As filed with the Securities and Exchange Commission on April 16, 1997
Registration No. 33-25623
811-5690
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 21 X
-
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 21 X
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FIRST INVESTORS SERIES FUND
(Exact name of Registrant as specified in charter)
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)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
It is proposed that this filing will become effective on April 30, 1997 pursuant
to paragraph (b) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
previously elected to register an indefinite number of shares of beneficial
interest, no par value $.01 per share, under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for its fiscal year ending December 31,
1996 on February 27, 1997.
<PAGE>
FIRST INVESTORS SERIES FUND
Blue Chip Fund
Investment Grade Fund
Special Situations Fund
Total Return Fund
CROSS-REFERENCE SHEET
N-1A Item No. Location
- ------------- --------
PART A: PROSPECTUS
1. Cover Page................................... Cover Page
2. Synopsis..................................... Fee Table
3. Condensed Financial Information.............. Financial Highlights
4. General Description of Registrant............ Investment Objectives
and Policies;
General Information
5. Management of the Fund....................... Management
5A. Management's Discussion of
Fund Performance............................ Performance Information
6. Capital Stock and Other Securities........... Description of Shares;
Dividends and Other
Distributions; Taxes;
Determination of Net
Asset Value
7. Purchase of Securities Being Offered......... Alternative Purchase Plan;
How to Buy Shares
8. Redemption or Repurchase..................... How to Exchange Shares;
How to Redeem Shares;
Telephone Transactions
9. Pending Legal Proceedings.................... Not Applicable
PART B: STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page................................... Cover Page
11. Table of Contents............................ Table of Contents
12. General Information and History.............. General Information
13. Investment Objectives and Policies........... Investment Policies;
Investment Restrictions
14. Management of the Fund....................... Trustees and Officers
15. Control Persons and Principal
Holders of Securities.......................
16. Investment Advisory and Other Services....... Management
17. Brokerage Allocation......................... Allocation of Portfolio
Brokerage
18. Capital Stock and Other Securities........... Determination of Net Asset
Value
19. Purchase, Redemption and Pricing
of Securities Being Offered................. Reduced Sales Charges,
Additional Exchange and
Redemption Information and
Other Services;
Determination of Net
Asset Value
<PAGE>
20. Tax Status................................... Taxes
21. Underwriters................................. Underwriter
22. Performance Data............................. Performance Information
23. Financial Statements......................... Financial Statements;
Report of Independent
Accountants
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item so numbered, in Part C hereof.
<PAGE>
FIRST INVESTORS SERIES FUND
BLUE CHIP FUND SPECIAL SITUATIONS FUND
INVESTMENT GRADE FUND TOTAL RETURN FUND
95 Wall Street, New York, New York 10005/1-800-423-4026
This is a Prospectus for FIRST INVESTORS BLUE CHIP FUND, FIRST
INVESTORS INVESTMENT GRADE FUND, FIRST INVESTORS SPECIAL SITUATIONS FUND and
FIRST INVESTORS TOTAL RETURN FUND, each of which is a separate series of First
Investors Series Fund ("Series Fund"). Series Fund is an open-end diversified
management investment company which presently offers five separate investment
series. This Prospectus relates to the four series of Series Fund listed above
(singularly, "Fund," and collectively, "Funds"). Each Fund sells two classes of
shares. Investors may select Class A or Class B shares, each with a public
offering price that reflects different sales charges and expense levels. See
"Alternative Purchase Plans."
BLUE CHIP FUND seeks to provide investors with high total investment
return consistent with the preservation of capital. This Fund seeks to achieve
its objective by investing, under normal market conditions, primarily in equity
securities of "Blue Chip" companies that the Fund's investment adviser believes
have potential earnings growth that is greater than the average company included
in the Standard & Poor's 500 Composite Stock Price Index.
INVESTMENT GRADE FUND seeks to generate a maximum level of income
consistent with investment in investment grade debt securities. This Fund seeks
to achieve its objective by investing, under normal market conditions, at least
65% of its total assets in investment grade debt securities, which are
securities rated in one of the four highest rating categories by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group or, if unrated, are
deemed to be of comparable quality by the Fund's investment adviser.
SPECIAL SITUATIONS FUND seeks long-term growth of capital. This Fund
seeks to achieve its objective by investing, under normal market conditions, at
least 65% of its total assets in the common stock of companies with small to
medium market capitalization that the Fund's investment adviser considers to be
undervalued or less well known in the current marketplace and to have potential
for capital growth.
TOTAL RETURN FUND seeks to provide investors with high long-term total
investment return consistent with moderate investment risk. This Fund seeks to
achieve its objective by investing, under normal market conditions, primarily in
stocks, bonds and money market instruments.
There can be no assurance that any Fund will achieve its investment
objective.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should know before investing and should be retained
for future reference. First Investors Management Company, Inc. ("FIMCO" or
"Adviser") serves as investment adviser to the Funds and First Investors
Corporation ("FIC" or "Underwriter") serves as distributor of the Funds' shares.
A Statement of Additional Information ("SAI"), dated April 30, 1997 (which is
incorporated by reference herein), has been filed with the Securities and
Exchange Commission. The SAI is available at no charge upon request to Series
Fund at the address or telephone number indicated above.
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured or protected by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other government agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 30, 1997
<PAGE>
FEE TABLE
The following table is intended to assist investors in understanding the
expenses associated with investing in each class of shares of a Fund. Shares of
a Fund issued prior to January 12, 1995 have been designated as Class A shares.
SHAREHOLDER TRANSACTION EXPENSES
Class A Class B
Shares Shares
------- -------
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................... 6.25% None
Deferred Sales Load
(as a percentage of the lower of original purchase
price or redemption proceeds).......................... None* 4% in the
first year;
declining
to 0% after
the sixth
year
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
TOTAL FUND
MANAGEMENT 12B-1 OTHER OPERATING
FEES(1)+ FEES EXPENSES(2) EXPENSES(3)+
---------- ----- ----------- ------------
BLUE CHIP FUND
Class A Shares.......... 0.75% 0.30% 0.39% 1.44%
Class B Shares.......... 0.75 1.00 0.39 2.14
INVESTMENT GRADE FUND
Class A Shares.......... 0.65 0.30 0.15+ 1.10
Class B Shares.......... 0.65 1.00 0.15+ 1.80
SPECIAL SITUATIONS FUND
Class A Shares.......... 0.75 0.30 0.54 1.59
Class B Shares.......... 0.75 1.00 0.54 2.29
TOTAL RETURN FUND
Class A Shares.......... 0.75 0.30 0.48 1.53
Class B Shares.......... 0.75 1.00 0.48 2.23
- -----------------
* A contingent deferred sales charge of 1.00% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge.
See "How to Buy Shares."
+ Net of waiver and/or reimbursement.
(1) For the fiscal year ended December 31, 1996, the Adviser waived Management
Fees in excess of 0.75% for each Fund, except that it waived Management
Fees in excess of 0.65% for INVESTMENT GRADE FUND. Absent the waiver, such
fees would have been 1.00% for each Fund, other than INVESTMENT GRADE FUND,
which would have been 0.75%. The Adviser expects to continue to waive such
fees for a minimum period ending December 31, 1997.
(2) For the fiscal year ended December 31, 1996, the Adviser reimbursed
INVESTMENT GRADE FUND for certain Other Expenses. Absent such
reimbursement, Other Expenses would have been 0.37% for each class of
shares. The Adviser will reimburse each class of that Fund for Other
Expenses in excess of 0.15% for a minimum period ending December 31, 1997.
(3) If certain fees and expenses had not been waived or reimbursed, Total Fund
Operating Expenses would have been as follows: BLUE CHIP FUND - 1.69% for
Class A and 2.39% for Class B; INVESTMENT GRADE FUND - 1.42% for Class A
and 2.12% for Class B; SPECIAL SITUATIONS FUND - 1.84% for Class A and
2.54% for Class B; TOTAL RETURN FUND - 1.78% for Class A and 2.48% for
Class B. Each Fund has an expense offset arrangement that may reduce the
Fund's custodian fee based on the amount of cash maintained by the Fund
with its custodian. Any such fee reductions are not reflected under Total
Fund Operating Expenses.
2
<PAGE>
For a more complete description of the various costs and expenses, see
"Alternative Purchase Plans," "How to Buy Shares," "How to Redeem Shares,"
"Management" and "Distribution Plans." Due to the imposition of Rule 12b-1 fees,
it is possible that long-term shareholders of a Fund may pay more in total sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by the rules of the National Association of Securities Dealers, Inc.
The Example below is based on Class A and Class B expense data for each
Fund's fiscal year ended December 31, 1996, except that certain Operating
Expenses have been restated, as noted above.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
BLUE CHIP FUND
Class A.................. $76 $105 $136 $224
Class B.................. 62 97 135 229*
INVESTMENT GRADE FUND
Class A.................. 73 95 119 188
Class B.................. 58 87 117 193*
SPECIAL SITUATIONS FUND
Class A.................. 78 110 144 240
Class B.................. 63 102 143 245*
TOTAL RETURN FUND
Class A.................. 77 108 141 233
Class B.................. 63 100 139 239*
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) no redemption at the end of each time period:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
BLUE CHIP FUND
Class A................... $76 $105 $136 $224
Class B................... 22 67 115 229*
INVESTMENT GRADE FUND
Class A................... 73 95 119 188
Class B................... 18 57 97 193*
SPECIAL SITUATIONS FUND
Class A................... 78 110 144 240
Class B................... 23 72 123 245*
TOTAL RETURN FUND
Class A................... 77 108 141 233
Class B................... 23 70 119 239*
* Assumes conversion to Class A shares eight years after purchase.
THE EXPENSES IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION BY
THE FUNDS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES IN FUTURE YEARS MAY BE
GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth the per share operating performance data for a
share outstanding, total return, ratios to average net assets and other
supplemental data for each period indicated. The table has been derived from
financial statements which have been examined by Tait, Weller & Baker,
independent certified public accountants, whose report thereon appears in the
SAI. This information should be read in conjunction with the Financial
Statements and Notes thereto, which also appear in the SAI, available at no
charge upon request to Series Fund.
<TABLE>
<CAPTION>
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PER SHARE DATA
-------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
--------------------------------- ------------------
NET REALIZED
NET ASSET AND
--------- UNREALIZED
VALUE NET GAIN (LOSS) TOTAL FROM NET NET
BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BLUE CHIP FUND
CLASS A
1/3/89* to 12/31/89 $ 11.13 $ .50 $ 1.18 $ 1.68 $ .40 $ -- $ .40
1990 . . . . . . . . 12.41 .32 (.74) (.42) .35 -- .35
1991 . . . . . . . . 11.64 .21 2.96 3.17 .22 -- .22
1992 . . . . . . . . 14.59 .13 .82 .95 .13 .12 .25
1993 . . . . . . . . 15.29 .10 1.08 1.18 .10 .79 .89
1994 . . . . . . . . 15.58 .11 (.58) (.47) .09 1.56 1.65
1995 . . . . . . . 13.46 .19 4.37 4.56 .20 .60 .80
1996 . . . . . . . . 17.22 .14 3.39 3.53 .17 1.11 1.28
CLASS B
1/12/95* to 12/31/95 13.51 .10 4.31 4.41 .16 .60 .76
1996 . . . . . . . . 17.16 .06 3.32 3.38 .06 1.11 1.17
INVESTMENT GRADE FUND
CLASS A
2/19/91* to 12/31/91 9.31 .57 .67 1.24 .57 .05 .62
1992 . . . . . . . . 9.93 .71 .04 .75 .72 .06 .78
1993 . . . . . . . . 9.90 .65 .50 1.15 .65 .07 .72
1994 . . . . . . . . 10.33 .62 (1.09) (.47) .62 -- .62
1995 . . . . . . . . 9.24 .64 1.10 1.74 .64 -- .64
1996 . . . . . . . 10.34 .62 (.39) .23 .62 .02 .64
CLASS B
1/12/95* to 12/31/95 9.26 .54 1.10 1.64 .55 -- .55
1996 . . . . . . . . 10.35 .55 (.39) .16 .55 .02 .57
</TABLE>
* Commencement of operations of Class A shares or date Class B shares first
offered
** Calculated without sales charges
+ Annualized
++ Net of expenses waived or assumed
+++ Average commission rate (per share of security) as required by amended
disclosure requirements effective for fiscal years beginning on or after
September 1, 1995.
4
<PAGE>
<TABLE>
<CAPTION>
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RATIOS / SUPPLEMENTAL DATA
------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS BEFORE
RATIO TO AVERAGE EXPENSES WAIVED OR
NET ASSETS + ASSUMED
---------------- ------------------
NET ASSET NET ASSETS
VALUE END OF NET NET
--------- TOTAL PERIOD INVESTMENT INVESTMENT PORTFOLIO AVERAGE
END RETURN ** (IN EXPENSES INCOME EXPENSES INCOME TURNOVER COMMISSION
OF PERIOD (%) THOUSANDS) (%) (%) (%) (%) RATE (%) RATE++
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$12.41 15.40 $ 27,212 .02 3.72 1.48 2.26 49 $ N/A
11.64 (3.50) 55,816 .77 2.57 1.88 1.46 49 N/A
14.59 27.52 79,932 1.28 1.63 1.78 1.14 31 N/A
15.29 6.56 99,501 1.46 .95 1.73 .67 44 N/A
15.58 7.77 117,929 1.48 .66 1.73 .41 39 N/A
13.46 (3.02) 123,694 1.54 .80 1.79 .55 82 N/A
17.22 34.01 170,271 1.49 1.23 1.74 .98 25 N/A
19.47 20.55 239,851 1.44 .78 1.67 .55 45 .0689
17.16 32.76 5,481 2.20+ .52+ 2.46+ .26+ 25 N/A
19.37 19.71 17,012 2.22 -- 2.37 (.16) 45 .0689
9.93 15.70+ 18,153 -- 7.79+ 1.48+ 6.31+ 51 N/A
9.90 7.83 37,922 .57 7.20 1.41 6.36 44 N/A
10.33 11.82 48,507 .86 6.27 1.40 5.73 38 N/A
9.24 (4.62) 46,179 .95 6.46 1.47 5.94 17 N/A
10.34 19.40 49,997 1.10 6.43 1.43 6.10 27 N/A
9.93 2.39 46,396 1.11 5.96 1.42 5.65 22 N/A
10.35 18.08 1,167 1.80+ 5.73+ 2.13+ 5.40+ 27 N/A
9.94 1.64 2,333 1.81 5.26 2.12 4.95 22 N/A
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
-------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
--------------------------------- ------------------
NET REALIZED
NET ASSET AND
--------- UNREALIZED
VALUE NET GAIN (LOSS) TOTAL FROM NET NET
BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SPECIAL SITUATIONS FUND
CLASS A
9/18/90* to 12/31/90 . . . . $ 9.31 $ .09 $ .27 $ .36 $ .09 $ -- $ .09
1991 . . . . . . . . . . . . 9.58 .10 4.74 4.84 .10 .33 .43
1992 . . . . . . . . . . . . 13.99 -- 2.41 2.41 -- .78 .78
1993 . . . . . . . . . . . . 15.62 (.08) 3.29 3.21 -- .83 .83
1994 . . . . . . . . . . . . 18.00 (.04) (.62) (.66) -- .91 .91
1995 . . . . . . . . . . . . 16.43 (.01) 3.94 3.93 -- .73 .73
1996 . . . . . . . . . . . 19.63 (.01) 2.28 2.27 -- 1.17 1.17
CLASS B
1/12/95* to 12/31/95 . . . . 16.40 (.01) 3.85 3.84 -- .73 .73
1996 . . . . . . . . . . . . 19.51 (.14) 2.25 2.11 -- 1.17 1.17
TOTAL RETURN FUND
CLASS A
4/24/90* to 12/31/90 . . . . 11.17 .32 (.12) .20 .32 -- .32
1991 . . . . . . . . . . . . 11.05 .37 1.97 2.34 .34 .12 .46
1992 . . . . . . . . . . . . 12.93 .27 (.41) (.14) .30 -- .30
1993 . . . . . . . . . . . . 12.49 .26 .63 .89 .26 1.24 1.50
1994 . . . . . . . . . . . . 11.88 .21 (.62) (.41) .19 .39 .58
1995 . . . . . . . . . . . 10.89 .39 2.50 2.89 .37 .44 .81
1996 . . . . . . . . . . . 12.97 .39 .97 1.36 .41 1.12 1.53
CLASS B
1/12/95* to 12/31/95 . . . . 10.90 .25 2.54 2.79 .33 .44 .77
1996 . . . . . . . . . . . . 12.92 .32 .94 1.26 .34 1.12 1.46
</TABLE>
* Commencement of operations of Class A shares or date Class B shares first
offered
** Calculated without sales charges
+ Annualized
++ Net of expenses waived or assumed
+++ Average commission rate (per share of security) as required by amended
disclosure requirements effective for fiscal years beginning on or after
September 1, 1995.
6
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS BEFORE
RATIO TO AVERAGE EXPENSES WAIVED OR
NET ASSETS + ASSUMED
---------------- ------------------
NET ASSET NET ASSETS
VALUE END OF NET NET
--------- TOTAL PERIOD INVESTMENT INVESTMENT PORTFOLIO AVERAGE
END RETURN ** (IN EXPENSES INCOME EXPENSES INCOME TURNOVER COMMISSION
OF PERIOD (%) THOUSANDS) (%) (%) (%) (%) RATE (%) RATE++
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.58 13.58+ $ 1,321 -- 3.93+ 2.74+ 1.19+ 0 $ N/A
13.99 50.47 9,183 -- 1.44 2.31 (.87) 86 N/A
15.62 17.26 25,814 1.06 (.05) 1.92 (.91) 88 N/A
18.00 20.52 59,148 1.55 (.63) 1.89 (.96) 71 N/A
16.43 (3.66) 89,906 1.65 (.26) 1.90 (.51) 53 N/A
19.63 23.92 125,331 1.60 (.08) 1.85 (.33) 80 N/A
20.73 11.56 158,326 1.59 (.13) 1.84 (.38) 99 .0689
19.51 23.42 4,566 2.33+ (.81)+ 2.59+ (1.07)+ 80 N/A
20.45 10.81 10,242 2.38 (.92) 2.55 (1.09) 99 .0689
11.05 2.67+ 41,499 -- 5.85+ 2.11+ 3.74+ 13 N/A
12.93 21.51 60,888 .83 3.20 1.88 2.14 51 N/A
12.49 (1.00) 65,537 1.29 2.25 1.78 1.76 75 N/A
11.88 7.18 58,176 1.45 2.00 1.83 1.62 131 N/A
10.89 (3.45) 50,714 1.63 1.91 1.88 1.66 124 N/A
12.97 26.71 55,442 1.58 3.08 1.83 2.83 135 N/A
12.80 10.62 56,530 1.53 2.93 1.78 2.68 146 .0691
12.92 25.74 270 2.41+ 2.24+ 2.67+ 1.98+ 135 N/A
12.72 9.86 1,032 2.32 2.14 2.49 1.97 146 .0691
</TABLE>
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
BLUE CHIP FUND
BLUE CHIP FUND seeks to provide investors with high total investment
return consistent with the preservation of capital. The Fund seeks to achieve
its objective by investing, under normal market conditions, at least 65% of its
total assets in equity securities of "Blue Chip" companies, including common and
preferred stocks and securities convertible into common stock, that the Adviser
believes have potential earnings growth that is greater than the average company
included in the Standard & Poor's 500 Composite Stock Price Index ("S&P 500").
The Fund also may invest up to 35% of its total assets in the equity securities
of non-Blue Chip companies that the Adviser believes have significant potential
for growth of capital or future income consistent with the preservation of
capital. When market conditions warrant, or when the Adviser believes it is
necessary to achieve the Fund's objective, the Fund may invest up to 25% of its
total assets in fixed income securities.
The Fund defines Blue Chip companies as those companies that are
included in the S&P 500. S&P 500 companies tend to be the companies with larger
capitalizations and histories of payment of dividends. Blue Chip companies are
considered to be of relatively high quality and generally exhibit superior
fundamental characteristics, which may include: potential for consistent
earnings growth, a history of profitability and payment of dividends, leadership
position in their industries and markets, proprietary products or services,
experienced management, high return on equity and a strong balance sheet. Blue
Chip companies usually exhibit less investment risk and share price volatility
than smaller, less established companies. Examples of Blue Chip companies are
Microsoft Corp., General Electric Co., Pepsico Inc. and Bristol-Myers Squibb Co.
The fixed income securities in which the Fund may invest include money
market instruments (including prime commercial paper, certificates of deposit of
domestic branches of U.S. banks and bankers' acceptances), obligations issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations") (including mortgage-backed
securities) and corporate debt securities. However, no more than 5% of the
Fund's net assets may be invested in corporate debt securities rated below Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P"). The Fund may borrow money for temporary or emergency
purposes in amounts not exceeding 5% of its total assets. The Fund may also
invest up to 10% of its net assets in American Depository Receipts ("ADRs"),
enter into repurchase agreements and make loans of portfolio securities. See
"Description of Certain Securities, Other Investment Policies and Risk Factors"
and the SAI for additional information concerning these securities.
INVESTMENT GRADE FUND
INVESTMENT GRADE FUND seeks to generate a maximum level of income
consistent with investment in investment grade debt securities. The Fund seeks
to achieve its objective by investing, under normal market conditions, at least
65% of its total assets in debt securities of U.S. issuers that are rated in the
four highest rating categories by Moody's or S&P, or in unrated securities that
are deemed to be of comparable quality by the Adviser ("investment grade
securities"). The Fund may invest up to 35% of its total assets in U.S.
Government Obligations (including mortgage-backed securities), dividend-paying
8
<PAGE>
common and preferred stocks, obligations convertible into common stocks,
repurchase agreements, debt securities rated below investment grade and money
market instruments. The Fund may invest up to 5% of its net assets in corporate
or government debt securities of foreign issuers which are U.S. dollar
denominated and traded in U.S. markets. The Fund also may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets.
The Fund may purchase securities on a when-issued basis, engage in short sales
"against the box" and make loans of portfolio securities. The Fund may invest up
to 5% of its net assets in zero coupon or pay-in-kind securities. See
"Description of Certain Securities, Other Investment Policies and Risk Factors,"
below, and the SAI for additional information concerning these securities.
The published reports of rating services are considered by the Adviser in
selecting rated securities for the Fund's portfolio. The Adviser also relies,
among other things, on its own credit analysis, which includes a study of the
existing debt's capital structure, the issuer's ability to service debt (or to
pay dividends, if investing in common or preferred stock) and the current trend
of earnings for the issuer. Although up to 100% of the Fund's total assets can
be invested in debt securities rated at least Baa by Moody's or at least BBB by
S&P, or unrated debt securities deemed to be of comparable quality by the
Adviser, no more than 5% of the Fund's net assets may be invested in debt
securities rated lower than Baa by Moody's or BBB by S&P (including securities
that have been downgraded), or if unrated, deemed to be of comparable quality by
the Adviser, or in any equity securities of any issuer if a majority of the debt
securities of such issuer are rated lower than Baa by Moody's or BBB by S&P. The
Adviser continually monitors the investments in the Fund's portfolio and
carefully evaluates on a case-by-case basis whether to dispose of or retain a
debt security which has been downgraded to a rating lower than investment grade.
However, if downgrading results in the Fund holding more than 5% of its net
assets in securities rated lower than Baa by Moody's or BBB by S&P, the Adviser
will sell sufficient securities to stay within this limit. See "Debt
Securities--Risk Factors" and Appendix A for a description of corporate bond
ratings.
SPECIAL SITUATIONS FUND
SPECIAL SITUATIONS FUND seeks long-term growth of capital. The Fund seeks
to achieve its objective by investing, under normal market conditions, at least
65% of its total assets in the common stock of companies with small to medium
market capitalization that the Adviser considers to be undervalued or less well
known in the current marketplace and to have potential for capital growth. The
Fund may invest up to 35% of its total assets in other common stocks, in
preferred stock that is convertible into common stock issued by U.S.
corporations and in the common stock of companies located outside the United
States.
SPECIAL SITUATIONS FUND seeks to invest in the common stock of companies
that the Adviser believes are undervalued in the current market in relation to
fundamental economic values such as earnings, sales, cash flow and tangible book
value; that are early in their corporate development (i.e., before they become
widely recognized and well known and while their reputations and track records
are still emerging); or that offer the possibility of greater earnings because
of revitalized management, new products or structural changes in the economy.
Such companies primarily are those with small to medium market capitalization,
which the Fund considers to be market capitalization of up to $1.5 billion. The
Adviser believes that, over time, these securities are more likely to appreciate
in price than
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securities whose market prices have already reached their perceived
economic value. In addition, the Fund intends to diversify its holdings among as
many companies and industries as the Adviser deems appropriate.
Companies that are early in their corporate development may be dependent
on relatively few products or services, may lack adequate capital reserves, may
be dependent on one or two management individuals and may have less of a track
record or historical pattern of performance. In addition, there may be less
information available as to the issuers and their securities may not be well
known to the general public and may not yet have wide institutional ownership.
Thus, the investment risk is higher than that normally associated with larger,
older or better-known companies.
Investments in securities of companies with small to medium market
capitalization are generally considered to offer greater opportunity for
appreciation and to involve greater risk of depreciation than securities of
companies with larger market capitalization. These include the equity securities
of companies which represent new or changing industries and those which, in the
opinion of the Adviser, represent special situations, the potential future value
of which has not been fully recognized. Growth securities of companies with
small to medium market capitalization which represent a special situation bear
the risk that the special situation will not develop as favorably as expected,
or the situation may deteriorate. For example, a merger with favorable
implications may be blocked, an industrial development may not enjoy anticipated
market acceptance or a bankruptcy may not be as profitably resolved as had been
expected. Because the securities of most companies with small to medium market
capitalization are not as broadly traded as those of companies with larger
market capitalization, these securities are often subject to wider and more
abrupt fluctuations in market price. In the past, there have been prolonged
periods when these securities have substantially underperformed or outperformed
the securities of larger capitalization companies. In addition, smaller
capitalization companies generally have fewer assets available to cushion an
unforeseen adverse occurrence and thus such an occurrence may have a
disproportionately negative impact on these companies.
The majority of SPECIAL SITUATIONS FUND'S investments are expected to be
securities listed on the New York Stock Exchange ("NYSE") or other national
securities exchanges, or securities that have an established over-the-counter
("OTC") market, although the depth and liquidity of the OTC market may vary from
time to time and from security to security.
SPECIAL SITUATIONS FUND may invest up to 15% of its total assets in common
stocks issued by foreign companies which are traded on a recognized domestic or
foreign securities exchange. In addition to the fundamental analysis of
companies and their industries which it performs for U.S. issuers, the Adviser
evaluates the economic and political climate of the country in which the company
is located and the principal securities markets in which such securities are
traded. Although the foreign stocks in which the Fund invests are primarily
denominated in foreign currencies, the Fund also may invest in ADRs. The Adviser
does not attempt to time actively either short-term market trends or short-term
currency trends in any market. See "Foreign Securities--Risk Factors" and
"American Depository Receipts."
The Fund may invest up to 5% of its total assets in the securities of
other registered investment companies. Such investments will probably involve
additional advisory or distribution fees. The Fund may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets.
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The Fund also may enter into repurchase agreements and engage in short sales
"against the box." See "Description of Certain Securities, Other Investment
Policies and Risk Factors" and the SAI for more information regarding these
securities.
TOTAL RETURN FUND
TOTAL RETURN FUND seeks to provide investors with high long-term total
investment return consistent with moderate investment risk. The Fund employs a
flexible investment strategy which emphasizes investments in stocks, bonds and
money market instruments. The amount of Fund assets which may be invested in any
of these categories of securities is not fixed and is determined by the
Adviser's Investment Committee. The Fund may invest in domestic and foreign
common stocks and other equity securities, such as preferred stocks, securities
convertible into common stocks and warrants to purchase common stock. The Fund
also may invest in fixed-income securities, including money market instruments
(consisting of prime commercial paper, certificates of deposit of domestic
branches of U.S. banks and bankers' acceptances), U.S. Government Obligations
(including mortgage-backed securities), municipal bonds rated Baa or better by
Moody's or BBB or better by S&P and corporate and foreign debt securities. The
Fund also may borrow money for temporary or emergency purposes in amounts not
exceeding 5% of its total assets, enter into repurchase agreements, purchase
securities on a when-issued basis and make loans of portfolio securities. The
Fund may invest up to 5% of its net assets in zero coupon and pay-in-kind
securities. See "Description of Certain Securities, Other Investment Policies
and Risk Factors," below, and the SAI for additional information concerning
these securities. There is the possibility that 100% of the Fund's total assets
could be invested in corporate debt securities and municipal bonds. No more than
25% of the Fund's net assets may be invested in corporate debt securities and
municipal bonds rated below Baa by Moody's or BBB by S&P. See "Debt
Securities--Risk Factors" and Appendix A for a description of corporate and
municipal bond ratings.
The type of equity securities in which the Fund generally invests include
growth and value equity securities. Growth equity securities include securities
of seasoned companies, i.e., companies with above-average earnings growth as
compared to the average of the stocks in the S&P 500, other companies which the
Adviser believes demonstrate changing or accelerating growth profiles and
smaller companies with outstanding growth records and potential based on the
Adviser's fundamental analysis of the company. Growth equity securities tend to
have above-average price/earnings ratios and less-than-average current yields as
compared to other equity securities. Value equity securities tend to have below
average price/earnings ratios, low price to book value and potentially high
current yields.
The majority of the Fund's equity investments are expected to be
securities listed on the NYSE, other national securities exchanges or securities
that have an established OTC market, although the depth and liquidity of the OTC
market may vary from time to time and from security to security. The Fund also
may invest in newer and less seasoned companies with small to medium market
capitalizations, which the Fund considers to be market capitalization of up to
$1.5 billion. The Fund's ability to invest in unseasoned companies with
above-average earnings growth, other companies with changing or accelerating
growth profiles and smaller companies with outstanding growth records and
potential subjects the Fund to greater risk than may be involved in investing in
securities which are not selected for such growth characteristics.
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TOTAL RETURN FUND does not intend to invest more than 25% of its total
assets in foreign securities. Foreign securities include equity and debt
securities issued by foreign companies and government instrumentalities which
usually are denominated in foreign currencies. Although the foreign securities
in which the Fund invests are primarily denominated in foreign currencies, the
Fund also may invest in ADRs. In addition to the fundamental analysis of
companies and their industries which it performs for U.S. issuers, the Adviser
evaluates the economic and political climate of the country in which the company
is located and the principal securities markets in which such securities are
traded. The Fund does not purchase foreign securities which are not traded on a
recognized domestic or foreign securities exchange. The Adviser does not attempt
to time actively either short-term market trends or short-term currency trends
in any market. See "Foreign Securities--Risk Factors" and "American Depository
Receipts."
GENERAL
In any period of market weakness or of uncertain market or economic
conditions, each Fund may establish a temporary defensive position to preserve
capital by having all or part of its assets invested in short-term fixed income
securities or retained in cash or cash equivalents, including bank certificates
of deposit, bankers' acceptances, U.S. Government Obligations and commercial
paper issued by domestic corporations. See the SAI for a description of these
securities.
Each Fund's net asset value fluctuates based mainly upon changes in the
value of its portfolio securities. Each Fund's investment objective and certain
investment policies set forth in the SAI that are designated fundamental
policies may not be changed without shareholder approval. There can be no
assurance that any Fund will achieve its investment objective.
DESCRIPTION OF CERTAIN SECURITIES, OTHER INVESTMENT POLICIES AND RISK FACTORS
GENERAL MARKET RISK
In addition to the risks associated with particular types of
securities, which are discussed below, the Funds are subject to general market
risks. The Funds invest primarily in common stocks and bonds. The market risks
associated with stock include the possibility that the entire market for common
stocks could suffer a decline in price over a short or even extended period.
This could affect the net asset value of your Fund shares. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The market risks associated with bonds
include the possibility that the value of corporate, government and other bonds
held by the Funds will fluctuate with movements in interest rates and changes in
the perceived creditworthiness of the issuers of those securities. Bonds are
likely to decline in value in times of rising interest rates and to rise in
value in times of falling interest rates. In general, the longer the maturity of
a bond, the more pronounced is the effect of a change in interest rates on the
value of the security. In addition, because inflation strongly influences
interest rates, inflation can affect the net asset value of the Funds.
Accordingly, the Funds generally will be appropriate investments only with
respect to that portion of your assets that is available for longer-term
investments.
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TYPES OF SECURITIES AND THEIR RISKS
AMERICAN DEPOSITORY RECEIPTS. SPECIAL SITUATIONS FUND, BLUE CHIP FUND and
TOTAL RETURN FUND may invest in sponsored and unsponsored ADRs. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities of foreign issuers, and other forms of depository
receipts for securities of foreign issuers. Generally, ADRs, in registered form,
are denominated in U.S. dollars and are designed for use in the U.S. securities
markets. Thus, these securities are not denominated in the same currency as the
securities into which they may be converted. In addition, the issuers of the
securities underlying unsponsored ADRs are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the ADRs. ADRs are considered to be foreign
securities by each of the Funds.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or
dividends paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock because they have
fixed income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
See the SAI for more information on convertible securities.
DEBT SECURITIES--RISK FACTORS. The market value of debt securities is
influenced primarily by changes in the level of interest rates. Generally, as
interest rates rise, the market value of debt securities decreases. Conversely,
as interest rates fall, the market value of debt securities increases. Factors
which could result in a rise in interest rates, and a decrease in the market
value of debt securities, include an increase in inflation or inflation
expectations, an increase in the rate of U.S. economic growth, an expansion in
the Federal budget deficit or an increase in the price of commodities such as
oil. In addition, the market value of debt securities is influenced by
perceptions of the credit risks associated with such securities. Credit risk is
the risk that adverse changes in economic conditions can affect an issuer's
ability to pay principal and interest. Debt obligations rated lower than Baa by
Moody's or BBB by S&P, commonly referred to as "junk bonds," are speculative and
generally involve a higher risk of loss of principal and income than
higher-rated securities. See Appendix A for a description of corporate and
municipal bond ratings.
The prices of lower-rated debt obligations tend to be less sensitive to
interest rate changes than higher-rated investments, but may be more sensitive
to adverse economic changes or individual corporate developments. Thus, there
could be a higher incidence of default. This would affect the value of such
securities and thus a Fund's net asset value. Further, if the issuer of a
security owned by a Fund defaults, the Fund might incur additional expenses to
seek recovery. Generally, when interest rates rise, the value of fixed rate debt
obligations tends to decrease; when interest rates fall, the value of fixed rate
debt obligations tends to increase. Factors which could result in a rise in
interest rates, and a decrease in market value of debt securities, include an
increase in inflation or inflation expectations, an increase in the rate of U.S.
economic growth, an expansion in the Federal budget deficit, or an increase in
the
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price of commodities such as oil. In addition, the market value of debt
securities is influenced by perceptions of the credit risks associated with such
securities. If a Fund experiences unexpected net redemptions in a rising
interest rate market, it might be forced to sell certain securities, regardless
of investment merit. This could result in decreasing the assets to which Fund
expenses could be allocated and in a reduced rate of return for the Fund. While
it is impossible to protect entirely against this risk, diversification of a
Fund's portfolio and the Adviser's careful analysis of prospective portfolio
securities should minimize the impact of a decrease in value of a particular
security or group of securities in a Fund's portfolio.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of
lower-rated debt securities. Also, credit rating agencies may fail to change on
a timely basis a credit rating to reflect changes in economic or company
conditions that affect a security's market value. Although the Adviser considers
ratings of recognized rating services such as Moody's and S&P, the Adviser
primarily relies on its own credit analysis, which includes a study of existing
debt, capital structure, ability to service debt and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors the investments in a
Fund's portfolio and carefully evaluates whether to dispose of or retain
lower-rated debt securities whose credit ratings have changed.
Lower-rated debt securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of such
securities tend to be institutions, rather than individuals, which is a factor
that further limits the secondary market. To the extent that no established
retail secondary market exists, many lower-rated debt securities may not be as
liquid as higher-grade securities. A less active and thinner market for such
securities than that available for higher quality securities may result in more
volatile valuations of a Fund's holdings and more difficulty in executing trades
at fair value during unsettled market conditions. The ability of a Fund to value
or sell lower-rated debt securities will be adversely affected to the extent
that such securities are thinly traded or illiquid. See "Risks Factors of High
Yield Securities" in the SAI.
FOREIGN SECURITIES--RISK FACTORS. SPECIAL SITUATIONS FUND and TOTAL RETURN
FUND may sell a security denominated in a foreign currency and retain the
proceeds in that foreign currency to use at a future date (to purchase other
securities denominated in that currency) or the Funds may buy foreign currency
outright to purchase securities denominated in that foreign currency at a future
date. Investing in foreign securities involves more risks than investing in
securities of U.S. companies. Because the Funds do not intend to hedge their
foreign investments against the risk of foreign currency fluctuations, changes
in the value of these currencies can significantly affect each Fund's share
price. In addition, the Funds will be affected by changes in exchange control
regulations and fluctuations in the relative rates of exchange between the
currencies of different nations, as well as by economic and political
developments. Other risks involved in foreign securities include the following:
there may be less publicly available information about foreign companies
comparable to the reports and ratings that are published about companies in the
United States; foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies; some foreign stock markets
have substantially less volume than U.S. markets, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies; there may be less government supervision and regulation of foreign
stock exchanges, brokers
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and listed companies than exist in the United States; and there may be the
possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments which could affect assets of the Funds
held in foreign countries.
MONEY MARKET INSTRUMENTS. Investments in commercial paper are limited to
obligations rated Prime-1 by Moody's or A-1 by S&P. Commercial paper includes
notes, drafts, or similar instruments payable on demand or having a maturity at
the time of issuance not exceeding nine months, exclusive of days of grace or
any renewal thereof. Investments in certificates of deposit will be made only
with domestic institutions with assets in excess of $500 million. See the SAI
for more information regarding money market instruments and Appendix A to the
SAI for a description of commercial paper ratings.
MORTGAGE-BACKED SECURITIES. Mortgage loans often are assembled into pools,
the interests in which are issued and guaranteed by an agency or instrumentality
of the U.S. Government, though not necessarily by the U.S. Government itself.
Interests in such pools are referred to herein as "mortgage-backed securities."
The market value of these securities can and will fluctuate as interest rates
and market conditions change. In addition, prepayment of principal by the
mortgagees which often occurs with mortgage-backed securities when interest
rates decline, can significantly change the realized yield of these securities.
See the SAI for more information concerning mortgage-backed securities.
RISKS OF MORTGAGE-BACKED SECURITIES. Investments in mortgage-backed
securities entail both market and prepayment risk. Fixed-rate mortgage-backed
securities are priced to reflect, among other things, current and perceived
interest rate conditions. As conditions change, market values will fluctuate. In
addition, the mortgages underlying mortgage-backed securities generally may be
prepaid in whole or in part at the option of the individual buyer. Prepayments
of the underlying mortgages can affect the yield to maturity on mortgage-backed
securities and, if interest rates decline, the prepayment may only be invested
at the then prevailing lower interest rate. Changes in market conditions,
particularly during periods of rapid or unanticipated changes in market interest
rates, may result in volatility and reduced liquidity of the market value of
certain mortgage-backed securities.
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, generally 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, conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issuer. Generally, the value of municipal bonds varies
inversely to changes in interest rates. See Appendix A for a description of
municipal bond ratings.
In order for the Fund's interest income from municipal bonds to be exempt
from Federal income taxation when distributed to its shareholders, the Fund must
comply with certain requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund's investments in municipal bonds
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are not expected to meet these requirements. Accordingly, distributions of
interest income from municipal bonds in the Fund's portfolio will be taxable to
shareholders the same as distributions of interest income from other securities
held by the Fund. See "Taxes."
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. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. Each Fund's risk is limited
primarily to the ability of the seller to repurchase the securities at the
agreed-upon price upon the delivery date. See the SAI for more information
regarding repurchase agreements.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 15% of its
net assets in illiquid securities, including (1) securities that are illiquid
due to the absence of a readily available market or due to legal or contractual
restrictions on resale and (2) repurchase agreements maturing in more than seven
days. However, illiquid securities for purposes of this limitation do not
include securities eligible for resale under Rule 144A under the Securities Act
of 1933, as amended, which the Board of Trustees or the Adviser has determined
are liquid under Board-approved guidelines. See the SAI for more information
regarding restricted and illiquid securities.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed as to
principal and interest by the U.S. Government include (1) U.S. Treasury
obligations which differ only in their interest rates, maturities and times of
issuance as follows: U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years), and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities that are backed by
the full faith and credit of the United States, such as securities issued by the
Federal Housing Administration, Government National Mortgage Association, the
Department of Housing and Urban Development, the Export-Import Bank, the General
Services Administration and the Maritime Administration and certain securities
issued by the Farmers Home Administration and the Small Business Administration.
The range of maturities of U.S. Government Obligations is usually three months
to thirty years.
OTHER INVESTMENT POLICIES -- PORTFOLIO TURNOVER
TOTAL RETURN FUND'S portfolio turnover resulted generally from changes
in asset allocation of the Fund throughout 1996. In particular, the Fund was
substantially restructured in October, which caused an increase in portfolio
turnover. This resulted in a portfolio turnover rate of 146% for the fiscal
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year ended December 31, 1996. A high rate of portfolio turnover
generally leads to increased transaction costs and may result in a greater
number of taxable transactions. See "Allocation of Portfolio Brokerage" in the
SAI. See the SAI for the portfolio turnover rate of the other Funds and for more
information on portfolio turnover rate.
ALTERNATIVE PURCHASE PLANS
Each Fund has two classes of shares, Class A and Class B, which represent
interests in the same portfolio of securities and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that each class (i) is subject to a different sales charge and bears its
separate distribution and certain other class expenses; (ii) has exclusive
voting rights with respect to matters affecting only that class; and (iii) has
different exchange privileges.
CLASS A SHARES. Class A shares are sold with an initial sales charge of up
to 6.25% of the offering price with discounts available for volume purchases.
Class A shares pay a 12b-1 fee at the annual rate of 0.30% of each Fund's
average daily net assets attributable to Class A shares, of which no more than
0.25% may be paid as a service fee and the balance thereof paid as an
asset-based sales charge. The initial sales charge is waived for certain
purchases and a contingent deferred sales charge ("CDSC") may be imposed on such
purchases. See "How to Buy Shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are generally subject to a CDSC which declines in steps from 4% to 0% during
a six-year period and bear a higher 12b-1 fee than Class A shares. Class B
shares pay a 12b-1 fee at the annual rate of 1.00% of each Fund's average daily
net assets attributable to Class B shares, of which no more than 0.25% may be
paid as a service fee and the balance thereof paid as an asset-based sales
charge. Class B shares automatically convert into Class A shares after eight
years. See "How to Buy Shares."
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES. In deciding which
alternative is most suitable, an investor should consider several factors, as
discussed below.
The principal advantages of purchasing Class A shares are the lower
overall expenses, the availability of quantity discounts on volume purchases and
certain account privileges which are not offered to Class B shareholders. If an
investor plans to make a substantial investment, the sales charge on Class A
shares may either be lower due to the reduced sales charges available on volume
purchases of Class A shares or waived for certain eligible purchasers. Because
of the reduced sales charge available on quantity purchases of Class A shares,
it is recommended that investments of $250,000 or more be made in Class A
shares. Investments in excess of $1,000,000 will only be accepted as purchases
of Class A shares. Distributions paid by each Fund with respect to Class A
shares will also generally be greater than those paid with respect to Class B
shares because expenses attributable to Class A shares will generally be lower.
The principal advantage of purchasing Class B shares is that, since no
initial sales charge is paid, all of an investor's money is put to work from the
outset. Furthermore, although any investment in a Fund should only be viewed as
a long-term investment, if a redemption must be made soon after purchase, an
investor will pay a lower sales charge than if Class A shares had been
purchased.
