promoting sales, thereby increasing the net assets of the Fund.
20
<PAGE>
In reporting amounts expended under the Plans to the Trustees, FIMCO will
allocate expenses attributable to the sale of each class of the Fund's shares to
such class based on the ratio of sales of such class to the sales of both
classes of shares. The fees paid by one class of the Fund's shares will not be
used to subsidize the sale of any other class of the Fund's shares.
Prior to _______, 2000, the Fund had only one class of undesignated shares
and had adopted a plan of distribution pursuant to Rule 12b-1 under the 1940 Act
with respect to that single class of shares (the "Old Plan") to compensate EIC
for certain expenses incurred in the distribution of the shares and the
servicing or maintenance of Fund shareholder accounts. For the fiscal year ended
December 31, 1999, the Fund paid $67,199 in fees pursuant to the Old Plan. For
the same period, EIC waived an additional $16,800 in fees pursuant to the Old
Plan. For the fiscal year ended December 31, 1999, the EIC incurred the
following expenses related to the Old Plan with respect to the Fund:
<TABLE>
<CAPTION>
Compensation to Compensation to Compensation to
Underwriter Dealers Sales Personnel
<S> <C> <C> <C>
Insured Tax Exempt Fund II 27,737 $0 $39,462
</TABLE>
DEALER CONCESSIONS. With respect to Class A shares of the Fund, the Fund will
reallow a portion of the sales load to the dealers selling the shares as shown
in the following table:
Sales Charges as % of Concession to
Offering Net Amount Dealers as % of
Amount of Investment Price Invested Offering Price
-------------------- ----- -------- --------------
Less than $100,000 4.75 4.99 4.27
$100,000 but under $250,000 3.90 4.06 3.51
$250,000 but under $500,000 2.90 2.99 2.61
$500,000 but under $1,000,000 2.40 2.46 2.16
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 are provided to the Fund by
Muller Data Corporation. 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. Short-term debt securities that mature in 60
days or less are valued at amortized cost. Securities for which market
quotations are not readily available are valued on at fair value as determined
in good faith by or under the supervision of the Trust's officers in a manner
specifically authorized by the Board of the Trust.
"When-issued securities" are reflected in the assets of the Fund as of the
date the securities are purchased. Such investments are valued thereafter at the
mean between the most recent bid and asked prices obtained from recognized
dealers in such securities or by the pricing services.
The Fund may retain any insured municipal bond which is in default in the
payment of principal or interest until the default has been cured, or the
principal and interest outstanding are paid by an insurer or the issuer of any
21
<PAGE>
letter of credit or other guarantee supporting such municipal bond. In such
case, it is the Fund's policy to value the defaulted bond daily based upon the
value of a comparable bond which is insured and not in default. In selecting a
comparable bond, the Fund will consider security type, rating, market condition
and yield.
The Board may suspend the determination of the Fund's net asset value for
the whole or any part of any period (1) during which trading on the New York
Stock Exchange ("NYSE") is restricted as determined by the SEC or the NYSE is
closed for other than weekend and holiday closings, (2) during which an
emergency, as defined by rules of the SEC in respect to the United States
market, exists as a result of which disposal by a Fund of securities owned by it
is not reasonably practicable for the Fund fairly to determine the value of its
net assets, or (3) for such other period as the SEC has by order permitted.
EMERGENCY PRICING PROCEDURES. In the event that the Fund must halt
operations during any day that 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 Fund will make every reasonable effort to segregate orders received
on the Emergency Closed Day and give them the price that they would have
received but for the closing. The Emergency Closed Day price will be calculated
as soon as practicable after operations have resumed and will be applied equally
to sales, redemptions and repurchases that were in fact received in the mail or
otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Fund on an Emergency Closed Day, even if neither the Fund nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order the order will be considered
received by a Fund when the postal service has delivered it to FIC's Woodbridge
offices prior to the close of regular trading on the NYSE; 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.
3. If the Fund is unable to segregate orders received on the Emergency
Closed Day from those received on the next day the Fund is open for business,
the Fund may give all orders the next price calculated after operations resume.
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Fund may determine not to price its portfolio
securities if such prices would lead to a distortion of the NAV, for the Fund
and its shareholders.