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Conversely, because Class B shares are subject to higher asset-based sales
charges, long-term Class B shareholders may pay more in asset-based sales
charges than the economic equivalent of the maximum sales charge on Class A
shares. The automatic conversion of Class B shares into Class A shares after
eight years is designed to reduce the probability of this occurring.
HOW TO BUY SHARES
You may buy shares of a Fund through a First Investors registered
representative ("FIC Representative") or through a registered representative
("Dealer Representative") of an unaffiliated broker-dealer ("Dealer") which is
authorized to sell shares of a Fund. Your FIC Representative or Dealer
Representative (each, a "Representative") may help you complete and submit an
application to open an account with a Fund. Certain accounts may require
additional documentation. Applications accompanied by checks drawn on U.S. banks
made payable to "FIC" and received in FIC's Woodbridge offices by the close of
regular trading on the NYSE, generally 4:00 P.M. (New York City time), will be
processed and shares will be purchased at the public offering price determined
at the close of regular trading on the NYSE on that day. Orders received by
Representatives before the close of regular trading on the NYSE and received by
FIC at their Woodbridge offices before the close of its business day, generally
5:00 P.M. (New York City time), will be executed at the public offering price
determined at the close of regular trading on the NYSE on that day. It is the
responsibility of Representatives to promptly transmit orders they receive to
FIC. The "public offering price" is the net asset value plus the applicable
sales charge for Class A shares and the net asset value for Class B shares. For
a discussion of pricing practices when FIC's Woodbridge offices are unable to
open for business due to an emergency, see the SAI. Each Fund reserves the right
to reject any application or order for its shares for any reason and to suspend
the offering of its shares.
WHEN YOU OPEN A FUND ACCOUNT, YOU MUST SPECIFY WHICH CLASS OF SHARES YOU
WISH TO PURCHASE. If you do not specify which class of shares you wish to
purchase, your order will be processed according to procedures established by
FIC. For more information, see the SAI.
INITIAL INVESTMENT IN A FUND. You may open a Fund account with as little
as $1,000. This account minimum is waived if you open an account for a
particular class of shares through a full exchange of shares of the same class
of another "Eligible Fund," as defined below. Class A share accounts opened
through an exchange of shares from First Investors Cash Management Fund, Inc. or
First Investors Tax-Exempt Money Market Fund, Inc. (collectively, "Money Market
Funds") may be subject to an initial sales charge. You may open a Fund account
with $250 for individual retirement accounts ("IRAs") or, at the Fund's
discretion, a lesser amount for Simplified Employee Pension Plans ("SEPs"),
salary reduction SEPs ("SARSEPs"), SIMPLE-IRAs and qualified or other retirement
plans. Automatic investment plans allow you to open an account with as little as
$50, provided you invest at least $600 a year. See "Systematic Investing."
ADDITIONAL PURCHASES. After you make your first investment in a Fund, you may
purchase additional shares of a Fund by mailing a check made payable to FIC,
directly to First Investors Corporation, 581 Main Street, Woodbridge, NJ
07095-1198, Attn: Dept. CP. Include your account number on the face of the
check. There is no minimum on additional purchases of Fund shares.
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ELIGIBLE FUNDS. With respect to certain shareholder privileges noted in
this Prospectus and the SAI, each fund in the First Investors family of funds,
except as noted below, is an "Eligible Fund" (collectively, "Eligible Funds").
First Investors Special Bond Fund, Inc., First Investors Life Series Fund and
First Investors U.S. Government Plus Fund are not Eligible Funds. The Money
Market Funds, unless otherwise noted, are not Eligible Funds. The funds of
Executive Investors Trust ("Executive Investors") are Eligible Funds provided
the shares of any such fund either have been (a) acquired through an exchange
from an Eligible Fund which imposes a maximum sales charge of 6.25%, or (b) held
for at least one year from their date of purchase.
SYSTEMATIC INVESTING. Shareholders who have an account with a U.S. bank,
or other financial institution that is an Automated Clearing House member, may
arrange for automatic investments in a Fund on a systematic basis through First
Investors Money Line and through automatic payroll investments. You may also
elect to invest in Class A or Class B shares of a Fund at net asset value all
the cash distributions or Systematic Withdrawal Plan payments from the same
class of shares of an existing account in another Eligible Fund. If you wish to
participate in any of these systematic investment plans, please call Shareholder
Services at 1-800-423-4026 or see the SAI.
FUND/SERV PURCHASES. If there is a Dealer of record on your Fund account,
the Fund is authorized to execute electronic purchase orders received directly
from this Dealer. Electronic purchase orders may be processed through the
services of the National Securities Clearing Corp. ("NSCC") "Fund/SERV" system.
Purchase orders received by a Dealer before the close of regular trading on the
NYSE and received by FIC at its Woodbridge offices in accordance with NSCC rules
and procedures will be executed at the net asset value, plus any applicable
sales charge, determined at the close of regular trading on the NYSE on that
day. It is the responsibility of the Dealer to transmit purchase orders to FIC
promptly and accurately. FIC will not be liable for any change in the purchase
price due to the failure of FIC to receive such purchase orders. Any such
disputes must be settled between you and the Dealer.
CLASS A SHARES. Class A shares of each Fund are sold at the public
offering price, which will vary with the size of the purchase, as shown in the
following table:
SALES CHARGE AS % OF CONCESSION TO
OFFERING NET AMOUNT DEALERS AS % OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
-------------------- --------- -------------- ---------------
Less than $25,000............. 6.25% 6.67% 5.13%
$25,000 but under $50,000..... 5.75 6.10 4.72
$50,000 but under $100,000.... 5.50 5.82 4.51
$100,000 but under $250,000... 4.50 4.71 3.69
$250,000 but under $500,000... 3.50 3.63 2.87
$500,000 but under $1,000,000. 2.50 2.56 2.05
There is no sales charge on transactions of $1 million or more.
Additionally, there is no sales charge on purchases that qualify for the
Cumulative Purchase Privilege if they total at least $1 million or on purchases
made pursuant to a Letter of Intent in the minimum amount of $1 million. The
Underwriter
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will pay from its own resources a sales commission to FIC Representatives and a
concession equal to 0.90% of the amount invested to Dealers on such purchases.
If shares are redeemed within 24 months of purchase a CDSC of 1.00% will be
deducted from the redemption proceeds. The CDSC will be applied in the same
manner as the CDSC on Class B shares. See "Class B Shares."
CUMULATIVE PURCHASE PRIVILEGE AND LETTER OF INTENT. You may purchase Class
A shares of a Fund at a reduced sales charge through the Cumulative Purchase
Privilege or by executing a Letter of Intent. For more information, see the SAI,
call your Representative or call Shareholder Services at 1-800-423-4026.
WAIVERS OF CLASS A SALES CHARGES. Sales charges on Class A shares do not
apply to: (1) any purchase by an officer, trustee, director or employee (who has
completed the introductory employment period) of Series Fund, the Underwriter,
the Adviser, or their affiliates, by a Representative, or by the spouse, or by
the children and grandchildren under the age of 21 of any such person; (2) any
purchase by a former officer, trustee, director or employee of Series Fund, the
Underwriter, the Adviser, or their affiliates, or by a former FIC
Representative; provided they had acted as such for at least five years and had
retired or otherwise terminated the relationship in good standing; (3) any
reinvestment of the loan repayments by a participant in a loan program of any
First Investors sponsored qualified retirement plan; (4) a purchase with
proceeds from the liquidation of a First Investors Life Variable Annuity Fund A
contract or a First Investors Life Variable Annuity Fund C contract during the
one-year period preceding the maturity date of the contract; (5) any purchase by
a participant in a Group Qualified Plan account, as defined under "Retirement
Plans," if the purchase is made with the proceeds from a redemption of shares of
a fund in another fund group on which either an initial sales charge or a CDSC
has been paid; and (6) any purchase in an IRA account if the purchase is made
with the proceeds of a distribution from a First Investors Fund under a Group
Qualified Plan, as defined under "Retirement Plans." With respect to items (5)
and (6) above, if shares are redeemed within 24 months of purchase, a CDSC of
1.00% will be deducted from the redemption proceeds.
Additionally, policyholders of participating life insurance policies
issued by First Investors Life Insurance Company ("FIL"), an affiliate of the
Adviser and Underwriter, may elect to invest dividends earned on such policies
in Class A shares of a Fund at net asset value, provided the annual dividend is
at least $50 and the policyholder has an existing account with the Fund.
Holders of certain unit trusts ("Unitholders") who have elected to invest
the entire amount of cash distributions from either principal, interest income
or capital gains or any combination thereof ("Unit Distributions") from the
following trusts may invest such Unit Distributions in Class A shares of a Fund
at a reduced sales charge. Unitholders of various series of New York Insured
Municipals-Income Trust sponsored by Van Kampen Merritt Inc. (the "New York
Trust"); Unitholders of various series of the Multistate Tax Exempt Trust
sponsored by Advest Inc.; and Unitholders of various series of the Municipal
Insured National Trust, J.C. Bradford & Co. as agent, may purchase Class A
shares of a Fund with Unit Distributions at an offering price which is the net
asset value per share plus a sales charge of 1.5%. Unitholders of various series
of tax-exempt trusts, other than the New York Trust, sponsored by Van Kampen
Merritt Inc. may purchase Class A shares of a Fund with Unit Distributions at an
offering
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price which is the net asset value per share plus a sales charge of 1.0%. Each
Fund's initial minimum investment requirement is waived for purchases of Class A
shares with Unit Distributions. Shares of a Fund purchased by Unitholders may be
exchanged for Class A shares of any Eligible Fund subject to the terms and
conditions set forth under "How to Exchange Shares."
RETIREMENT PLANS. You may invest in shares of a Fund through an IRA, SEP,
SARSEP, SIMPLE-IRA or any other retirement plan. Participant-directed plans,
such as 401(k) plans, profit sharing and money purchase plans and 403(b) plans,
that are subject to Title I of ERISA (each, a "Group Qualified Plan") are
entitled to a reduced sales charge provided the number of employees eligible to
participate is 99 or less. The sales charge as a percentage of the offering
price and net amount invested is 3.00% and 3.09%, respectively, and the
concession to Dealers as a percentage of the offering price is 2.55%.
There is no sales charge on purchases through a Group Qualified Plan with
100 or more eligible employees. A CDSC of 1.00% will be deducted from the
redemption proceeds of such accounts for redemptions made within 24 months of
purchase. The CDSC will be applied in the same manner as the CDSC on Class B
shares. See "Class B Shares." The Underwriter will pay from its own resources a
sales commission to FIC Representatives and a concession equal to 0.90% of the
amount invested to Dealers on such purchases. These sales charges will be
available regardless of whether the account is registered with the Transfer
Agent in the name of the individual participant or the sponsoring employer or
plan trustee. A Group Qualified Plan account will be subject to the lower of the
sales charge for Group Qualified Plans or the sales charge for the purchase of
Fund shares.
CLASS B SHARES. The public offering price of Class B shares of each Fund
is the next determined net asset value, with no initial sales charge imposed. A
CDSC, however, is imposed upon most redemptions of Class B shares at the rates
set forth below:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
First........................ 4%
Second....................... 4
Third........................ 3
Fourth....................... 3
Fifth........................ 2
Sixth........................ 1
Seventh and thereafter....... 0
The CDSC will not be imposed on (1) the redemption of Class B shares
acquired as dividends or other distributions, or (2) any increase in the net
asset value of redeemed shares above their initial purchase price (in other
words, the CDSC will be imposed on the lower of net asset value or purchase
price). In determining whether a CDSC is payable on any redemption, it will be
assumed that the redemption is made first of any Class B shares acquired as
dividends or distributions, second of Class B shares that have been held for a
sufficient period of time such that the CDSC no longer is applicable to such
shares and finally of Class B shares held longest during the period of time that
a CDSC is applicable to such shares. This will result in you paying the lowest
possible CDSC.
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As an example, assume an investor purchased 100 shares of Class B shares
at $10 per share for a total cost of $1,000 and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B shares as dividends. If at such time
the investor makes his or her first redemption of 50 shares (proceeds of $600),
10 shares will not be subject to a CDSC charge because redemptions are first
made of shares acquired through dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 4.00% (the
applicable rate in the second year after purchase).
For purposes of determining the CDSC on Class B shares, all purchases made
during a calendar month will be deemed to have been made on the first business
day of that month at the average cost of all purchases made during that month.
The holding period of Class B shares acquired through an exchange with another
Eligible Fund will be calculated from the first business day of the month that
the Class B shares were initially acquired in the other Eligible Fund. The
amount of any CDSC will be paid to FIC. The CDSC imposed on the purchase of
Class B shares will be waived under certain circumstances. See "Waivers of CDSC
on Class B Shares" in the SAI.
CONVERSION OF CLASS B SHARES. A shareholder's Class B shares will
automatically convert to Class A shares approximately eight years after the date
of purchase, together with a pro rata portion of all Class B shares representing
dividends and other distributions paid in additional Class B shares. The Class B
shares so converted will no longer be subject to the higher expenses borne by
Class B shares. The conversion will be effected at the relative net asset values
per share of the two classes on the first business day of the month following
the month in which the eighth anniversary of the purchase of the Class B shares
occurs. If a shareholder effects one or more exchanges between Class B shares of
the Eligible Funds during the eight-year period, the holding period for the
shares so exchanged will commence upon the date of the purchase of the original
shares. Because the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion, a shareholder
may receive fewer Class A shares than the number of Class B shares converted.
See "Determination of Net Asset Value."
GENERAL. The Underwriter may at times agree to reallow to Dealers up to an
additional 0.25% of the dollar amount of shares of the Funds and/or certain
other First Investors Funds sold by such Dealers during a specific period of
time. From time to time, the Underwriter also will pay, through additional
reallowances or other sources, a bonus or other compensation to Dealers that
employ a Dealer Representative who sells a minimum dollar amount of the shares
of the Funds and/or certain other First Investors Funds during a specific period
of time. Such bonus or other compensation may take the form of reimbursement of
certain seminar expenses, co-operative advertising, or payment for travel
expenses, including lodging incurred in connection with trips taken by
qualifying Dealer Representatives to the Underwriter's principal office in New
York City. FIC Representatives generally are more highly compensated for sales
of First Investors mutual funds than for sales of other mutual funds.
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HOW TO EXCHANGE SHARES
Should your investment needs change, you may exchange, at net asset value,
shares of a Fund for shares of any Eligible Fund, including the Money Market
Funds. In addition, Class A shares of a Fund may be exchanged at net asset value
for units of any single payment plan ("plan") sponsored by the Underwriter.
SHARES OF A PARTICULAR CLASS MAY BE EXCHANGED ONLY FOR SHARES OF THE SAME CLASS
OF ANOTHER FUND. Exchanges can only be made into accounts registered to
identical owners. If your exchange is into a new account, it must meet the
minimum investment and other requirements of the fund or plan into which the
exchange is being made. Additionally, the fund or plan must be available for
sale in the state where you reside. Before exchanging Fund shares for shares of
another fund or plan, you should read the Prospectus of the fund or plan into
which the exchange is to be made. You may obtain Prospectuses and information
with respect to which funds or plans qualify for the exchange privilege free of
charge by calling Shareholder Services at 1-800-423-4026. Exchange requests
received in "good order," as defined below, by the Transfer Agent before the
close of regular trading on the NYSE will be processed at the net asset value
determined as of the close of regular trading on the NYSE on that day; exchange
requests received after that time will be processed on the following trading
day.
EXCHANGES BY MAIL. To exchange shares by mail, you should mail requests to
Administrative Data Management Corp., 581 Main Street, Woodbridge, NJ
07095-1198. Shares will be exchanged after the request is received in "good
order" by the Transfer Agent. "Good order" means that an exchange request must
include: (1) the names of the funds, account number(s), the dollar amount,
number of shares or percentage of the account you wish to exchange; (2) share
certificates, if issued; (3) the signature of all registered owners exactly as
the account is registered; and (4) signature guarantees, if required (see "How
to Redeem Shares-Signature Guarantees"). If the request is not in good order or
information is missing, the Transfer Agent will seek additional information from
you and process the exchange on the day it receives such information. Certain
account registrations may require additional legal documentation in order to
exchange. To review these requirements, please call Shareholder Services at
1-800-423-4026.
EXCHANGES BY TELEPHONE. See "Telephone Transactions."
ADDITIONAL EXCHANGE INFORMATION. Exchanges should be made for investment
purposes only. A pattern of frequent exchanges may be contrary to the best
interests of a Fund's other shareholders. Accordingly, each Fund has the right,
at its sole discretion, to limit the amount of an exchange, reject any exchange,
or, upon 60 days' notice, materially modify or discontinue the exchange
privilege. Each Fund will consider all relevant factors in determining whether a
particular frequency of exchanges is contrary to the best interests of the Fund
and/or a class of the Fund and its other shareholders. Any such restriction will
be made by a Fund on a prospective basis only, upon notice to the shareholder
not later than ten days following such shareholder's most recent exchange.
HOW TO REDEEM SHARES
You may redeem your Fund shares at the next determined net asset value,
less any applicable CDSC, on any day the NYSE is open, directly through the
Transfer Agent. Your Representative may help you with this transaction. Shares
in a non-retirement account may be redeemed by mail or telephone. Shares in a
retirement account may only be redeemed by mail. Certain account registrations
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may require additional legal documentation in order to redeem. Redemption
requests received in "good order" by the Transfer Agent before the close of
regular trading on the NYSE, will be processed at the net asset value, less any
applicable CDSC, determined as of the close of regular trading on the NYSE on
that day. Payment of redemption proceeds generally will be made within seven
days. If the shares being redeemed were recently purchased by check, payment may
be delayed to verify that the check has been honored, normally not more than
fifteen days. For a discussion of pricing practices when FIC's Woodbridge
offices are unable to open due to an emergency, see the SAI.
REDEMPTIONS BY MAIL. Written redemption requests should be mailed to
Administrative Data Management Corp., 581 Main Street, Woodbridge, NJ
07095-1198. For your redemption request to be in good order, you must include:
(1) the name of the Fund; (2) your account number; (3) the dollar amount, number
of shares or percentage of the account you want redeemed; (4) share
certificates, if issued; (5) the original signatures of all registered owners
exactly as the account is registered; and (6) signature guarantees, if required.
If your redemption request is not in good order or information is missing, the
Transfer Agent will seek additional information and process the redemption on
the day it receives such information. To review these requirements, please call
Shareholder Services at 1-800-423-4026.
SIGNATURE GUARANTEES. In order to protect you, the Funds and their agents,
each Fund reserves the right to require signature guarantees in order to process
certain exchange or redemption requests. See the SAI or call Shareholder
Services at 1-800-423-4026 for instances when signature guarantees are required.
REDEMPTIONS BY TELEPHONE. See "Telephone Transactions."
ELECTRONIC FUND TRANSFER. Shareholders who have established Electronic
Fund Transfer may have redemption proceeds electronically transferred to a
predesignated bank account. Each Fund has the right, at its sole discretion, to
limit or terminate your ability to exercise the electronic fund transfer
privilege at any time. For additional information, see the SAI. Applications to
establish Electronic Fund Transfer are available from your FIC Representative or
by calling Shareholder Services at 1-800-423-4026.
FUND/SERV REDEMPTIONS. If there is a Dealer of record on your Fund
account, the Fund is authorized to execute electronic redemption requests
received directly from this Dealer. Electronic requests may be processed through
the services of the NSCC "Fund/SERV" system. Redemption requests received by a
Dealer before the close of regular trading on the NYSE and received by FIC at
its Woodbridge offices in accordance with NSCC rules and procedures will be
executed at the net asset value, less any applicable sales charge, determined at
the close of regular trading on the NYSE on that day. It is the responsibility
of the Dealer to transmit redemption requests to FIC promptly and accurately.
FIC will not be liable for any change in the redemption price due to the failure
of FIC to receive such redemption requests. Any such disputes must be settled
between you and the Dealer.
SYSTEMATIC WITHDRAWAL PLAN. If you own noncertificated shares, you may set
up a plan for redemptions to be made automatically at regular intervals. See the
SAI for more information on the Systematic Withdrawal Plan or call Shareholder
Services at 1-800-423-4026.
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REINVESTMENT AFTER REDEMPTION. If you redeem Class A or Class B shares in
your Fund account, you can reinvest within six months from the date of
redemption all or any part of the proceeds in shares of the same class of the
same Fund or any other Eligible Fund, including the Money Market Funds, at net
asset value, on the date the Transfer Agent receives your purchase request. For
more information on the reinvestment privilege, please see the SAI or call
Shareholder Services at 1-800-423-4026.
REPURCHASE THROUGH UNDERWRITER. You may redeem Fund shares through a
Dealer. In this event, the Underwriter, acting as agent for each Fund, will
offer to repurchase or accept an offer to sell such shares at a price equal to
the net asset value next determined after the making of such offer, less any
applicable CDSC. The Dealer may charge you an added commission for handling any
redemption transaction.
REDEMPTION OF LOW BALANCE ACCOUNTS. Because each Fund incurs certain fixed
costs in maintaining shareholder accounts, each Fund may redeem without your
consent, on at least 60 days' prior written notice (which may appear on your
account statement), any Fund account of Class A or Class B shares which has a
net asset value of less than $500. To avoid such redemption, you may, during
such 60-day period, purchase additional Fund shares of the same class so as to
increase your account balance to the required minimum. There will be no CDSC
imposed on such redemptions of Class B shares. A Fund will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value.
Accounts established under a Systematic Investment Plan that have been
discontinued prior to meeting the $1,000 minimum are subject to this policy.
Additional information concerning how to redeem shares of a Fund is
available upon request to your Representative or Shareholder Services at
1-800-423-4026.
TELEPHONE TRANSACTIONS
Unless you specifically decline to have telephone privileges, you, or any
person who we reasonably believe is authorized to act on your behalf, may redeem
or exchange noncertificated shares of a Fund by calling the Special Services
Department at 1-800-342-6221 weekdays (except holidays) between 9:00 A.M. and
5:00 P.M. (New York City time). Certain accounts, however, are required to
complete additional documents in order to activate telephone privileges.
Exchange or redemption requests received before the close of regular trading on
the NYSE will be processed at the net asset value, less any applicable CDSC,
determined as of the close of business on that day. For more information on
telephone privileges, please call Shareholder Services at 1-800-423-4026 or see
the SAI.
TELEPHONE EXCHANGES. Exchange requests may be made by telephone (for
shares held on deposit only). Telephone exchanges to Money Market Funds are not
available if your address of record has changed within 60 days prior to the
exchange request.
TELEPHONE REDEMPTIONS. The telephone redemption privilege may be used
provided: (1) the redemption proceeds are being mailed to the address of record
or to a predesignated bank account; (2) your address of record has not changed
within the past 60 days; (3) the shares to be redeemed have not
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been issued in certificate form; (4) each redemption does not exceed $50,000;
and (5) the proceeds of the redemption, together with all redemptions made from
the account during the prior 30-day period, do not exceed $100,000. TELEPHONE
REDEMPTION INSTRUCTIONS WILL BE ACCEPTED FROM ANY ONE OWNER OR AUTHORIZED
INDIVIDUAL.
ADDITIONAL INFORMATION. Series Fund, the Adviser, the Underwriter and
their officers, trustees, directors and employees will not be liable for any
loss, damage, cost or expense arising out of any instruction (or any
interpretation of such instruction) received by telephone or which they
reasonably believe to be authentic. This policy places the entire risk of loss
for unauthorized or fraudulent transactions on the shareholder, except that if
the above-referenced parties do not follow reasonable procedures, some or all of
them may be liable for any such losses. For more information on telephone
transactions see the SAI. The Funds have the right, at their sole discretion,
upon 60 days' notice, to materially modify or discontinue the telephone exchange
and redemption privilege. During times of drastic economic or market changes,
telephone exchanges or redemptions may be difficult to implement. If you
experience difficulty in making a telephone exchange or redemption, your
exchange or redemption request may be made by regular or express mail, and it
will be implemented at the next determined net asset value, less any applicable
CDSC, following receipt by the Transfer Agent.
MANAGEMENT
BOARD OF TRUSTEES. Series Fund's Board of Trustees, as part of its overall
management responsibility, oversees various organizations responsible for each
Fund's day-to-day management.
ADVISER. First Investors Management Company, Inc. supervises and manages
each Fund's investments, supervises all aspects of each Fund's operations and
determines each Fund's portfolio transactions. The Adviser is a New York
corporation located at 95 Wall Street, New York, NY 10005. The Adviser presently
acts as investment adviser to 14 mutual funds. First Investors Consolidated
Corporation ("FICC") owns all of the voting common stock of the Adviser and all
of the outstanding stock of FIC and the Transfer Agent. Mr. Glenn O. Head
controls FICC and, therefore, controls the Adviser.
As compensation for its services, the Adviser receives an annual fee from
each Fund, which is payable monthly. For the fiscal year ended December 31,
1996, the advisory fees were 0.75% of average daily net assets, net of waiver,
for each of BLUE CHIP FUND, TOTAL RETURN FUND and SPECIAL SITUATIONS FUND and
0.65% of average daily assets, net of waiver, for INVESTMENT GRADE FUND.
PORTFOLIO MANAGERS. Since February 1997, the BLUE CHIP FUND has been
co-managed by Patricia D. Poitra, Director of Equities, and Dennis T.
Fitzpatrick. From October 1994 to February 1997, Ms. Poitra had primary
responsibility for the day-to-day management of the BLUE CHIP FUND. Ms. Poitra
has been responsible for the management of the SPECIAL SITUATIONS FUND since its
inception in 1990 and the equity portion of the TOTAL RETURN FUND since 1993.
Ms. Poitra also is responsible for the management of the Discovery Fund of First
Investors Life Series Fund and the U.S.A. Mid-Cap Opportunity Fund of First
Investors Series Fund II, Inc. Ms. Poitra and Mr. Fitzpatrick also co-manage the
Blue Chip Fund of First Investors Life Series Fund and the Blue Chip Fund of
Executive Investors Trust. Ms. Poitra joined FIMCO in 1985 as a Senior Equity
Analyst. Mr. Fitzpatrick joined FIMCO in
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October 1995 as a Large Cap Analyst. From July 1995 to October 1995, Mr.
Fitzpatrick was a Regional Surety Manager at United States Fidelity & Guaranty
Co. and from 1988 to 1995 he was Northeast Surety Manager at American
International Group.
Nancy Jones has been Portfolio Manager for INVESTMENT GRADE FUND since its
inception in 1991 and has managed the fixed income corporate securities portion
of TOTAL RETURN FUND since 1992. Ms. Jones joined FIMCO in 1983 as Director of
Research in the High Yield Department. Ms. Jones also is Portfolio Manager for
First Investors Fund For Income, Inc. and the Investment Grade Fund of First
Investors Life Series Fund.
Clark D. Wagner has been primarily responsible for the day-to-day
management of the U.S. Government and mortgaged-backed securities portion of
TOTAL RETURN FUND since October 1995. Mr. Wagner is also Portfolio Manager for
all of the First Investors municipal bond funds and for First Investors
Government Fund, Inc., Target Maturity 2007 Fund, Target Maturity 2010 Fund and
Government Fund of First Investors Life Series Fund. Mr. Wagner has been Chief
Investment Officer of FIMCO since 1992.
BROKERAGE. Each Fund may allocate brokerage commissions, if any, to
broker-dealers in consideration of Fund share distribution, but only when
execution and price are comparable to that offered by other broker-dealers.
Brokerage may be directed to brokers who provide research. See the SAI for more
information on allocation of portfolio brokerage.
UNDERWRITER. Series Fund has entered into an Underwriting Agreement with
First Investors Corporation, 95 Wall Street, New York, NY 10005, as Underwriter.
The Underwriter receives all sales charges in connection with the sale of each
Fund's Class A shares and all CDSCs in connection with each Fund's Class B
shares and may receive other payments under a plan of distribution. See "How to
Buy Shares" and "Distribution Plans."
DISTRIBUTION PLANS
Pursuant to separate distribution plans pertaining to each Fund's Class A
and Class B shares ("Class A Plan" or "Class B Plan," and collectively,
"Plans"), each Fund is authorized to compensate the Underwriter for certain
expenses incurred in the distribution of that Fund's shares ("distribution
fees") and the servicing or maintenance of existing Fund shareholder accounts
("service fees"). Pursuant to the Plans, distribution fees are paid for
activities relating to the distribution of Fund shares, including costs of
printing and dissemination of sales material or literature, prospectuses and
reports used in connection with the sale of Fund shares. Service fees are paid
for the ongoing maintenance and servicing of existing shareholder accounts,
including payments to Representatives who provide shareholder liaison services
to their customers who are holders of that Fund, provided they meet certain
criteria.
Pursuant to each Class A Plan, each Fund is authorized to pay the
Underwriter a distribution fee at the annual rate of 0.05% of that Fund's
average daily net assets attributable to Class A shares and a service fee of
0.25% of that Fund's average daily net assets attributable to Class A shares.
Pursuant to each Class B Plan, each Fund is authorized to pay the Underwriter a
distribution fee at the annual rate of 0.75% of that Fund's average daily net
assets attributable to Class B shares and a service fee of 0.25%
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of that Fund's average daily net assets attributable to Class B shares. Payments
made to the Underwriter under the Plans will represent compensation for
distribution and service activities, not reimbursement for specific expenses
incurred.
Although Class B shares are sold without an initial sales charge, the
Underwriter pays from its own resources a sales commission to FIC
Representatives and a concession equal to 3.5% of the amount invested to Dealers
who sell Class B shares. In addition, the Underwriter will make quarterly
payments of service fees to Representatives commencing after the thirteenth
month following the initial sale of Class B shares. The Underwriter will make
such payments at an annual rate of up to 0.25% of the average net asset value of
Class B shares which are attributable to shareholders for whom the
Representatives are designated as dealer of record.
Each Fund may suspend or modify payments under the Plans at any time, and
payments are subject to the continuation of each Plan, the terms of any dealer
agreements between Dealers and the Underwriter and any applicable limits imposed
by the National Association of Securities Dealers, Inc. Each Fund will not carry
over any fees under the Plans to the next fiscal year. See "Distribution Plans"
in the SAI for a full discussion of the various Plans.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund's shares fluctuates and is determined
separately for each class of shares. The net asset value of shares of a given
class of each Fund is determined as of the close of regular trading on the NYSE
(generally 4:00 P.M., New York City time) on each day the NYSE is open for
trading, and at such other times as the Board of Trustees deems necessary, by
dividing the market value of the securities held by such Fund, plus any cash and
other assets, less all liabilities attributable to that class, by the number of
shares of the applicable class outstanding. If there is no available market
value, securities will be valued at their fair value as determined in good faith
pursuant to procedures adopted by the Board of Trustees. Expenses (other than
12b-1 fees and certain other class expenses) are allocated daily to each class
of shares based upon the relative proportion of net assets of each class. The
per share net asset value of the Class B shares will generally be lower than
that of the Class A shares because of the higher expenses borne by the Class B
shares. The NYSE currently observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are generally declared daily by
INVESTMENT GRADE FUND, quarterly by BLUE CHIP FUND and TOTAL RETURN FUND and
annually by SPECIAL SITUATIONS FUND. Unless you direct the Transfer Agent
otherwise, (a) dividends declared on a class of shares of INVESTMENT GRADE FUND
are paid in additional shares of that class at the net asset value generally
determined as of the close of business on the first business day of the
following month, and (b) dividends declared on a class of shares of any other
Fund are paid in additional shares of that class at the net asset value
generally determined as of the close of business on the business day immediately
following the record date of the dividend. If you redeem all of your shares of
INVESTMENT GRADE FUND at any time
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during a month, you are paid all dividends declared through the day prior to the
date of the redemption, together with the proceeds of your redemption, less any
applicable CDSC. Net investment income includes interest and dividends, earned
discount and other income earned on portfolio securities less expenses.
Each Fund also distributes with its regular dividend at the end of each
year substantially all of (a) its net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital gain,
if any, after deducting any available capital loss carryovers, and (b) for
SPECIAL SITUATIONS FUND and TOTAL RETURN FUND, any net realized gains from
foreign currency transactions. Unless you direct the Transfer Agent otherwise,
these distributions are paid in additional shares of the same class of the
distributing Fund at the net asset value generally determined as of the close of
business on the business day immediately following the record date of the
distribution. A 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 a Fund's shares
are calculated at the same time and in the same manner. Dividends on Class B
shares of a 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 elect to receive dividends and/or other distributions in
cash by notifying the Transfer Agent by telephone or in writing prior to the
record date of any such distribution. If you elect this form of payment, the
payment date generally is two weeks following the record date of any such
distribution. Your election remains in effect until you revoke it by notifying
the Transfer Agent.
You may elect to invest the entire amount of any cash distribution on
Class A or Class B shares of a Fund in the same class of shares of any Eligible
Fund, including the Money Market Funds, by notifying the Transfer Agent. See
"Cross-Investment of Cash Distributions" in the SAI.
A dividend or other distribution paid on a class of shares of a Fund will
be paid in additional shares of that class and not in cash if any of the
following events occur: (1) the total amount of the distribution is under $5,
(2) the Fund has received notice of your death on an individual account (until
written alternate payment instructions and other necessary documents are
provided by your legal representative), or (3) a distribution check is returned
to the Transfer Agent, marked as being undeliverable, by the U.S. Postal Service
after two consecutive mailings.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of Federal income
tax on that part of its investment company taxable income (consisting generally
of net investment income, net short-term capital gain and, for SPECIAL
SITUATIONS FUND and TOTAL RETURN FUND, net gains from certain foreign currency
transactions) and net capital gain that is distributed to its shareholders.
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Dividends from a Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether paid in cash or in additional Fund shares. Distributions of a Fund's net
capital gain, when designated as such, are taxable to you as long-term capital
gain, whether paid in cash or in additional Fund shares, regardless of the
length of time you have owned your shares. If you purchase shares shortly before
the record date for a dividend or other distribution, you will pay full price
for the shares and receive some portion of the price back as a taxable
distribution. You will receive an annual statement following the end of each
calendar year describing the tax status of distributions paid by the Fund during
that year.
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to you (if you are an individual
or certain other non-corporate shareholder) if the Fund is not furnished with
your correct taxpayer identification number, and the same percentage of
dividends and such distributions in certain other circumstances.
Your redemption of Fund shares will result in a taxable gain or loss to
you, depending on whether the redemption proceeds are more or less than your
adjusted basis for the redeemed shares (which normally includes any initial
sales charge paid on Class A shares). An exchange of Fund shares for shares of
any Eligible Fund generally will have similar tax consequences. However, special
tax rules apply if you (1) dispose of Class A shares through a redemption or
exchange within 90 days of your purchase and (2) subsequently acquire Class A
shares of the same Fund or an Eligible Fund without paying a sales charge due to
the reinvestment privilege or exchange privilege. In these cases, any gain on
your disposition of the original Class A shares will be increased, or loss
decreased, by the amount of the sales charge you paid when the shares were
acquired, and that amount will increase the basis of the Eligible Fund's shares
you subsequently acquired. In addition, if you purchase Fund shares within 30
days before or after redeeming other shares of that Fund (regardless of class)
at a loss, all or a portion of the loss will not be deductible and will increase
the basis of the newly purchased shares.
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting each Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You therefore are urged to
consult your own tax adviser.
PERFORMANCE INFORMATION
For purposes of advertising, each Fund's performance may be calculated for
each class of its shares based on average annual total return and total return.
Each of these figures reflects past performance and does not necessarily
indicate future results. Average annual total return shows the average annual
percentage change in an assumed $1,000 investment. It reflects the hypothetical
annually compounded return that would have produced the same total return if a
Fund's performance had been constant over the entire period. Because average
annual total return tends to smooth out variations in a Fund's return, you
should recognize that it is not the same as actual year-by-year results. Average
annual total return includes the effect of paying the maximum sales charge (in
the case of Class A shares) or the
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deduction of any applicable CDSC (in the case of Class B shares) and payment of
dividends and other distributions in additional shares. One, five and ten year
periods will be shown unless the class has been in existence for a shorter
period. Total return is computed using the same calculations as average annual
total return. However, the rate expressed is the percentage change from the
initial $1,000 invested to the value of the investment at the end of the stated
period. Total return calculations assume reinvestment of dividends and other
distributions.
INVESTMENT GRADE FUND also may advertise its yield for each class of
shares. Yield reflects investment income net of expenses over a 30-day (or
one-month) period on a Fund share, expressed as an annualized percentage of the
maximum offering price per share for Class A shares and the net asset value per
share for Class B shares at the end of the period. Yield computations differ
from other accounting methods and therefore may differ from dividends actually
paid or reported net income. INVESTMENT GRADE FUND may also advertise its
"actual distribution rate" for each class of shares. This is computed in the
same manner as yield except that actual income dividends declared per share
during the period in question are substituted for net investment income per
share. In addition, INVESTMENT GRADE FUND calculates its "actual distribution
rate" based upon net asset value for dissemination to existing shareholders.
Each of the above performance calculations may be based on investment at
reduced sales charge levels or at net asset value. Any quotation of performance
figures not reflecting the maximum sales charge or CDSC will be greater than if
the maximum sales charge or CDSC were used. Each class of shares of a Fund has
different expenses which will affect its performance. Additional performance
information is contained in Series Fund's Annual Report which may be obtained
without charge by contacting Series Fund at 1-800-423-4026.
GENERAL INFORMATION
ORGANIZATION. Series Fund is a Massachusetts business trust organized on
September 23, 1988. Series Fund 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 of Trustees shall from time to time
establish. The shares of beneficial interest of Series Fund are presently
divided into five separate and distinct series, each having two classes,
designated Class A shares and Class B shares. Series Fund does not hold annual
shareholder meetings. If requested to do so by the holders of at least 10% of
Series Fund's outstanding shares, Series Fund's Board of Trustees will call a
special meeting of shareholders for any purpose, including the removal of
Trustees. Each share of each Fund has equal voting rights except as noted above.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of each Fund, and employs foreign
sub-custodians to provide custody of the Funds' foreign assets.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of FIMCO and FIC, acts as transfer and
dividend disbursing agent for each Fund and as redemption agent for regular
redemptions. The Transfer Agent's telephone number is 1-800-423-4026.
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SHARE CERTIFICATES. The Funds do not issue certificates for Class B shares
or for Class A shares purchased under any retirement account. The Funds,
however, will issue share certificates for Class A shares at the shareholder's
request. Ownership of shares of each Fund is recorded on a stock register by the
Transfer Agent and shareholders have the same rights of ownership with respect
to such shares as if certificates had been issued.
CONFIRMATIONS AND STATEMENTS. You will receive confirmations of purchases
and redemptions of shares of a Fund. Generally, confirmation statements will be
sent to you following a transaction in the account, including payment of a
dividend or capital gain distribution in additional shares or cash. However,
systematic investments made through First Investors Money Line or automatic
payroll deductions will only be confirmed in your monthly or quarterly
statement, showing all transactions occurring during the period.
SHAREHOLDER INQUIRIES. Shareholder inquiries can be made by calling
Shareholder Services at 1-800-423-4026.
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. It is each Fund's practice
to mail only one copy of its annual and semi-annual reports to any address at
which more than one shareholder with the same last name has indicated that mail
is to be delivered. Additional copies of the reports will be mailed if requested
in writing or by telephone by any shareholder.
APPENDIX A
DESCRIPTION OF CORPORATE AND MUNICIPAL BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
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AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated "BB," "B," "CCC," "CC" and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
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D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat greater than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
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Ca Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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TABLE OF CONTENTS
Fee Table.............................................................. 2
Financial Highlights................................................... 4
Investment Objectives and Policies..................................... 8
Alternative Purchase Plans............................................. 17
How to Buy Shares...................................................... 18
How to Exchange Shares................................................. 23
How to Redeem Shares................................................... 23
Telephone Transactions................................................. 25
Management............................................................. 26
Distribution Plans..................................................... 27
Determination of Net Asset Value....................................... 28
Dividends and Other Distributions...................................... 28
Taxes.................................................................. 29
Performance Information................................................ 30
General Information.................................................... 31
Appendix A............................................................. 32
INVESTMENT ADVISER CUSTODIAN
First Investors Management The Bank of New York
Company, Inc. 48 Wall Street
95 Wall Street New York, NY 10286
New York, NY 10005
AUDITORS
UNDERWRITER Tait, Weller & Baker
First Investors Corporation Two Penn Center Plaza
95 Wall Street Philadelphia, PA 19102-1707
New York, NY 10005
LEGAL COUNSEL
TRANSFER AGENT Kirkpatrick & Lockhart LLP
Administrative Data 1800 Massachusetts Avenue, N.W.
Management Corp. Washington, D.C. 20036
581 Main Street
Woodbridge, NJ 07095-1198
This Prospectus is intended to constitute an offer by Series Fund only of the
securities of which it is the issuer and is not intended to constitute an offer
by any Fund of the securities of any other Fund whose securities are also
offered by this Prospectus. No Fund intends to make any representation as to the
accuracy or completeness of the disclosure in this Prospectus relating to any
other Fund. No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus or the Statement of Additional Information, and if given or
made, such information and representation must not be relied upon as having been
authorized by Series Fund, First Investors Corporation, or any affiliate
thereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the shares offered hereby in any state to any person
to whom it is unlawful to make such offer in such state.
<PAGE>
First Investors
Series Fund
- ---------------------------
Blue Chip Fund
Investment Grade Fund
Special Situations Fund
Total Return Fund
- ---------------------------
Prospectus
- ----------------------------
April 30, 1997
First Investors Logo
Logo is described as follows: the arabic numeral one separated into seven
vertical segments followed by the words "First Investors."
Verticle line from top to bottom in center of page about 1/2 inch in thickness
The following language appears to the left of the above language in the printed
piece:
The words "BULK RATE U.S. POSTAGE PAID PERMIT NO. 7379" in a box to the right of
a circle containing the words "MAILED FROM ZIP CODE 11201" appears on the
righthand side.
The following language appears on the lefthand side:
FIRST INVESTORS SERIES FUND
95 WALL STREET
NEW YORK, NY 10005
First Investors Logo (as described above)
A MEMBER OF THE
FIRST INVESTORS
FINANCIAL NETWORK
FISF001
<PAGE>
FIRST INVESTORS SERIES FUND
FIRST INVESTORS BLUE CHIP FUND
FIRST INVESTORS INVESTMENT GRADE FUND
FIRST INVESTORS SPECIAL SITUATIONS FUND
FIRST INVESTORS TOTAL RETURN FUND
95 Wall Street 1-800-423-4026
New York, New York 10005
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1997
This is a Statement of Additional Information ("SAI") for FIRST
INVESTORS BLUE CHIP FUND, FIRST INVESTORS INVESTMENT GRADE FUND, FIRST INVESTORS
SPECIAL SITUATIONS FUND and FIRST INVESTORS TOTAL RETURN FUND (individually,
"Fund," and collectively, "Funds"), each of which is a separate series of FIRST
INVESTORS SERIES FUND ("Series Fund"). Series Fund is an open-end diversified
management investment company which presently offers five separate investment
series. This SAI related to the four series of Series Fund listed above.
BLUE CHIP FUND seeks to provide investors with high total investment
return consistent with the preservation of capital.
INVESTMENT GRADE FUND seeks to generate a maximum level of income
consistent with investment in investment grade debt securities.
SPECIAL SITUATIONS FUND seeks long-term growth of capital.
TOTAL RETURN FUND seeks to provide investors with high long-term total
investment return consistent with moderate investment risk.
There can be no assurance that any Fund will achieve its investment
objective.
This SAI is not a prospectus. It should be read in conjunction with the
Funds' Prospectus dated April 30, 1997, which may be obtained free of cost from
Series Fund at the address or telephone number noted above.
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TABLE OF CONTENTS
Page
Investment Policies................................................. 3
Hedging and Option Income Strategies................................ 9
Investment Restrictions............................................. 17
Trustees and Officers............................................... 24
Management.......................................................... 26
Underwriter......................................................... 28
Distribution Plans.................................................. 28
Determination of Net Asset Value.................................... 30
Allocation of Portfolio Brokerage................................... 30
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services......................... 32
Taxes............................................................... 39
Performance Information............................................. 42
General Information................................................. 47
Appendix A.......................................................... 48
Appendix B.......................................................... 49
Appendix C.......................................................... 51
Financial Statements................................................ 57
2
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INVESTMENT POLICIES
BANKERS' ACCEPTANCES. Each Fund may invest in bankers' acceptances.
Bankers' acceptances are short-term credit instruments used to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of interest for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
CERTIFICATES OF DEPOSIT. Each Fund may invest in bank certificates of
deposit ("CDs") subject to the restrictions set forth in the Prospectus. The
Federal Deposit Insurance Corporation is an agency of the U.S. Government which
insures the deposits of certain banks and savings and loan associations up to
$100,000 per deposit. The interest on such deposits may not be insured if this
limit is exceeded. Current Federal regulations also permit such institutions to
issue insured negotiable CDs in amounts of $100,000 or more, without regard to
the interest rate ceilings on other deposits. To remain fully insured, these
investments currently must be limited to $100,000 per insured bank or savings
and loan association.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
While no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security. The Funds' investment adviser, First Investors Management Company,
Inc. ("Adviser" or "FIMCO"), will decide to invest based upon a fundamental
analysis of the long-term attractiveness of the issuer and the underlying common
stock, the evaluation of the relative attractiveness of the current price of the
underlying common stock and the judgment of the value of the convertible
security relative to the common stock at current prices.
FOREIGN GOVERNMENT OBLIGATIONS. SPECIAL SITUATIONS FUND and TOTAL
RETURN FUND may invest in foreign government obligations, which generally
consist of obligations supported by national, state or provincial governments or
similar political subdivisions. Investments in foreign government debt
obligations involve special risks. The issuer of the debt may be unable or
unwilling to pay interest or repay principal when due in accordance with the
terms of such debt, and a Fund may have limited legal resources in the event of
default. Political conditions, especially a sovereign entity's willingness to
meet the terms of its debt obligations, are of considerable significance.
LOANS OF PORTFOLIO SECURITIES. BLUE CHIP FUND, INVESTMENT GRADE FUND
and TOTAL RETURN 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.
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MORTGAGE-BACKED SECURITIES. BLUE CHIP FUND, INVESTMENT GRADE FUND and
TOTAL RETURN FUND may invest in mortgage-backed securities, including those
representing an undivided ownership interest in a pool of mortgage loans. Each
of the certificates described below is characterized by monthly payments to the
security holder, reflecting the monthly payments made by the mortgagees of the
underlying mortgage loans. The payments to the security holders (such as a
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as twenty to thirty years, the borrowers can, and typically do, repay
them sooner. Thus, the security holders frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payments. A borrower is more likely to prepay a mortgage which bears a
relatively high rate of interest. Thus, in times of declining interest rates,
some higher yielding mortgages might be repaid resulting in larger cash payments
to a Fund, and the Fund will be forced to accept lower interest rates when that
cash is used to purchase additional securities.
Interest rate fluctuations may significantly alter the average maturity
of mortgage-backed securities, due to the level of refinancing by homeowners.
When interest rates rise, prepayments often drop, which should increase the
average maturity of the mortgage-backed security. Conversely, when interest
rates fall, prepayments often rise, which should decrease the average maturity
of the mortgage-backed security.
GNMA CERTIFICATES. Government National Mortgage Association
("GNMA") certificates ("GNMA Certificates") are mortgage-backed securities,
which evidence an undivided interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA Certificates that a Fund purchases are the "modified
pass-through" type. "Modified pass-through" GNMA Certificates entitle the holder
to receive a share of all interest and principal payments paid and owed on the
mortgage pool net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to
guarantee the timely payment of principal and interest on securities backed by a
pool of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers' Home Administration ("FMHA"), or guaranteed by the Department of
Veteran Affairs ("VA"). The GNMA guarantee is backed by the full faith and
credit of the U.S. Government. GNMA also is empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities. Prepayments of principal by mortgagors
and mortgage foreclosures will usually result in the return of the greater part
of principal investment long before maturity of the mortgages in the pool. A
Fund normally will not distribute principal payments (whether regular or
prepaid) to its shareholders. Rather, it will invest such payments in additional
mortgage-backed securities of the types described above. Interest received by
the Fund will, however, be distributed to shareholders. Foreclosures impose no
risk to principal investment because of the GNMA guarantee. As prepayment rates
of the individual mortgage pools vary widely, it is not possible to predict
accurately the average life of a particular issue of GNMA Certificates.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of
interest on GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the Certificates by the amount
of the fees paid to GNMA and the issuer. The coupon rate by itself, however,
does not indicate the yield which will be earned on GNMA Certificates. First,
Certificates may trade in the secondary market at a premium or discount. Second,
interest is earned
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monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool.
FNMA SECURITIES. The Federal National Mortgage Association
("FNMA") issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal.
Risk of foreclosure of the underlying mortgages is greater with FHLMC
and FNMA securities because, unlike GNMA Certificates, FHLMC and FNMA securities
are not guaranteed by the full faith and credit of the U.S.
Government.
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 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. No Fund may enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 15% of such Fund's net assets would be invested in such repurchase
agreements and other illiquid investments.
RESTRICTED AND ILLIQUID SECURITIES. No Fund will purchase or otherwise
acquire any security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restrictions
on resale. 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
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restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended ("1933 Act"), which the Board of Trustees 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 each Fund's limit, as noted above. 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.
RISK FACTORS OF HIGH YIELD SECURITIES. High yield, high risk securities
(commonly referred to as "junk bonds") ("High Yield Securities"), are subject to
certain risks that may not be present with investments of higher grade
securities. These risks also apply to lower-rated and certain unrated
convertible securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The prices of
High Yield Securities tend to be less sensitive to interest rate changes than
higher-rated investments, but may be more sensitive to adverse economic changes
or individual corporate developments. Periods of economic uncertainty and
changes generally result in increased volatility in the market prices and yields
of High Yield Securities and thus in a Fund's net asset value. A strong economic
downturn or a substantial period of rising interest rates could severely affect
the market for High Yield Securities. In these circumstances, highly leveraged
companies might have greater difficulty in making principal and interest
payments, meeting projected business goals, and obtaining additional financing.
Thus, there could be a higher incidence of default. This would affect the value
of such securities and thus a Fund's net asset value. Further, if the issuer of
a security owned by a Fund defaults, that Fund might incur additional expenses
to seek recovery.
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Generally, when interest rates rise, the value of fixed rate debt
obligations, including High Yield Securities, tends to decrease; when interest
rates fall, the value of fixed rate debt obligations tends to increase. If an
issuer of a High Yield Security containing a redemption or call provision
exercises either provision in a declining interest rate market, a Fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if a Fund experiences unexpected net redemptions in a
rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which Fund expenses could be allocated and in a reduced rate of return for that
Fund. While it is impossible to protect entirely against this risk,
diversification of a Fund's portfolio and the Adviser's careful analysis of
prospective portfolio securities should minimize the impact of a decrease in
value of a particular security or group of securities in a Fund's portfolio.
THE HIGH YIELD SECURITIES MARKET. The market for below
investment grade bonds expanded rapidly in recent years and its growth
paralleled a long economic expansion. In the past, the prices of many
lower-rated debt securities declined substantially, reflecting an expectation
that many issuers of such securities might experience financial difficulties. As
a result, the yields on lower-rated debt securities rose dramatically. However,
such higher yields did not reflect the value of the income streams that holders
of such securities expected, but rather the risk that holders of such securities
could lose a substantial portion of their value as a result of the issuers'
financial restructuring or default. There can be no assurance that such declines
in the below investment grade market will not reoccur. The market for below
investment grade bonds generally is thinner and less active than that for higher
quality bonds, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or the financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
LIQUIDITY AND VALUATION. Lower-rated bonds are typically
traded among a smaller number of broker-dealers than in a broad secondary
market. Purchasers of High Yield Securities tend to be institutions, rather than
individuals, which is a factor that further limits the secondary market. To the
extent that no established retail secondary market exists, many High Yield
Securities may not be as liquid as higher-grade bonds. A less active and thinner
market for High Yield Securities than that available for higher quality
securities may result in more volatile valuations of a Fund's holdings and more
difficulty in executing trades at favorable prices during unsettled market
conditions.
The ability of a Fund to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective information
available and thus the responsibility of the Board of Trustees to value High
Yield Securities becomes more difficult, with judgment playing a greater role.
Further, adverse publicity about the economy or a particular issuer may
adversely affect the public's perception of the value, and thus liquidity, of a
High Yield Security, whether or not such perceptions are based on a fundamental
analysis. See "Determination of Net Asset Value."
LEGISLATION. Provisions of the Revenue Reconciliation Act of
1989 limit a corporate issuer's deduction for a portion of the original issue
discount on "high yield discount" obligations (including certain pay-in-kind
securities). This limitation could have a materially adverse impact on the
market for certain High Yield Securities. From time to time, legislators and
regulators have proposed other legislation that would limit the use of high
yield debt securities in leveraged buyouts, mergers and acquisitions. It is not
certain whether such proposals, which also could adversely affect High Yield
Securities, will be enacted into law.
SHORT SALES. Although neither Fund intends to do so in the foreseeable
future, INVESTMENT GRADE FUND and SPECIAL SITUATIONS FUND may borrow securities
for cash sale to others. This type
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of transaction is commonly known as a "short sale." These Funds will engage in
short sales for hedging purposes only. These Funds only may make short sales
"against the box," which occurs when a Fund enters into a short sale with a
security identical to one it already owns or has the immediate or unconditional
right, at no cost, to obtain the identical security.
WARRANTS. INVESTMENT GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL
RETURN FUND may purchase warrants, which are instruments that permit a Fund to
acquire, by subscription, the capital stock of a corporation at a set price,
regardless of the market price for such stock. Warrants may be either perpetual
or of limited duration. There is greater risk that warrants might drop in value
at a faster rate than the underlying stock. Each Fund's investments in warrants
is limited to 5% of its total assets, of which no more than 2% may not be listed
on the New York or American Stock Exchange.
WHEN-ISSUED SECURITIES. INVESTMENT GRADE FUND and TOTAL RETURN FUND may
each invest up to 10% of its net assets in securities issued on a when-issued or
delayed delivery basis at the time the purchase is made. The Fund generally
would not pay for such securities or start earning interest on them until they
are issued or received. However, when the Fund purchases debt obligations on a
when-issued basis, it assumes the risks of ownership, including the risk of
price fluctuation, at the time of purchase, not at the time of receipt. Failure
of the issuer to deliver a security purchased by the Fund on a when-issued basis
may result in the Fund's incurring a loss or missing an opportunity to make an
alternative investment. When the Fund enters into a commitment to purchase
securities on a when-issued basis, it establishes a separate account with its
custodian consisting of cash or liquid high-grade debt securities equal to the
amount of the Fund's commitment, which are valued at their fair market value. If
on any day the market value of this segregated account falls below the value of
the Fund's commitment, the Fund will be required to deposit additional cash or
qualified securities into the account until equal to the value of the Fund's
commitment. When the securities to be purchased are issued, the Fund will pay
for the securities from available cash, the sale of securities in the segregated
account, sales of other securities and, if necessary, from sale of the
when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities the Fund is committed to purchase. 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. INVESTMENT GRADE FUND and TOTAL
RETURN FUND may each invest up to 5% of its net assets in 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 on zero coupon securities and the "interest" on pay-in-kind securities
must be included in a Fund's income. Thus, to continue to qualify for tax
treatment as a regulated investment company and to avoid a certain excise tax on
undistributed income, a Fund may be required to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. See
"Taxes." These distributions must be made from a Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. Each 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.
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PORTFOLIO TURNOVER. Although each Fund generally will not invest for
short-term trading purposes, portfolio securities may be sold from time to time
without regard to the length of time they have been held when, in the opinion of
the 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 within one year. A high rate of
portfolio turnover 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, 1995 and 1996, BLUE CHIP FUND'S
portfolio turnover rate was 25% and 45%, respectively, INVESTMENT GRADE FUND'S
portfolio turnover rate was 27% and 22%, respectively, and SPECIAL SITUATIONS
FUND'S portfolio turnover rate was 80% and 99%, respectively. For the fiscal
years ended December 31, 1995 and 1996, TOTAL RETURN FUND'S portfolio turnover
rate was 135% and 146%, respectively.
HEDGING AND OPTION INCOME STRATEGIES
The Adviser may engage in certain options and futures strategies to
hedge the Funds' portfolios, in other circumstances permitted by the Commodities
Futures Trading Commission ("CFTC") and, for TOTAL RETURN FUND, engage in
certain options strategies to enhance income. The instruments described below
are sometimes referred to collectively as "Hedging Instruments" and are defined
in Appendix B. Certain special characteristics of and risks associated with
using Hedging Instruments are discussed below. In addition to the
non-fundamental investment guidelines (described below) adopted by the Board of
Trustees to govern each Fund's investments in Hedging Instruments, 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, the CFTC and various state
regulatory authorities. In addition, a Fund's ability to use Hedging Instruments
will be limited by tax considerations. See "Taxes."
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
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. A Fund might not employ any of the strategies
described below, and there can be no assurance that any strategy will succeed.
The use of these strategies involve certain special risks, including (1)
dependence on 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, (4) the possible absence of a liquid secondary market for
any particular instrument at any time, and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences.
BLUE CHIP FUND. Although it does not intend to engage in these
strategies in the coming year, BLUE CHIP FUND may attempt to hedge against
changes in market conditions by buying U.S. exchange-traded put and call options
on stock indices and enter into closing transactions with respect to such
options.
INVESTMENT GRADE FUND. Although it does not intend to engage in these
strategies in the coming year, INVESTMENT GRADE FUND may buy and sell interest
rate futures contracts and buy and
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sell call and put options thereon traded on a U.S. exchange or board of trade.
INVESTMENT GRADE FUND also may enter into closing transactions with respect to
such options to terminate an existing position.
SPECIAL SITUATIONS FUND. Although it does not intend to engage in these
strategies in the coming year, SPECIAL SITUATIONS FUND may enter into forward
currency contracts.
TOTAL RETURN FUND. Although it does not intend to engage in these
strategies in the coming year, TOTAL RETURN FUND may buy U.S. exchange-traded
put and call options on stock indices and enter into closing transactions with
respect to such options. The Fund also may sell covered listed put and call
options and buy call and put options on its portfolio securities and may enter
into closing transactions with respect to such options. The Fund may also 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. The Fund also may enter into forward
currency contracts.
COVER FOR HEDGING AND OPTION INCOME STRATEGIES. No Fund will use
leverage in its hedging and option income strategies. Each 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, currencies or other options or futures contracts or (2) cash and
other 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, currencies 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. TOTAL RETURN 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. TOTAL RETURN 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.
TOTAL RETURN 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
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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 over-the-counter
("OTC") options written by the Fund, to the extent described under "Investment
Policies--Restricted and Illiquid Securities" 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 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).
TOTAL RETURN 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.
BLUE CHIP FUND and TOTAL RETURN FUND may purchase U.S. exchange-traded
put and call options on stock indices in much the same manner as the more
traditional equity and debt options discussed above, except that stock index
options may serve as a hedge against overall fluctuations in the securities
markets (or a market sector) rather than anticipated increases or decreases in
the value of a particular security. A stock index assigns relative values to the
stock included in the index and fluctuates with changes in such values. Stock
index options operate in the same way as the more traditional equity options,
except that settlements of stock index options are effected with cash payments
and do not involve delivery of securities. Thus, upon settlement of a stock
index option, the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
stock index. The effectiveness of hedging techniques using stock index options
will depend on the extent to which price movements in the stock index selected
correlate with price movements of the securities in which a Fund invests.
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.
OPTIONS GUIDELINES. In view of the risks involved in using options, the
Board of Trustees has adopted non-fundamental investment guidelines to govern a
Fund's use of options that may be modified by the Board without shareholder
vote: (1) options will be purchased or written only when the Adviser
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believes that there exists a liquid secondary market in such options; and (2) no
Fund may purchase a put or call option if the value of the option's premium,
when aggregated with the premiums on all other options held by such Fund,
exceeds 5% of that Fund's total assets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. A Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If TOTAL RETURN 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 put or call option previously written); this is known as a closing
purchase transaction. Conversely, in order to terminate its right to purchase or
sell specified securities 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 markets or, in the case of stock index
options, fluctuations in the market sector represented by the index selected.
Options normally have expiration dates of up to nine months. Unless an
option purchased by 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.
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 BLUE CHIP FUND and TOTAL RETURN FUND
intend 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 a 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, the Fund may not
sell the underlying assets used to cover an option during the period it is
obligated under the option. This requirement may impair 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.
Stock index options are settled exclusively in cash. If a Fund
purchases an option on a stock index, the option is settled based on the closing
value of the index on the exercise date. Thus, a holder of a stock index option
who exercises it before the closing index value for that day is available runs
the risk that the level of the underlying index may subsequently change. For
example, in the case of a call
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option, if such a change causes the closing index value to fall below the
exercise price of the option on the index, the exercising holder will be
required to pay the difference between the closing index value and the exercise
price of the option.
A 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. INVESTMENT GRADE FUND and TOTAL RETURN 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 each invests.
TOTAL RETURN FUND may sell stock index futures contracts in
anticipation of a general market or market sector decline that could adversely
affect the market value of the Fund's portfolio. To the extent that a portion of
the Fund's portfolio correlates with a given stock index, the sale of futures
contracts on that index could reduce the risks associated with a market decline
and thus provide an alternative to the liquidation of securities positions. The
Fund may purchase a stock index futures contract if a significant market or
market sector advance is anticipated. Such a purchase would serve as a temporary
substitute for the purchase of individual stocks, which stocks may then be
purchased in an orderly fashion. This strategy may minimize the effect of all or
part of an increase in the market price of securities that the Fund intends to
purchase. A rise in the price of the securities should be partially or wholly
offset by gains in the futures position.
TOTAL RETURN FUND may purchase a call option on a stock index future to
hedge against a market advance in equity securities that the Fund plans to
purchase at a future date. The Fund may write covered call options on stock
index futures as a partial hedge against a decline in the prices of stocks held
in the Fund's portfolio. The Fund also may purchase put options on stock index
futures contracts.
INVESTMENT GRADE FUND and TOTAL RETURN FUND may use interest rate
futures contracts and options thereon to hedge the debt portion of each of its
portfolio against changes in the general level of interest rates. Each Fund may
purchase an interest rate futures contract when it intends to purchase debt
securities but has not yet done so. This strategy may minimize the effect of all
or part of an increase in the market price of those securities because a rise in
the price of the securities prior to their purchase may either be offset by an
increase in the value of the futures contract purchased by the Fund or avoided
by taking delivery of the debt securities under the futures contract.
Conversely, a fall in the market price of the underlying debt securities may
result in a corresponding decrease in the value of the futures position. Each
Fund may sell an interest rate futures contract in order to continue to receive
the income from a debt security, while endeavoring to avoid part or all of the
decline in the market value of that security that would accompany an increase in
interest rates.
INVESTMENT GRADE FUND and TOTAL RETURN FUND may purchase a call option
on an interest rate futures contract to hedge against a market advance in debt
securities that such Fund plans to acquire at a future date. Each Fund also may
write covered call options on interest rate futures contracts as a partial hedge
against a decline in the price of debt securities held in such Fund's portfolio
or purchase put options on interest rate futures contracts in order to hedge
against a decline in the value of debt securities held in the Fund's portfolio.
INVESTMENT GRADE FUND and TOTAL RETURN FUND will use futures contracts
and options thereon solely in bona fide hedging transactions or under other
circumstances permitted by the CFTC and INVESTMENT GRAD FUND will not enter into
such investments for which the aggregate initial
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margin and premiums exceed 5% of that Fund's total assets. This does not limit a
Fund's assets at risk to 5%. Series Fund, on behalf of INVESTMENT GRAD Fund, has
represented the foregoing to the CFTC.
FUTURES GUIDELINES. In view of the risks involved in using futures
strategies described below, the Board of Trustees has adopted non-fundamental
investment guidelines to govern the use of such investments by INVESTMENT GRADE
FUND and TOTAL RETURN FUND that may be modified by the Board without shareholder
vote. In the event that either INVESTMENT GRADE FUND or TOTAL RETURN FUND enter
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
INVESTMENT GRADE FUND'S assets and (2) the aggregate margin deposits on all
outstanding futures contracts positions held by TOTAL RETURN FUND and premiums
paid on outstanding options and futures contracts, after taking into account
unrealized profits and losses, will not exceed 5% of TOTAL RETURN FUND'S total
assets, or enter into any futures contracts or related options if the aggregate
amount of TOTAL RETURN FUND's commitments under outstanding futures contracts
positions and related options written by TOTAL RETURN FUND would exceed the
market value of TOTAL RETURN FUND's total assets. This 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, INVESTMENT GRADE FUND and TOTAL
RETURN FUND may not purchase interest rate futures contracts if immediately
thereafter more than 30% of such Fund's 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, INVESTMENT GRADE FUND and TOTAL RETURN FUND are 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
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event of adverse price movements a Fund would have to make daily cash payments
of variation margin (except in the case of purchased options). However, in the
event futures contracts have been used to hedge portfolio securities, such
securities will not be sold until the contracts can be terminated. In such
circumstances, an increase in the price of the securities, if any, may partially
or completely offset losses on the futures contract. However, there is no
guarantee that the price of the securities will, in fact, correlate with the
price movements in the contracts and thus provide an offset to losses on the
contracts.
Successful use by INVESTMENT GRADE FUND and TOTAL RETURN 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 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 a
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 INVESTMENT GRADE FUND and TOTAL RETURN FUND intend 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 a
Fund purchases an option is the premium paid for the option and the transaction
costs, there may be circumstances when the purchase of an option on a futures
contract would result in a loss to that 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.
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<PAGE>
INVESTMENT GRADE FUND'S and TOTAL RETURN FUND'S activities in the
futures and related options markets may result in a higher portfolio turnover
rate and additional transaction costs in the form of added brokerage
commissions; however, each Fund also may save on commissions by using futures
and related options as a hedge rather than buying or selling individual
securities or currencies in anticipation or as a result of market movements.
FORWARD CURRENCY CONTRACTS. SPECIAL SITUATIONS FUND and TOTAL RETURN
FUND may use forward currency contracts to protect against uncertainty in the
level of future exchange rates. These Fund will not speculate with forward
currency contracts or foreign currency exchange rates.
SPECIAL SITUATIONS FUND and TOTAL RETURN FUND may enter into forward
currency contracts with respect to specific transactions. For example, when a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, or when a Fund anticipates the receipt in a foreign
currency of dividend or interest payments on a security that it holds, the Fund
may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars or foreign
currency, of the amount of foreign currency involved in the underlying
transaction. A Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date of which
such payments are made or received.
A Fund also may use forward currency contracts in connection with
portfolio positions to lock in the U.S. dollar value of those positions, to
increase the Fund's exposure to foreign currencies that the Adviser believes may
rise in value relative to the U.S. dollar or to shift a Fund's exposure to
foreign currency fluctuations from one country to another. This investment
practice generally is referred to as "cross-hedging" when another foreign
currency is used.
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market and
bear the expense of such purchase if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency a Fund is obligated to deliver. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward contracts involve the risk that anticipated currency movements will not
be accurately predicted, causing a Fund to sustain losses on these contracts and
transactions costs. Unless a Fund's obligations under a forward contract are
covered, the Fund will enter into a forward contract only if the Fund maintains
cash assets in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contracts, as marked to
market daily.
At or before the maturity date of a forward contract requiring a Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. A Fund would realize a
gain or loss as a
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<PAGE>
result of entering into an offsetting forward currency contract under either
circumstance to the extent the exchange rate or rates between the currencies
involved moved between the execution dates of the first contract and the
offsetting contract. There can be no assurance that new forward contracts or
offsets always will be available for a Fund. Forward currency contracts also
involve a risk that the other party to the contract may fail to deliver currency
or pay for currency when due, which could result in substantial losses to a
Fund. The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
respective 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 that Fund, voting separately from any other Fund of Series Fund.
As provided in the Investment Company Act of 1940, as amended ("1940 Act"), a
"vote of a majority of the outstanding voting securities of the Fund" means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares of the Fund present at a meeting, if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. Except with respect to borrowing, changes in values of a particular
Fund's assets will not cause a violation of the following investment
restrictions so long as percentage restrictions are observed by that Fund at the
time it purchases any security.
BLUE CHIP FUND. BLUE CHIP FUND will not:
(1) Make short sales of securities to maintain a short position.
(2) Issue senior securities, borrow money or pledge its assets except
that the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 5% (taken at the lower of cost or current value) of its
total assets (not including the amount borrowed) and pledge its assets to secure
such borrowings.
(3) Make loans, except loans of portfolio securities (limited to
10% of the Fund's total assets).
(4) Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result: (1) as to 75% of
the Fund's total assets (taken at current value), more than 5% of such assets
would then be invested in securities of a single issuer, or (2) 25% or more of
the Fund's total assets (taken at current value) would be invested in a single
industry.
(5) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(6) Pledge, mortgage or hypothecate any of its assets except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (2) above, provided the Fund maintains asset coverage of at least 300%
for pledged assets.
(7) Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in real
estate.
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(8) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(9) Make investments for the purpose of exercising control or
management.
(10) Purchase any securities on margin.
(11) Purchase or sell portfolio securities from or to the Adviser or
any director, officer or Trustee thereof or of Series Fund, as principals.
(12) Invest in any securities of any issuer if, to the knowledge of
Series Fund, any officer, director or Trustee of Series Fund 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 the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) less than three years old.
(2) Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets would
be invested in such securities, or except as part of a merger, consolidation or
other acquisition.
(3) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(4) Write, purchase or sell options (puts, calls or combinations
thereof), except that the Fund may purchase put and call options on U.S.
exchange-traded options on stock indices (and may enter into closing sale
transactions with respect to such options) provided that the premiums paid for
such options do not exceed 5% of the Fund's total assets.
(5) Purchase warrants if as a result the Fund would then have more than
5% of its total assets invested in warrants (of which no more than 2% may be
warrants not listed on the New York or American Stock Exchange).
(6) 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; the Adviser will monitor
the liquidity of such restricted securities under the supervision of the Board
of Trustees.
Series Fund, on behalf of the Fund, has filed the following undertaking
to comply with requirements of certain states in which shares of the Fund are
sold, which may be changed without
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<PAGE>
shareholder approval: Notwithstanding fundamental investment restriction (7)
above, the Fund will not invest in real estate limited partnership interests or
in interests in real estate investment trusts that are not readily marketable.
INVESTMENT GRADE FUND. INVESTMENT GRADE FUND will not:
(1) Make short sales of securities "against the box" in excess of
10% of the Fund's total assets.
(2) Issue senior securities, as defined in the 1940 Act, or borrow
money, except that the Fund may borrow money from a bank for temporary or
emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed).
(3) Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result: (1) as to 75% of
the Fund's total assets (taken at current value), more than 5% of such assets
would then be invested in securities of a single issuer, or (2) 25% or more of
the Fund's total assets (taken at current value) would be invested in a single
industry.
(4) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(5) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (2) above, provided the Fund maintains asset coverage of at least 300%
for all such borrowings.
(6) Purchase or sell commodities or commodity contracts or real estate
or interests in real estate, although it may purchase and sell securities which
are secured by real estate, securities of companies which invest or deal in real
estate and interests in real estate investment trusts. However, this restriction
will not preclude bona fide hedging transactions, including the purchase and
sale of futures contracts and related options.
(7) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make investments for the purpose of exercising control or
management.
(9) Purchase any securities on margin (although the Fund may obtain
such short-term credit as may be necessary for the purchases and sales of its
portfolio securities).
(10) Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies, (b) through
the lending of its portfolio securities, or (c) to the extent a repurchase
agreement is deemed a loan.
(11) Purchase or sell portfolio securities from or to the Adviser or
any director, officer or Trustee thereof or of Series Fund, as principals.
(12) Invest in any securities of any issuer if, to the knowledge of
Series Fund, any officer, director or Trustee of Series Fund 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.
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The following investment restrictions are not fundamental and may be
changed without shareholder approval. These investment restrictions provide that
the Fund will not:
(1) Invest more than 15% of its assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market are not deemed illiquid for purposes of this limitation; the Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Trustees.
(2) Purchase any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) less than three years old.
(3) Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets would
be invested in such securities, or except as part of a merger, consolidation or
other acquisition.
(4) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(5) Purchase warrants if as a result the Fund would then have more than
5% of its total assets, valued at the lower of cost or market, invested in
warrants (of which no more than 2% may be warrants not listed on the New York or
American Stock Exchange).
(6) Write, purchase or sell options (puts, calls or combinations
thereof), except that the Fund may purchase or write put and call U.S.
exchange-traded options on futures contracts, and may enter into closing
transactions with respect to such options.
Series Fund, on behalf of the Fund, has filed the following
undertakings to comply with requirements of certain states in which shares of
the Fund are sold, which may be changed without shareholder approval:
(1) Notwithstanding fundamental investment restriction (5) above, the
Fund will not borrow, pledge, mortgage or hypothecate in excess of one-third of
its total assets.
(2) Notwithstanding fundamental investment restriction (6) above, the
Fund will not invest in real estate limited partnership interests or in
interests in real estate investment trusts that are not readily marketable and
will not invest more than 5% of its total assets in puts, calls, straddles,
spreads or any combination thereof.
(3) All investors in the Fund shall receive written notification at
least thirty days prior to a change in the Fund's investment objective and that
there shall be no exit fee for those investors who desire to redeem their Fund's
shares based upon receipt of such notification.
SPECIAL SITUATIONS FUND. SPECIAL SITUATIONS FUND will not:
(1) Make short sales of securities "against the box" in excess of
10% of the Fund's total assets.
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<PAGE>
(2) Issue senior securities or borrow money, except that the Fund may
borrow money from a bank for temporary or emergency purposes in amounts not
exceeding 5% (taken at the lower of cost or current value) of its total assets
(not including the amount borrowed).
(3) Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result: (i) as to 75% of
the Fund's total assets (taken at current value), more than 5% of such assets
would then be invested in securities of a single issuer, or (ii) 25% or more of
the Fund's total assets (taken at current value) would be invested in a single
industry.
(4) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(5) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (2) above, provided the Fund maintains asset coverage of at least 300%
for all such borrowings.
(6) Buy or sell commodities or commodity contracts including futures
contracts, or real estate or interests in real estate, although it may purchase
and sell securities which are secured by real estate, securities of companies
which invest or deal in real estate and interests in real estate investment
trusts.
(7) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make investments for the purpose of exercising control or
management.
(9) Purchase any securities on margin.
(10) Make loans, except through repurchase agreements.
(11) Purchase or sell portfolio securities from or to the Adviser or
any director, officer or Trustee thereof or of Series Fund, as principals.
(12) Invest in any securities of any issuer if, to the knowledge of
Series Fund, any officer, director or Trustee of Series Fund 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) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market are not deemed illiquid for purposes of this limitation; the Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Trustees.
(2) Purchase any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) less than three years old.
21
<PAGE>
(3) Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets would
be invested in such securities, or except as part of a merger, consolidation or
other acquisition.
(4) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(5) Write, purchase or sell options (puts, calls or combinations
thereof).
(6) Purchase warrants if as a result the Fund would then have more than
5% of its total assets, valued at the lower of cost or market, invested in
warrants (of which no more than 2% may be warrants not listed on the New York or
American Stock Exchange).
Series Fund, on behalf of the Fund, has filed the following undertaking
to comply with requirements of certain states in which shares of the Fund are
sold, which may changed without shareholder approval: Notwithstanding
fundamental investment restriction (6) above, the Fund will not invest in real
estate limited partnership interests or in interests in real estate investment
trusts that are not readily marketable.
TOTAL RETURN FUND. TOTAL RETURN FUND 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).
(4) Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result: (i) as to 75% of
the Fund's total assets (taken at current value), more than 5% of such assets
would then be invested in securities of a single issuer, or (ii) 25% or more of
the Fund's total assets (taken at current value) would be invested in a single
industry.
(5) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(6) Buy or sell real estate or interests in real estate, although it
may purchase and sell securities which are secured by real estate and securities
of companies which invest or deal in real estate, including limited partnership
interests.
(7) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
22
<PAGE>
(8) Make investments for the purpose of exercising control or
management.
(9) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of Series Fund, as principals.
(10) Invest in any securities of any issuer if, to the knowledge of
Series Fund, any officer, director or Trustee of Series Fund 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 the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) less than three years old.
(2) Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets would
be invested in such securities, or except as part of a merger, consolidation or
other acquisition.
(3) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(4) Purchase warrants if as a result the Fund would then have more than
5% of its total assets, valued at the lower of cost or market, invested in
warrants (of which no more than 2% may be warrants not listed on the New York or
American Stock Exchange).
(5) 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; the Adviser will monitor
the liquidity of such restricted securities under the supervision of the Board
of Trustees.
(6) 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).
(7) Enter into futures contracts or options on futures contracts if
immediately thereafter the aggregate margin deposits on all outstanding futures
contracts positions held by the Fund and premiums paid on outstanding options on
futures contracts, after taking into account unrealized profits and losses,
would exceed 5% of the market value of the total assets of the Fund, or enter
into any futures contracts or options on futures contracts if the aggregate
amount of the Fund's commitments under outstanding futures contracts positions
and options on future contracts written by the Fund would exceed the market
value of the total assets of the Fund.
23
<PAGE>
(8) 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.
(9) 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.
(10) Sell securities short, unless it owns or has the right to obtain
securities, without additional consideration, equivalent in kind and amount to
the securities sold short, and provided that transactions in options, futures
contracts, swaps, forward contracts, and other derivative instruments are not
deemed to constitute selling securities short.
Series Fund, on behalf of the Fund, has filed the following
undertaking to comply with requirements of certain states in which shares of the
Fund are sold, which may be changed without shareholder approval:
Notwithstanding fundamental investment restriction (6) above, the Fund will not
invest in real estate limited partnership interests or in interests in real
estate investment trusts that are not readily marketable.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of Series
Fund, their age, business address and principal occupations during the past five
years. Unless otherwise noted, an individual's business address is 95 Wall
Street, New York, New York 10005.
GLENN O. HEAD*+ (71), President and Trustee. Chairman of the Board and Director,
Administrative Data Management Corp. ("ADM"), FIMCO, Executive Investors
Management Company, Inc. ("EIMCO"), First Investors Corporation ("FIC"),
Executive Investors Corporation ("EIC") and First Investors Consolidated
Corporation ("FICC").
JAMES J. COY (83), Trustee, 90 Buell Lane, East Hampton, NY 11937. Retired;
formerly Senior Vice President, James Talcott, Inc. (financial institution).
ROGER L. GRAYSON* (40), Trustee, FIC and FICC; President and Director, First
Investors Resources, Inc.; Commodities Portfolio Manager.
KATHRYN S. HEAD*+ (41), Trustee, 581 Main Street, Woodbridge, NJ 07095.
President, FICC, EIMCO, ADM and FIMCO; Vice President, Chief Financial Officer
and Trustee, FIC and EIC; President and Trustee, First Financial Savings Bank,
S.L.A.
REX R. REED (75), Trustee, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN (75), Trustee, 145 Elm Drive, Roslyn, NY 11576. Retired;
formerly President, Belvac International Industries, Ltd. and President, Central
Dental Supply.
NANCY SCHAENEN (65), Trustee, 56 Midwood Terrace, Madison, NJ 07940. Trustee,
Drew University and DePauw University.
24
<PAGE>
JAMES M. SRYGLEY (64), Trustee, 33 Hampton Road, Chatham, NJ 07982. Principal,
Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (65), Trustee and Chairman of the Board; Director, FIMCO, FIC,
FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH (67), Trustee, RR1, Box 2554, Upland Downs Road, Manchester
Center, VT 05255. Retired; formerly financial and planning executive with
American Telephone & Telegraph Company.
JOSEPH I. BENEDEK (39), Treasurer, 581 Main Street, Woodbridge, NJ 07095.
Treasurer, FIC, FIMCO, EIMCO and EIC; Comptroller and Treasurer, FICC.
CONCETTA DURSO (62), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
PATRICIA D. POITRA (42), Vice President. Vice President, First Investors Series
Fund, First Investors U.S. Government Plus Fund and Executive Investors Trust;
Director of Equities, FIMCO.
MARGARET HAGGERTY (32), Vice President. Portfolio Manager since November 1993;
Analyst from 1990 to 1993.
CLARK D. WAGNER (38), Vice President. Vice President, Executive Investors Trust,
First Investors Insured Tax Exempt Fund, Inc., First Investors Multi-State
Insured Tax Free Fund, First Investors New York Insured Tax Free Fund, Inc. and
First Investors Government Fund, Inc.
NANCY W. JONES (53), Vice President. Vice President, First Investors Asset
Management Company, Inc. and First Investors Fund For Income, Inc.; Portfolio
Manager, FIMCO.
- ----------
* These Trustees may be deemed to be "interested persons," as defined in the
1940 Act.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
All of the officers and Trustees, except for Ms. Haggerty, Ms. Poitra
and Mr. Wagner hold identical or similar positions with 14 other registered
investment companies in the First Investors Family of Funds. Mr. Head is also an
officer and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation, School Financial Management
Services, Inc. and Specialty Insurance Group, Inc. Ms. Head is also an officer
and/or Director of First Investors Life Insurance Company, First Investors
Credit Corporation, School Financial Management Services, Inc., First Investors
Credit Funding Corporation, N.A.K. Realty Corporation, Real Property Development
Corporation, First Investors Leverage Corporation, Route 33 Realty Corporation
and Specialty Insurance Group, Inc.
25
<PAGE>
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT ESTIMATED FROM FIRST
AGGREGATE BENEFITS ACCRUED ANNUAL INVESTORS FAMILY
COMPENSATION AS PART OF FUND BENEFITS UPON OF FUNDS PAID TO
TRUSTEE** FROM FUND* EXPENSES RETIREMENT TRUSTEES*
- --------- ------------ ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
James J. Coy $2,400 $-0- $-0- $37,200
Roger L. Grayson -0- -0- -0- -0-
Glenn O. Head -0- -0- -0- -0-
Kathryn S. Head -0- -0- -0- -0-
Rex R. Reed 2,400 -0- -0- 37,200
Herbert Rubinstein 2,400 -0- -0- 37,200
James M. Srygley 2,200 -0- -0- 34,100
John T. Sullivan -0- -0- -0- -0-
Robert F. Wentworth 2,400 -0- -0- 37,200
</TABLE>
* Compensation to officers and interested Trustees of Series Fund is paid
by the Adviser. In addition, compensation to non-interested Trustees of
Series Fund is currently voluntarily paid by the Adviser.
** Nancy Schaenen was not a Trustee in 1996.
MANAGEMENT
Investment advisory services to each Fund are provided by First
Investors Management Company, Inc. pursuant to an Investment Advisory Agreement
("Advisory Agreement") dated June 13, 1994. The Advisory Agreement was approved
by the Board of Trustees of Series Fund, including a majority of the Trustees
who are not parties to the Funds' Advisory Agreement or "interested persons" (as
defined in the 1940 Act) of any such party ("Independent Trustees"), in person
at a meeting called for such purpose and by a majority of the public
shareholders of each Fund.
Pursuant to the Advisory Agreement, FIMCO shall supervise and manage
each Fund's investments, determine each Fund's portfolio transactions and
supervise all aspects of each Fund's operations, subject to review by Series
Fund's Trustees. The Advisory Agreement also provides that FIMCO shall provide
Series Fund with certain executive, administrative and clerical personnel,
office facilities and supplies, conduct the business and details of the
operation of Series Fund and each Fund and assume certain expenses thereof,
other than obligations or liabilities of the Funds. The Advisory Agreement may
be terminated at any time, with respect to a Fund, without penalty by Series
Fund's Trustees or by a majority of the outstanding voting securities of such
Fund, or by FIMCO, in each instance on not less than 60 days' written notice,
and shall automatically terminate in the event of its assignment (as defined in
the 1940 Act). The Advisory Agreement also provides that it will continue in
effect, with respect to a Fund, for a period of over two years only if such
continuance is approved annually either by Series Fund's Trustees or by a
majority of the outstanding voting securities of such Fund, and, in either case,
by a vote of a majority of Series Fund's Independent Trustees voting in person
at a meeting called for the purpose of voting on such approval.
Under the Advisory Agreement, each Fund pays the Adviser an annual fee,
paid monthly, according to the following schedules:
26
<PAGE>
BLUE CHIP FUND, TOTAL RETURN FUND, SPECIAL SITUATIONS FUND
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
INVESTMENT GRADE FUND
Annual
Average Daily Net Assets Rate
- ------------------------ -----
Up to $300 million............................................... 0.75%
In excess of $300 million up to $500 million..................... 0.72
In excess of $500 million up to $750 million..................... 0.69
Over $750 million................................................ 0.66
For the fiscal year ended December 31, 1994, BLUE CHIP FUND, INVESTMENT
GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND paid $910,508,
$303,734, $560,009 and $411,603, respectively, in advisory fees. For the same
period, the Adviser voluntarily waived advisory fees accrued by BLUE CHIP FUND,
INVESTMENT GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND in the
amounts of $303,502, $46,728, $186,670 and $137,201, respectively. In addition,
for the same period, the Adviser voluntarily reimbursed INVESTMENT GRADE FUND
the amount of $85,012.
For the fiscal year ended December 31, 1995, BLUE CHIP FUND, INVESTMENT
GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND paid $1,112,369,
$315,396, $829,137 and $396,040, respectively, in advisory fees. For the same
period, the Adviser voluntarily waived advisory fees accrued by BLUE CHIP FUND,
INVESTMENT GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND in the
amounts of $370,790, $48,523, $276,379 and $132,013. In addition, for the same
period, the Adviser voluntarily reimbursed INVESTMENT GRADE FUND the amount of
$51,516.
For the fiscal year ended December 31, 1996, BLUE CHIP FUND, TOTAL
RETURN FUND, SPECIAL SITUATIONS FUND and INVESTMENT GRADE FUND paid $1,589,142,
$417,844, $1,123,731 and $319,601, respectively, in advisory fees. For the same
period, the Adviser voluntary waived advisory fees accrued by BLUE CHIP FUND,
TOTAL RETURN FUND, SPECIAL SITUATIONS FUND and INVESTMENT GRADE FUND in the
amounts of $490,381, $139,362, $374,577 and $49,170, respectively. In addition,
for the same period, the Adviser voluntarily reimbursed expenses for INVESTMENT
GRADE FUND in the amount of $103,287.
The Adviser has an Investment Committee composed of George V. Ganter,
Margaret Haggerty, Glenn O. Head, Nancy W. Jones, Patricia D. Poitra, Michael
O'Keefe, Clark D. Wagner and Richard Guinnessey. The Committee usually meets
weekly to discuss the composition of the portfolio of each Fund and to review
additions to and deletions from the portfolios.
Each 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
27
<PAGE>
preparing, printing and mailing prospectuses and shareholder reports to such
shareholders; and proxy and shareholder meeting expenses.
UNDERWRITER
Series Fund 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 Funds.
Pursuant to the Underwriting Agreement, the Underwriter shall bear all fees and
expenses incident to the registration and qualification of the Funds' shares. In
addition, the Underwriter shall bear all expenses of sales material or
literature, including prospectuses and proxy materials, to the extent such
materials are used in connection with the sale of the Funds' shares, unless the
Fund has agreed to bear such costs pursuant to a plan of distribution. See
"Distribution Plans." The Underwriting Agreement was approved by Series Fund's
Board of Trustees, including a majority of the Independent Trustees. The
Underwriting Agreement provides that it will continue in effect from year to
year, with respect to a Fund, only so long as such continuance is specifically
approved at least annually by the Board of Trustees 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 Series Fund'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.