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser may purchase or sell portfolio securities on behalf of the
Fund in agency or principal transactions. In agency transactions, the Fund
generally pays brokerage commissions. In principal transactions, the Fund
generally does not pay commissions, however the price paid for the security may
include an undisclosed dealer commission or "mark-up" or selling concessions.
The Adviser normally purchases fixed-income securities on a net basis from
primary market makers acting as principals for the securities. The Adviser may
purchase certain money market instruments directly from an issuer without paying
commissions or discounts. The Adviser may also purchase securities traded in the
OTC market. As a general practice, OTC securities are usually purchased from
22
<PAGE>
market makers without paying commissions, although the price of the security
usually will include undisclosed compensation. However, when it is advantageous
to the Fund the Adviser may utilize a broker to purchase OTC securities and pay
a commission.
In purchasing and selling portfolio securities on behalf of the Fund, the
Adviser will seek to obtain best execution. The Fund may pay more than the
lowest available commission in return for brokerage and research services.
Additionally, upon instruction by the Board, the Adviser may use dealer
concessions available in fixed-priced underwritings, over-the-counter
transactions, and/or brokerage to pay for research and other services. Research
and other services may include information as to the availability of securities
for purchase or sale, statistical or factual information or opinions pertaining
to securities, reports and analysis concerning issuers and their
creditworthiness, and Lipper's Directors' Analytical Data concerning Fund
performance and fees. The Adviser generally uses the research and other services
to service all the funds in the First Investors Family of Funds, rather than the
particular Funds whose commissions may pay for research or other services. In
other words, a Fund's brokerage may be used to pay for a research service that
is used in managing another Fund within the First Investor Fund Family. The
Lipper's Directors' Analytical Data is used by the Adviser and the Fund Board to
analyze a fund's performance relative to other comparable funds.
In selecting the broker-dealers to execute the Fund's portfolio
transactions, the Adviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order, the
trading characteristics of the security involved, the difficulty in executing
the order, the research and other services provided, the expertise, reputation
and reliability of the broker-dealer, access to new offerings, and other factors
bearing upon the quality of the execution. The Adviser does not place portfolio
orders with an affiliated broker, or allocate brokerage commission business to
any broker-dealer for distributing fund shares. Moreover, no broker-dealer
affiliated with the Adviser participates in commissions generated by portfolio
orders placed on behalf of the Fund.
The Adviser may combine transaction orders placed on behalf of the Fund,
other funds in the First Investors Group of Funds and First Investors Life
Insurance Company, affiliates of the Funds, 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. The Trust's Board has authorized and
directed the Adviser to use dealer concessions available in fixed-price
underwritings of municipal bonds to pay for research services which are
beneficial in the management of the Fund's portfolio.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund did
not pay brokerage commissions.
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Information regarding the purchase, redemption and exchange of Fund shares
is contained in the Shareholder Manual, a separate section of the SAI that is a
distinct document and may be obtained free of charge by contacting your Fund.
REDEMPTIONS-IN KIND. If the Board should determine that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution in kind of securities from the portfolio of
the Fund. If shares are redeemed in kind, the redeeming shareholder will likely
incur brokerage costs in converting the assets into cash. The method of valuing
portfolio securities for this purpose is described under "Determination of Net
Asset Value."
23
<PAGE>
TAXES
To continue to qualify for treatment as a regulated investment company
("RIC") under the Code, the Fund must distribute to its shareholders for each
taxable year at least 90% of the sum of its investment company taxable income
(consisting generally of taxable net investment income and net short-term
capital gain) plus its net interest income excludable from gross income under
section 103(a) of the Code ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or other income (including gains from options or
futures contracts) derived with respect to its business of investing in
securities ("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 (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer.
Dividends paid by the Fund will qualify as "exempt-interest dividends" as
defined in the Prospectus, and thus will be excludable from gross income for
Federal income tax purposes by its shareholders, if the Fund satisfies the
requirement that, at the close of each quarter of its taxable year, at least 50%
of the value of its total assets consists of securities the interest on which is
excludable from gross income under section 103(a); the Fund intends to continue
to satisfy this requirement. The aggregate dividends excludable from the Fund's
shareholders' gross income may not exceed its net tax-exempt income.