For the fiscal years ended December 31, 1994, 1995 and 1996, FIC
received underwriting commissions with respect to BLUE CHIP FUND of $1,207,688,
$1,356,655 and $2,440,825, respectively. For the same periods, FIC reallowed an
additional $52, $13,730 and $11,607, respectively, to outside dealers. For the
fiscal years ended December 31, 1994, 1995 and 1996, FIC received underwriting
commissions with respect to INVESTMENT GRADE FUND of $423,503, $303,161 and
$349,473, respectively. For the fiscal year ended December 31, 1996, FIC
reallowed an additional $2,060 to outside dealers. For the fiscal years ended
December 31, 1994, 1995 and 1996, FIC received underwriting commissions with
respect to SPECIAL SITUATIONS FUND of $1,494,055, $1,429,875 and $1,840,951,
respectively. For the same period, FIC reallowed an additional $40, $29,218 and
$44,618, respectively, to outside dealers. For the fiscal years ended December
31, 1994, 1995 and 1996, FIC received underwriting commissions with respect to
TOTAL RETURN FUND of $261,280, $155,548 and $228,699, respectively. For the
fiscal years ended December 31, 1994 and 1996, FIC reallowed an additional $257
and $2,402, respectively, to unaffiliated dealers.
DISTRIBUTION PLANS
As stated in the Funds' Prospectus, pursuant to a separate plan of
distribution for each class of shares adopted by Series Fund pursuant to Rule
12b-1 under the 1940 Act ("Class A Plan" and "Class B Plan" and, collectively,
"Plans"), each Fund is authorized to compensate the Underwriter for certain
expenses incurred in the distribution of that Fund's shares and the servicing or
maintenance of existing Fund shareholder accounts.
Each Plan was approved by Series Fund's Board of Trustees, including a
majority of the Independent Trustees, and by a majority of the outstanding
voting securities of the relevant class of each Fund. Each Plan will continue in
effect, with respect to a Fund, from year to year as long as its continuance is
approved annually by either Series Fund's Board of Trustees or by a vote of a
majority of the outstanding voting securities of the relevant class of shares of
that Fund. In either case, to continue, each Plan must be approved by the vote
of a majority of the Independent Trustees of Series Fund. Series Fund's 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
28
<PAGE>
were made. While each Plan is in effect, the selection and nomination of Series
Fund's Independent Trustees will be committed to the discretion of such
Independent Trustees then in office.
Each Plan can be terminated, with respect to a Fund, at any time by a
vote of a majority of Series Fund's Independent Trustees or by a vote of a
majority of the outstanding voting securities of the relevant class of shares of
that Fund. Any change to each Class B Plan that would materially increase the
costs to that class of shares of a Fund or any material change to each Class A
Plan may not be instituted without the approval of the outstanding voting
securities of the relevant class of shares of that Fund. Such changes also
require approval by a majority of Series Fund's Independent Trustees.
In adopting each Plan, the Board of Trustees considered all relevant
information and determined that there is a reasonable likelihood that each Plan
will benefit each Fund and their class of shareholders. The Board believes that
the amounts spent pursuant to each Plan have assisted each 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
each Fund.
In reporting amounts expended under the Plans to the Trustees, FIMCO
will allocate expenses attributable to the sale of each class of a 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 a Fund's shares will not be
used to subsidize the sale of any other class of that Fund's shares.
For the fiscal year ended December 31, 1996, BLUE CHIP FUND, INVESTMENT
GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND paid $603,372,
$142,304, $427,003 and $165,211, respectively, in fees pursuant to the Class A
Plan. For the same period, the Underwriter incurred the following Class A
Plan-related expenses with respect to each Fund:
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
BLUE CHIP FUND $388,749 $-0- $214,623
INVESTMENT GRADE FUND 90,108 -0- 52,196
SPECIAL SITUATIONS FUND 266,265 21,989 138,749
TOTAL RETURN FUND 104,647 -0- 60,564
For the fiscal year ended December 31, 1996, BLUE CHIP FUND, INVESTMENT
GRADE FUND, SPECIAL SITUATIONS FUND and TOTAL RETURN FUND paid $107,618,
$17,349, $74,995 and $6,986, respectively, in fees pursuant to the Class B Plan.
For the same period, the Underwriter incurred the following Class B Plan-related
expenses with respect to each Fund:
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
BLUE CHIP FUND $103,554 $2,680 $1,383
INVESTMENT GRADE FUND 14,038 3,112 199
SPECIAL SITUATIONS FUND 70,518 3,170 1,307
TOTAL RETURN FUND 6,861 63 61
29
<PAGE>
DETERMINATION OF NET ASSET VALUE
Except as provided herein, a security listed or traded on an exchange
or the Nasdaq Market is valued at its last sale price on the exchange or system
where the security is principally traded, and lacking any sales, the security is
valued at the mean between the closing bid and asked prices. Each security
traded in the over-the-counter ("OTC") market (including securities listed on
exchanges whose primary market is believed to be OTC) is valued at the mean
between the last bid and asked prices based upon quotes furnished by a market
maker for such securities. In the absence of market quotations, a Fund will
determine the value of bonds based upon quotes furnished by market makers, if
available, or in accordance with the procedures described herein. The Board of
Trustees has determined that securities may also be priced by a pricing service.
The pricing service uses quotations obtained from investment dealers or brokers
and other available information in determining value. Interactive Data
Corporation provides pricing services for corporate debt securities and foreign
equity securities. Muller Data Corporation provides pricing services for
municipal bonds. Short-term debt securities that mature in 60 days or less are
valued at amortized cost if their original term to maturity from the date of
purchase was 60 days or less, or by amortizing their value on the 61st day prior
to maturity if their term to maturity from the date of purchase exceeded 60
days, unless the Board of Trustees determines that such valuation does not
represent fair value. Securities for which market quotations are not readily
available and other assets are valued on a consistent basis at fair value as
determined in good faith by or under the direction of Series Fund's officers in
a manner specifically authorized by the Board of Trustees.
With respect INVESTMENT GRADE FUND "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. For
valuation purposes, with respect to SPECIAL SITUATIONS FUND and TOTAL RETURN
FUND, quotations of foreign securities in foreign currencies are converted into
U.S. dollar equivalents using the foreign exchange equivalents in effect.
Series Fund's Board of Trustees may suspend the determination of a
Fund's net asset value per share separately for each class of shares 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 U.S. 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.
ALLOCATION OF PORTFOLIO BROKERAGE
Purchases and sales of portfolio securities by the Funds may be
principal transactions. In principal transactions, portfolio securities are
normally purchased directly from the issuer or from an underwriter or market
maker for the securities. There will usually be no brokerage commissions paid by
a Fund for such purchases. Purchases from underwriters will include the
underwriter's commission or concession and purchases from dealers serving as
market makers will include the spread between the bid and asked price. Certain
money market instruments may be purchased by a Fund directly from an issuer, in
which no commission or discounts are paid. Each Fund may purchase fixed income
securities on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer.
Each Fund may deal in securities which are not listed on a national
securities exchange or the Nasdaq national market system but are traded in the
OTC market. Each Fund also may purchase
30
<PAGE>
listed securities through the "third market." When transactions are executed in
the OTC market, a Fund seeks to deal with the primary market makers, but when
advantageous it utilizes the services of brokers.
In effecting portfolio transactions, the Adviser seeks best execution
of trades either (1) at the most favorable and competitive rate of commission
charged by any broker or member of an exchange, or (2) with respect to agency
transactions, at a higher rate of commission if reasonable in relation to
brokerage and research services provided to a Fund or the Adviser by such member
or broker. In addition, upon the instruction of the Board of Trustees, the
Adviser may use dealer concessions available in fixed-price underwritings to pay
for research services. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of securities
for purchase or sale and statistical or factual information or opinions
pertaining to investments. The Adviser may use research and services provided to
it by brokers in servicing all the funds in the First Investors Group of Funds;
however, not all such services may be used by the Adviser in connection with a
Fund. No portfolio orders are placed with an affiliated broker, nor does any
affiliated broker-dealer participate in these commissions.
The Adviser may combine transaction orders placed on behalf of a Fund
and any other fund in the First Investors Group of Funds, any fund of Executive
Investors Trust 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 of
Trustees.
For the fiscal year ended December 31, 1994, SPECIAL SITUATIONS FUND
paid $96,700 in brokerage commissions. For the fiscal year ended December 31,
1994, BLUE CHIP FUND paid $291,605 in brokerage commissions. Of that amount,
$892 was paid in brokerage commissions to brokers who furnished research
services on portfolio transactions in the amount of $923,452. For the fiscal
year ended December 31, 1994, TOTAL RETURN FUND paid $96,700 in brokerage
commissions. Of that amount, $2,350 was paid in brokerage commissions to brokers
who furnished research services on portfolio transactions in the amount of
$672,269. For the same period, INVESTMENT GRADE FUND did not pay brokerage
commissions.
For the fiscal year ended December 31, 1995, BLUE CHIP FUND paid
$125,137 in brokerage commissions. Of that amount, $74,088 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $42,331,633. For the fiscal year ended December 31, 1995, TOTAL
RETURN FUND paid $57,607 in brokerage commissions. Of such amount, $9,712 was
paid in brokerage commissions to brokers who furnished research services on
portfolio transactions in the amount of $5,121,579. For the fiscal year ended
December 31, 1995, SPECIAL SITUATIONS FUND paid $146,529 in brokerage
commissions. Of such amount $65,187 was paid in brokerage commissions to brokers
who furnished research services on portfolio transactions in the amount of
$25,626,484. For the same period, INVESTMENT GRADE FUND did not pay brokerage
commissions.
For the fiscal year ended December 31, 1996, BLUE CHIP FUND paid
$267,278 in brokerage commissions. Of that amount, $121,545 was paid in
brokerage commissions to brokers who furnished research services on portfolio
transactions in the amount of $60,753,840. For the fiscal year ended December
31, 1995, TOTAL RETURN FUND paid $93,483 in brokerage commissions. Of such
amount, $30,665 was paid in brokerage commissions to brokers who furnished
research services on portfolio transactions in the amount of $15,308,100. For
the fiscal year ended December 31, 1995, SPECIAL SITUATIONS FUND paid $240,088
in brokerage commissions. Of such amount $125,413 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
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in the amount of $46,784,781. For the same period, INVESTMENT GRADE FUND did not
pay brokerage commissions.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND
REDEMPTION INFORMATION AND OTHER SERVICES
REDUCED SALES CHARGES--CLASS A SHARES
Reduced sales charges are applicable to purchases made at one time of
Class A shares of any one or more of the Funds or of any one or more of the
Eligible Funds, as defined in the Prospectus, by "any person," which term shall
include an individual, or an individual's spouse and children under the age of
21, or a trustee or other fiduciary of a single trust, estate or fiduciary
account (including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under section 401 of the Internal Revenue
Code of 1986, as amended (the "Code")), although more than one beneficiary is
involved; provided, however, that the term "any person" shall not include a
group of individuals whose funds are combined, directly or indirectly, for the
purchase of redeemable securities of a registered investment company, nor shall
it include a trustee, agent, custodian or other representative of such a group
of individuals.
Ownership of Class A and Class B shares of any Eligible Fund, except as
noted below, qualify for a reduced sales charge on the purchase of Class A
shares. Class A shares purchased at net asset value, Class A shares of the Money
Market Funds, or shares owned under a Contractual Plan are not eligible for the
purchase of Class A shares of a Fund at a reduced sales charge through a Letter
of Intent or the Cumulative Purchase Privilege.
LETTER OF INTENT. Any of the eligible persons described above may,
within 90 days of their investment, sign a statement of intent ("Letter of
Intent") in the form provided by the Underwriter, covering purchases of Class A
shares of any one or more of the Funds and of the other Eligible Funds to be
made within a period of thirteen months, provided said shares are currently
being offered to the general public and only in those states where such shares
may be legally sold, and thereby become eligible for the reduced sales charge
applicable to the total amount purchased. A Letter of Intent filed within 90
days of the date of investment is considered retroactive to the date of
investment for determination of the thirteen-month period. The Letter of Intent
is not a binding obligation on either the investor or the Fund. During the term
of a Letter of Intent, Administrative Data Management Corp. ("Transfer Agent")
will hold Class A shares representing 5% of each purchase in escrow, which
shares will be released upon completion of the intended investment.
Purchases of Class A Shares made under a Letter of Intent are made at
the sales charge applicable to the purchase of the aggregate amount of shares
covered by the Letter of Intent as if they were purchased in a single
transaction. The applicable quantity discount will be based on the sum of the
then current public offering price (i.e., net asset value plus applicable sales
charge) of all Class A shares and the net asset value of all Class B shares of a
Fund and of the other Eligible Funds, including Class B shares of the Money
Market Funds, currently owned, together with the aggregate offering price of
purchases to be made under the Letter of Intent. If all such shares are not so
purchased, a price adjustment is made, depending upon the actual amount invested
within such period, by the redemption of sufficient Class A shares held in
escrow in the name of the investor (or by the investor paying the commission
differential). A Letter of Intent can be amended (1) during the thirteen-month
period if the purchaser files an amended Letter of Intent with the same
expiration date as the original Letter of Intent, or (2) automatically after the
end of the period, if total purchases credited to the Letter of Intent
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qualify for an additional reduction in the sales charge. The Letter of Intent
privilege may be modified or terminated at any time by the Underwriter.
CUMULATIVE PURCHASE PRIVILEGE. Upon written notice to FIC, Class A
shares of a Fund are also available at a quantity discount on new purchases if
the then current public offering price (i.e., net asset value plus applicable
sales charge) of all Class A shares and the net asset value of all Class B
shares of a Fund and of the other Eligible Funds, including Class B shares of
the Money Market Funds, previously purchased and then owned, plus the value of
Class A shares being purchased at the current public offering price, amount to
$25,000 or more. Such quantity discounts may be modified or terminated at any
time by the Underwriter.
PURCHASE OF SHARES. When you open a Fund account, you must specify
which class of shares you wish to purchase. If not, your order will be processed
as follows: (1) if you are opening an account with a new registration with First
Investors your order will not be processed until the Fund receives notification
of which class of shares to purchase; (2) if you have existing First Investors
accounts solely in either Class A shares or Class B shares with the identical
registration, your investment in the Fund will be made in the same class of
shares as your existing account(s); (3) if you are an existing First Investors
shareholder and own a combination of Class A and Class B shares with an
identical registration, your investment in the Fund will be made in Class B
shares; and (4) if you own in the aggregate at least $250,000 in any combination
of classes, your investment will be made in Class A shares.
SYSTEMATIC INVESTING
FIRST INVESTORS MONEY LINE. This service allows you to invest in a Fund
through automatic deductions from your bank checking account. Scheduled
investments in the minimum amount of $50 may be made on a bi-weekly,
semi-monthly, monthly, quarterly, semi-annual or annual basis. The maximum
amount which may be invested through First Investors Money Line is $10,000 a
month. Shares of the Fund are purchased at the public offering price determined
at the close of business on the day your designated bank account is debited. You
may change the amount or discontinue this service at any time by calling
Shareholder Services or writing to Administrative Data Management Corp., 581
Main Street, Woodbridge, NJ 07095-1198, Attn: Control Dept. It takes between
three and five business days to process any changes you request be made to your
Money Line service. Money Line application forms are available from your
Representative or by calling Shareholder Services at 1-800-423-4026.
AUTOMATIC PAYROLL INVESTMENT. You also may arrange for automatic
investments in the minimum amount of $50 into a Fund on a systematic basis
through salary deductions, provided your employer has direct deposit
capabilities. Shares of the Fund are purchased at the public offering price
determined as of the close of business on the day the electronic fund transfer
is received by the Fund. You may change the amount or discontinue the service by
contacting your employer. An application is available from your Representative
or by calling Shareholder Services at 1-800-423-4026. Arrangements must also be
made with your employer's payroll department.
CROSS-INVESTMENT OF CASH DISTRIBUTIONS. You may elect to invest in
Class A or Class B shares of a Fund at net asset value all the cash
distributions from the same class of shares of another Eligible Fund. The
investment will be made at the net asset value per share of the Fund, generally
determined as of the close of business, on the business day immediately
following the record date of any such distribution. You may also elect to invest
cash distributions of a Fund's Class A or Class B shares into the same class of
another Eligible Fund, including the Money Market Funds. The investment will be
made at the net asset value per share of the other fund, generally determined as
of the close of business, on the business day immediately following the record
date of any such distribution. Cash distributions from a Fund's Class B shares
may only be invested into an existing Class B share account.
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If your distributions are to be invested in Class A shares in a new account, you
must invest a minimum of $50 per month. To arrange for cross-investing, call
Shareholder Services at 1-800-423-4026.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own noncertificated Class
A or Class B shares may establish a Systematic Withdrawal Plan ("Withdrawal
Plan"). If you have a Fund account with a value of at least $5,000, you may
elect to receive monthly, quarterly, semi-annual or annual checks for any
designated amount (minimum $25). You may have the payments sent directly to you
or persons you designate. The $5,000 minimum account balance is currently being
waived for required minimum distributions on retirement plan accounts.
Additionally, regardless of the amount of your Class A or Class B Fund account,
you may also elect to have the Systematic Plan payments automatically (i)
invested at net asset value in the same class of shares of any other Eligible
Fund, including the Money Market Funds, or (ii) paid to First Investors Life
Insurance Company for the purchase of a life insurance policy or a variable
annuity. If your Systematic Plan payments are to be invested in a new Class A
Eligible Fund account, you must invest a minimum of $600 per year. Systematic
Plan payments from a Class B account must be invested in an existing Class B
Eligible Fund account. Dividends and other distributions, if any, are reinvested
in additional shares of the same class of the Fund. Shareholders may add shares
to the Withdrawal Plan or terminate the Withdrawal Plan at any time. Withdrawal
Plan payments will be suspended when a distributing Fund has received notice of
a shareholder's death on an individual account. Payments may recommence upon
receipt of written alternate payment instructions and other necessary documents
from the deceased's legal representative. Withdrawal payments will also be
suspended when a payment check is returned to the Transfer Agent marked as
undeliverable by the U.S. Postal Service after two consecutive mailings.
Shareholders who own Class B shares may establish a Withdrawal Plan and
elect to receive up to 8% of the value of their account (calculated as set forth
below) each year without incurring any CDSC. Shares not subject to a CDSC (such
as shares representing reinvestment of distributions) will be redeemed first and
will count toward the 8% limitation. If the shares not subject to a CDSC are
insufficient for this purpose, then shares subject to the lowest CDSC will be
redeemed next until the 8% limit is reached. The 8% figure is calculated on a
pro rata basis at the time of the first payment made pursuant to the Plan and
recalculated thereafter on a pro rata basis at the time of each Plan payment.
Therefore, shareholders who have chosen the Plan based on a percentage of the
value of their account of up to 8% will be able to receive Plan payments without
incurring a CDSC. However, shareholders who have chosen a specific dollar amount
(for example, $100 per month) for their periodic Plan payment should be aware
that the amount of that payment not subject to a CDSC may vary over time
depending on the value of their account. For example, if the value of the
account is $15,000 at the time of payment, the shareholder will receive $100
free of the CDSC (8% of $15,000 divided by 12 monthly payments). However, if at
the time of a payment the value of the account has fallen to $14,000, the
shareholder will receive $93.33 free of any CDSC (8% of $14,000 divided by 12
monthly payments) and $6.67 subject to the lowest applicable CDSC. This
privilege may be revised or terminated at any time.
The withdrawal payments derived from the redemption of sufficient
shares in the account to meet designated payments in excess of dividends and
other distributions may deplete or possibly extinguish the initial investment,
particularly in the event of a market decline, and may result in a capital gain
or loss depending on the shareholder's cost. Purchases of additional shares of a
Fund concurrent with withdrawals are ordinarily disadvantageous to shareholders
because of tax liabilities and sales charges. To establish a Withdrawal Plan,
call Shareholder Services at 1-800-423-4026.
ELECTRONIC FUND TRANSFER. Shareholders may establish Electronic Fund
Transfers ("EFT") between Fund accounts and a predesignated bank account by
completing an application and having all shareholders' signatures guaranteed. If
the bank account registration is not identical to the Fund account, a signature
guarantee of the bank account holder is required for Money Line purchases.
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Shareholders may choose EFT privileges for Money Line purchases or redemptions
or both. The minimum EFT amount is $500 and the maximum is $50,000. The total
EFT redemptions during a 30 day period may not exceed $100,000. Each Fund has
the right, at its sole discretion, to limit or terminate your ability to
exercise the EFT privileges at any time. Fund shares will be purchased on the
day the Fund receives the funds, which is normally two days after the EFT is
initiated. The EFT normally will be initiated on the next bank business day
after the redemption request is received and will ordinarily be received by the
predesignated bank account within two days after transmission. However, once the
funds are transmitted, the time of receipt and the availability of the funds are
not within the Funds' control. No dividends are paid on the proceeds of redeemed
shares awaiting EFT.
CONVERSION OF CLASS B SHARES. Class B Shares of a Fund will
automatically convert to Class A shares of that Fund, based on the relative net
asset values per share of the two classes, as of the close of business on the
first business day of the month in which the eighth anniversary of the initial
purchase of such Class B shares occurs. For these purposes, the date of initial
purchase shall mean (1) the first business day of the month in which such Class
B shares were issued, or (2) for Class B shares obtained through an exchange or
a series of exchanges, the first business day of the month in which the original
Class B shares were issued. For conversion purposes, Class B shares purchased
through the reinvestment of dividends and other distributions paid in respect of
Class B shares will be held in a separate sub-account. Each time any Class B
shares in the shareholder's regular account (other than those in the
sub-account) convert to Class A shares, a pro rata portion of the Class B shares
in the sub-account also will convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
applicability of a ruling of the Internal Revenue Service ("IRS"), or the
availability of an opinion of counsel, that: (1) the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Code; and (2) the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Class B shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond eight years from the date of purchase. FIMCO has no reason to believe
that these conditions for the availability of the conversion feature will not
continue to be met.
If either Fund implements any amendments to its Class A Plan that would
increase materially the costs that may be borne under such Plan by Class A
shareholders, a new target class into which Class B shares will convert will be
established, unless a majority of Class B shareholders, voting separately as a
class, approve the proposal.
WAIVERS OF CDSC ON CLASS B SHARES. The CDSC imposed on Class B shares
does not apply to: (a) any redemption pursuant to the tax-free return of an
excess contribution to an individual retirement account ("IRA") or other
qualified retirement plan if the Fund is notified at the time of such request;
(b) any redemption of a lump-sum or other distribution from qualified retirement
plans or accounts provided the shareholder has attained the minimum age of 70
1/2 years and has held the Class B shares for a minimum period of three years;
(c) any redemption by advisory accounts managed by the Adviser or any of its
affiliates or for shares held by the Adviser or any of its affiliates; (d) any
redemption by a tax-exempt employee benefit plan if continuance of the
investment would be improper under applicable laws or regulations; (e) any
redemption or transfer of ownership of Class B shares following the death or
disability, as defined in Section 72(m)(7) of the Code, of a shareholder if the
Fund is provided with proof of death or disability and with all documents
required by the Transfer Agent within one year after the death or disability;
(f) any redemption of shares purchased during the period April 29, 1996 through
June 30, 1996 with the proceeds from a redemption of shares of a fund in another
fund group for which no sales charge was paid, other than a money market fund or
shares held
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in a retirement plan account; and (g) certain redemptions pursuant to a
Withdrawal Plan (see "Systematic Withdrawal Plan"). For more information on what
specific documents are required, call Shareholder Services at 1-800-423-4026.
SIGNATURE GUARANTEES. The words "Signature Guaranteed" must appear in
direct association with the signature of the guarantor. Members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Medallion Signature Program), SEMP (Stock Exchanges Medallion Program) and FIC
are eligible signature guarantors. A notary public is not an acceptable
guarantor. Although each Fund reserves the right to require signature guarantees
at any other time, signature guarantees are required whenever: (1) the amount of
the redemption is over $50,000, (2) an exchange in the amount over $50,000 is
made into the Money Market Funds, (3) a redemption check is to be made payable
to someone other than the registered accountholder, other than major financial
institutions, as determined solely by the Fund and its agent, on behalf of the
shareholder, (4) a redemption check is to be mailed to an address other than the
address of record, preauthorized bank account, or to a major financial
institution for the benefit of a shareholder, (5) an account registration is
being transferred to another owner, (6) a transaction requires additional legal
documentation; (7) the redemption request is for certificated shares; (8) your
address of record has changed within 60 days prior to a redemption request; (9)
multiple owners have a dispute or give inconsistent instructions; (10) the
authority of a representative of a corporation, partnership, association or
other entity has not been established to the satisfaction of a Fund or its
agents; and (11) you elect EFT privileges. ERISA Title I 403(b) Plans and 401(k)
Plans are exempt from the signature guarantee requirement except for exchanges
or redemption in amounts greater than $50,000.
REINVESTMENT AFTER REDEMPTION. If you redeem Class A or Class B shares
in your Fund account, you can reinvest within six months from the date of
redemption all or any part of the proceeds in shares of the same class of the
same Fund or any other Eligible Fund (including the Money Market Funds), at net
asset value, on the date the Transfer Agent receives your purchase request. If
you reinvest the entire proceeds of a redemption of Class B shares for which a
CDSC has been paid, you will be credited for the amount of the CDSC. If you
reinvest less than the entire proceeds, you will be credited with a pro rata
portion of the CDSC. All credits will be paid in Class B shares of the fund into
which the reinvestment is being made. The period you owned the original Class B
shares prior to redemption will be added to the period of time you own Class B
shares acquired through reinvestment for purposes of determining (a) the
applicable CDSC upon a subsequent redemption and (b) the date on which Class B
shares automatically convert to Class A shares. If your reinvestment is into a
new account, other than the Money Market Funds, it must meet the minimum
investment and other requirements of the fund into which the reinvestment is
being made. If you reinvest into a new Money Market Fund account within one year
from the date of redemption, the minimum investment is $500. To take advantage
of this option, send your reinvestment check along with a written request to the
Transfer Agent within six months from the date of your redemption. Include your
account number and a statement that you are taking advantage of the
"Reinvestment Privilege."
TELEPHONE TRANSACTIONS. Fund shares not held in certificate form may be
exchanged or redeemed by telephone provided you have not declined telephone
privileges. Telephone exchanges are available between non-retirement accounts.
Telephone exchanges are also available between participant directed 401(k)
accounts where First Financial Savings (as defined below) acts as Custodian, IRA
accounts or 403(b) accounts of the same class of shares registered in the same
name. Telephone exchanges are also available from an individually registered
non-retirement account to an IRA account of the same class of shares in the same
name (provided an IRA application is on file). Telephone exchanges are not
available for exchanges of Fund shares for plan units.
As stated in the Funds' Prospectus, Series Fund, the Adviser, the
Underwriter and their officers, trustees and employees will not be liable for
any loss, damage, cost or expense arising out of
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any instruction (or any interpretation of such instruction) received by
telephone which they reasonably believe to be authentic. In acting upon
telephone instructions, these parties use procedures which are reasonably
designed to ensure that such instructions are genuine, such as (1) obtaining
some or all of the following information: account number, address, social
security number and such other information as may be deemed necessary; (2)
recording all telephone instructions; and (3) sending written confirmation of
each transaction to the shareholder's address of record.
CANCELLED CHECKS. Copies of cancelled purchase, liquidation or dividend
checks will be provided to shareholders upon request. Shareholders will be
charged $10.00 per check.
EMERGENCY PRICING PROCEDURES. In the event that the Funds must halt
operations during any day that they would normally be required to price under
Rule 22c-1 under the Investment Company of 1940 due to an emergency ("Emergency
Closed Day"), the Funds will apply the following procedures:
1. The Funds will make every reasonable effort to segregate orders
received on the Emergency Closed Day and give them the price that they would
have received but for the closing. The Emergency Closed Day price will be
calculated as soon as practicable after operations have resumed and will be
applied equally to sales, redemptions and repurchases that were in fact received
in the mail or otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Funds on an Emergency Closed Day, even if neither the Funds nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order, the order will be
considered received by a Fund when the postal service has delivered it to FIC's
Woodbridge offices prior to the close of regular trading on the NYSE, or such
other time as may be prescribed in the Funds' Prospectus; and
(b) In the case of a wire order, including a
Fund/SERV order, the order will be considered received when it is received in
good form by a FIC branch office or an authorized dealer prior to the close of
regular trading on the NYSE, or such other time as may be prescribed in the
Funds' Prospectus.
3. If the Funds are unable to segregate orders received on the
Emergency Closed Day from those received on the next day the Funds are open for
business, the Funds may give all orders the next price calculated after
operations resume.
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Funds may determine not to price their
portfolio securities if such prices would lead to a distortion of the net asset
value for the Funds and their shareholders.
RETIREMENT PLANS
PROFIT-SHARING/MONEY PURCHASE PENSION/401(K) PLANS. FIC offers
prototype Profit-Sharing, Money Purchase Pension and 401(k) Retirement Plans
("Retirement Plans"), approved by the IRS for corporations, sole proprietorships
and partnerships. Custodial Agreements can be utilized for such Retirement Plans
that provide that First Financial Savings Bank, S.L.A. ("First Financial
Savings"), an affiliate of FIC, will furnish all required custodial services.
FIC offers additional versions of prototype qualified retirement plans
for eligible employers, including 401(k), money purchase and profit-sharing
plans.
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Currently, there are no annual service fees chargeable to participants
in connection with a Retirement Plan account. Each Fund currently pays the
annual $10.00 custodian fee for each Retirement Plan account, if applicable,
maintained with such Fund. This policy may be changed at any time by a Fund on
45 days' written notice. First Financial Savings has reserved the right to waive
its fees at any time or to change the fees on 45 days' prior written notice.
The Retirement Plan documents contain further specific information
about the Retirement Plans and may be obtained from your Representative. Prior
to establishing a Retirement Plan, you are advised to consult with your legal
and tax advisers.
INDIVIDUAL RETIREMENT ACCOUNTS. A qualified individual may purchase
shares of a Fund through an IRA or, as an employee of a qualified employer,
through a simplified employee pension-IRA ("SEP-IRA") or a salary reduction
simplified employee pension-IRA ("SARSEP-IRA") furnished by FIC. Under the
related Custodial Agreements, First Financial Savings acts as custodian of each
of these retirement plans.
Effective January 1, 1997, legislation enables certain eligible
employees to establish a Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE-IRAs"). FIC intends to offer a prototype SIMPLE-IRA plan for
eligible employers. First Financial Savings will act as Custodian for the
SIMPLE-IRA plan.
The Funds offer IRA accounts with specific provisions tailored to meet
the needs of certain groups of investors. The custodian fees are disclosed in
the IRA documents provided to investors in such accounts.
A taxpayer generally may make an annual individual IRA contribution no
greater than the lesser of (a) 100% of his or her compensation or (b) $2,000 (or
$4,000 when also contributing to a spousal IRA). However, contributions are
deductible only under certain conditions. The requirements as to SEP-IRAs,
SARSEP-IRAs and SIMPLE-IRAs are described in IRS Forms 5305-SEP, 5305A-SEP and
5305-SIMPLE, respectively, which are provided to employers. Employers are
required to provide copies of these forms to their eligible employees. A
disclosure statement setting forth complete details of the IRA should be given
to each participant before the contribution is invested.
Currently, there are no annual service fees chargeable to a participant
in connection with an IRA, SEP-IRA or SARSEP-IRA. Each Fund currently pays the
annual $10.00 custodian fee for each IRA account maintained with such Fund. This
policy may be changed at any time by a Fund on 45 days' written notice to the
holder of any IRA, SEP-IRA or SARSEP-IRA. First Financial Savings has reserved
the right to waive its fees at any time or to change the fees on 45 days' prior
written notice to the holder of any IRA.
An application and other documents necessary to establish an IRA,
SEP-IRA or SARSEP-IRA, are available from your Representative. SIMPLE-IRA
applications will also be available. Prior to establishing an IRA, SEP-IRA,
SARSEP-IRA or SIMPLE-IRA, you are advised to consult with your legal and tax
advisers.
RETIREMENT BENEFIT PLANS FOR EMPLOYEES OF ELIGIBLE ORGANIZATIONS. FIC
makes available model custodial accounts under Section 403(b)(7) of the Code
("Custodial Accounts") to provide retirement benefits for employees of certain
eligible public educational institutions and other eligible non-profit
charitable, religious and humane organizations. The Custodial Accounts are
designed to permit contributions (up to a "maximum exclusion allowance") by
employees through salary reduction. First Financial Savings acts as custodian of
these accounts.
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Contributions may be made to a Custodial Account under the Optional
Retirement Program for Employees of Texas Institutions of Higher Education
("ORP"), either by salary reduction agreement or otherwise, in accordance with
the terms and conditions of the ORP, and under the Texas Deferred Compensation
Plan Program for eligible state employees by salary reduction agreement. In
addition, contributions may also be made to other deferred compensation plans
maintained by state or local governments, or their agencies, commonly referred
to as Section 457 plans.
Currently, there are no annual service fees chargeable to participants
in connection with a Custodial Account. Each Fund currently pays the annual
$10.00 custodian fee for each Custodial Account maintained with such Fund. This
policy may be changed at any time by a Fund on 45 days' written notice to a
Custodial Account participant. First Financial Savings has reserved the right to
waive its fees at any time or to change the fees on 45 days' prior written
notice to a Custodial Account participant.
An application and other documents necessary to establish a Custodial
Account are available from your Representative. Persons desiring to create a
Custodial Account are advised to confer with their legal and tax advisers
concerning the specifics of this type of retirement benefit plan.
Mandatory income tax withholding, at the applicable rate may be
required on "eligible rollover" distributions made from any of the foregoing
retirement plans (other than IRAs, including SEP-IRAs, SARSEP-IRAs and
SIMPLE-IRAs). If the recipient elects to directly transfer an eligible rollover
distribution to an "eligible retirement plan" that permits acceptance of such
distributions, no withholding will apply. For distributions that are not
"eligible rollover" distributions, the recipient can elect, in writing, not to
require any withholding. This election must be submitted immediately before, or
must accompany, the distribution request. The amount, if any, of any such
optional withholding depends on the amount and type of the distribution.
Appropriate election forms are available from the Custodian or Shareholder
Services. Other types of withholding nonetheless may apply.
DISTRIBUTION FEES. A participant/shareholder's account under any of the
foregoing retirement plans (including IRAs) may be charged a distribution fee
(at the time of withdrawal) of $7.00 for a single distribution of the entire
account and $1.00 for each periodic distribution therefrom.
TAXES
Each Fund is treated as a separate corporation for Federal income tax
purposes. In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Code, a Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and, for SPECIAL SITUATIONS FUND and TOTAL RETURN FUND, net gains
from certain foreign currency transactions) plus its net interest income
excludable from gross income under section 103(a) of the Code ("Distribution
Requirement") and must meet several additional requirements. For each Fund these
requirements include the following: (1) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months -- options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contract thereon), that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its
39
<PAGE>
total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) 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 and other distributions declared by a 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
taxed to shareholders for the year in which that December 31 falls.
Each 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 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.
A portion of the dividends from a Fund's investment company taxable
income may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by a Fund from U.S. corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the Federal alternative minimum tax.
Although INVESTMENT GRADE FUND is authorized to hold equity securities, it is
expected that any dividend income received by that Fund will be minimal;
accordingly, very little, if any, of the distributions made by that Fund will be
eligible for the dividends-received deduction.
If shares of a Fund 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.
Dividends and interest received by SPECIAL SITUATIONS FUND or TOTAL
RETURN FUND may be subject to income, withholding or other taxes imposed by
foreign countries that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
SPECIAL SITUATIONS FUND and TOTAL RETURN FUND may invest in the stock
of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, if a Fund holds stock of a PFIC, it will be subject to Federal
income tax on a portion of any "excess distribution" received on the stock or of
any gain on disposition of the stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders.
If SPECIAL SITUATIONS FUND or TOTAL RETURN FUND invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund would be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain
over net short-
40
<PAGE>
term capital loss) -- which probably would have to be distributed to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not received by the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as Series Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of such a
PFIC's stock over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
For SPECIAL SITUATIONS FUND and TOTAL RETURN FUND, gains from the
disposition of foreign currencies (except certain gains that may be excluded by
future regulations) will qualify as permissible income under the Income
Requirement. However, income from such a Fund's disposition of foreign
currencies that are not directly related to its principal business of investing
in securities (or options and futures with respect to securities) will be
subject to the Short-Short Limitation if they are held for less than three
months.
INVESTMENT GRADE FUND and TOTAL RETURN FUND may acquire zero coupon
securities issued with original issue discount. As a holder of those securities,
each such Fund must include in its income the original issue discount that
accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. Similarly, each such Fund must
include in its gross income securities it receives as "interest" on pay-in-kind
securities. Because each Fund annually must distribute substantially all of its
investment company taxable income, including any original issue discount and
other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, a Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a Fund's cash assets
or from the proceeds of sales of portfolio securities, if necessary. A Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce a Fund's ability to sell other securities, or certain
options, futures, forward contracts or foreign currency positions, held for less
than three months that it might wish to sell in the ordinary course of its
portfolio management.
The use of hedging strategies, such as selling (writing) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses a Fund realizes in connection
therewith. Gains from options, futures and forward contracts derived by a Fund
with respect to its business of investing in securities -- and, for SPECIAL
SITUATIONS FUND and TOTAL RETURN FUND, gains from the disposition of foreign
currencies (except certain gains therefrom that may be excluded by future
regulations) -- will qualify as permissible income under the Income Requirement.
However, income from a Fund's disposition of options and futures contracts, and
from SPECIAL SITUATIONS FUND and TOTAL RETURN FUND'S disposition of foreign
currencies and forward currency contracts that are not directly related to its
principal business of investing in securities, will be subject to the
Short-Short Limitation if they are held for less than three months. Income from
a Fund's disposition of forward contracts that are not directly related to its
principal business of investing in securities also will be subject to the
Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, then any increase in value of
a position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies
41
<PAGE>
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund intends that, when it engages in hedging strategies, it will qualify for
this treatment, but at the present time it is not clear whether this treatment
will be available for all of each Funds' hedging transactions. To the extent
this treatment is not available, a Fund may be forced to defer the closing out
of certain options, futures and certain forward contracts and foreign currency
positions beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
PERFORMANCE INFORMATION
A Fund may advertise its performance in various ways.
Each Fund's "average annual total return" ("T") is an average annual
compounded rate of return. The calculation produces an average annual total
return for the number of years measured. It is the rate of return based on
factors which include a hypothetical initial investment of $1,000 ("P") over a
number of years ("n") with an Ending Redeemable Value ("ERV") of that
investment, according to the following formula:
T=[(ERV/P)caret(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 Class A shares, each Fund will deduct the maximum sales
charge of 6.25% (as a percentage of the offering price) from the initial $1,000
payment and, for Class B shares, the applicable CDSC imposed on a redemption of
Class B shares held for the period is deducted. All dividends and other
distributions are assumed to have been reinvested at net asset value on the
initial investment ("P").
Return information may be useful to investors in reviewing a Fund's
performance. However, certain factors should be taken into account before using
this information as a basis for comparison with alternative investments. No
adjustment is made for taxes payable on distributions. Return will fluctuate
over time and return for any given past period is not an indication or
representation by a Fund of future rates of return on its shares. At times, the
Adviser may reduce its compensation or assume expenses of a Fund in order to
reduce the Fund's expenses. Any such waiver or reimbursement would increase the
Fund's return during the period of the waiver or reimbursement.
Average annual return and total return computed at the public offering
price (maximum sales charge for Class A shares and applicable CDSC for Class B
shares) for the periods ended December 31, 1996 are set forth in the tables
below:
42
<PAGE>
AVERAGE ANNUAL TOTAL RETURN:1
<TABLE>
<CAPTION>
One Year Five Years Life of Fund2
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares3
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BLUE CHIP FUND 13.01% 14.89% 11.03 N/A 11.54 23.95%
INVESTMENT GRADE FUND (4.01) (2.42) 5.56 N/A 7.14 7.44
SPECIAL SITUATIONS FUND 4.58 6.39 12.03 N/A 17.51 14.84
TOTAL RETURN FUND 3.74 5.45 6.13 N/A 7.93 15.43
TOTAL RETURN: 1
<CAPTION>
One Year Five Years Life of Fund2
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares3
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BLUE CHIP FUND 13.01% 14.89% 68.71% N/A 139.45% 52.60%
INVESTMENT GRADE FUND (4.01) (2.42) 31.10 N/A 49.96 15.17
SPECIAL SITUATIONS FUND 4.58 6.39 76.49 N/A 175.88 31.32
TOTAL RETURN FUND 3.74 5.45 34.64 N/A 66.65 32.65
</TABLE>
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, 1996 are set forth in the
tables below:
- --------
1 All return figures reflect the maximum sales charge of 6.25%. Prior to
July 1, 1993 the maximum sales charge was 6.90% and prior to December 29,
1989 the maximum sales charge for BLUE CHIP FUND was 7.25%. The figures
also assume the reinvestment of dividends at net asset value. Prior to
June 28, 1991, BLUE CHIP Fund and TOTAL RETURN FUND reinvested dividends
at the public offering price (net asset value plus applicable sales
charge). Certain expenses of the Funds have been waived or reimbursed from
inception through December 31, 1996. Accordingly, return figures are
higher than they would have been had such expenses not been waived or
reimbursed.
2 The inception dates for the Funds are as follows: BLUE CHIP FUND - January
3, 1989; INVESTMENT GRADE FUND - February 19, 1991; SPECIAL SITUATIONS
FUND - September 18, 1990; and TOTAL RETURN FUND - April 24, 1990.
3 The commencement date for the offering of Class B shares is January 12,
1995.
43
<PAGE>
AVERAGE ANNUAL TOTAL RETURN: 4
<TABLE>
<CAPTION>
One Year Five Years Life of Fund5
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares 6
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BLUE CHIP FUND 20.55% 19.71% 12.47% N/A 12.44% 26.54%
INVESTMENT GRADE FUND 2.39 1.64 6.94 N/A 8.32 9.71
SPECIAL SITUATIONS FUND 11.56 10.81 13.48 N/A 18.72 17.24
TOTAL RETURN FUND 10.62 9.86 7.50 N/A 8.97 17.83
TOTAL RETURN:1
One Year Five Years Life of Fund2
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares3
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BLUE CHIP FUND 20.55% 19.71% 79.93% N/A 155.37% 58.93%
INVESTMENT GRADE FUND 2.39 1.64 39.89 N/A 59.94 20.02
SPECIAL SITUATIONS FUND 11.56 10.81 88.23 N/A 194.25 36.76
TOTAL RETURN FUND 10.62 9.86 43.59 N/A 77.69 38.12
</TABLE>
Yield 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 a 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 for Class A shares or the net asset value for
Class B shares 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.
For the 30 days ended December 31, 1996, the yield for Class A shares
and Class B shares of INVESTMENT GRADE FUND was 5.41% and 5.08%, respectively.
During this period certain expenses of
- --------
1 All return figures reflect the maximum sales charge of 6.25%. Prior to
July 1, 1993 the maximum sales charge was 6.90% and prior to December 29,
1989 the maximum sales charge for BLUE CHIP FUND was 7.25%. The figures
also assume the reinvestment of dividends at net asset value. Prior to
June 28, 1991, BLUE CHIP Fund and TOTAL RETURN FUND reinvested dividends
at the public offering price (net asset value plus applicable sales
charge). Certain expenses of the Funds have been waived or reimbursed from
inception through December 31, 1996. Accordingly, return figures are
higher than they would have been had such expenses not been waived or
reimbursed.
2 The inception dates for the Funds are as follows: BLUE CHIP FUND - January
3, 1989; INVESTMENT GRADE FUND - February 19, 1991; SPECIAL SITUATIONS
FUND - September 18, 1990; and TOTAL RETURN FUND - April 24, 1990.
3 The commencement date for the offering of Class B shares is January 12,
1995.
44
<PAGE>
the Fund were waived. Accordingly, yield is higher than it would have been if
such expenses had not been waived.
The distribution rate for INVESTMENT GRADE 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 the Fund's offering price per share at the
end of that period. The distribution rate is also calculated by using the 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, 1996 for Class A shares of INVESTMENT GRADE FUND calculated
using the offering price and net asset value was 5.87% and 6.26%, respectively.