Shareholders' treatment of dividends from the Fund under state and local income
tax laws may differ from the treatment thereof under the Code. Investors should
consult their tax advisers concerning this matter.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares, and any portion of the loss not disallowed will be
treated as described above.
Tax-exempt interest attributable to certain PABs (including, to the extent
the Fund receives interest on those bonds, a proportionate part of the
exempt-interest dividends it pays) is a Tax Preference Item. Exempt-interest
dividends received by a corporate shareholder also may be indirectly subject to
the Federal alternative minimum tax without regard to whether the Fund's
tax-exempt interest was attributable to those bonds. Entities or other persons
who are "substantial users" (or persons related to "substantial users") of
facilities financed by PABs should consult their tax advisers before purchasing
shares of the Fund because, for users of certain of these facilities, the
interest on those bonds is not exempt from Federal income tax. For these
purposes, the term "substantial user" is defined generally to include a
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of PABs.
Up to 85% of social security and certain railroad retirement benefits may be
included in taxable income for recipients whose modified adjusted gross income
(which includes income from tax-exempt sources such as the Fund) plus 50% of
their benefits exceeds certain base amounts. Exempt-interest dividends from the
Fund still are tax-exempt to the extent described in the Prospectus; they are
only included in the calculation of whether a recipient's income exceeds the
established amounts.
The Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of those securities, the Fund must account
for the portion of the OID that accrues on the securities during the taxable
year, even if the Fund receives no corresponding payment on them during the
year. Because the Fund annually must distribute substantially all of its
investment company taxable income and net tax-exempt interest, including any
OID, to satisfy the Distribution Requirement, it may be required in a particular
24
<PAGE>
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the Fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain.
The Fund may invest in municipal bonds that are purchased, generally not on
their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with OID,
a price less than the amount of the issue price plus accrued OID) ("municipal
market discount bonds"). Gain on the disposition of a municipal market discount
bond (other than a bond with a fixed maturity date within one year from its
issuance), generally is treated as ordinary (taxable) income, rather than
capital gain, to the extent of the bond's accrued market discount at the time of
disposition. Market discount on such a bond generally is accrued ratably, on a
daily basis, over the period from the acquisition date to the date of maturity.
In lieu of treating the disposition gain as above, the Fund may elect to include
market discount in its gross income currently, for each taxable year to which it
is attributable.
If the Fund invests in any instruments that generate taxable income under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to its shareholders as ordinary income to the
extent of its earnings and profits. Moreover, if the Fund realizes capital gain
as a result of market transactions, any distributions of that gain will be
taxable to its shareholders. There also may be collateral Federal income tax
consequences regarding the receipt of exempt-interest dividends by shareholders
such as S corporations, financial institutions and property and casualty
insurance companies. A shareholder falling into any such category should consult
its tax adviser concerning its investment in shares of the Fund.
By qualifying for treatment as a RIC, the Fund (but not its shareholders)
will be relieved of federal income tax on the part of its investment company
taxable income and net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
If the Fund failed to qualify for treatment as a RIC for any taxable year, (1)
it would be taxed as an ordinary corporation on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (2) the shareholders would treat all those distributions,
including distributions that otherwise would be "exempt-interest dividends"
described in the following paragraph and distributions of net capital gain, as
taxable dividends (that is, ordinary income) to the extent of the Fund's
earnings and profits. 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.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
reported by, in the case of exempt-interest dividends (see below), and will be
taxed to shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary (taxable) income for that year and capital gain net income
for the one-year period ending on October 31 of that year, plus certain other
amounts.
25
<PAGE>
The use of hedging strategies, such as writing (selling) and purchasing
options and futures 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 options and
futures contracts derived by the Fund with respect to its business of investing
in securities will be treated as qualifying income under the Income Requirement.
If the Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures 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 Fund will be treated
as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or futures contract entered into by
the Fund 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 if the transaction is closed within 30 days
after the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Fund's 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 Fund may advertise its performance in various ways.
The 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. In calculating the ending
redeemable value for Fund shares, the Fund will deduct the maximum current sales
charge of 6.25% (as a percentage of the offering price) from the initial $1,000
payment. 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 the 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 the Fund of future rates of return on its shares. At times,
the Adviser may reduce its compensation or assume expenses of the 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.
26
<PAGE>
Average annual return and total return computed at the public offering price
for the periods ended December 31, 1999 are set forth in the tables below:
AVERAGE ANNUAL TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
INSURED TAX EXEMPT FUND II -8.05% 6.44% N/A 7.51%
TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
INSURED TAX EXEMPT FUND II -8.05% 36.62% N/A 98.02%
* All return figures reflect the current maximum sales charge of 6.25% and
dividends reinvested at net asset value. Certain expenses of the Fund have
been waived or reimbursed from commencement of operations through December
31, 1999. Accordingly, return figures are higher than they would have been
had such expenses not been waived or reimbursed.
** The inception date for the Fund is July 26, 1990.
Average annual total return and total return may also be based on investment
at reduced sales charge levels or at net asset value. Any quotation of return
not reflecting the maximum sales charge will be greater than if the maximum
sales charge were used. Average annual return and total return computed at net
asset value for the periods ended December 31, 1999 is set forth in the tables
below:
AVERAGE ANNUAL TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
INSURED TAX EXEMPT FUND II -1.92% 7.83% N/A 8.24%
TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
INSURED TAX EXEMPT FUND II -1.92% 45.79% N/A 111.19%
-----------------
* Certain expenses of the Fund have been waived or reimbursed from commencement
of operations through December 31, 1999. Accordingly, return figures are
higher than they would have been had such expenses not been waived or
reimbursed.
** The inception date for the Fund is July 26, 1990.
Yield for the Fund is presented for a specified thirty-day period ("base
period"). Yield is based on the amount determined by (i) calculating the
aggregate amount of dividends and interest earned by the Fund during the base
period less expenses accrued for that period (net of reimbursement), and (ii)
dividing that amount by the product of (A) the average daily number of shares of
the Fund outstanding during the base period and entitled to receive dividends
and (B) the per share maximum public offering price of the Fund on the last day
of the base period. The result is annualized by compounding on a semi-annual
basis to determine the Fund's yield. For this calculation, interest earned on
debt obligations held by the Fund is generally calculated using the yield to
maturity (or first expected call date) of such obligations based on their market
values (or, in the case of receivables-backed securities such as GNMA
Certificates, based on cost). Dividends on equity securities are accrued daily
at their estimated stated dividend rates.
27
<PAGE>
The Fund's tax-equivalent yield during the base period may be presented in
one or more stated tax brackets. Tax-equivalent yield is calculated by adjusting
the Fund's tax-exempt yield by a factor designed to show the approximate yield
that a taxable investment would have to earn to produce an after-tax yield equal
to the Fund's tax-exempt yield.
To calculate a taxable bond yield which is equivalent to a tax-exempt bond
yield (for Federal tax purposes), shareholders may use the following formula:
Tax Free Yield
--------------
= Taxable Equivalent Yield
1 - Your Tax Bracket
For the 30 days ended December 31, 1999, the yield and tax-equivalent yield
(assuming a Federal tax rate of 28%) for the Fund was 4.46% and 6.19%,
respectively. The maximum Federal tax rate for this period was 39.6%. Some of
the Fund's expenses were waived or reimbursed during this period. Accordingly,
yields are higher than they would have been had such expenses not been waived or
reimbursed.
The distribution rate for the Fund is presented for a twelve-month period.
It is calculated by adding the dividends for the last twelve months and dividing
the sum by a Fund's offering price per share at the end of that period. The
distribution rate is also calculated by using a Fund's net asset value.
Distribution rate calculations do not include capital gain distributions, if
any, paid. The distribution rate for the twelve-month period ended December 31,
1999 for shares of the Fund calculated using the offering price was 4.56%. The
distribution rate for the same period for shares of the Fund calculated using
the net asset value was 4.79%. During this period certain expenses of the Fund
were waived or reimbursed. Accordingly, the distribution rates are higher than
they would have been had such expenses not been waived or reimbursed.
The 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 C.