The distribution rate for the twelve-month period ended December 31, 1996 for
Class B shares of INVESTMENT GRADE FUND calculated using net asset value was
5.51%. During this period certain expenses of INVESTMENT GRADE FUND were waived.
Accordingly, the distribution rates are higher than they would have been had
such expenses not been waived.
Each Fund may include in advertisements and sales literature,
information, examples and statistics to illustrate the effect of compounding
income at a fixed rate of return to demonstrate the growth of an investment over
a stated period of time resulting from the payment of dividends and capital gain
distributions in additional shares. These examples may also include hypothetical
returns comparing taxable versus tax-deferred growth which would pertain to an
IRA, section 403(b)(7) Custodial Account or other qualified retirement program.
The examples used will be for illustrative purposes only and are not
representations by any Fund of past or future yield or return. Examples of
typical graphs and charts depicting such historical performances, compounding
and hypothetical returns are included in Appendix D.
From time to time, in reports and promotional literature, each Fund may
compare its 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, the Fund's portfolio holdings, such as:
Lipper Analytical Services, Inc. ("Lipper") is a widely-recognized
independent service that monitors and ranks the performance of
regulated investment companies. The Lipper performance analysis
includes the reinvestment of capital gain distributions and income
dividends but does not take sales charges into consideration. The
method of calculating total return data on indices utilizes actual
dividends on ex-dividend dates accumulated for the quarter and
reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication of
Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds
with at least three years of performance history are assigned ratings
from one star (lowest) to five stars (highest). Morningstar ratings are
calculated from the Fund's three-, five-, and ten-year average annual
returns (when available) and a risk factor that reflects fund
performance relative to three-month Treasury bill monthly returns.
Fund's returns are adjusted for fees and sales loads. Ten percent of
the funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and the
bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly publication
which tracks principal return, total return and yield on the Salomon
Brothers Broad Investment-Grade Bond Index and the components of the
Index.
45
<PAGE>
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.
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
The Russell 2500 Index, prepared by the Frank Russell Company, consists
of U.S. publicly traded stocks of domestic companies that rank from 500
to 3000 by market capitalization. The Russell 2500 tracks the return on
these stocks based on price appreciation or depreciation and does not
include dividends and income or changes in market values caused by
other kinds of corporate changes.
The Russell 2000 Index, prepared by the Frank Russell Company, consists
of U.S. publicly traded stocks of domestic companies that rank from
1000 to 3000 by market capitalization. The Russell 2000 tracks the
return on these stocks based on price appreciation or depreciation and
does not include dividends and income or changes in market values
caused by other kinds of corporate changes.
46
<PAGE>
Reuters, a wire service that frequently reports on global business.
Standard & Poor's Utilities Index is an unmanaged capitalization
weighted index comprising common stock in approximately 40 electric,
natural gas distributors and pipelines, and telephone companies. The
Index assumes the reinvestment of dividends.
Moody's Stock Index, an unmanaged index of utility stock performance.
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
AUDITS AND REPORTS. The accounts of the Funds are audited twice a year
by Tait, Weller & Baker, independent certified public accountants, Two Penn
Center Plaza, Philadelphia, PA, 19102-1707. Shareholders of each Fund receive
semi-annual and annual reports, including audited financial statements, and a
list of securities owned.
5% SHAREHOLDERS. As of March 31, 1997 the following beneficially owned
more than 5% of the outstanding Class B shares of the INVESTMENT GRADE FUND:
Shareholder % of Shares
----------- -----------
Kenneth L. Orser 7.7%
4112 Glade Road
Spring Hill, FL 34606
6.8%
Mary E. Zaneski
28 Canel Street
Sayreville, NJ 08872-1010
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 Funds and as redemption agent for regular redemptions. The fees charged
to each 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;
$1.00 for each Systematic Withdrawal Plan check; $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 Funds. 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. Furthermore, if there is no known address for a shareholder
47
<PAGE>
for at least one year, the Transfer Agent will charge such shareholder's account
$40 to cover the Transfer Agent's expenses in trying to locate the shareholder's
correct address. For the fiscal year ended October 31, 1996, BLUE CHIP FUND,
SPECIAL SITUATIONS Fund, TOTAL RETURN FUND and INVESTMENT GRADE FUND paid
$487,543, $490,019, $130,998 and $102,990 respectively, in transfer agent fees
and expenses. The Transfer Agent's telephone number is 1-800-423-4026
SHAREHOLDER LIABILITY. Series Fund is organized as an entity known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable for the
obligations of Series Fund. The Declaration of Trust however, contains an
express disclaimer of shareholder liability for acts or obligations of Series
Fund and requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by Series Fund or the
Trustees. The Fund's Declaration of Trust provides for indemnification out of
the property of the Fund of any shareholder held personally liable for the
obligations of Series Fund. The Declaration of Trust also provides that Series
Fund shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of Series Fund 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 Series Fund itself
would be unable to meet its obligations. The Adviser believes that, in view of
the above, the risk of personal liability to shareholders is immaterial and
extremely remote. The Declaration of Trust further provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or law, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. Series Fund 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 Fund and the
Adviser have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Fund. Among other things,
such persons, except the Trustees: (a) must have all non-exempt trades
pre-cleared; (b) are restricted from short-term trading; (c) must have duplicate
statements and transactions confirmations reviewed by a compliance officer; and
(d) are prohibited from purchasing securities of initial public offerings.
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
Standard & Poor's Rating Group ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt considered
short-term in the relevant market. Ratings are graded into several categories,
ranging from "A-1" for the highest quality obligations to "D" for the lowest.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
48
<PAGE>
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.
APPENDIX B
The Fund may use some or all of the following hedging instruments:
OPTIONS ON EQUITY AND DEBT SECURITIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security at the exercise price.
OPTIONS ON STOCK INDICES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values of
those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the other
party agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE FUTURES CONTRACTS--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures
49
<PAGE>
contracts by their terms call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
50
<PAGE>
APPENDIX C
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
<PAGE>
[The following table is represented as graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a diference of
$331,215.
25 years old .............. 533,443
35 years old .............. 202,228
45 years old .............. 62,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
<PAGE>
[The following table is represented as chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1995.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1995........................ 1.00
1996........................ 1.03
1997........................ 1.06
1998 ....................... 1.09
1999 ....................... 1.13
2000 ....................... 1.16
2001 ....................... 1.19
2002 ....................... 1.23
2003 ....................... 1.27
2004 ....................... 1.30
2005 ....................... 1.34
2006 ....................... 1.38
2007 ....................... 1.43
2008 ....................... 1.47
2009 ....................... 1.51
2010 ....................... 1.56
2011 ....................... 1.60
2012 ....................... 1.65
2013 ....................... 1.70
2014 ....................... 1.75
2015 ....................... 1.81
2016 ....................... 1.86
2017 ....................... 1.92
2018 ....................... 1.97
2019 ....................... 2.03
2020 ....................... 2.09
2021 ....................... 2.16
2022 ....................... 2.22
2023 ....................... 2.29
2024 ....................... 2.36
2025 ....................... 2.43
Inflation erodes your buying power. $100 in 1966, could purchase the same amount
of goods and service as $21 in 1995.* Projecting inflation at 3%, goods and
services costing $100 today will cost $243 in the year 2025.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
<PAGE>
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1995(1)
Total Number of Percentage of
Number of Positive Positive
Periods Periods Periods
------- ------- -------
1-Year Periods 70 50 71%
5-Year Periods 66 59 89%
10-Year Periods 61 59 97%
15-Year Periods 56 56 100%
20-Year Periods 51 51 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. (2)
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Large Company Stocks .......... 14.80
The following chart illustrates for the period shown that long-term corpoate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Long-Term Corp. bonds ......... 13.46
(1) Sources: Stocks, Bonds, Bill and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago.
(2) Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, reeturns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal TAx Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
<PAGE>
Financial Statements
as of December 31, 1996
Registrant incorporates by reference the financial statements and report of
independent auditors contained in the Annual Report to shareholders for the
fiscal year ended December 31, 1996 electronically filed with the Commission on
March 4, 1997 (Accession Number: 0000912057-97-007729).
<PAGE>
FIRST INVESTORS SERIES FUND
Insured Intermediate Tax Exempt Fund
CROSS-REFERENCE SHEET
N-1A Item No. Location
- ------------- --------
PART A: PROSPECTUS
1. Cover Page............................... Cover Page
2. Synopsis................................. Fee Table
3. Condensed Financial Information.......... Financial Highlights
4. General Description of Registrant........ Investment Objectives and
Policies;
General Information
5. Management of the Fund................... Management
5A. Management's Discussion of
Fund Performance........................ Performance Information
6. Capital Stock and Other Securities....... Description of Shares;
Dividends and Other
Distributions; Taxes;
Determination of Net Asset
Value
7. Purchase of Securities Being Offered..... Alternative Purchase Plan;
How to Buy Shares
8. Redemption or Repurchase................. How to Exchange Shares; How
to Redeem Shares; Telephone
Transactions
9. Pending Legal Proceedings................ Not Applicable
PART B: STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page............................... Cover Page
11. Table of Contents........................ Table of Contents
12. General Information and History.......... General Information
13. Investment Objectives and Policies....... Investment Policies;
Investment Restrictions
14. Management of the Fund................... Directors or Trustees and
Officers
15. Control Persons and Principal
Holders of Securities...................
16. Investment Advisory and Other Services... Management
17. Brokerage Allocation..................... Allocation of Portfolio
Brokerage
18. Capital Stock and Other Securities....... Determination of Net Asset
Value
19. Purchase, Redemption and Pricing
of Securities Being Offered............. Reduced Sales Charges,
Additional Exchange and
Redemption Information and
Other Services; Determination
of Net Asset Value
<PAGE>
20. Tax Status................................... Taxes
21. Underwriters................................. Underwriter
22. Performance Data............................. Performance Information
23. Financial Statements......................... Financial Statements; Report
of Independent Accountants
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item so numbered, in Part C hereof.
<PAGE>
FIRST INVESTORS INSURED TAX EXEMPT FUND, INC.
FIRST INVESTORS INSURED INTERMEDIATE
TAX EXEMPT FUND
A SERIES OF FIRST INVESTORS SERIES FUND
95 Wall Street, New York, New York 10005/1-800-423-4026
This is a Prospectus for FIRST INVESTORS INSURED TAX EXEMPT FUND, INC.
("INSURED TAX EXEMPT FUND") and FIRST INVESTORS INSURED INTERMEDIATE TAX EXEMPT
FUND ("INSURED INTERMEDIATE FUND"). INSURED INTERMEDIATE FUND is a separate
series of First Investors Series Fund ("Series Fund"). INSURED TAX EXEMPT FUND
and Series Fund are each an open-end diversified management investment company
(collectively, "Tax Exempt Funds"). INSURED TAX EXEMPT FUND and INSURED
INTERMEDIATE FUND are sometimes referred to herein singularly as "Fund" and
collectively as "Funds." Each Fund sells two classes of shares. Investors may
select Class A or Class B shares, each with a public offering price that
reflects different sales charges and expense levels. See "Alternative Purchase
Plans."
The investment objective of each Fund is to seek to provide a high
level of interest income which is exempt from Federal income tax and is not an
item of tax preference for purposes of the Federal alternative minimum tax ("Tax
Preference Item"). Each Fund invests primarily in tax-exempt obligations issued
by or on behalf of 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. There can be no assurance that the objective of
either Fund will be realized.
THE FUNDS' MUNICIPAL BONDS ARE INSURED AS TO TIMELY PAYMENT OF
PRINCIPAL AND INTEREST THROUGH THE ISSUER OR UNDER INSURANCE POLICIES WRITTEN BY
INDEPENDENT INSURANCE COMPANIES. INSURANCE DOES NOT PROTECT AGAINST FLUCTUATIONS
IN THE BONDS' MARKET VALUE OR THE NET ASSET VALUE PER SHARE OF EACH FUND. FOR
MORE INFORMATION REGARDING THE FUNDS' INSURANCE COVERAGE, SEE "INSURANCE" ON
PAGE 9.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should know before investing and should be retained
for future reference. First Investors Management Company, Inc. ("FIMCO" or
"Adviser") serves as investment adviser to the Funds and First Investors
Corporation ("FIC" or "Underwriter") serves as distributor of the Funds' shares.
A Statement of Additional Information ("SAI"), dated April 30, 1997 (which is
incorporated by reference herein), has been filed with the Securities and
Exchange Commission. The SAI is available at no charge upon request to the Funds
at the address or telephone number indicated above.
An investment in these securities is not a deposit or obligation of, or
guaranteed or endorsed by, any bank and is not federally insured or protected by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other government agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is April 30, 1997
<PAGE>
FEE TABLE
The following table is intended to assist investors in understanding the
expenses associated with investing in each class of shares of a Fund. Shares of
either Fund issued prior to January 12, 1995 have been designated as Class A
shares.
SHAREHOLDER TRANSACTION EXPENSES
Class A Class B
Shares Shares
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................... 6.25% None
Deferred Sales Load
(as a percentage of the lower of original purchase
price or redemption proceeds)......................... None* 4% in the
first year;
declining to
0% after the
sixth year
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Insured Insured
Intermediate Fund Tax Exempt Fund
Class A Class B Class A Class B
Shares+ Shares Shares Shares
Management Fees (1) 0.40% 0.40%+ 0.69% 0.69%
12b-1 Fees(2) 0.20 1.00 0.29+ 1.00
Other Expenses (3) 0.10 0.10+ 0.15 0.15
Total Fund Operating Expenses (4) 0.70 1.50+ 1.13+ 1.84
- ----------
* A contingent deferred sales charge of 1.00% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge.
See "How to Buy Shares."
+ Net of waiver and/or reimbursement.
(1) For the fiscal year ended December 31, 1996, the Adviser waived Management
Fees for INSURED INTERMEDIATE FUND in excess of 0.40%. Absent the waiver,
such fees would have been 0.60%. The Adviser will continue to waive such
fees for a minimum period ending December 31, 1997.
(2) Class A 12b-1 Fees for INSURED INTERMEDIATE FUND have been restated to
reflect current fees. The Underwriter has agreed through December 31, 1997
to cap its right to claim Class A 12b-1 Fees at the annual rates listed
above for the Funds. Each Fund's Class A Distribution Plan provides for
12b-1 Fees in the total amount of up to 0.30% on an annual basis.
(3) For the fiscal year ended December 31, 1996, the Adviser reimbursed
INSURED INTERMEDIATE FUND for Other Expenses in the amount of 0.24% for
each class of shares. Absent such reimbursement, Other Expenses would have
been 0.34% for each class of shares. The Adviser will reimburse each class
of that Fund for Other Expenses in excess of 0.10% for a minimum period
ending December 31, 1997.
(4) If certain fees and expenses had not been waived or reimbursed, Total Fund
Operating Expenses for INSURED INTERMEDIATE FUND would have been 1.24% for
Class A shares and 1.94% for Class B shares. Each Fund has an expense
offset arrangement that may reduce the Fund's custodian fee based on the
amount of cash maintained by the Fund with its custodian. Any such fee
reductions are not reflected under Total Fund Operating Expenses.
2
<PAGE>
For more complete descriptions of the various costs and expenses, see
"Investment Objectives and Policies-Insurance," "Alternative Purchase Plans,"
"Management," "Distribution Plans," "How to Buy Shares" and "How to Redeem
Shares." Due to the imposition of Rule 12b-1 fees, it is possible that long-term
shareholders of a Fund may pay more in total sales charges than the economic
equivalent of the maximum front-end sales charge permitted by the rules of the
National Association of Securities Dealers, Inc. The Fee Table does not reflect
the costs incurred by those shareholders of INSURED TAX EXEMPT FUND who purchase
their shares through First Investors Contractual Plans.
The Example below is based on Class A and Class B expense data for each
Fund's fiscal year ended December 31, 1996, except that certain Operating
Expenses have been restated, as noted above.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
INSURED INTERMEDIATE FUND
Class A................................. $69 $83 $ 99 $144
Class B................................. 55 77 102 152*
INSURED TAX EXEMPT FUND
Class A................................. 73 96 121 191
Class B................................. 59 88 120 197*
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) no
redemption at the end of each time period:
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
INSURED INTERMEDIATE FUND
Class A................................. $69 $83 $ 99 $144
Class B................................. 15 47 82 152*
INSURED TAX EXEMPT FUND
Class A................................. 73 96 121 191
Class B................................. 19 58 100 197*
</TABLE>
* Assumes conversion to Class A shares eight years after purchase.
THE EXPENSES IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION BY
THE FUNDS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES IN FUTURE YEARS MAY BE
GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables set forth the per share operating performance data
for a share outstanding, total return, ratios to average net assets and other
supplemental data for each year indicated. The tables have been derived from
financial statements which have been examined by Tait, Weller & Baker,
independent certified public accountants, whose reports thereon appear in the
SAI. This information should be read in conjunction with the Financial
Statements and Notes thereto, which also appear in the SAI, available at no
charge upon request to the Funds.
INSURED TAX EXEMPT FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------------------------------------
CLASS A
----------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- ------------------------------------------------------- ----------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Year . . . . . . . . $10.37 $9.42 $10.56 $10.32 $10.22
------ ----- ------ ------ ------
Income from Investment Operations
Net investment income . . . . . . . . . . . . . . .51 .52 .56 .60 .65
Net realized and unrealized gain (loss) on
investments ..................................... (.23) .96 (1.15) .40 .15
------ ----- ------ ------ ------
Total from Investment Operations . . . . . .28 1.48 (.59) 1.00 .80
------ ----- ------ ------ ------
Less Distributions from:
Net investment income . . . . . . . . . . . . . . .51 .53 .55 .61 .65
Net realized gains . . . . . . . . . . . . . . . -- -- -- .15 .05
------ ----- ------ ------ ------
Total Distributions . . . . . . . . . . . . .51 .53 .55 .76 .70
------ ----- ------ ------ ------
Net Asset Value, End of Year . . . . . . . . . . . . $10.14 $10.37 $9.42 $10.56 $10.32
====== ====== ===== ====== ======
TOTAL RETURN (%) + . . . . . . . . . . . . . . . . 2.81 16.01 (5.61) 9.88 8.05
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in millions) . . . . . . . $1,253 $1,373 $1,302 $1,507 $1,363
Ratio to Average Net Assets: (%)
Expenses . . . . . . . . . . . . . . . . . . . . . 1.14 1.14 1.18 1.15 1.16
Net investment income . . . . . . . . . . . . . . . 5.06 5.25 5.64 5.69 6.32
Portfolio Turnover Rate (%) . . . . . . . . . . . . 21 37 57 58 52
</TABLE>
* For the period 1/12/95 (date shares first offered) to 12/31/95 +
Calculated without sales charge
(a) Annualized
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ -----------------------
CLASS A CLASS B
1991 1990 1989 1988 1987 1996 1995*
- -------------- ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
$9.92 $10.03 $9.91 $9.64 $10.14 $10.37 $9.48
----- ------ ----- ----- ------ ------ -----
.69 .70 .71 .72 .72 .44 .44
.30 (.11) .12 .27 (.50) (.24) .89
----- ------ ----- ----- ------ ------ -----
.99 .59 .83 .99 .22 .20 1.33
----- ------ ----- ----- ------ ------ -----
.69 .70 .71 .72 .72 .44 .44
-- -- -- -- -- -- --
----- ------ ----- ----- ------ ------ -----
.69 .70 .71 .72 .72 .44 .44
----- ------ ----- ----- ------ ------ -----
$10.22 $9.92 $10.03 $9.91 $9.64 $10.13 $10.37
====== ===== ====== ===== ===== ====== ======
10.26 6.13 8.64 10.61 2.33 2.03 14.27
$1,208 $1,132 $1,079 $971 $853 $3 $2
1.13 1.14 1.01 1.04 1.13 1.83 1.88(a)
6.82 7.03 7.16 7.33 7.39 4.37 4.45(a)
34 28 26 43 18 21 37
</TABLE>
5
<PAGE>
INSURED INTERMEDIATE FUND
<TABLE>
<CAPTION>
- --------------------------------------- -------------------------------------------- --------------------
CLASS A CLASS B
-------------------------------------------- --------------------
11/22/93* 1/12/95*
to to
Year Ended December 31 1996 1995 1994 1993 1996 1995
- --------------------------------------- ---------- --------- ----------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value, Beginning of Period $ 5.85 $ 5.43 $ 5.79 $ 5.79 $ 5.85 $ 5.45
------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income . . . . . . .29 .30 .24 -- .23 .25
Net realized and unrealized gain
(Loss) on Investments . . . . . (.06) .42 (.36) -- (.05) .41
------- ------- ------- ------- ------ ------
Total from Investment
Operations . . . . . . . .23 .72 (.12) -- .18 .66
------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS FROM
Net investment income . . . . . . .29 .30 .24 -- .23 .26
. . . . .
Net realized gains . . . . . . . -- -- -- -- -- --
------- ------- ------- ------- ------ ------
Total Distributions . . . . .29 .30 .24 -- .23 .26
------- ------- ------- ------- ------ ------
Net Asset Value, End of Period . . . $ 5.79 $ 5.85 $ 5.43 $ 5.79 $ 5.80 $ 5.85
======= ======= ======= ======= ====== ======
RATIOS/SUPPLEMENTAL DATA
Total Return** (%) . . . . . . . . . 4.07 13.50 (2.05) .00 3.17 12.27
Net Assets, End of Period (in
thousands). . . . . . . . . . . . . . $7,415 $7,017 $5,688 $1,615 $ 613 $ 378
RATIO TO AVERAGE NET ASSETS++
Expenses (%). . . . . . . . . . . . .49 .35 .14 -- 1.49 1.35+
Net investment income (%). . . . . 5.05 5.32 4.52 .54+ 4.05 4.32+
RATIO TO AVERAGE NET ASSETS BEFORE
EXPENSES WAIVED OR ASSUMED
Expenses (%). . . . . . . . . . . . 1.24 1.22 .96 1.78+ 1.94 2.22+
Net investment income (%) . . . . . 4.30 4.45 3.70 (1.24)+ 3.60 3.45+
Portfolio Turnover Rate (%) . . . . 82 47 210 0 82 47
</TABLE>
* Commencement of operations of Class A shares or date Class B shares first
offered
** Calculated without sales charges
+ Annualized
++ Net of expenses waived or assumed
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INSURED TAX EXEMPT FUND
The investment objective of INSURED TAX EXEMPT FUND is to provide a high
level of interest income which is exempt from Federal income tax and is not a
Tax Preference Item. 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
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. 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. See "Municipal Instruments," below.
INSURED INTERMEDIATE FUND
The investment objective of INSURED INTERMEDIATE FUND is to provide a high
level of interest income which is exempt from Federal income tax and is not a
Tax Preference Item. The Fund seeks to achieve its objective by investing at
least 80% of its total assets in Municipal Instruments, as defined below, which
are issued by or on behalf of 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. See "Municipal Instruments," below.
GENERAL POLICIES
The Funds differ in the maturities of the securities in their portfolios
and, accordingly, in their degree of risk and level of income. Generally, bonds
with longer maturities are likely to exhibit greater fluctuations in market
value and have the potential for higher levels of income than bonds with shorter
maturities. In order to reduce the effect of bond price declines on a Fund's net
asset value during periods of rising interest rates, each Fund may invest in
shorter maturity securities. Conversely, during periods of falling interest
rates, each Fund may invest in longer maturity securities. There is no limit on
the maturity of any individual security in any Fund's portfolio. See "Debt
Securities-Risk Factors."
INSURED INTERMEDIATE FUND is designed for investors seeking a higher level
of income than is generally available on short-term tax-exempt bonds and money
market securities and who are willing to accept a greater degree of fluctuation
in principal. It is expected that, under normal market conditions, the Fund will
maintain a dollar-weighted average maturity of between three and ten years.
INSURED TAX EXEMPT FUND is designed for investors seeking a higher level
of income than is generally available on short-term and intermediate tax-exempt
bonds and who are willing to accept a potentially high degree of fluctuation in
principal. The Fund generally invests in bonds with maturities of over fifteen
years.
7
<PAGE>
As used in this Prospectus and in the SAI, "Municipal Instruments" include
the following: (1) municipal bonds; (2) private activity bonds or industrial
development bonds; (3) certificates of participation ("COPs"); (4) municipal
notes; (5) municipal commercial paper; and (6) variable rate demand instruments
("VRDIs").
Each Fund may make loans of portfolio securities and invest in zero coupon
municipal securities. Each 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 the
agreement to purchase the instruments is made by a Fund. Each 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. Each Fund also 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). INSURED INTERMEDIATE FUND also may acquire detachable call
options relating to municipal bonds and invest in repurchase agreements. Each
Fund may borrow money for temporary or emergency purposes in amounts not
exceeding 5% of its total assets. See "Description of Certain Securities, Other
Investment Policies and Risk Factors," below, and the SAI for more information
regarding these securities.
Although each 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 Ratings Group ("S&P"), each 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 the Adviser. See "Debt Securities--Risk Factors."
However, in each instance such municipal bonds will be covered by the insurance
feature and thus are 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 which has been downgraded
in rating subsequent to its purchase by a Fund. A description of municipal bond
ratings is contained in Appendix A to the SAI.
Each Fund 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, industrial development bonds, airport bonds and university
dormitory bonds, during periods when one or more of these segments offer higher
yields and/or profit potential. This possible concentration of the assets of a
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 a Fund's investments could increase market risks, but risk of non-payment of
interest when due, or default on the payment of principal, is covered by the
insurance feature.
Each Fund's net asset value fluctuates based mainly upon changes in the
value of its portfolio securities. Each Fund's investment objective and certain
investment policies set forth in the SAI that are designated fundamental
policies may not be changed without shareholder approval. There can be no
assurance that either Fund will achieve its investment objective.
8
<PAGE>
DESCRIPTION OF CERTAIN SECURITIES, OTHER INVESTMENT POLICIES AND RISK FACTORS
GENERAL MARKET RISK
In addition to the risks associated with particular types of
securities, which are discussed below, the Funds are subject to general market
risks. The Funds invest primarily in Municipal Instruments. The market risks
associated with Municipal Instruments include the possibility that the value of
those instruments held by the Funds will fluctuate with movements in interest
rates and changes in the perceived creditworthiness of the issuers of those
instruments. Municipal Instruments are likely to decline in value in times of
rising interest rates and to rise in value in times of falling interest rates.
In general, the longer the maturity of a Municipal Instrument, the more
pronounced is the effect of a change in interest rates on the value of the
instrument. An additional risk exists that new federal, state and local laws, or
changes in existing laws, may adversely affect the tax-exempt status of interest
on a Fund's portfolio securities or of the exempt-interest dividends paid by a
Fund, extend the time for payment of principal or interest or otherwise
constrain enforcement of such obligations. Furthermore, because the Funds may
concentrate investments in a particular industry, a Fund's yield and net asset
value per share can be affected by political and economic developments that
would affect a particular industry.
TYPES OF SECURITIES AND THEIR RISKS
DEBT SECURITIES--RISK FACTORS. The market value of debt securities is
influenced significantly by changes in the level of interest rates. Generally,
as interest rates rise, the market value of debt securities decreases.
Conversely, as interest rates fall, the market value of debt securities
increases. Factors which could result in a rise in interest rates, and a
decrease in market value of debt securities, include an increase in inflation or
inflation expectations, an increase in the rate of U.S. economic growth, an
expansion in the Federal budget deficit, or an increase in the price of
commodities such as oil. In addition, the market value of debt securities is
influenced by perceptions of the credit risks associated with such securities.
Credit risk is the risk that adverse changes in economic conditions can affect
an issuer's ability to pay principal and interest. Debt obligations rated lower
than Baa by Moody's or BBB by S&P, commonly referred to as "junk bonds," are
speculative and generally involve a higher risk of loss of principal and income
than higher-rated securities. See Appendix A to the SAI for a description of
municipal bond ratings.
INSURANCE. All municipal bonds in each Fund's portfolio will be insured as
to their scheduled payment of principal and interest at the time of purchase
either (1) under a Mutual Fund Insurance Policy purchased by the Tax Exempt
Funds from an independent insurance company; (2) under an insurance policy
obtained subsequent to a municipal bond's original issue or (3) under an
insurance policy obtained by the issuer or underwriter of such municipal bond at
the time of original issuance. An insured municipal bond in the portfolio of a
Fund typically will be covered by only one of the three policies. All three
types of insurance policies insure the scheduled payment of all principal and
interest on the Funds' municipal bonds as they fall due. The insurance does not
guarantee the market value or yield of the insured municipal bonds or the net
asset value or yield of the shares of a Fund. Investors should note that while
all municipal bonds in which the Funds will invest will be insured, INSURED TAX
EXEMPT FUND and INSURED INTERMEDIATE FUND each may invest up to 20% and 35%,
respectively, of its total assets in portfolio securities not covered by the
insurance feature. Each Tax Exempt Fund has purchased a Mutual Fund Insurance
Policy
9
<PAGE>
from AMBAC Indemnity Corporation ("AMBAC"), a Wisconsin stock insurance company
with its principal executive offices in New York City. Under certain
circumstances, each Tax Exempt Fund may obtain such insurance from an insurer
other than AMBAC, provided such insurer is rated in the top rating catagory by
S&P, Moody's, Fitch Investors Service, Inc. or any other nationally recognized
statistical rating organization. Because these insurance premiums are paid by
each Fund, a Fund's yield is reduced by this expense. See "Insurance" in the SAI
for a detailed discussion of the insurance feature.
INVERSE FLOATERS. Each 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. Each Fund
may invest up to 10% of its net assets in inverse floaters.
MUNICIPAL INSTRUMENTS
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. See Appendix A to the SAI for a description of municipal bond ratings.
PRIVATE ACTIVITY BONDS OR INDUSTRIAL DEVELOPMENT BONDS. Certain types
of revenue bonds, referred to as private activity bonds ("PABs") or industrial
development bonds ("IDBs"), 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 and IDBs are pure revenue
bonds and are not backed by the taxing power of the issuing agency or authority.
See "Taxes" in the SAI for a discussion of special tax consequences to
"substantial users," or persons related thereto, of facilities financed by PABs
or IDBs.
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. See "Certificates of Participation" in the SAI for further
information on COPs.
10
<PAGE>
MUNICIPAL COMMERCIAL PAPER. Issues of municipal commercial paper
which a 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 C to the SAI.
MUNICIPAL NOTES. Municipal notes which a 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 to the SAI.
VARIABLE RATE DEMAND INSTRUMENTS. VRDIs are Municipal Instruments,
the interest on which is adjusted periodically, and which allow the holder to
demand payment of all unpaid principal plus accrued interest from the issuer. A
VRDI that a Fund may purchase will be selected if it meets criteria established
and designed by the applicable Tax Exempt Fund's Board of Directors or Trustees
(each, a "Board") to minimize risk to that 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.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 15% of its
net assets in illiquid securities, including (1) securities that are illiquid
due to the absence of a readily available market or due to legal or contractual
restrictions on resale and (2) repurchase agreements maturing in more than seven
days. However, illiquid securities for purposes of this limitation do not
include securities eligible for resale under Rule 144A under the Securities Act
of 1933, as amended, which the applicable Tax Exempt Fund's Board or the Adviser
has determined are liquid under Board-approved guidelines. See the SAI for more
information regarding restricted and illiquid securities.
TAXABLE SECURITIES. Each Fund 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. A Fund may, for example,
invest the proceeds from the sale of portfolio securities in taxable obligations
pending the investment or reinvestment thereof in Municipal Instruments. A Fund
may invest in highly liquid taxable obligations in order to avoid the necessity
of liquidating portfolio investments to meet redemptions by Fund investors. Each
Fund's temporary investments in taxable securities may consist of: (1)
obligations of the U.S. Government, its agencies or instrumentalities; (2) other
debt securities rated within the highest grade of S&P or Moody's; (3) commercial
paper rated in the highest grade by either of such rating services; and (4)
certificates of deposit and letters of credit. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank or a
savings and loan association for a definite period of time and
11
<PAGE>
earning a specified return.
ALTERNATIVE PURCHASE PLANS
Each Fund has two classes of shares, Class A and Class B, which represent
interests in the same portfolio of securities and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that each class (i) is subject to a different sales charge and bears its
separate distribution and certain other class expenses; (ii) has exclusive
voting rights with respect to matters affecting only that class; and (iii) has
different exchange privileges.
CLASS A SHARES. Class A shares are sold with an initial sales charge of up
to 6.25% of the offering price with discounts available for volume purchases.
Class A shares are subject to a maximum 12b-1 fee at the annual rate of 0.30% of
each Fund's average daily net assets attributable to Class A shares, of which no
more than 0.25% may be paid as a service fee and the balance thereof paid as an
asset-based sales charge. The initial sales charge is waived for certain
purchases and a contingent deferred sales charge ("CDSC") may be imposed on such
purchases. See "How to Buy Shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are generally subject to a CDSC which declines in steps from 4% to 0% during
a six-year period and bear a higher 12b-1 fee than Class A shares. Class B
shares pay a 12b-1 fee at the annual rate of 1.00% of each Fund's average daily
net assets attributable to Class B shares, of which no more than 0.25% may be
paid as a service fee and the balance thereof paid as an asset-based sales
charge. Class B shares automatically convert into Class A shares after eight
years. See "How to Buy Shares."
FACTORS TO CONSIDER IN CHOOSING A CLASS OF SHARES. In deciding which
alternative is most suitable, an investor should consider several factors, as
discussed below. Regardless of whether an investor purchases Class A or Class B
shares, your Representative, as defined under "How to Buy Shares," receives
compensation for selling shares of a Fund, which may differ for each class.
The principal advantages of purchasing Class A shares are the lower overall
expenses, the availability of quantity discounts on volume purchases and certain
account privileges which are not offered to Class B shareholders. If an investor
plans to make a substantial investment, the sales charge on Class A shares may
either be lower due to the reduced sales charges available on volume purchases
of Class A shares or waived for certain eligible purchasers. Because of the
reduced sales charge available on quantity purchases of Class A shares, it is
recommended that investments of $250,000 or more be made in Class A shares.
Investments in excess of $1,000,000 must be made in Class A shares.
Distributions paid by each Fund with respect to Class A shares will also
generally be greater than those paid with respect to Class B shares because
expenses attributable to Class A shares will generally be lower.
12
<PAGE>
The principal advantage of purchasing Class B shares is that, since no
initial sales charge is paid, all of an investor's money is put to work from the
outset. Furthermore, although any investment in a Fund should only be viewed as
a long-term investment, if a redemption must be made soon after purchase, an
investor will pay a lower sales charge than if Class A shares had been
purchased. Conversely, because Class B shares are subject to a higher
asset-based sales charge, long-term Class B shareholders may pay more in
asset-based sales charges than the economic equivalent of the maximum sales
charge on Class A shares. The automatic conversion of Class B shares into Class
A shares after eight years is designed to reduce the probability of this
occurring.
HOW TO BUY SHARES
You may buy shares of a Fund through a First Investors registered
representative ("FIC Representative") or through a registered representative
("Dealer Representative") of an unaffiliated broker-dealer ("Dealer") which is
authorized to sell shares of a Fund. Your FIC Representative or Dealer
Representative (each, a "Representative") may help you complete and submit an
application to open an account with a Fund. Certain accounts may require
additional documentation. Applications accompanied by checks drawn on U.S. banks
made payable to "FIC" and received in FIC's Woodbridge offices by the close of
regular trading on the NYSE, generally 4:00 P.M. (New York City time), will be
processed and shares will be purchased at the public offering price determined
at the close of regular trading on the NYSE on that day. Orders received by
Representatives before the close of regular trading on the NYSE and received by
FIC at their Woodbridge offices before the close of its business day, generally
5:00 P.M. (New York City time), will be executed at the public offering price
determined at the close of regular trading on the NYSE on that day. It is the
responsibility of Representatives to promptly transmit orders they receive to
FIC. The "public offering price" is the net asset value plus the applicable
sales charge for Class A shares and the net asset value for Class B shares. For
a discussion of pricing practices when FIC's Woodbridge offices are unable to
open for business due to an emergency, see the SAI. Each Fund reserves the right
to reject any application or order for its shares for any reason and to suspend
the offering of its shares.
WHEN YOU OPEN A FUND ACCOUNT, YOU MUST SPECIFY WHICH CLASS OF SHARES YOU
WISH TO PURCHASE. If you do not specify which class of shares you wish to
purchase, your order will be processed according to procedures established by
FIC. For more information, see the SAI.
INITIAL INVESTMENT IN A FUND. You may open a Fund account with as little
as $1,000. This account minimum is waived if you open an account for a
particular class of shares through a full exchange of shares of the same class
of another "Eligible Fund," as defined below. Class A share accounts opened
through an exchange of shares from First Investors Cash Management Fund, Inc. or
First Investors Tax-Exempt Money Market Fund, Inc. (collectively, "Money Market
Funds") may be subject to an initial sales charge. Automatic investment plans
allow you to open an account with as little as $50, provided you invest at least
$600 a year. See "Systematic Investing."
13
<PAGE>
ADDITIONAL PURCHASES. After you make your first investment in a Fund, you
may purchase additional shares of a Fund by mailing a check made payable to FIC,
directly to First Investors Corporation, 581 Main Street, Woodbridge, NJ
07095-1198, Attn: Dept. CP. Include your account number on the face of the
check. There is no minimum on additional purchases of Fund shares.
ELIGIBLE FUNDS. With respect to certain shareholder privileges noted in
this Prospectus and the SAI, each fund in the First Investors family of funds,
except as noted below, is an "Eligible Fund" (collectively, "Eligible Funds").
First Investors Special Bond Fund, Inc., First Investors Life Series Fund and
First Investors U.S. Government Plus Fund are not Eligible Funds. The Money
Market Funds, unless otherwise noted, are not Eligible Funds. The funds of
Executive Investors Trust ("Executive Investors") are Eligible Funds provided
the shares of any such fund either have been (a) acquired through an exchange
from an Eligible Fund which imposes a maximum sales charge of 6.25%, or (b) held
for at least one year from their date of purchase.
SYSTEMATIC INVESTING. Shareholders who have an account with a U.S. bank,
or other financial institution that is an Automated Clearing House member, may
arrange for automatic investments in a Fund on a systematic basis through First
Investors Money Line and through automatic payroll investments. You may also
elect to invest in Class A or Class B shares of a Fund at net asset value all
the cash distributions or Systematic Withdrawal Plan payments from the same
class of shares of an existing account in another Eligible Fund. If you wish to
participate in any of these systematic investment plans, please call Shareholder
Services at 1-800-423-4026 or see the SAI.
FUND/SERV PURCHASES. If there is a Dealer of record on your Fund account,
the Fund is authorized to execute electronic purchase orders received directly
from this Dealer. Electronic purchase orders may be processed through the
services of the National Securities Clearing Corp. ("NSCC") "Fund/SERV" system.
Purchase orders received by a Dealer before the close of regular trading on the
NYSE and received by FIC at its Woodbridge offices in accordance with NSCC rules
and procedures will be executed at the net asset value, plus any applicable
sales charge, determined at the close of regular trading on the NYSE on that
day. It is the responsibility of the Dealer to transmit purchase orders to FIC
promptly and accurately. FIC will not be liable for any change in the purchase
price due to the failure of FIC to receive such purchase orders. Any such
disputes must be settled between you and the Dealer.
CLASS A SHARES. Class A shares of each Fund are sold at the public
offering price, which will vary with the size of the purchase, as shown in the
following table:
SALES CHARGE AS % OF CONCESSION TO
OFFERING NET AMOUNT DEALERS AS % OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- -------------------- --------- ------------ --------------
Less than $25,000.................. 6.25% 6.67% 5.13%
$25,000 but under $50,000.......... 5.75 6.10 4.72
$50,000 but under $100,000......... 5.50 5.82 4.51
$100,000 but under $250,000........ 4.50 4.71 3.69
$250,000 but under $500,000........ 3.50 3.63 2.87
$500,000 but under $1,000,000...... 2.50 2.56 2.05
14
<PAGE>
There is no sales charge on transactions of $1 million or more.
Additionally, there is no sales charge on purchases that qualify for the
Cumulative Purchase Privilege if they total at least $1 million or on purchases
made pursuant to a Letter of Intent in the minimum amount of $1 million. The
Underwriter will pay from its own resources a sales commission to FIC
Representatives and a concession equal to 0.90% of the amount invested to
Dealers on such purchases. If shares are redeemed within 24 months of purchase a
CDSC of 1.00% will be deducted from the redemption proceeds. The CDSC will be
applied in the same manner as the CDSC on Class B shares. See "Class B Shares."
CUMULATIVE PURCHASE PRIVILEGE AND LETTER OF INTENT. You may purchase Class
A shares of a Fund at a reduced sales charge through the Cumulative Purchase
Privilege or by executing a Letter of Intent. For more information, see the SAI,
call your Representative or call Shareholder Services at 1-800-423-4026.
WAIVERS OF CLASS A SALES CHARGES. Sales charges on Class A shares do not
apply to: (1) any purchase by an officer, trustee, director or employee (who has
completed the introductory employment period) of the Tax Exempt Funds, the
Underwriter, the Adviser, or their affiliates, by a Representative, or by the
spouse, or by the children and grandchildren under the age of 21 of any such
person; (2) any purchase by a former officer, trustee, director or employee of
the Tax Exempt Funds, the Underwriter, the Adviser, or their affiliates, or by a
former FIC Representative; provided they had acted as such for at least five
years and had retired or otherwise terminated the relationship in good standing;
(3) any reinvestment of the loan repayments by a participant in a loan program
of any First Investors sponsored qualified retirement plan; and (4) a purchase
with proceeds from the liquidation of a First Investors Life Variable Annuity
Fund A contract or a First Investors Life Variable Annuity Fund C contract
during the one-year period preceding the maturity date of the contract.
Additionally, policyholders of participating life insurance policies
issued by First Investors Life Insurance Company ("FIL"), an affiliate of the
Adviser and Underwriter, may elect to invest dividends earned on such policies
in Class A shares of a Fund at net asset value, provided the annual dividend is
at least $50 and the policyholder has an existing account with the Fund.
Holders of certain unit trusts ("Unitholders") who have elected to invest
the entire amount of cash distributions from either principal, interest income
or capital gains or any combination thereof ("Unit Distributions") from the
following trusts may invest such Unit Distributions in Class A shares of a Fund
at a reduced sales charge. Unitholders of various series of New York Insured
Municipals-Income Trust sponsored by Van Kampen Merritt Inc. (the "New York
Trust"); Unitholders of various series of the Multistate Tax Exempt Trust
sponsored by Advest Inc.; and Unitholders of various series of the Municipal
Insured National Trust, J.C. Bradford & Co. as agent, may purchase Class A
shares of a Fund with Unit Distributions at an offering price which is the net
asset value per share plus a sales charge of 1.5%. Unitholders of various series
of tax-exempt trusts, other than the New York Trust, sponsored by Van Kampen
Merritt Inc. may purchase Class A shares of a Fund with Unit Distributions at an
offering price which is the net asset value per share plus a sales charge of
1.0%. Each Fund's initial minimum investment requirement is waived for purchases
of Class A shares with Unit Distributions. Shares of a Fund purchased by
Unitholders may be exchanged for Class A shares of any Eligible Fund subject to
the terms and conditions set forth under "How to Exchange Shares."
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CLASS B SHARES. The public offering price of Class B shares of each Fund
is the next determined net asset value, with no initial sales charge imposed. A
CDSC, however, is imposed upon most redemptions of Class B shares at the rates
set forth below:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
First......................... 4%
Second........................ 4
Third......................... 3
Fourth........................ 3
Fifth......................... 2
Sixth......................... 1
Seventh and thereafter........ 0
The CDSC will not be imposed on (1) the redemption of Class B shares
acquired as dividends or other distributions, or (2) any increase in the net
asset value of redeemed shares above their initial purchase price (in other
words, the CDSC will be imposed on the lower of net asset value or purchase
price). In determining whether a CDSC is payable on any redemption, it will be
assumed that the redemption is made first of any Class B shares acquired as
dividends or distributions, second of Class B shares that have been held for a
sufficient period of time such that the CDSC no longer is applicable to such
shares and finally of Class B shares held longest during the period of time that
a CDSC is applicable to such shares. This will result in you paying the lowest
possible CDSC.
As an example, assume an investor purchased 100 shares of Class B shares
at $10 per share for a total cost of $1,000 and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B shares as dividends. If at such time
the investor makes his or her first redemption of 50 shares (proceeds of $600),
10 shares will not be subject to a CDSC charge because redemptions are first
made of shares acquired through dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 4.00% (the
applicable rate in the second year after purchase).
For purposes of determining the CDSC on Class B shares, all purchases made
during a calendar month will be deemed to have been made on the first business
day of that month at the average cost of all purchases made during that month.
The holding period of Class B shares acquired through an exchange with another
Eligible Fund will be calculated from the first business day of the month that
the Class B shares were initially acquired in the other Eligible Fund. The
amount of any CDSC will be paid to FIC. The CDSC imposed on the purchase of
Class B shares will be waived under certain circumstances. See "Waivers of CDSC
on Class B Shares" in the SAI.
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CONVERSION OF CLASS B SHARES. A shareholder's Class B shares will
automatically convert to Class A shares approximately eight years after the date
of purchase, together with a pro rata portion of all Class B shares representing
dividends and other distributions paid in additional Class B shares. The Class B
shares so converted will no longer be subject to the higher expenses borne by
Class B shares. The conversion will be effected at the relative net asset values
per share of the two classes on the first business day of the month following
the month in which the eighth anniversary of the purchase of the Class B shares
occurs. If a shareholder effects one or more exchanges between Class B shares of
the Eligible Funds during the eight-year period, the holding period for the
shares so exchanged will commence upon the date of the purchase of the original
shares. Because the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion, a shareholder
may receive fewer Class A shares than the number of Class B shares converted.
See "Determination of Net Asset Value."
GENERAL. The Underwriter may at times agree to reallow to Dealers up to an
additional 0.25% of the dollar amount of shares of the Funds and/or certain
other First Investors Funds sold by such Dealers during a specific period of
time. From time to time, the Underwriter also will pay, through additional
reallowances or other sources, a bonus or other compensation to Dealers that
employ a Dealer Representative who sells a minimum dollar amount of the shares
of the Funds and/or certain other First Investors Funds during a specific period
of time. Such bonus or other compensation may take the form of reimbursement of
certain seminar expenses, co-operative advertising, or payment for travel
expenses, including lodging incurred in connection with trips taken by
qualifying Dealer Representatives to the Underwriter's principal office in New
York City. FIC Representatives generally are more highly compensated for sales
of First Investors mutual funds than for sales of other mutual funds.
HOW TO EXCHANGE SHARES
Should your investment needs change, you may exchange, at net asset value,
shares of a Fund for shares of any Eligible Fund, including the Money Market
Funds. In addition, Class A shares of a Fund may be exchanged at net asset value
for units of any single payment plan ("plan") sponsored by the Underwriter.
SHARES OF A PARTICULAR CLASS MAY BE EXCHANGED ONLY FOR SHARES OF THE SAME CLASS
OF ANOTHER FUND. Exchanges can only be made into accounts registered to
identical owners. If your exchange is into a new account, it must meet the
minimum investment and other requirements of the fund or plan into which the
exchange is being made. Additionally, the fund or plan must be available for
sale in the state where you reside. Before exchanging Fund shares for shares of
another fund or plan, you should read the Prospectus of the fund or plan into
which the exchange is to be made. You may obtain Prospectuses and information
with respect to which funds or plans qualify for the exchange privilege free of
charge by calling Shareholder Services at 1-800-423-4026. Exchange requests
received in "good order," as defined below, by the Transfer Agent before the
close of regular trading on the NYSE will be processed at the net asset value
determined as of the close of regular trading on the NYSE on that day; exchange
requests received after that time will be processed on the following trading
day.
EXCHANGES BY MAIL. To exchange shares by mail, you should mail requests to
Administrative Data Management Corp., 581 Main Street, Woodbridge, NJ
07095-1198. Shares will be exchanged after the request is received in "good
order" by the Transfer Agent. "Good order" means that an exchange request must
include: (1) the names of the funds, account number(s), the
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dollar amount, number of shares or percentage of the account you wish to
exchange; (2) share certificates, if issued; (3) the signature of all registered
owners exactly as the account is registered; and (4) signature guarantees, if
required (see "How to Redeem Shares-Signature Guarantees"). If the request is
not in good order or information is missing, the Transfer Agent will seek
additional information from you and process the exchange on the day it receives
such information. Certain account registrations may require additional legal
documentation in order to exchange. To review these requirements, please call
Shareholder Services at 1-800-423-4026.
EXCHANGES BY TELEPHONE. See "Telephone Transactions."
ADDITIONAL EXCHANGE INFORMATION. Exchanges should be made for investment
purposes only. A pattern of frequent exchanges may be contrary to the best
interests of a Fund's other shareholders. Accordingly, each Fund has the right,
at its sole discretion, to limit the amount of an exchange, reject any exchange,
or, upon 60 days' notice, materially modify or discontinue the exchange
privilege. Each Fund will consider all relevant factors in determining whether a
particular frequency of exchanges is contrary to the best interests of the Fund
and/or a class of the Fund and its other shareholders. Any such restriction will
be made by a Fund on a prospective basis only, upon notice to the shareholder
not later than ten days following such shareholder's most recent exchange.
HOW TO REDEEM SHARES
You may redeem your Fund shares at the next determined net asset value,
less any applicable CDSC, on any day the NYSE is open, directly through the
Transfer Agent. Your Representative may help you with this transaction. Shares
may be redeemed by mail or telephone. Certain account registrations may require
additional legal documentation in order to redeem. Redemption requests received
in "good order" by the Transfer Agent before the close of regular trading on the
NYSE, will be processed at the net asset value, less any applicable CDSC,
determined as of the close of regular trading on the NYSE on that day. Payment
of redemption proceeds generally will be made within seven days. If the shares
being redeemed were recently purchased by check, payment may be delayed to
verify that the check has been honored, normally not more than fifteen days. For
a discussion of pricing practices when FIC's Woodbridge offices are unable to
open due to an emergency, see the SAI.
REDEMPTIONS BY MAIL. Written redemption requests should be mailed to
Administrative Data Management Corp., 581 Main Street, Woodbridge, NJ
07095-1198. For your redemption request to be in good order, you must include:
(1) the name of the Fund; (2) your account number; (3) the dollar amount, number
of shares or percentage of the account you want redeemed; (4) share
certificates, if issued; (5) the original signatures of all registered owners
exactly as the account is registered; and (6) signature guarantees, if required.
If your redemption request is not in good order or information is missing, the
Transfer Agent will seek additional information and process the redemption on
the day it receives such information. To review these requirements, please call
Shareholder Services at 1-800-423-4026.
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SIGNATURE GUARANTEES. In order to protect you, the Funds and their agents,
each Fund reserves the right to require signature guarantees in order to process
certain exchange or redemption requests. See the SAI or call Shareholder
Services at 1-800-423-4026 for instances when signature guarantees are required.
REDEMPTIONS BY TELEPHONE. See "Telephone Transactions."
ELECTRONIC FUND TRANSFER. Shareholders who have established Electronic
Fund Transfer may have redemption proceeds electronically transferred to a
predesignated bank account. Each Fund has the right, at its sole discretion, to
limit or terminate your ability to exercise the electronic fund transfer
privilege at any time. For additional information, see the SAI. Applications to
establish Electronic Fund Transfer are available from your FIC Representative or
by calling Shareholder Services at 1-800-423-4026.
FUND/SERV REDEMPTIONS. If there is a Dealer of record on your Fund
account, the Fund is authorized to execute electronic redemption requests
received directly from this Dealer. Electronic requests may be processed through
the services of the NSCC "Fund/SERV" system. Redemption requests received by a
Dealer before the close of regular trading on the NYSE and received by FIC at
its Woodbridge offices in accordance with NSCC rules and procedures will be
executed at the net asset value, less any applicable sales charge, determined at
the close of regular trading on the NYSE on that day. It is the responsibility
of the Dealer to transmit redemption requests to FIC promptly and accurately.
FIC will not be liable for any change in the redemption price due to the failure
of FIC to receive such redemption requests. Any such disputes must be settled
between you and the Dealer.
SYSTEMATIC WITHDRAWAL PLAN. If you own noncertificated shares, you may set
up a plan for redemptions to be made automatically at regular intervals. See the
SAI for more information on the Systematic Withdrawal Plan or call Shareholder
Services at 1-800-423-4026.
REINVESTMENT AFTER REDEMPTION. If you redeem Class A or Class B shares in
your Fund account, you can reinvest within six months from the date of
redemption all or any part of the proceeds in shares of the same class of the
same Fund or any other Eligible Fund, including the Money Market Funds, at net
asset value, on the date the Transfer Agent receives your purchase request. For
more information on the reinvestment privilege, please see the SAI or call
Shareholder Services at 1-800-423-4026.
REPURCHASE THROUGH UNDERWRITER. You may redeem Fund shares through a
Dealer. In this event, the Underwriter, acting as agent for each Fund, will
offer to repurchase or accept an offer to sell such shares at a price equal to
the net asset value next determined after the making of such offer, less any
applicable CDSC. The Dealer may charge you an added commission for handling any
redemption transaction.
REDEMPTION OF LOW BALANCE ACCOUNTS. Because each Fund incurs certain fixed
costs in maintaining shareholder accounts, each Fund may redeem without your
consent, on at least 60 days' prior written notice (which may appear on your
account statement), any Fund account of Class A or Class B shares which has a
net asset value of less than $500. To avoid such redemption, you may, during
such 60-day period, purchase additional Fund shares of the same class so as to
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increase your account balance to the required minimum. There will be no CDSC
imposed on such redemptions of Class B shares. A Fund will not redeem accounts
that fall below $500 solely as a result of a reduction in net asset value.
Accounts established under a Systematic Investment Plan that have been
discontinued prior to meeting the $1,000 minimum are subject to this policy.
Additional information concerning how to redeem shares of a Fund is
available upon request to your Representative or Shareholder Services at
1-800-423-4026.
TELEPHONE TRANSACTIONS
Unless you specifically decline to have telephone privileges, you, or any
person who we reasonably believe is authorized to act on your behalf, may redeem
or exchange noncertificated shares of a Fund by calling the Special Services
Department at 1-800-342-6221 weekdays (except holidays) between 9:00 A.M. and
5:00 P.M. (New York City time). Certain accounts, however, are required to
complete additional documents in order to activate telephone privileges.
Exchange or redemption requests received before the close of regular trading on
the NYSE will be processed at the net asset value, less any applicable CDSC,
determined as of the close of business on that day. For more information on
telephone privileges, please call Shareholder Services at 1-800-423-4026 or see
the SAI.
TELEPHONE EXCHANGES. Exchange requests may be made by telephone (for
shares held on deposit only). Telephone exchanges to Money Market Funds are not
available if your address of record has changed within 60 days prior to the
exchange request.
TELEPHONE REDEMPTIONS. The telephone redemption privilege may be used
provided: (1) the redemption proceeds are being mailed to the address of record
or to a predesignated bank account; (2) your address of record has not changed
within the past 60 days; (3) the shares to be redeemed have not been issued in
certificate form; (4) each redemption does not exceed $50,000; and (5) the
proceeds of the redemption, together with all redemptions made from the account
during the prior 30-day period, do not exceed $100,000. TELEPHONE REDEMPTION
INSTRUCTIONS WILL BE ACCEPTED FROM ANY ONE OWNER OR AUTHORIZED INDIVIDUAL.
ADDITIONAL INFORMATION. The Tax Exempt Funds, the Adviser, the Underwriter
and their officers, trustees, directors and employees will not be liable for any
loss, damage, cost or expense arising out of any instruction (or any
interpretation of such instruction) received by telephone or which they
reasonably believe to be authentic. This policy places the entire risk of loss
for unauthorized or fraudulent transactions on the shareholder, except that if
the above-referenced parties do not follow reasonable procedures, some or all of
them may be liable for any such losses. For more information on telephone
transactions see the SAI. The Tax Exempt Funds have the right, at their sole
discretion, upon 60 days' notice, to materially modify or discontinue the
telephone exchange and redemption privilege. During times of drastic economic or
market changes, telephone exchanges or redemptions may be difficult to
implement. If you experience difficulty in making a telephone exchange or
redemption, your exchange or redemption request may be made by regular or
express mail, and it will be implemented at the next determined net asset value,
less any applicable CDSC, following receipt by the Transfer Agent.
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MANAGEMENT
BOARD OF DIRECTORS OR TRUSTEES. Each Tax Exempt Fund's Board, as part of
its overall management responsibility, oversees various organizations
responsible for the applicable Fund's day-to-day management.
ADVISER. First Investors Management Company, Inc. supervises and manages
each Fund's investments, determines each Fund's portfolio transactions and
supervises all aspects of each Fund's operations. The Adviser is a New York
corporation located at 95 Wall Street, New York, NY 10005. The Adviser presently
acts as investment adviser to 14 mutual funds. First Investors Consolidated
Corporation ("FICC") owns all of the voting common stock of the Adviser and all
of the outstanding stock of FIC and the Transfer Agent. Mr. Glenn O. Head
controls FICC and, therefore, controls the Adviser.
As compensation for its services, the Adviser receives an annual fee from
each of the Funds, which is payable monthly. For the fiscal year ended December
31, 1996, the advisory fees for INSURED TAX EXEMPT FUND were 0.69% of its
average daily net assets. For the same period, INSURED INTERMEDIATE FUND's
advisory fees, net of waiver, were 0.39%.
PORTFOLIO MANAGER. Clark D. Wagner has been Portfolio Manager of the Funds
since he joined FIMCO in 1991. Mr. Wagner is also Portfolio Manager for all of
the First Investors municipal bond funds. Mr. Wagner is also Portfolio Manager
for Government Fund, Target Maturity 2007 Fund and Target Maturity 2010 Fund of
First Investors Life Series Fund and First Investors Government Fund, Inc. Mr.
Wagner is also responsible for the day-to-day management of the U.S. Government
and mortgage-backed securities portion of Total Return Fund of First Investors
Series Fund. Mr. Wagner has been Chief Investment Officer of FIMCO since 1992.
BROKERAGE. Each Fund may allocate brokerage commissions, if any, to
broker-dealers in consideration of Fund share distribution, but only when
execution and price are comparable to that offered by other broker-dealers.
Brokerage may be directed to brokers who provide research. See the SAI for more
information on allocation of portfolio brokerage.
UNDERWRITER. Each Tax Exempt Fund has entered into an Underwriting
Agreement with First Investors Corporation, 95 Wall Street, New York, NY 10005,
as Underwriter. The Underwriter receives all sales charges in connection with
the sale of each Fund's Class A shares and all CDSCs in connection with each
Fund's Class B shares and may receive other payments under a plan of
distribution. See "How to Buy Shares" and "Distribution Plans."
DISTRIBUTION PLANS
Pursuant to separate distribution plans pertaining to each Fund's Class A
and Class B shares ("Class A Plan" or "Class B Plan," and collectively,
"Plans"), each Fund may reimburse or compensate, as applicable, the Underwriter
for certain expenses incurred in the distribution of that Fund's shares
("distribution fees") and the servicing or maintenance of existing Fund
shareholder accounts ("service fees"). Pursuant to the Plans, distribution fees
are paid for activities relating to the distribution of Fund shares, including
costs of printing and dissemination of sales material or literature,
prospectuses and reports used in connection with the sale of Fund shares.
Service fees are paid for the ongoing maintenance and servicing of existing
shareholder accounts, including
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payments to Representatives who provide shareholder liaison services to their
customers who are holders of that Fund, provided they meet certain criteria.
Pursuant to INSURED TAX EXEMPT FUND'S Class A Plan, the Fund's Board of
Directors, in its sole discretion, may periodically allocate the portion of
distribution fees and services fees that may be spent, provided the aggregate of
such fees paid by the Fund may not exceed an annual rate of 0.30% of its average
daily net assets attributable to Class A shares in any one fiscal year. Of that
amount, no more than 0.25% of the Fund's average daily net assets attributable
to Class A shares may be paid as service fees. Payments made to the Underwriter
will be for reimbursement of specific expenses incurred in connection with
distribution and service activities.
Pursuant to INSURED INTERMEDIATE FUND's Class A Plan, the Fund is
authorized to pay the Underwriter a distribution fee at the annual rate of 0.05%
of the Fund's average daily net assets attributable to Class A shares and a
service fee of 0.25% of the Fund's average daily net assets attributable to
Class A shares. Payments made to the Underwriter will represent compensation for
distribution and service activities, not reimbursement for specific expenses
incurred.
Pursuant to each Class B Plan, each Fund is authorized to pay the
Underwriter a distribution fee at the annual rate of 0.75% of that Fund's
average daily net assets attributable to Class B shares and a service fee of
0.25% of the Fund's average daily net assets attributable to Class B shares.
Payments made to the Underwriter under each Class B Plan will represent
compensation for distribution and service activities, not reimbursement for
specific expenses incurred.
Although Class B shares are sold without an initial sales charge, the
Underwriter pays from its own resources a sales commission to FIC
Representatives and a concession equal to 3.5% of the amount invested to Dealers
who sell Class B shares. In addition, the Underwriter will make quarterly
payments of service fees to Representatives commencing after the thirteenth
month following the initial sale of Class B shares. The Underwriter will make
such payments at an annual rate of up to 0.25% of the average net asset value of
Class B shares which are attributable to shareholders for whom the
Representatives are designated as dealer of record.
Each Fund may suspend or modify payments under the Plans at any time, and
payments are subject to the continuation of each Plan, the terms of any dealer
agreements between Dealers and the Underwriter and any applicable limits imposed
by the National Association of Securities Dealers, Inc. Each Fund will not carry
over any fees under the Plans to the next fiscal year. See "Distribution Plans"
in the SAI for a full discussion of the various Plans.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund's shares fluctuates and is determined
separately for each class of shares. The net asset value of shares of a given
class of each Fund is determined as of the close of regular trading on the NYSE
(generally 4:00 P.M., New York City time) on each day the NYSE is open for
trading, and at such other times as the applicable Tax Exempt Fund's Board deems
necessary, by dividing the market value of the securities held by such Fund,
plus any cash and other assets, less all liabilities attributable to that class,
by the number of shares of the applicable class outstanding. If there is no
available market value, securities will be valued at their fair value as
determined in good faith pursuant to procedures adopted by the applicable Tax
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Exempt Fund's Board. Expenses (other than 12b-1 fees and certain other class
expenses) are allocated daily to each class of shares based upon the relative
proportion of net assets of each class. The per share net asset value of the
Class B shares will generally be lower than that of the Class A shares because
of the higher expenses borne by the Class B shares. The NYSE currently observes
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are generally declared daily and paid
monthly by each Fund. Unless you direct the Transfer Agent otherwise, dividends
declared on a class of shares of a Fund are paid in additional shares of that
class at the net asset value generally determined as of the close of business on
the first business day of the following month. If you redeem all of your shares
of a Fund at any time during a month, you are paid all dividends declared
through the day prior to the date of the redemption, together with the proceeds
of your redemption, less any applicable CDSC. Net investment income includes
interest, earned discount and other income earned on portfolio securities less
expenses.
Each Fund also distributes with its regular dividend at the end of each
year substantially all of its net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital gain,
if any, after deducting any available capital loss carryovers. Unless you direct
the Transfer Agent otherwise, these distributions are paid in additional shares
of the same class of the distributing Fund at the net asset value generally
determined as of the close of business on the business day immediately following
the record date of the distribution. A Fund may make an additional distribution
in any year if necessary to avoid a Federal excise tax on certain undistributed
ordinary (taxable) income and capital gain.
Dividends and other distributions paid on both classes of a Fund's shares
are calculated at the same time and in the same manner. Dividends on Class B
shares of a 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 elect to receive dividends and/or other distributions in
cash by notifying the Transfer Agent by telephone or in writing prior to the
record date of any such distribution. If you elect this form of payment, the
payment date generally is two weeks following the record date of any such
distribution. Your election remains in effect until you revoke it by notifying
the Transfer Agent.
You may elect to invest the entire amount of any cash distribution on
Class A or Class B shares of a Fund in the same class of shares of any Eligible
Fund, including the Money Market Funds, by notifying the Transfer Agent. See
"Cross-Investment of Cash Distributions" in the SAI.
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A dividend or other distribution paid on a class of shares of a Fund will
be paid in additional shares of that class and not in cash if any of the
following events occurs: (1) the total amount of the distribution is under $5,
(2) the Fund has received notice of your death on an individual account (until
written alternate payment instructions and other necessary documents are
provided by your legal representative), or (3) a distribution check is returned
to the Transfer Agent, marked as being undeliverable, by the U.S. Postal Service
after two consecutive mailings.
TAXES
Each Fund has qualified and intends to continue to qualify for treatment
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"), so that it will be relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of taxable
net investment income and net short-term capital gain) and net capital gain that
is distributed to its shareholders. In addition, each Fund intends to continue
to qualify to pay "exempt-interest dividends" (as defined below), which
requires, among other things, that at the close of each calendar quarter at
least 50% of the value of its total assets must consist of Municipal
Instruments.
Distributions by a Fund of the excess of interest income from Municipal
Instruments over certain amounts disallowed as deductions, which are designated
by the Fund as "exempt-interest dividends," generally may be excluded by you
from gross income. Distributions by a Fund of interest income from taxable
obligations and net short-term capital gain, if any, are taxable to you as
ordinary income to the extent of the Fund's earnings and profits, whether
received in cash or paid in additional Fund shares. Distributions of a Fund's
realized net capital gain, if any, when designated as such, are taxable to you
as long-term capital gains, whether received in cash or paid in additional Fund
shares, regardless of the length of time you have owned your shares. If you
purchase your shares shortly before the record date for a taxable dividend or
capital gain distribution, you will pay full price for the shares and receive
some portion of the price back as a taxable distribution. You will receive a
statement following the end of each calendar year describing the tax status of
distributions paid by your Fund during that year.
Interest on indebtedness incurred or continued to purchase or carry shares
of a Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Each Fund does
not intend to invest in PABs or IDBs the interest on which is treated as a Tax
Preference Item.
Proposals have been and, in the future, may be introduced before Congress
for the purpose of restricting or eliminating the Federal income tax exemption
for interest on Municipal Instruments. If such a proposal were enacted, the
availability of Municipal Instruments for investment by each Fund and the value
of its portfolio securities would be affected. In that event, each Fund would
reevaluate its investment objective and policies.
Each Fund is required to withhold 31% of all taxable dividends, capital
gain distributions and redemption proceeds payable to you (if you are an
individual or certain other non-corporate shareholder) if the Fund is not
furnished with your correct taxpayer identification number, and the same
percentage of dividends and such distributions in certain other circumstances.
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Your redemption of Fund shares will result in a taxable gain or loss to
you, depending on whether the redemption proceeds are more or less than your
adjusted basis for the redeemed shares (which normally includes any initial
sales charge paid on Class A shares). An exchange of Fund shares for shares of
any other Eligible Fund generally will have similar tax consequences. However,
special tax rules apply if you (1) dispose of Class A shares through a
redemption or exchange within 90 days of your purchase and (2) subsequently
acquire Class A shares of the same Fund or an Eligible Fund without paying a
sales charge due to the reinvestment privilege or exchange privilege. In these
cases, any gain on your disposition of the original Class A shares will be
increased, or loss decreased, by the amount of the sales charge you paid when
the shares were acquired, and that amount will increase the basis of the
Eligible Fund's shares subsequently acquired. In addition, if you purchase
shares of a Fund within 30 days before or after redeeming other shares of that
Fund (regardless of class) at a loss, all or a portion of the loss will not be
deductible and will increase the basis of the newly purchased shares.
No gain or loss will be recognized to a shareholder as a result of a
conversion of Class B shares into Class A shares.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting each Fund and its shareholders; see the
SAI for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor; for example, a Fund's
distributions may be wholly or partly taxable under state and/or local laws. You
therefore are urged to consult your own tax adviser.
PERFORMANCE INFORMATION
For purposes of advertising, each Fund's performance may be calculated for
each class of its shares based on average annual total return and total return.
Each of these figures reflects past performance and does not necessarily
indicate future results. Average annual total return shows the average annual
percentage change in an assumed $1,000 investment. It reflects the hypothetical
annually compounded return that would have produced the same total return if a
Fund's performance had been constant over the entire period. Because average
annual total return tends to smooth out variations in a Fund's return, you
should recognize that it is not the same as actual year-by-year results. Average
annual total return includes the effect of paying the maximum sales charge (in
the case of Class A shares) or the deduction of any applicable CDSC (in the case
of Class B shares) and payment of dividends and other distributions in
additional shares. One, five and ten year periods will be shown unless the class
has been in existence for a shorter period. Total return is computed using the
same calculations as average annual total return. However, the rate expressed is
the percentage change from the initial $1,000 invested to the value of the
investment at the end of the stated period. Total return calculations assume
reinvestment of dividends and other distributions.
Each Fund also may advertise its yield for each class of shares. Yield
reflects investment income net of expenses over a 30-day (or one-month) period
on a Fund share, expressed as an annualized percentage of the maximum offering
price per share for Class A shares and the net asset value per share for Class B
shares at the end of the period. Yield computations differ from other accounting
methods and therefore may differ from dividends actually paid or reported net
income.
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Tax-equivalent yields show the taxable yields an investor would have to
earn to equal a Fund's tax-free yields. The tax-equivalent yield is calculated
similarly to the yield, except that the yield is increased using a stated income
tax rate to demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to a Fund's tax-free yield. Each Fund may also advertise its
"actual distribution rate" for each class of shares. This is computed in the
same manner as yield except that actual income dividends declared per share
during the period in question are substituted for net investment income per
share. In addition, each Fund calculates its "actual distribution rate" based
upon net asset value for dissemination to existing shareholders.
Each of the above performance calculations may be based on investment at
reduced sales charge levels or at net asset value. Any quotation of performance
figures not reflecting the maximum sales charge or CDSC will be greater than if
the maximum sales charge or CDSC were used. Each class of shares of a Fund has
different expenses which will affect its performance. Additional performance
information is contained in the Funds' Annual Reports which may be obtained
without charge by contacting the applicable Fund at 1-800-423-4026.
GENERAL INFORMATION
ORGANIZATION. INSURED TAX EXEMPT FUND was incorporated in the State of
Maryland on September 28, 1976. Series Fund is a Massachusetts business trust
organized on September 23, 1988. Each Fund is authorized to issue shares of
beneficial interest or common stock, as applicable, in such separate and
distinct series and classes of shares as that Tax Exempt Fund's Board shall from
time to time establish. The shares of common stock of INSURED TAX EXEMPT FUND
presently comprise one series and the shares of beneficial interest of Series
Fund are presently divided into five separate and distinct series. Each Tax
Exempt Fund presently has two classes, designated Class A shares and Class B
shares. Each class of a Fund represents interests in the same assets of that
Fund. The Tax Exempt Funds do not hold annual shareholder meetings. If requested
to do so by the holders of at least 10% of a Tax Exempt Fund's outstanding
shares, that Tax Exempt Fund's Board will call a special meeting of shareholders
for any purpose, including the removal of Directors or Trustees.
Each share of each Fund has equal voting rights except as noted.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of each Fund.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of FIMCO and FIC, acts as transfer and
dividend disbursing agent for each Fund and as redemption agent for regular
redemptions. The Transfer Agent's telephone number is 1-800-423-4026.
SHARE CERTIFICATES. The Funds do not issue certificates for Class B
shares, The Funds, however, will issue share certificates for Class A shares at
the shareholder's request. Ownership of shares of each Fund is recorded on a
stock register by the Transfer Agent and shareholders have the same rights of
ownership with respect to such shares as if certificates had been issued.
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CONFIRMATIONS AND STATEMENTS. You will receive confirmations of purchases
and redemptions of shares of a Fund. Generally, confirmation statements will be
sent to you following a transaction in the account, including payment of a
dividend or capital gain distribution in additional shares or cash. However,
systematic investments made through First Investors Money Line or automatic
payroll deductions will only be confirmed in your monthly or quarterly
statement, showing all transactions occurring during the period.
SHAREHOLDER INQUIRIES. Shareholder inquiries can be made by calling
Shareholder Services at 1-800-423-4026.
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. It is each Fund's practice
to mail only one copy of its annual and semi-annual reports to any address at
which more than one shareholder with the same last name has indicated that mail
is to be delivered. Additional copies of the reports will be mailed if requested
in writing or by telephone by any shareholder.
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TABLE OF CONTENTS
Fee Table............................................................... 2
Financial Highlights.................................................... 4
Investment Objectives and Policies...................................... 7
Alternative Purchase Plans.............................................. 12
How to Buy Shares....................................................... 13
How to Exchange Shares.................................................. 17
How to Redeem Shares.................................................... 18
Telephone Transactions.................................................. 20
Management.............................................................. 21
Distribution Plans...................................................... 21
Determination of Net Asset Value........................................ 22
Dividends and Other Distributions....................................... 23
Taxes................................................................... 24
Performance Information................................................. 25
General Information..................................................... 26
ADVISER CUSTODIAN
First Investors Management The Bank of New York
Company, Inc. 48 Wall Street
95 Wall Street New York, NY 10286
New York, NY 10005
TRANSFER AGENT
UNDERWRITER Administrative Data
First Investors Corporation Management Corp.
95 Wall Street 581 Main Street
New York, NY 10005 Woodbridge, NJ 07095-1198
LEGAL COUNSEL AUDITORS
Kirkpatrick & Lockhart LLP Tait, Weller & Baker
1800 Massachusetts Avenue, N.W. Two Penn Center Plaza
Washington, D.C. 20036 Philadelphia, PA 19102-1707
This Prospectus is intended to constitute an offer by each Tax Exempt Fund only
of the securities of which it is the issuer and is not intended to constitute an
offer by either Fund of the securities of the other Fund whose securities are
also offered by this Prospectus. Neither Fund intends to make any representation
as to the accuracy or completeness of the disclosure in this Prospectus relating
to the other Fund. No dealer, salesman or any other person has been authorized
to give any information or to make any representations other than those
contained in this Prospectus or the Statement of Additional Information, and if
given or made, such information and representation must not be relied upon as
having been authorized by either Tax Exempt Fund, First Investors Corporation,
or any affiliate thereof. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of the shares offered hereby in any
state to any person to whom it is unlawful to make such offer in such state.
<PAGE>
First Investors
Insured Tax Exempt
Fund, Inc.
- ---------------------------
First Investors
Insured Intermediate
Tax Exempt Fund
A Series of
First Investors Series Fund
- ---------------------------
Prospectus
- ----------------------------
April 30, 1997
First Investors Logo
Logo is described as follows: the arabic numeral one separated into seven
vertical segments followed by the words "First Investors."
Verticle line from top to bottom in center of page about 1/2 inch in thickness
The following language appears to the left of the above language in the printed
piece:
The words "BULK RATE U.S. POSTAGE PAID PERMIT NO. 7379" in a box to the right of
a circle containing the words "MAILED FROM ZIP CODE 11201" appears on the
righthand side.
The following language appears on the lefthand side:
FIRST INVESTORS INSURED TAX EXEMPT FUND, INC.
FIRST INVESTORS INSURED INTERMEDIATE TAX EXEMPT FUND
a Series of First Investors Series Fund
95 WALL STREET
NEW YORK, NY 10005
First Investors Logo (as described above)
A MEMBER OF THE
FIRST INVESTORS
FINANCIAL NETWORK
FIITE01
<PAGE>
FIRST INVESTORS INSURED TAX EXEMPT FUND, INC.
FIRST INVESTORS INSURED INTERMEDIATE
TAX EXEMPT FUND, A SERIES OF
FIRST INVESTORS SERIES FUND
95 Wall Street 1-800-423-4026
New York, New York 10005
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1997
This is a Statement of Additional Information ("SAI") for FIRST
INVESTORS INSURED TAX EXEMPT FUND, INC. ("INSURED TAX EXEMPT FUND") and FIRST
INVESTORS INSURED INTERMEDIATE TAX EXEMPT FUND ("INSURED INTERMEDIATE FUND").
INSURED INTERMEDIATE FUND is a separate series of FIRST INVESTORS SERIES FUND
("SERIES FUND"). INSURED TAX EXEMPT FUND and SERIES FUND are each an open-end
diversified management investment company (collectively, "Tax Exempt Funds").
INSURED TAX EXEMPT FUND and INSURED INTERMEDIATE FUND are sometimes referred to
herein singularly as "Fund" and collectively as "Funds." The investment
objective of each Fund is to seek to provide a high level of interest income
which is exempt from Federal income tax and is not an item of tax preference for
purposes of the Federal alternative minimum tax ("Tax Preference Item"). There
can be no assurance that the objective of any Fund will be realized.
This SAI is not a prospectus. It should be read in conjunction with the
Tax Exempt Funds' Prospectus dated April 30, 1997, which may be obtained free of
cost from the Tax Exempt Funds at the address or telephone number noted above.
TABLE OF CONTENTS
Page
Investment Policies........................................................ 2
Hedging and Option Income Strategies....................................... 6
Insurance.................................................................. 12
Investment Restrictions.................................................... 14
Directors or Trustees and Officers......................................... 18
Management................................................................. 20
Underwriter................................................................ 21
Distribution Plans......................................................... 22
Determination of Net Asset Value........................................... 23
Allocation of Portfolio Brokerage.......................................... 24
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services................................ 25
Taxes...................................................................... 30
Performance Information.................................................... 33
General Information........................................................ 38
Appendix A................................................................. 40
Appendix B................................................................. 43
Appendix C................................................................. 43
Appendix D................................................................. 45
Financial Statements....................................................... 51
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INVESTMENT POLICIES
BOND MARKET CONCENTRATION. Each Fund 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, industrial development bonds,
utility bonds and university bonds, during periods when one or more of these
segments offer higher yields and/or profit potential. As of December 31, 1996,
INSURED TAX EXEMPT FUND had 25.33% of its assets in general obligation bonds and
INSURED INTERMEDIATE FUND had 51.02% of its assets in general obligation bonds.
CERTIFICATES OF PARTICIPATION. The applicable Tax Free Fund's Board of
Directors or Trustees (each, a "Board") has established guidelines for
determining the liquidity of the certificates of participation ("COPs") in the
applicable Tax Free Fund's portfolio and, subject to review by that Tax Free
Fund's Board, has delegated that responsibility to the Adviser. Pursuant to
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 a
Fund, and (7) for unrated COPs, the COPs' credit status analyzed by the Adviser
according to the factors reviewed by rating agencies.
DETACHABLE CALL OPTIONS. Detachable call options are sold by issuers of
municipal bonds separately from the municipal bonds to which the call options
relate and permit the purchasers of the call options to acquire the municipal
bonds at the call prices and call dates. In the event that interest rates drop,
the purchaser could exercise the call option to acquire municipal bonds that
yield above-market rates. INSURED INTERMEDIATE FUND may acquire detachable call
options relating to municipal bonds that the Fund already owns or will acquire
in the immediate future and thereby, in effect, make such municipal bonds
non-callable so long as the Fund continues to hold the detachable call option.
INSURED INTERMEDIATE FUND will consider detachable call options to be illiquid
securities and they will be treated as such for purposes of certain investment
limitation calculations.
HIGH YIELD SECURITIES. Although each Fund may invest up to 5% of its
net assets in municipal bonds rated lower than Baa by Moody's Investors Service,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P"), each Fund
currently does not intend to purchase such municipal bonds. However,
occasionally a Fund may hold in its portfolio a municipal bond that has had its
rating downgraded. In each instance, such bonds will be covered by the insurance
feature and thus considered to be of higher quality than high yield securities
without an insurance feature. See "Insurance" for a detailed discussion of the
insurance feature. Debt obligations rated lower than Baa by Moody's or BBB by
S&P, commonly referred to as "junk bonds," are speculative and generally involve
a higher risk or loss of principal and income than higher-rated securities
("High Yield Securities"). High Yield Securities are subject to certain risks
that may not be present with investments in high grade securities. The prices of
High Yield Securities tend to be less sensitive to interest rate changes than
higher-rated investments, but may be more sensitive to adverse economic changes.
A strong economic downturn or a substantial period of rising interest rates
could severely affect the market for High Yield Securities.
Municipal obligations that are high yield securities rated below
investment grade ("Municipal High Yield Securities") are deemed by Moody's and
S&P to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. "Municipal High Yield Securities," unless otherwise
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<PAGE>
noted, include unrated securities deemed to be rated below investment grade by
the Funds' investment adviser, First Investors Management Company, Inc.
("Adviser" or "FIMCO"). Ratings of Municipal High Yield Securities represent the
rating agencies' opinions regarding their quality, are not a guarantee of
quality and may be reduced after a Fund has acquired the security. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates.
Municipal High Yield Securities generally offer a higher current yield
than higher grade issues. However, Municipal High Yield Securities involve
higher risks, in that they are especially subject to adverse changes in the
general economic conditions, in economic conditions of an issuer's geographic
area and in the industries or activities in which the issuer is engaged.
Municipal High Yield Securities are also especially sensitive to changes in the
financial condition of the issuer and to price fluctuations in response to
changes in interest rates. Accordingly, the yield on lower rated Municipal High
Yield Securities will fluctuate over time. During periods of economic downturn
or rising interest rates, municipal issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default.
In addition, Municipal High Yield Securities are frequently traded only
in markets where the number of potential purchasers and sellers, if any, is
limited. This factor may limit a Fund's ability to acquire such securities and
to sell such securities at their fair value in response to changes in the
economy or the financial markets, especially for unrated Municipal High Yield
Securities. Although unrated Municipal High Yield Securities are not necessarily
of lower quality than rated Municipal High Yield Securities, the market for
rated Municipal High Yield Securities generally is broader than that for unrated
Municipal High Yield Securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of Municipal High Yield Securities, especially in a thinly traded
market.
LOANS OF PORTFOLIO SECURITIES. Each Fund may loan securities to
qualified broker-dealers or other institutional investors provided: the borrower
pledges to a Fund and agrees to maintain at all times with that Fund cash
collateral equal to not less than 100% of the value of the securities loaned
(plus accrued interest or dividend), if any, the loan is terminable at will by a
Fund, that 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 a Fund at any time and that
Fund may vote the proxies if a material event affecting the investment is to
occur. The market risk applicable to any security loaned remains a risk of a
Fund. The borrower must add to the collateral whenever the market value of the
securities rises above the level of such collateral. A Fund could incur a loss
if the borrower should fail financially at a time when the value of the loaned
securities is greater than the collateral. The primary objective of such loaning
function is to supplement a Fund's income through investment of the cash
collateral in short-term interest bearing obligations. INSURED INTERMEDIATE FUND
has a non-fundamental policy that the aggregate value of portfolio securities it
can lend will not exceed 10% of its net assets and INSURED TAX EXEMPT FUND may
not make such loans in excess of 10% of its total assets.
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 the Fund's custodian
bank. In a "tri-party" repurchase agreement, these securities would be held by a
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<PAGE>
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. INSURED INTERMEDIATE 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 the Fund invest in repurchase agreements with more than one year in time to
maturity. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of one year from the effective date of the
repurchase agreement. The Fund will always receive, as collateral, securities
whose market value, including accrued interest, which will at all times be at
least equal to 100% of the dollar amount invested by the Fund in each agreement,
and the Fund will make payment for such securities only upon physical delivery
or evidence of book entry transfer to the account of the custodian. If the
seller defaults, the Fund might incur a loss if the value of the collateral
securing the repurchase agreement declines, and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy or
similar proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. INSURED
INTERMEDIATE 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 AND ILLIQUID SECURITIES. Neither Fund will purchase or
otherwise acquire any security if, as a result, more than 15% of its net assets
(taken at current value) would be invested in securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale. This policy includes detachable call options 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 each Tax Exempt
Fund's Board or the Adviser has determined under Board-approved guidelines are
liquid. As a result of an undertaking to a certain state securities commission,
INSURED INTERMEDIATE FUND will not invest more than 10% of its total assets in
restricted securities, excluding Rule 144A securities.
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.
4
<PAGE>
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 the Fund might be unable to dispose of such
securities promptly or at reasonable prices.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed as to
principal and interest by the U.S. Government include (1) U.S. Treasury
obligations which differ only in their interest rates, maturities and times of
issuance as follows: U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years), and U.S. Treasury bonds
(generally maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities that are backed by
the full faith and credit of the United States, such as securities issued by the
Federal Housing Administration, Government National Mortgage Association, the
Department of Housing and Urban Development, the Export-Import Bank, the General
Services Administration and the Maritime Administration and certain securities
issued by the Farmers Home Administration and the Small Business Administration.
The range of maturities of U.S. Government Obligations is usually three months
to thirty years.
WHEN-ISSUED SECURITIES. Each Fund may invest up to 25% of its net
assets in securities issued on a when-issued or delayed delivery basis, which
involves an arrangement whereby delivery of, and payment for, the instruments
occur up to 45 days after the agreement to purchase the instruments is made by a
Fund. The purchase price to be paid by a Fund and the interest rate on the
instruments to be purchased are both selected when the Fund agrees to purchase
the securities on a "when-issued" basis. A Fund generally would not pay for such
securities or start earning interest on them until they are issued or received.
However, when a Fund purchases debt obligations on a when-issued basis, it
assumes the risks of ownership, including the risk of price fluctuation, at the
time of purchase, not at the time of receipt. Failure of the issuer to deliver a
security purchased by a Fund on a when-issued basis may result in such Fund
incurring a loss or missing an opportunity to make an alternative investment.
When a Fund enters into a commitment to purchase securities on a when-issued
basis, it establishes a separate account with its custodian consisting of cash,
U.S. Government securities or other liquid high-grade debt securities equal to
the amount of the Fund's commitment, which are valued at their fair market
value. If on any day the market value of this segregated account falls below the
value of the Fund's commitment, the Fund will be required to deposit additional
cash or qualified securities into the account until equal to the value of the
Fund's commitment. When the securities to be purchased are issued, a Fund will
pay for the securities from available cash, the sale of securities in the
segregated account, sales of other securities and, if necessary, from sale of
the when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities a Fund is committed to purchase. Sale of
securities in the segregated account or sale of the when-issued securities may
cause the realization of a capital gain or loss.
ZERO COUPON SECURITIES. Each Fund may invest in zero coupon municipal
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.
Original issue discount earned on zero
5
<PAGE>
coupon securities must be included in a Fund's income. Thus, to continue to
qualify for tax treatment as a regulated investment company, a Fund may be
required to distribute as a dividend an amount that is greater than the total
amount of cash it actually receives. These distributions must be made from a
Fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A Fund will not be able to purchase additional income-producing
securities with cash used to make such distributions, and its current income
ultimately could be reduced as a result. The market prices of zero coupon
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.
PORTFOLIO TURNOVER. Although each Fund generally will not invest for
short-term trading purposes, portfolio securities may be sold from time to time
without regard to the length of time they have been held when, in the opinion of
the 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 within one year. A high rate of
portfolio turnover 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, 1995 and 1996, INSURED TAX EXEMPT FUND's
portfolio turnover rate was 37% and 21%, respectively. For the fiscal years
ended December 31, 1995 and 1996, INSURED INTERMEDIATE FUND'S portfolio turnover
rate was 47% and 82%, respectively.
HEDGING AND OPTION INCOME STRATEGIES
The Adviser may engage in certain options and futures strategies to
hedge each Fund's portfolio, in other circumstances permitted by the Commodities
Futures Trading Commission ("CFTC") and engage in certain options strategies to
enhance income. The instruments described below are sometimes referred to
collectively as "Hedging Instruments." Certain special characteristics of and
risks associated with using Hedging Instruments are discussed below. In addition
to the non-fundamental investment guidelines (described below) adopted by each
Tax Exempt Fund's Board to govern each Fund's investments in Hedging
Instruments, 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, the CFTC
and various state regulatory authorities. In addition, a Fund's ability to use
Hedging Instruments will be limited by tax considerations. See "Taxes."
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
consequences to a Fund may leave the Fund in a worse position than if such
strategies were not used. A Fund might not employ any of the strategies
described below, and there can be no assurance that any strategy will succeed.