From time to time, in reports and promotional literature, the Fund 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
28
<PAGE>
star (lowest) to five stars (highest). Morningstar ratings are calculated
from the Fund's three-, five-, and ten-year average annual returns (when
available) and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are adjusted for
fees and sales loads. Ten percent of the funds in an investment category
receive five stars, 22.5% receive four stars, 35% receive three stars, 22.5%
receive two stars, and the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad Investment-Grade Bond Index and the components of the Index.
Telerate Systems, Inc., a computer system to which the Adviser subscribes
which daily tracks the rates on money market instruments, public corporate
debt obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
THE WALL STREET JOURNAL, a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in addition to
indices prepared by the research departments of such financial organizations
as Lehman Bros., Merrill Lynch, Pierce, Fenner and Smith, Inc., First
Boston, Salomon Brothers, Morgan Stanley, Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette, Value Line, Datastream International, James Capel, S.G.
Warburg Securities, County Natwest and UBS UK Limited, including information
provided by the Federal Reserve Board, Moody's, and the Federal Reserve
Bank.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices," a
monthly corporate government index publication which lists principal, coupon
and total return on over 100 different taxable bond indices which Merrill
Lynch tracks. They also list the par weighted characteristics of each Index.
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.
29
<PAGE>
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
Morgan Stanley All Country World Free Index is designed to measure the
performance of stock markets in the United States, Europe, Canada,
Australia, New Zealand and the developed and emerging markets of Eastern
Europe, Latin America, Asia and the Far East. The index consists of
approximately 60% of the aggregate market value of the covered stock
exchanges and is calculated to exclude companies and share classes which
cannot be freely purchased by foreigners.
Morgan Stanley World Index is designed to measure the performance of stock
markets in the United States, Europe, Canada, Australia, New Zealand and the
Far East. The index consists of approximately 60% of the aggregate market
value of the covered stock exchanges.
Reuters, a wire service that frequently reports on global business.
Russell 2000 Index, prepared by the Frank Russell Company, consists of U.S.
publicly traded stocks of domestic companies that rank from 1000 to 3000 by
market capitalization.
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.
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 Mid-Cap Index is an unmanaged capitalization-weighted
index that is generally representative of the U.S. market for medium cap
stocks.
Standard & Poor's Small-Cap 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 41 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. The Trust is a Massachusetts business trust organized on
October 28, 1986. The Trust is authorized to issue an unlimited number of shares
of beneficial interest, no par value, in such separate and distinct series and
classes of shares as the Board shall from time to time establish. The shares of
beneficial interest of the Trust are presently divided into one series, having
two classes, designated Class A and Class B shares. The Trust does not hold
annual shareholder meetings. If requested to do so by the holders of at least
10% of the Trust's outstanding shares, the Trust's Board will call a special
meeting of shareholders for any purpose, including the removal of Trustees. Each
30
<PAGE>
share of the Fund has equal voting rights. Each share of the Fund is entitled to
participate equally in dividends and other distributions and the proceeds of any
liquidation.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of the Fund.
AUDITS AND REPORTS. The accounts of the Fund are audited twice a year by
Tait, Weller & Baker, independent certified public accountants, 8 Penn Center
Plaza, Philadelphia, PA, 19103. Shareholders of the Fund receive semi-annual and
annual reports, including audited financial statements, and a list of securities
owned.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036 serves as counsel to the Fund.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of FIMCO and FIC, acts as transfer agent
for the Fund and as redemption agent for regular redemptions. The fees charged
to the Fund by the Transfer Agent are $5.00 to open an account; $3.00 for each
certificate issued; $.75 per account per month; $10.00 for each legal transfer
of shares; $.45 per account per dividend declared; $5.00 for each exchange of
shares into a Fund; $5.00 for each partial withdrawal or complete liquidation;
$4.00 for each shareholder services call; $20.00 for each item of
correspondence; and $1.00 per account per report required by any governmental
authority. Additional fees charged to the Funds by the Transfer Agent are
assumed by the Underwriter. The Transfer Agent reserves the right to change the
fees on prior notice to the Fund. Upon request from shareholders, the Transfer
Agent will provide an account history. For account histories covering the most
recent three year period, there is no charge. The Transfer Agent charges a $5.00
administrative fee for each account history covering the period 1983 through
1994 and $10.00 per year for each account history covering the period 1974
through 1982. Account histories prior to 1974 will not be provided. If any
communication from the Transfer Agent to a shareholder is returned from the U.S.