The use of these strategies involve certain special risks, including (1)
dependence on 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, (4) the possible absence of a liquid secondary market for
any particular instrument at any time, and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences.
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Although each Fund may engage in the strategies listed below, INSURED
INTERMEDIATE FUND does not intend to do so in the coming year and INSURED TAX
EXEMPT FUND will only engage in transactions involving futures contracts and
options thereon.
COVER FOR HEDGING AND OPTION INCOME STRATEGIES. No Fund will use
leverage in its hedging and option income strategies. No Fund will 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 other 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. Each 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 a Fund
either sells or exercises the option, any profit eventually realized will be
reduced by the premium. Each Fund may purchase put options in order to hedge
against a decline in the market value of securities held in its portfolio. The
put option enables a Fund to sell the underlying security at the predetermined
exercise price; thus the potential for loss to 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.
Each Fund may write covered call options on securities to increase
income in the form of premiums received from the purchasers of the options.
Because it can be expected that a call option will be exercised if the market
value of the underlying security increases to a level greater than the exercise
price, a 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 a 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. A 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 over-the-counter ("OTC") options written by a Fund, to the extent
described under "Investment Policies--Restricted and Illiquid Securities" and
therefore subject to each Fund's limitation on investments in illiquid
securities. In addition, a Fund could lose the ability to
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participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely be offset by an
increase in the cost of closing out the call option (or could be negated if the
buyer chose to exercise the call option at an exercise price below the
securities' current market value).
Each Fund may 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. A 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, a Fund will realize
income in the amount of the premium received. This technique could be used to
enhance current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security would
decline below the exercise price less the premiums received, in which case the
Fund would expect to suffer a loss.
Currently, options on debt securities are primarily traded on the OTC
market. 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.
OPTIONS GUIDELINES. In view of the risks involved in using options,
each Tax Exempt Fund's Board has adopted non-fundamental investment guidelines
to govern a Fund's use of options that may be modified by each Board without
shareholder vote: (1) options will be purchased or written only when the Adviser
believes that there exists a liquid secondary market in such options; and (2) a
Fund may purchase a put or call option if the value of the option's premium,
when aggregated with the premiums on all other options held by such Fund,
exceeds 5% of that Fund's total assets. This does not limit a Fund's assets at
risk to 5%.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. Each Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If a 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 put or call option previously written); this is known as a closing
purchase transaction. Conversely, in order to terminate its right to purchase or
sell specified securities 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 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, the time remaining until
expiration, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security 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.
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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.
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 a 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, the Fund may not
sell the underlying assets used to cover an option during the period it is
obligated under the option. This requirement may impair a Fund's ability to sell
a portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, a Fund also may
save on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
FUTURES STRATEGIES. Each Fund may engage in futures strategies to
attempt to reduce the overall investment risk that would normally be expected to
be associated with ownership of the securities in which it invests.
Each Fund may use financial futures contracts and options thereon to
hedge the debt portion of its portfolio against changes in the general level of
interest rates. A Fund may purchase a financial 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 the
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 a financial futures contract in order to continue to
receive the income from a debt security, while endeavoring to avoid part or all
of the decline in the market value of that security that would accompany an
increase in interest rates.
Each Fund may purchase a call option on a financial futures contract to
hedge against a market advance in debt securities that the Fund plans to acquire
at a future date. A 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.
Each Fund will use futures contracts and options thereon solely in bona
fide hedging transactions or under other circumstances permitted by the CFTC.
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FUTURES GUIDELINES. In view of the risks involved in using futures
strategies described below, each Tax Exempt Fund's Board has adopted
non-fundamental investment guidelines to govern the use of such investments by
the Fund that may be modified by each Board without shareholder vote. In the
event a Fund enters into futures contracts or options thereon other than for
bona fide hedging purposes (as defined by the CFTC), the aggregate margin
deposits on all outstanding futures contracts positions held by a Fund and
premiums paid on outstanding options and futures contracts, after taking into
account unrealized profits and losses, will not exceed 5% of a Fund's total
assets, or enter into any futures contracts or options on futures contracts if
the aggregate amount of a Fund's commitments under outstanding futures contracts
positions and options on futures contracts written by a Fund would exceed the
market value of the total assets of a Fund. This 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, each Fund may not purchase financial
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, a Fund is required to deposit with its 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.
Each 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 the 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
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the contracts and thus provide an offset to losses on the contracts.
Successful use by a Fund of futures contracts and related options will
depend upon the 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
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 the 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 each 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 a
Fund purchases an option is the premium paid for the option and the transaction
costs, there may be circumstances when the purchase of an option on a futures
contract would result in a loss to the Fund when the use of a futures contract
would not.
Each Fund's activities in the futures and related options markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions; however, the Fund also may save on
commissions by using futures and related options as a hedge rather than buying
or selling individual securities or currencies in anticipation or as a result of
market movements.
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INSURANCE
The municipal bonds in each 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 a 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.
Each Tax Free Fund has purchased a Mutual Fund Insurance Policy
("Policy") from AMBAC Indemnity Corporation ("AMBAC Indemnity"), 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 a Fund which are eligible for insurance under the Policy. Municipal
bonds are eligible for insurance if they are approved by AMBAC Indemnity prior
to their purchase by a Fund. AMBAC Indemnity furnished each 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 Indemnity 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 a 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 Indemnity to insure such securities. In
determining eligibility for insurance, AMBAC Indemnity 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 a 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 a Fund at a time when they were ineligible for insurance; (4)
municipal bonds which are insured by insurers other than AMBAC Indemnity; and
(5) municipal bonds which are no longer owned by a Fund. AMBAC Indemnity has
reserved the right at any time, upon 90 days' prior written notice to a Fund, to
refuse to insure any additional municipal bonds purchased by a Fund, on or after
the effective date of such notice. If AMBAC Indemnity so notifies a Fund, the
Fund will attempt to replace AMBAC Indemnity with another insurer. If another
insurer cannot be found to replace AMBAC Indemnity, the Fund will 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 Indemnity is obligated under the
Policy to make such payment not later than 30 days after it has been notified by
a Fund that such nonpayment has occurred (but not earlier than the date such
payment is due). AMBAC Indemnity, as regards insurance payments it may make,
will succeed to the rights of a 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 a Fund's shares. The Policy
will be effective only as to insured municipal bonds owned by a Fund. In the
event of a sale by a Fund of a municipal bond insured
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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 a Fund, AMBAC
Indemnity is liable only for those payments of interest and principal which are
then due and owing and, after making such payments, AMBAC Indemnity will have no
further obligations to a Fund in respect of such municipal bond. It is the
intention of each 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 a 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 Funds' method of valuing securities in default
and securities which have a significant risk of default.
Each Tax Free 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 Investors Service, Inc. or any other nationally recognized rating
organization which insures a particular bond for the remainder of its term at a
premium rate fixed at the time such bond is purchased by a 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. Each Fund may also purchase municipal bonds which are
already insured under a Secondary Market Insurance Policy. A Secondary Market
Insurance Policy could enable a 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 a Fund in determining the net capital gain
or loss realized by a Fund upon the sale of the bond.
In addition to the contract of insurance relating to each Tax Exempt
Fund, there is a contract of insurance between AMBAC Indemnity and Executive
Investors Trust, between AMBAC Indemnity and First Investors Multi-State Insured
Tax Fund and between AMBAC Indemnity and First Investors New York Insured Tax
Free Fund, Inc. Otherwise, neither AMBAC Indemnity nor its parent AMBAC Inc., or
any affiliate thereof, has any material business relationship, direct or
indirect, with the Funds.
AMBAC Indemnity 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 approximately $2,585,000,000 (unaudited) and statutory capital of
approximately $1,467,000,000. (unaudited) as of December 31, 1996. Statutory
capital consists of AMBAC Indemnity's policyholders' surplus and statutory
contingency reserve. AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc.,
a 100% publicly-held company. Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc., Moody's Investors Service and Fitch Investors
Service L.P. have each assigned a triple-A claims-paying ability rating to AMBAC
Indemnity.
AMBAC Indemnity has obtained a ruling from the Internal Revenue Service
to the effect that the insuring of an obligation by AMBAC Indemnity will not
affect the treatment for Federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
AMBAC Indemnity under policy provisions substantially identical to those
contained in its municipal bond insurance policy shall be treated for Federal
income tax purposes in the same manner as if such payments were made by the
issuer of the municipal bonds.
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AMBAC Indemnity makes no representation regarding the municipal bonds
included in the investment portfolio of each 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 Indemnity contained above has been
furnished by AMBAC Indemnity. 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.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
respective 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 that 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 Fund's assets will not cause a violation of the following
investment restrictions so long as percentage restrictions are observed by such
Fund at the time it purchases any security.
INSURED INTERMEDIATE FUND. INSURED INTERMEDIATE FUND will not:
(1) Issue senior securities.
(2) Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result, with respect to
75% of the Fund's total assets more than 5% of such assets would then be
invested in securities of a single issuer.
(3) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of any one issuer or more than 10% of any
class of securities of one issuer (all debt and all preferred stock of an issuer
are each considered a single class for this purpose).
(4) Buy or sell real estate or interests in oil, gas or mineral
exploration, or senior securities (as defined in the 1940 Act); provided,
however, the Fund may invest in Municipal Instruments secured by real estate or
interests in real estate.
(5) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be an
underwriter under certain Federal securities laws.
(6) Make loans, except loans of portfolio securities and
repurchase agreements.
(7) 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 exceeds 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.
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The following investment restrictions are not fundamental and may be
changed without shareholder approval. The Fund will not:
(1) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale.
(2) Invest more than 5% of its total assets in securities of companies
(including predecessors) which have been in operation for less than three years.
(3) Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets would
be invested in such securities, or except as part of a merger, consolidation or
other acquisition.
(4) Make investments for the purpose of exercising control or
management.
(5) Purchase or sell portfolio securities from or to the Adviser or any
trustee, director or officer thereof or of Series Fund, as principals.
(6) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer, trustee or director of Series Fund or of the Adviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers, trustees or directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
(7) 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).
(8) Enter into futures contracts or options on futures contracts if
immediately thereafter the aggregate margin deposits on all outstanding futures
contracts positions held by the Fund and premiums paid on outstanding options on
futures contracts, after taking into account unrealized profits and losses,
would exceed 5% of the market value of the total assets of the Fund, or enter
into any futures contracts or options on futures contracts if the aggregate
amount of the Fund's commitments under outstanding futures contracts positions
and options on future contracts written by the Fund would exceed the market
value of the total assets of the Fund.
(9) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (7) 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.
(10) 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.
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(11) Sell securities short, unless it owns or has the right to obtain
securities, without additional consideration, equivalent in kind and amount to
the securities sold short, and provided that transactions in options, futures
contracts, swaps, forward contracts, and other derivative instruments are not
deemed to constitute selling securities short.
The Series Fund, on behalf of the INSURED INTERMEDIATE FUND, has filed
the following undertakings to comply with requirements of certain states in
which shares of the Fund are sold, which may be changed without shareholder
approval:
1. The Fund will not invest more than 10% of its total assets
in restricted securities, excluding Rule 144A Securities.
2. The Fund will not purchase puts, calls, straddles, spreads or any
combination thereof, if by reason thereof, the value of its aggregate investment
in such securities will exceed 5% of its total assets.
3. The Fund will not purchase or sell real estate limited partnership
interests.
INSURED TAX EXEMPT FUND. INSURED TAX EXEMPT FUND 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) Make loans (the purchase of a portion of an issue of publicly
distributed debt securities is not considered the making of a loan). In
addition, the Insured Tax Exempt Fund's Board of Directors may on the request of
broker-dealers or other institutional investors, which it deems qualified,
authorize the Fund to lend securities for the purpose of covering short
positions of the borrower, but only when the borrower pledges cash collateral to
the Fund and agrees to maintain such collateral so that it amounts at all times
to at least 100% of the value of the securities. Such security loans will not be
made if as a result the aggregate of such loans exceed 10% of the value of the
Fund's gross assets.
(3) Invest more than 5% of the value of its gross assets, at the time
of purchase, in securities of any one issuer (except obligations of the U.S.
Government).
(4) Purchase securities in an amount to exceed 5% of its gross assets,
of unseasoned issuers, including their predecessors, which have been in
operation less than three years.
(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) Issue senior securities.
(7) Invest in securities of other investment companies, except in the
case of money market funds offered without selling commissions, or in the event
of merger with another investment company.
16
<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) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds or other obligations secured by real estate or
interests therein.
(10) Invest in oil, gas or other mineral exploration or development
programs.
(11) Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers and directors of the Adviser, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such issuer
together own beneficially more than 5% of such outstanding securities.
(12) Purchase securities which would not enable the Fund to qualify as
a regulated investment company qualified to pay exempt-interest dividends under
the Internal Revenue Code of 1986, as amended.
The Fund has adopted the following non-fundamental investment
restrictions which may be changed without shareholder approval. These
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
Directors, or the Fund's investment adviser acting pursuant to authority
delegated by the Directors, may determine that a readily available market exists
for securities eligible for resale pursuant to Rule 144A 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 if
immediately thereafter the aggregate margin deposits on all outstanding futures
contracts positions held by the Fund and premiums paid on outstanding options on
futures contracts, after taking into account unrealized profits and losses,
would exceed 5% of the market value of the total assets of the Fund, or enter
into any futures contracts or options on futures contracts if the aggregate
amount of the Fund's commitments under outstanding futures contracts positions
and options on future contracts written by the Fund would exceed the market
value of the total assets of the Fund.
(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
17
<PAGE>
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.
(6) Sell securities short, unless it owns or has the right to obtain
securities, without additional consideration, equivalent in kind and amount to
the securities sold short, and provided that transactions in options, futures
contracts, swaps, forward contracts, and other derivative instruments are not
deemed to constitute selling securities short.
(7) Invest in real estate limited partnership interests or in interests
in real estate investment trusts that are not readily marketable.
DIRECTORS OR TRUSTEES AND OFFICERS
The following table lists the Directors or Trustees and executive
officers of the Tax Exempt Funds, 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*+ (71), President and Director or Trustee. Chairman of the Board
and Director, Administrative Data Management Corp. ("ADM"), FIMCO, Executive
Investors Management Company, Inc. ("EIMCO"), First Investors Corporation
("FIC"), Executive Investors Corporation ("EIC") and First Investors
Consolidated Corporation ("FICC").
ROGER L. GRAYSON* (40), Director or Trustee. Director, FIC and FICC; President
and Director, First Investors Resources, Inc.; Commodities Portfolio Manager.
KATHRYN S. HEAD*+ (41), Director or Trustee, 581 Main Street, Woodbridge, NJ
07095. President, FICC, EIMCO, ADM and FIMCO; Vice President, Chief Financial
Officer and Director, FIC and EIC; President and Director, First Financial
Savings Bank, S.L.A.
REX R. REED (75), Director or Trustee, 259 Governors Drive, Kiawah Island, SC
29455. Retired; formerly Senior Vice President, American Telephone & Telegraph
Company.
HERBERT RUBINSTEIN (75), Director or Trustee, 145 Elm Drive, Roslyn, NY 11576.
Retired; formerly President, Belvac International Industries, Ltd. and
President, Central Dental Supply.
NANCY SCHAENEN (65), Director or Trustee, 56 Midwood Terrace, Madison, NJ 07940.
Trustee, Drew University and DePauw University.
JAMES M. SRYGLEY (64), Director or Trustee, 33 Hampton Road, Chatham, NJ 07982.
Principal, Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (65), Director or Trustee and Chairman of the Board; Director,
FIMCO, FIC, FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH (67), Director or Trustee, RR1, Box 2554, Upland Downs Road,
Manchester Center, VT 05255. Retired; formerly financial and planning executive
with American Telephone & Telegraph Company.
18
<PAGE>
JOSEPH I. BENEDEK (39), Treasurer, 581 Main Street, Woodbridge, NJ 07095.
Treasurer, FIC, FIMCO, EIMCO and EIC; Comptroller and Treasurer, FICC.
CONCETTA DURSO (62), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
CLARK D. WAGNER (38), Vice President. Vice President, Executive Investors Trust,
First Investors New York Insured Tax Free Fund, Inc., First Investors
Multi-State Insured Tax Free Fund, First Investors Government Fund, Inc. and
First Investors Series Fund.
- ----------
* These Directors or Trustees may be deemed to be "interested persons,"
as defined in the 1940 Act.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
All of the officers and Directors or Trustees, except for Mr. Wagner,
hold identical or similar positions with 14 other registered investment
companies in the First Investors Family of Funds. Mr. Head is also an officer
and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation, School Financial Management
Services, Inc. and Specialty Insurance Group, Inc. Ms. Head is also an officer
and/or Director of First Investors Life Insurance Company, First Investors
Credit Corporation, School Financial Management Services, Inc., First Investors
Credit Funding Corporation, N.A.K. Realty Corporation, Real Property Development
Corporation, First Investors Leverage Corporation, Route 33 Realty Corporation
and Specialty Insurance Group, Inc.
The following table lists compensation paid to the Directors of Insured
Tax Exempt Fund for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT ESTIMATED FROM FIRST
AGGREGATE BENEFITS ACCRUED ANNUAL INVESTORS FAMILY OF
COMPENSATION AS PART OF BENEFITS UPON FUNDS
FROM FUND* FUND EXPENSES RETIREMENT PAID TO DIRECTORS*
<S> <C> <C> <C> <C>
DIRECTOR**
James J. Coy*** $4,200 $-0- $-0- $37,200
Roger L. Grayson -0- -0- -0- -0-
Glenn O. Head -0- -0- -0- -0-
Kathryn S. Head -0- -0- -0- -0-
Rex R. Reed 4,200 -0- -0- 37,200
Herbert Rubinstein 4,200 -0- -0- 37,200
James M. Srygley 3,850 -0- -0- 34,100
John T. Sullivan -0- -0- -0- -0-
Robert F. Wentworth 4,200 -0- -0- 37,200
</TABLE>
The following table lists compensation paid to the Trustees of Series
Fund for the fiscal year ended December 31, 1996.
19
<PAGE>
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT ESTIMATED FROM FIRST
AGGREGATE BENEFITS ACCRUED ANNUAL INVESTORS FAMILY OF
COMPENSATION AS PART OF BENEFITS UPON FUNDS
FROM FUND* FUND EXPENSES RETIREMENT PAID TO DIRECTORS*
<S> <C> <C> <C> <C>
James J. Coy*** $2,400 $-0- $-0- $37,200
Roger L. Grayson -0- -0- -0- -0-
Glenn O. Head -0- -0- -0- -0-
Kathryn S. Head -0- -0- -0- -0-
Rex R. Reed 2,400 -0- -0- 37,200
Herbert Rubinstein 2,400 -0- -0- 37,200
James M. Srygley 2,200 -0- -0- 34,100
John T. Sullivan -0- -0- -0- -0-
Robert F. Wentworth 2,400 -0- -0- 37,200
</TABLE>
- -----------------
* Compensation to officers and interested Directors or Trustees of the Tax
Exempt Funds is paid by the Adviser. In addition, compensation to
non-interested Directors or Trustees of the Tax Exempt Funds is currently
voluntarily paid by the Adviser.
** Nancy Schaenen was not a Director or Trustee in 1996.
*** On March 27, 1997 Mr. Coy resigned as a Director or Trustee of the Tax
Exempt Funds. Mr. Coy did not resign due to a disagreement with the Tax
Exempt Funds' management on any matter relating to the Tax Exempt Funds'
operations, policies or practices. Mr. Coy currently serves as an emeritus
Director or Trustee.
MANAGEMENT
Investment advisory services to each Fund are provided by First
Investors Management Company, Inc. pursuant to separate Investment Advisory
Agreements (each, an "Advisory Agreement") dated June 13, 1994. Each Advisory
Agreement was approved by the Board of Directors or Trustees of the applicable
Tax Exempt Fund, including a majority of the Directors or Trustees who are not
parties to such Fund's Advisory Agreement or "interested persons" (as defined in
the 1940 Act) of any such party ("Independent Directors or Trustees"), in person
at a meeting called for such purpose and by a majority of the public
shareholders of the applicable Fund.
Pursuant to each Advisory Agreement, FIMCO shall supervise and manage
each Fund's investments, determine each Fund's portfolio transactions and
supervise all aspects of each Fund's operations, subject to review by the
applicable Tax Exempt Fund's Directors or Trustees. Each Advisory Agreement also
provides that FIMCO shall provide the applicable Fund with certain executive,
administrative and clerical personnel, office facilities and supplies, conduct
the business and details of the operation of such Fund and assume certain
expenses thereof, other than obligations or liabilities of such Fund. Each
Advisory Agreement may be terminated, with respect to a Fund, at any time
without penalty by the applicable Tax Exempt Fund's Directors or Trustees or by
a majority of the outstanding voting securities of such 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). Each
Advisory Agreement also provides that it will continue in effect, with respect
to a Fund, for a period of over two years only if such continuance is approved
annually either by the applicable Tax Exempt Fund's Directors or Trustees or by
a majority of the outstanding voting securities of such Fund, and, in either
case, by a vote of a majority of that Tax Exempt Fund's Independent Directors or
Trustees voting in person at a
20
<PAGE>
meeting called for the purpose of voting on such approval.
Under Series Fund's Advisory Agreement, INSURED INTERMEDIATE FUND pays
the Adviser an annual fee, paid monthly of 0.60% of its average daily net
assets. Under INSURED TAX EXEMPT FUND's Advisory Agreement, it pays the Adviser
an annual fee, paid monthly, according to the following schedule:
Annual
Average Daily Net Assets Rate
- ------------------------ -----
Up to $250 million................................................. 0.75%
In excess of $250 million up to $500 million....................... 0.72
In excess of $500 million up to $750 million....................... 0.69
Over $750 million.................................................. 0.66
The Adviser has an Investment Committee composed of George V. Ganter,
Margaret Haggerty, Glenn O. Head, Nancy W. Jones, Patricia D. Poitra, Michael
O'Keefe, Clark D. Wagner and Richard Guinnessey. The Committee usually meets
weekly to discuss the composition of the portfolio of each Fund and to review
additions to and deletions from the portfolios.
For the fiscal years ended December 31, 1994, 1995 and 1996, INSURED TAX
EXEMPT Fund paid $9,654,489, $9,356,534 and $8,971,924, respectively, in
advisory fees. For the fiscal years ended December 31, 1994, 1995 and 1996
INSURED INTERMEDIATE FUND paid $6,294, $22,374 and $28,735, respectively, in
advisory fees. For the same periods, the Adviser voluntarily waived an
additional $20,794, $15,982 and $15,775, respectively, in advisory fees. For the
fiscal year ended December 31, 1996, the Adviser voluntarily reimbursed expenses
for INSURED INTERMEDIATE FUND in the amount of $17,521.
Each 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.
UNDERWRITER
Each Tax Exempt Fund 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 Funds. Pursuant to each Underwriting Agreement, the Underwriter shall bear
all fees and expenses incident to the registration and qualification of the
applicable Fund's shares. In addition, the Underwriter shall bear all expenses
of sales material or literature, including prospectuses and proxy materials, to
the extent such materials are used in connection with the sale of the Fund's
shares, unless a Fund has agreed to bear such costs pursuant to a plan of
distribution. See "Distribution Plans." Each Underwriting Agreement was approved
by the applicable Tax Exempt Fund's Board of Directors or Trustees, including a
majority of the Independent Directors or Trustees. Each Underwriting Agreement
provides that it will continue in effect, with respect to a Fund, from year to
year only so long as such continuance is specifically approved at least annually
by the applicable Tax Exempt Fund's Board of Directors or Trustees or by a vote
of a majority of the outstanding voting securities of that Fund, and in either
case by the vote of a majority of such Tax Exempt Fund's Disinterested
21
<PAGE>
Directors or Trustees, voting in person at a meeting called for the purpose of
voting on such approval. Each Underwriting Agreement will terminate
automatically in the event of its assignment.
For the fiscal years ended December 31, 1994, 1995 and 1996, FIC
received underwriting commissions with respect to INSURED TAX EXEMPT FUND of
$1,033,292, $698,289 and $793,591, respectively. For the same periods, FIC
reallowed an additional $173,429, $87,383 and $46,262, respectively, to
unaffiliated dealers. For the fiscal years ended December 31, 1994, 1995 and
1996, FIC received underwriting commissions with respect to INSURED INTERMEDIATE
FUND of $72,466, $36,160 and $36,336, respectively. For the same periods, FIC
reallowed an additional $28,882, $10,211 and $4,543, respectively, to
unaffiliated dealers.
DISTRIBUTION PLANS
As stated in the Funds' Prospectus, pursuant to a separate plan of
distribution for each class of shares adopted by each Tax Exempt Fund pursuant
to Rule 12b-1 under the 1940 Act ("Class A Plan" and "Class B Plan" and,
collectively, "Plans"), each Fund may reimburse or compensate, as applicable,
the Underwriter for certain expenses incurred in the distribution of that Fund's
shares and the servicing or maintenance of existing Fund shareholder accounts.
Each Plan was approved by the applicable Tax Exempt Fund's Board of
Directors or Trustees, including a majority of the Independent Directors or
Trustees, and by a majority of the outstanding voting securities of the relevant
class of each Fund. Each Plan will continue in effect, with respect to a Fund,
from year to year as long as its continuance is approved annually by either the
applicable Tax Exempt Fund's Board of Directors or Trustees or by a vote of a
majority of the outstanding voting securities of the relevant class of shares of
that Fund. In either case, to continue, each Plan must be approved by the vote
of a majority of the Independent Directors or Trustees of the applicable Tax
Exempt Fund. Each Tax Exempt Fund's 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 applicable Tax
Exempt Fund's Independent Directors or Trustees will be committed to the
discretion of such Independent Directors or Trustees then in office.
Each Plan can be terminated, with respect to a Fund, at any time by a
vote of a majority of the applicable Tax Exempt Fund's Independent Directors or
Trustees or by a vote of a majority of the outstanding voting securities of the
relevant class of shares of that Fund. Any change to each Class B Plan that
would materially increase the costs to that class of shares of a Fund or any
material change to each Class A Plan may not be instituted without the approval
of the outstanding voting securities of the relevant class of shares of that
Fund. Such changes also require approval by a majority of the applicable Tax
Exempt Fund's Independent Directors or Trustees.
In reporting amounts expended under the Plans to the Directors or
Trustees, FIMCO will allocate expenses attributable to the sale of each class of
a 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 a Fund's shares
will not be used to subsidize the sale of any other class of that Fund's shares.
In adopting each Plan, the applicable Tax Exempt Fund's Board
considered all relevant information and determined that there is a reasonable
likelihood that each Plan will benefit each Fund and their class of
shareholders. The Boards believe that amounts spent pursuant to each Plan have
assisted each 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 each Fund.
22
<PAGE>
For the fiscal year ended December 31, 1996, INSURED INTERMEDIATE FUND
accrued $20,739 in 12b-1 fees pursuant to Series Fund's Class A Plan, all of
which was waived by the Underwriter. For the fiscal year ended December 31,
1996, INSURED TAX EXEMPT FUND paid $3,820,500 in 12b-1 fees pursuant to its
Class A Plan. For the fiscal year ended December 31, 1996, the Underwriter
incurred the following Class A Plan-related expenses with respect to INSURED TAX
EXEMPT FUND:
COMPENSATION TO COMPENSATION TO COMPENSATION TO
UNDERWRITER DEALERS SALES PERSONNEL
$3,284,017 -0- $536,483
For the fiscal year ended December 31, 1996, INSURED TAX EXEMPT FUND
and INSURED INTERMEDIATE FUND paid $25,939 and $5,049, respectively, in 12b-1
fees pursuant to their respective Class B Plan. For the same period, the
Underwriter incurred the following Class B Plan-related expenses with respect to
each Fund:
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
INSURED TAX EXEMPT FUND $16,089 $9,531 $318
INSURED INTERMEDIATEFUND 2,750 2,299 -0-
DETERMINATION OF NET ASSET VALUE
The municipal instruments in which each Fund invests are traded
primarily in the over-the-counter markets. Such securities are valued daily at
their fair value on the basis of valuations provided by a pricing service
approved by the applicable Tax Exempt Fund's Board. This service is provided by
Muller Data Corporation. The pricing service considers security type, rating,
market condition and yield data, as well as market quotations and prices
provided by market makers. With respect to each Fund, "when-issued securities"
are reflected in the assets of a Fund as of the date the securities are
purchased.
The Funds intend to retain any insured municipal bonds which are in
default, or in significant risk of 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 letter of credit or
other guarantee supporting such municipal bond. In its evaluation of municipal
bonds for portfolio valuation purposes, the applicable Tax Exempt Fund's Board
will consider the value of insurance or any other type of guarantee supporting
payments of principal and interest. This will be accomplished by comparing the
value of the municipal bonds which are in default, or in significant risk of
default, with other municipal bonds of similar maturity, interest rate and type
which are not in default. This results in the applicable Tax Exempt Fund's Board
ascribing a good faith value to the insurance or guarantee on any municipal bond
which is in default, or in significant risk of default, equal to the difference
between the insured or guaranteed security's market value and the
then-prevailing market rate for other, similar non-defaulting municipal bonds.
23
<PAGE>
Each Tax Exempt Fund's Board may suspend the determination of a 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
Securities and Exchange Commission ("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 U.S. 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.
ALLOCATION OF PORTFOLIO BROKERAGE
Each Fund expects that purchases and sales of portfolio securities
generally will be principal transactions. Portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There will usually be no brokerage commissions paid by the Fund
for such purchases. Purchases from underwriters will include the underwriter's
commission or concession and purchases from dealers serving as market makers
will include the spread between the bid and asked price.
At times the Adviser may engage in agency transactions and, in
effecting the purchase and sale of portfolio securities for the account of each
Fund, will seek best execution of trades either (1) at the most favorable and
competitive rate of commission charged by any broker or member of an exchange,
or (2) at a higher rate of commission if reasonable in relation to brokerage and
research services provided to the Fund or the Adviser by such member or broker.
In addition, upon the instruction of each Tax Exempt Fund's Board, the Adviser
may use dealer concessions available in fixed-price underwritings to pay for
research services. Such services may include, but are not limited to, any one or
more of the following: information as to the availability of securities for
purchase or sale, statistical or factual information or opinions pertaining to
investments. The Adviser may use research and services provided to it by brokers
in servicing all the funds in the First Investors Group of Funds; however, not
all such services will be used by the Adviser in connection with the Funds. No
portfolio orders are placed with an affiliated broker, nor does any affiliated
broker participate in these commissions.
The Adviser may combine transaction orders placed on behalf of a Fund
and any other fund in the First Investors Group of Funds, any series of
Executive Investors Trust 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 each
Tax Exempt Fund's Board. Each Tax Exempt Fund'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 each Fund's portfolio.
The Tax Exempt Funds did not pay any brokerage commissions for the
fiscal years December 31, 1994, 1995 and 1996. With the approval of INSURED TAX
EXEMPT FUND'S Board of Directors, $65,007 of principal transactions were used to
acquire research and other services which benefitted the Fund.
24
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND
REDEMPTION INFORMATION AND OTHER SERVICES
REDUCED SALES CHARGES--CLASS A SHARES
Reduced sales charges are applicable to purchases made at one time of
Class A shares of any one or more of the Funds or of any one or more of the
Eligible Funds, as defined in the Prospectus, by "any person," which term shall
include an individual, or an individual's spouse and children under the age of
21, or a trustee or other fiduciary of a single trust, estate or fiduciary
account (including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under section 401 of the Internal Revenue
Code of 1986, as amended (the "Code")), although more than one beneficiary is
involved; provided, however, that the term "any person" shall not include a
group of individuals whose funds are combined, directly or indirectly, for the
purchase of redeemable securities of a registered investment company, nor shall
it include a trustee, agent, custodian or other representative of such a group
of individuals.
Ownership of Class A and Class B shares of any Eligible Fund, except as
noted below, qualify for a reduced sales charge on the purchase of Class A
shares. Class A shares purchased at net asset value, Class A shares of the Money
Market Funds, or shares owned under a Contractual Plan are not eligible for the
purchase of Class A shares of a Fund at a reduced sales charge through a Letter
of Intent or the Cumulative Purchase Privilege.
LETTER OF INTENT. Any of the eligible persons described above may,
within 90 days of their investment, sign a statement of intent ("Letter of
Intent") in the form provided by the Underwriter, covering purchases of Class A
shares of any one or more of the Funds and of the other Eligible Funds to be
made within a period of thirteen months, provided said shares are currently
being offered to the general public and only in those states where such shares
may be legally sold, and thereby become eligible for the reduced sales charge
applicable to the total amount purchased. A Letter of Intent filed within 90
days of the date of investment is considered retroactive to the date of
investment for determination of the thirteen-month period. The Letter of Intent
is not a binding obligation on either the investor or the Fund. During the term
of a Letter of Intent, Administrative Data Management Corp. ("Transfer Agent")
will hold Class A shares representing 5% of each purchase in escrow, which
shares will be released upon completion of the intended investment.
Purchases of Class A Shares made under a Letter of Intent are made at
the sales charge applicable to the purchase of the aggregate amount of shares
covered by the Letter of Intent as if they were purchased in a single
transaction. The applicable quantity discount will be based on the sum of the
then current public offering price (i.e., net asset value plus applicable sales
charge) of all Class A shares and the net asset value of all Class B shares of a
Fund and of the other Eligible Funds, including Class B shares of the Money
Market Funds, currently owned, together with the aggregate offering price of
purchases to be made under the Letter of Intent. If all such shares are not so
purchased, a price adjustment is made, depending upon the actual amount invested
within such period, by the redemption of sufficient Class A shares held in
escrow in the name of the investor (or by the investor paying the commission
differential). A Letter of Intent can be amended (1) during the thirteen-month
period if the purchaser files an amended Letter of Intent with the same
expiration date as the original Letter of Intent, or (2) automatically after the
end of the period, if total purchases credited to the Letter of Intent qualify
for an additional reduction in the sales charge. The Letter of Intent privilege
may be modified or terminated at any time by the Underwriter.
CUMULATIVE PURCHASE PRIVILEGE. Upon written notice to FIC, Class A
shares of a Fund are also available at a quantity discount on new purchases if
the then current public offering price
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<PAGE>
(i.e., net asset value plus applicable sales charge) of all Class A shares and
the net asset value of all Class B shares of a Fund and of the other Eligible
Funds, including Class B shares of the Money Market Funds, previously purchased
and then owned, plus the value of Class A shares being purchased at the current
public offering price, amount to $25,000 or more. Such quantity discounts may be
modified or terminated at any time by the Underwriter.
PURCHASE OF SHARES. When you open a Fund account, you must specify
which class of shares you wish to purchase. If not, your order will be processed
as follows: (1) if you are opening an account with a new registration with First
Investors your order will not be processed until the Fund receives notification
of which class of shares to purchase; (2) if you have existing First Investors
accounts solely in either Class A shares or Class B shares with the identical
registration, your investment in the Fund will be made in the same class of
shares as your existing account(s); (3) if you are an existing First Investors
shareholder and own a combination of Class A and Class B shares with an
identical registration, your investment in the Fund will be made in Class B
shares; and (4) if you own in the aggregate at least $250,000 in any combination
of classes, your investment will be made in Class A shares.
SYSTEMATIC INVESTING
FIRST INVESTORS MONEY LINE. This service allows you to invest in a Fund
through automatic deductions from your bank checking account. Scheduled
investments in the minimum amount of $50 may be made on a bi-weekly,
semi-monthly, monthly, quarterly, semi-annual or annual basis. The maximum
amount which may be invested through First Investors Money Line is $10,000 a
month. Shares of the Fund are purchased at the public offering price determined
at the close of business on the day your designated bank account is debited. You
may change the amount or discontinue this service at any time by calling
Shareholder Services or writing to Administrative Data Management Corp., 581
Main Street, Woodbridge, NJ 07095-1198, Attn: Control Dept. It takes between
three and five business days to process any changes you request be made to your
Money Line service. Money Line application forms are available from your
Representative or by calling Shareholder Services at 1-800-423-4026.
AUTOMATIC PAYROLL INVESTMENT. You also may arrange for automatic
investments in the minimum amount of $50 into a Fund on a systematic basis
through salary deductions, provided your employer has direct deposit
capabilities. Shares of the Fund are purchased at the public offering price
determined as of the close of business on the day the electronic fund transfer
is received by the Fund. You may change the amount or discontinue the service by
contacting your employer. An application is available from your Representative
or by calling Shareholder Services at 1-800-423-4026. Arrangements must also be
made with your employer's payroll department.
CROSS-INVESTMENT OF CASH DISTRIBUTIONS. You may elect to invest in
Class A or Class B shares of a Fund at net asset value all the cash
distributions from the same class of shares of another Eligible Fund. The
investment will be made at the net asset value per share of the Fund, generally
determined as of the close of business, on the business day immediately
following the record date of any such distribution. You may also elect to invest
cash distributions of a Fund's Class A or Class B shares into the same class of
another Eligible Fund, including the Money Market Funds. The investment will be
made at the net asset value per share of the other fund, generally determined as
of the close of business, on the business day immediately following the record
date of any such distribution. Cash distributions from a Fund's Class B shares
may only be invested into an existing Class B share account. If your
distributions are to be invested in Class A shares in a new account, you must
invest a minimum of $50 per month. To arrange for cross-investing, call
Shareholder Services at 1-800-423-4026.
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<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own noncertificated Class
A or Class B shares may establish a Systematic Withdrawal Plan ("Withdrawal
Plan"). If you have a Fund account with a value of at least $5,000, you may
elect to receive monthly, quarterly, semi-annual or annual checks for any
designated amount (minimum $25). You may have the payments sent directly to you
or persons you designate. The $5,000 minimum account balance is currently being
waived for required minimum distributions on retirement plan accounts.
Additionally, regardless of the amount of your Class A or Class B Fund account,
you may also elect to have the Systematic Plan payments automatically (i)
invested at net asset value in the same class of shares of any other Eligible
Fund, including the Money Market Funds, or (ii) paid to First Investors Life
Insurance Company for the purchase of a life insurance policy or a variable
annuity. If your Systematic Plan payments are to be invested in a new Class A
Eligible Fund account, you must invest a minimum of $600 per year. Systematic
Plan payments from a Class B account must be invested in an existing Class B
Eligible Fund account. Dividends and other distributions, if any, are reinvested
in additional shares of the same class of the Fund. Shareholders may add shares
to the Withdrawal Plan or terminate the Withdrawal Plan at any time. Withdrawal
Plan payments will be suspended when a distributing Fund has received notice of
a shareholder's death on an individual account. Payments may recommence upon
receipt of written alternate payment instructions and other necessary documents
from the deceased's legal representative. Withdrawal payments will also be
suspended when a payment check is returned to the Transfer Agent marked as
undeliverable by the U.S. Postal Service after two consecutive mailings.
Shareholders who own Class B shares may establish a Withdrawal Plan and
elect to receive up to 8% of the value of their account (calculated as set forth
below) each year without incurring any CDSC. Shares not subject to a CDSC (such
as shares representing reinvestment of distributions) will be redeemed first and
will count toward the 8% limitation. If the shares not subject to a CDSC are
insufficient for this purpose, then shares subject to the lowest CDSC will be
redeemed next until the 8% limit is reached. The 8% figure is calculated on a
pro rata basis at the time of the first payment made pursuant to the Plan and
recalculated thereafter on a pro rata basis at the time of each Plan payment.
Therefore, shareholders who have chosen the Plan based on a percentage of the
value of their account of up to 8% will be able to receive Plan payments without
incurring a CDSC. However, shareholders who have chosen a specific dollar amount
(for example, $100 per month) for their periodic Plan payment should be aware
that the amount of that payment not subject to a CDSC may vary over time
depending on the value of their account. For example, if the value of the
account is $15,000 at the time of payment, the shareholder will receive $100
free of the CDSC (8% of $15,000 divided by 12 monthly payments). However, if at
the time of a payment the value of the account has fallen to $14,000, the
shareholder will receive $93.33 free of any CDSC (8% of $14,000 divided by 12
monthly payments) and $6.67 subject to the lowest applicable CDSC. This
privilege may be revised or terminated at any time.
The withdrawal payments derived from the redemption of sufficient
shares in the account to meet designated payments in excess of dividends and
other distributions may deplete or possibly extinguish the initial investment,
particularly in the event of a market decline, and may result in a capital gain
or loss depending on the shareholder's cost. Purchases of additional shares of a
Fund concurrent with withdrawals are ordinarily disadvantageous to shareholders
because of tax liabilities and sales charges. To establish a Withdrawal Plan,
call Shareholder Services at 1-800-423-4026.
ELECTRONIC FUND TRANSFER. Shareholders may establish Electronic Fund
Transfers ("EFT") between Fund accounts and a predesignated bank account by
completing an application and having all shareholders' signatures guaranteed. If
the bank account registration is not identical to the Fund account, a signature
guarantee of the bank account holder is required for Money Line purchases.
Shareholders may choose EFT privileges for Money Line purchases or redemptions
or
27
<PAGE>
both. The minimum EFT amount is $500 and the maximum is $50,000. The total EFT
redemptions during a 30 day period may not exceed $100,000. Each Fund has the
right, at its sole discretion, to limit or terminate your ability to exercise
the EFT privileges at any time. Fund shares will be purchased on the day the
Fund receives the funds, which is normally two days after the EFT is initiated.
The EFT normally will be initiated on the next bank business day after the
redemption request is received and will ordinarily be received by the
predesignated bank account within two days after transmission. However, once the
funds are transmitted, the time of receipt and the availability of the funds are
not within the Funds' control. No dividends are paid on the proceeds of redeemed
shares awaiting EFT.
CONVERSION OF CLASS B SHARES. Class B Shares of a Fund will
automatically convert to Class A shares of that Fund, based on the relative net
asset values per share of the two classes, as of the close of business on the
first business day of the month in which the eighth anniversary of the initial
purchase of such Class B shares occurs. For these purposes, the date of initial
purchase shall mean (1) the first business day of the month in which such Class
B shares were issued, or (2) for Class B shares obtained through an exchange or
a series of exchanges, the first business day of the month in which the original
Class B shares were issued. For conversion purposes, Class B shares purchased
through the reinvestment of dividends and other distributions paid in respect of
Class B shares will be held in a separate sub-account. Each time any Class B
shares in the shareholder's regular account (other than those in the
sub-account) convert to Class A shares, a pro rata portion of the Class B shares
in the sub-account also will convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
applicability of a ruling of the Internal Revenue Service ("IRS"), or the
availability of an opinion of counsel, that: (1) the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Code; and (2) the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Class B shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the Class B shares
beyond eight years from the date of purchase. FIMCO has no reason to believe
that these conditions for the availability of the conversion feature will not
continue to be met.
If either Fund implements any amendments to its Class A Plan that would
increase materially the costs that may be borne under such Plan by Class A
shareholders, a new target class into which Class B shares will convert will be
established, unless a majority of Class B shareholders, voting separately as a
class, approve the proposal.
WAIVERS OF CDSC ON CLASS B SHARES. The CDSC imposed on Class B shares
does not apply to: (a) any redemption by advisory accounts managed by the
Adviser or any of its affiliates or for shares held by the Adviser or any of its
affiliates; (b) any redemption or transfer of ownership of Class B shares
following the death or disability, as defined in Section 72(m)(7) of the Code,
of a shareholder if the Fund is provided with proof of death or disability and
with all documents required by the Transfer Agent within one year after the
death or disability; (c) any redemption of shares purchased during the period
April 29, 1996 through June 30, 1996 with the proceeds from a redemption of
shares of a fund in another fund group for which no sales charge was paid, other
than a money market fund or shares held in a retirement plan account; and (d)
certain redemptions pursuant to a Withdrawal Plan (see "Systematic Withdrawal
Plan"). For more information on what specific documents are required, call
Shareholder Services at 1-800-423-4026.