Postal Service marked as "Undeliverable" two consecutive times, the Transfer
Agent will cease sending any further materials to the shareholder until the
Transfer Agent is provided with a correct address. Efforts to locate a
shareholder will be conducted in accordance with SEC rules and regulations prior
to escheatment of funds to the appropriate state treasury. The Transfer Agent
may deduct the costs of its efforts to locate a shareholder from the
shareholder's account. These costs may include a percentage of the account if a
search company charges such a fee in exchange for its location services. The
Transfer Agent is not responsible for any fees that states and/or their
representatives may charge for processing the return of funds to investors whose
funds have been escheated. The Transfer Agent's telephone number is
1-800-423-4026.
5% SHAREHOLDERS. As of _________, 2000, the following owned of record or
beneficially 5% or more of the outstanding shares of the Fund:
[UPDATE]
% of Shares Shareholder
----------- -----------
%
SHAREHOLDER LIABILITY. The Trust 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 the Trust. The Declaration of Trust however, contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by the Trust or the Trustees. The
Declaration of Trust provides for indemnification out of the property of the
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<PAGE>
Trust of any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. Thus, the risk
of a shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust 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. The
Trust may have an obligation to indemnify Trustees and officers with respect to
litigation.
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to Section
17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust, the Adviser, and the
Underwriter have adopted Codes of Ethics ("Codes"). These Codes permit portfolio
managers and other access persons of the Fund to invest in securities, including
securities that may be owned by the Fund, subject to certain restrictions.
32
<PAGE>
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
Standard & Poor's Ratings 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.
33
<PAGE>
APPENDIX B
DESCRIPTION OF MUNICIPAL NOTE RATINGS
STANDARD & POOR'S RATINGS GROUP
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.
34
<PAGE>
APPENDIX C
[TO BE INSERTED]
35
<PAGE>
FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
The financial statements which follow contain financial information for the
Insured Tax Exempt Fund II for the annual period ended December 31, 1999 and the
semi-annual period ended June 30, 2000.
Registrant incorporates by reference the financial statements and report of
independent auditors contained in the Annual Report to shareholders for the
annual period ended December 31, 1999 and the Semi-Annual Report to shareholders
for the semi-annual period ended June 30, 2000 electronically filed with the
Securities and Exchange Commission on March 2, 2000 and August 31, 2000,
respectively.
(Accession Number for the Annual Report:0000912057-00-009400 and Accession
Number for the Semi-Annual Report:0000928816-00-000367)
36
<PAGE>
SHAREHOLDER MANUAL:
A GUIDE TO YOUR FIRST INVESTORS MUTUAL FUND ACCOUNT
[TO BE INSERTED]
37
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Amended and Restated Declaration of Trust1
(b) By-laws1
(c) Shareholders' rights are contained in (a) Articles III, VIII, X, XI
and XII of Registrant's Amended and Restated Declaration of Trust
dated October 28, 1986, as amended September 22, 1994, previously
filed as Exhibit 99.B1 to Registrant's Registration Statement and
(b) Articles III and V of Registrant's By-laws, previously filed as
Exhibit 99.B2 to Registrant's Registration Statement.
(d) Investment Advisory Agreement between Registrant and Executive
Investors Management Company, Inc.1
(e) Underwriting Agreement between Registrant and Executive Investors
Corporation1
(f) Bonus, profit sharing or pension plans - none
(g) Supplement to Custodian Agreement between Registrant and The
Bank of New York1
(h)(i) Administration Agreement between Registrant, Executive Investors
Corporation and Administrative Data Management Corp.1
(ii) Schedule A to Administration Agreement2
(i) Opinion and Consent of Counsel - To be Filed
(j)(i) Consent of Independent Accountants - Filed herewith
(ii) Powers of Attorney1
(iii) Power of Attorney for Robert M. Grohol - Filed herewith
(k) Financial statements omitted from prospectus -none
(l) Initial capital agreements - none
(m) Amended and Restated Class A Distribution Plan1
(n) 18f-3 Plan - To be Filed
(o) Reserved
(p) Codes of Ethics3
-------------
1 Incorporated by reference from Post-Effective Amendment No. 17 to
Registrant's Registration Statement (File No. 33-10648) filed on April 24,
1996.
<PAGE>
2 Incorporated by reference from Post-Effective Amendment No. 18 to
Registrant's Registration Statement (File No. 33-10648) filed on May 15,
1997.
3 Incorporated by reference from Post-Effective Amendment No. 23 to
Registrant's Registration Statement (File No. 33-10648) filed on April 28,
2000.
Item 24. Persons Controlled by or Under Common Control with Registrant
--------------------------------------------------------------
There are no persons controlled by or under common control with the
Registrant.
Item 25. Indemnification
---------------
Indemnification provisions are contained in:
1. Article XI, Sections 1 and 2 of Registrant's Declaration of Trust;
2. Paragraph 7 of the Investment Advisory Agreement by and between
Executive Investors Management Company, Inc. and Registrant; and
3. Paragraph 7 of the Underwriting Agreement by and between Executive
Investors Corporation and Registrant.
The general effect of these indemnification provisions will be to
indemnify the officers and Trustees of the Registrant from costs and expenses
arising from any action, suit or proceeding to which they may be made a party by
reason of their being or having been a trustee or officer of the Registrant,
except where such action is determined to have arisen out of the willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the trustee's or officer's office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers or persons controlling the
Registrant pursuant to the foregoing, the Registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
See Item 30 herein.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
Executive Investors Management Company, Inc. offers investment
management services and is a registered investment adviser. Affiliations of the
officers and directors of the Investment Adviser are set forth in Part B,
Statement of Additional Information, under "Directors or Trustees and Officers."
Item 27. Principal Underwriters
----------------------
(a) Executive Investors Corporation, Underwriter of the Registrant, is
only underwriter for the Trust.
(b) The following persons are the officers and directors of the
Underwriter:
Position and Position and
Name and Principal Office with Executive Office with
Business Address Investors Corporation Registrant
------------------ --------------------- ------------
Glenn O. Head Chairman President
95 Wall Street and Director and Trustee
New York, NY 10005
<PAGE>
Marvin M. Hecker President None
95 Wall Street
New York, NY 10005
John T. Sullivan Director Chairman of the
95 Wall Street Board of Trustees
New York, NY 10005
Joseph I. Benedek Treasurer Treasurer
581 Main Street
Woodbridge, NJ 07095
Lawrence A. Fauci Senior Vice President None
95 Wall Street and Director
New York, NY 10005
Kathryn S. Head Vice President Trustee
581 Main Street and Director
Woodbridge, NJ 07095
Louis Rinaldi Senior Vice None
581 Main Street President
Woodbridge, NJ 07095
Frederick Miller Senior Vice President None
581 Main Street
Woodbridge, NJ 07095
Larry R. Lavoie Secretary and Trustee
95 Wall Street General Counsel
New York, NY 10005
Matthew Smith Vice President None
581 Main Street
Woodbridge, NJ 07095
Jeremiah J. Lyons Director None
56 Weston Avenue
Chatham, NJ 07928
Anne Condon Vice President None
581 Main Street
Woodbridge, NJ 07095
Jane W. Kruzan Director None
232 Adair Street
Decatur, GA 30030
<PAGE>
Elizabeth Reilly Vice President None
581 Main Street
Woodbridge, NJ 07095
Robert Flanagan Vice President- None
95 Wall Street Sales Administration
New York, NY 10005
William M. Lipkus Chief Financial Officer None
581 Main Street
Woodbridge, NJ 07095
(c) Not applicable
Item 28. Location of Accounts and Records
--------------------------------
Physical possession of the books, accounts and records of the
Registrant are held by First Investors Management Company, Inc. and its
affiliated companies, First Investors Corporation and Administrative Data
Management Corp., at their corporate headquarters, 95 Wall Street, New York, NY
10005 and administrative offices, 581 Main Street, Woodbridge, NJ 07095, except
for those maintained by the Registrant's Custodian, The Bank of New York, 48
Wall Street, New York, NY 10286.