SIGNATURE GUARANTEES. The words "Signature Guaranteed" must appear in
direct association with the signature of the guarantor. Members of the STAMP
(Securities Transfer
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<PAGE>
Agents Medallion Program), MSP (New York Stock Exchange Medallion Signature
Program), SEMP (Stock Exchanges Medallion Program) and FIC are eligible
signature guarantors. A notary public is not an acceptable guarantor. Although
each Fund reserves the right to require signature guarantees at any other time,
signature guarantees are required whenever: (1) the amount of the redemption is
over $50,000, (2) an exchange in the amount over $50,000 is made into the Money
Market Funds, (3) a redemption check is to be made payable to someone other than
the registered accountholder, other than major financial institutions, as
determined solely by the Fund and its agent, on behalf of the shareholder, (4) a
redemption check is to be mailed to an address other than the address of record,
preauthorized bank account, or to a major financial institution for the benefit
of a shareholder, (5) an account registration is being transferred to another
owner, (6) a transaction requires additional legal documentation; (7) the
redemption request is for certificated shares; (8) your address of record has
changed within 60 days prior to a redemption request; (9) multiple owners have a
dispute or give inconsistent instructions; (10) the authority of a
representative of a corporation, partnership, association or other entity has
not been established to the satisfaction of a Fund or its agents; and (11) you
elect EFT privileges.
REINVESTMENT AFTER REDEMPTION. If you redeem Class A or Class B shares
in your Fund account, you can reinvest within six months from the date of
redemption all or any part of the proceeds in shares of the same class of the
same Fund or any other Eligible Fund (including the Money Market Funds), at net
asset value, on the date the Transfer Agent receives your purchase request. If
you reinvest the entire proceeds of a redemption of Class B shares for which a
CDSC has been paid, you will be credited for the amount of the CDSC. If you
reinvest less than the entire proceeds, you will be credited with a pro rata
portion of the CDSC. All credits will be paid in Class B shares of the fund into
which the reinvestment is being made. The period you owned the original Class B
shares prior to redemption will be added to the period of time you own Class B
shares acquired through reinvestment for purposes of determining (a) the
applicable CDSC upon a subsequent redemption and (b) the date on which Class B
shares automatically convert to Class A shares. If your reinvestment is into a
new account, other than the Money Market Funds, it must meet the minimum
investment and other requirements of the fund into which the reinvestment is
being made. If you reinvest into a new Money Market Fund account within one year
from the date of redemption, the minimum investment is $500. To take advantage
of this option, send your reinvestment check along with a written request to the
Transfer Agent within six months from the date of your redemption. Include your
account number and a statement that you are taking advantage of the
"Reinvestment Privilege."
TELEPHONE TRANSACTIONS. Fund shares not held in certificate form may be
exchanged or redeemed by telephone provided you have not declined telephone
privileges. Telephone exchanges are available between non-retirement accounts.
Telephone exchanges are also available from an individually registered
non-retirement account to an IRA account of the same class of shares in the same
name (provided an IRA application is on file). Telephone exchanges are not
available for exchanges of Fund shares for plan units.
As stated in the Funds' Prospectus, the Tax Exempt Funds, the Adviser,
the Underwriter and their officers, trustees, directors and employees will not
be liable for any loss, damage, cost or expense arising out of any instruction
(or any interpretation of such instruction) received by telephone which they
reasonably believe to be authentic. In acting upon telephone instructions, these
parties use procedures which are reasonably designed to ensure that such
instructions are genuine, such as (1) obtaining some or all of the following
information: account number, address, social security number and such other
information as may be deemed necessary; (2) recording all telephone
instructions; and (3) sending written confirmation of each transaction to the
shareholder's address of record.
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<PAGE>
CANCELLED CHECKS. Copies of cancelled purchase, liquidation or dividend
checks will be provided to shareholders upon request. Shareholders will be
charged $10.00 per check.
EMERGENCY PRICING PROCEDURES. In the event that the Funds must halt
operations during any day that they would normally be required to price under
Rule 22c-1 under the Investment Company of 1940 due to an emergency ("Emergency
Closed Day"), the Funds will apply the following procedures:
1. The Funds will make every reasonable effort to segregate orders
received on the Emergency Closed Day and give them the price that they would
have received but for the closing. The Emergency Closed Day price will be
calculated as soon as practicable after operations have resumed and will be
applied equally to sales, redemptions and repurchases that were in fact received
in the mail or otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Funds on an Emergency Closed Day, even if neither the Funds nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order, the order will
be considered received by a Fund when the postal service has delivered it to
FIC's Woodbridge offices prior to the close of regular trading on the NYSE, or
such other time as may be prescribed in the Funds' Prospectus; and
(b) In the case of a wire order, including a
Fund/SERV order, the order will be considered received when it is received in
good form by a FIC branch office or an authorized dealer prior to the close of
regular trading on the NYSE, or such other time as may be prescribed in the
Funds' Prospectus.
3. If the Funds are unable to segregate orders received on the
Emergency Closed Day from those received on the next day the Funds are open for
business, the Funds may give all orders the next price calculated after
operations resume.
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Funds may determine not to price their
portfolio securities if such prices would lead to a distortion of the net asset
value for the Funds and their shareholders.
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<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, a 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. For each Fund these requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities, or other income (including gains
from options or futures) derived with respect to its business of investing in
securities ("Income Requirement"); (2) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities,
options or futures that were held for less than three months ("Short-Short
Limitation"); (3) 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 (4) 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 a 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
additional 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); each
Fund intends to continue to satisfy this requirement. The aggregate dividends
excludable from a Fund shareholder's gross income may not exceed the Fund's net
tax-exempt income. The shareholders' treatment of dividends from a 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.
Dividends and other distributions declared by a 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 shareholders for the year in which that December 31 falls.
Each Fund will be subject to a nondeductible 4% 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.
If shares of a Fund 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 the portion of the loss that is not
disallowed, if any, will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Tax-exempt interest attributable to certain private activity bonds
("PABs") (including, in the case of a Fund receiving interest on such bonds, a
proportionate part of the exempt-interest dividends paid by that Fund) is Tax
Preference Item. Exempt-interest dividends received by a corporate shareholder
also may be indirectly subject to the alternative minimum tax without regard to
whether the Fund's tax-exempt interest was attributable to such bonds. Entities
or other persons
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<PAGE>
who are "substantial users" (or persons related to "substantial users") of
facilities financed by PABs or industrial development bonds ("IDBs") should
consult their tax advisers before purchasing shares of any Fund because, for
users of certain of these facilities, the interest on such 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 or IDBs.
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 Prospectuses; they
are only included in the calculation of whether a recipient's income exceeds the
established amounts.
Each Fund may acquire zero coupon municipal securities issued with
original issue discount. As a holder of those securities, a Fund must take into
account the portion of the original issue discount that accrues on the
securities during the taxable year, even if it receives no corresponding payment
on them during the year. Because each Fund annually must distribute
substantially all of its net tax-exempt income, including any original issue
discount on Municipal Instruments, to satisfy the Distribution Requirement, a
Fund may be required in a particular year to distribute as a dividend an amount
that is greater than the total amount of cash it actually receives. Those
distributions will be made from a Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. A Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain (the excess of net long-term capital gain
over net short-term capital loss). In addition, any such gains may be realized
on the disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce the Fund's ability to sell
other securities or options or futures held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.
Each 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
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ("municipal market discount bonds"). Gain on
the disposition of a municipal market discount bond purchased by a Fund after
April 30, 1993 (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, a Fund may elect
to include market discount in its gross income currently, for each taxable year
to which it is attributable.
If a Fund invests in any instruments that generate taxable income,
distributions of the interest earned thereon will be taxable to the Fund's
shareholders as ordinary income to the extent of its earnings and profits.
Moreover, if a Fund realizes capital gain as a result of market transactions,
any distributions of such 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.
The use of hedging strategies, such as selling (writing) and purchasing
options and futures
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<PAGE>
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses a Fund realizes
in connection therewith. Gains from options and futures contracts derived by a
Fund with respect to its business of investing in securities will qualify as
permissible income under the Income Requirement. However, income from a Fund's
disposition of options and futures contracts will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, then any increase in value of
a position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund intends that, when it engages in hedging strategies, it will qualify for
this treatment, but at the present time it is not clear whether this treatment
will be available for all of each Fund's hedging transactions. To the extent
this treatment is not available, a Fund may be forced to defer the closing out
of certain options or futures contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a RIC.
PERFORMANCE INFORMATION
A Fund may advertise its performance in various ways.
Each Fund's "average annual total return" ("T") is an average annual
compounded rate of return. The calculation produces an average annual total
return for the number of years measured. It is the rate of return based on
factors which include a hypothetical initial investment of $1,000 ("P") over a
number of years ("n") with an Ending Redeemable Value ("ERV") of that
investment, according to the following formula:
T=[(ERV/P)caret(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 Class A shares, each Fund will deduct the maximum sales
charge of 6.25% (as a percentage of the offering price) from the initial $1,000
payment and, for Class B shares, the applicable CDSC imposed on a redemption of
Class B shares held for the period is deducted. All dividends and other
distributions are assumed to have been reinvested at net asset value on the
initial investment ("P").
Return information may be useful to investors in reviewing a Fund's
performance. However, certain factors should be taken into account before using
this information as a basis for comparison with alternative investments. No
adjustment is made for taxes payable on distributions. Return will fluctuate
over time and return for any given past period is not an indication or
representation by a Fund of future rates of return on its shares. At times, the
Adviser may reduce its compensation or assume expenses of a Fund in order to
reduce the Fund's expenses. Any such waiver or reimbursement would increase the
Fund's return during the period of the waiver or reimbursement.
Average annual return and total return computed at the public offering
price (maximum sales charge for Class A shares and applicable CDSC for Class B
shares) for the periods ended December 31, 1996 are set forth in the tables
below:
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<PAGE>
AVERAGE ANNUAL TOTAL RETURN1
Insured Intermediate Fund2 Insured Tax Exempt Fund
Class A Class B Class A Class B
Shares Shares 4 Shares Shares 4
------ ------ ------ -------
One Year (2.44)% (1.06)% (3.60)% (2.04)%
Five Years N/A N/A 4.62 N/A
Ten Years N/A N/A 6.07 N/A
Life of Fund 3 2.63 5.42 N/A 5.86
TOTAL RETURN3
Insured Intermediate Fund2 Insured Tax Exempt Fund
Class A Class B Class A Class B
Shares Shares4 Shares Shares4
One Year (2.44)% (1.06)% (3.60)% (2.04)%
Five Years N/A N/A 25.34 N/A
Ten Years N/A N/A 80.23 N/A
Life of Fund3 8.40 10.95 N/A 11.86
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 total return and total return
computed at net asset value for the periods ended December 31, 1996 are set
forth in the tables below:
- --------
1 All return figures reflect the current maximum sales charge of 6.25%. Prior
to July 1, 1993, the maximum sales charge for INSURED TAX EXEMPT FUND was
6.90%. Prior to December 29, 1989, the maximum sales charge for INSURED TAX
EXEMPT FUND was 7.25%. Prior to January 12, 1995, the maximum sales charge
for INSURED INTERMEDIATE FUND was 3.50%.
2 Certain expenses of the INSURED INTERMEDIATE FUND have been waived from
commencement of operations through December 31, 1996. Accordingly, return
figures are higher than they would have been had such expenses not been
waived.
3 INSURED INTERMEDIATE FUND commenced operations on November 22, 1993.
4 The commencement date for the offering of Class B shares is January 12,
1995.
34
<PAGE>
AVERAGE ANNUAL TOTAL RETURN1
<TABLE>
<CAPTION>
Insured Intermediate Fund2 Insured Tax Exempt Fund
Class A Shares Class B Shares4 Class A Class B Shares4
<S> <C> <C> <C> <C>
Shares
One Year 4.07% 2.99% 2.81% 2.03%
Five Years N/A N/A 5.98 N/A
Ten Years N/A N/A 6.76 N/A
Life of Fund4 4.80 7.65 N/A 8.10
TOTAL RETURN1
<CAPTION>
Insured Intermediate Fund2 Insured Tax Exempt Fund
Class A Shares Class B Shares4 Class A Class B Shares4
<S> <C> <C> <C> <C>
Shares
One Year 4.07% 2.99% 2.81% 2.03%
Five Years N/A N/A 33.68 N/A
Ten Years N/A N/A 92.31 N/A
Life of Fund3 15.70 15.63 N/A 16.58
</TABLE>
Yield 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 a 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 for Class A shares or the net asset value for
Class B shares 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.
Each 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 a 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.
The yield and tax-equivalent yield for INSURED TAX EXEMPT FUND Class A
shares for the thirty day period ended December 31, 1996 (assuming a Federal tax
rate of 28%) was 3.95% and 5.49%, respectively. The yield and tax-equivalent
yield for INSURED TAX EXEMPT FUND Class B
- --------
1 All return figures reflect the current maximum sales charge of 6.25%. Prior
to July 1, 1993, the maximum sales charge for INSURED TAX EXEMPT FUND was
6.90%. Prior to December 29, 1989, the maximum sales charge for INSURED TAX
EXEMPT FUND was 7.25%. Prior to January 12, 1995, the maximum sales charge
for INSURED INTERMEDIATE FUND was 3.50%.
2 Certain expenses of the INSURED INTERMEDIATE FUND have been waived from
commencement of operations through December 31, 1996. Accordingly, return
figures are higher than they would have been had such expenses not been
waived.
3 INSURED INTERMEDIATE FUND commenced operations on November 22, 1993.
4 The commencement date for the offering of Class B shares is January 12,
1995.
35
<PAGE>
shares for the same period (assuming a Federal Tax rate of 28%) was 3.53% and
4.90%, respectively. The yield and tax-equivalent yield (assuming the same tax
rate) for INSURED INTERMEDIATE FUND Class A shares for the thirty days ended
December 31, 1996 was 4.33% and 6.01%, respectively. The yield and
tax-equivalent yield for INSURED INTERMEDIATE FUND Class B shares for the same
period (assuming a Federal Tax rate of 28%) was 3.63% and 5.04%, respectively.
The maximum Federal tax rate during this period was 39.6%. During this period,
certain expenses of INSURED INTERMEDIATE FUND have been waived or reimbursed.
Accordingly yield and tax-equivalent yield figures are higher than they would
have been had such expenses not been waived or reimbursed.
The distribution rate for each 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,
1996 for Class A shares of INSURED INTERMEDIATE FUND and INSURED TAX EXEMPT FUND
calculated using the offering price was 4.69% and 4.69%, respectively. The
distribution rate for the twelve-month period ended December 31, 1996 for Class
A shares of INSURED INTERMEDIATE FUND and INSURED TAX EXEMPT FUND calculated at
net asset value was 5.01% and 5.00%, respectively. The distribution rate for the
twelve-month period ended December 31, 1996 for Class B shares of INSURED
INTERMEDIATE FUND and INSURED TAX EXEMPT Fund calculated using net asset value
was 3.97% and 4.33%, respectively. During this period certain expenses of
INSURED INTERMEDIATE FUND were waived. Accordingly, the distribution rates are
higher than they would have been had such expenses not been waived.
Each Fund may include in advertisements and sales literature,
information, examples and statistics to illustrate the effect of compounding
income at a fixed rate of return to demonstrate the growth of an investment over
a stated period of time resulting from the payment of dividends and capital gain
distributions in additional shares. The examples used will be for illustrative
purposes only and are not representations by the Fund of past or future yield or
return. Examples of typical graphs and charts depicting such historical
performance, compounding and hypothetical returns are included in Appendix D.
A Fund may include in advertisements and sales literature, information,
examples and statistics that illustrate the effect of taxable versus tax-free
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 gains distributions in additional shares. The examples used will be
for illustrative purposes only and are not representations by any Fund of past
or future yield or return.
From time to time, in reports and promotional literature, a Fund may
compare its performance to, or cite the historical performance of, U.S. Treasury
bills, notes and bonds, or indices of broad groups of unmanaged securities
considered to be representative of, or similar to, that 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.
36
<PAGE>
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication of
Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds
with at least three years of performance history are assigned ratings
from one star (lowest) to five stars (highest). Morningstar ratings are
calculated from the funds' 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.
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.
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.
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.
37
<PAGE>
GENERAL INFORMATION
AUDITS AND REPORTS. The accounts of each Fund are audited twice a year
by Tait, Weller & Baker, independent certified public accountants, Two Penn
Center Plaza, Philadelphia, PA, 19102-1707. Shareholders of each Fund receive
semi-annual and annual reports, including audited financial statements, and a
list of securities owned.
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 Funds and as redemption agent for regular redemptions. The fees charged
to each 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;
$1.00 for each Systematic Withdrawal Plan check; $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 Funds. 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. Furthermore, if there is no known address for a shareholder for at
least one year, the Transfer Agent will charge such shareholder's account $40 to
cover the Transfer Agent's expenses in trying to locate the shareholder's
correct address. For the fiscal year ended December 31, 1996, INSURED TAX EXEMPT
FUND and INSURED INTERMEDIATE FUND paid $1,011,863 and $8,231, respectively, in
transfer agency fees and expenses. The Transfer Agent's telephone number is
1-800-423-4026.
38
<PAGE>
SHAREHOLDER LIABILITY. Series Fund is organized as an entity known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable for the
obligations of the Series Fund. The Declaration of Trust however, contains an
express disclaimer of shareholder liability for acts or obligations of the
Series Fund and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Series Fund
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of the Fund of any shareholder held personally liable for the
obligations of the Series Fund. The Declaration of Trust also provides that the
Series Fund shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Series Fund 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 Series
Fund itself would be unable to meet its obligations. The Adviser believes that,
in view of the above, the risk of personal liability to shareholders is
immaterial and extremely remote. The Declaration of Trust further provides that
the Trustees will not be liable for errors of judgment or mistakes of fact or
law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. The Series Fund may have an obligation to
indemnify Trustees and officers with respect to litigation.
5% SHAREHOLDERS. As of March 31, 1997, John W. Roberts, 1316 Indian
Mound W, Bloomfield Hills, MI 48301, beneficially owned 6.0% of the outstanding
Class A shares of INSURED INTERMEDIATE FUND.
As of March 31, 1997, the following beneficially owned more than 5% of
the outstanding Class B shares of the Fund listed below:
Fund % of Shares Shareholder
INSURED INTERMEDIATE FUND 11.1% Alexander J. Rota
363 Van Wick Lake Road
Fishkill, NY 12524
7.6% Vivien B. Shelanski
241 Kane Street
Brooklyn, NY 11231
7.5% William A. Bloomhall
932 Mariner Point
760 Sextant Drive
Sanibel, FL 33957
7.4% Shirley M. Pusko
8129 W. 87th Street
Hickory Hills, IL 60457
5.5% James J. Rahner
424 Darby Road
Havertown, PA 19082
39
<PAGE>
Fund % of Shares Shareholder
13.5% Harrison W. Snyder
RD 4 Box 313
Huntington, PA 16652
5.4% Frank J. Mullins
16934 Creek Line Drive
Friendswood, TX 77546-4202
INSURED TAX EXEMPT FUND 6.2% Giselle Serio
48 Athens Avenue
South Amboy, NJ 08879-2453
9.6% Daniel Williams Sr.
Eagle Ridge Drive
W. Orange, NJ 07052 USA
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to
Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, each Fund and the
Adviser have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Fund. Among other things,
such persons, except the Directors or Trustees: (a) must have all non-exempt
trades pre-cleared; (b) are restricted from short-term trading; (c) must have
duplicate statements and transactions confirmations reviewed by a compliance
officer; and (d) are prohibited from purchasing securities of initial public
offerings.
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
40
<PAGE>
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
41
<PAGE>
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat greater than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa Bonds which are rated "Baa" are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
42
<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.
APPENDIX C
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
43
<PAGE>
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.
44
<PAGE>
APPENDIX D
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
<PAGE>
[The following table is represented as graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a diference of
$331,215.
25 years old .............. 533,443
35 years old .............. 202,228
45 years old .............. 62,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
<PAGE>
[The following table is represented as chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1995.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1995........................ 1.00
1996........................ 1.03
1997........................ 1.06
1998 ....................... 1.09
1999 ....................... 1.13
2000 ....................... 1.16
2001 ....................... 1.19
2002 ....................... 1.23
2003 ....................... 1.27
2004 ....................... 1.30
2005 ....................... 1.34
2006 ....................... 1.38
2007 ....................... 1.43
2008 ....................... 1.47
2009 ....................... 1.51
2010 ....................... 1.56
2011 ....................... 1.60
2012 ....................... 1.65
2013 ....................... 1.70
2014 ....................... 1.75
2015 ....................... 1.81
2016 ....................... 1.86
2017 ....................... 1.92
2018 ....................... 1.97
2019 ....................... 2.03
2020 ....................... 2.09
2021 ....................... 2.16
2022 ....................... 2.22
2023 ....................... 2.29
2024 ....................... 2.36
2025 ....................... 2.43
Inflation erodes your buying power. $100 in 1966, could purchase the same amount
of goods and service as $21 in 1995.* Projecting inflation at 3%, goods and
services costing $100 today will cost $243 in the year 2025.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
<PAGE>
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1995(1)
Total Number of Percentage of
Number of Positive Positive
Periods Periods Periods
------- ------- -------
1-Year Periods 70 50 71%
5-Year Periods 66 59 89%
10-Year Periods 61 59 97%
15-Year Periods 56 56 100%
20-Year Periods 51 51 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. (2)
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Large Company Stocks .......... 14.80
The following chart illustrates for the period shown that long-term corpoate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Long-Term Corp. bonds ......... 13.46
(1) Sources: Stocks, Bonds, Bill and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago.
(2) Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, reeturns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal TAx Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
<PAGE>
FINANCIAL STATEMENTS
as of December 31, 1996
First Investors Insured Tax Exempt Fund, Inc. (2-57473) incorporates by
reference the financial statements and report of independent auditors contained
in the Annual Report to shareholders for the fiscal year ended December 31, 1996
electronically filed with the Commission on February 24, 1997 (Accession Number:
0000928816-97-000043).
First Investors Series Fund (33-25623) incorporates by reference the financial
statements and report of independent auditors contained in the Annual Report to
shareholders for the fiscal year ended December 31, 1996 electronically filed
with the Commission on March 4, 1997 (Accession Number: 0000912057-97-007729).
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: Financial Statements are set forth in
Part B, Statement of Additional Information
(b) Exhibits:
(1)/2/ Amended and Restated Declaration of Trust
(2)/2/ By-laws
(3) Not Applicable
(4) Shareholders' rights are contained in (a)
Articles III, VIII, X, XI and XII of
Registrant's Amended and Restated Declaration of
Trust dated September 19, 1988, 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
(5)a./2/ Investment Advisory Agreement between Registrant
and First Investors Management Company, Inc.
(6)/2/ Underwriting Agreement between Registrant and First
Investors Corporation
(7) Not Applicable
(8)a./2/ Custodian Agreement between Registrant and Irving
Trust Company
b./2/ Supplement to Custodian Agreement between
Registrant and The Bank of New York
c./2/ Custodian Agreement between Registrant and Brown
Brothers Harriman & Co.
(9)/2/ Administration Agreement between Registrant,
First Investors Management Company, Inc.,
First Investors Corporation and Administrative
Data Management Corp.
(10)/1/ Opinion of counsel
(11)a. Consent of Independent Accountants
b./2/ Power of Attorney
<PAGE>
(12) Not Applicable
(13)/6/ Undertakings of the Underwriter
(14)a./3/ First Investors Profit Sharing/Money Purchase
Pension Retirement Plan for Sole Proprietorships,
Partnerships, and Corporations
b./4/ First Investors Individual Retirement Account
c./5/ First Investors 403(b) Custodial Account
d./4/ First Investors SEP-IRA and SARSEP-IRA
(15)a./2/ Amended and Restated Class A Distribution Plan
b./2/ Class B Distribution Plan
(16) Performance Calculations
(17) Financial Data Schedule (filed as Exhibit 27 for
electronic filing purposes)
(18)/2/ 18f-3 Plan
- ----------
/1/ Incorporated by reference from Registrant's Rule 24f-2 Notice for its
fiscal year ending December 31, 1996 filed on February 27, 1997.
/2/ Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 33-25623) filed on April 23,
1996.
/3/ Incorporated by reference from Post-Effective Amendment No. 10 to
Registrant's Registration Statement (File No. 33-25623) filed on April 15,
1991.
/4/ Incorporated by reference from Post-Effective Amendment No. 11 to
Registrant's Registration Statement (File No. 33-25623) filed on April 29,
1993.
/5/ Incorporated by reference from Post-Effective Amendment No. 5 to
Registrant's Registration Statement (File No. 33-25623) filed on September
5, 1990.
/6/ Previously filed with the Commission.
Item 25. Persons Controlled by or under common control with Registrant
There are no persons controlled by or under common control with the
Registrant.
Item 26. Number of Holders of Securities
Number of
Record Holders as of
Title of Class February 3, 1997
-------------- --------------------
Class A Class B
Blue Chip Fund 30,053 2,206
Total Return Fund 8,067 1,242
Special Situations Fund 29,870 1,997
Investment Grade Fund 4,295 183
Insured Intermediate Tax Exempt Fund 315 38
<PAGE>
Item 27. Indemnification
Article XI, Section 1 of Registrant's Declaration of Trust provides as
follows:
Section 1.
Provided they have exercised reasonable care and have acted
under the reasonable belief that their actions are in the best interest of the
Trust, the Trustees shall not be responsible for or liable in any event for
neglect or wrongdoing of them or any officer, agent, employee or investment
adviser of the Trust, but nothing contained herein shall protect any 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.
Article XI, Section 2 of Registrant's Declaration of Trust
provides as follows:
Section 2.
(a) Subject to the exceptions and limitations contained in Section
(b) below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (a "Covered Person") shall be indemnified by the Trust
to the fullest extent permitted by law against liability and
against expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding which he
becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened,
and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office or (B) not to have acted
in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office,
<PAGE>
(A) by the court or other body approving the settlement; or
(B) by at least a majority or those Trustees who are
neither interested persons of the Trust nor are
parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type
inquiry); or
(C) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed
to a full trial-type inquiry); provided, however,
that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the
Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under the
law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the Trust from time to time prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him to the Trust if it
is ultimately determined that he is not entitled to indemnification under this
Section 2; provided, however, that either (a) such Covered Person shall have
provided appropriate security for such undertaking, (b) the Trust is insured
against losses arising out of any such advance payments or (c) either a majority
of the Trustees who are neither interested persons of the Trust nor are parties
to the matter, or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is a reason to believe that such Covered Person
will be found entitled to indemnification under this Section 2.
The general effect of this Indemnification will be to indemnify the
officers and Trustees of the Registrant from costs and expenses arising from any
action, suit or proceeding to which they may be made a party by reason of their
being or having been a Trustee or officer of the Registrant, except where such
action is determined to have arisen out of the willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
the Trustee's or officer's office.
The Registrant's Investment Advisory Agreement provides as follows:
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Company or any Series in connection with the
matters to which this Agreement relate except a
<PAGE>
loss resulting from the willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also an
officer, partner, employee, or agent of the Manager, who may be or become an
officer, Board member, employee or agent of the Company shall be deemed, when
rendering services to the Company or acting in any business of the Company, to
be rendering such services to or acting solely for the Company and not as an
officer, partner, employee, or agent or one under the control or direction of
the Manager even though paid by it.
The Registrant's Underwriting Agreement provides as follows:
The Underwriter agrees to use its best efforts in effecting the sale and
public distribution of the shares of the Fund through dealers and to perform its
duties in redeeming and repurchasing the shares of the Fund, but nothing
contained in this Agreement shall make the Underwriter or any of its officers
and directors or shareholders liable for any loss sustained by the Fund or any
of its officers, trustees, or shareholders, or by any other person on account of
any act done or omitted to be done by the Underwriter under this Agreement
provided that nothing herein contained shall protect the Underwriter against any
liability to the Fund or to any of its shareholders to which the Underwriter
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties as Underwriter or by reason of its
reckless disregard of its obligations or duties as Underwriter under this
Agreement. Nothing in this Agreement shall protect the Underwriter from any
liabilities which they may have under the Securities Act of 1933 or the
Investment Company Act of 1940.
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 provisions, the Registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. See Item 32 herein.
Item 28. Business and Other Connections of Investment Adviser
First Investors Management Company, Inc., the Registrant's Investment
Adviser, also serves as investment adviser to:
First Investors Cash Management Fund, Inc.
First Investors Fund For Income, Inc.
First Investors Global Fund, Inc.
First Investors Government Fund, Inc.
First Investors High Yield Fund, Inc.
First Investors Insured Tax Exempt Fund, Inc.
First Investors Life Series Fund
First Investors Multi-State Insured Tax Free Fund
First Investors New York Insured Tax Free Fund, Inc.
First Investors Series Fund II, Inc.
First Investors Special Bond Fund, Inc.
First Investors Tax-Exempt Money Market Fund, Inc.
First Investors U.S. Government Plus Fund
<PAGE>
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 29. Principal Underwriters
(a) First Investors Corporation, Underwriter of the Registrant, is also
underwriter for:
First Investors Cash Management Fund, Inc.
First Investors Fund For Income, Inc.
First Investors Global Fund, Inc.
First Investors Government Fund, Inc.
First Investors High Yield Fund, Inc.
First Investors Insured Tax Exempt Fund, Inc.
First Investors Multi-State Insured Tax Free Fund
First Investors New York Insured Tax Free Fund, Inc.
First Investors Tax-Exempt Money Market Fund, Inc.
First Investors U.S. Government Plus Fund
First Investors Series Fund II, Inc.
(b) The following persons are the officers and directors of the
Underwriter:
Position and Position and
Name and Principal Office with First Office with
Business Address Investors Corporation Registrant
- ------------------ --------------------- ------------
Glenn O. Head Chairman President
95 Wall Street and Director and Trustee
New York, NY 10005
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
Roger L. Grayson Director Trustee
95 Wall Street
New York, NY 10005
Joseph I. Benedek Treasurer Treasurer
581 Main Street
Woodbridge, NJ 07095
Robert Murphy Comptroller None
581 Main Street
Woodbridge, NJ 07095
<PAGE>
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 Chief Financial
Woodbridge, NJ 07095 Officer and Director
Louis Rinaldi Senior Vice None
581 Main Street President
Woodbridge, NJ 07095
Frederick Miller Vice President None
581 Main Street
Woodbridge, NJ 07095
Howard M. Factor Vice President None
95 Wall Street
New York, NY 10005
Larry R. Lavoie Secretary and None
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
(c) Not applicable
Item 30. 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 Custodians, The Bank of New York, 48 Wall Street,
New York, NY 10286, and Brown Brothers Harriman & Co., 40 Water Street, Boston,
MA 02109.
<PAGE>
Item 31. Management Services
Inapplicable
Item 32. 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 and the
Investment Company Act of 1940, the Registrant represents that this Amendment
meets all the requirements for effectiveness pursuant to Rule 485(b) under the
Securities Act of 1933, and has duly caused this Post-Effective Amendment to
this 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
16th day of April, 1997.
FIRST INVESTORS SERIES FUND
(Registrant)
By: /s/ Glenn O. Head
----------------
Glenn O. Head
President and Trustee
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Amendment to this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/Glenn O. Head Principal Executive April 16, 1997
- ------------------------- Officer and Trustee
Glenn O. Head
/s/Joseph I. Benedek Principal Financial April 16, 1997
- ------------------------- and Accounting Officer
Joseph I. Benedek
* Trustee April 16, 1997
- -------------------------
Kathryn S. Head
* Trustee April 16, 1997
- -------------------------
Roger L. Grayson
* Trustee April 16, 1997
- -------------------------
Herbert Rubinstein
* Trustee April 16, 1997
- -------------------------
Nancy Schaenen
* Trustee April 9, 1997
- -------------------------
James M. Srygley
* Trustee April 9, 1997
- -------------------------
John T. Sullivan
* Trustee April 9, 1997
- -------------------------
Rex R. Reed
* Trustee April 16, 1997
- -------------------------
Robert F. Wentworth
*By: /s/Larry R. Lavoie
------------------
Larry R. Lavoie
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
99.B11.1 Consent of Accountants
99.B11.2 Power of Attorney
99.B16 Performance Calculations
27.011 FDS-Blue Chip Fund Class A
27.012 FDS-Blue Chip Fund Class B
27.021 FDS-Total Return Fund Class A
27.022 FDS-Total Return Fund Class B
27.031 FDS-Special Situations Fund Class A
27.032 FDS-Special Situations Fund Class B
27.041 FDS-Investment Grade Fund Class A
27.042 FDS-Investment Grade Fund Class B
27.051 FDS-Intermediate Tax Exempt Fund Class A
27.052 FDS-Intermediate Tax Exempt Fund Class B
Consent of Independent Certified Public Accountants
First Investors Series Fund
95 Wall Street
New York, New York 10005
We consent to the use in Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A (File No. 33-25623) of our report dated
January 31, 1997 relating to the December 31, 1996 financial statements of First
Investors Series Fund, which are included in said Registration Statement.
/s/ Tait, Weller & Baker
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 16, 1997
First Investors Series Fund
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned officer and/or
trustee of First Investors Series Fund hereby appoints Larry R. Lavoie or Glenn
O. Head, and each of them, his true and lawful attorney to execute in his name,
place and stead and on his behalf a Registration Statement on Form N-1A for the
registration pursuant to the Securities Act of 1933 and the Investment Company
Act of 1940 of shares of beneficial interest of said Massachusetts business
trust, and any and all amendments to said Registration Statement (including
post-effective amendments), and all instruments necessary or incidental in
connection therewith and to file the same with the Securities and Exchange
Commission. Said attorney shall have full power and authority to do and perform
in the name and on behalf of the undersigned every act whatsoever requisite or
desirable to be done in the premises, as fully and to all intents and purposes
as the undersigned might or could do, the undersigned hereby ratifying and
approving all such acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
3rd day of April, 1997.
/s/ Nancy Schaenen
Nancy Schaenen
Distribution yields for First Investor's Funds are calculated using the
following formula:
Yield = (a/b)
Where:
a = dividends declared during the last 12 months.
b = Net asset value per share on the last day of the period.
The following is a list of the information used to calculate the distribution
yield for First Investors Series Fund (Class A shares) as of December 31, 1996.
Distribution
a b Yield
- - -----
Insured Intermediate
Tax Exempt Fund $.290 $5.79 5.00%
Investment Grade Fund $.622 $9.93 6.26%
<PAGE>
Distribution yields for First Investor's Funds are calculated using the
following formula:
Yield = (a/b)
Where:
a = dividends declared during the last 12 months.
b = Net asset value per share on the last day of the period.
The following is a list of the information used to calculate the distribution
yield for First Investors Series Fund (Class B shares) as of December 31, 1996.
Distribution
a b Yield
- - -----
Insured Intermediate
Tax Exempt Fund $.230 $5.80 3.97%
Investment Grade Fund $.548 $9.94 5.51%
<PAGE>
Yields for First Investor's Funds are calculated using the following formula:
2(((((a-b) + ((cd)-e))+1)-)-1)
Where:
a = dividends and interest earned during the 30 day period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
e = undeclared earned income.
The following is a list of the information used to calculate the for First
Investors Series Fund (Class A shares) as of December 31, 1996.
<TABLE>
<CAPTION>
*Tax
Equivalent
a b c d e Yield Yield
- - - - - ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Intermediate
Tax Exempt Fund $30,554 $2,928 1,251,221 $6.18 $.00 4.33% 6.01%
Investment Grade Fund $261,484 $41,387 4,656,961 $10.59 $.00 5.41% N/A
</TABLE>
* Tax Equivalent Yields are computed assuming a federal tax rate of 28%.
<PAGE>
Yields for First Investor's Funds are calculated using the following formula:
2(((((a-b) + ((cd)-e))+1)-)-1)
Where:
a = dividends and interest earned during the 30 day period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
e = undeclared earned income.
The following is a list of the information used to calculate the for First
Investors Series Fund (Class B shares) as of December 31, 1996.
<TABLE>
<CAPTION>
*Tax
Equivalent
a b c d e Yield Yield
- - - - - ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Intermediate
Tax Exempt Fund $2,504 $725 102,274 $5.80 $.00 3.63% 5.04%
Investment Grade Fund $12,894 $3,339 229,390 $9.94 $.00 5.08% N/A
</TABLE>
*Tax Equivalent Yields are computed assuming a federal tax rate of 28%.
<PAGE>
SEC Standardized Total Returns
Average Annual Total Return and Total Return for First Investors Funds are
calculated using the following standardized formula:
Average Annual
Total Return = ((ERV / P) ) - 1
Total Return = ((ERV - P) / P)
Where: ERV = Ending redeemable value of a hypothetical $1,000
investment made at the beginning of 1, 5, or 10
year periods (or fractional period there of.)
P = a hypothetical initial investment of $1,000
N = number of years
The following table lists the information used to calculate the standardized
average annual total return and total return for First Investors Series Fund
(Class A shares) as of December 31, 1996.
AVE. ANNUAL TOTAL
ERV P N TOTAL RETURN RETURN
--- - - ------------ ------
Blue Chip Fund
--------------
1 year: $ 1,130.10 $ 1,000.00 1.00 13.01% 13.01%
5 years: $ 1,687.10 $ 1,000.00 5.00 11.03% 68.71%
Life of Fund: $ 2,394.50 $ 1,000.00 7.99 11.54% 139.45%
Insured Intermediate Fund
- -------------------------
1 year: $ 975.60 $ 1,000.00 1.00 (2.44%) (2.44%)
Life of Fund: $ 1,084.00 $ 1,000.00 3.09 2.63% 8.40%
Investment Grade Fund
---------------------
1 year: $ 959.90 $ 1,000.00 1.00 (4.01%) (4.01%)
5 years: $ 1,311.00 $ 1,000.00 5.00 5.56% 31.10%
Life of Fund: $ 1,499.60 $ 1,000.00 5.87 7.14% 49.96%
Special Situations Fund
-----------------------
1 year: $ 1,045.80$ 1,000.00 1.00 4.58% 4.58%
5 years: $ 1,764.90$ 1,000.00 5.00 12.03% 76.49%
Life of Fund: $ 2,758.80$ 1,000.00 6.29 17.51% 175.88%
Total Return Fund
-----------------
1 year: $ 1,037.40$ 1,000.00 1.00 3.74% 3.74%
5 years: $ 1,346.40$ 1,000.00 5.00 6.13% 34.64%
Life of Fund: $ 1,666.50$ 1,000.00 6.69 7.93% 66.65%
<PAGE>
NAV Only Total Returns - Class A Shares
Average Annual Total Return and Total Return for First Investors Funds are
calculated using the following standardized formula:
Average Annual
Total Return = ((ERV / P) ) - 1
Total Return = ((ERV - P) / P)
Where: ERV = Ending redeemable value of a hypothetical $1,000
investment made at the beginning of 1, 5, or 10 year
periods (or fractional period there of.)
P = a hypothetical initial investment of $1,000
N = number of years
The following table lists the information used to calculate the average annual
total return and total return for First Investors Series Fund (Class A shares)
as of December 31, 1996.
AVE. ANNUAL TOTAL
ERV P N TOTAL RETURN RETURN
--- - - ------------ ------
Blue Chip Fund
--------------
1 year: $ 1,205.50 $ 1,000.00 1.00 20.55% 20.55%
5 years: $ 1,799.30 $ 1,000.00 5.00 12.47% 79.93%
Life of Fund: $ 2,553.70 $ 1,000.00 7.99 12.44% 155.37%
Insured Intermediate Fund
- -------------------------
1 year: $ 1,040.70 $ 1,000.00 1.00 4.07% 4.07%
Life of Fund: $ 1,157.00 $ 1,000.00 3.09 4.80% 15.70%
Investment Grade Fund
---------------------
1 year: $ 1,023.90 $ 1,000.00 1.00 2.39% 2.39%
5 years: $ 1,398.90 $ 1,000.00 5.00 6.94% 39.89%
Life of Fund: $ 1,599.40 $ 1,000.00 5.87 8.32% 59.94%
Special Situations Fund
-----------------------
1 year: $ 1,115.60 $ 1,000.00 1.00 11.56% 11.56%
5 years: $ 1,882.30 $ 1,000.00 5.00 13.48% 88.23%
Life of Fund: $ 2,942.50 $ 1,000.00 6.29 18.72% 194.25%
Total Return Fund
-----------------
1 year: $ 1,106.20 $ 1,000.00 1.00 10.62% 10.62%
5 years: $ 1,435.90 $ 1,000.00 5.00 7.50% 43.59%
Life of Fund: $ 1,776.90 $ 1,000.00 6.69 8.97% 77.69%
<PAGE>
SEC Standardized Total Returns
Average Annual Total Return and Total Return for First Investors Funds are
calculated using the following standardized formula:
Average Annual
Total Return = ((ERV / P) ) - 1
Total Return = ((ERV - P) / P)
Where: ERV = Ending redeemable value of a hypothetical $1,000
investment made at the beginning of 1, 5, or 10 year
periods (or fractional period there of.)
P = a hypothetical initial investment of $1,000
N = number of years
The following table lists the information used to calculate the standardized
average annual total return and total return for First Investors Series Fund
(Class B shares) as of December 31, 1996.
AVE. ANNUAL TOTAL
ERV P N TOTAL RETURN RETURN
--- - - ------------ ------
Blue Chip Fund
--------------
1 year: $ 1,148.90 $ 1,000.00 1.00 14.89% 14.89%
Life of Fund: $ 1,239.50 $ 1,000.00 1.97 23.95% 52.60%
Insured Intermediate Fund
- -------------------------
1 year: $ 991.40 $ 1,000.00 1.00 (.89%) (.89%)
Life of Fund: $ 1,111.40 $ 1,000.00 1.97 5.51% 11.14%
Investment Grade Fund
---------------------
1 year: $ 975.80 $ 1,000.00 1.00 (2.42%) (2.42%)
Life of Fund: $ 1,151.70 $ 1,000.00 1.97 7.44% 15.17%
Special Situations Fund
-----------------------
1 year: $ 1,063.90 $ 1,000.00 1.00 6.39% 6.39%
Life of Fund: $ 1,313.20 $ 1,000.00 1.97 14.84% 31.32%
Total Return Fund
-----------------
1 year: $ 1,054.50 $ 1,000.00 1.00 5.45% 5.45%
Life of Fund: $ 1,326.50 $ 1,000.00 1.97 15.43% 32.65%
<PAGE>
NAV Only Total Returns - Class B Shares
Average Annual Total Return and Total Return for First Investors Funds are
calculated using the following standardized formula:
Average Annual
Total Return = ((ERV / P) ) - 1
Total Return = ((ERV - P) / P)
Where: ERV = Ending redeemable value of a hypothetical $1,000
investment made at the beginning of 1, 5, or 10 year
periods (or fractional period there of.)
P = a hypothetical initial investment of $1,000
N = number of years
The following table lists the information used to calculate the average annual
total return and total return for First Investors Series Fund (Class B shares)
as of December 31, 1996.
AVE. ANNUAL TOTAL
ERV P N TOTAL RETURN RETURN
--- - - ------------ ------
Blue Chip Fund
--------------
1 year: $ 1,197.10 $ 1,000.00 1.00 19.71% 19.71%
Life of Fund: $ 1,589.30 $ 1,000.00 1.97 26.54% 58.93%
Insured Intermediate Fund
- -------------------------
1 year: $ 1,031.70 $ 1,000.00 1.00 3.17% 3.17%
Life of Fund: $ 1,158.30 $ 1,000.00 1.97 7.75% 15.83%
Investment Grade Fund
---------------------
1 year: $ 1,016.40 $ 1,000.00 1.00 1.64% 1.64%
Life of Fund: $ 1,200.20 $ 1,000.00 1.97 9.71% 20.02%
Special Situations Fund
-----------------------
1 year: $ 1,108.10 $ 1,000.00 1.00 10.81% 10.81%
Life of Fund: $ 1,367.60 $ 1,000.00 1.97 17.24% 36.76%
Total Return Fund
-----------------
1 year: $ 1,098.60 $ 1,000.00 1.00 9.86% 9.86%
Life of Fund: $ 1,381.20 $ 1,000.00 1.97 17.83% 38.12%
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