Item 29. Management Services
-------------------
Not Applicable.
Item 30. Undertakings
------------
The Registrant undertakes to carry out all indemnification provisions
of its Declaration of Trust, Advisory Agreement and Underwriting Agreement in
accordance with Investment Company Act Release No. 11330 (September 4, 1980) and
successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the provisions under Item 27 herein, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes to furnish a copy of its latest
annual report to shareholders, upon request and without charge, to each person
to whom a prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant represents
that this Post-Effective Amendment No. 24 meets all the requirements for
effectiveness pursuant to Rule 485(a) under the Securities Act of 1933, and has
duly caused this Post-Effective Amendment No. 24 to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 19th day of October, 2000.
EXECUTIVE INVESTORS TRUST
By: /s/ Glenn O. Head
-----------------
Glenn O. Head
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 24 to this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
/s/ Glenn O. Head Principal Executive October 19, 2000
------------------------ Officer and Trustee
Glenn O. Head
/s/ Joseph I. Benedek Principal Financial October 19, 2000
------------------------ and Accounting Officer
Joseph I. Benedek
Kathryn S. Head* Trustee October 19, 2000
------------------------
Kathryn S. Head
/s/ Larry R. Lavoie Trustee October 19, 2000
------------------------
Larry R. Lavoie
Herbert Rubinstein* Trustee October 19, 2000
------------------------
Herbert Rubinstein
Robert Grohol* Trustee October 19, 2000
------------------------
Robert Grohol
James M. Srygley* Trustee October 19, 2000
------------------------
James M. Srygley
John T. Sullivan* Trustee October 19, 2000
------------------------
John T. Sullivan
<PAGE>
Rex R. Reed* Trustee October 19, 2000
------------------------
Rex R. Reed
Robert F. Wentworth* Trustee October 19, 2000
------------------------
Robert F. Wentworth
*By: /s/ Larry R. Lavoie
-------------------
Larry R. Lavoie
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
23(a) Amended and Restated Declaration of Trust1
23(b) By-laws1
23(c) Shareholders' rights are contained in (a) Articles III,
VIII, X, XI and XII of Registrant's Amended and Restated
Declaration of Trust dated October 28, 1986, as amended
September 22, 1994, previously filed as Exhibit 99.B1 to
Registrant's Registration Statement and (b) Articles III
and V of Registrant's By-laws, previously filed as
Exhibit 99.B2 to Registrant's Registration Statement.
23(d) Investment Advisory Agreement between Registrant and
Executive Investors Management Company, Inc.1
23(e) Underwriting Agreement between Registrant and Executive
Investors Corporation1
23(f) Bonus or Profit Sharing Contracts--None
23(g)(i) Custodian Agreement between Registrant and Irving Trust
Company1
23(g)(ii) Supplement to Custodian Agreement between Registrant and
The Bank of New York1
23(h)(i) Administration Agreement between Registrant, Executive
Investors Corporation and Administrative Data Management
Corp.1
23(h)(ii) Schedule A to Administration Agreement2
23(i) Opinion and Consent of Counsel - To be Filed
23(j)(i) Consent of independent accountants - Filed herewith
23(j)(ii) Powers of Attorney1
23(j)(iii) Power of Attorney for Robert M. Grohol
23(k) Omitted Financial Statements -- None
23(l) Initial Capital Agreements -- None
<PAGE>
23(m) Amended and Restated Class A Distribution Plan1
23(n) Rule 18f-3 Plan - To be Filed
23(o) Reserved
23(p) Codes of Ethics3
--------------
1 Incorporated by reference from Post-Effective Amendment No. 17 to
Registrant's Registration Statement (File No. 33-10648) filed on April 24,
1996.
2 Incorporated by reference from Post-Effective Amendment No. 18 to
Registrant's Registration Statement (File No. 33-10648) filed on May 15,
1997.
3 Incorporated by reference from Post-Effective Amendment No. 23 to
Registrant's Registration Statement (File No. 33-10648) filed on April 28,
2000.
